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TABLE OF CONTENTS
TABLE OF CONTENTS
TABLE OF CONTENTS
Index to Consolidated Financial Statements
Contents
As filed with the Securities and Exchange Commission on March 11, 2019
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form S-1
Registration Statement
Under
The Securities Act of 1933
HarborOne NorthEast Bancorp, Inc.
HarborOne 401(k) Plan
HarborOne Mortgage, LLC Retirement Plan
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction of incorporation or organization) |
6022
(Primary Standard Industrial Classification Code Number) |
81-1607465
(IRS Employer Identification No.) |
HarborOne NorthEast Bancorp, Inc.
770 Oak Street
Brockton, Massachusetts 02301
(508) 895-1000
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
James W. Blake
Chief Executive Officer
HarborOne NorthEast Bancorp, Inc.
770 Oak Street
Brockton, Massachusetts 02301
(508) 895-1000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Please send copies of all communications to: | ||
Samantha M. Kirby, Esq. Goodwin Procter LLP 100 Northern Avenue Boston, Massachusetts 02210 (617) 570-1000 |
|
Scott A. Brown, Esq. Luse Gorman, PC 5335 Wisconsin Avenue, NW Suite 780 Washington, D.C. 20015 (202) 274-2000 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. ý
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 o | Accelerated Filer ý | Non-Accelerated Filer o |
Smaller Reporting Company
o
Emerging Growth Company ý |
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 to Section 7(a)(2)(B) of the Securities Act. o
CALCULATION OF REGISTRATION FEE
|
||||||||
Title of Each Class of Securities to Be Registered
|
Amount to Be Registered
|
Proposed Maximum Offering Price per Unit
|
Proposed Maximum Aggregate Offering Price
|
Amount of Registration Fee
|
||||
---|---|---|---|---|---|---|---|---|
Common Stock, par value $0.01 per share |
58,538,517 shares | $10.00 | $585,385,170(1) | $70,948.68 | ||||
Participation interests |
658,000 interests(2) | (2) | ||||||
|
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.
PROSPECTUS SUPPLEMENT
Interests in
HarborOne 401(k) Plan
Offering of Participation Interests in up to 378,000 Shares of
HarborOne NorthEast Bancorp, Inc.
Common Stock
In connection with the conversion of HarborOne Mutual Bancshares from the mutual to the stock form of organization, HarborOne NorthEast Bancorp, Inc., a newly formed Massachusetts corporation, or "New HarborOne," is offering shares of common stock for sale at $10.00 per share. The shares being offered represent the ownership interest in HarborOne Bancorp, Inc., an existing Massachusetts corporation, or "Old HarborOne," currently held by HarborOne Mutual Bancshares. Old HarborOne currently owns all of the outstanding shares of common stock of HarborOne Bank. Upon completion of the conversion, New HarborOne will become the successor corporation to Old HarborOne and the parent holding company for HarborOne Bank, and will change its name to "HarborOne Bancorp, Inc." Old HarborOne's common stock is currently traded on the Nasdaq Global Select Market under the trading symbol "HONE," and we expect the shares of New HarborOne common stock will also trade on the Nasdaq Global Select Market under the symbol "HONE."
In connection with the stock offering, New HarborOne is allowing participants in the HarborOne 401(k) Plan, or the "401(k) Plan," to make a one-time election to purchase participation interests in shares of New HarborOne common stock through the 401(k) Plan in an amount not to exceed 25% of the participant's 401(k) Plan account balance. Based upon the value of the 401(k) Plan assets at December 31, 2018, the trustee of the 401(k) Plan could acquire up to 378,000 shares of New HarborOne common stock, at the purchase price of $10.00 per share.
This prospectus supplement relates to the one-time election of 401(k) Plan participants to direct the trustee of the 401(k) Plan to invest a portion of their 401(k) Plan accounts, up to a maximum of 25% of the value thereof, in New HarborOne common stock at the time of the stock offering.
The prospectus dated [prospectus date ] of New HarborOne, which accompanies this prospectus supplement, includes detailed information regarding the conversion and New HarborOne's stock offering, and the financial condition, results of operations and business of HarborOne Bank. This prospectus supplement provides information regarding the 401(k) Plan. You should read this prospectus supplement together with the accompanying prospectus and keep both for future reference.
Please refer to "Risk Factors" beginning on page 18 of the accompanying prospectus.
The securities offered in this prospectus supplement are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation, any other government agency or the Share Insurance Fund.
None of the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks or any state securities regulator has approved or disapproved of these securities or determined if this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus supplement may be used only in connection with offers and sales by New HarborOne of interests in, or shares of, common stock acquired by the 401(k) Plan. No one may use this prospectus supplement to reoffer or resell interests in, or shares of, common stock acquired through the 401(k) Plan.
Neither New HarborOne nor HarborOne Bank has authorized any person to give any information or to make any representations other than those contained in the prospectus or this prospectus supplement, and, if given or made, no one may rely on such information or representations as having been authorized by New HarborOne, HarborOne Bank or the 401(k) Plan.
This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction in which it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock shall under any circumstances imply that there has been no change in the affairs of New HarborOne or any of its subsidiaries incorporated by the accompanying prospectus or the 401(k) Plan since the date of this prospectus supplement, or imply the information contained in this prospectus supplement is correct as of any time after the date of this prospectus supplement.
The date of this prospectus supplement is [prospectus date].
The securities offered in connection with this prospectus supplement are participation interests in the HarborOne 401(k) Plan, or the 401(k) Plan. New HarborOne, the proposed holding company for HarborOne Bank, is the issuer of the common stock. All participants in the 401(k) Plan may use up to 25% of their account balances to subscribe for shares of New HarborOne common stock in the offering, subject to the purchase priorities set forth in the plan of conversion. See "The Conversion and Offering" in the prospectus accompanying this prospectus supplement for a discussion of the purchase priorities in the offering. The interests offered under this prospectus supplement are conditioned on the consummation of the conversion and related New HarborOne stock offering.
This prospectus supplement contains information regarding the 401(k) Plan. The accompanying prospectus contains information regarding the conversion from a two-tier mutual holding company structure to a fully public stock holding company structure, New HarborOne's stock offering, and the financial condition, results of operations and business of HarborOne Bank. The address of the principal executive office of New HarborOne is 770 Oak Street, Brockton, MA 02301. The telephone number of New HarborOne is (508) 895-1000.
Election to Purchase the Common Stock in the Offering; Priorities
In connection with the offering, you will be permitted to transfer up to 25% of the funds which represent your beneficial interest in the assets of the 401(k) Plan to the New HarborOne Stock Fund (inclusive of any beneficial interest you currently hold in the HarborOne Bancorp, Inc. Stock Fund). If you elect to invest in the New HarborOne Stock Fund, the 401(k) Plan trustee will subscribe for the common stock offered for sale in the offering in accordance with your direction, subject to the purchase priorities discussed below. In the event the offering is oversubscribed and some or all of your funds cannot be used to purchase common stock in the offering, the 401(k) Plan trustee will return the amount not invested in common stock to the default investment fund in the 401(k) Plan.
All plan participants are eligible to direct a transfer of funds to the New HarborOne Stock Fund. However, these directions are subject to subscription rights and purchase priorities. Your order for shares in the offering will be filled based on your purchase priority in the offering. New HarborOne has granted rights to subscribe for shares of New HarborOne common stock to the following persons in the subscription offering, in descending order: (i) depositors who had accounts at HarborOne Bank with aggregate balances of at least $50 as of the close of business on February 28, 2018 (including certain former depositors of Coastway Bank, who are deemed to have opened their account at HarborOne Bank on the dates such accounts were opened at Coastway Bank), (ii) HarborOne Bank's tax-qualified employee benefit plans (including its employee stock ownership plan, the 401(k) Plan and the HarborOne Mortgage Retirement Plan) and (iii) employees, officers, directors, trustees and corporators of HarborOne Bank, any subsidiary of HarborOne Bank, or HarborOne Mutual Bancshares who are not eligible under priority (i) above. No investor in the offering may purchase fewer than 25 shares of common stock or more than 100,000 shares of common stock in the offering through one or more individual and/or joint deposit accounts, including New HarborOne Stock Fund accounts, and no individual together with any associate or group acting in concert may purchase more than 200,000 shares of common stock in the offering.
If any shares of our common stock remain unsold in the subscription offering, we will offer such shares for sale to the general public in a community offering, with a preference given to natural persons residing in the Massachusetts cities and towns of Abington, Acushnet, Attleboro, Avon, Berkley, Braintree, Bridgewater, Brockton, Canton, Carver, Cohasset, Dartmouth, Dighton, Duxbury, East Bridgewater, Easton, Fairhaven, Fall River, Foxboro, Freetown, Halifax, Hanover, Hanson, Hingham, Holbrook, Hull, Kingston, Lakeville, Mansfield, Marion, Marshfield, Mattapoisett, Middleborough, Milton, New Bedford, North Attleboro, Norton, Norwell, Plainville, Pembroke, Plymouth, Plympton, Quincy, Randolph, Raynham, Rehoboth, Rochester, Rockland, Seekonk, Scituate, Sharon, Somerset, Stoughton, Swansea, Taunton, Wareham, West Bridgewater, Westport, Weymouth
and Whitman, and the Rhode Island cities and towns of Barrington, Bristol, Burrillville, Central Falls, Charlestown, Coventry, Cranston, Cumberland, East Greenwich, East Providence, Exeter, Foster, Glocester, Hopkinton, Jamestown, Johnston, Lincoln, Little Compton, Middletown, Narragansett, New Shoreham, Newport, North Kingstown, North Providence, North Smithfield, Pawtucket, Portsmouth, Providence, Richmond, Scituate, Smithfield, South Kingstown, Tiverton, Warren, Warwick, West Greenwich, West Warwick, Westerly, and Woonsocket. The community offering, if any, may commence concurrently with, during or promptly after, the subscription offering. See "The Conversion and OfferingCommunity Offering" in the accompanying prospectus for a discussion of the community offering.
We also may offer shares of common stock not purchased in the subscription offering or the community offering through a syndicate of brokers in what is referred to as a syndicated offering or, in a separate firm commitment underwritten public offering. Sandler O'Neill & Partners, L.P. will assist us in selling the shares on a best efforts basis in the subscription offering, and if held, the community offering, and will serve as sole book-running manager for any syndicated offering or firm commitment offering. Sandler O'Neill & Partners, L.P. is not required to purchase any shares of common stock that are sold in the subscription offering or, if held, the community offering. We have the right to accept or reject, in our sole discretion, any orders received in the community or syndicated or firm commitment offering.
To ensure proper allocation of our shares of common stock, each eligible account holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on February 28, 2018. In the event of an oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. In the event of an oversubscription, the subscription rights of eligible account holders who are also our trustees, directors or officers, or any of their associates, will be subordinated to the subscription rights of other eligible account holders to the extent attributable to their increased deposits during the year preceding February 28, 2018. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the stock purchase order forms will be final.
Value of Participation Interests
As of December 31, 2018, the market value of the assets of the 401(k) Plan totaled approximately $54.5 million, and up to 25% of this amount may be used to purchase common stock in the offering. The plan administrator informed each participant of the value of his or her beneficial interest in the 401(k) Plan as of December 31, 2018 via John Hancock Retirement Plan Services at www.mylife.jhrps.com. The value of plan assets represents the past contributions to the 401(k) Plan by or on behalf of the participants of the 401(k) Plan, plus or minus earnings or losses on the contributions, less previous withdrawals.
If you want to use your 401(k) Plan funds to purchase common stock in the offering, you must complete the Special Investment Election Form included with this prospectus supplement and submit the form to Patricia Williams, Senior Vice President, Human Resources, by hand delivery, electronic mail, interoffice mail, fax or regular mail, as specified in the first paragraph of the Special Investment Form. The 401(k) Plan trustee will submit an order form on your behalf to purchase the number of shares in the offering that you have elected to purchase. To transfer the funds into the New HarborOne Stock Fund, the 401(k) Plan trustee will withdraw the amount indicated on the Special Investment Election Form from the other investment funds in which your accounts are invested on a pro rata basis. If you do not wish to purchase shares in the offering with your 401(k) Plan funds, you should still check the applicable box on the Special Investment Election Form included with this prospectus supplement and submit the form to Patricia Williams.
S-2
Please note that if you are subscribed to OnTarget, you will be automatically unsubscribed from this service in order to initiate your election to invest all or a portion of your accounts in New HarborOne common stock and that you can re-subscribe to OnTarget after the transfer is complete, by contacting John Hancock at www.mylife.jhrps.com or by calling 1-800-294-3575
Deadline for Directing Transfer in Connection with the Offering
The deadline for submitting your instructions to Patricia Williams in the Human Resources Department, to transfer your funds to the New HarborOne Stock Fund in connection with the offering is [time] p.m., Eastern time, on [date].
The 401(k) Plan deadline is earlier than the [Expiration Date] deadline for submitting stock order forms to purchase shares in the offering with funds outside of the 401(k) Plan.
Irrevocability of Transfer Direction in Connection with the Offering
Your direction to transfer amounts credited to your account in the 401(k) Plan to the New HarborOne Stock Fund in connection with the offering cannot be changed. Pending completion of the offering, the funds you elect to transfer to the New HarborOne Stock Fund will be held in an interest-bearing account until the offering is completed.
Direction to Purchase the Common Stock After the Close of the Offering
After the close of the offering, you may direct on a daily basis the 401(k) Plan trustee to transfer a certain percentage (in multiples of not less than 1%) of the net value of your interests in the other investment funds in the 401(k) Plan into the New HarborOne Stock Fund. Alternatively, you may direct the 401(k) Plan trustee to transfer a certain percentage of your interest in the New HarborOne Stock Fund into any of the other investment funds in the 401(k) Plan in accordance with the terms of the 401(k) Plan by visiting the website of John Hancock Retirement Plan Services at www.mylife.jhrps.com or by calling John Hancock Participant Services Center at 1-800-294-3575. Special restrictions may apply to transfers directed by those participants who are officers, directors and 10% shareholders of New HarborOne.
Common Stock in the Offering will be Purchased at $10 Per Share
You will pay the same price for shares of common stock as all other persons who purchase shares of the common stock in the offering. Post-conversion purchases of common stock in the New HarborOne Stock Fund will be made at prevailing market prices. These prices may be higher or lower than the current offering price of $10 per share of common stock.
Nature of a Participant's Interest in the New HarborOne Stock Fund
The 401(k) Plan purchases its underlying investments every pay period. Each investment fund's unit value is updated every business day based on the total value of its underlying investments and the number of units held in the fund. Distributions, withdrawals, and investment transfers may occur each business day. Distribution and other requests are made through John Hancock Retirement Plan Services at www.mylife.jhrps.com or by calling John Hancock Participant Services Center at 1-800-294-3575.
Voting Rights of the Common Stock
Although not required by the 401(k) Plan, it is anticipated that you will be given the opportunity to direct the 401(k) Plan trustee how to vote the shares of New HarborOne common stock held by the New HarborOne Stock Fund representing the interest in the shares that is credited to your account. If the trustee does not receive your voting instructions, the plan administrator will exercise these rights as it determines in its discretion and will direct the trustee accordingly. All voting instructions will be kept confidential.
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DESCRIPTION OF THE 401(k) PLAN
Since January 1, 1997, HarborOne Bank has maintained the 401(k) Plan. HarborOne Bank intends for the 401(k) Plan to comply, in form and in operation, with all applicable provisions of the Internal Revenue Code and the Employee Retirement Income Security Act, commonly referred to as "ERISA." HarborOne Bank may amend the 401(k) Plan from time to time to ensure continued compliance with these laws. HarborOne Bank may also amend the 401(k) Plan from time to time to add, modify, or eliminate certain features of the 401(k) Plan, as it sees fit. As a plan subject to ERISA, federal law provides you with various rights and protections as a plan participant. Although the 401(k) Plan is subject to many of the provisions of ERISA, your benefits under the 401(k) Plan are not guaranteed by the Pension Benefit Guaranty Corporation.
Applicable federal tax law requires the 401(k) Plan to impose substantial restrictions on your right to withdraw amounts held under the 401(k) Plan. Generally, withdrawals of 401(k) pre-tax and Roth deferrals are not permitted before a participant's death, disability, attainment of age 59 1 / 2 , termination of employment, except in the case of certain loans or in connection with a financial hardship. Federal law may also impose an additional 10% tax on withdrawals made from the 401(k) Plan prior to your attainment of age 59 1 / 2 , regardless of whether the withdrawal occurs during your employment with HarborOne Bank or after termination of employment.
Reference to Full Text of Plan. The following portions of this prospectus supplement summarize certain provisions of the 401(k) Plan. HarborOne Bank qualifies these summaries in their entirety by the full text of the 401(k) Plan. You may obtain copies of the 401(k) Plan document by sending a request to: Patricia Williams, Senior Vice President, Human Resources, HarborOne Bank, 770 Oak Street, Brockton, MA 02301. You should carefully read the full text of the 401(k) Plan document to understand your rights and obligations under the 401(k) Plan.
Any eligible employee of HarborOne Bank age 21 or older is eligible to make deferrals (pre-tax or Roth) into the 401(k) Plan as soon as administratively possible following the date employment commences. Participants are also eligible to receive employer match and profit sharing contributions upon attainment of age 21 and the completion of one year of service with HarborOne Bank.
As of December 31, 2018, there were 586 participants in the 401(k) Plan.
Contributions Under the 401(k) Plan
401(k) Plan Participant Contributions. The 401(k) Plan permits each participant to make pre-tax salary deferrals or Roth deferral contributions, or a combination of both, in an amount up to the statutory limit of $19,000 for participants under age 50 and $25,000 for participants age 50 or older. All newly hired eligible employees age 21 or over are automatically enrolled in the 401(k) Plan unless they elect otherwise, and 5% of compensation will be withheld from their pay automatically. Also, the contribution level of participants included in automatic enrollment will increase by 2% each year (unless they choose a different level), until it reaches 15% of their eligible compensation. These increases will occur each year on the anniversary of the participants' automatic enrollment date. Employees who do not wish to make deferrals under the 401(k) Plan must notify the plan administrator. Participants in the 401(k) Plan may modify the amount contributed to the 401(k) Plan, effective on the first day of the next payroll period, by filing a new deferral agreement with the plan administrator.
HarborOne Bank Contributions. At the time of initial hire, the plan administrator will provide each new employee with a notice that explains the automatic enrollment provisions. This notice will also
S-4
explain how an employee may elect not to have automatic deferrals made to the 401(k) Plan or how to alter the amount of the salary deferrals. HarborOne Bank may make a discretionary matching contribution to the 401(k) Plan equal to a discretionary percentage of employee deferrals. HarborOne Bank also may make a profit sharing contribution to the 401(k) Plan. The decision on whether to make a contribution and the amount of the match and/or profit sharing contribution is determined by the Board of Directors of HarborOne Bank. Any profit sharing contributions are allocated to plan participants who have completed a year of service and who are either employed on the last day of the plan year, or who retired, died or became disabled during the plan year. Assuming a profit sharing contribution is made, the Company contemplates that such contributions will be made according to the following formula:
Only compensation up to $280,000 (as adjusted) is recognized under the 401(k) Plan.
Limitation on Employee Salary Deferral. Although the 401(k) Plan permits highly compensated employees to defer up to 25% and non-highly compensated employees to defer up to 100% of your compensation, by law, your total pre-tax and Roth deferrals under the 401(k) Plan for the 2019 Plan Year, together with contributions to similar plans, may not exceed $19,000. If you are over age 50, you may contribute an additional $6,000 per year. The IRS will periodically increase these annual limitations. Contributions in excess of the limitations, or excess deferrals, will be included in an affected participant's gross income for federal income tax purposes in the year they are made. In addition, any such excess deferral made on a pre-tax basis will again be subject to federal income tax when distributed by the 401(k) Plan to the participant, unless the excess deferral, together with any income allocable thereto, is distributed to the participant not later than the first April 15th following the close of the taxable year in which the excess deferral is made. Any income on the excess deferral that is distributed not later than such date shall be treated, for federal income tax purposes, as earned and received by the participant in the taxable year in which the distribution is made.
Limitations on Annual Additions and Benefits. Under the requirements of the Internal Revenue Code, the 401(k) Plan provides that the total amount of contributions and forfeitures (annual additions) allocated to participants under the 401(k) Plan and other defined contribution plans maintained by HarborOne Bank during any plan year may not exceed the lesser of 100% of the participant's compensation, or $56,000 (as indexed for future years for increases in the cost of living).
Top-Heavy Plan Requirements. If for any calendar year the 401(k) Plan is a Top-Heavy Plan, then HarborOne Bank may be required to make certain minimum contributions to the 401(k) Plan on behalf of non-key employees.
In general, the 401(k) Plan will be treated as a "Top-Heavy Plan" for any calendar year if, as of the last day of the preceding calendar year, the aggregate balance of the accounts of participants who are "Key Employees" exceeds 60% of the aggregate balance of the accounts of all participants. While the test for whether the 401(k) Plan is a Top-Heavy Plan is subject to complex requirements under the Code, Key Employees generally include any employee who, at any time during the calendar year or any of the four preceding years, is a participant in the 401(k) Plan and is:
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The foregoing dollar amounts are for 2019 and may be adjusted periodically by the IRS.
All amounts credited to participants' accounts under the 401(k) Plan are held in trust. A trustee appointed by the Board of Directors of HarborOne Bank administers the trust.
Prior to the effective date of the offering, you were provided the opportunity to direct the investment of your account into one or more of the following options:
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New HarborOne Stock Fund. In connection with the offering, you will be permitted to invest in the HarborOne NorthEast Bancorp, Inc. Stock Fund. The New HarborOne Stock Fund will invest primarily in the common stock of New HarborOne This fund will maintain a relatively small position in a money market account to accommodate liquidity. In connection with the offering, participants in the 401(k) Plan may direct the trustee to invest up to 25% of their 401(k) Plan account balance in the New HarborOne Stock Fund. Your interest in the New HarborOne Stock Fund will be credited to your 401(k) Plan account in units, just like the other funds available under the 401(k) Plan.
As of the date of this prospectus supplement, none of the shares of common stock of HarborOne NorthEast Bancorp Inc. have been issued or are outstanding and there is no established market for the common stock of New HarborOne. Accordingly, there is no record of the historical performance of the New HarborOne Stock Fund. Performance of the New HarborOne Stock Fund depends on a number of factors, including the financial condition and profitability of New HarborOne and HarborOne Bank and market conditions for the common stock generally.
Investments in the New HarborOne Stock Fund may involve certain special risks in investments in the common stock of New HarborOne For a discussion of these risk factors, see "Risk Factors" in the accompanying prospectus.
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The following table provides performance data with respect to the investment accounts available under the 401(k) Plan through December 31, 2018 (performance results shown are net of investment management fees):
PERFORMANCE AS OF DECEMBER 31, 2018
Stock Funds
|
ONE
QUARTER |
1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
HarborOne Bancorp, Inc. |
(16.54 | )% | | | | | ||||||||||
Vanguard Treasury Money Market Investor |
0.54 | % | 1.80 | % | 0.95 | % | 0.57 | % | 0.32 | % | ||||||
Putnam Stable Value Fund |
0.31 | % | 2.24 | % | 1.97 | % | 1.88 | % | 2.35 | % | ||||||
Metropolitan West Total Return Bond M |
1.37 | % | (0.06 | )% | 1.78 | % | 2.21 | % | 5.51 | % | ||||||
Vanguard Total Bond Market Index Admiral |
1.61 | % | 90.03 | )% | 2.03 | % | 2.46 | % | 3.42 | % | ||||||
PIMCO Real Return Institutional |
(0.93 | )% | (1.97 | )% | 2.28 | % | 1.48 | % | 4.35 | % | ||||||
Pioneer Strategic Income K |
(0.38 | )% | (1.49 | )% | 4.00 | % | 3.20 | % | 7.15 | % | ||||||
BlackRock High Yield Bond Institutional |
(5.26 | )% | (2.84 | )% | 6.20 | % | 3.51 | % | 11.00 | % | ||||||
Templeton Global Bond Adv |
1.71 | % | 1.44 | % | 3.53 | % | 1.64 | % | 5.45 | % | ||||||
JPMorgan Equity Income R6 |
(9.50 | )% | (4.24 | )% | 9.13 | % | 7.76 | % | 12.59 | % | ||||||
JPMorgan US Equity R6 |
(15.20 | )% | (5.86 | )% | 8.31 | % | 7.89 | % | 13.40 | % | ||||||
Vanguard 500 Index Admiral |
(13.53 | )% | (4.43 | )% | 9.22 | % | 8.46 | % | 13.10 | % | ||||||
T. Rowe Price Institutional Large Cap Growth |
(12.85 | )% | 4.32 | % | 13.93 | % | 12.09 | % | 18.12 | % | ||||||
JHancock Disciplined Value Mid Cap R6 |
(16.74 | )% | (14.59 | )% | 4.46 | % | 5.72 | % | 14.35 | % | ||||||
Vanguard Mid-Cap Index Admiral |
(15.46 | )% | (9.23 | )% | 6.38 | % | 6.21 | % | 13.87 | % | ||||||
Janus Henderson Enterprise N |
(13.63 | )% | (0.81 | )% | 12.11 | % | 10.36 | % | 16.14 | % | ||||||
Undiscoverd Managers Behavioral Value R6 |
(20.42 | )% | (15.20 | )% | 5.21 | % | 4.99 | % | 14.85 | % | ||||||
Vanguard Small Cap Index Admiral |
(18.33 | )% | (9.31 | )% | 7.64 | % | 5.25 | % | 13.57 | % | ||||||
PNC Multi Factor Small Cap Growth I |
(21.33 | )% | (5.34 | )% | 6.26 | % | 6.05 | % | 13.32 | % | ||||||
Vanguard Total International Stock Index Admiral |
(11.68 | )% | (4.43 | )% | 4.54 | % | 0.94 | % | 6.35 | % | ||||||
American Funds EuroPacific Growth R6 |
(12.59 | )% | (14.91 | )% | 4.08 | % | 1.86 | % | 7.69 | % | ||||||
American Funds New Perspective R6 |
(13.15 | )% | (5.56 | )% | 7.66 | % | 6.42 | % | 11.76 | % | ||||||
American Funds New World R6 |
(8.09 | )% | (11.97 | )% | 6.91 | % | 2.21 | % | 8.65 | % | ||||||
JHancock Multimanager 2010 Lifetime R6 |
(5.08 | )% | (4.15 | )% | 4.56 | % | 3.38 | % | 8.18 | % | ||||||
JHancock Multimanager 2015 Lifetime R6 |
(5.08 | )% | (4.69 | )% | 4.80 | % | 3.60 | % | 8.70 | % | ||||||
JHancock Multimanager 2020 Lifetime R6 |
(7.30 | )% | (5.44 | )% | 5.22 | % | 3.92 | % | 9.30 | % | ||||||
JHancock Multimanager 2025 Lifetime R6 |
(8.81 | )% | (6.35 | )% | 5.69 | % | 4.24 | % | 9.81 | % | ||||||
JHancock Multimanager 2030 Lifetime R6 |
(10.67 | )% | (7.37 | )% | 5.99 | % | 4.45 | % | 10.17 | % | ||||||
JHancock Multimanager 2035 Lifetime R6 |
(11.56 | )% | (8.24 | )% | 6.22 | % | 4.57 | % | 10.42 | % | ||||||
JHancock Multimanager 2040 Lifetime R6 |
(12.41 | )% | (8.79 | )% | 6.42 | % | 4.68 | % | 10.49 | % | ||||||
JHancock Multimanager 2045 Lifetime R6 |
(12.59 | )% | (8.86 | )% | 6.42 | % | 4.68 | % | 10.49 | % | ||||||
JHancock Multimanager 2050 Lifetime R6 |
(12.62 | )% | (8.93 | )% | 6.39 | % | 4.68 | % | | |||||||
JHancock Multimanager 2055 Lifetime R6 |
(12.66 | )% | (8.94 | )% | 6.36 | % | | | ||||||||
JHancock Multimanager 2060 Lifetime R6 |
(12.67 | )% | (8.94 | )% | | | |
The following is a description of each of the 401(k) Plan's investment options (excerpted from each option's own description):
HarborOne Bancorp, Inc. Stock Fund This fund invests primarily in shares of HarborOne Bancorp, Inc. stock. Performance is directly tied to the performance of the company, as well as to that of the stock market as a whole.
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Vanguard Treasury Money Market Fund This fund seeks to provide current income while maintaining liquidity and a stable share price of $1. The fund invests solely in high-quality, short-term money market securities whose interest and principal payments are backed by the full faith and credit of the U.S. government. At least 80% of the fund's assets will be invested in U.S. Treasury securities; the remainder of the assets may be invested in securities issued by U.S. governmental agencies. The fund maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less.
Putnam Stable Value Fund This fund seeks to deliver intermediate-bond-like returns while maintaining a stable net asset value. Consistency, liquidity, and stability are essential to the portfolio construction process, which emphasizes diversifying the sources of returns, industries, and issuers within the portfolio.
Metropolitan West Total Return Bond M This fund seeks to maximize long-term total return. This fund pursues its objective by investing, under normal circumstances, at least 80% of its net assets in investment grade fixed income securities or unrated securities that are determined by the Adviser to be of similar quality. Up to 20% of the fund's net assets may be invested in securities rated below investment grade. This fund also invests at least 80% of its net assets plus borrowings for investment purposes in fixed income securities it regards as bonds.
Vanguard Total Bond Market Index Admiral This fund seeks to track the performance of a broad, market weighted bond index. This fund employs an indexing investment approach designed to track the performance of the Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United Statesincluding government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securitiesall with maturities of more than one year.
Pioneer Strategic Income Fund This fund seeks a high level of current income. The fund normally invests at least 80% of its net assets (plus the amount of borrowings, if any, for investment purposes) in debt securities. It invests primarily in debt securities issued or guaranteed by the U.S. government, its agencies or instrumentalities or non-U.S. governmental entities; debt securities of U.S. and non-U.S. corporate issuers; and mortgage-related securities. The fund invests in securities with a broad range of maturities and maintains an average portfolio maturity which varies based upon the judgment of the fund's investment adviser.
BlackRock High Yield Bond Institutional This fund seeks to maximize total return, consistent with income generation and prudent investment management. This fund invests primarily in non-investment grade bonds with maturities of ten years or less. This fund formally invests at least 80% of its assets in high yield bonds. The high yield securities (commonly called "junk bonds") acquired by the fund will generally be in the lower rating categories of the major rating agencies (BB or lower by Standard & Poor's or Fitch Ratings, Inc. or Ba or lower by Moody's Investor Services) or will be determined by the Fund management team to be of similar quality. This fund may invest up to 30% of its assets in non-dollar denominated bonds of issuers located outside of the United States.
PIMCO Real Return Fund This fund seeks maximum real return, consistent with preservation of capital and prudent investment management. The fund normally invests at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies or instrumentalities, and corporations, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements.
Templeton Global Bond Adv This fund seeks current income with capital appreciation and growth of income. Under normal market conditions, the fund invests at least 80% of its net assets in "bonds." Bonds include debt obligations of any maturity, such as bonds, notes, bills and debentures. It invests
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predominantly in bonds issued by governments and government agencies located around the world. This fund may invest up to 25% of its total assets in bonds that are rated below investment grade. It is non-diversified.
JPMorgan Equity Income R6 This fund seeks to provide a blend of long-term growth and current income through the consistent payments of dividends. Under normal circumstances, at least 80% of the fund's Assets will be invested in the equity securities of corporations that regularly pay dividends, including common stocks and debt securities and preferred stock convertible to common stock. Although this fund invests primarily in securities of large cap companies, it may invest in equity investments of companies across all market capitalizations. In implementing this strategy, the fund invests primarily in common stock and real estate investment trusts (REITs).
JPMorgan US Equity R6 This fund seeks to provide high total return from a portfolio of selected equity securities. Under normal circumstances, the fund invests at least 80% of its assets in equity securities of U.S. companies. "Assets" means net assets, plus the amount of borrowings for investment purposes. In implementing its strategy, the fund primarily invests in common stocks of large- and medium-capitalization U.S. companies, but it may also invest up to 20% of its assets in common stocks of foreign companies, including depositary receipts.
Vanguard 500 Index Admiral This fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. This fund employs an indexing investment approach designed to track the performance of the Standard & Poor's 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
T. Rowe Price Institutional Large Cap Growth This fund seeks to provide long-term capital appreciation through investments in common stocks of growth companies. This fund employs a growth approach to stock selection. This fund will normally invest at least 80% of its net assets (including any borrowings for investment purposes) in the common stocks of large-cap companies. This fund defines a large-cap company as one whose market capitalization is larger than the median market capitalization of companies in the Russell 1000 Growth Index, a widely used benchmark of the largest U.S. growth stocks.
JHancock Disciplined Value Mid Cap R6 This fund seeks long-term growth of capital with current income as a secondary objective. Under normal circumstances, the fund seeks to achieve its investment objectives by investing at least 80% of its net assets (including borrowings for investment purposes) in a diversified portfolio consisting primarily of equity securities, such as common stocks, of issuers with medium market capitalizations, and identified by the subadvisor as having value characteristics. It may also invest up to 20% of its total assets in foreign currency-denominated securities.
Vanguard Mid-Cap Index Admiral This fund seeks to track the performance of a benchmark index that measures the investment return of mid-capitalization stocks. This fund employs an indexing investment approach designed to track the performance of the CRSP US Mid Cap Index, a broadly diversified index of stocks of mid-size U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Janus Henderson Enterprise N This fund seeks long-term growth of capital. This fund invests primarily in common stocks selected for their growth potential, and normally invests at least 50% of its equity assets in medium-sized companies. Medium-sized companies are those whose market
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capitalization falls within the range of companies in the Russell Midcap Growth Index. This fund may also invest in foreign securities, which may include investment in emerging markets.
Undiscovered Managers Behavioral Value Fund The investment seeks capital appreciation. The fund seeks to achieve its objective by investing primarily in common stocks of U.S. companies that the fund's sub-adviser believes have value characteristics. Such common stocks include stocks of small capitalization companies, similar to those that are included in the Russell 2000 Value Index and real estate investment trusts (REITs). In selecting stocks for the fund, the sub-adviser applies principles based on behavioral finance.
Vanguard Small Cap Index Admiral This fund seeks to track an index of small-sized companies. One of the fund's primary risks is its focus on the small-cap arena. This fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Index, a broadly diversified index of stocks of small U.S. companies. This fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.
PNC Multi Factor Small Cap Growth I This fund seeks long-term capital appreciation by primarily investing in stocks of small-cap companies with market caps approximating the benchmark. Using an analytical process together with fundamental research methods, the team rates the performance potential of companies and buys those stocks that it believes offer the best prospects for superior performance relative to the securities of comparable companies.
Vanguard Total International Stock Index Admiral This fund tracks stock markets all over the globe, with the exception of the United States. This fund employs an indexing investment approach designed to track the performance of the FTSE Global All Cap ex US Index. The Index includes approximately 5,550 stocks of companies located in 46 countries. This fund invests all, or substantially all, of its assets in the common stocks included in its target index.
American Funds EuroPacific Growth R6 This fund seeks long-term growth of capital. This fund invests primarily in common stocks of issuers in Europe and the Pacific Basin that the investment adviser believes have the potential for growth. Growth stocks are stocks that the investment adviser believes have the potential for above-average capital appreciation. It normally invests at least 80% of its net assets in securities of issuers in Europe and the Pacific Basin. This fund may invest a portion of its assets in common stocks and other securities of companies in emerging markets.
American Funds New Perspective R6 This fund seeks long-term growth of capital; future income is a secondary objective. This fund seeks to take advantage of investment opportunities generated by changes in international trade patterns and economic and political relationships by investing in common stocks of companies located around the world. In pursuing its primary investment objective, it invests primarily in common stocks that the investment adviser believes have the potential for growth. In pursuing its secondary objective, this fund invests in common stocks of companies with the potential to pay dividends in the future.
American Funds New World R6 This fund seeks long-term capital appreciation. This fund invests primarily in common stocks of companies with significant exposure to countries with developing economies and/or markets. The securities markets of these countries may be referred to as emerging markets. This fund may also invest in debt securities of issuers, including issuers of lower rated bonds with exposure to these countries. Under normal market conditions, the fund will invest at least 35% of its assets in equity and debt securities of issuers primarily based in qualified countries that have developing economies and/or markets.
John Hancock Multimanager 2010 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The
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fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2010. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 40% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2015 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2015. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 46.25% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2020 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2020. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 56% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2025 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2025. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 67% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2030 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2030. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 79% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2035 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2035. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 88% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2040 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2040. It has a target asset allocation of 94% of its assets in underlying funds that invest primarily in equity securities. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time.
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John Hancock Multimanager 2045 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2045. It has a target asset allocation of 95% of its assets in underlying funds that invest primarily in equity securities. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time.
John Hancock Multimanager 2050 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2050. It has a target asset allocation of 95% of its assets in underlying funds that invest primarily in equity securities. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time.
John Hancock Multimanager 2055 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2055. It has a target asset allocation of 95% of its assets in underlying funds that invest primarily in equity securities. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time.
John Hancock Multimanager 2060 Lifetime Portfolio R6 The investment seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2060. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 95% of its assets in underlying funds that invest primarily in equity securities.
An investment in any of the funds listed above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund investment, there is always a risk that you may lose money on your investment in any of the funds listed above.
Benefits Under the 401(k) Plan
Vesting. At all times, you have a fully vested, nonforfeitable interest in your own contributions (including Roth contributions, rollover contributions, and any amounts which transferred to the 401(k) Plan as a result of its merger with the Brockton Credit Union Money Purchase Pension Plan), adjusted for earnings or losses. Your share of employer matching and profit sharing contributions, as adjusted for earnings or losses, becomes vested at 20% after two years of service, and vesting increases by 20% for each subsequent year of service until you become fully vested after six years of service. Service with Nations Heritage Federal Credit Union and Coastway Community Bank is also recognized for this purpose.
Withdrawals and Distributions From the 401(k) Plan
Withdrawals Prior to Termination of Employment. You may receive in-service distributions from the 401(k) Plan. The 401(k) Plan permits in-service withdrawals of rollover contributions at any time. If you are an eligible employee hired prior to February 1, 2017, you may also withdraw vested employer profit
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sharing contributions that have been in your account for at least two years. You may also apply for a hardship withdrawal from your salary deferral contributions and Roth deferral contributions if you are under age 59 1 / 2 . In order to qualify for a hardship withdrawal, you must have an immediate and substantial need to meet certain expenses and have no other reasonably available resources to meet the financial need. If you qualify for a hardship distribution, the trustee will make the distribution pro rata from the investment funds in which you have invested your own contributions. Hardship withdrawals may not be paid back to the 401(k) Plan. Once you attain age 59 1 / 2 , all your contributions in the 401(k) Plan are eligible for in-service withdrawals. You can also apply for a loan from the 401(k) Plan. You cannot have more than one loan outstanding at a time. You can apply for a minimum loan of $1,000 and a maximum loan equal to the lesser of (i) $50,000 or (ii) 50% of your total vested account balance.
Distribution Upon Retirement or Disability. Participants shall receive benefits as soon as administratively feasible once the distribution is requested. Distributions are payable to participants in a lump sum or installments, at the participant's election. Certain distributions may also be rolled over to another qualified plan or individual retirement account.
Distribution Upon Death. If you die prior to your benefits being paid from the 401(k) Plan, your benefits will be paid to your surviving spouse or beneficiary under one or more of the forms available under the 401(k) Plan if your vested account balance exceeds $5,000. Vested account balances of less than $5,000 will normally be made in the form of a single-sum payment. Certain distributions may also be rolled over to another qualified plan or individual retirement account.
Distribution Upon Termination for Any Other Reason. If you terminate employment for any reason other than retirement, disability or death, distribution will be made in the form of a single-sum payment as soon as administratively possible following your request for distribution. However, if your vested account balance exceeds $5,000, you may instead elect to receive your distribution in partial payments, and/or annual (or more frequent) installments over a period as limited under the 401(k) Plan. If your vested account balance does not exceed $5,000, unless you make a timely election to roll over your vested account to an eligible individual retirement account or another eligible retirement plan, or elect to have your vested account distributed to you, your vested account will be rolled over to an individual retirement account selected by the plan administrator.
Nonalienation of Benefits. Except with respect to federal income tax withholding, federal tax liens and as provided with respect to a qualified domestic relations order, benefits payable under the 401(k) Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the 401(k) Plan shall be void.
Applicable federal tax law requires the 401(k) Plan to impose substantial restrictions on your right to withdraw amounts held under the 401(k) Plan before your termination of employment with HarborOne Bank or its affiliates. Federal law may also impose an additional 10% tax on distributions from the 401(k) Plan before you attain 59 1 / 2 years of age, regardless of whether the withdrawal occurs during your employment with HarborOne Bank or its affiliates or after your termination of employment.
Administration of the 401(k) Plan
Trustee. The board of directors of HarborOne Bank has appointed John Hancock Trust Company LLC as trustee of the 401(k) Plan. The trustee receives, holds and invests the contributions to the 401(k) Plan in trust and distributes them to participants and beneficiaries in accordance with the terms of the 401(k) Plan and the directions of the plan administrator. The trustee is responsible for investment of the assets of the trust as directed by plan participants.
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Up-to-date participant statements are available 24 hours a day, seven days a week by logging in to your account via John Hancock Retirement Plan Services at www.mylife.jhrps.com.
Currently, the plan administrator of the 401(k) Plan is HarborOne Bank. The plan administrator is responsible for the administration of the 401(k) Plan, interpretation of the provisions of the plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the plan, maintenance of plan records, books of account and all other data necessary for the proper administration of the plan, and preparation and filing of all returns and reports relating to the plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under ERISA.
HarborOne Bank intends to continue the 401(k) Plan indefinitely. Nevertheless, HarborOne Bank may terminate the 401(k) Plan at any time. If HarborOne Bank terminates the 401(k) Plan in whole or in part, then regardless of other provisions in the 401(k) Plan, all participants affected by such termination shall become fully vested in their accounts. HarborOne Bank reserves the right to make, from time to time, any amendment or amendments to the 401(k) Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that HarborOne Bank may amend the 401(k) Plan as it determines necessary or desirable, with or without retroactive effect, to comply with ERISA or the Internal Revenue Code.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the 401(k) Plan with another plan, or the transfer of the trust assets to another plan, the plan requires that you would (if either the plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer (if the plan had then terminated).
Federal Income Tax Consequences
The following is only a brief summary of the material federal income tax aspects of the 401(k) Plan. You should not consider the following as a complete or definitive description of the material federal income tax consequences relating to the 401(k) Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. You are urged to consult your tax advisor with respect to any distribution from the 401(k) Plan and transactions involving the 401(k) Plan.
As a "qualified retirement plan," the Internal Revenue Code affords the 401(k) Plan special tax treatment, including:
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HarborOne Bank will administer the 401(k) Plan to comply with the requirements of the Internal Revenue Code. If HarborOne Bank receives an adverse determination letter regarding its tax exempt status from the Internal Revenue Service, all participants would generally recognize income equal to their vested interest in the plan, the participants would not be permitted to transfer amounts distributed from the 401(k) Plan to an individual retirement account or to another qualified retirement plan, and HarborOne Bank may be denied certain deductions taken with respect to the 401(k) Plan.
Lump Sum Distribution. A distribution from the 401(k) Plan to a participant or the beneficiary of a participant will qualify as a lump sum distribution if it is made within one taxable year, on account of the participant's death, disability or separation from service, or after the participant attains age 59 1 / 2 , and consists of the balance credited to the participant under the plan. The portion of any lump sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump sum distribution.
New HarborOne Common Stock Included in Lump Sum Distribution. If a lump sum distribution includes New HarborOne common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount will be reduced by the amount of any net unrealized appreciation with respect to New HarborOne common stock, that is, the excess of the value of New HarborOne common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of New HarborOne common stock for computing gain or loss on its subsequent sale equals the value of New HarborOne common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of New HarborOne common stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute long-term capital gain regardless of how long the New HarborOne common stock is held. Any gain on a subsequent sale or other taxable disposition of New HarborOne common stock in excess of the amount of net unrealized appreciation at the time of distribution will be considered either short-term or long-term capital gain, depending upon the length of the holding period of New HarborOne common stock after the date of distribution from the 401(k) Plan. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA. Generally, you may roll over virtually all distributions from the 401(k) Plan to another qualified retirement plan or to an individual retirement account.
We have provided you with a brief description of the material federal income tax aspects of the 401(k) Plan which are of general application under the Internal Revenue Code. It is not intended to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the 401(k) Plan. Accordingly, you are urged to consult a tax advisor concerning the federal, state and local tax consequences of participating in and receiving distributions from the 401(k) Plan.
Additional Employee Retirement Income Security Act Considerations
As noted above, the 401(k) Plan is subject to certain provisions of ERISA, including special provisions relating to control over the 401(k) Plan's assets by participants and beneficiaries. The 401(k) Plan's feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a "fiduciary" because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as HarborOne
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Bank, as the plan administrator, or the 401(k) Plan's trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over the assets in your 401(k) Plan account.
Because you will be entitled to invest a portion of your account balance in the 401(k) Plan in New HarborOne common stock, the regulations under ERISA section 404(c) require that the 401(k) Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the New HarborOne common stock be conducted in a way that ensures the confidentiality of your exercise of these rights.
There are restrictions on resale of shares of New HarborOne common stock applicable to persons who may be "affiliates" of New HarborOne, including any person receiving a distribution of shares of common stock under the 401(k) Plan who is an "affiliate" of New HarborOne under the Securities Act of 1933, as amended. An "affiliate" of New HarborOne is someone who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control, with New HarborOne Normally, a director, principal officer or major shareholder of a corporation may be deemed to be an "affiliate" of that corporation. A person who may be deemed an "affiliate" of New HarborOne at the time of a proposed resale will be permitted to make public resales of the common stock only under a "reoffer" prospectus or in accordance with the restrictions and conditions contained in Rule 144 under the Securities Act, or some other exemption from registration, and will not be permitted to use this prospectus in connection with any such resale. In general, the amount of the common stock which any such affiliate may publicly resell under Rule 144 in any three-month period may not exceed the greater of 1% of New HarborOne common stock then outstanding or the average weekly trading volume reported on the Nasdaq Global Market during the four calendar weeks before the sale. Such sales may be made only through brokers without solicitation and only at a time when New HarborOne is current in filing the reports required of it under the Securities Exchange Act of 1934, as amended.
Any person who may be an "affiliate" of HarborOne Bank may wish to consult with counsel before transferring any common stock they own. In addition, participants are advised to consult with counsel as to the applicability of Section 16 of the Securities Exchange Act of 1934, as amended, which may restrict the sale of New HarborOne common stock acquired under the 401(k) Plan, or other sales of New HarborOne common stock.
Persons who are not deemed to be "affiliates" of New HarborOne at the time of resale will be free to resell any shares of New HarborOne common stock distributed to them under the 401(k) Plan, either publicly or privately, without regard to the registration and prospectus delivery requirements of the Securities Act, or compliance with the restrictions and conditions contained in the exemptive rules under federal law.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," imposes reporting and liability requirements on officers, directors and persons beneficially owning more than 10% of public companies such as New HarborOne Section 16(a) of the Exchange Act requires the filing of reports of beneficial ownership. Within ten days of becoming a person required to file reports under Section 16(a), a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission, or the SEC. Certain changes in beneficial ownership involving allocation or reallocation of assets held in your 401(k) Plan account must be reported periodically, either on a
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Form 4 within two days after a transaction, or annually on a Form 5 within 45 days after the close of a company's fiscal year.
In addition to the reporting requirements described above, Section 16(b) of the Exchange Act provides for the recovery by New HarborOne of profits realized by any officer, director or any person beneficially owning more than 10% of the common stock resulting from the purchase and sale or sale and purchase of the common stock within any six-month period.
The SEC has adopted rules that exempt many transactions involving the Plan from the "short-swing" profit recovery provisions of Section 16(b). The exemptions are available if an election to transfer into the New HarborOne Stock Fund is at least six months after an election to transfer out of the New HarborOne Stock Fund, and vice versa.
Except for distributions of the common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons who are governed by Section 16(b) may, under limited circumstances involving the purchase of common stock within six months of the distribution, be required to hold shares of the common stock distributed from the 401(k) Plan for six months following the distribution date.
The validity of the issuance of the common stock has been passed upon by Goodwin Procter LLP, Boston, Massachusetts. Goodwin Procter LLP has acted as special counsel for HarborOne Bank in connection with New HarborOne's offering.
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PROSPECTUS SUPPLEMENT
Interests in
HarborOne Mortgage, LLC Retirement Plan
Offering of Participation Interests in up to 280,000 Shares of
HarborOne NorthEast Bancorp, Inc.
Common Stock
In connection with the conversion of HarborOne Mutual Bancshares from the mutual to the stock form of organization, HarborOne NorthEast Bancorp, Inc., a newly formed Massachusetts corporation, or "New HarborOne," is offering shares of common stock for sale at $10.00 per share. The shares being offered represent the ownership interest in HarborOne Bancorp, Inc., an existing Massachusetts corporation, or "Old HarborOne," currently held by HarborOne Mutual Bancshares. Old HarborOne currently owns all of the outstanding shares of common stock of HarborOne Bank, which in turn currently owns all of the outstanding membership interests of HarborOne Mortgage, LLC. Upon completion of the conversion, New HarborOne will become the successor corporation to Old HarborOne and the parent holding company for HarborOne Bank, and will change its name to "HarborOne Bancorp, Inc." Old HarborOne's common stock is currently traded on the Nasdaq Global Select Market under the trading symbol "HONE," and we expect the shares of New HarborOne common stock will also trade on the Nasdaq Global Select Market under the symbol "HONE."
In connection with the stock offering, New HarborOne is allowing participants in the HarborOne Mortgage, LLC Retirement Plan, or the "Retirement Plan," to make a one-time election to purchase participation interests in shares of New HarborOne common stock through the Retirement Plan in an amount not to exceed 25% of the participant's Retirement Plan account balance. Based upon the value of the Retirement Plan assets at December 31, 2018, the trustee of the Retirement Plan could acquire up to 280,000 shares of New HarborOne common stock, at the purchase price of $10.00 per share.
This prospectus supplement relates to the one-time election of Retirement Plan participants to direct the trustee of the Retirement Plan to invest a portion of their Retirement Plan accounts, up to a maximum of 25% of the value thereof, in New HarborOne common stock at the time of the stock offering.
The prospectus dated [prospectus date ] of New HarborOne, which accompanies this prospectus supplement, includes detailed information regarding the conversion and New HarborOne's stock offering, and the financial condition, results of operations and business of HarborOne Mortgage, LLC. This prospectus supplement provides information regarding the Retirement Plan. You should read this prospectus supplement together with the accompanying prospectus and keep both for future reference.
Please refer to "Risk Factors" beginning on page 18 of the accompanying prospectus.
The securities offered in this prospectus supplement are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation, any other government agency or the Share Insurance Fund.
None of the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks or any state securities regulator has approved or disapproved of these securities or determined if this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus supplement may be used only in connection with offers and sales by New HarborOne of interests in, or shares of, common stock acquired by the Retirement Plan. No one may use this prospectus supplement to reoffer or resell interests in, or shares of, common stock acquired through the Retirement Plan.
Neither New HarborOne nor HarborOne Mortgage, LLC has authorized any person to give any information or to make any representations other than those contained in the prospectus or this prospectus supplement, and, if given or made, no one may rely on such information or representations as having been authorized by New HarborOne, HarborOne Mortgage, LLC or the Retirement Plan.
This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction in which it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock shall under any circumstances imply that there has been no change in the affairs of New HarborOne or any of its subsidiaries incorporated by the accompanying prospectus or the Retirement Plan since the date of this prospectus supplement, or imply the information contained in this prospectus supplement is correct as of any time after the date of this prospectus supplement.
The date of this prospectus supplement is [prospectus date].
The securities offered in connection with this prospectus supplement are participation interests in the HarborOne Mortgage, LLC Retirement Plan, or the Retirement Plan. New HarborOne, the proposed holding company for HarborOne Bank, which is the parent company of HarborOne Mortgage, LLC, is the issuer of the common stock. All participants in the Retirement Plan may use up to 25% of their account balances to subscribe for shares of New HarborOne common stock in the offering, subject to the purchase priorities set forth in the plan of conversion. See "The Conversion and Offering" in the prospectus accompanying this prospectus supplement for a discussion of the purchase priorities in the offering. The interests offered under this prospectus supplement are conditioned on the consummation of the conversion and related New HarborOne stock offering.
This prospectus supplement contains information regarding the Retirement Plan. The accompanying prospectus contains information regarding the conversion from a two-tier mutual holding company structure to a fully public stock holding company structure, New HarborOne's stock offering, and the financial condition, results of operations and business of HarborOne Mortgage, LLC. The address of the principal executive office of New HarborOne is 770 Oak Street, Brockton, MA 02301. The telephone number of New HarborOne is (508) 895-1000.
Election to Purchase the Common Stock in the Offering; Priorities
In connection with the offering, you will be permitted to transfer up to 25% of the funds which represent your beneficial interest in the assets of the Retirement Plan to the New HarborOne Stock Fund (inclusive of any beneficial interest you currently hold in the HarborOne Bancorp, Inc. Stock Fund). If you elect to invest in the New HarborOne Stock Fund, the Retirement Plan trustee will subscribe for the common stock offered for sale in the offering in accordance with your direction, subject to the purchase priorities discussed below. In the event the offering is oversubscribed and some or all of your funds cannot be used to purchase common stock in the offering, the Retirement Plan trustee will return the amount not invested in common stock to the default investment fund in the Retirement Plan.
All plan participants are eligible to direct a transfer of funds to the New HarborOne Stock Fund. However, these directions are subject to subscription rights and purchase priorities. Your order for shares in the offering will be filled based on your purchase priority in the offering. New HarborOne has granted rights to subscribe for shares of New HarborOne common stock to the following persons in the subscription offering, in descending order: (i) depositors who had accounts at HarborOne Bank with aggregate balances of at least $50 as of the close of business on February 28, 2018 (including certain former depositors of Coastway Bank, who are deemed to have opened their account at HarborOne Bank on the dates such accounts were opened at Coastway Bank), (ii) HarborOne Bank's tax-qualified employee benefit plans (including its employee stock ownership plan, the HarborOne 401(k) Plan and the Retirement Plan) and (iii) employees, officers, directors, trustees and corporators of HarborOne Bank, any subsidiary of HarborOne Bank, or HarborOne Mutual Bancshares who are not eligible under priority (i) above. No investor in the offering may purchase fewer than 25 shares of common stock or more than 100,000 shares of common stock in the offering through one or more individual and/or joint deposit accounts, including New HarborOne Stock Fund accounts, and no individual together with any associate or group acting in concert may purchase more than 200,000 shares of common stock in the offering.
If any shares of our common stock remain unsold in the subscription offering, we will offer such shares for sale to the general public in a community offering, with a preference given to natural persons residing in the Massachusetts cities and towns of Abington, Acushnet, Attleboro, Avon, Berkley, Braintree, Bridgewater, Brockton, Canton, Carver, Cohasset, Dartmouth, Dighton, Duxbury, East Bridgewater, Easton, Fairhaven, Fall River, Foxboro, Freetown, Halifax, Hanover, Hanson, Hingham, Holbrook, Hull, Kingston, Lakeville, Mansfield, Marion, Marshfield, Mattapoisett, Middleborough, Milton, New Bedford, North Attleboro, Norton, Norwell, Plainville, Pembroke,
Plymouth, Plympton, Quincy, Randolph, Raynham, Rehoboth, Rochester, Rockland, Seekonk, Scituate, Sharon, Somerset, Stoughton, Swansea, Taunton, Wareham, West Bridgewater, Westport, Weymouth and Whitman, and the Rhode Island cities and towns of Barrington, Bristol, Burrillville, Central Falls, Charlestown, Coventry, Cranston, Cumberland, East Greenwich, East Providence, Exeter, Foster, Glocester, Hopkinton, Jamestown, Johnston, Lincoln, Little Compton, Middletown, Narragansett, New Shoreham, Newport, North Kingstown, North Providence, North Smithfield, Pawtucket, Portsmouth, Providence, Richmond, Scituate, Smithfield, South Kingstown, Tiverton, Warren, Warwick, West Greenwich, West Warwick, Westerly, and Woonsocket. The community offering, if any, may commence concurrently with, during or promptly after, the subscription offering. See "The Conversion and OfferingCommunity Offering" in the accompanying prospectus for a discussion of the community offering.
We also may offer shares of common stock not purchased in the subscription offering or the community offering through a syndicate of brokers in what is referred to as a syndicated offering or, in a separate firm commitment underwritten public offering. Sandler O'Neill & Partners, L.P. will assist us in selling the shares on a best efforts basis in the subscription offering, and if held, the community offering, and will serve as sole book-running manager for any syndicated offering or firm commitment offering. Sandler O'Neill & Partners, L.P. is not required to purchase any shares of common stock that are sold in the subscription offering or, if held, the community offering. We have the right to accept or reject, in our sole discretion, any orders received in the community or syndicated or firm commitment offering.
To ensure proper allocation of our shares of common stock, each eligible account holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on February 28, 2018. In the event of an oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. In the event of an oversubscription, the subscription rights of eligible account holders who are also our trustees, directors or officers, or any of their associates, will be subordinated to the subscription rights of other eligible account holders to the extent attributable to their increased deposits during the year preceding February 28, 2018. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the stock purchase order forms will be final.
Value of Participation Interests
As of December 31, 2018, the market value of the assets of the Retirement Plan totaled approximately $11.5 million, and up to 25% of this amount may be used to purchase common stock in the offering. The plan administrator informed each participant of the value of his or her beneficial interest in the Retirement Plan as of December 31, 2018 via John Hancock Retirement Plan Services at www.mylife.jhrps.com. The value of plan assets represents the past contributions to the Retirement Plan by or on behalf of the participants of the Retirement Plan, plus or minus earnings or losses on the contributions, less previous withdrawals.
If you want to use your Retirement Plan funds to purchase common stock in the offering, you must complete the Special Investment Election Form included with this prospectus supplement and submit the form to Anne Desmond, Vice President, Human Resources, by hand delivery, electronic mail, interoffice mail, fax or regular mail, as specified in the first paragraph of the Special Investment Form. The Retirement Plan trustee will submit an order form on your behalf to purchase the number of shares in the offering that you have elected to purchase. To transfer the funds into the New HarborOne Stock Fund, the Retirement Plan trustee will withdraw the amount indicated on the Special Investment Election Form from the other investment funds in which your accounts are invested on a pro rata basis. If you do not wish to purchase shares in the offering with your Retirement Plan funds,
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you should still check the applicable box on the Special Investment Election Form included with this prospectus supplement and submit the form to Anne Desmond.
Please note that if you are subscribed to OnTarget, you will be automatically unsubscribed from this service in order to initiate your election to invest all or a portion of your accounts in New HarborOne common stock and that you can re-subscribe to OnTarget after the transfer is complete, by contacting John Hancock at www.mylife.jhrps.com or by calling 1-800-294-3575.
Deadline for Directing Transfer in Connection with the Offering
The deadline for submitting your instructions to Anne Desmond in the Human Resources Department, to transfer your funds to the New HarborOne Stock Fund in connection with the offering is [time] p.m., Eastern time, on [date].
The Retirement Plan deadline is earlier than the [Expiration Date] deadline for submitting stock order forms to purchase shares in the offering with funds outside of the Retirement Plan.
Irrevocability of Transfer Direction in Connection with the Offering
Your direction to transfer amounts credited to your account in the Retirement Plan to the New HarborOne Stock Fund in connection with the offering cannot be changed. Pending completion of the offering, the funds you elect to transfer to the New HarborOne Stock Fund will be held in an interest-bearing account until the offering is completed.
Direction to Purchase the Common Stock After the Close of the Offering
After the close of the offering, you may direct on a daily basis the Retirement Plan trustee to transfer a certain percentage (in multiples of not less than 1%) of the net value of your interests in the other investment funds in the Retirement Plan into the New HarborOne Stock Fund. Alternatively, you may direct the Retirement Plan trustee to transfer a certain percentage of your interest in the New HarborOne Stock Fund into any of the other investment funds in the Retirement Plan in accordance with the terms of the Retirement Plan by visiting the website of John Hancock Retirement Plan Services at www.mylife.jhrps.com or by calling John Hancock Participant Services Center at 1-800-294-3575. Special restrictions may apply to transfers directed by those participants who are officers, directors and 10% shareholders of New HarborOne.
Common Stock in the Offering will be Purchased at $10 Per Share
You will pay the same price for shares of common stock as all other persons who purchase shares of the common stock in the offering. Post-conversion purchases of common stock in the New HarborOne Stock Fund will be made at prevailing market prices. These prices may be higher or lower than the current offering price of $10 per share of common stock.
Nature of a Participant's Interest in the New HarborOne Stock Fund
The Retirement Plan purchases its underlying investments every pay period. Each investment fund's unit value is updated every business day based on the total value of its underlying investments and the number of units held in the fund. Distributions, withdrawals, and investment transfers may occur each business day. Distribution and other requests are made through John Hancock Retirement Plan Services at www.mylife.jhrps.com or by calling John Hancock Participant Services Center at 1-800-294-3575.
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Voting Rights of the Common Stock
Although not required by the Retirement Plan, it is anticipated that you will be given the opportunity to direct the Retirement Plan trustee how to vote the shares of New HarborOne common stock held by the New HarborOne Stock Fund representing the interest in the shares that is credited to your account. If the trustee does not receive your voting instructions, the plan administrator will exercise these rights as it determines in its discretion and will direct the trustee accordingly. All voting instructions will be kept confidential.
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DESCRIPTION OF THE RETIREMENT PLAN
Since April 1, 1989, HarborOne Mortgage, LLC has maintained the Retirement Plan. HarborOne Mortgage, LLC intends for the Retirement Plan to comply, in form and in operation, with all applicable provisions of the Internal Revenue Code and the Employee Retirement Income Security Act, commonly referred to as "ERISA." HarborOne Mortgage, LLC may amend the Retirement Plan from time to time to ensure continued compliance with these laws. HarborOne Mortgage, LLC may also amend the Retirement Plan from time to time to add, modify, or eliminate certain features of the Retirement Plan, as it sees fit. As a plan subject to ERISA, federal law provides you with various rights and protections as a plan participant. Although the Retirement Plan is subject to many of the provisions of ERISA, your benefits under the Retirement Plan are not guaranteed by the Pension Benefit Guaranty Corporation.
Applicable federal tax law requires the Retirement Plan to impose substantial restrictions on your right to withdraw amounts held under the Retirement Plan. Generally, withdrawals of 401(k) pre-tax and Roth deferrals are not permitted before a participant's death, disability, attainment of age 59 1 / 2 , termination of employment, except in the case of certain loans or in connection with a financial hardship. Federal law may also impose an additional 10% tax on withdrawals made from the Retirement Plan prior to your attainment of age 59 1 / 2 , regardless of whether the withdrawal occurs during your employment with HarborOne Mortgage, LLC or after termination of employment.
Reference to Full Text of Plan. The following portions of this prospectus supplement summarize certain provisions of the Retirement Plan. HarborOne Mortgage, LLC qualifies these summaries in their entirety by the full text of the Retirement Plan. You may obtain copies of the Retirement Plan document by sending a request to: Anne Desmond, Vice President, Human Resources, HarborOne Mortgage, LLC, 1045 Elm Street, Manchester, NH 03101. You should carefully read the full text of the Retirement Plan document to understand your rights and obligations under the Retirement Plan.
Any eligible employee of HarborOne Mortgage, LLC age 21 or older is eligible to make deferrals (pre-tax or Roth) into the Retirement Plan and receive employer contributions as soon as administratively possible following the date employment commences. Temporary and seasonal employees who are otherwise eligible to participate in the Retirement Plan may become eligible to make deferrals upon the later of the attainment of age 21 and the completion of a 12 month period of employment in which he or she is credited with at least 1,000 hours of service. Temporary and seasonal employees who are otherwise eligible to participate in the Retirement Plan may become eligible to receive employer contributions as of the first day of the calendar month coincident with or following the later of the attainment of age 21 and the completion of a 12 month period of employment in which he or she is credited with at least 1,000 hours of service.
As of December 31, 2018, there were 260 participants in the Retirement Plan.
Contributions Under the Retirement Plan
Retirement Plan Participant Contributions. The Retirement Plan permits each participant to make pre-tax salary deferrals or Roth deferral contributions, or a combination of both, in an amount up to the statutory limit of $19,000 for participants under age 50 and $25,000 for participants age 50 or older. All newly hired eligible employees (other than temporary or seasonal employees) age 21 or over are automatically enrolled in the Retirement Plan unless they elect otherwise, and 5% of compensation will be withheld from their pay automatically. Also, the contribution level of participants included in automatic enrollment will increase by 2% each year (unless they choose a different level), until it
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reaches 15% of their eligible compensation. These increases will occur each year on the anniversary of the participants' automatic enrollment date. Employees who do not wish to make deferrals under the Retirement Plan must notify the plan administrator. Participants in the Retirement Plan may modify the amount contributed to the Retirement Plan, effective on the first day of the next payroll period, by filing a new deferral agreement with the plan administrator.
HarborOne Mortgage, LLC Contributions. At the time of initial hire, the plan administrator will provide each new employee with a notice that explains the automatic enrollment provisions. This notice will also explain how an employee may elect not to have automatic deferrals made to the Retirement Plan or how to alter the amount of the salary deferrals. HarborOne Mortgage, LLC may make a discretionary profit sharing contribution to the Retirement Plan. The decision on whether to make a profit sharing contribution and the amount of the profit sharing contribution is determined by the Board of Directors of HarborOne Mortgage, LLC. Any profit sharing contributions are allocated to plan participants who have completed a year of service and who are either employed on the last day of the plan year, or who retired, died or became disabled during the plan year. Assuming a profit sharing contribution is made, the Company contemplates that such contributions will be made according to the ratio that each eligible participant's compensation bears to the total compensation of all eligible participants for the period for which such contribution is made; provided, however, that for purposes of allocating profit sharing contributions, only compensation received while a participant in the Retirement Plan shall be taken into account. Only compensation up to $280,000 (as adjusted) is recognized under the Retirement Plan.
Limitation on Employee Salary Deferral. Although the 401(k) Plan permits highly compensated employees to defer up to 25% and non-highly compensated employees to defer up to 100% of your compensation, by law, your total pre-tax and Roth deferrals under the Retirement Plan for the 2019 Plan Year, together with contributions to similar plans, may not exceed $19,000. If you are over age 50, you may contribute an additional $6,000 per year. The IRS will periodically increase these annual limitations. Contributions in excess of the limitations, or excess deferrals, will be included in an affected participant's gross income for federal income tax purposes in the year they are made. In addition, any such excess deferral made on a pre-tax basis will again be subject to federal income tax when distributed by the Retirement Plan to the participant, unless the excess deferral, together with any income allocable thereto, is distributed to the participant not later than the first April 15th following the close of the taxable year in which the excess deferral is made. Any income on the excess deferral that is distributed not later than such date shall be treated, for federal income tax purposes, as earned and received by the participant in the taxable year in which the distribution is made.
Limitations on Annual Additions and Benefits. Under the requirements of the Internal Revenue Code, the Retirement Plan provides that the total amount of contributions and forfeitures (annual additions) allocated to participants under the Retirement Plan and other defined contribution plans maintained by HarborOne Mortgage, LLC during any plan year may not exceed the lesser of 100% of the participant's compensation, or $56,000 (as indexed for future years for increases in the cost of living).
Top-Heavy Plan Requirements. If for any calendar year the Retirement Plan is a Top-Heavy Plan, then HarborOne Mortgage, LLC may be required to make certain minimum contributions to the Retirement Plan on behalf of non-key employees.
In general, the Retirement Plan will be treated as a "Top-Heavy Plan" for any calendar year if, as of the last day of the preceding calendar year, the aggregate balance of the accounts of participants who are "Key Employees" exceeds 60% of the aggregate balance of the accounts of all participants. While the test for whether the Retirement Plan is a Top-Heavy Plan is subject to complex requirements
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under the Code, Key Employees generally include any employee who, at any time during the calendar year or any of the four preceding years, is a participant in the Retirement Plan and is:
The foregoing dollar amounts are for 2019 and may be adjusted periodically by the IRS.
All amounts credited to participants' accounts under the Retirement Plan are held in trust. A trustee appointed by the Board of Directors of HarborOne Mortgage, LLC administers the trust.
Prior to the effective date of the offering, you were provided the opportunity to direct the investment of your account into one or more of the following options:
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New HarborOne Stock Fund. In connection with the offering, you will be permitted to invest in the HarborOne NorthEast Bancorp, Inc. Stock Fund. The New HarborOne Stock Fund will invest primarily in the common stock of New HarborOne This fund will maintain a relatively small position in a money market account to accommodate liquidity. In connection with the offering, participants in the Retirement Plan may direct the trustee to invest up to 25% of their Retirement Plan account balance in the New HarborOne Stock Fund. Your interest in the New HarborOne Stock Fund will be credited to your Retirement Plan account in units, just like the other funds available under the Retirement Plan.
As of the date of this prospectus supplement, none of the shares of common stock of HarborOne NorthEast Bancorp Inc. have been issued or are outstanding and there is no established market for the common stock of New HarborOne. Accordingly, there is no record of the historical performance of the New HarborOne Stock Fund. Performance of the New HarborOne Stock Fund depends on a number of factors, including the financial condition and profitability of New HarborOne and HarborOne Mortgage, LLC and market conditions for the common stock generally.
Investments in the New HarborOne Stock Fund may involve certain special risks in investments in the common stock of New HarborOne For a discussion of these risk factors, see "Risk Factors" in the accompanying prospectus.
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The following table provides performance data with respect to the investment accounts available under the Retirement Plan through December 31, 2018 (performance results shown are net of investment management fees):
PERFORMANCE AS OF DECEMBER 31, 2018
Stock Funds
|
ONE
QUARTER |
1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
HarborOne Bancorp, Inc. |
(16.54 | )% | | | | | ||||||||||
Vanguard Treasury Money Market Investor |
0.54 | % | 1.80 | % | 0.95 | % | 0.57 | % | 0.32 | % | ||||||
Putnam Stable Value Fund |
0.31 | % | 2.24 | % | 1.97 | % | 1.88 | % | 2.35 | % | ||||||
Metropolitan West Total Return Bond M |
1.37 | % | (0.06 | )% | 1.78 | % | 2.21 | % | 5.51 | % | ||||||
Vanguard Total Bond Market Index Admiral |
1.61 | % | 90.03 | )% | 2.03 | % | 2.46 | % | 3.42 | % | ||||||
PIMCO Real Return Institutional |
(0.93 | )% | (1.97 | )% | 2.28 | % | 1.48 | % | 4.35 | % | ||||||
Pioneer Strategic Income K |
(0.38 | )% | (1.49 | )% | 4.00 | % | 3.20 | % | 7.15 | % | ||||||
BlackRock High Yield Bond Institutional |
(5.26 | )% | (2.84 | )% | 6.20 | % | 3.51 | % | 11.00 | % | ||||||
Templeton Global Bond Adv |
1.71 | % | 1.44 | % | 3.53 | % | 1.64 | % | 5.45 | % | ||||||
JPMorgan Equity Income R6 |
(9.50 | )% | (4.24 | )% | 9.13 | % | 7.76 | % | 12.59 | % | ||||||
JPMorgan US Equity R6 |
(15.20 | )% | (5.86 | )% | 8.31 | % | 7.89 | % | 13.40 | % | ||||||
Vanguard 500 Index Admiral |
(13.53 | )% | (4.43 | )% | 9.22 | % | 8.46 | % | 13.10 | % | ||||||
T. Rowe Price Institutional Large Cap Growth |
(12.85 | )% | 4.32 | % | 13.93 | % | 12.09 | % | 18.12 | % | ||||||
JHancock Disciplined Value Mid Cap R6 |
(16.74 | )% | (14.59 | )% | 4.46 | % | 5.72 | % | 14.35 | % | ||||||
Vanguard Mid-Cap Index Admiral |
(15.46 | )% | (9.23 | )% | 6.38 | % | 6.21 | % | 13.87 | % | ||||||
Janus Henderson Enterprise N |
(13.63 | )% | (0.81 | )% | 12.11 | % | 10.36 | % | 16.14 | % | ||||||
Undiscoverd Managers Behavioral Value R6 |
(20.42 | )% | (15.20 | )% | 5.21 | % | 4.99 | % | 14.85 | % | ||||||
Vanguard Small Cap Index Admiral |
(18.33 | )% | (9.31 | )% | 7.64 | % | 5.25 | % | 13.57 | % | ||||||
PNC Multi Factor Small Cap Growth I |
(21.33 | )% | (5.34 | )% | 6.26 | % | 6.05 | % | 13.32 | % | ||||||
Vanguard Total International Stock Index Admiral |
(11.68 | )% | (4.43 | )% | 4.54 | % | 0.94 | % | 6.35 | % | ||||||
American Funds EuroPacific Growth R6 |
(12.59 | )% | (14.91 | )% | 4.08 | % | 1.86 | % | 7.69 | % | ||||||
American Funds New Perspective R6 |
(13.15 | )% | (5.56 | )% | 7.66 | % | 6.42 | % | 11.76 | % | ||||||
American Funds New World R6 |
(8.09 | )% | (11.97 | )% | 6.91 | % | 2.21 | % | 8.65 | % | ||||||
JHancock Multimanager 2010 Lifetime R6 |
(5.08 | )% | (4.15 | )% | 4.56 | % | 3.38 | % | 8.18 | % | ||||||
JHancock Multimanager 2015 Lifetime R6 |
(5.08 | )% | (4.69 | )% | 4.80 | % | 3.60 | % | 8.70 | % | ||||||
JHancock Multimanager 2020 Lifetime R6 |
(7.30 | )% | (5.44 | )% | 5.22 | % | 3.92 | % | 9.30 | % | ||||||
JHancock Multimanager 2025 Lifetime R6 |
(8.81 | )% | (6.35 | )% | 5.69 | % | 4.24 | % | 9.81 | % | ||||||
JHancock Multimanager 2030 Lifetime R6 |
(10.67 | )% | (7.37 | ))% | 5.99 | % | 4.45 | % | 10.17 | % | ||||||
JHancock Multimanager 2035 Lifetime R6 |
(11.56 | )% | (8.24 | )% | 6.22 | % | 4.57 | % | 10.42 | % | ||||||
JHancock Multimanager 2040 Lifetime R6 |
(12.41 | )% | (8.79 | )% | 6.42 | % | 4.68 | % | 10.49 | % | ||||||
JHancock Multimanager 2045 Lifetime R6 |
(12.59 | )% | (8.86 | )% | 6.42 | % | 4.68 | % | 10.49 | % | ||||||
JHancock Multimanager 2050 Lifetime R6 |
(12.62 | )% | (8.93 | )% | 6.39 | % | 4.68 | % | | |||||||
JHancock Multimanager 2055 Lifetime R6 |
(12.66 | )% | (8.94 | )% | 6.36 | % | | | ||||||||
JHancock Multimanager 2060 Lifetime R6 |
(12.67 | )% | (8.94 | )% | | | |
The following is a description of each of the Retirement Plan's investment options (excerpted from each option's own description):
HarborOne Bancorp, Inc. Stock Fund This fund invests primarily in shares of HarborOne Bancorp, Inc. stock. Performance is directly tied to the performance of the company, as well as to that of the stock market as a whole.
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Vanguard Treasury Money Market Fund This fund seeks to provide current income while maintaining liquidity and a stable share price of $1. The fund invests solely in high-quality, short-term money market securities whose interest and principal payments are backed by the full faith and credit of the U.S. government. At least 80% of the fund's assets will be invested in U.S. Treasury securities; the remainder of the assets may be invested in securities issued by U.S. governmental agencies. The fund maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less.
Putnam Stable Value Fund This fund seeks to deliver intermediate-bond-like returns while maintaining a stable net asset value. Consistency, liquidity, and stability are essential to the portfolio construction process, which emphasizes diversifying the sources of returns, industries, and issuers within the portfolio.
Metropolitan West Total Return Bond M This fund seeks to maximize long-term total return. This fund pursues its objective by investing, under normal circumstances, at least 80% of its net assets in investment grade fixed income securities or unrated securities that are determined by the Adviser to be of similar quality. Up to 20% of the fund's net assets may be invested in securities rated below investment grade. This fund also invests at least 80% of its net assets plus borrowings for investment purposes in fixed income securities it regards as bonds.
Vanguard Total Bond Market Index Admiral This fund seeks to track the performance of a broad, market weighted bond index. This fund employs an indexing investment approach designed to track the performance of the Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United Statesincluding government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securitiesall with maturities of more than one year.
Pioneer Strategic Income Fund This fund seeks a high level of current income. The fund normally invests at least 80% of its net assets (plus the amount of borrowings, if any, for investment purposes) in debt securities. It invests primarily in debt securities issued or guaranteed by the U.S. government, its agencies or instrumentalities or non-U.S. governmental entities; debt securities of U.S. and non-U.S. corporate issuers; and mortgage-related securities. The fund invests in securities with a broad range of maturities and maintains an average portfolio maturity which varies based upon the judgment of the fund's investment adviser.
BlackRock High Yield Bond Institutional This fund seeks to maximize total return, consistent with income generation and prudent investment management. This fund invests primarily in non-investment grade bonds with maturities of ten years or less. This fund formally invests at least 80% of its assets in high yield bonds. The high yield securities (commonly called "junk bonds") acquired by the fund will generally be in the lower rating categories of the major rating agencies (BB or lower by Standard & Poor's or Fitch Ratings, Inc. or Ba or lower by Moody's Investor Services) or will be determined by the Fund management team to be of similar quality. This fund may invest up to 30% of its assets in non-dollar denominated bonds of issuers located outside of the United States.
PIMCO Real Return Fund This fund seeks maximum real return, consistent with preservation of capital and prudent investment management. The fund normally invests at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies or instrumentalities, and corporations, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements.
Templeton Global Bond Adv This fund seeks current income with capital appreciation and growth of income. Under normal market conditions, the fund invests at least 80% of its net assets in "bonds." Bonds include debt obligations of any maturity, such as bonds, notes, bills and debentures. It invests
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predominantly in bonds issued by governments and government agencies located around the world. This fund may invest up to 25% of its total assets in bonds that are rated below investment grade. It is non-diversified.
JPMorgan Equity Income R6 This fund seeks to provide a blend of long-term growth and current income through the consistent payments of dividends. Under normal circumstances, at least 80% of the fund's Assets will be invested in the equity securities of corporations that regularly pay dividends, including common stocks and debt securities and preferred stock convertible to common stock. Although this fund invests primarily in securities of large cap companies, it may invest in equity investments of companies across all market capitalizations. In implementing this strategy, the fund invests primarily in common stock and real estate investment trusts (REITs).
JPMorgan US Equity R6 This fund seeks to provide high total return from a portfolio of selected equity securities. Under normal circumstances, the fund invests at least 80% of its assets in equity securities of U.S. companies. "Assets" means net assets, plus the amount of borrowings for investment purposes. In implementing its strategy, the fund primarily invests in common stocks of large- and medium-capitalization U.S. companies, but it may also invest up to 20% of its assets in common stocks of foreign companies, including depositary receipts.
Vanguard 500 Index Admiral This fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. This fund employs an indexing investment approach designed to track the performance of the Standard & Poor's 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
T. Rowe Price Institutional Large Cap Growth This fund seeks to provide long-term capital appreciation through investments in common stocks of growth companies. This fund employs a growth approach to stock selection. This fund will normally invest at least 80% of its net assets (including any borrowings for investment purposes) in the common stocks of large-cap companies. This fund defines a large-cap company as one whose market capitalization is larger than the median market capitalization of companies in the Russell 1000 Growth Index, a widely used benchmark of the largest U.S. growth stocks.
JHancock Disciplined Value Mid Cap R6 This fund seeks long-term growth of capital with current income as a secondary objective. Under normal circumstances, the fund seeks to achieve its investment objectives by investing at least 80% of its net assets (including borrowings for investment purposes) in a diversified portfolio consisting primarily of equity securities, such as common stocks, of issuers with medium market capitalizations, and identified by the subadvisor as having value characteristics. It may also invest up to 20% of its total assets in foreign currency-denominated securities.
Vanguard Mid-Cap Index Admiral This fund seeks to track the performance of a benchmark index that measures the investment return of mid-capitalization stocks. This fund employs an indexing investment approach designed to track the performance of the CRSP US Mid Cap Index, a broadly diversified index of stocks of mid-size U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Janus Henderson Enterprise N This fund seeks long-term growth of capital. This fund invests primarily in common stocks selected for their growth potential, and normally invests at least 50% of its equity assets in medium-sized companies. Medium-sized companies are those whose market
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capitalization falls within the range of companies in the Russell Midcap Growth Index. This fund may also invest in foreign securities, which may include investment in emerging markets.
Undiscovered Managers Behavioral Value Fund The investment seeks capital appreciation. The fund seeks to achieve its objective by investing primarily in common stocks of U.S. companies that the fund's sub-adviser believes have value characteristics. Such common stocks include stocks of small capitalization companies, similar to those that are included in the Russell 2000 Value Index and real estate investment trusts (REITs). In selecting stocks for the fund, the sub-adviser applies principles based on behavioral finance. Vanguard Small Cap Index Admiral This fund seeks to track an index of small-sized companies. One of the fund's primary risks is its focus on the small-cap arena. This fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Index, a broadly diversified index of stocks of small U.S. companies. This fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.
PNC Multi Factor Small Cap Growth I This fund seeks long-term capital appreciation by primarily investing in stocks of small-cap companies with market caps approximating the benchmark. Using an analytical process together with fundamental research methods, the team rates the performance potential of companies and buys those stocks that it believes offer the best prospects for superior performance relative to the securities of comparable companies.
Vanguard Total International Stock Index Admiral This fund tracks stock markets all over the globe, with the exception of the United States. This fund employs an indexing investment approach designed to track the performance of the FTSE Global All Cap ex US Index. The Index includes approximately 5,550 stocks of companies located in 46 countries. This fund invests all, or substantially all, of its assets in the common stocks included in its target index.
American Funds EuroPacific Growth R6 This fund seeks long-term growth of capital. This fund invests primarily in common stocks of issuers in Europe and the Pacific Basin that the investment adviser believes have the potential for growth. Growth stocks are stocks that the investment adviser believes have the potential for above-average capital appreciation. It normally invests at least 80% of its net assets in securities of issuers in Europe and the Pacific Basin. This fund may invest a portion of its assets in common stocks and other securities of companies in emerging markets
American Funds New Perspective R6 This fund seeks long-term growth of capital; future income is a secondary objective. This fund seeks to take advantage of investment opportunities generated by changes in international trade patterns and economic and political relationships by investing in common stocks of companies located around the world. In pursuing its primary investment objective, it invests primarily in common stocks that the investment adviser believes have the potential for growth. In pursuing its secondary objective, this fund invests in common stocks of companies with the potential to pay dividends in the future.
American Funds New World R6 This fund seeks long-term capital appreciation. This fund invests primarily in common stocks of companies with significant exposure to countries with developing economies and/or markets. The securities markets of these countries may be referred to as emerging markets. This fund may also invest in debt securities of issuers, including issuers of lower rated bonds with exposure to these countries. Under normal market conditions, the fund will invest at least 35% of its assets in equity and debt securities of issuers primarily based in qualified countries that have developing economies and/or markets.
John Hancock Multimanager 2010 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed
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for investors expected to retire around the year 2010. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 40% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2015 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2015. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 46.25% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2020 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2020. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 56% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2025 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2025. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 67% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2030 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2030. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 79% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2035 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2035. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 88% of its assets in underlying funds that invest primarily in equity securities.
John Hancock Multimanager 2040 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2040. It has a target asset allocation of 94% of its assets in underlying funds that invest primarily in equity securities. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time.
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John Hancock Multimanager 2045 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2045. It has a target asset allocation of 95% of its assets in underlying funds that invest primarily in equity securities. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time.
John Hancock Multimanager 2050 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2050. It has a target asset allocation of 95% of its assets in underlying funds that invest primarily in equity securities. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time.
John Hancock Multimanager 2055 Lifetime Portfolio R6 This fund seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2055. It has a target asset allocation of 95% of its assets in underlying funds that invest primarily in equity securities. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time.
John Hancock Multimanager 2060 Lifetime Portfolio R6 The investment seeks high total return through the fund's target retirement date, with a greater focus on income beyond the target date. The fund invests substantially all of its assets in underlying funds using an asset allocation strategy designed for investors expected to retire around the year 2060. The portfolio managers of the fund allocate assets among the underlying funds according to an asset allocation strategy that becomes increasingly conservative over time. It has a target asset allocation of 95% of its assets in underlying funds that invest primarily in equity securities.
An investment in any of the funds listed above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund investment, there is always a risk that you may lose money on your investment in any of the funds listed above.
Benefits Under the Retirement Plan
Vesting. At all times, you have a fully vested, nonforfeitable interest in your own contributions (including Roth contributions and rollover contributions, , adjusted for earnings or losses. If you were a participant in the 401(k) Plan on March 31, 2018, your share of employer matching contributions previously made to the 401(k) Plan and profit sharing contributions, as adjusted for earnings or losses, becomes vested at a rate of 25% after each year of service until you become fully vested after four years of service. If you became a participant in the 401(k) Plan after March 31, 2018, your share of employer profit sharing contributions, as adjusted for earnings or losses, becomes vested at 20% after two years of service, and vesting increases by 20% for each subsequent year of service until you become fully vested after six years of service. Service with Schaefer Mortgage Corporation, Mount Vernon Mortgage Company, and Coastway Community Bank is also recognized for this purpose.
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Withdrawals and Distributions From the Retirement Plan
Withdrawals Prior to Termination of Employment. You may receive in-service distributions from the Retirement Plan. The Retirement Plan permits in-service withdrawals of rollover contributions at any time. You may also apply for a hardship withdrawal from your salary deferral contributions and Roth deferral contributions if you are under age 59 1 / 2 . In order to qualify for a hardship withdrawal, you must have an immediate and substantial need to meet certain expenses and have no other reasonably available resources to meet the financial need. If you qualify for a hardship distribution, the trustee will make the distribution pro rata from the investment funds in which you have invested your own contributions. Hardship withdrawals may not be paid back to the Retirement Plan. Once you attain age 59 1 / 2 , all your contributions in the Retirement Plan are eligible for in-service withdrawals. You can also apply for a loan from the Retirement Plan. You cannot have more than one loan outstanding at a time. You can apply for a minimum loan of $1,000 and a maximum loan equal to the lesser of (i) $50,000 or (ii) 50% of your total vested account balance.
Distribution Upon Retirement or Disability. Participants shall receive benefits as soon as administratively feasible once the distribution is requested. Distributions are payable to participants in a lump sum or installments, at the participant's election. Certain distributions may also be rolled over to another qualified plan or individual retirement account.
Distribution Upon Death. If you die prior to your benefits being paid from the Retirement Plan, your benefits will be paid to your surviving spouse or beneficiary under one or more of the forms available under the Retirement Plan if your vested account balance exceeds $5,000. Vested account balances of less than $5,000 will normally be made in the form of a single-sum payment. Certain distributions may also be rolled over to another qualified plan or individual retirement account.
Distribution Upon Termination for Any Other Reason. If you terminate employment for any reason other than retirement, disability or death, distribution will be made in the form of a single-sum payment as soon as administratively possible following your request for distribution. However, if your vested account balance exceeds $5,000, you may instead elect to receive your distribution in partial payments, and/or annual (or more frequent) installments over a period as limited under the Retirement Plan. If your vested account balance does not exceed $5,000, unless you make a timely election to roll over your vested account to an eligible individual retirement account or another eligible retirement plan, or elect to have your vested account distributed to you, your vested account will be rolled over to an individual retirement account selected by the plan administrator.
Nonalienation of Benefits. Except with respect to federal income tax withholding, federal tax liens and as provided with respect to a qualified domestic relations order, benefits payable under the Retirement Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the Retirement Plan shall be void.
Applicable federal tax law requires the Retirement Plan to impose substantial restrictions on your right to withdraw amounts held under the Retirement Plan before your termination of employment with HarborOne Mortgage, LLC or its affiliates. Federal law may also impose an additional 10% tax on distributions from the Retirement Plan before you attain 59 1 / 2 years of age, regardless of whether the withdrawal occurs during your employment with HarborOne Mortgage, LLC or its affiliates or after your termination of employment.
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Administration of the Retirement Plan
Trustee. The board of directors of HarborOne Mortgage, LLC has appointed John Hancock Trust Company LLC as trustee of the Retirement Plan. The trustee receives, holds and invests the contributions to the Retirement Plan in trust and distributes them to participants and beneficiaries in accordance with the terms of the Retirement Plan and the directions of the plan administrator. The trustee is responsible for investment of the assets of the trust as directed by plan participants.
Up-to-date participant statements are available 24 hours a day, seven days a week by logging in to your account via John Hancock Retirement Plan Services at www.mylife.jhrps.com.
Currently, the plan administrator of the Retirement Plan is HarborOne Mortgage, LLC. The plan administrator is responsible for the administration of the Retirement Plan, interpretation of the provisions of the plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the plan, maintenance of plan records, books of account and all other data necessary for the proper administration of the plan, and preparation and filing of all returns and reports relating to the plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under ERISA.
HarborOne Mortgage, LLC intends to continue the Retirement Plan indefinitely. Nevertheless, HarborOne Mortgage, LLC may terminate the Retirement Plan at any time. If HarborOne Mortgage, LLC terminates the Retirement Plan in whole or in part, then regardless of other provisions in the Retirement Plan, all participants affected by such termination shall become fully vested in their accounts. HarborOne Mortgage, LLC reserves the right to make, from time to time, any amendment or amendments to the Retirement Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that HarborOne Mortgage, LLC may amend the Retirement Plan as it determines necessary or desirable, with or without retroactive effect, to comply with ERISA or the Internal Revenue Code.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Retirement Plan with another plan, or the transfer of the trust assets to another plan, the plan requires that you would (if either the plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer (if the plan had then terminated).
Federal Income Tax Consequences
The following is only a brief summary of the material federal income tax aspects of the Retirement Plan. You should not consider the following as a complete or definitive description of the material federal income tax consequences relating to the Retirement Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. You are urged to consult your tax advisor with respect to any distribution from the Retirement Plan and transactions involving the Retirement Plan.
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As a "qualified retirement plan," the Internal Revenue Code affords the Retirement Plan special tax treatment, including:
HarborOne Mortgage, LLC will administer the Retirement Plan to comply with the requirements of the Internal Revenue Code. If HarborOne Mortgage, LLC receives an adverse determination letter regarding its tax exempt status from the Internal Revenue Service, all participants would generally recognize income equal to their vested interest in the plan, the participants would not be permitted to transfer amounts distributed from the Retirement Plan to an individual retirement account or to another qualified retirement plan, and HarborOne Mortgage, LLC may be denied certain deductions taken with respect to the Retirement Plan.
Lump Sum Distribution. A distribution from the Retirement Plan to a participant or the beneficiary of a participant will qualify as a lump sum distribution if it is made within one taxable year, on account of the participant's death, disability or separation from service, or after the participant attains age 59 1 / 2 , and consists of the balance credited to the participant under the plan. The portion of any lump sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump sum distribution.
New HarborOne Common Stock Included in Lump Sum Distribution. If a lump sum distribution includes New HarborOne common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount will be reduced by the amount of any net unrealized appreciation with respect to New HarborOne common stock, that is, the excess of the value of New HarborOne common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of New HarborOne common stock for computing gain or loss on its subsequent sale equals the value of New HarborOne common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of New HarborOne common stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute long-term capital gain regardless of how long the New HarborOne common stock is held. Any gain on a subsequent sale or other taxable disposition of New HarborOne common stock in excess of the amount of net unrealized appreciation at the time of distribution will be considered either short-term or long-term capital gain, depending upon the length of the holding period of New HarborOne common stock after the date of distribution from the Retirement Plan. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA. Generally, you may roll over virtually all distributions from the Retirement Plan to another qualified retirement plan or to an individual retirement account.
We have provided you with a brief description of the material federal income tax aspects of the Retirement Plan which are of general application under the Internal Revenue Code. It is not intended to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the Retirement Plan. Accordingly, you are urged to consult a tax advisor concerning the federal, state and local tax consequences of participating in and receiving distributions from the Retirement Plan.
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Additional Employee Retirement Income Security Act Considerations
As noted above, the Retirement Plan is subject to certain provisions of ERISA, including special provisions relating to control over the Retirement Plan's assets by participants and beneficiaries. The Retirement Plan's feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a "fiduciary" because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as HarborOne Mortgage, LLC, as the plan administrator, or the Retirement Plan's trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over the assets in your Retirement Plan account.
Because you will be entitled to invest a portion of your account balance in the Retirement Plan in New HarborOne common stock, the regulations under ERISA section 404(c) require that the Retirement Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the New HarborOne common stock be conducted in a way that ensures the confidentiality of your exercise of these rights.
There are restrictions on resale of shares of New HarborOne common stock applicable to persons who may be "affiliates" of New HarborOne, including any person receiving a distribution of shares of common stock under the Retirement Plan who is an "affiliate" of New HarborOne under the Securities Act of 1933, as amended. An "affiliate" of New HarborOne is someone who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control, with New HarborOne Normally, a director, principal officer or major shareholder of a corporation may be deemed to be an "affiliate" of that corporation. A person who may be deemed an "affiliate" of New HarborOne at the time of a proposed resale will be permitted to make public resales of the common stock only under a "reoffer" prospectus or in accordance with the restrictions and conditions contained in Rule 144 under the Securities Act, or some other exemption from registration, and will not be permitted to use this prospectus in connection with any such resale. In general, the amount of the common stock which any such affiliate may publicly resell under Rule 144 in any three-month period may not exceed the greater of 1% of New HarborOne common stock then outstanding or the average weekly trading volume reported on the Nasdaq Global Market during the four calendar weeks before the sale. Such sales may be made only through brokers without solicitation and only at a time when New HarborOne is current in filing the reports required of it under the Securities Exchange Act of 1934, as amended.
Any person who may be an "affiliate" of HarborOne Mortgage, LLC may wish to consult with counsel before transferring any common stock they own. In addition, participants are advised to consult with counsel as to the applicability of Section 16 of the Securities Exchange Act of 1934, as amended, which may restrict the sale of New HarborOne common stock acquired under the Retirement Plan, or other sales of New HarborOne common stock.
Persons who are not deemed to be "affiliates" of New HarborOne at the time of resale will be free to resell any shares of New HarborOne common stock distributed to them under the Retirement Plan, either publicly or privately, without regard to the registration and prospectus delivery requirements of the Securities Act, or compliance with the restrictions and conditions contained in the exemptive rules under federal law.
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SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," imposes reporting and liability requirements on officers, directors and persons beneficially owning more than 10% of public companies such as New HarborOne Section 16(a) of the Exchange Act requires the filing of reports of beneficial ownership. Within ten days of becoming a person required to file reports under Section 16(a), a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission, or the SEC. Certain changes in beneficial ownership involving allocation or reallocation of assets held in your Retirement Plan account must be reported periodically, either on a Form 4 within two days after a transaction, or annually on a Form 5 within 45 days after the close of a company's fiscal year.
In addition to the reporting requirements described above, Section 16(b) of the Exchange Act provides for the recovery by New HarborOne of profits realized by any officer, director or any person beneficially owning more than 10% of the common stock resulting from the purchase and sale or sale and purchase of the common stock within any six-month period.
The SEC has adopted rules that exempt many transactions involving the Plan from the "short-swing" profit recovery provisions of Section 16(b). The exemptions are available if an election to transfer into the New HarborOne Stock Fund is at least six months after an election to transfer out of the New HarborOne Stock Fund, and vice versa.
Except for distributions of the common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons who are governed by Section 16(b) may, under limited circumstances involving the purchase of common stock within six months of the distribution, be required to hold shares of the common stock distributed from the Retirement Plan for six months following the distribution date.
The validity of the issuance of the common stock has been passed upon by Goodwin Procter LLP, Boston, Massachusetts. Goodwin Procter LLP has acted as special counsel for HarborOne Mortgage, LLC in connection with New HarborOne's offering.
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SUBSCRIPTION AND COMMUNITY
OFFERING PROSPECTUS
HARBORONE NORTHEAST BANCORP, INC.
(Proposed Holding Company for HarborOne Bank)
Up to 31,050,000 Shares of Common Stock
HarborOne NorthEast Bancorp, Inc., a newly formed Massachusetts corporation, is offering up to 31,050,000 shares of common stock for sale at $10.00 per share on a best efforts basis in connection with the conversion of HarborOne Mutual Bancshares from the mutual holding company to the stock holding company form of organization. The shares we are offering represent the ownership interest in HarborOne Bancorp, Inc., an existing Massachusetts corporation, currently held by HarborOne Mutual Bancshares. In this prospectus, we refer to HarborOne NorthEast Bancorp, Inc. as "New HarborOne" and we refer to HarborOne Bancorp, Inc. as "Old HarborOne." Old HarborOne's common stock is currently traded on the Nasdaq Global Select Market under the trading symbol "HONE," and we expect the shares of New HarborOne common stock will also trade on the Nasdaq Global Select Market under the symbol "HONE." We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.
The shares of common stock are first being offered in a subscription offering to eligible depositors of HarborOne Bank and to tax-qualified employee benefit plans of HarborOne Bank, as described in this prospectus. Eligible depositors and tax-qualified employees have priority rights to buy all the shares offered. Eligible depositors include certain former depositors of Coastway Community Bank, or "Coastway Bank," which was recently merged into HarborOne Bank. Coastway Bank depositors are deemed to have opened their accounts at HarborOne Bank on the date such accounts were opened at Coastway Bank. Any shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with preference given to the residents of specified cities and towns of Massachusetts and Rhode Island. Any shares of common stock not purchased in the subscription or community offerings may be offered to the general public through a syndicate of broker-dealers, referred to in this prospectus as the syndicated offering, or, in a separate firm commitment underwritten public offering. The syndicated offering or the firm commitment offering may commence before the subscription and community offerings (including any extensions) have expired. The subscription, community, syndicated and firm commitment offerings are collectively referred to in this prospectus as the offering. We must sell a minimum of 22,950,000 shares in order to complete the offering.
In addition to the shares we are selling in the offering, the shares of Old HarborOne currently held by the public will be exchanged for shares of common stock of New HarborOne based on an exchange ratio that will result in existing public shareholders of Old HarborOne owning approximately the same percentage of New HarborOne common stock as they owned in Old HarborOne common stock immediately prior to the completion of the conversion. The number of shares we expect to issue in the exchange ranges from 20,288,349 shares to 27,448,942 shares.
The minimum order is 25 shares. The subscription and community offerings are expected to expire at 7:00 p.m., Eastern Time, on [Expiration Date]. We may extend this expiration date without notice to you until [Extension Date #1], unless we receive regulatory approval to extend the offering to a later date, which may not be beyond [Extension Date #2]. Once submitted, orders are irrevocable unless the subscription and community offerings are terminated or extended, with regulatory approval, beyond [Extension Date #1], or the number of shares of common stock to be sold is increased to more than 31,050,000 shares or decreased to less than 22,950,000 shares. If the offering is extended past [Extension Date #1], or the number of shares of common stock to be sold is increased to more than 31,050,000 shares or decreased to fewer than 22,950,000 shares, we will resolicit subscribers, giving them an opportunity to change or cancel their orders. Funds received during the offering will be held in a segregated account at HarborOne Bank, and will earn interest at our statement savings rate, which is currently 0.07% per annum.
Sandler O'Neill & Partners, L.P. will assist us in selling the shares on a best efforts basis in the subscription offering, and if held, the community offering, and will serve as sole book-running manager for any syndicated offering or firm commitment offering. Sandler O'Neill & Partners, L.P. is not required to purchase any shares of common stock that are sold in the subscription offering or, if held, the community offering.
OFFERING SUMMARY
Price: $10.00 per Share
|
Minimum | Midpoint | Maximum | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Number of shares |
22,950,000 | 27,000,000 | 31,050,000 | |||||||
Gross offering proceeds |
$ | 229,500,000 | $ | 270,000,000 | $ | 310,500,000 | ||||
Estimated offering expenses, excluding selling agent and underwriters' commissions |
$ | 2,040,000 | $ | 2,040,000 | $ | 2,040,000 | ||||
Selling agent and underwriters' commissions(1) |
$ | 1,679,938 | $ | 1,959,3888 | $ | 2,238,838 | ||||
Estimated net proceeds |
$ | 225,780,063 | $ | 266,000,612 | $ | 306,221,162 | ||||
Estimated net proceeds per share |
$ | 9.84 | $ | 9.85 | $ | 9.86 |
This investment involves a degree of risk, including the possible loss of principal. Please read "Risk Factors" beginning on page 18.
These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation, any other government agency or the Share Insurance Fund of the Co-operative Central Bank. None of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
For assistance, please contact the Stock Information Center at [phone number].
The date of this prospectus is [prospectus date].
[MAP TO BE INSERTED ON INSIDE FRONT COVER]
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The following summary highlights material information in this prospectus. It may not contain all the information that is important to you. Before making an investment decision, you should read this entire prospectus carefully, including the audited consolidated financial statements and the notes thereto, and the section of this prospectus entitled "Risk Factors."
In this prospectus, "New HarborOne" refers to HarborOne NorthEast Bancorp, Inc., "Old HarborOne "refers to HarborOne Bancorp, Inc., and "HarborOne Bank" or the "Bank" refers to HarborOne Bank. The terms "we," "our," and "us" refer to New HarborOne or Old HarborOne and HarborOne Bank, together with their consolidated subsidiaries, unless the context indicates another meaning.
HarborOne NorthEast Bancorp, Inc. This offering is made by HarborOne NorthEast Bancorp, Inc., a Massachusetts corporation. Upon completion of the conversion, New HarborOne will become the successor corporation to Old HarborOne and the parent company for HarborOne Bank, and will change its name to HarborOne Bancorp, Inc.
HarborOne Bancorp, Inc. HarborOne Bancorp, Inc. is a Massachusetts corporation formed in 2016 as part of the reorganization of HarborOne Bank into the two-tier mutual holding company form of organization. In 2018, Old HarborOne acquired Coastway Bancorp, Inc., or "Coastway," the holding company of Coastway Community Bank, or "Coastway Bank." Old HarborOne is a publicly-traded stock holding company and currently owns 100% of HarborOne Bank. Old HarborOne's other subsidiary is Legion Parkway Company LLC, a security corporation formed in 2016.
At December 31, 2018, Old HarborOne had consolidated assets of $3.65 billion, deposits of $2.69 billion and stockholders' equity of $357.6 million.
As of February 28, 2019, Old HarborOne had 32,560,136 shares of common stock outstanding, of which 15,279,102 shares, or approximately 47%, was owned by the public. The remaining shares of common stock of Old HarborOne are held by HarborOne Mutual Bancshares, a Massachusetts-chartered mutual holding company, or "HarborOne Mutual Bancshares." The shares of common stock New HarborOne is offering represent HarborOne Mutual Bancshares' ownership interest in Old HarborOne.
HarborOne Mutual Bancshares. HarborOne Mutual Bancshares is a Massachusetts-chartered mutual holding company formed in 2016 as part of the reorganization of HarborOne Bank into a two-tier mutual holding company form of organization. HarborOne Mutual Bancshares currently owns approximately 53% of Old HarborOne's outstanding shares of common stock and, through its board of trustees, currently exercises voting control over virtually all matters put to a vote of Old HarborOne's shareholders, other than matters that would require the approval of members of HarborOne Mutual Bancshares, who are HarborOne Bank's depositors, such as the second step conversion of Old HarborOne into New HarborOne to be effected in connection with this offering. HarborOne Mutual Bancshares does not engage in any business activities other than those relating to owning a majority of the common stock of Old HarborOne. Upon completion of the conversion, HarborOne Mutual Bancshares will no longer exist.
HarborOne Bank. HarborOne Bank is the largest state-chartered co-operative bank in New England. The Bank was established in 1917 as Brockton Credit Union and converted to a Massachusetts co-operative bank in 2013 to better support our continued growth, including the expansion of our business lending program. In 2015, the Bank acquired Merrimack Mortgage Company, Inc., a residential mortgage company headquartered in Manchester, New Hampshire, which
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is now known as HarborOne Mortgage, LLC, or "HarborOne Mortgage." In 2016, the Bank reorganized into a two-tier mutual holding company structure. In 2018, following the acquisition of Coastway by Old HarborOne, Coastway Bank merged into the Bank.
HarborOne Bank provides financial services to individuals, families, small and mid-size businesses and municipalities throughout Southeastern Massachusetts and Rhode Island through our network of 24 full-service branches, one limited-service branch, our ATM network and online banking. We also provide a range of educational services through "HarborOne U," with classes on small business, financial literacy and personal enrichment at classroom sites adjacent to our Brockton and Mansfield locations. While our primary deposit-gathering area is concentrated within our branch office communities and surrounding cities and towns, our lending area encompasses the broader market of New England. The Bank maintains a commercial lending office in each of Boston, Massachusetts, and Providence, Rhode Island. HarborOne Mortgage maintains 34 offices in Massachusetts, Rhode Island, New Hampshire, Maine, and New Jersey, and is licensed to lend in five additional states.
Our executive offices are located at 770 Oak Street, Brockton, Massachusetts 02301, and the telephone number is (508) 895-1000. Our website address is www.harborone.com. Information on this website is not and should not be considered a part of this prospectus.
We have been operating continuously in and around Brockton, Massachusetts, since 1917. We are committed to meeting the financial needs of consumers and small and middle-market businesses in the communities in which we operate now and in the future, and we are dedicated to providing exceptional personal service to our customers. We plan to employ the following strategies to maximize profitability:
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Co-operative Central Bank. At December 31, 2018, we had $255.1 million in municipal deposits and relationships with over 40 cities and towns.
See "Business of HarborOne Bank" for further discussion of our business strategy.
Our Organizational Structure and the Proposed Conversion
Since 2016, we have operated in a two-tier mutual holding company structure. Pursuant to the terms of the plan of conversion, we are converting from a two-tier mutual holding company structure to a fully public stock holding company structure. As part of the conversion, HarborOne Mutual Bancshares, the mutual holding company parent of Old HarborOne, will merge with and into Old HarborOne, with Old HarborOne as the resulting entity. Old HarborOne, which owns 100% of HarborOne Bank, will be merged into a new Massachusetts corporation named HarborOne NorthEast Bancorp, Inc. HarborOne NorthEast Bancorp, Inc. will then own 100% of HarborOne Bank.
The shares of New HarborOne being offered in this offering represent the approximately 53% ownership interest in Old HarborOne currently held by HarborOne Mutual Bancshares. When the conversion is completed, Old HarborOne and HarborOne Mutual Bancshares will cease to exist, and New HarborOne will become the successor corporation to Old HarborOne. HarborOne Mutual Bancshares' shares of Old HarborOne will be cancelled. Shares of Old HarborOne currently owned by
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HarborOne Bank charitable foundations will be exchanged for shares of New HarborOne, but no additional shares will be contributed to the foundation in connection with the conversion and offering.
At the completion of the conversion and offering, all of the outstanding common stock of HarborOne Bank will be owned by New HarborOne, and all of the outstanding common stock of New HarborOne will be owned by public shareholders. Each share of Old HarborOne common stock owned by persons other than HarborOne Mutual Bancshares will be converted automatically into the right to receive new shares of New HarborOne common stock determined pursuant to an exchange ratio. The exchange ratio will ensure that immediately after the exchange of existing shares of Old HarborOne for new shares of New HarborOne, the public shareholders will own the same aggregate percentage of shares of common stock of New HarborOne that they owned in Old HarborOne immediately prior to the conversion, excluding any shares they purchased in the offering and their receipt of cash paid in lieu of fractional shares.
The following diagram shows our current organizational structure, reflecting ownership percentages as of February 28, 2019:
After the conversion and offering are completed, we will be organized as a fully public stock holding company, with the stock of New HarborOne held as follows:
Reasons for the Conversion and Offering
Our primary reasons for converting and undertaking the offering are to:
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For further information about our reasons for the conversion and offering, see "The Conversion and OfferingReasons for the Conversion and Offering."
We are offering between 22,950,000 and 31,050,000 shares of common stock in the offering. The purchase price of each share of common stock offered for sale in the offering is $10.00, and all investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, the community offering or a syndicated or firm commitment offering. Investors will not be charged a commission to purchase shares of common stock in the offering. Sandler O'Neill & Partners, L.P. will assist us in selling the shares on a best efforts basis in the subscription offering, and if held, the community offering, and will serve as sole book-running manager for any syndicated offering or firm commitment offering. Sandler O'Neill & Partners, L.P. is not required to purchase any shares of common stock that are sold in the subscription offering or, if held, the community offering.
Unless the number of shares of common stock to be offered is increased to more than 31,050,000 shares or decreased to fewer than 22,950,000 shares, or the subscription and community offerings are extended beyond [Extension Date #1], subscribers in the subscription offering and in any community or syndicated or firm commitment offering will not have the opportunity to change or cancel their stock orders once submitted.
Persons Who May Order Shares of Common Stock in the Subscription and Community Offerings
We are offering shares of common stock in a subscription offering in the following descending order of priority:
Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to natural persons and trusts of natural persons residing in the Massachusetts cities and towns of Abington, Acushnet, Attleboro, Avon, Berkley, Braintree, Bridgewater, Brockton, Canton, Carver, Cohasset, Dartmouth, Dighton, Duxbury, East Bridgewater, Easton, Fairhaven, Fall River, Foxboro, Freetown, Halifax, Hanover, Hanson, Hingham, Holbrook, Hull, Kingston, Lakeville, Mansfield, Marion, Marshfield, Mattapoisett, Middleborough, Milton, New Bedford, North Attleboro, Norton, Norwell, Plainville, Pembroke, Plymouth, Plympton, Quincy, Randolph, Raynham, Rehoboth, Rochester, Rockland, Seekonk, Scituate, Sharon, Somerset, Stoughton, Swansea, Taunton, Wareham, West Bridgewater, Westport, Weymouth
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and Whitman, and the Rhode Island cities and towns of Barrington, Bristol, Burrillville, Central Falls, Charlestown, Coventry, Cranston, Cumberland, East Greenwich, East Providence, Exeter, Foster, Glocester, Hopkinton, Jamestown, Johnston, Lincoln, Little Compton, Middletown, Narragansett, New Shoreham, Newport, North Kingstown, North Providence, North Smithfield, Pawtucket, Portsmouth, Providence, Richmond, Scituate, Smithfield, South Kingstown, Tiverton, Warren, Warwick, West Greenwich, West Warwick, Westerly, and Woonsocket.
The community offering may begin concurrently with, during or promptly after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering or the community offering through a syndicated or firm commitment offering. Sandler O'Neill & Partners, L.P. will act as sole book-running manager for any syndicated or firm commitment offering. We have the right to accept or reject, in our sole discretion, orders received in the community or syndicated or firm commitment offering, and our interpretation of the terms and conditions of the plan of conversion will be final, subject to the authority of the Massachusetts Commissioner of Banks. Any determination to accept or reject stock orders in the community or syndicated or firm commitment offering will be based on the facts and circumstances available to management at the time of the determination.
If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. See " The Conversion and Offering" for a detailed description of each of the subscription offering, the community offering, the syndicated offering and the firm commitment offering, as well as a discussion regarding allocation procedures.
How We Determined the Offering Range, the Exchange Ratio and the $10.00 Per Share Stock Price
The amount of common stock we are offering for sale and the exchange ratio for the exchange of shares of New HarborOne for shares of Old HarborOne are based on an independent appraisal of the estimated market value of New HarborOne, assuming the offering has been completed. RP Financial, LC., our independent appraiser, has estimated that, as of February 8, 2019, this market value was $508.7 million. Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $432.4 million and a maximum of $585.0 million. Based on this valuation range, the approximately 53% ownership interest of HarborOne Mutual Bancshares in Old HarborOne as of December 31, 2018 being sold in the offering and the $10.00 per share price, the number of shares of common stock being offered for sale by New HarborOne ranges from 22,950,000 shares to 31,050,000 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The exchange ratio ranges from 1.3276 shares at the minimum of the offering range to 1.7961 shares at the maximum of the offering range, and will generally preserve the existing percentage ownership of public shareholders.
The appraisal is based in part on Old HarborOne's financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of 10 publicly traded bank holding companies and savings and
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loan holding companies that RP Financial, LC. considers comparable to Old HarborOne. The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market.
Company Name
|
Ticker
Symbol |
Headquarters | Total Assets(1) | |||||
---|---|---|---|---|---|---|---|---|
|
|
|
(In millions)
|
|||||
Dime Community Bancshares, Inc. |
DCOM | Brooklyn, New York | $ | 6,321 | ||||
ESSA Bancorp, Inc. |
ESSA | Stroudsburg, Pennsylvania | $ | 1,863 | ||||
First Defiance Financial Corp. |
FDEF | Defiance, Ohio | $ | 3,182 | ||||
Kearny Financial Corp. |
KRNY | Fairfield, New Jersey | $ | 6,702 | ||||
Meridian Bancorp, Inc. |
EBSB | Boston, Massachusetts | $ | 6,179 | ||||
Northfield Bancorp, Inc. |
NFBK | Woodbridge, New Jersey | $ | 4,408 | ||||
Oritani Financial Corp. |
ORIT | Township of Washington, New Jersey | $ | 4,090 | ||||
TrustCo Bank Corp NY |
TRST | Glenville, New York | $ | 4,959 | ||||
Waterstone Financial, Inc. |
WSBF | Wauwatosa, Wisconsin | $ | 1,915 | ||||
Western New England Bancorp, Inc. |
WNEB | Westfield, Massachusetts | $ | 2,119 |
The following table presents a summary of selected pricing ratios for New HarborOne (on a pro forma basis) as of and for the year ended December 31, 2018, and for the peer group companies based on earnings and other information as of and for the year ended December 31, 2018, with stock prices as of February 8, 2019, as reflected in the appraisal report. Compared to the average pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 30.4% on a price-to-book value basis, a discount of 26.5% on a price-to-tangible book value basis, and a premium of 96.4% on a price-to-earnings basis.
|
Price-to earnings
multiple(1) |
Price-to-book
value ratio |
Price-to-tangible
book value ratio |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
New HarborOne (on a pro forma basis, assuming completion of conversion) |
||||||||||
Maximum |
37.15x | 93.37 | % | 106.72 | % | |||||
Midpoint |
32.27x | 86.06 | % | 99.21 | % | |||||
Minimum |
27.40x | 77.76 | % | 90.58 | % | |||||
Valuation of peer group companies, all of which are fully converted (on an historical basis) |
||||||||||
Averages |
16.43x | 123.57 | % | 134.98 | % | |||||
Medians |
14.62x | 118.16 | % | 127.78 | % |
The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were used by RP Financial, LC. to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.
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For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see " The Conversion and Offering Stock Pricing and Number of Shares to be Issued ."
Effect of HarborOne Mutual Bancshares' Assets on Minority Stock Ownership
The public shareholders of Old HarborOne will receive shares of common stock of New HarborOne in exchange for their shares of common stock of Old HarborOne pursuant to an exchange ratio that is designed to provide, subject to adjustment, existing public shareholders with the same ownership percentage of common stock of New HarborOne after the conversion as their ownership percentage in Old HarborOne immediately prior to the conversion, without giving effect to new shares purchased in the offering or cash paid in lieu of any fractional shares. However, the exchange ratio will be adjusted downward to reflect assets held by HarborOne Mutual Bancshares (other than shares of stock of Old HarborOne), which assets consist primarily of cash. HarborOne Mutual Bancshares had net assets of $99,000 as of December 31, 2018, not including Old HarborOne common stock. This adjustment would decrease Old HarborOne's public shareholders' ownership interest in New HarborOne from 46.93% to 46.92%, and would increase the ownership interest of persons who purchase stock in the offering from approximately 53.07% (the amount of Old HarborOne's outstanding common stock held by HarborOne Mutual Bancshares) to 53.08%.
The Exchange of Existing Shares of Old HarborOne Common Stock
If you are currently a shareholder of Old HarborOne, at the completion of the conversion, your shares will be exchanged for shares of common stock of New HarborOne. The number of shares of common stock you will receive will be based on the exchange ratio, which will depend upon our final appraised value and the percentage of outstanding shares of Old HarborOne common stock owned by public shareholders immediately prior to the completion of the conversion. The following table shows how the exchange ratio will adjust, based on the appraised value of New HarborOne as of February 8, 2019, assuming public shareholders of Old HarborOne own 46.93% of Old HarborOne common stock and HarborOne Mutual Bancshares had net assets of $99,000 immediately prior to the completion of the conversion. The table also shows the number of shares of New HarborOne common stock a hypothetical owner of Old HarborOne common stock would receive in exchange for 100 shares of Old HarborOne common stock owned at the completion of the conversion, depending on the number of shares of common stock issued in the offering.
|
|
|
|
|
Total
Shares of Common Stock to be Issued in Exchange and Offering |
|
|
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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|
|
|
|
|
|
Equivalent
Pro Forma Tangible Book Value Per Exchanged Share(2) |
|
||||||||||||||||||||
|
|
|
Shares of New
HarborOne to be Issued for Shares of Old HarborOne |
|
Equivalent
Value of Shares Based Upon Offering Price(1) |
Shares
to be Received for 100 Existing Shares(3) |
||||||||||||||||||||||
|
Shares to be Sold
in This Offering |
|
||||||||||||||||||||||||||
|
Exchange
Ratio |
|||||||||||||||||||||||||||
|
Amount | Percent | Amount | Percent | ||||||||||||||||||||||||
Minimum |
22,950,000 | 53.08 | % | 20,288,349 | 46.92 | % | 43,238,349 | 1.3276 | $ | 13.28 | $ | 14.66 | 132 | |||||||||||||||
Midpoint |
27,000,000 | 53.08 | % | 23,868,645 | 46.92 | % | 50,868,645 | 1.5618 | $ | 15.62 | $ | 15.74 | 156 | |||||||||||||||
Maximum |
31,050,000 | 53.08 | % | 27,448,942 | 46.92 | % | 58,498,942 | 1.7961 | $ | 17.96 | $ | 16.83 | 179 |
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No fractional shares of New HarborOne common stock will be issued to any public shareholder of Old HarborOne. For each fractional share that otherwise would be issued, New HarborOne will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder otherwise would be entitled by the $10.00 per share offering price.
Outstanding options to purchase shares of Old HarborOne common stock also will convert into and become options to purchase shares of New HarborOne common stock based upon the exchange ratio. The aggregate exercise price, duration and vesting schedule of these options will not be affected by the conversion. At December 31, 2018, there were 990,520 outstanding options to purchase shares of Old HarborOne common stock, 294,427 of which have vested. Such outstanding options will be converted into options to purchase 1,315,014 shares of common stock at the minimum of the offering range and 1,779,073 shares of common stock at the maximum of the offering range. Because Massachusetts regulations prohibit us from repurchasing our common stock in the three years following the conversion other than in certain circumstances, we may use authorized but unissued shares to fund option exercises that occur following the conversion. If all existing options were exercised and funded with authorized but unissued shares of common stock following the conversion, shareholders would experience ownership dilution of approximately 3.0% at the minimum of the offering range.
Possible Change in the Offering Range
RP Financial, LC. will update its appraisal before we complete the offering. If our pro forma market value at that time is either below $432.4 million or above $585.0 million, then, after consulting with the Board of Governors of the Federal Reserve System, or the "Federal Reserve," and the Massachusetts Commissioner of Banks, we may:
How We Intend to Use the Proceeds from the Offering
We intend to invest 50% of the net proceeds from the offering in HarborOne Bank and to use a portion of the remaining proceeds to fund a loan to our employee stock ownership plan to finance its purchase of shares of common stock in this offering. The remainder of the net proceeds from the offering will be retained by us. Therefore, assuming we sell 27,000,000 shares of common stock in the offering at the midpoint of the offering range, and we have net proceeds of $266.0 million, we intend to invest $133.0 million in HarborOne Bank, loan $21.6 million to our employee stock ownership plan to fund its purchase of shares of common stock, and retain the remaining $111.4 million of the net proceeds at New HarborOne.
New HarborOne may use the funds it retains to invest in securities; to finance potential expansion and diversification of operations through organic growth or acquisitions, although we do not currently have any agreements or understandings regarding any specific acquisition transaction; to repurchase shares of our common stock, subject to regulatory approval; to pay cash dividends to shareholders; or for other general corporate purposes. HarborOne Bank may use the proceeds it receives to invest in securities; to fund new loans; to enhance existing products and services and develop new products and services; to expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise,
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although we do not currently have any understandings or agreements to acquire a financial institution or other entity; or for other general corporate purposes.
See " Use of Proceeds " for more information on the proposed use of the proceeds from the offering.
Limits on How Much Common Stock You May Purchase
The minimum number of shares of common stock that may be purchased is 25 shares.
Generally, no individual may purchase more than 100,000 shares ($1,000,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 200,000 shares ($2,000,000) of common stock:
Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying deposit accounts registered to the same address will be subject to the overall purchase limitation of 200,000 shares ($2,000,000).
In addition to the above purchase limitations, there is an ownership limitation for current shareholders of Old HarborOne other than our employee stock ownership plan. Shares of common stock that you purchase in the offering individually and together with persons described above, plus any shares you and they receive in exchange for existing shares of Old HarborOne common stock, may not exceed 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and offering. However, if, based on your current ownership level, you will own more than 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and offering following the exchange of your shares of Old HarborOne common stock, you will be ineligible to purchase any new shares in the offering. You will be required to obtain regulatory approval or non-objection prior to acquiring 10% or more of New HarborOne's common stock.
Subject to regulatory approval, we may increase or decrease the purchase and ownership limitations at any time. See the detailed description of the purchase limitations in " The Conversion and Offering Additional Limitations on Common Stock Purchases ."
How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering
In the subscription offering and the community offering, you may pay for your shares only by:
Regulations prohibit HarborOne Bank from lending funds or extending credit to any persons to purchase shares of common stock in the offering. You may not use cash or a check drawn on a
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HarborOne Bank line of credit, and we will not accept third-party checks (a check written by someone other than you) payable to you and endorsed over to HarborOne NorthEast Bancorp, Inc. Wire transfers will not be accepted without our prior approval. Once we receive your executed order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by the expiration date, in which event you may be given the opportunity to increase, decrease or rescind your order(s) for a specified period of time. You may not authorize direct withdrawal from a HarborOne Bank retirement account. See "Using Retirement Account Funds to Purchase Shares of Common Stock" below.
See " The Conversion and OfferingProcedure for Purchasing Shares in the Subscription and Community Offerings " for a complete description of how to purchase shares in the offering.
Using Individual Retirement Account Funds to Purchase Shares of Common Stock
You may be able to subscribe for shares of common stock using funds in your individual retirement account, or "IRA." If you wish to use funds that are currently in your IRA or other retirement account held at HarborOne Bank, the funds you wish to use will have to be transferred to a self-directed account maintained by an independent trustee, such as a brokerage account with a broker who is willing and able to facilitate your purchase in the offering. It may take several weeks to transfer the funds in your IRA to an independent trustee, so please allow yourself sufficient time to take this action. Depositors interested in using funds in an individual retirement account or any other retirement account to purchase shares of common stock should contact our Stock Information Center as soon as possible, preferably at least two weeks prior to the end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.
See " The Conversion and Offering Procedure for Purchasing Shares in Subscription and Community Offerings Payment for Shares " and " Using Individual Retirement Account Funds " for a complete description of how to use IRA funds to purchase shares in the offering.
Deadline for Orders of Common Stock
The deadline for purchasing shares of common stock in the subscription and community offerings is 7:00 p.m., Eastern Time, on [Expiration Date], unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time. You may submit your stock order form and payment by mail using the stock order reply envelope provided or by overnight mail to our Stock Information Center, which will be located at [Stock Information Center location]. You may also hand-deliver stock order forms to the Stock Information Center. Hand-delivered stock order forms will only be accepted at this location. We will not accept stock order forms at our branches or banking offices. Please do not mail stock order forms to HarborOne Bank's branches or banking offices.
Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 7:00 p.m., Eastern Time, on [Expiration Date], whether or not we have been able to locate each person entitled to subscription rights.
See " The Conversion and Offering Procedure for Purchasing Shares in Subscription and Community Offerings Expiration Date " for a complete description of the deadline for purchasing shares in the offering.
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Delivery of Shares of Common Stock
All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering or the next business day. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described below in " Conditions to Completion of the Conversion ." Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they purchased, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.
Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 22,950,000 shares of common stock, we may take several steps in order to sell the minimum number of shares of common stock in the offering range. Specifically, we may:
If we extend the offering beyond [Extension Date #1], we will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. If a subscriber does not respond, we will cancel his or her stock order and return his or her subscription funds, with interest at our statement savings rate, and cancel any authorization to withdraw funds from interest-bearing deposit accounts for the purchase of shares of common stock. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the then-applicable limit.
Conditions to Completion of the Conversion
We cannot complete the conversion and offering unless:
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HarborOne Mutual Bancshares intends to vote its shares in favor of the plan of conversion. At February 28, 2019, HarborOne Mutual Bancshares owned approximately 53% of the outstanding shares of common stock of Old HarborOne. The directors and executive officers of Old HarborOne and their affiliates owned 802,527 shares of Old HarborOne (excluding exercisable options), or 2.46% of the outstanding shares of common stock and 5.25% of the outstanding shares of common stock excluding shares held by HarborOne Mutual Bancshares. They intend to vote those shares in favor of the plan of conversion.
You May Not Sell or Transfer Your Subscription Rights
Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal or state agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe you have sold or transferred your subscription rights. On the order form, you cannot add the names of others for joint stock registration unless they are also named on the qualifying deposit account, and you cannot delete names of others except in the case of certain orders placed through an IRA, Keogh, 401(k) or similar plan, and except in the event of the death of a named eligible depositor. Doing so may jeopardize your subscription rights. In addition, the stock order form requires that you list all deposit accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation if there is an oversubscription.
Purchases by Directors and Executive Officers
We expect our directors and executive officers, together with their associates, to subscribe for 181,500 shares of common stock in the offering, representing 0.8% of shares to be sold at the minimum of the offering range. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Following the conversion, our directors and executive officers, together with their associates, are expected to beneficially own 1,586,319 shares of our common stock (including stock options exercisable within 60 days of [Record Date]), or 3.67% of our total outstanding shares of common stock at the minimum of the offering range, which includes shares they currently own that will be exchanged for shares of New HarborOne.
See " Subscriptions by Directors and Executive Officers " for more information on the proposed purchases of shares of common stock by our directors and executive officers.
Benefits to Management and Potential Dilution to Shareholders Resulting from the Conversion
We expect our employee stock ownership plan, which is a tax-qualified retirement plan for the benefit of all HarborOne Bank employees, to purchase up to 8.0% of the shares of common stock we sell in the offering. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan's subscription order will not be filled and the employee stock ownership plan may elect to purchase shares in the open market following the completion of the conversion, subject to the approval of the Federal Reserve and the Massachusetts Commissioner of Banks.
We intend to implement one or more new stock-based benefit plans no earlier than six months after completion of the conversion. Shareholder approval of these plans would be required. We have not determined whether we would adopt the plans within 12 months following the completion of the conversion. If we implement stock-based benefit plans within 12 months following the completion of the conversion, the stock-based benefit plans would be limited to reserving a number of shares (i) up to
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4.0% of the shares of common stock sold in the offering (reduced by amounts purchased by our 401(k) plan using its purchase priority in the offering) for awards of restricted stock to key employees and directors, at no cost to the recipients, and (ii) up to 10.0% of the shares of common stock sold in the offering for issuance pursuant to the exercise of stock options by key employees and directors. If the stock-based benefit plan is adopted more than 12 months after the completion of the conversion, it would not be subject to the percentage limitations set forth above. We have not yet determined the number of shares that would be reserved for issuance under these plans. For a description of our current stock-based benefit plan, see " Management Benefit Plans 2017 Stock Option and Incentive Plan ."
The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that are available under one or more stock-based benefit plans if such plans reserve a number of shares of common stock equal to 4.0% and 10.0% of the shares sold in the offering for restricted stock awards and stock options, respectively. The table shows the dilution to shareholders if all such shares are issued from authorized but unissued shares, instead of shares purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all qualifying employees.
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Value of Grants
(in thousands)(1) |
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Number of Shares to be Granted or Purchased |
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Dilution
Resulting From Issuance of Shares for Stock-Based Benefit Plans |
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At Minimum
of Offering Range |
At Maximum
of Offering Range |
As a Percentage
of Common Stock to be Sold in the Offering |
At Minimum
of Offering Range |
At Maximum
of Offering Range |
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Employee stock ownership plan |
1,836,000 | 2,484,000 | 8.00 | % | N/A | (2) | $ | 18,360 | $ | 24,840 | |||||||||
Restricted stock awards |
918,000 | 1,242,000 | 4.00 | % | 2.08 | % | 9,180 | 12,420 | |||||||||||
Stock options |
2,295,000 | 3,105,000 | 10.00 | % | 5.04 | % | 6,770 | 9,160 | |||||||||||
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Total |
5,049,000 | 6,831,000 | 22.00 | % | 6.92 | % | $ | 34,310 | $ | 46,240 | |||||||||
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We may fund our stock-based benefit plans through open market purchases, as opposed to new issuances of stock; however, if any options previously granted under our existing 2017 Stock Option and Incentive Plan are exercised during the first year following completion of the offering, they will be funded with newly issued shares as Massachusetts regulations do not permit us to repurchase our shares in the three year except under certain circumstances.
The following table presents information as of December 31, 2018 regarding our employee stock ownership plan, our 2017 Stock Option and Incentive Plan and our proposed stock-based benefit plan.
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The table below assumes that 58,498,942 shares are outstanding after the offering, which includes the sale of 31,050,000 shares in the offering at the maximum of the offering range and the issuance of new shares in exchange for shares of Old HarborOne using an exchange ratio of 1.7961. It also assumes that the value of the stock is $10.00 per share.
Existing and New Stock Benefit Plans
|
Participants |
Shares at
Maximum of Offering Range |
Estimated
Value of Shares |
Percentage of
Shares Outstanding After the Conversion |
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Employee Stock Ownership Plan: |
Officers and Employees | |||||||||||
Shares purchased in 2016 offering(1)(2) |
2,132,308 | $ | 21,323,084 | 3.65 | % | |||||||
Shares to be purchased in this offering |
2,484,000 | $ | 24,840,000 | 4.25 | % | |||||||
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Total employee stock ownership plan shares |
4,616,308 | $ | 46,163,084 | 7.89 | % | |||||||
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Restricted Stock Awards: |
Officers and Employees | |||||||||||
2017 Equity Incentive Plan(1)(3)(4) |
941,661 | $ | 9,625,799 | 1.61 | % | |||||||
New shares of restricted stock(4) |
1,242,000 | $ | 12,420,000 | 2.12 | % | |||||||
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Total shares of restricted stock |
2,183,661 | $ | 22,045,799 | 3.73 | % | |||||||
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Stock Options: |
Officers and Employees | |||||||||||
2017 Equity Incentive Plan(1)(5) |
1,779,073 | $ | 5,021,936 | 3.04 | % | |||||||
New stock options(6) |
3,105,000 | $ | 9,159,750 | 5.31 | % | |||||||
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Total stock options |
4,884,073 | $ | 14,181,686 | 8.35 | % | |||||||
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Total of stock benefit plans |
11,684,042 | $ | 82,390,569 | 19.97 | % | |||||||
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will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.
Existing publicly held shares of Old HarborOne's common stock are listed on the Nasdaq Global Select Market under the symbol "HONE." Upon completion of the conversion, the shares of common stock of New HarborOne will replace the existing shares, and we expect the shares of New HarborOne common stock will also trade on the Nasdaq Global Select Market under the symbol "HONE." Sandler O'Neill has advised us that it intends to make a market in our common stock following the offering but is under no obligation to do so.
Following completion of the offering, our board of directors will have the authority to declare dividends on our common stock, subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. However, no decision has been made with respect to the amount, if any, and timing of any dividend payments. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future. To date, Old HarborOne has not paid any dividends. For information regarding our proposed dividend policy, see "Dividend Policy."
Material Income Tax Consequences
We have received an opinion of counsel from Goodwin Procter LLP regarding the material federal income tax consequences and the material Massachusetts corporate excise and personal income tax consequences of the conversion. As a general matter, the conversion qualifies as a tax-free transaction. Existing shareholders of Old HarborOne who receive cash in lieu of fractional shares of New HarborOne will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share. See " The Conversion and Offering Material Income Tax Consequences " for a complete discussion of the income tax consequences of the transaction.
Emerging Growth Company Status
As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, or the "JOBS Act." An emerging growth company may take advantage of specified relief from reporting requirements and other burdens that are applicable to other public companies. These provisions include:
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We may remain an emerging growth company for up to five years from our initial public offering in June 2016, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the "Exchange Act," which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
In addition, pursuant to the JOBS Act, we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
How You Can Obtain Additional Information
Our branch office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or the offering, please call our Stock Information Center at [phone number], Monday through Friday between [time] a.m. and [time] p.m., Eastern Time. You may also visit our Stock Information Center, located at [address], which is open Monday through Friday between [time] a.m. and [time] p.m. The Stock Information Center will be closed on weekends and bank holidays.
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Investing in our common stock involves a high degree of risk. Before making your decision to invest in shares of our common stock, you should carefully consider the risks described below, together with the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus and the matters addressed in the section of this prospectus titled "Forward-Looking Statements" on page 30. The events discussed below could have a material adverse impact on our business, results of operations, financial condition and cash flows. If that were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment.
Commercial real estate and commercial loans carry greater credit risk than loans secured by owner occupied one- to four-family real estate.
We intend to continue our focus on prudently growing our commercial real estate and commercial loan portfolio. At December 31, 2018, our commercial real estate loan portfolio was $934.4 million, or 31.4% of total loans, and our commercial loan portfolio was $277.3 million, or 9.3% of total loans. Given their larger balances and the complexity of the underlying collateral, commercial real estate and commercial loans generally expose a lender to greater credit risk than loans secured by owner occupied one- to four-family real estate. Also, many of our borrowers or related groups of borrowers have more than one of these types of loans outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential real estate loan. If loans that are collateralized by real estate or other business assets become troubled and the value of the collateral has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses which would in turn adversely affect our operating results and financial condition. Further, if we foreclose on the collateral, our holding period for the collateral may be longer than for one- to four-family real estate loans because there are fewer potential purchasers of the collateral, which can result in substantial holding costs.
The unseasoned nature of our commercial real estate and commercial loan portfolio may result in changes to our estimates of collectability, which may lead to additional provisions or charge-offs, which could hurt our profits.
Our commercial real estate loan portfolio increased to $934.4 million at December 31, 2018 from $655.4 million at December 31, 2017 and $142.5 million at December 31, 2014, and our commercial loan portfolio increased to $277.3 million at December 31, 2018 from $109.5 million at December 31, 2017 and $47.5 million at December 31, 2014. The increases in 2018 were due in part to our acquisition of Coastway. A large portion of our commercial real estate and commercial loan portfolio is unseasoned and does not provide us with a significant payment or charge-off history pattern from which to judge future collectability. Currently we estimate potential charge-offs using peer data adjusted for qualitative factors specific to us. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience or current estimates, which could adversely affect our future performance. Further, these types of loans generally have larger balances and involve a greater risk than one- to four-family residential mortgage loans. Accordingly, if we make any errors in judgment in the collectability of our commercial or commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred historically with our residential mortgage loan or consumer loan portfolios.
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Our commercial and residential construction loans are subject to various lending risks depending on the nature of the borrower's business, its cash flow and our collateral.
At December 31, 2018, our commercial construction loan portfolio was $161.7 million, or 5.4% of total loans, and our residential construction loan portfolio consisted of $14.7 million, or 0.5% of total loans. Our construction loans are based upon estimates of costs to construct and the value associated with the completed project. These estimates may be inaccurate due to the uncertainties inherent in estimating construction costs, as well as the market value of the completed project, making it relatively difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. Delays in completing the project may arise from labor problems, material shortages and other unpredictable contingencies. If the estimate of construction costs is inaccurate, we may be required to advance additional funds to complete construction. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project.
Environmental liability associated with commercial lending could result in losses.
In the course of business, we may acquire, through foreclosure or other similar proceedings, properties securing loans we have originated that are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered at these properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of this remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties as a result of their condition. These events could have an adverse effect on our business, results of operations and financial condition.
Our business may be adversely affected by credit risks associated with residential property.
At December 31, 2018, one- to four-family residential real estate loans were $942.7 million, or 31.6% of total loans. One- to four-family residential mortgage lending, whether owner occupied or non-owner occupied, is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations. Declines in real estate values could cause some of our residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral. Residential loans with combined higher loan-to-value ratios are more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the sale proceeds. For those home equity loans and lines of credit secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property. For these reasons, we may experience higher rates of delinquencies, default and losses on our home equity loans.
The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.
While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is composed of loans
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secured by property located in the greater Boston metropolitan area and, to a lesser extent, the greater Providence metropolitan area. This makes us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local economy such as unemployment, recession, a catastrophic event or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income, level of non-performing loans and the allowance for loan losses. Decreases in local real estate values caused by economic conditions or other events could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. For more information about our market area, see " Business of HarborOne Bank Market Area " and " Competition ."
An increase in interest rates or changes in the secondary mortgage market may reduce our mortgage banking revenues, which would negatively impact our non-interest income.
We sell residential mortgage loans in the secondary market, which provides a significant portion of our non-interest income. We generate mortgage banking revenues primarily from gains on the sale of mortgage loans to investors on a servicing-released and retained basis. We also earn interest on loans held for sale while they are awaiting delivery to our investors. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues. In addition, to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for single-family mortgage loans and potentially increased investor yield requirements for those loans. These conditions may fluctuate or even worsen in the future or during a prolonged period of secondary market illiquidity. We believe our ability to retain mortgage loans at the levels generated by the mortgage division is limited. Furthermore, our results of operations are affected by the amount of non-interest expenses associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in mortgage loan origination activity.
We use significant assumptions and estimates in our financial models to determine the fair value of certain assets, including mortgage servicing rights, origination commitments and loans held for sale. If our assumptions or estimates are incorrect, that may have a negative impact on the fair value of such assets and adversely affect our earnings.
We use internal and third party financial models that utilize market data to value certain assets, including mortgage servicing rights when they are initially acquired and on a quarterly basis thereafter. The methodology used to estimate these values is complex and uses asset-specific collateral data and market inputs for interest and discount rates and liquidity dates. Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of our valuation methodologies. If prepayment speeds increase more than estimated, or if delinquency or default levels are higher than anticipated, we may be required to write down the value of certain assets, which could adversely affect our earnings. Prepayment speeds are significantly impacted by fluctuations in interest rates and are therefore difficult to predict. During periods of declining interest rates, prepayment speeds increase resulting in a decrease in the fair value of the mortgage servicing rights. In addition, there can be no assurance that, even if our models are correct, these assets could be sold for our carrying value should we chose or be forced to sell them in the open market.
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If we are required to repurchase mortgage loans that we have previously sold, it could negatively affect our earnings.
In connection with selling residential mortgage loans in the secondary market, our agreements with investors contain standard representations and warranties and early payment default clauses that could require us to repurchase mortgage loans sold to these investors or reimburse the investors for losses incurred on loans in the event of borrower default within a defined period after origination or, in the event of breaches of contractual representations or warranties made at the time of sale that are not remedied within a defined period after we receive notice of such breaches, or refund the profit received from the sale of a loan to an investor if the borrower pays off the loan within a defined period after origination. If we are required to repurchase mortgage loans or provide indemnification or other recourse, this could significantly increase our costs and thereby affect our future earnings.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital could decrease.
At December 31, 2018, our allowance for loan losses was $20.7 million, or 0.69% of total loans, compared to $18.5 million, or 0.84% of total loans, at December 31, 2017. The decrease in the allowance for loan losses as a percent of total loans outstanding was due to the addition of Coastway loans, as loans acquired are recorded at fair value and have no corresponding allowance for loan losses. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for many of our loans. In determining the amount of the allowance for loan losses, we review our loans, loss and delinquency experience, and commercial and commercial real estate peer data and we evaluate other factors including, among other things, current economic conditions. If our assumptions are incorrect, or if delinquencies or non-performing loans increase, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance, which could materially decrease our net income.
In addition, our regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to increase the allowance for loan losses by recognizing additional provisions for loan losses charged to income, or to charge-off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan losses or charge-offs could have a material adverse effect on our financial condition and results of operations.
Our portfolio of indirect auto lending and auto lease lending exposes us to increased credit risks.
Historically, we originated auto loans through a network of auto dealers in Massachusetts and Rhode Island, a practice that we discontinued in April 2018. We also originated auto lease loans through our relationship with Credit Union Leasing of America, or "CULA." We expect to continue to originate auto lease loans. At December 31, 2018, our indirect auto loan portfolio was $85.8 million, or 2.9% of total loans, and our indirect auto lease loan portfolio was $384.2 million, or 12.9% of total loans. Auto loans and auto lease loans are inherently risky as they are often secured by assets that may be difficult to locate and can depreciate rapidly. In some cases, repossessed collateral for a defaulted auto loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency may not warrant further substantial collection efforts against the borrower. Auto loan collections depend on the borrower's continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers.
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We depend on our relationship with Credit Union Leasing of America to grow our auto lease loan portfolio.
While we stopped originating indirect auto loans in 2018, we continue to fund indirect auto lease loans for the leasing of new or used automobiles through our relationship with CULA. At December 31, 2018, $384.2 million, or 12.9% of our total loan portfolio, consisted of auto lease loans. While these loans are originated through a network of dealers in Massachusetts and Rhode Island, CULA assigns the auto lease loans to us. We plan to continue to originate auto lease loans through our relationship with CULA. If our relationship with CULA were terminated, or if CULA changed its business model, that could impede our ability to grow our auto lease loan portfolio, and thus have an adverse effect on our financial condition and results of operations.
A portion of our loan portfolio consists of loan participations, which may have a higher risk of loss than loans we originate because we are not the lead lender and we have limited control over credit monitoring.
We occasionally purchase loan participations. Although we underwrite these loan participations consistent with our general underwriting criteria, loan participations may have a higher risk of loss than loans we originate because we rely on the lead lender to monitor the performance of the loan. Moreover, our decision regarding the classification of a loan participation and loan loss provisions associated with a loan participation is made in part based upon information provided by the lead lender. A lead lender also may not monitor a participation loan in the same manner as we would for loans that we originate. At December 31, 2018, we held loan participation interests in commercial real estate, commercial and commercial construction loans totaling $223.2 million.
Changes in interest rates may hurt our results of operations and financial condition.
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Changes in the general level of interest rates can affect our net interest income by affecting the difference between the weighted-average yield earned on our interest-earning assets and the weighted-average rate paid on our interest-bearing liabilities, or interest rate spread, and the average life of our interest-earning assets and interest-bearing liabilities. Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond our control.
While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates may still have a material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate and sell loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.
Hedging against interest rate exposure may adversely affect our earnings.
We employ techniques that limit, or "hedge," the adverse effects of rising interest rates on our loans held for sale, originated interest rate locks and our mortgage servicing asset. Our hedging activity varies based on the level and volatility of interest rates and other changing market conditions. These techniques may include purchasing or selling futures contracts, purchasing put and call options on securities or securities underlying futures contracts, or entering into other mortgage-backed derivatives. There are, however, no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Moreover, hedging activities could result in losses if the event against which we hedge does not occur. Additionally, interest rate hedging could fail to protect us or adversely affect us because, among other things:
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We may be unable to attract, hire and retain qualified key employees, which could adversely affect our business prospects, including our competitive position and results of operations.
Our success is dependent upon our ability to attract, hire and retain highly skilled individuals. There is significant competition for those individuals with the experience and skills required to conduct many of our business activities. We may not be able to hire or retain the key personnel that we depend upon for our success. The unexpected loss of services of one or more of these or other key personnel could have a material adverse impact or our business because of their skills, knowledge or the markets in which we operate, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
We may not be able to successfully implement our strategic plan.
Our growth is essential to improving our profitability, and we expect to continue to incur expenses related to the implementation of our strategic plan, including hiring initiatives and the opening of new branches. We may not be able to successfully implement our strategic plan, or do so in the timeframe that we expect, and therefore may not be able to increase profitability in the timeframe that we expect or at all, and could experience a decrease in profitability.
The successful implementation of our strategic plan will require, among other things that we attract new customers that currently bank at other financial institutions in our market area or adjacent markets. In addition, our ability to successfully grow will depend on several factors, including continued favorable market conditions, the competitive responses from other financial institutions in our market area, our ability to attract and retain experienced lenders, and our ability to maintain high asset quality as we increase our loan portfolio. While we believe we have the management resources and internal systems in place to successfully manage our future growth, growth opportunities may not be available and we may not be successful in implementing our business strategy. Further, it will take time to implement our business strategy, especially for our lenders to originate enough loans and for our branch network to attract enough favorably priced deposits to generate the revenue needed to offset the associated expenses. Our strategic plan, even if successfully implemented, may not ultimately produce positive results.
Failure to attain expected synergies related to the Coastway acquisition could reduce our future earnings per share.
The success of our acquisition of Coastway will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the business of HarborOne Bank with Coastway Bank. It is possible that we will not be able to achieve expected synergies related to the acquisition or do so in the timeframe that we expect. Further, we may incur unexpected future operating expenses such as increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, any of which could have a material adverse effect on the results of operations and financial condition of Old HarborOne. If unexpected costs are incurred, the merger may not be as accretive as expected or could even have a dilutive effect on our earnings per share.
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Impairment of goodwill and/or intangible assets could require a charge to earnings, which could adversely affect us.
When the purchase price of an acquired business exceeds the fair value of its tangible assets, the excess is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. At December 31, 2018, we had goodwill and other intangible assets of $78.5 million, consisting of $13.4 million of goodwill in connection with the acquisition of HarborOne Mortgage in 2015, and $56.4 million of goodwill and $8.3 million in core deposit intangibles in connection with the Coastway acquisition. Under current accounting standards, if we determine goodwill or intangible assets are impaired, we will be required to write down the value of these assets. We may be required to take impairment charges in the future, which would have a negative effect on our shareholders' equity and financial results.
Our efficiency ratio is high, and we anticipate that it may remain high, as a result of the ongoing implementation of our business strategy.
Our noninterest expense totaled $120.1 million and $109.4 million for the years ended December 31, 2018 and 2017, respectively. Although we continue to analyze our expenses and pursue efficiencies where available, our efficiency ratio remains high as a result of our implementation of our business strategy. Our efficiency ratio was 86.43% and 84.83% for the years ended December 31, 2018 and 2017, respectively. If we are unable to successfully implement our business strategy and increase our revenues, our profitability could be adversely affected.
An increase in FDIC or Co-operative Central Bank insurance assessments could significantly increase our expenses.
The Dodd-Frank Act eliminated the maximum Deposit Insurance Fund ratio of 1.5% of estimated deposits, and the FDIC has established a long-term ratio of 2.0%. The FDIC has the authority to increase assessments in order to maintain the Deposit Insurance Fund ratio at particular levels. In addition, if our regulators issue downgraded ratings of the Bank in connection with their examinations, the FDIC could impose significant additional fees and assessments on us. All Massachusetts-chartered co-operative banks are required to be members of the Co-operative Central Bank, which maintains the Share Insurance Fund that insures co-operative bank deposits in excess of federal deposit insurance coverage. The Co-operative Central Bank is authorized to charge co-operative banks an annual assessment fee on deposit balances in excess of amounts insured by the FDIC. Increases in assessments by either the FDIC or the Co-operative Central Bank could significantly increase our expenses.
The loss of deposits or a change in deposit mix could increase our cost of funding.
Our deposits are a low cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if clients shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. In addition, we face pressure from the Co-operative Central Bank, our excess deposit insurer, to reduce excess deposits. We can reduce excess deposits by allowing deposits to run off. We can also reduce excess deposits by converting deposits at the Bank into multiple deposits at other financial institutions through our participation in a reciprocal deposit program. Reducing our excess deposits by allowing deposits to run off reduces our overall level of deposits, and increases the extent to which we may need to rely in the future on other, more expensive sources for funding, including Federal Home Loan Bank advances, which reduces our net income. Shifting excess deposits into the reciprocal deposit program may also result in higher funding costs, which also reduces our net income.
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Our funding sources may prove insufficient to allow us to meet our obligations, replace depositor withdrawals or support future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. Liquidity is also required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, and operating expenses and capital improvements. To manage liquidity, we draw upon a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include Federal Home Loan Bank advances and proceeds from the sale of investments and loans. Our ability to manage liquidity will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.
Strong competition within our market area could hurt our profits and slow growth.
We face intense competition in making loans and attracting deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. If we are not able to effectively compete in our market area, our profitability may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets or deposits.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
We are a community bank and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area. As a community bank, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or by events beyond our control, our business and operating results may be adversely affected.
Our banking business is highly regulated, which could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business.
We are subject to regulation and supervision by the Federal Reserve, and the Bank is subject to regulation and supervision by the Massachusetts Commissioner of Banks and the FDIC. Federal and state laws and regulations govern numerous matters affecting us, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on stock repurchases and dividend payments. The FDIC and the Massachusetts Commissioner of Banks have the power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or
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violations of law by banks subject to their regulation, and the Federal Reserve possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we and HarborOne Bank may conduct business and obtain financing.
Because our business is highly regulated, the laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on our business, financial condition, and results of operations. See the section of prospectus entitled " Supervision and Regulation " for a discussion of the regulations to which we are subject.
We are subject to capital and liquidity standards that require banks and bank holding companies to maintain more and higher quality capital and greater liquidity than has historically been the case.
We became subject to new capital requirements in 2015. These new standards force bank holding companies and their bank subsidiaries to maintain substantially higher levels of capital as a percentage of their assets, with a greater emphasis on common equity as opposed to other components of capital. The need to maintain more and higher quality capital, as well as greater liquidity, and generally increased regulatory scrutiny with respect to capital levels, may at some point limit our business activities, including lending, and our ability to expand. It could also result in our being required to take steps to increase our regulatory capital by issuing additional shares of common stock, which may dilute shareholder value or limit our ability to pay dividends or effect stock repurchases.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution's performance under the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
Changes in the valuation of our securities could adversely affect us.
Most of the securities in our portfolio are classified as available-for-sale. Accordingly, a decline in the fair value of our securities could cause a material decline in our reported equity and/or net income. At least quarterly, and more frequently when warranted by economic or market conditions, management evaluates all securities classified as available-for-sale with a decline in fair value below the amortized cost of the investment to determine whether the impairment is deemed to be other-than-temporary, or "OTTI." For impaired debt securities that are intended to be sold, or more likely than not will be required to be sold, the full amount of market decline is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive
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income, net of applicable taxes. A decline in the market value of our securities portfolio could adversely affect our earnings.
We may need to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
We are required by our regulators to maintain adequate levels of capital to support our operations, which may result in our need to raise additional capital to support continued growth. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by the Massachusetts Commissioner of Banks or the Federal Reserve, we may be subject to adverse regulatory action.
If we raise capital through the issuance of additional of common stock or other securities, it would dilute the ownership interests of existing shareholder and may dilute the per share value of our common stock. New investors may also have rights, preferences and privileges senior to our current shareholders.
We face continuing and growing security risks to our information base, including the information we maintain relating to our customers.
We are subject to certain operational risks, including, but not limited to, data processing system failures and errors, inadequate or failed internal processes, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. In the ordinary course of business, we rely on electronic communications and information systems to conduct our business and to store sensitive data, including financial information regarding customers. Our electronic communications and information systems infrastructure could be susceptible to cyberattacks, hacking, identity theft or terrorist activity. We have implemented and regularly review and update extensive systems of internal controls and procedures as well as corporate governance policies and procedures intended to protect our business operations, including the security and privacy of all confidential customer information. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. No matter how well designed or implemented our controls are, we cannot provide an absolute guarantee to protect our business operations from every type of problem in every situation. A failure or circumvention of these controls could have a material adverse effect on our business operations and financial condition.
We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cybersecurity and the continued enhancement of our controls and processes to protect our systems, data and networks from attacks, unauthorized access or significant damage remain a priority. Accordingly, we may be required to expend additional resources to enhance our protective measures or to investigate and remediate any information security vulnerabilities or exposures. Any breach of our system security could result in disruption of our operations, unauthorized access to confidential customer information, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or losses could exceed the amount of available insurance coverage, if any, and would adversely affect our earnings. Also, any failure to prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence, damaging our reputation and undermining our ability to attract and keep customers.
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We may not be able to successfully implement future information technology system enhancements, which could adversely affect our business operations and profitability.
We invest significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. We may not be able to successfully implement and integrate future system enhancements, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in our stock, among others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact our financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
We rely on other companies to provide key components of our business infrastructure.
Third-party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third party vendors could also entail significant delay and expense.
If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established processes and procedures intended to identify, measure, monitor and report the types of risk to which we are subject, including credit risk, operations risk, compliance risk, reputation risk, strategic risk, market risk and liquidity risk. We seek to monitor and control our risk exposure through a framework of policies, procedures and reporting requirements. Management of our risks in some cases depends upon the use of analytical and/or forecasting models. If the models used to mitigate these risks are inadequate, we may incur losses. In addition, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.
Changes in accounting standards could affect reported earnings.
The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, or "FASB," the SEC and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.
Of the newly issued guidance, the most significant to us is the FASB Accounting Standards Update (ASU) 2016-13, Financial InstrumentsCredit Losses (Topic 326), commonly referred to as "CECL," which introduces new guidance for the accounting for credit losses on instruments within its scope. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. It also modifies the
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impairment model for debt securities available for sale and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The impact of this Update will be dependent on the portfolio composition, credit quality and economic conditions at the time of adoption.
Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may adversely impact our financial statements.
From time to time, local, state or federal tax authorities change tax laws and regulations, which may result in a decrease or increase to our deferred tax asset. Local, state or federal tax authorities may interpret laws and regulations differently than we do and challenge tax positions that we have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest, penalties, or litigation costs that could have a material adverse effect on our results.
Holders of our subordinated notes have rights that are senior to those of our common shareholders. We have supported a portion of our growth through the issuance of subordinated notes.
At December 31, 2018, we had aggregate principal amount of $35.0 million in subordinated notes. Payments of the principal and interest on the subordinated notes are senior to our shares of common stock. As a result, we must make payments on our subordinated notes before any dividends can be paid to our common shareholders. In addition, in the event of our bankruptcy, dissolution or liquidation, the holders of the subordinated notes must be satisfied before any distributions can be made on our common stock.
Acquisitions may disrupt our business and dilute shareholder value.
We regularly evaluate merger and acquisition opportunities with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash or equity securities may occur at any time. We would seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded services.
Acquiring other banks, businesses, or branches may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions, including, among other things:
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Natural disasters, acts of terrorism and other external events could harm our business.
Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest, violence or human error could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.
The future price of the shares of common stock may be less than the $10.00 purchase price per share in the offering.
If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price in the offering. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in federal tax laws, new regulations, investor perceptions of New HarborOne and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.
Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.
We intend to invest between $112.9 million and $153.1 million of the net proceeds of the offering in HarborOne Bank. We also expect to use a portion of the net proceeds we retain to fund a loan to our employee stock ownership plan to purchase shares of common stock in the offering. We may use the remaining net proceeds: to invest in securities; to pay cash dividends to shareholders; to repurchase shares of our common stock; to finance potential expansion and diversification of our operations, including through the potential acquisition of financial institutions or financial services companies; and for other general corporate purposes. HarborOne Bank may use the net proceeds it receives to invest in securities; to fund new loans; to enhance existing products and services and develop new products and services; to expand its retail banking franchise; and for other general corporate purposes. However, with the exception of our investment in HarborOne Bank and funding the loan to the employee stock ownership plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and when we apply or reinvest such proceeds. Also, certain of these uses, such as opening new branches or acquiring other financial institutions, may require the approval of the Massachusetts Commissioner of Banks, the FDIC or the Federal Reserve. We have not established a timetable for reinvesting the net proceeds, and we cannot predict how long we will require to reinvest
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the net proceeds. Our failure to utilize these funds effectively would reduce our profitability and may adversely affect the value of our common stock.
Our return on equity may be low following the offering. This could negatively affect the trading price of our shares of common stock.
Net income divided by average shareholders' equity, known as "return on equity," is a ratio many investors use to compare the performance of financial institutions. Our return on equity may be low until we are able to leverage the additional capital we receive from the offering. Our return on equity will be negatively affected by added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to adopt. Until we can increase our net interest income and non-interest income and leverage the capital raised in the offering, we expect our return on equity to be low, which may reduce the market price of our shares of common stock.
Our stock-based benefit plans will increase our expenses and reduce our income.
We intend to adopt one or more new stock-based benefit plans after the conversion, subject to shareholder approval, which will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants under the new stock-based benefit plans. The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards actually granted under the plans, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time. In the event we adopt stock-based benefit plans within 12 months following the conversion, the total shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans would be limited to 4.0% and 10.0%, respectively, of the total shares of our common stock sold in the offering. If we award restricted shares of common stock or grant options in excess of these amounts under stock-based benefit plans adopted more than 12 months after the completion of the conversion, our costs could increase further.
In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants' accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for shares purchased in the offering by the employee stock ownership plan and for our new stock-based benefit plans has been estimated to be approximately $5.6 million ($4.6 million after tax) at the maximum of the offering range as set forth in the pro forma financial information under "Pro Forma Data," assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our employee stock ownership plan and proposed stock-based plans, see " ManagementBenefits to be Considered Following Completion of the Conversion ."
The implementation of stock-based benefit plans may dilute your ownership interest. Historically, shareholders have approved these stock-based benefit plans.
We intend to adopt one or more new stock-based benefit plans following the offering. These plans may be funded either through open market purchases or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is to fund the new stock-based benefit plans through open market purchases, shareholders would experience a 6.9% dilution in ownership interest at the maximum of the offering range in the event newly issued shares of our common stock are used to fund stock options and shares of restricted common stock in amounts equal to 6.0% and 2.5%, respectively, of the shares sold in the offering. In the event we adopt the plans more than 12 months
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following the conversion, new stock-based benefit plans would not be subject to these limitations and shareholders could experience greater dilution.
Although the implementation of new stock-based benefit plans would be subject to shareholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by shareholders.
Our stock value may be negatively affected by applicable regulations that restrict stock repurchases.
Applicable regulations restrict us from repurchasing any of our shares of common stock during the first three years following the offering, unless we obtain prior approval from the Massachusetts Commissioner of Banks. Stock repurchases are a capital management tool that can enhance the value of a company's stock, and our inability to repurchase any of our shares of common stock during the first three years following the offering may negatively affect our stock price.
Various factors may make takeover attempts more difficult to achieve.
Certain provisions of our articles of organization and state and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of New HarborOne without our board of directors' approval. Under regulations applicable to the conversion, for a period of three years following completion of the conversion, no person may acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve and the Massachusetts Commissioner of Banks. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company creates a rebuttable presumption that the acquirer "controls" the bank holding company. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, including HarborOne Bank.
There also are provisions in our articles of organization that may be used to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of the shares of common stock outstanding. Furthermore, shares of restricted stock and stock options that we have granted or may grant to employees and directors, stock ownership by our management and directors, employment agreements that we have entered into with our executive officers and other factors may make it more difficult for companies or persons to acquire control of New HarborOne without the consent of our board of directors. Taken as a whole, these statutory provisions and provisions in our articles of organization could result in our being less attractive to a potential acquirer and thus could adversely affect the market price of our common stock.
For additional information, see "Restrictions on Acquisition of New HarborOne," "ManagementEmployment and Change in Control Agreements," and "ManagementBenefits to be Considered Following Completion of the Conversion."
You may not revoke your decision to purchase New HarborOne common stock in the subscription or community offerings after you send us your order.
Funds submitted or automatic withdrawals authorized in connection with the purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering, including any extension of the expiration date and consummation of a syndicated or firm commitment underwritten offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, LC., among other factors, there may be one or more delays in
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completing the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond [Extension Date #1], or the number of shares to be sold in the offering is increased to more than 31,050,000 shares or decreased to fewer than 22,950,000 shares.
The distribution of subscription rights could have adverse income tax consequences.
If the subscription rights granted to certain current or former depositors of HarborOne Bank are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. RP Financial, LC. has issued a letter that the subscription rights have no ascertainable market value; however, such letter is not a formal opinion and in any event is not binding on the Internal Revenue Service.
Securities issued by us, including our common stock, are not FDIC insured.
Securities issued by us, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the FDIC, the Co-operative Central Bank, or any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal.
We are an emerging growth company, and if we elect to comply only with the reduced reporting and disclosure requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to "emerging growth companies," including, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Investors may find our common stock less attractive if we choose to rely on these exemptions.
As an emerging growth company, we also will not be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors review and attest to the effectiveness of our internal control over financial reporting. We could be an emerging growth company for up to five years following the completion of Old HarborOne's initial public offering. We will cease to be an emerging growth company upon the earliest of: (1) the end of the fiscal year following the fifth anniversary of this offering; (2) the first fiscal year after our annual gross revenues are $1.07 billion or more; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (4) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million at the end of the second quarter of that fiscal year.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial and other data of Old HarborOne and its subsidiaries for the periods and at the dates indicated. The following is only a summary and you should read it in conjunction with the business and financial information regarding Old HarborOne contained elsewhere in this prospectus, including the audited consolidated financial statements beginning on page F-1, or the "Consolidated Financial Statements." The information at December 31, 2018 and 2017, and for the years ended December 31, 2018, 2017, and 2016, is derived in part from the Consolidated Financial Statements. The information at December 31, 2016, 2015 and 2014, and for the years ended December 31, 2015 and 2014, is derived in part from audited consolidated financial statements that do not appear in this prospectus.
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December 31, | |||||||||||||||
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2018(1) | 2017 | 2016 | 2015 | 2014 | |||||||||||
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(in thousands)
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Financial Condition Data: |
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Total assets |
$ | 3,653,121 | $ | 2,684,920 | $ | 2,448,310 | $ | 2,163,142 | $ | 2,041,879 | ||||||
Cash and cash equivalents |
105,521 | 80,791 | 50,215 | 40,652 | 52,983 | |||||||||||
Securities available for sale, at fair value |
209,293 | 170,853 | 136,469 | 128,541 | 148,015 | |||||||||||
Securities held to maturity, at cost |
44,688 | 46,869 | 47,877 | 63,579 | 58,384 | |||||||||||
Loans held for sale, at fair value(2) |
42,107 | 59,460 | 86,443 | 63,797 | 3,525 | |||||||||||
Loans receivable, net |
2,964,852 | 2,176,478 | 1,981,747 | 1,729,388 | 1,651,894 | |||||||||||
Deposits |
2,685,061 | 2,013,738 | 1,804,753 | 1,691,212 | 1,500,115 | |||||||||||
Borrowings |
553,735 | 290,365 | 275,119 | 249,598 | 329,602 | |||||||||||
Total equity |
357,574 | 343,484 | 329,384 | 190,688 | 183,458 |
|
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018(1) | 2017 | 2016 | 2015 | 2014 | |||||||||||
|
(in thousands)
|
|||||||||||||||
Selected Operating Data: |
||||||||||||||||
Interest and dividend income |
$ | 115,708 | $ | 90,284 | $ | 74,756 | $ | 66,800 | $ | 61,079 | ||||||
Interest expense |
26,778 | 15,936 | 13,761 | 14,575 | 15,878 | |||||||||||
| | | | | | | | | | | | | | | | |
Net interest income |
88,930 | 74,348 | 60,995 | 52,225 | 45,201 | |||||||||||
Provision for loan losses |
3,828 | 2,416 | 4,172 | 1,257 | 2,589 | |||||||||||
| | | | | | | | | | | | | | | | |
Net interest income, after provision for loan losses |
85,102 | 71,932 | 56,823 | 50,968 | 42,612 | |||||||||||
Mortgage banking income(2) |
30,609 | 37,195 | 50,999 | 20,230 | 1,433 | |||||||||||
Gains on sale and calls of securities |
5 | | 283 | 295 | 483 | |||||||||||
Other noninterest income |
18,584 | 17,339 | 15,821 | 14,848 | 13,694 | |||||||||||
Noninterest expense |
120,093 | 109,414 | 114,698 | 78,014 | 54,302 | |||||||||||
| | | | | | | | | | | | | | | | |
Income before income taxes |
14,207 | 17,052 | 9,228 | 8,327 | 3,920 | |||||||||||
Income tax expense |
2,813 | 6,673 | 3,297 | 2,559 | 1,350 | |||||||||||
| | | | | | | | | | | | | | | | |
Net income |
$ | 11,394 | $ | 10,379 | $ | 5,931 | $ | 5,768 | $ | 2,570 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
34
|
At or For the Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||
Performance Ratios: |
||||||||||||||||
Return on average assets (ratio of net income to average total assets) |
0.39 | % | 0.40 | % | 0.26 | % | 0.27 | % | 0.13 | % | ||||||
Return on average equity (ratio of net income to average equity) |
3.27 | 3.09 | 2.26 | 3.04 | 1.38 | |||||||||||
Interest rate spread(1) |
2.99 | 2.88 | 2.71 | 2.50 | 2.26 | |||||||||||
Net interest margin(2) |
3.22 | 3.04 | 2.85 | 2.61 | 2.39 | |||||||||||
Efficiency ratio(3) |
86.43 | 84.83 | 89.47 | 88.85 | 88.99 | |||||||||||
Average interest-earning assets to average interest-bearing liabilities |
124.05 | 124.78 | 121.83 | 115.38 | 115.72 | |||||||||||
Average equity to average total assets |
11.91 | 13.00 | 11.50 | 8.93 | 9.40 | |||||||||||
Asset Quality Ratios: |
|
|
|
|
|
|||||||||||
Non-performing assets to total assets |
0.51 | % | 0.69 | % | 0.94 | % | 1.47 | % | 1.87 | % | ||||||
Non-performing loans to total loans |
0.59 | 0.81 | 1.06 | 1.69 | 2.12 | |||||||||||
Allowance for loan losses to non-performing loans |
116.62 | 103.55 | 80.11 | 46.56 | 39.49 | |||||||||||
Allowance for loan losses to total loans |
0.69 | 0.84 | 0.85 | 0.79 | 0.84 | |||||||||||
Net loans charged off as a percent of average loans outstanding |
0.07 | 0.04 | 0.05 | 0.09 | 0.20 | |||||||||||
Capital Ratios: |
|
|
|
|
|
|||||||||||
Common equity Tier 1 to risk weighted assets |
9.9 | % | 15.1 | % | 16.2 | % | 10.8 | % | N/A | |||||||
Tier 1 capital to risk weighted assets |
9.9 | 15.1 | 16.2 | 10.8 | 12.2 | |||||||||||
Total capital to risk weighted assets |
11.8 | 16.0 | 17.0 | 11.7 | 13.1 | |||||||||||
Tier 1 capital to average assets |
8.2 | 12.5 | 13.2 | 8.3 | 8.9 | |||||||||||
Per Share Data: |
|
|
|
|
|
|||||||||||
Basic earnings per share |
$ | 0.36 | $ | 0.33 | $ | N/A | N/A | N/A | ||||||||
Diluted earnings per share |
$ | 0.36 | $ | 0.33 | $ | N/A | N/A | N/A | ||||||||
Book value per share at end of year |
$ | 10.98 | $ | 10.52 | $ | 10.25 | N/A | N/A | ||||||||
Tangible book value per share at end of year(4) |
$ | 8.57 | $ | 10.11 | $ | 9.83 | N/A | N/A | ||||||||
Market value per share at end of year |
$ | 15.89 | $ | 19.16 | $ | 19.34 | N/A | N/A | ||||||||
Number of shares outstanding at end of year |
32,563,485 | 32,647,395 | 32,120,880 | N/A | N/A | |||||||||||
Other Data: |
|
|
|
|
|
|||||||||||
Number of full-service branches |
24 | 14 | 14 | 14 | 14 | |||||||||||
Number of full-time equivalent employees |
658 | 581 | 614 | 577 | 326 |
35
|
At December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(dollars in thousands, except per share data)
|
|||||||||
Common stock outstanding |
32,563,485 | 32,647,395 | 32,120,880 | |||||||
Tangible common equity: |
||||||||||
Total shareholders' equity |
$ | 357,574 | $ | 343,484 | $ | 329,384 | ||||
Less: goodwill and other intangibles |
78,467 | 13,497 | 13,585 | |||||||
| | | | | | | | | | |
Tangible common equity |
$ | 279,107 | $ | 329,987 | $ | 315,799 | ||||
| | | | | | | | | | |
Tangible book value per share |
$ | 8.57 | $ | 10.11 | $ | 9.83 |
36
This prospectus contains statements that may be considered forward-looking statements. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions. These statements include, among others, statements regarding our strategy, goals and expectations; evaluations of future interest rate trends and liquidity; expectations as to growth in assets, deposits and results of operations, future operations, market position and financial position; and prospects, plans and objectives of management. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond our control.
Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. Old HarborOne's actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned "Risk Factors"; adverse conditions in the capital and debt markets and the impact of such conditions on our business activities; changes in interest rates; competitive pressures from other financial institutions; the effects of general economic conditions on a national basis or in the local markets in which we operate, including changes that adversely affect borrowers' ability to service and repay our loans; changes in the value of securities in our investment portfolio; changes in loan default and charge-off rates; fluctuations in real estate values; the adequacy of loan loss reserves; decreases in deposit levels necessitating raising rates to maintain deposit levels or increased borrowings to fund loans and investments; operational risks including, but not limited to, cybersecurity, fraud and natural disasters; changes in government regulation; changes in accounting standards and practices; the risk that goodwill and intangibles recorded in our financial statements will become impaired; demand for loans in our market area; our ability to attract and maintain deposits; our ability to attract and retain key employees; risks related to the implementation of acquisitions, dispositions, and restructurings; the risk that we may not be successful in the implementation of our business strategy; and changes in assumptions used in making such forward-looking statements. Forward-looking statements speak only as of the date on which they are made. Old HarborOne does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see "Risk Factors" beginning on page 18.
37
The following table shows how we intend to use the net proceeds of the offering. Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $225.8 million and $306.2 million.
We intend to distribute the net proceeds as follows:
|
Based Upon the Sale at $10.00 Per Share | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
22,950,000 Shares | 27,000,000 Shares | 31,050,000 Shares | ||||||||||||||||
|
Amount |
Percent of
Net Proceeds |
Amount |
Percent of
Net Proceeds |
Amount |
Percent of
Net Proceeds |
|||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||
Offering proceeds |
$ | 229,500 | $ | 270,000 | $ | 310,500 | |||||||||||||
Less offering expenses |
3,720 | 3,999 | 4,279 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net offering proceeds |
$ | 225,780 | 100.0 | % | $ | 266,001 | 100.0 | % | $ | 306,221 | 100.0 | % | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Distribution of net proceeds: |
|||||||||||||||||||
To HarborOne Bank |
$ | 112,890 | 50.0 | % | $ | 133,000 | 50.0 | % | $ | 153,111 | 50.0 | % | |||||||
To fund loan to employee stock ownership plan |
$ | 18,360 | 8.1 | % | $ | 21,600 | 8.1 | % | $ | 24,840 | 8.1 | % | |||||||
Retained by New HarborOne |
$ | 94,530 | 41.9 | % | $ | 111,401 | 41.9 | % | $ | 128,270 | 41.9 | % |
Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of HarborOne Bank's deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if fewer shares were sold in the subscription and community offerings and more in the syndicated or firm commitment offering than we have assumed.
New HarborOne may use the proceeds it retains from the offering (subject to existing restrictions on repurchases in the first three years after the conversion):
With the exception of the funding of the loan to the employee stock ownership plan, we have not quantified our plans for use of the retained net proceeds for each of the foregoing purposes. Initially, we intend to invest a substantial portion of the retained net proceeds in short-term investments, investment-grade debt obligations and mortgage-backed securities.
Under currently applicable regulations, we may not repurchase shares of our common stock during the first three years following the conversion, except to fund equity benefit plans other than stock options or except when extraordinary circumstances exist and with prior regulatory approval. See "Dividend Policy" for a discussion of our expected dividend policy following the completion of the offering.
38
We expect that HarborOne Bank will receive a contribution equal to 50.0% of the net proceeds of the offering, which it may use as follows:
HarborOne Bank has not quantified its plans for use of the offering proceeds for any of the foregoing purposes. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of opportunities to expand our operations through establishing or acquiring new branches, our ability to receive regulatory approval for any such expansion activities, and overall market conditions. Initially, HarborOne Bank intends to invest a substantial portion of the offering proceeds it receives in short-term investments, investment-grade debt obligations and mortgage-backed securities.
39
Following completion of the offering, our board of directors will have the authority to declare dividends on our common stock, subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No decision has been made with respect to the amount, if any, and timing of any dividend payments. The payment and amount of any dividend payments will depend upon a number of factors. We cannot assure you that we will pay dividends in the future, or, if we do, that any such dividends will not be reduced or eliminated in the future.
The Federal Reserve has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances, such as where a holding company's net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or a holding company's overall rate of earnings retention is inconsistent with its capital needs and overall financial condition.
Dividends we can declare and pay will depend, in part, upon receipt of dividends from HarborOne Bank, because initially we will have no source of income other than dividends from HarborOne Bank, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments received in connection with the loan to the employee stock ownership plan. We will not be permitted to pay dividends on our common stock if our stockholders' equity would be reduced below the amount of the liquidation account established by us in connection with the conversion.
Massachusetts banking law and FDIC regulations impose significant limitations on "capital distributions" by depository institutions. See the sections of this prospectus entitled "Supervision and RegulationDividend Restrictions." After the completion of the conversion, HarborOne Bank will not be permitted to pay dividends on its capital stock to us if HarborOne Bank's stockholder's equity would be reduced below the amount of the liquidation account established in connection with the conversion.
40
Old HarborOne's common stock is currently listed on the Nasdaq Global Select Market under the symbol "HONE." Upon completion of the conversion, we expect the shares of common stock of New HarborOne will replace the existing shares of Old HarborOne and trade on the Nasdaq Global Select Market under the symbol "HONE." In order to list our stock on the Nasdaq Global Select Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of [Record Date], Old HarborOne had approximately [number] registered market makers in its common stock. As of the close of business on [Record Date], there were [number] shares of common stock outstanding, including [number] publicly held shares (shares held by shareholders other than HarborOne Mutual Bancshares), and approximately [number] shareholders of record.
On March 4, 2019, the business day immediately preceding the public announcement of the conversion, and on [date prior to prospectus date], 2019, the closing prices of Old HarborOne common stock as reported on the Nasdaq Global Select Market were $16.26 per share and $[price] per share, respectively. On the effective date of the conversion, all publicly held shares of Old HarborOne common stock, including shares of common stock held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of New HarborOne common stock determined pursuant to the exchange ratio. See "The Conversion and OfferingShare Exchange Ratio for Current Shareholders." Options to purchase shares of Old HarborOne common stock will be converted into options to purchase a number of shares of New HarborOne common stock determined pursuant to the exchange ratio, for the same aggregate exercise price. See "Beneficial Ownership of Common Stock."
41
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At December 31, 2018, HarborOne Bank exceeded all of the applicable regulatory capital requirements and was considered "well capitalized." The table below sets forth the historical equity capital and regulatory capital of HarborOne Bank at December 31, 2018, and the pro forma equity capital and regulatory capital of HarborOne Bank, after giving effect to the sale of shares of common stock at $10.00 per share. The table assumes the receipt by HarborOne Bank of 50.0% of the net offering proceeds. See "Use of Proceeds."
|
|
|
Pro Forma at December 31, 2018,
Based Upon the Sale in the Offering of |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
HarborOne Bank
Historical at December 31, 2018 |
||||||||||||||||||||||||
|
22,950,000 Shares | 27,000,000 Shares | 31,050,000 Shares | ||||||||||||||||||||||
|
Amount |
Percent of
Assets(1) |
Amount |
Percent of
Assets(1) |
Amount |
Percent of
Assets(1) |
Amount |
Percent of
Assets(1) |
|||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||
Equity |
$ | 370,574 | 10.13 | % | $ | 455,924 | 12.09 | % | $ | 471,174 | 12.43 | % | $ | 486,425 | 12.77 | % | |||||||||
Tier 1 leverage capital |
$ | 296,738 | 8.61 | % | $ | 382,088 | 10.74 | % | $ | 397,338 | 11.11 | % | $ | 412,589 | 11.47 | % | |||||||||
Leverage requirement(2) |
$ | 172,230 | 5.00 | % | $ | 177,875 | 5.00 | % | $ | 178,880 | 5.00 | % | $ | 179,886 | 5.00 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Excess |
$ | 124,508 | 3.61 | % | $ | 204,213 | 5.74 | % | $ | 218,458 | 6.11 | % | $ | 232,703 | 6.47 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 risk-based capital(3) |
$ | 296,738 | 10.33 | % | $ | 382,088 | 13.20 | % | $ | 397,338 | 13.71 | % | $ | 412,589 | 14.21 | % | |||||||||
Risk-based requirement(2) |
$ | 229,778 | 8.00 | % | $ | 231,584 | 8.00 | % | $ | 231,906 | 8.00 | % | $ | 232,227 | 8.00 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Excess |
$ | 66,960 | 2.33 | % | $ | 150,504 | 5.20 | % | $ | 165,432 | 5.71 | % | $ | 180,362 | 6.21 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total risk-based capital(3) |
$ | 317,393 | 11.05 | % | $ | 402,743 | 13.91 | % | $ | 417,993 | 14.42 | % | $ | 433,244 | 14.92 | % | |||||||||
Risk-based requirement(2) |
$ | 287,222 | 10.00 | % | 289,480 | 10.00 | % | $ | 289,882 | 10.00 | % | $ | 290,284 | 10.00 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Excess |
$ | 30,171 | 1.05 | % | $ | 113,263 | 3.91 | % | $ | 128,111 | 4.42 | % | $ | 142,960 | 4.92 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Common equity tier 1 risk-based capital(3) |
$ | 296,738 | 10.33 | % | $ | 382,088 | 13.20 | % | $ | 397,338 | 13.71 | % | $ | 412,589 | 14.21 | % | |||||||||
Risk-based requirement(2) |
$ | 186,694 | 6.50 | % | $ | 188,162 | 6.50 | % | $ | 188,423 | 6.50 | % | $ | 188,685 | 6.50 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Excess |
$ | 110,044 | 3.83 | % | $ | 193,926 | 6.70 | % | $ | 208,915 | 7.21 | % | $ | 223,904 | 7.71 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of capital infused into HarborOne Bank: |
|||||||||||||||||||||||||
Net proceeds |
$ | 112,890 | $ | 133,000 | $ | 153,111 | |||||||||||||||||||
Less: Common stock acquired by stock-based benefit plan |
$ | (9,180 | ) | $ | (10,800 | ) | $ | (12,420 | ) | ||||||||||||||||
Less: Common stock acquired by employee stock ownership plan |
$ | (18,360 | ) | $ | (21,600 | ) | $ | (24,840 | ) | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Pro forma increase in equity: |
$ | 85,350 | $ | 100,600 | $ | 115,851 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
42
The following table presents the historical consolidated capitalization of Old HarborOne at December 31, 2018 and the pro forma consolidated capitalization of New HarborOne after giving effect to the conversion and offering based upon the assumptions set forth in the "Pro Forma Data" section.
|
|
Pro Forma at December 31, 2018 Based upon the Sale in
the Offering at $10.00 per Share of |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Old HarborOne
Historical at December 31, 2018 |
||||||||||||
|
22,950,000 Shares | 27,000,000 Shares | 31,050,000 Shares | ||||||||||
|
(Dollars in thousands)
|
||||||||||||
Deposits(1) |
$ | 2,685,061 | $ | 2,685,061 | $ | 2,685,061 | $ | 2,685,061 | |||||
Borrowed funds |
553,735 | 553,735 | 553,735 | 553,735 | |||||||||
| | | | | | | | | | | | | |
Total deposits and borrowed funds |
$ | 3,238,796 | $ | 3,238,796 | $ | 3,238,796 | $ | 3,238,796 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Shareholders' equity: |
|||||||||||||
Preferred stock, $0.01 par value, 1,000,000 shares authorized (post-conversion)(2) |
$ | | $ | | $ | | $ | | |||||
Common stock, $0.01 par value, 150,000,000 shares authorized (post-conversion); shares to be issued as reflected(2)(3) |
327 | 432 | 509 | 585 | |||||||||
Additional paid-in capital(2) |
152,156 | 376,283 | 416,427 | 456,571 | |||||||||
MHC capital contribution |
| 99 | 99 | 99 | |||||||||
Retained earnings(4) |
219,088 | 219,088 | 219,088 | 219,088 | |||||||||
Accumulated other comprehensive (loss) income |
(2,358 | ) | (2,358 | ) | (2,358 | ) | (2,358 | ) | |||||
Less: |
| | | ||||||||||
Treasury stock |
(1,548 | ) | | | | ||||||||
Common stock held by employee stock ownership plan(5) |
(10,091 | ) | (28,451 | ) | (31,691 | ) | (34,931 | ) | |||||
Common stock to be acquired by stock-based benefit plan(6) |
| (9,180 | ) | (10,800 | ) | (12,420 | ) | ||||||
| | | | | | | | | | | | | |
Total shareholders' equity |
$ | 357,574 | $ | 555,913 | $ | 591,274 | $ | 626,634 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Pro Forma Shares Outstanding |
|||||||||||||
Shares offered for sale |
| 22,950,000 | 27,000,000 | 31,050,000 | |||||||||
Exchange shares issued |
| 20,288,349 | 23,868,645 | 27,448,942 | |||||||||
| | | | | | | | | | | | | |
Total shares outstanding |
32,563,485 | 43,238,349 | 50,868,645 | 58,498,942 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total shareholders' equity as a percentage of total assets |
9.79 | % | 14.43 | % | 15.21 | % | 15.98 | % | |||||
Tangible equity as a percentage of total assets |
7.81 | % | 12.65 | % | 13.47 | % | 14.26 | % |
43
The following table summarizes historical data of Old HarborOne and pro forma data of New HarborOne at and for the year ended December 31, 2018. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.
The net proceeds in the table are based upon the following assumptions:
We calculated pro forma consolidated net income for the year ended December 31, 2018 as if the estimated net proceeds we received had been invested at the beginning of the period at an assumed interest rate of 2.51% (1.83% on an after-tax basis). This represents the yield on the five-year U.S. Treasury Note as of December 31, 2018, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by federal regulations.
We further believe that the reinvestment rate is factually supportable because:
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We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and shareholders' equity by the indicated number of shares of common stock. For purposes of pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the year, but we did not adjust per share historical or pro forma shareholders' equity to reflect the earnings on the estimated net proceeds.
The pro forma table gives effect to the implementation of one or more stock-based benefit plans. Subject to the receipt of shareholder approval, we have assumed that stock-based benefit plans will acquire for restricted stock awards a number of shares of common stock equal to 4.0% of the shares of common stock sold in the offering at the same price for which they were sold in the offering. We assume that awards of common stock granted under such plans vest over a five-year period.
We have also assumed that options will be granted under stock-based benefit plans to acquire shares of common stock equal to 10% of the shares of common stock sold in the offering. In preparing the table below, we assumed that shareholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.95 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 13.53% for the shares of common stock, no dividend yield, an expected option term of 10 years and a risk-free rate of return of 2.69%.
We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10.0% and 4.0%, respectively, of the shares of common stock sold in the offering and that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the offering.
As discussed under "How We Intend to Use the Proceeds from the Offering," we intend to invest 50% of the net proceeds from the offering in HarborOne Bank, and we will retain the remainder of the net proceeds from the offering. We will use a portion of the proceeds we retain for the purpose of funding a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.
The pro forma table does not give effect to:
The following pro forma information may not be representative of the financial effects of the offering at the dates on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated shareholders' equity represents the difference between the stated amounts of our assets and liabilities. The pro forma shareholders' equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to shareholders if we liquidated. Moreover, pro forma shareholders' equity per share does not give effect to the liquidation accounts to be established
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in the conversion or, in the unlikely event of a liquidation of HarborOne Bank, to the tax effect of the recapture of the bad debt reserve. See " The Conversion and Offering Liquidation Rights ."
|
At or for the Year Ended December 31, 2018
Based upon the Sale at $10.00 Per Share of |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
22,950,000 Shares | 27,000,000 Shares | 31,050,000 Shares | |||||||
|
(Dollars in thousands, except per share amounts)
|
|||||||||
Gross proceeds of offering |
$ | 229,500 | $ | 270,000 | $ | 310,500 | ||||
Market value of shares issued in the exchange |
202,883 | 238,686 | 274,489 | |||||||
| | | | | | | | | | |
Pro forma market capitalization |
$ | 432,383 | $ | 508,686 | $ | 584,989 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Gross proceeds of offering |
$ | 229,500 | $ | 270,000 | $ | 310,500 | ||||
Expenses |
3,720 | 3,999 | 4,279 | |||||||
| | | | | | | | | | |
Estimated net proceeds |
225,780 | 266,001 | 306,221 | |||||||
Common stock purchased by employee stock ownership plan |
(18,360 | ) | (21,600 | ) | (24,840 | ) | ||||
Common stock purchased by stock-based benefit plans |
(9,180 | ) | (10,800 | ) | (12,420 | ) | ||||
| | | | | | | | | | |
Estimated net proceeds, as adjusted |
$ | 198,240 | $ | 233,601 | $ | 268,961 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
For the Year Ended December 31, 2018 |
||||||||||
Consolidated net earnings: |
||||||||||
Historical |
$ | 11,394 | $ | 11,394 | $ | 11,394 | ||||
Income on adjusted net proceeds |
3,632 | 4,280 | 4,928 | |||||||
Income on mutual holding company asset contribution |
2 | 2 | 2 | |||||||
Employee stock ownership plan(1) |
(358 | ) | (563 | ) | (767 | ) | ||||
Stock awards(2) |
(1,340 | ) | (1,577 | ) | (1,813 | ) | ||||
Stock options(3) |
(1,263 | ) | (1,485 | ) | (1,708 | ) | ||||
| | | | | | | | | | |
Pro forma net income |
$ | 12,067 | $ | 12,051 | $ | 12,035 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Basic earnings per share(4): |
||||||||||
Historical |
$ | 0.28 | $ | 0.23 | $ | 0.20 | ||||
Income on adjusted net proceeds |
0.09 | 0.09 | 0.09 | |||||||
Income on mutual holding company asset contribution |
| | | |||||||
Employee stock ownership plan(1) |
(0.01 | ) | (0.01 | ) | (0.01 | ) | ||||
Stock awards(2) |
(0.03 | ) | (0.03 | ) | (0.03 | ) | ||||
Stock options(3) |
(0.03 | ) | (0.03 | ) | (0.03 | ) | ||||
| | | | | | | | | | |
Pro forma basic earnings per share(4) |
$ | 0.30 | $ | 0.25 | $ | 0.22 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Offering price to pro forma net earnings per share |
33.33 | 40.00 | 45.45 | |||||||
Number of shares used in basic earnings per share calculations |
40,221,479 | 47,319,386 | 54,417,294 | |||||||
At December 31, 2018 |
||||||||||
Shareholders' equity: |
||||||||||
Historical |
$ | 357,574 | $ | 357,574 | $ | 357,574 | ||||
Estimated net proceeds |
225,780 | 266,001 | 306,221 | |||||||
Equity increase from the mutual holding company |
99 | 99 | 99 | |||||||
Common stock acquired by employee stock ownership plan(1) |
(18,360 | ) | (21,600 | ) | (24,840 | ) | ||||
Common stock acquired by stock-based benefit plans(2) |
(9,180 | ) | (10,800 | ) | (12,420 | ) | ||||
| | | | | | | | | | |
Pro forma shareholders' equity(5) |
$ | 555,913 | $ | 591,274 | $ | 626,634 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Intangible assets |
$ | (78,467 | ) | $ | (78,467 | ) | $ | (78,467 | ) | |
| | | | | | | | | | |
Pro forma tangible shareholders' equity(5) |
$ | 477,446 | $ | 512,807 | $ | 548,167 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Shareholders' equity per share(6): |
||||||||||
Historical |
$ | 8.27 | $ | 7.02 | $ | 6.11 | ||||
Estimated net proceeds |
5.22 | 5.23 | 5.23 | |||||||
Equity increase from the mutual holding company |
| | | |||||||
Common stock acquired by employee stock ownership plan(1) |
(0.42 | ) | (0.42 | ) | (0.42 | ) | ||||
Common stock acquired by stock-based benefit plans(2) |
(0.21 | ) | (0.21 | ) | (0.21 | ) | ||||
| | | | | | | | | | |
Pro forma shareholders' equity per share(5)(6) |
$ | 12.86 | $ | 11.62 | $ | 10.71 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Intangible assets |
$ | (1.82 | ) | $ | (1.54 | ) | $ | (1.34 | ) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Pro forma tangible shareholders' equity per share(5)(6) |
$ | 11.04 | $ | 10.08 | $ | 9.37 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Offering price as percentage of pro forma shareholders' equity per share |
77.76 | % | 86.06 | % | 93.37 | % | ||||
Offering price as percentage of pro forma tangible shareholders' equity per share |
90.58 | % | 99.21 | % | 106.72 | % | ||||
Number of shares outstanding for pro forma book value per share calculations |
43,238,349 | 50,868,645 | 58,498,942 |
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"ASC 718-40," requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by HarborOne Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 27.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of shareholders' equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 158,783, 186,803 and 214,824 shares were committed to be released during the year at the minimum, midpoint and maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations.
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BUSINESS OF NEW HARBORONE AND OLD HARBORONE
New HarborOne is a newly formed Massachusetts corporation that was organized in March 2019. Upon completion of the conversion, New HarborOne will own 100% of the common stock of HarborOne Bank and will succeed to all of the business and operations of Old HarborOne and each of Old HarborOne and HarborOne Mutual Bancshares will cease to exist.
Initially following the completion of the conversion, New HarborOne will have a total of $[number] million in cash and securities held by Old HarborOne and HarborOne Mutual Bancshares as of December 31, 2018, and the proceeds it retains from the offering, following (i) investing 50% of the net proceeds in HarborOne Bank and (ii) funding a loan to the HarborOne Bank Employee Stock Ownership Plan to fund its purchase of shares of New HarborOne common stock in this offering. New HarborOne will have no significant liabilities. Other than servicing the obligations on $35 million in subordinated debt that it will assume from Old HarborOne in the transaction, New HarborOne intends to use the support staff and offices of HarborOne Bank and will pay HarborOne Bank for these services. If New HarborOne expands or changes its business in the future, it may hire its own employees.
New HarborOne intends to invest the net proceeds of the offering as discussed under " Use of Proceeds ." In the future, we may pursue other business activities, including mergers and acquisitions, investment alternatives and diversification of operations. There are, however, no current understandings or agreements for these activities.
Old HarborOne is a Massachusetts corporation that was formed in 2016 as part of the reorganization of HarborOne Bank into a two-tier mutual holding company structure. Old HarborOne sold 14,454,396 shares of common stock at $10.00 per share, including 1,187,188 shares purchased by the employee stock ownership plan. In addition, Old HarborOne issued 17,281,034 shares to HarborOne Mutual Bancshares, Old HarborOne's mutual holding company parent, and 385,450 shares to the HarborOne Foundation, a charitable foundation that was formed in connection with the stock offering and is dedicated to supporting charitable organizations operating in HarborOne Bank's local community. A total of 32,120,880 shares of common stock were outstanding following the completion of the stock offering.
At December 31, 2018, Old HarborOne had total assets of $3.65 billion, deposits of $2.69 billion and shareholders' equity of $357.6 million on a consolidated basis. The Consolidated Financial Statements included herein include the accounts of Old HarborOne, Legion Parkway Company LLC, a security corporation and subsidiary of Old HarborOne formed on July 13, 2016, the Bank and the Bank's wholly-owned subsidiaries including HarborOne Mortgage, LLC, or "HarborOne Mortgage." HarborOne Mortgage was acquired as Merrimack Mortgage Company, LLC on July 1, 2015 and, effective April 3, 2018, became HarborOne Mortgage.
On October 5, 2018, Old HarborOne completed its acquisition of Coastway Bancorp, Inc., the parent company of Coastway Bank, adding nine full service branches in Rhode Island. The acquisition included $703.9 million in loans and $476.5 million in deposits, at fair value, and total cash consideration was $119.4 million. Coastway Bancorp, Inc.'s charitable foundation was also acquired and was renamed the HarborOne Foundation of Rhode Island.
Old HarborOne's corporate offices are located at 770 Oak Street, Brockton, Massachusetts 02301, and the telephone number is (508) 895-1000.
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HarborOne Bank is the largest state-chartered co-operative bank in New England. The Bank, originally established in 1917 as a state-chartered credit union, converted to a state-chartered co-operative bank on July 1, 2013. The Bank provides a variety of financial services to individuals and businesses online and through its 24 full-service branches located in Massachusetts and Rhode Island, one limited-service branch, and a commercial lending office in each of Boston, Massachusetts, and Providence, Rhode Island. We provide a range of educational services through "HarborOne U," with classes on small business, financial literacy and personal enrichment at classroom sites adjacent to our Brockton and Mansfield locations.
HarborOne Mortgage, LLC, a wholly owned subsidiary of the Bank, is a residential mortgage company headquartered in New Hampshire that maintains 34 offices in Massachusetts, Rhode Island, New Hampshire, Maine and New Jersey, and is also licensed to lend in five additional states.
We have been operating continuously in and around Brockton, Massachusetts, since 1917. We are committed to meeting the financial needs of consumers and small and middle-market businesses in the communities in which we operate now and in the future, and we are dedicated to providing exceptional personal service to our customers. We plan to employ the following strategies to maximize profitability:
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See the section in this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of OperationsBusiness Strategy" for further discussion of our business strategy.
HarborOne Bank. HarborOne Bank provides financial services to individuals, families, small and mid-size businesses and municipalities throughout Southeastern Massachusetts and Rhode Island. While our primary deposit-gathering area is concentrated within our branch office communities and surrounding cities and towns, our lending area encompasses the broader market of New England.
Due to our proximity to Boston and Providence, our primary market area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several investment and financial services companies. The greater Boston metropolitan area also has many life science and high technology companies employing personnel with specialized skills, which impacts the demand for residential homes, residential construction, office buildings, shopping centers, and other commercial properties in our market area. Communities within our market area include many older residential commuter towns, which function partially as business and service centers.
Massachusetts' population is projected to grow 3.1%, and Massachusetts household income is projected to grow 11.6%, from 2019 to 2024. Rhode Island's population is projected to grow 0.73%, and Rhode Island household income is projected to grow 7.5%, over the same timeframe.
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HarborOne Mortgage. HarborOne Mortgage maintains 34 offices in Massachusetts, Rhode Island, New Hampshire, Maine, and New Jersey, and is licensed to lend in five additional states.
HarborOne Bank. We face significant competition for deposits and loans. Our most direct competition for deposits has historically come from banking institutions operating in our primary market area and from other financial service companies such as securities brokerage firms, credit unions, and insurance companies. We also face competition for investors' funds from money market funds and mutual funds. Many of the banks that operate in our primary market area are owned by large national and regional holding companies, are larger than we are and therefore may have greater resources or offer a broader range of products and services.
Our competition for loans comes from financial institutions, including credit unions, in our primary market area and from other financial service providers, such as mortgage companies, mortgage brokers and the finance arms of auto makers. Competition for loans also comes from non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.
We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks and other financial services companies to expand their geographic reach by providing services over the internet, and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Increased competition for deposits and the origination of loans could limit our growth in the future
HarborOne Mortgage. HarborOne Mortgage faces competition for originating loans both directly within the markets in which it operates and from entities that provide services throughout the United States through internet channels. HarborOne Mortgage's competition comes principally from other mortgage banking firms, as well as from commercial banks, savings institutions and credit unions.
The scope of the discussion included under " Lending Activities " is limited to lending operations related to loans originated for investment. A discussion of the lending activities related to loans originated for sale is included under " Mortgage Banking Activity ."
Commercial Real Estate Loans. Our commercial real estate loans are generally secured by properties used for business purposes such as office buildings, retail development, manufacturing facilities, warehouse distribution, hospitality and apartment buildings. We currently focus our commercial real estate efforts on small- and mid-size owner occupants and investors in our market area seeking loans between $350,000 and $25.0 million. At December 31, 2018, commercial real estate loans were $934.4 million, or 31.4% of total loans, and consisted of $343.0 million of fixed-rate loans and $591.4 million of adjustable-rate loans.
We originate fixed- and adjustable-rate commercial real estate loans typically with terms of five to ten years, though loans may be for terms of up to 20 years. Interest rates and payments on our adjustable-rate loans typically adjust in accordance with a designated index every three, five or seven years. Most of our adjustable-rate commercial real estate loans adjust every five years to a specified percentage above the corresponding Federal Home Loan Bank, or "FHLB," Classic Advance borrowing rate and amortize over a 25-year term. We also offer interest rate swaps to accommodate customer needs. Loan amounts generally do not exceed 80.0% of the property's appraised value at the time the loan is originated.
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We consider a number of factors when underwriting commercial real estate loans that include projected net cash flow to the loan's debt service requirement, the age and condition of the collateral, the profitability and the value of the underlying property, the financial resources and income level of the sponsor and their experience in owning or managing similar properties, and the borrower's credit history. When circumstances warrant, personal guarantees are obtained from the principals of the borrower on commercial real estate. To monitor cash flows on income properties, we require borrowers and loan guarantors, where applicable, to provide annual financial statements on commercial real estate loans. We also generally require an independent appraisal or valuation, an environmental survey and a property condition report for commercial real estate loans.
In addition to originating these loans, we participate in commercial real estate loans with other financial institutions located primarily in Massachusetts and sell participation interests in commercial real estate loans to local financial institutions, primarily the portion of loans that exceed our borrowing limits or are in an amount that is considered prudent to manage our credit risk. See below " Loan Underwriting RisksLoan Participations."
At December 31, 2018, the average originated loan balance of our outstanding commercial real estate loans was $3.5 million, and our four largest credits ranged from $14.0 million to $16.0 million. These loans were performing in accordance with their original terms at December 31, 2018. Our largest commercial real estate relationship totaled $34.1 million and consists of loans to finance hotels.
Commercial Loans. We originate commercial loans and lines of credit to a variety of professionals, sole proprietorships and small- to medium-sized businesses, primarily in Massachusetts and Rhode Island, with sales typically up to $75.0 million and borrowing needs up to $10.0 million, for working capital and other business purposes. In connection with the Coastway acquisition we acquired a small business lending team that will generate small business loans, including loans originated through the SBA, which provide a partial government guarantee. Small business loans, including real estate loans, generally consist of loans to businesses with commercial credit needs of less than or equal to $250,000 and revenues of less than $2.5 million.
At December 31, 2018, commercial loans were $277.3 million, or 9.3% of total loans, and included $139.2 million in small business loans of which $47.9 million had a partial SBA guarantee. At December 31, 2018, commercial loans consisted of $74.5 million of fixed-rate loans and $202.8 million of adjustable-rate loans.
Commercial loans are originated with either variable or fixed rates of interest. Variable rates are based on a margin over the LIBOR index or tied to the Prime rate as published in The Wall Street Journal , plus a margin. Fixed-rate business loans are generally indexed to a corresponding FHLB rate, plus a margin. Commercial loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We generally require that our commercial customers maintain a deposit relationship with the Bank.
When making commercial loans, we consider the financial statements and the experience of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral, primarily accounts receivable, inventory and equipment. Commercial loan amounts are determined based on the capacity for debt service and an evaluation of the age, condition and collectability of the collateral but generally, advance rates for certain asset classes would not exceed 80.0%.
At December 31, 2018, the average originated balance of our outstanding commercial loans was $300,000 and our four largest commercial loan exposures ranged from $5.5 million to $11.1 million. These loans are secured by business assets of the borrower and were performing according to their original terms at December 31, 2018.
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Commercial Construction Loans. We originate commercial construction loans for commercial development projects, including industrial buildings, retail and office buildings and speculative residential real estate. At December 31, 2018, construction loan balances were $161.7 million, or 5.4% of total loans. At December 31, 2018, our commercial construction loan portfolio consisted of $7.4 million in loan balances that were secured by speculative residential real estate loan projects, $135.6 million in loans that were secured by commercial real estate speculative projects and $18.7 million secured by owner occupied commercial real estate projects. At December 31, 2018, unadvanced funds on commercial construction loans was $103.0 million.
Our commercial construction loans generally call for the payment of interest only with interest rates tied to LIBOR or Prime rate as published in The Wall Street Journal , plus a margin. Construction loans for commercial real estate projects can be originated with principal balances of up to $20.0 million, but generally are lower; the average originated principal balance at December 31, 2018 was $5.1 million. Advances on commercial construction loans are made in accordance with a schedule reflecting the cost of construction and repayment is generally expected from permanent financing upon completion of construction.
At December 31, 2018, our largest outstanding commercial construction loan was $14.5 million, and the average balance of our outstanding commercial construction loans was $2.7 million. This project is secured by a first mortgage to develop an apartment building and was performing according to its original repayment terms at December 31, 2018.
One- to Four-Family Residential Real Estate Loans. We provide residential real estate loans through HarborOne Mortgage for home purchase or refinancing of existing homes, most of which serve as the primary residence of the owner. At December 31, 2018, residential mortgage loans were $942.7 million, or 31.6% of total loans, and consisted of $846.7 million and $96.0 million of fixed-rate and adjustable-rate loans, respectively. We offer fixed-rate and adjustable-rate residential mortgage loans with terms up to 30 years.
Our one- to four-family residential mortgage originations are generally underwritten to conform to Federal National Mortgage Association, or "Fannie Mae," and Federal National Home Loan Mortgage Corporation, or "Freddie Mac," underwriting guidelines. Our adjustable-rate mortgage loans generally adjust annually or after an initial fixed period that ranges from three to seven years and are adjusted to a rate equal to a specified percentage above the LIBOR or U.S. Treasury index. Depending on the loan type, the maximum amount by which the interest rate may be increased or decreased is generally 2.0% per adjustment period with the lifetime interest rate caps ranging from 5.0% to 6.0% over the initial interest rate of the loan.
Borrower demand for adjustable-rate compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.
While residential mortgage loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.
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We originate one- to four-family residential mortgage loans with loan-to-value ratios up to 80.0% and we generally require private mortgage insurance for residential loans secured by a first mortgage with a loan-to-value ratio over 80.0%. We generally require all properties securing mortgage loans to be appraised by a licensed real estate appraiser. We generally require title insurance on all first mortgage loans. Exceptions to these lending policies are based on an evaluation of credit risk related to the borrower and the size of the loan. Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.
In an effort to provide financing for first-time buyers, we offer adjustable- and fixed-rate loans to qualified individuals and originate the loans using modified underwriting guidelines, reduced interest rates and loan conditions and reduced closing costs. We also participate in publicly sponsored loan programs which provide competitive terms for low and moderate income home buyers.
The majority of the conforming fixed-rate one- to four-family residential mortgage loans we originate are sold to the secondary market, mainly to Fannie Mae and Freddie Mac, with servicing retained other than for specialized governmental programs that require servicing to be released. Generally, we hold in our portfolio nonconforming loans, shorter-term fixed-rate loans and adjustable-rate loans.
We generally do not (i) originate "interest only" mortgage loans on one- to four-family residential properties, (ii) offer loans that provide for negative amortization of principal such as "option ARM" loans where the borrower can pay less than the interest owed on their loan, (iii) offer "subprime" loans (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies or borrowers with questionable repayment capacity) or (iv) offer "Alt-A" loans (loans to borrowers having less than full documentation).
Second Mortgages and Equity Lines of Credit. We offer second mortgages and equity lines of credit, which are secured by owner-occupied residences. At December 31, 2018, second mortgages and equity lines of credit were $158.1 million, or 5.3% of total loans. Second mortgages are made at fixed interest rates and terms of up to fifteen years. Equity lines of credit have adjustable rates of interest that are indexed to the Prime rate as published in The Wall Street Journal plus or minus a margin, and generally are subject to an interest rate floor, with 10-year draws and repayment terms of between five and 20 years. We offer second mortgages and equity lines of credit with cumulative loan-to-value ratios generally up to 80.0%, when taking into account both the balance of the home equity loan and first mortgage loan. We hold a first mortgage position on the homes that secure second mortgages or equity lines of credit in approximately one-third of the portfolio.
The procedures for underwriting home equity lines of credit include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral to the proposed loan amount. The procedures for underwriting residential mortgage loans apply equally to second mortgages and equity lines of credit.
Residential Construction Loans. We originate residential real estate construction loans through HarborOne Mortgage to professional developers, contractors and builders, and to a lesser extent, individuals, to finance the construction of residential dwellings. At December 31, 2018, the balance of residential construction loans was $14.7 million and unadvanced funds were $8.3 million.
Our residential real estate construction loans generally are fixed-rate loans that provide for the payment of interest only during the construction phase, which is usually 12 to 36 months. At the end of the construction phase, the loan may be paid in full or converted to a permanent mortgage loan. Before making a commitment to fund a construction loan, we generally require an appraisal of the
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property by an independent licensed appraiser. Our loan policy dictates a minimum equity contribution by the borrower of 20.0% and a loan-to-value ratio not greater than 80.0% of the appraised market value estimated upon completion of the project. All borrowers are underwritten and evaluated for creditworthiness based on past experience, debt service ability, net worth analysis including available liquidity, and other credit factors. Advances are only made following an inspection of the property confirming completion of the required progress on the project and an update to the title completed by a bank approved attorney.
Auto and Other Consumer Loans. While we stopped originating indirect auto loans in 2018, we continue to fund indirect auto lease loans for the leasing of new or used automobiles through our relationship with CULA. At December 31, 2018, auto loans were $478.9 million, or 16.1% of total loans and 97.4% of consumer loans. Other consumer loans, consisting primarily of unsecured lines of credit and personal loans, were $12.6 million, or 0.4% of total loans. Auto loans consisted of $384.2 million of auto lease loans, $85.8 million of indirect auto loans and $8.9 million in direct auto loans.
An indirect auto lease is originated when a customer, the lessee, agrees to lease a vehicle where the lessee is guaranteed use of the vehicle over a specified term. The lease payment consists of the monthly depreciation of the vehicle, interest, and if applicable, depending on the state, sales tax. At the end of the lease term, the lessee has the option of returning the vehicle, purchasing it outright for the agreed upon contractual residual value or purchasing the vehicle and financing it by means of a conventional fully amortizing auto loan. The Bank is assigned leases through an agreement with CULA. At the origination of the lease, the car dealership sells the lease and related vehicle to CULA. CULA simultaneously assigns the lease and grants a security interest in the vehicle to the Bank.
Indirect auto lease loans generally have a higher rate of return than indirect auto loans because interest rates on leases are higher, the lease loans tend to last for the full term of the lease, and lessees typically have higher credit scores. Lease terms vary between 12 and 60 months, but typically average 36 to 39 months in duration.
The procedures for underwriting consumer loans include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.
Loan Originations, Purchases and Sales. Loan originations come from a number of sources. The primary source of loan originations are our loan originators, and to a lesser extent, local mortgage brokers and third party originators of residential loans, advertising and referrals from customers. We occasionally purchase participation interests in commercial real estate loans and commercial business loans. In addition, we sell participation interests in commercial real estate loans to local financial institutions, primarily the portion of loans that exceed our borrowing limits or are in an amount that is considered prudent to manage our credit risk.
Our current practice is generally (1) to sell to the secondary market newly originated 15-year or longer term conforming fixed-rate residential mortgage loans and (2) to hold in our portfolio nonconforming loans, shorter-term fixed-rate loans, jumbo loans and adjustable-rate residential mortgage loans. Our decision to sell loans is based on prevailing market interest rate conditions and interest rate risk management. Loans are sold to third parties with servicing either retained or released.
For the years ended December 31, 2018 and 2017, we originated loans of $1.51 billion and $1.73 billion of loans, respectively. During the same periods, we sold $977.4 million and $1.16 billion of loans, respectively.
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Mortgage Banking Activity. We originate residential mortgage loans through HarborOne Mortgage. For the year ended December 31, 2018, HarborOne Mortgage originated $866.9 million in mortgage loans. HarborOne Mortgage sells loans on both a servicing-released and a servicing-retained basis. HarborOne Mortgage has contracted with a third party to service the loans for which it retains servicing. HarborOne Bank purchases residential mortgage loans for portfolio from HarborOne Mortgage. These purchases generally consist of short term fixed-rate mortgages, adjustable-rate mortgages and nonconforming mortgages. The Bank's decision to purchase loans from HarborOne Mortgage is based on prevailing market interest rate conditions, interest rate risk management and balance sheet management.
Our overall margin can be affected by the mix of both loan type (conventional loans versus governmental) and loan purpose (purchase versus refinance). Conventional loans include loans that conform to Fannie Mae and Freddie Mac standards, whereas governmental loans are those loans guaranteed or insured by the federal government, such as a Federal Housing Authority or a Veterans' Administration loan.
Loan Underwriting Risks
Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than residential mortgage loans. Of primary concern in commercial real estate lending is the borrower's creditworthiness and the feasibility and cash flow potential of the project. In addition, our commercial borrowers may have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than residential real estate loans. If we are forced to foreclose on a commercial real estate property due to default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
Commercial Loans. Commercial loans also involve a greater degree of risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are typically made on the basis of the borrower's ability to make repayment from the cash flows of the borrower's business, although small business loans originated through the SBA program include a partial guarantee. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Construction Loans. Construction financing is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we are forced to foreclose on a project before or at completion due to a default, we may not be able to
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recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
Residential Real Estate Loans. Due to historically low interest rate levels, borrowers generally have preferred fixed-rate loans in recent years. While we anticipate that our adjustable-rate loans will better offset the adverse effects on our net interest income of an increase in interest rates as compared to fixed-rate loans, the increased mortgage payments required of adjustable-rate loans in a rising interest rate environment could cause an increase in delinquencies and defaults. If we are forced to foreclose on a residential property due to default, the marketability of the underlying property also may be adversely affected in a high interest rate environment, and we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, although adjustable-rate loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.
Consumer Loans. Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower's continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Loan Participations. We cultivate relationships with other financial institutions to mitigate the risk of our lending activities by participating either as the lead bank or as a participant in various loan transactions. We purchase participation interests in larger balance loans from other financial institutions generally in our market area. Such participations are evaluated with the same level of due diligence and care as loans we originate. The participations are underwritten, reviewed for compliance, and approved in accordance with our underwriting policies and criteria. We actively monitor the performance of such loans and periodically receive updated financial statements of the borrower from the lead lender in accordance with loan reporting requirements and covenant testing. These loans are subjected to regular internal reviews in accordance with our loan policy. We also participate in a commercial lending network operated by BancAlliance. As of December 31, 2018, total exposure for this program was $18.1 million comprising 15 credits. All but one of these relationships were performing in accordance with their payment terms. The BancAlliance substandard loan is a $1.3 million loan that is on nonaccrual and under a forbearance agreement. At December 31, 2018, the outstanding balances of commercial loan participations purchased outside of the BancAlliance network totaled $9.2 million. We also participate in commercial real estate loans that totaled $142.2 million and commercial construction loans that totaled $53.7 million at December 31, 2018. We sell loan participations in the ordinary course of business when a loan originated by us exceeds our legal lending limit or we otherwise deem it prudent to share the risk with another lending institution. We were the lead bank in commercial real estate loans of $277.4 million, commercial construction loans of $46.5 million and commercial loans of $7.3 million with participation balances sold that totaled $111.1 million, $28.8 million and $1.0 million, respectively, at December 31, 2018. As compared to December 31, 2017, this represents an increase of $40.7 million in commercial real estate participations sold, a $14.0 million increase in commercial construction participations sold, and an increase of $1.0 million in commercial participations sold.
Loan Approval Procedures and Authority. Our lending activities follow written, nondiscriminatory underwriting standards and loan origination procedures established by our board of directors and
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management. Our board of directors has granted loan approval authority to certain executive officers. Commercial loans in excess of any officer's individual authority must be approved by a lending committee comprised of several executive officers. Commercial loans in excess of the lending committee authority must be approved by the board of directors or by the executive committee, which is comprised of our president and chief executive officer and three independent members of our Board of Directors. Commercial loans in excess of the "in-house limit" must be approved by the board of directors. The executive committee of the board of directors reviews all commercial loan requests greater than $1.0 million and commercial real estate loan requests greater than $3.0 million. All mortgage and commercial real estate loans to any single borrower that exceed $7.5 million and commercial loans that exceed $3.0 million must be approved by the board of directors.
Loans-to-One Borrower Limit. The maximum amount that the Bank may lend to one borrower and the borrower's related entities is generally limited, by statute, to 20.0% of the Bank's capital, which is defined under Massachusetts law as the sum of the Bank's capital stock, surplus account and undivided profits. At December 31, 2018, the Bank's regulatory limit on loans-to-one borrower was $63.4 million. At that date, our largest lending relationship totaled $34.1 million and was comprised of four loans to finance hotels. These loans were performing in accordance with their original repayment terms at December 31, 2018. Our internal loans-to-one borrower limit is $38.5 million.
General. At December 31, 2018, securities totaled $254.0 million. The securities portfolio consists of U.S. government and government sponsored enterprise obligations, residential mortgage-backed securities and collateralized mortgage obligations, state, county and municipal bonds and small business administration asset-backed securities. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help mitigate interest rate and market risk, to diversify our assets, and to generate a reasonable rate of return on funds within the context of our interest rate and credit risk objectives. Our board of directors reviews and approves our investment policy annually. Authority to make investments under the approved investment policy guidelines is delegated to our president or our chief financial officer. All investment transactions are reviewed at the next regularly scheduled meeting of the board of directors. We classify the majority of our securities as available-for-sale.
We have legal authority to invest in various types of securities, including U.S. Treasury obligations, securities of various government-sponsored enterprises and municipal governments, deposits at the FHLB, certificates of deposit of federally insured institutions and investment grade corporate bonds. We also are required to maintain an investment in FHLB stock. While we have the authority under applicable law to invest in marketable equity securities and derivative securities, we had no investments in such securities at December 31, 2018.
Investment Securities. At December 31, 2018 our securities portfolio consisted of the following:
U.S. Government and Government-Sponsored Enterprise Obligations. At December 31, 2018, we had U.S. government and government-sponsored enterprise securities totaling $28.0 million, which constituted 10.8% of our securities portfolio. While these securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent we deem appropriate, for liquidity purposes, as collateral for borrowings and for prepayment protection.
U.S. Government and Government-Sponsored Mortgage-Backed and Collateralized Mortgage Obligations, or "CMOs". At December 31, 2018, we had mortgage-backed securities and CMOs totaling $151.7 million, which constituted 59.7% of our securities portfolio. Mortgage-backed securities and CMOs are securities issued in the secondary market that are collateralized by pools of residential
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mortgages. Certain types of mortgage-backed securities are commonly referred to as "pass-through" certificates because the principal and interest of the underlying loans is "passed through" to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multi-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as the Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed securities are either backed by the Government National Mortgage Association, or "Ginnie Mae," a U.S. government agency, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Residential mortgage-backed securities issued by U.S. government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
U.S. Small Business Administration Asset-Backed Securities. At December 31, 2018, we had investments in participation certificates issued and guaranteed by the U.S. Small Business Administration totaling $52.6 million.
Tax Exempt Municipal Bonds. At December 31, 2018, we had $22.1 million invested in issues of a diversified municipal bond portfolio. All but one of these bonds are rated in the top four tiers in terms of credit ratings by Moody's and S&P and the lowest rated bond is rated A1 by Moody's and is in the amount of $633,000.
In addition to our securities portfolio, we also have investments in FHLB stock and bank-owned life insurance.
FHLB Stock. In connection with our borrowing activities, we held common stock of the FHLB totaling $25.0 million at December 31, 2018. The FHLB common stock is carried at cost and classified as a restricted equity security. We may be required to purchase additional FHLB stock if we increase borrowings in the future.
Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. At December 31, 2018, our balance in bank-owned life insurance totaled $44.6 million and was issued by four highly rated insurance companies.
General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.
Deposit Accounts. At December 31, 2018, total deposits were $2.69 billion. Deposits are attracted from within our market area by sales efforts of our retail branch network, municipal department and commercial loan officers, advertising and through our website. We offer a broad selection of deposit instruments, including noninterest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), savings accounts and term
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certificates of deposit. We also offer a variety of deposit accounts designed for businesses and municipalities operating in our market area. Our business banking deposit products include a commercial checking account, sweep accounts, money market accounts and checking accounts specifically designed for small businesses. We also offer remote deposit capture products for business customers to meet their online banking needs. Additionally, the Bank has a municipal banking department that provides core depository services to local municipalities. At December 31, 2018, municipal deposits totaled $255.1 million and consisted of relationships with over 40 cities and towns. The Bank also participates in a reciprocal deposit program that provides access to FDIC insured deposit products in aggregate amounts exceeding the current insurance limits for depositors. At December 31, 2018, total reciprocal deposits were $110.4 million and included $105.3 million of municipal deposits.
The Bank utilizes a deposit listing service which targets institutional funds throughout the country. We generally prohibit the withdrawal of our listing service deposits prior to maturity. Also, when rates and terms are favorable, the Bank supplements the customer deposit base with brokered deposits. At December 31, 2018, we had $28.1 million of institutional deposits and $77.5 million of brokered deposits, which represented 3.7% of total deposits at December 31, 2018 with such funds having a weighted average remaining term to maturity of 7.5 months. In a rising rate environment, we may be unwilling or unable to pay a competitive rate. To the extent that such deposits do not remain with us, they may need to be replaced with borrowings, which could increase our cost of funds and negatively impact our interest rate spread, financial condition and results of operations.
Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, and customer preferences and concerns. We generally review our deposit mix and pricing on a weekly basis. Our deposit pricing strategy has generally been to offer competitive rates and to periodically offer special rates in order to attract deposits of a specific type or term.
Borrowings. At December 31, 2018, total borrowings were $553.7 million. Borrowings consist of short-term and long-term obligations from the FHLB and subordinated debentures issued in 2018. The Bank is a member of the FHLB Boston, which provides access to wholesale funding to supplement our supply of investable funds. The FHLB functions as a central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the FHLB and are authorized to apply for advances on the security of such stock and portions of our loan portfolio identified under a blanket lien, provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's net worth or on the FHLB's assessment of the institution's creditworthiness. At December 31, 2018, based on available collateral and our ownership of FHLB stock, we had access to additional FHLB advances of up to $404.3 million. All of our borrowings from the FHLB are secured by a blanket lien on residential real estate and certain other loans.
The Share Insurance Fund of the Co-operative Central Bank provides for borrowings for liquidity purposes and is available to all co-operative member banks. Loan advances will generally be made on an unsecured basis provided that: the aggregate loan balance is less than 5.0% of total deposits of the member bank; the member bank's primary capital ratio is in excess of 5.0%; the member bank meets the required CAMELS rating; and the quarterly and year-to-date net income before extraordinary items is positive. At December 31, 2018, we had $5.0 million of borrowing capacity with the Co-operative Central Bank, none of which was outstanding.
In August 2018, we issued $35.0 million in fixed to floating rate subordinated notes. The notes bear interest at an annual fixed rate of 5.625% until September 1, 2023 at which time the interest
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resets quarterly to an interest rate per annum equal to the three month LIBOR plus 278 basis points. The notes are carried on the consolidated balance sheet net of issuance costs of $1.2 million, which are being amortized over the period to maturity date.
We also have an available line of credit with the Federal Reserve Bank of Boston secured by 75.0% of the carrying value of indirect auto loans with an amortized balance amounting to $70.6 million of which no amount was outstanding at December 31, 2018.
As of December 31, 2018, we had 658 full-time equivalent employees. None of our employees are represented by a labor union and management considers its relationship with employees to be good.
At December 31, 2018, we conducted business throughout our Southeastern New England network of 24 full-service branches, one limited-service branch, and a commercial lending office in each of Boston, Massachusetts and Providence, Rhode Island. In addition, we have administrative offices in Brockton, Massachusetts, and Warwick, Rhode Island, in which HarborOne Mortgage also has offices, and own five ATM locations. HarborOne Mortgage maintains 34 offices in Massachusetts, Rhode Island, New Hampshire, Maine and New Jersey. We own 18 and lease 48 of our offices. At December 31, 2018, the total net book value of our land, buildings, furniture, fixtures and equipment was $57.0 million.
We have two wholly owned subsidiaries, HarborOne Bank and Legion Parkway Company LLC, a Massachusetts limited liability company formed in 2016 to engage in buying, selling, dealing in and holding securities. In addition to HarborOne Mortgage, HarborOne Bank has three additional wholly-owned subsidiaries, HarborOne Security Corporation, LLC and Oak Street Security Corporation, LLC, each a Massachusetts limited liability company that, like Legion Parkway Company LLC, are each engaged in buying, selling, dealing in and holding securities, and Rhode Island Passive Investment Corp., a Rhode Island passive investment corporation.
Legal Proceedings
We are not currently a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis is intended to assist potential investors in understanding and evaluating our financial condition and results of operation. The information in this section has been derived from the Consolidated Financial Statements, beginning on page F-1 of this prospectus. This section should be read in conjunction with the business and financial information of Old HarborOne and the Consolidated Financial Statements provided in this prospectus.
All material intercompany balances and transactions have been eliminated in consolidation. When necessary, certain amounts in prior year financial statements have been reclassified to conform to the current year's presentation.
On June 29, 2016, we completed our conversion to a two-tier mutual holding company form of organization. Our principal subsidiary is HarborOne Bank. HarborOne Bank is a state chartered co-operative bank whose primary subsidiary is a residential mortgage company, HarborOne Mortgage, LLC, acquired on July 1, 2015.
On October 5, 2018, we completed our acquisition of Coastway, adding nine full service branches in Rhode Island. The acquisition included $703.9 million in loans and $476.5 million in deposits, at fair value, and total cash consideration was $119.4 million. Coastway's charitable foundation was also acquired and was renamed the HarborOne Foundation of Rhode Island.
As described in the Notes to our Consolidated Financial Statements, we have two reportable segments: HarborOne Bank and HarborOne Mortgage. The HarborOne Bank segment provides consumer and business banking products and services to individuals, businesses and municipalities. Consumer products include loan and deposit products, and business banking products include loans for working capital, inventory and general corporate use, commercial real estate construction loans, and deposit accounts. The HarborOne Mortgage segment consists of originating residential mortgage loans primarily for sale in the secondary market and the servicing of those loans.
The HarborOne Bank segment generates the significant majority of our consolidated net interest income and requires the provision for loan losses. The HarborOne Mortgage segment generates the majority of our noninterest income. We have provided below a discussion of the material results of operations for each segment on a separate basis for the years ended December 31, 2018, 2017, and 2016 that focuses on noninterest income and noninterest expenses. We have also provided a discussion of our consolidated operations, which includes the operations of HarborOne Bank and HarborOne Mortgage, for the same periods.
For additional revenue, net income, assets, and other financial information for each of our reportable segments, see Note 25 of the Notes to our Consolidated Financial Statements.
Certain of our accounting policies, which are important to the portrayal of our financial condition, require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 1 of the Notes to our Consolidated Financial Statements.
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The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our Consolidated Financial Statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of December 31, 2018, there is no significant difference in the comparability of the financial statements as a result of the extended transition period.
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. The allowance consists of general, allocated and unallocated components. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: the likelihood of default; the loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and the determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the Massachusetts Commissioner of Banks, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See Note 7, "Loans" within the Notes to our Consolidated Financial Statements.
Goodwill. The assets (including identifiable intangible assets) and liabilities acquired in a business combination are recorded at fair value at the date of acquisition. Goodwill is recognized for the excess of the acquisition cost over the fair values of the net assets acquired and is not subsequently amortized. Identifiable intangible assets include core deposit premium and non-compete contracts and are being amortized on a straight-line basis over their estimated lives. Management assesses the recoverability of goodwill at least on an annual basis and all intangible assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The impairment test uses a combined qualitative and quantitative approach. The initial qualitative approach assesses whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after this assessment, we determine that it is more likely than not that the fair value is less than the carrying value, a quantitative impairment test is performed. The quantitative impairment test compares book value to the fair value of the reporting unit. If the carrying amount exceeds fair value, an impairment charge is recorded through earnings. Management has identified two reporting units for purposes of testing goodwill for impairment. Our reporting units are the same as the segments used for segment reporting: HarborOne Bank, including
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the two security corporations and a Rhode Island passive investment corporation; and HarborOne Mortgage.
Deferred Tax Assets. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Management reviews deferred tax assets on a quarterly basis to identify any uncertainties pertaining to realization of such assets. In determining whether a valuation allowance is required against deferred tax assets, management assesses historical and forecasted operating results, including a review of eligible carryforward periods, tax planning opportunities and other relevant considerations. We believe the accounting estimate related to the valuation allowance is a critical estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our deferred tax assets in the future, an adjustment to the related valuation allowance would be charged to income tax expense in the period such determination was made and could have a negative impact on earnings. In addition, if actual factors and conditions differ materially from those used by management, we could incur penalties and interest imposed by taxing authorities.
Derivatives. Derivative instruments are used in relation to our mortgage banking activities and require significant judgment and estimates in determining their fair value. We hold derivative instruments, which consist of interest rate lock agreements related to expected funding of fixed-rate mortgage loans to customers and forward commitments to sell mortgage loans. Our objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives related to these commitments are recorded as either a derivative asset or a derivative liability in the balance sheet and are measured at fair value, with adjustments recorded in "Mortgage banking income."
Mortgage Servicing Rights. We recognize the rights to service mortgage loans for others as a separate asset referred to as "mortgage servicing rights" or "MSRs." MSRs are generally recognized when loans are sold and the servicing is retained by us and are recorded at fair value. We base the fair value of our MSRs on a valuation performed by a third-party valuation specialist. This specialist determines fair value based on the present value of estimated future net servicing income cash flows, and incorporates assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, servicing costs, contractual servicing fee income, and ancillary income. Changes in the fair value of MSRs occur primarily in connection with the collection/realization of expected cash flows, as well as changes in the valuation inputs and assumptions. Moreover, MSRs are significantly impacted by mortgage rates. Decreasing mortgage rates normally encourage increased mortgage refinancing activity, which reduces the life of the loans underlying the mortgage servicing right, therefore reducing the value of mortgage servicing rights. Changes in the fair value of residential MSRs are reported in "Mortgage banking income."
Please see the Notes to our Consolidated Financial Statements for additional discussion of accounting policies.
Comparison of Financial Condition at December 31, 2018 and December 31, 2017
Total Assets. Total assets increased $968.2 million, or 36.1%, to $3.65 billion at December 31, 2018 from $2.68 billion at December 31, 2017. On October 5, 2018, we completed the acquisition of Coastway. The transaction included the acquisition of $703.9 million in loans and the assumption of $476.5 million in deposits and $276.8 million in FHLB borrowings, each at fair value. The recording of the transaction resulted in $56.4 million in goodwill and $9.0 million in core deposit intangibles. Also
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contributing to the total asset growth was organic loan growth, primarily in total commercial loans, that resulted in an increase in gross loans of $88.0 million, excluding the Coastway loans.
Cash and Cash Equivalents. At December 31, 2018, cash and cash equivalents were $105.5 million, an increase of 30.6% from $80.8 million at December 31, 2017. The increase was primarily due to the acquisition of Coastway.
Loans Held for Sale. Loans held for sale at December 31, 2018 were $42.1 million, a decrease of $17.4 million from $59.5 million at December 31, 2017, primarily due to a decrease in mortgage origination activity as a result of the rising interest rate environment.
Loans, net. At December 31, 2018, net loans were $2.96 billion, an increase of $788.4 million, or 36.2%, from $2.18 billion at December 31, 2017, primarily due to the $703.9 million in loans at fair value acquired from Coastway. Gross loans, excluding Coastway loans increased $88.0 million, reflecting an increase in commercial real estate loans of $164.7 million, an increase in commercial construction loans of $47.7 million and an increase in commercial loans of $36.9 million, offset by a decrease in residential real estate loans of $123.7 million and a decrease in consumer loans of $37.6 million. The decrease in residential real estate loans reflects the sale of $105.4 million of portfolio loans in the fourth quarter of 2018. The allowance for loan losses was $20.7 million at December 31, 2018 and $18.5 million December 31, 2017.
The following table provides the composition of our loan portfolio at the dates indicated:
|
December 31, | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||
|
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||||||
Residential real estate: |
|||||||||||||||||||||||||||||||
One- to four-family |
$ | 942,659 | 31.6 | % | $ | 677,837 | 31.0 | % | $ | 677,946 | 34.1 | % | $ | 710,969 | 41.1 | % | $ | 768,129 | 46.5 | % | |||||||||||
Second mortgages and equity lines of credit |
158,138 | 5.3 | 89,080 | 4.1 | 92,989 | 4.7 | 99,374 | 5.7 | 95,465 | 5.8 | |||||||||||||||||||||
Residential construction |
14,659 | 0.5 | 11,904 | 0.5 | 14,317 | 0.7 | 9,787 | 0.6 | 14,601 | 0.9 | |||||||||||||||||||||
Commercial real estate |
934,420 | 31.4 | 655,419 | 30.0 | 495,801 | 24.9 | 265,482 | 15.3 | 142,452 | 8.6 | |||||||||||||||||||||
Commercial construction |
161,660 | 5.4 | 116,739 | 5.3 | 44,126 | 2.2 | 26,043 | 1.5 | 11,524 | 0.7 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total real estate |
2,211,536 | 74.2 | 1,550,979 | 70.9 | 1,325,179 | 66.6 | 1,111,655 | 64.2 | 1,032,171 | 62.5 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial |
277,271 | 9.3 | 109,523 | 5.0 | 100,501 | 5.1 | 70,472 | 4.1 | 47,453 | 2.9 | |||||||||||||||||||||
Consumer: |
|||||||||||||||||||||||||||||||
Auto |
94,635 | 3.2 | 168,793 | 7.7 | 251,867 | 12.7 | 334,703 | 19.3 | 426,466 | 25.8 | |||||||||||||||||||||
Auto lease loans |
384,228 | 12.9 | 344,935 | 15.8 | 295,533 | 14.9 | 197,368 | 11.4 | 129,629 | 7.8 | |||||||||||||||||||||
Personal |
12,582 | 0.4 | 14,092 | 0.6 | 15,704 | 0.7 | 16,873 | 1.0 | 15,968 | 1.0 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total consumer |
491,445 | 16.5 | 527,820 | 24.1 | 563,104 | 28.3 | 548,944 | 31.7 | 572,063 | 34.6 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans |
2,980,252 | 100.0 | % | 2,188,322 | 100.0 | % | 1,988,784 | 100.0 | % | 1,731,071 | 100.0 | % | 1,651,687 | 100.0 | % | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses |
(20,655 | ) | (18,489 | ) | (16,968 | ) | (13,700 | ) | (13,934 | ) | |||||||||||||||||||||
Net deferred loan origination costs |
5,255 | 6,645 | 9,931 | 12,017 | 14,141 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans, net |
$ | 2,964,852 | $ | 2,176,478 | $ | 1,981,747 | $ | 1,729,388 | $ | 1,651,894 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
65
The following table sets forth our loan originations, sales, purchases and principal repayment activities during the periods indicated:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Total loans and loans held for sale at beginning of year (excluding net deferred loan costs) |
$ | 2,247,782 | $ | 2,075,227 | $ | 1,794,868 | ||||
Loan originations: |
|
|
|
|||||||
Residential real estate: |
||||||||||
One- to four-family residentialBank |
69,349 | 137,192 | 203,730 | |||||||
One- to four-family residentialHarborOne Mortgage |
866,945 | 1,024,895 | 1,357,483 | |||||||
Second mortgages and lines of credit |
42,214 | 30,606 | 36,470 | |||||||
Residential construction |
16,775 | 15,797 | 17,444 | |||||||
Commercial real estate |
233,573 | 151,048 | 218,826 | |||||||
Commercial construction |
27,234 | 139,866 | 68,566 | |||||||
| | | | | | | | | | |
Total mortgage loans on real estate |
1,256,090 | 1,499,404 | 1,902,519 | |||||||
Commercial |
72,047 | 37,432 | 45,534 | |||||||
Consumer |
176,973 | 189,057 | 258,969 | |||||||
| | | | | | | | | | |
Total loans originations |
1,505,110 | 1,725,893 | 2,207,022 | |||||||
| | | | | | | | | | |
Loan purchases:(1) |
|
|
|
|||||||
Acquired from Coastway: |
||||||||||
One- to four-family residential |
399,004 | | | |||||||
Home equity loans and lines of credit |
67,622 | | | |||||||
Commercial real estate |
114,350 | | | |||||||
Commercial |
130,832 | | | |||||||
Consumer |
1,176 | | | |||||||
| | | | | | | | | | |
Total acquired from Coastway |
712,984 | | | |||||||
| | | | | | | | | | |
Commercial real estate |
54,224 | 64,674 | 57,207 | |||||||
Commercial construction |
34,262 | 6,138 | 5,500 | |||||||
Commercial |
3,453 | 2,781 | 11,118 | |||||||
| | | | | | | | | | |
Total loan purchases |
804,923 | 73,593 | 73,825 | |||||||
| | | | | | | | | | |
Loan sales:(2) |
|
|
|
|||||||
Residential real estate: |
||||||||||
One- to four-family residentialBank |
(122,367 | ) | (58,485 | ) | (120,867 | ) | ||||
One- to four-family residentialHarborOne Mortgage |
(821,089 | ) | (1,049,501 | ) | (1,338,163 | ) | ||||
Commercial |
(26,712 | ) | (16,600 | ) | (23,650 | ) | ||||
Commercial construction |
(7,200 | ) | (27,500 | ) | (7,000 | ) | ||||
| | | | | | | | | | |
Total mortgage loans on real estate |
(977,368 | ) | (1,152,086 | ) | (1,489,680 | ) | ||||
| | | | | | | | | | |
Consumer |
| (4,970 | ) | (10,010 | ) | |||||
| | | | | | | | | | |
Total loan sales |
(977,368 | ) | (1,157,056 | ) | (1,499,690 | ) | ||||
| | | | | | | | | | |
Other: |
|
|
|
|||||||
Principal repayments |
(432,884 | ) | (353,970 | ) | (411,485 | ) | ||||
Net charge-offs |
(1,662 | ) | (895 | ) | (904 | ) | ||||
Unadvanced funds on originations |
(121,888 | ) | (113,725 | ) | (86,712 | ) | ||||
Transfer to other real estate owned |
(1,654 | ) | (1,285 | ) | (1,697 | ) | ||||
| | | | | | | | | | |
Total other |
(558,088 | ) | (469,875 | ) | (500,798 | ) | ||||
| | | | | | | | | | |
Net loan activity |
774,577 | 172,555 | 280,359 | |||||||
| | | | | | | | | | |
Total loans and loans held for sale at end of year (excluding net deferred loan costs) |
$ | 3,022,359 | $ | 2,247,782 | $ | 2,075,227 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
66
The following table sets forth certain information at December 31, 2018 regarding scheduled contractual maturities during the period indicated. The table does not include any estimate of prepayments. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The following table also sets forth the rate structure of loans scheduled to mature after one year. The amounts shown below exclude net deferred loan fees.
|
One- to
Four-Family Residential Real Estate |
Second
Mortgage and Equity Lines of Credit |
Residential
Construction |
Commercial
Real Estate |
Commercial
Construction |
Commercial | Consumer |
Total
Loans |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
||||||||||||||||||||||||
Amounts due in: |
|||||||||||||||||||||||||
One year or less |
$ | 550 | $ | 5,517 | $ | | $ | 25,317 | $ | 20,264 | $ | 45,761 | $ | 80,594 | $ | 178,003 | |||||||||
After one year through five years |
20,027 | 35,415 | | 333,361 | 39,749 | 89,548 | 405,350 | 923,450 | |||||||||||||||||
Beyond five years |
922,082 | 117,206 | 14,659 | 575,742 | 101,647 | 141,962 | 5,501 | 1,878,799 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
$ | 942,659 | $ | 158,138 | $ | 14,659 | $ | 934,420 | $ | 161,660 | $ | 277,271 | $ | 491,445 | $ | 2,980,252 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate terms on amounts due after one year: |
|||||||||||||||||||||||||
Fixed rate |
$ | 846,745 | $ | 28,045 | $ | 14,659 | $ | 331,999 | $ | 35,248 | $ | 70,194 | $ | 410,851 | $ | 1,737,741 | |||||||||
Adjustable rate |
$ | 95,364 | $ | 124,576 | $ | | $ | 577,104 | $ | 106,148 | $ | 161,316 | $ | | $ | 1,064,508 |
Generally, the actual maturity of loans is shorter than their contractual maturity due to prepayments. The average life of residential real estate loans are impacted by the current interest rate environment. The average life tends to increase when current mortgage loan rates are higher than the rates of the loans in the portfolio and decrease when current rates are lower than the rates of the loans in the portfolio. Also, commercial and commercial real estate loans may be renewed at or near maturity resulting in significant differences in principal payments actually received as compared to amounts contractually due in a period.
Securities. Total investment securities at December 31, 2018 were $254.0 million, an increase of $36.3 million, or 16.7%, from December 31, 2017. The purchase of $67.7 million of securities was partially offset by $28.2 million in prepayments, maturities, calls and amortization of securities. One security in the amount of $1.0 million was sold with a gross realized gain of $5,000. The total security portfolio was 7.0% of total assets as of December 31, 2018 as compared to 8.1% as of December 31,
67
2017. The following table provides the composition of our securities available for sale and our securities held to maturity at the dates indicated:
|
December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | ||||||||||||||||
|
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
|||||||||||||
|
(in thousands)
|
||||||||||||||||||
Securities available for sale: |
|||||||||||||||||||
Debt securities: |
|||||||||||||||||||
U.S. government and government-sponsored enterprise obligations |
$ | 27,997 | $ | 27,541 | $ | 17,985 | $ | 17,807 | $ | 9,983 | $ | 9,747 | |||||||
U.S. government agency and government-sponsored mortgage-backed and collateralized mortgage obligations |
136,633 | 134,945 | 111,121 | 110,552 | 94,656 | 94,030 | |||||||||||||
SBA asset-backed securities |
47,686 | 46,807 | 42,558 | 42,494 | 32,852 | 32,692 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total securities available for sale |
$ | 212,316 | $ | 209,293 | $ | 171,664 | $ | 170,853 | $ | 137,491 | $ | 136,469 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Securities held to maturity: |
|||||||||||||||||||
Debt securities: |
|||||||||||||||||||
U.S. government agency and government-sponsored mortgage-backed and collateralized mortgage obligations |
$ | 16,749 | $ | 16,360 | $ | 19,494 | $ | 19,431 | $ | 22,834 | $ | 22,783 | |||||||
SBA asset-backed securities |
5,818 | 5,819 | 2,991 | 2,977 | | | |||||||||||||
Other bonds and obligations: |
|||||||||||||||||||
State and political subdivisions |
22,121 | 22,527 | 24,384 | 25,266 | 25,043 | 26,189 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total securities held to maturity |
$ | 44,688 | $ | 44,706 | $ | 46,869 | $ | 47,674 | $ | 47,877 | $ | 48,972 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
68
The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2018:
|
One Year or Less |
More than One Year
to Five Years |
More than Five
Years to Ten Years |
More than Ten Years | Total | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized
Cost |
Weighted
Average Yield |
Amortized
Cost |
Weighted
Average Yield |
Amortized
Cost |
Weighted
Average Yield |
Amortized
Cost |
Weighted
Average Yield |
Amortized
Cost |
Weighted
Average Yield |
|||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||||||
Securities available for sale: |
|||||||||||||||||||||||||||||||
Debt securities: |
|||||||||||||||||||||||||||||||
U.S. government and government-sponsored enterprise obligations |
$ | | | % | $ | 5,000 | 3.30 | % | $ | 22,997 | 2.95 | % | $ | | | % | $ | 27,997 | 3.01 | % | |||||||||||
U.S. government agency and government-sponsored mortgage-backed and collateralized mortgage obligations |
| | | | 28,935 | 2.46 | 107,698 | 2.77 | 136,633 | 2.70 | |||||||||||||||||||||
SBA asset-backed securities |
| | 4,368 | 1.89 | 2,987 | 2.29 | 40,331 | 2.88 | 47,686 | 2.75 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities |
$ | | | % | $ | 9,368 | 2.64 | % | $ | 54,919 | 2.66 | % | $ | 148,029 | 2.80 | % | $ | 212,316 | 2.76 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities held to maturity: |
|||||||||||||||||||||||||||||||
Debt securities: |
|||||||||||||||||||||||||||||||
U.S. government and government-sponsored enterprise obligations |
$ | | | % | $ | | | % | $ | | | % | $ | | | % | $ | | | % | |||||||||||
U.S. government agency and government-sponsored mortgage-backed and collateralized mortgage obligations |
| | | | | | 16,749 | 2.64 | 16,749 | 2.64 | |||||||||||||||||||||
SBA asset-backed securities |
| | | | 5,818 | 2.78 | | | 5,818 | 2.78 | |||||||||||||||||||||
Other bonds and obligations: |
|||||||||||||||||||||||||||||||
State and political subdivisions |
| | | | 4,394 | 2.94 | 17,727 | 3.78 | 22,121 | 3.61 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities |
$ | | | % | $ | | | % | $ | 10,212 | 2.85 | % | $ | 34,476 | 3.23 | % | $ | 44,688 | 3.14 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Servicing Rights. MSRs are created as a result of our mortgage banking origination activities and accounted for at fair value. At December 31, 2018, we serviced mortgage loans for others with an aggregate outstanding principal balance of $1.99 billion. Total MSRs were $22.2 million at December 31, 2018, compared to $21.1 million at December 31, 2017. The $1.1 million increase was primarily due to new MSRs, partially offset by changes in market interest rates and loan repayments.
The following table represents the activity for mortgage servicing rights and the related fair value changes during the periods noted:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Balance, beginning of year |
$ | 21,092 | $ | 20,333 | $ | 12,958 | ||||
Additions |
2,521 | 2,815 | 8,505 | |||||||
Changes in fair value due to: |
||||||||||
Reductions from loans paid off during the year |
(1,795 | ) | (1,686 | ) | (1,779 | ) | ||||
Changes in valuation inputs or assumptions |
399 | (370 | ) | 649 | ||||||
| | | | | | | | | | |
Balance, end of year |
$ | 22,217 | $ | 21,092 | $ | 20,333 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The fair value of our mortgage servicing rights is determined by a third party provider that determines the appropriate prepayment speed, discount and default rate assumptions based on our portfolio. Any measurement of fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different
69
point in time. The following table presents weighted average assumptions utilized in determining the fair value of mortgage servicing rights at December 31, 2018 and 2017:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
Prepayment speed |
9.45 | % | 9.79 | % | |||
Discount rate |
9.32 | 9.26 | |||||
Default rate |
2.06 | 2.23 |
Prepayment speeds are significantly impacted by mortgage rates. Decreasing mortgage rates normally encourage increased mortgage refinancing activity, which reduces the life of the loans underlying the mortgage servicing rights, thereby reducing the value of mortgage servicing rights.
Management has made the strategic decision not to hedge mortgage servicing assets at this point. Therefore, any future declines in interest rates would likely cause further decreases in the fair value of the mortgage servicing rights, and a corresponding detriment to earnings, whereas increases in interest rates would result in increases in fair value, and a corresponding benefit to earnings. Management may choose to hedge the mortgage servicing assets in the future or limit the balance of mortgage servicing rights by selling them or selling loans with the servicing released.
Deposits. Deposits increased $671.3 million, or 33.3%, to $2.69 billion at December 31, 2018 from $2.01 billion at December 31, 2017 and primarily reflects the fair value of deposits acquired from Coastway of $476.5 million. The following table sets forth information concerning the composition of deposits:
The deposit growth, excluding Coastway, was driven by an increase of $256.6 million in retail deposits, $23.5 million in municipal deposits partially offset by a decrease of $85.2 million in wholesale deposits. The increase in retail deposits was primarily due to the increase in retail certificate of deposits, excluding Coastway, of $225.8 million. We offered certificate of deposit specials throughout the year at attractive rates. Wholesale deposits includes brokered deposits of $77.5 million and $28.1 million in certificates of deposits from institutional investors. We participate in a reciprocal deposit program that converts deposits at the Bank into multiple deposits at other financial institutions. The reciprocal deposit program provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. Total deposits at December 31, 2018 included $110.4 million in reciprocal deposits, including $105.3 million in municipal deposits. The wholesale deposits provide a channel for us to seek additional funding outside the Bank's core market. During the year ended
70
December 31, 2018, we continued to focus on enhancing our deposit mix in order to better manage our cost of funds and to expand our customer relationships.
The following table sets forth the average balances and weighted average rates of our deposit products at the dates indicated:
|
Year Ended December 31, | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||||||||||||||||||||
|
Average
Balance |
Percent |
Weighted
Average Rate |
Average
Balance |
Percent |
Weighted
Average Rate |
Average
Balance |
Percent |
Weighted
Average Rate |
|||||||||||||||||||
|
(dollars in thousands)
|
|||||||||||||||||||||||||||
Deposit type: |
||||||||||||||||||||||||||||
Noninterest-bearing demand |
$ | 308,441 | 13.8 | % | | % | $ | 249,035 | 12.9 | % | | % | $ | 221,212 | 12.7 | % | | % | ||||||||||
NOW accounts |
130,143 | 5.8 | 0.07 | 126,093 | 6.5 | 0.06 | 120,661 | 6.9 | 0.06 | |||||||||||||||||||
Regular savings and club |
375,436 | 16.8 | 0.20 | 357,777 | 18.5 | 0.18 | 314,304 | 18.1 | 0.17 | |||||||||||||||||||
Money market |
704,876 | 31.6 | 0.96 | 662,482 | 34.2 | 0.58 | 622,032 | 35.8 | 0.45 | |||||||||||||||||||
Certificates of deposit |
714,620 | 32.0 | 1.82 | 541,585 | 27.9 | 1.18 | 459,721 | 26.5 | 1.15 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
$ | 2,233,516 | 100.0 | % | 0.92 | % | $ | 1,936,972 | 100.0 | % | 0.57 | % | $ | 1,737,930 | 100.0 | % | 0.50 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth our certificates of deposit classified by interest rate as of the dates indicated:
71
The following table sets forth the amount and maturities of our certificates of deposit by interest rate at December 31, 2018:
|
Period to Maturity |
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than
One Year |
More than
One Year to Two Years |
More than
Two Years to Three Years |
More than
Three Years to Four Years |
More than
Four Years |
Total |
% of Total
Certificate Accounts |
|||||||||||||||
|
(dollars in thousands)
|
|||||||||||||||||||||
Less than 0.50% |
$ | 32,492 | $ | 269 | $ | 1 | $ | | $ | | $ | 32,762 | 3.68 | % | ||||||||
0.50% to 0.99% |
20,590 | 4,924 | 493 | | | 26,007 | 2.92 | |||||||||||||||
1.00% to 1.49% |
100,973 | 16,577 | 14,058 | 2,474 | 454 | 134,536 | 15.13 | |||||||||||||||
1.50% to 1.99% |
167,219 | 20,293 | 26,565 | 3,395 | 93 | 217,565 | 24.47 | |||||||||||||||
2.00% to 2.99% |
324,856 | 81,437 | 43,758 | 19,133 | 8,407 | 477,591 | 53.71 | |||||||||||||||
3.00% and greater |
| 812 | | | | 812 | 0.09 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total |
$ | 646,130 | $ | 124,312 | $ | 84,875 | $ | 25,002 | $ | 8,954 | $ | 889,273 | 100.00 | % | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Less unaccreted acquisition discount |
(1,750 | ) | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total, net of discount |
$ | 887,523 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth the maturity of certificates of deposit, excluding brokered deposits, of $100,000 or more as of December 31, 2018:
Maturity Period
|
Amount | |||
---|---|---|---|---|
|
(in thousands)
|
|||
Three months or less |
$ | 140,015 | ||
Over three through six months |
87,114 | |||
Over six months through one year |
180,066 | |||
Over one year |
121,231 | |||
| | | | |
Total |
$ | 528,426 | ||
| | | | |
| | | | |
| | | | |
Borrowings. Total borrowings from the FHLB were $519.9 million at December 31, 2018, an increase of $229.6 million from $290.3 million at December 31, 2017. We assumed $276.8 million in short-term FHLB borrowings in the Coastway acquisition.
In August 2018, we issued $35.0 million in fixed to floating rate subordinated notes. The notes bear interest at an annual fixed rate of 5.625% until September 1, 2023 at which time the interest resets quarterly to an interest rate per annum equal to the three month LIBOR plus 278 basis points. The notes are carried on the consolidated balance sheet net of issuance costs of $1.2 million, which are being amortized over the period to maturity date.
72
The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the periods indicated:
|
At or For the Year Ended
December 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(dollars in thousands)
|
|||||||||
FHLB Advances: |
||||||||||
Balance outstanding at end of year |
$ | 519,936 | $ | 290,365 | $ | 275,119 | ||||
Average amount outstanding during the year |
$ | 291,782 | $ | 278,663 | $ | 248,678 | ||||
Maximum outstanding at any month end |
$ | 519,936 | $ | 310,119 | $ | 280,121 | ||||
Weighted average interest rate during the year |
1.88 | % | 1.78 | % | 2.03 | % | ||||
Weighted average interest rate at end of year |
2.39 | % | 1.59 | % | 1.82 | % | ||||
Subordinated Debt: |
|
|
|
|||||||
Balance outstanding at end of year |
$ | 35,000 | $ | | $ | | ||||
Average amount outstanding during the year |
$ | 11,890 | $ | | $ | | ||||
Maximum outstanding at any month end |
$ | 35,000 | $ | | $ | | ||||
Weighted average interest rate during the year |
6.47 | % | | % | | % | ||||
Weighted average interest rate at end of year |
5.63 | % | | % | | % |
Stockholders' equity. Total stockholders' equity was $357.6 million at December 31, 2018 compared to $343.5 million at December 31, 2017. The increases from the prior period reflect our $11.4 million in net income, $4.6 million from stock-based compensation expense and $1.1 million from ESOP shares committed partially offset by unrealized losses on securities available for sale of $1.7 million and $1.3 million in treasury stock repurchases.
Comparison of Results of Operations for the Years Ended December 31, 2018 and 2017
HarborOne Bancorp, Inc. Consolidated
Overview. Consolidated net income for the year ended December 31, 2018 was $11.4 million compared to net income of $10.4 million for the year ended December 31, 2017. The 2018 results include merger expenses of $5.1 million and one quarter of normal operating income and expense from acquired Coastway operations, and a $746,000 life insurance death benefit. Items impacting 2017 net income include a $1.2 million reversal of a contingent consideration accrual for the acquisition of HarborOne Mortgage that was settled in the fourth quarter and is included in other income, an accrual of $925,000 to freeze the director's post retirement benefit plan included in other expenses and a charge of $243,000 related to the revaluation of our net deferred tax assets as a result of the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Act of 2017"), which is included in the income tax provision.
Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated, on a consolidated basis. Interest income on tax-exempt securities has been adjusted to a fully taxable-equivalent, or "FTE," basis using a federal tax rate of 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying
73
a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
|
Year Ended December 31, | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||||||||||||||||||||
|
Average
Outstanding Balance |
Interest |
Yield/
Cost |
Average
Outstanding Balance |
Interest |
Yield/
Cost |
Average
Outstanding Balance |
Interest |
Yield/
Cost |
|||||||||||||||||||
|
(dollars in thousands)
|
|||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||
Loans(1) |
$ | 2,474,644 | $ | 107,637 | 4.35 | % | $ | 2,165,806 | $ | 83,853 | 3.87 | % | $ | 1,931,271 | $ | 69,867 | 3.62 | % | ||||||||||
Investment securities(2) |
238,580 | 6,660 | 2.79 | 207,071 | 5,574 | 2.69 | 173,131 | 4,423 | 2.55 | |||||||||||||||||||
Other interest-earning assets |
50,912 | 1,591 | 3.12 | 81,082 | 1,160 | 1.43 | 46,448 | 777 | 1.66 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets |
2,764,136 | 115,888 | 4.19 | 2,453,959 | 90,587 | 3.69 | 2,150,850 | 75,067 | 3.49 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest-earning assets |
160,762 | 127,548 | 127,721 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets |
$ | 2,924,898 | $ | 2,581,507 | $ | 2,278,571 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: |
||||||||||||||||||||||||||||
Savings accounts |
$ | 375,436 | 755 | 0.20 | $ | 357,777 | 644 | 0.18 | $ | 314,304 | 548 | 0.17 | ||||||||||||||||
NOW accounts |
130,143 | 86 | 0.07 | 126,093 | 79 | 0.06 | 120,661 | 76 | 0.06 | |||||||||||||||||||
Money market accounts |
704,876 | 6,762 | 0.96 | 662,482 | 3,843 | 0.58 | 622,032 | 2,804 | 0.45 | |||||||||||||||||||
Certificates of deposit |
645,901 | 11,800 | 1.83 | 466,535 | 5,545 | 1.19 | 449,607 | 5,188 | 1.15 | |||||||||||||||||||
Brokered deposits |
68,719 | 1,160 | 1.69 | 75,050 | 851 | 1.13 | 10,114 | 94 | 0.93 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing deposits |
1,925,075 | 20,563 | 1.07 | 1,687,937 | 10,962 | 0.65 | 1,516,718 | 8,710 | 0.57 | |||||||||||||||||||
FHLB advances |
291,782 | 5,474 | 1.88 | 278,663 | 4,974 | 1.78 | 248,678 | 5,051 | 2.03 | |||||||||||||||||||
Subordinated debentures |
11,457 | 741 | 6.47 | | | | | | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total borrowings |
303,239 | 6,215 | 2.05 | 278,663 | 4,974 | 1.78 | 248,678 | 5,051 | 2.03 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities |
2,228,314 | 26,778 | 1.20 | 1,966,600 | 15,936 | 0.81 | 1,765,396 | 13,761 | 0.78 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing liabilities: |
||||||||||||||||||||||||||||
Noninterest-bearing deposits |
308,441 | 249,035 | 221,212 | |||||||||||||||||||||||||
Other noninterest-bearing liabilities |
39,802 | 30,179 | 29,855 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities |
2,576,557 | 2,245,814 | 2,016,463 | |||||||||||||||||||||||||
Total equity |
348,341 | 335,693 | 262,108 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and equity |
$ | 2,924,898 | $ | 2,581,507 | $ | 2,278,571 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tax equivalent net interest income |
89,110 | 74,651 | 61,306 | |||||||||||||||||||||||||
Tax equivalent interest rate spread(3) |
2.99 | % | 2.88 | % | 2.71 | % | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less: tax equivalent adjustment |
180 | 303 | 311 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income as reported |
$ | 88,930 | $ | 74,348 | $ | 60,995 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest-earning assets(4) |
$ | 535,822 | $ | 487,359 | $ | 385,454 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin(5) |
3.22 | % | 3.03 | % | 2.84 | % | ||||||||||||||||||||||
Tax equivalent effect |
| 0.01 | 0.01 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin on a fully tax equivalent basis |
3.22 | % | 3.04 | % | 2.85 | % | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of interest-earning assets to interest-bearing liabilities |
124.05 | % | 124.78 | % | 121.83 | % | ||||||||||||||||||||||
Supplemental information: |
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total deposits, including demand deposits |
$ | 2,233,516 | $ | 20,563 | $ | 1,936,972 | $ | 10,962 | $ | 1,737,930 | $ | 8,710 | ||||||||||||||||
Cost of total deposits |
0.92 | % | 0.57 | % | 0.50 | % | ||||||||||||||||||||||
Total funding liabilities, including demand deposits |
$ | 2,536,755 | $ | 26,778 | $ | 2,215,635 | $ | 15,936 | $ | 1,986,608 | $ | 13,761 | ||||||||||||||||
Cost of total funding liabilities |
1.06 | % | 0.72 | % | 0.69 | % |
74
Rate/Volume Analysis. The following table presents, on a tax equivalent basis, the effects of changing rates and volumes on our net interest income for the periods indicated, on a consolidated basis. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
|
Year Ended December 31,
2018 v. 2017 |
Year Ended December 31,
2017 v. 2016 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Increase
(Decrease) Due to Changes in |
|
Increase
(Decrease) Due to Changes in |
|
|||||||||||||||
|
Total
Increase (Decrease) |
Total
Increase (Decrease) |
|||||||||||||||||
|
Volume | Rate | Volume | Rate | |||||||||||||||
|
(in thousands)
|
||||||||||||||||||
Interest-earning assets: |
|||||||||||||||||||
Loans |
$ | 11,166 | $ | 12,618 | $ | 23,784 | $ | 8,064 | $ | 5,922 | $ | 13,986 | |||||||
Investment securities |
822 | 264 | 1,086 | 831 | 320 | 1,151 | |||||||||||||
Other interest-earning assets |
(311 | ) | 742 | 431 | 503 | (120 | ) | 383 | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total interest-earning assets |
11,677 | 13,624 | 25,301 | 9,398 | 6,122 | 15,520 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: |
|||||||||||||||||||
Savings accounts |
31 | 80 | 111 | 67 | 29 | 96 | |||||||||||||
NOW accounts |
3 | 4 | 7 | 3 | | 3 | |||||||||||||
Money market accounts |
232 | 2,687 | 2,919 | 173 | 866 | 1,039 | |||||||||||||
Certificates of deposit |
1,654 | 4,601 | 6,255 | 186 | 171 | 357 | |||||||||||||
Brokered deposit |
(67 | ) | 376 | 309 | 475 | 282 | 757 | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing deposits |
1,853 | 7,748 | 9,601 | 904 | 1,348 | 2,252 | |||||||||||||
FHLB advances |
228 | 272 | 500 | 577 | (654 | ) | (77 | ) | |||||||||||
Subordinated debentures |
741 | | 741 | | | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total borrowings |
969 | 272 | 1,241 | 577 | (654 | ) | (77 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities |
2,822 | 8,020 | 10,842 | 1,481 | 694 | 2,175 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Change in net interest income |
$ | 8,855 | $ | 5,604 | $ | 14,459 | $ | 7,917 | $ | 5,428 | $ | 13,345 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Interest and Dividend Income. Interest and dividend income increased $25.4 million, or 28.2% in 2018, compared to 2017, primarily reflecting the repositioning of the balance sheet to higher yielding commercial loans and rising interest rates. Loan interest income increased $23.8 million to $107.6 million, average loans increased by $308.8 million and the yield increased 48 basis points from a year ago.
Interest Expense. Compared to 2017, interest expense for the year ended December 31, 2018 increased $10.8 million, or 68.0% to $26.8 million from $15.9 million. The increase reflects an increase in average interest-bearing deposits of 14.0% combined with a 42 basis point increase in cost of deposit funds and an increase in average FHLB borrowings of 4.7% combined with a 10 basis point increase in borrowing costs. The cost of deposit funds was significantly impacted by rising rates in a competitive deposit market. We also issued $35.0 million in subordinated debentures in the third quarter of 2018 at annual fixed rate of 5.625%. The rate adjusts quarterly after September 30, 2023. The notes are carried
75
on the balance sheet net of issuance costs of $1.2 million, which are being amortized over the period to maturity as an adjustment to the yield.
Net Interest and Dividend Income. Compared to 2017, net interest and dividend income for the year ended December 31, 2018 increased $14.6 million, or 19.6%, to $88.9 million from $74.3 million. The tax equivalent net interest spread increased 11 basis points to 2.99% for the year ended December 31, 2018 from 2.88% for the year ended December 31, 2017, and net interest margin on a tax equivalent basis increased 18 basis points to 3.22% for the year ended December 31, 2018 from 3.04% for the year ended December 31, 2017.
Segments. We have two reportable segments: HarborOne Bank and HarborOne Mortgage. Revenue from HarborOne Bank consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from HarborOne Mortgage is comprised of interest earned on loans and fees received as a result of the residential mortgage origination, sale and servicing process. The table below shows the results of operations for our segments, HarborOne Bank and HarborOne Mortgage, for the years ended December 31, 2018 and 2017, and the increase or decrease in those results.
|
HarborOne Bank | HarborOne Mortgage | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended
December 31, |
Increase
(Decrease) |
Year Ended
December 31, |
Increase
(Decrease) |
|||||||||||||||||||||
|
2018 | 2017 | Dollars | Percent | 2018 | 2017 | Dollars | Percent | |||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
Net interest and dividend income |
$ | 88,478 | $ | 72,495 | $ | 15,983 | 22.0 | % | $ | 1,018 | $ | 1,707 | $ | (689 | ) | (40.4 | )% | ||||||||
Provision for loan losses |
3,828 | 2,416 | 1,412 | 58.4 | | | | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income, after provision for loan losses |
84,650 | 70,079 | 14,571 | 20.8 | 1,018 | 1,707 | (689 | ) | (40.4 | ) | |||||||||||||||
Mortgage banking income: |
|||||||||||||||||||||||||
Changes in mortgage servicing rights fair value |
(375 | ) | (785 | ) | 410 | 52.2 | (1,021 | ) | (1,271 | ) | 250 | 19.7 | |||||||||||||
Other |
2,024 | 2,740 | (716 | ) | (26.1 | ) | 29,981 | 36,511 | (6,530 | ) | (17.9 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage banking income |
1,649 | 1,955 | (306 | ) | (15.7 | ) | 28,960 | 35,240 | (6,280 | ) | (17.8 | ) | |||||||||||||
Other noninterest income |
18,587 | 17,295 | 1,292 | 7.5 | 2 | 44 | (42 | ) | (95.5 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total noninterest income |
20,236 | 19,250 | 986 | 5.1 | 28,962 | 35,284 | (6,322 | ) | (17.9 | ) | |||||||||||||||
Noninterest expense |
86,586 | 74,460 | 12,126 | 16.3 | 31,639 | 34,181 | (2,542 | ) | (7.4 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes |
18,300 | 14,869 | 3,431 | 23.1 | (1,659 | ) | 2,810 | (4,469 | ) | (159.0 | ) | ||||||||||||||
Provision (benefit) for income taxes |
3,463 | 7,382 | (3,919 | ) | (53.1 | ) | (262 | ) | (998 | ) | 736 | 73.7 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) |
$ | 14,837 | $ | 7,487 | $ | 7,350 | 98.2 | % | $ | (1,397 | ) | $ | 3,808 | $ | (5,205 | ) | (136.7 | )% | |||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Results of Operations for the Years Ended December 31, 2018 and 2017
Net Income. Bank net income for the year ended December 31, 2018 increased $7.4 million to $14.8 million from $7.5 million for the year ended December 31, 2017. The increase in net income reflects an increase of $16.0 million in net interest income, an increase of $986,000 in noninterest income, and a decrease in provision for income taxes of $3.9 million partially offset by a $1.4 million increase in provision for loan losses and an increase in noninterest expense of $12.1 million. Results of operations for 2018 include one quarter of income and expense from Coastway.
76
Provision for Loan Losses. We recorded a provision for loan losses of $3.8 million for the year ended December 31, 2018 compared to $2.4 million for the year ended December 31, 2017. The provision reflects the continued growth in commercial loans shifting the composition of the loan portfolio to a higher percentage of commercial lending, which requires a higher level of loan loss reserves than loans secured by automobiles and residential property. This was offset by decreased general reserves on residential real estate due to a decrease in balance, excluding loans acquired from Coastway, and a decrease in allocated reserves due to charge-offs on impaired loans. For the year ended December 31, 2018, HarborOne Bank recorded net charge-offs of $1.7 million compared to $895,000 for the year ended December 31, 2017. Additionally, nonaccrual loans declined modestly to $17.7 million at December 31, 2018 from $17.9 million at December 31, 2017.
Noninterest Income. Compared to the year ended December 31, 2017, total noninterest income for the year ended December 31, 2018 increased $986,000, or 5.1%, to $20.2 million from $19.3 million. The following table sets forth the components on non-interest income:
The primary reasons for the variances within the noninterest income categories shown in the preceding tables are noted below:
The decrease in total mortgage banking income reflects the consolidation of HarborOne Bank's residential lending division into HarborOne Mortgage in April 2018. The gain on sale of mortgage loans includes a $395,000 gain on the residential real estate portfolio loan sale.
The increase in deposit account fees reflects increased debit card interchange income and a higher deposit base.
The increase in bank-owned life insurance reflects the receipt of a death benefit in the amount of $746,000.
The decrease in other income was primarily due to a $1.2 million reversal of contingent consideration for the HarborOne Mortgage earn-out agreement that was recognized in 2017 with no such reversal in 2018, partially offset by an increase of $359,000 in swap fee income.
77
Noninterest Expense. Noninterest expense for the year ended December 31, 2018 increased $12.1 million, or 16.3% to $86.6 million from $74.5 million for the year ended December 31, 2017. The following table sets forth the components on noninterest expense:
|
Year Ended
December 31, |
Increase (Decrease) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | Dollars | Percent | |||||||||
|
(dollars in thousands)
|
||||||||||||
Compensation and benefits |
$ | 47,312 | $ | 41,795 | $ | 5,517 | 13.2 | % | |||||
Occupancy and equipment |
10,630 | 9,526 | 1,104 | 11.6 | |||||||||
Data processing expenses |
6,696 | 6,044 | 652 | 10.8 | |||||||||
Loan expenses |
1,569 | 1,460 | 109 | 7.5 | |||||||||
Marketing |
3,111 | 3,454 | (343 | ) | (9.9 | ) | |||||||
Deposit expenses |
1,321 | 1,349 | (28 | ) | (2.1 | ) | |||||||
Postage and printing |
1,310 | 1,177 | 133 | 11.3 | |||||||||
Professional fees |
2,804 | 3,264 | (460 | ) | (14.1 | ) | |||||||
Foreclosed and repossessed assets |
94 | 62 | 32 | 51.6 | |||||||||
Deposit insurance |
2,097 | 1,717 | 380 | 22.1 | |||||||||
Merger expenses |
5,092 | | 5,092 | 100.0 | |||||||||
Other expenses |
4,550 | 4,612 | (62 | ) | (1.3 | ) | |||||||
| | | | | | | | | | | | | |
Total noninterest expense |
$ | 86,586 | $ | 74,460 | $ | 12,126 | 16.3 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The primary reasons for the significant variances within the noninterest expense categories shown in the preceding table are noted below:
Compensation and benefits increased primarily due to an increase of $3.0 million in salary expense, $1.4 million in incentive expense, a full year of share-based compensation expense resulting in an increase of $1.4 million, partially offset by a decrease in commission expense of $724,000. The increase in salary expense primarily reflects increased headcount and annual salary increases. The decrease in commission expense reflects the consolidation of HarborOne Bank's residential lending division into HarborOne Mortgage.
The increase in occupancy and equipment expense primarily reflects increased software licensing costs and other technology and equipment costs as we invested in technologies to support HarborOne Bank's growth.
The increase in data processing expense primarily reflects increased debit card processing fees due to an increase in accounts with debit cards.
The increase in deposit insurance reflects increased deposit balances.
Fluctuations in marketing expenses and professional fees are generally due to timing and can fluctuate due to strategic efforts.
Merger expenses were recorded as result of the acquisition of Coastway.
Income Tax Provision. For the year ended December 31, 2018, HarborOne Bank recorded an expense of $3.5 million representing an effective tax rate of 18.9%. For the year ended December 31, 2017, the tax provision expense was $7.4 million representing an effective tax rate of 49.6%. The effective tax rate decrease reflects the impact of the enactment of the Tax Act of 2017. The Tax Act of 2017 resulted in significant changes to the U.S. tax code, including a reduction in the top corporate income tax rate from 35% to 21% effective January 1, 2018. In addition, as a result of the reduction in tax rate, HarborOne Bank revalued its net deferred tax asset as of the enactment date and recorded an additional $2.0 million tax provision in 2017.
78
Results of Operations for the Year Ended December 31, 2018 and 2017
Net Income. HarborOne Mortgage recorded a net loss of $1.4 million for the year ended December 31, 2018 as compared to and net income of $3.8 million for the year ended December 31, 2017. The HarborOne Mortgage segment's results are heavily impacted by prevailing rates, refinancing activity and home sales.
Noninterest Income. For the years ended December 31, 2018 and 2017, noninterest income totaled $29.0 million and $35.3 million, respectively. Noninterest income is primarily from mortgage banking income for which the following table provides further detail:
|
Year Ended
December 31, |
Increase (Decrease) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | Dollars | Percent | |||||||||
|
(dollars in thousands)
|
||||||||||||
Gain on sale of mortgage loans |
$ | 22,368 | $ | 29,394 | $ | (7,026 | ) | (23.9 | )% | ||||
Intersegment gain |
206 | | 206 | 100.0 | |||||||||
Processing, underwriting and closing fees |
3,561 | 3,519 | 42 | 1.2 | |||||||||
Secondary market loan servicing fees net of guarantee fees |
3,846 | 3,598 | 248 | 6.9 | |||||||||
Changes in mortgage servicing rights fair value |
(1,021 | ) | (1,271 | ) | 250 | 19.7 | |||||||
| | | | | | | | | | | | | |
Total mortgage banking income |
$ | 28,960 | $ | 35,240 | $ | (6,280 | ) | (17.8 | )% | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Originated mortgage servicing rights included in gain on sale of mortgage loans |
$ | 1,361 | $ | 2,227 | $ | (866 | ) | (38.9 | )% | ||||
Change in 10-year Treasury Constant Maturity rate in basis points |
29 | (5 | ) |
For the years ended December 31, 2018 and 2017, HarborOne Mortgage originated $866.9 million and $1.02 billion, respectively of residential mortgage loans. The following tables provide additional loan production detail:
|
Year Ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||||||||
|
Loan
Amount |
% of Total |
Loan
Amount |
% of Total | |||||||||
|
(dollars in thousands)
|
||||||||||||
Source |
|||||||||||||
Retail Offices |
$ | 805,963 | 93.0 | % | $ | 819,905 | 80.0 | % | |||||
Third Party |
60,982 | 7.0 | 204,812 | 20.0 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 866,945 | 100.0 | % | $ | 1,024,717 | 100.0 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Product Type |
|||||||||||||
Conventional |
$ | 524,526 | 60.5 | % | $ | 594,860 | 58.1 | % | |||||
Government |
191,627 | 22.1 | 341,266 | 33.3 | |||||||||
State Housing Agency |
61,767 | 7.1 | 20,240 | 2.0 | |||||||||
Jumbo |
88,969 | 10.3 | 67,551 | 6.6 | |||||||||
Seconds |
56 | | 799 | 0.0 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 866,945 | 100.0 | % | $ | 1,024,716 | 100.0 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Purpose |
|||||||||||||
Purchase |
$ | 698,893 | 80.6 | % | $ | 808,264 | 78.9 | % | |||||
Refinance |
151,443 | 17.5 | 216,029 | 21.1 | |||||||||
Construction |
16,609 | 1.9 | 424 | | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 866,945 | 100.0 | % | $ | 1,024,717 | 100.0 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
79
HarborOne Mortgage acquired its primary third party originator, Cumberland Mortgage, in January of 2018 and subsequently discontinued the third party program due to compressing spreads on third party originations. The primary reasons for the significant variances in the noninterest income category shown in the preceding tables are noted below:
Overall, gain on sale of mortgage loans decreased $7.0, million or 23.9%, due to decreased residential mortgage demand as a result of decreased refinance and purchase activity in 2018 due to higher mortgage interest rates combined with lower home inventory for sale. Included in the gain on mortgage sales was $1.4 million of originated mortgage servicing rights for the year ended December 31, 2018 as compared to $2.2 million for the year ended December 31, 2017.
Processing, underwriting and closing fees increased, due to fee increases partially offset by volume decreases.
Secondary market loan servicing fees, net of guarantee fees increased consistent with an increase in the average balance of the serviced portfolio. The unpaid balance of the servicing portfolio totaled $1.39 billion at December 31, 2018 and 2017.
During the year ended December 31, 2018, the fair value of mortgage servicing rights decreased $1.0 million as compared to a decrease of $1.3 million in 2017. The 10 year Treasury Constant Maturity rate, or "10 year CMT," increased 29 basis points for the year ended December 31, 2018 as compared to a decrease of 5 basis points for the year ended December 31, 2017. Decreasing interest rates generally result in a decrease in mortgage servicing rights fair value as the assumed prepayment speeds of the underlying mortgage loans tend to increase. Conversely, as interest rates rise and prepayment speeds slow, mortgage servicing rights fair value tends to increase. The negative change for the year despite the higher interest rates reflects reductions from loans paid off being greater than the positive fair value adjustment for the period. At December 31, 2018 and 2017, mortgage servicing rights were $16.3 million and $16.0 million, respectively.
Noninterest Expense. Noninterest expense decreased $2.5 million or 7.4%, to $31.6 million for the year ended December 31, 2018 from $34.2 million. The following table sets forth the components on noninterest expense:
|
Year Ended
December 31, |
Increase (Decrease) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | Dollars | Percent | |||||||||
|
(dollars in thousands)
|
||||||||||||
Compensation and benefits |
$ | 23,513 | $ | 24,851 | $ | (1,338 | ) | (5.4 | )% | ||||
Occupancy and equipment |
2,558 | 2,179 | 379 | 17.4 | |||||||||
Data processing expenses |
93 | 113 | (20 | ) | (17.7 | ) | |||||||
Loan expenses |
3,812 | 5,421 | (1,609 | ) | (29.7 | ) | |||||||
Marketing |
222 | 141 | 81 | 57.4 | |||||||||
Postage and printing |
147 | 170 | (23 | ) | (13.5 | ) | |||||||
Professional fees |
701 | 586 | 115 | 19.6 | |||||||||
Other expenses |
593 | 720 | (127 | ) | (17.6 | ) | |||||||
| | | | | | | | | | | | | |
Total noninterest expense |
$ | 31,639 | $ | 34,181 | $ | (2,542 | ) | (7.4 | )% | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Generally, HarborOne Mortgage expenses decreased consistent with the decreased mortgage loan volume. Occupancy and equipment expense increased due to expenses related to the conversion to a new mortgage origination system as part of the residential mortgage group integration.
Fluctuations in marketing expenses and professional fees are generally due to timing.
80
Income Tax Provision. For the year ended December 31, 2018, HarborOne Mortgage recorded a tax benefit of $262,000 and for the year ended December 31, 2017, a tax benefit of $998,000. The net tax benefit in 2017 was due to a $2.2 million benefit recorded as a result of the revaluation of net deferred tax liabilities, primarily related to mortgage servicing rights, due to the Tax Act of 2017.
Comparison of Results of Operations for the Years Ended December 31, 2017 and 2016
HarborOne Bancorp, Inc. Consolidated
Overview. Consolidated net income for the year ended December 31, 2017 was $10.4 million compared to net income of $5.9 million for the year ended December 31, 2016. Items impacting 2017 net income include a $1.2 million reversal of a contingent consideration accrual for the acquisition of HarborOne Mortgage that was settled in the fourth quarter and is included in other income, an accrual of $925,000 to freeze the director's post retirement benefit plan included in other expenses and a charge of $243,000 related to the revaluation of our net deferred tax assets as a result of the enactment of the Tax Act of 2017, which is included in the income tax provision. The 2016 results include a one-time, pre-tax contribution of $4.8 million to establish the HarborOne Foundation.
Interest and Dividend Income. Interest and dividend income increased $15.5 million, or 20.8%, in 2017, compared to 2016, primarily reflecting the repositioning of the balance sheet to higher yielding commercial loans. Loan interest income increased $14.0 million to $83.9 million, average loans increased by $234.5 million and the yield increased 25 basis points from a year earlier.
Interest Expense. Compared to 2016, interest expense for the year ended December 31, 2017 increased $2.2 million, or 15.8%, to $15.9 million from $13.8 million. The increase reflects an increase in average interest-bearing deposits of 11.3% combined with an 8 basis point increase in cost of deposit funds, partially offset by an increase in average FHLB borrowings of 12.1% that was tempered by a 25 basis point decrease in borrowing costs. Borrowing maturities repriced at lower rates during 2017 resulting in the 25 basis point improvement in borrowing costs.
Net Interest and Dividend Income. Compared to 2016, net interest and dividend income for the year ended December 31, 2017 increased $13.4 million, or 21.9%, to $74.3 million from $61.0 million. The tax equivalent net interest spread increased 17 basis points to 2.88% for the year ended December 31, 2017 from 2.71% for the year ended December 31, 2016, and net interest margin on a tax equivalent basis increased 19 basis points to 3.04% for the year ended December 31, 2017 from 2.85% for the year ended December 31, 2016.
81
The table below shows our results of operations for our segments, HarborOne Bank and HarborOne Mortgage, for the years ended December 31, 2017 and 2016, the increase or decrease in those results.
|
HarborOne Bank | HarborOne Mortgage | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended
December 31, |
Increase
(Decrease) |
Year Ended
December 31, |
Increase
(Decrease) |
|||||||||||||||||||||
|
2017 | 2016 | Dollars | Percent | 2017 | 2016 | Dollars | Percent | |||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
Net interest and dividend income |
$ | 72,495 | $ | 59,122 | $ | 13,373 | 22.6 | % | $ | 1,707 | $ | 1,873 | $ | (166 | ) | (8.9 | )% | ||||||||
Provision for loan losses |
2,416 | 4,172 | (1,756 | ) | (42.1 | ) | | | | | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income, after provision for loan losses |
70,079 | 54,950 | 15,129 | 27.5 | 1,707 | 1,873 | (166 | ) | (8.9 | ) | |||||||||||||||
Mortgage banking income: |
|||||||||||||||||||||||||
Changes in mortgage servicing rights fair value |
(785 | ) | (778 | ) | (7 | ) | 0.9 | (1,271 | ) | (352 | ) | (919 | ) | 261.1 | |||||||||||
Other |
2,740 | 4,857 | (2,117 | ) | (43.6 | ) | 36,511 | 47,272 | (10,761 | ) | (22.8 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage banking income |
1,955 | 4,079 | (2,124 | ) | (52.1 | ) | 35,240 | 46,920 | (11,680 | ) | (24.9 | ) | |||||||||||||
Other noninterest income |
17,295 | 16,091 | 1,204 | 7.5 | 44 | 13 | 31 | 238.5 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total noninterest income |
19,250 | 20,170 | (920 | ) | (4.6 | ) | 35,284 | 46,933 | (11,649 | ) | (24.8 | ) | |||||||||||||
Noninterest expense |
74,460 | 68,255 | 6,205 | 9.1 | 34,181 | 41,663 | (7,482 | ) | (18.0 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes |
14,869 | 6,865 | 8,004 | 116.6 | 2,810 | 7,143 | (4,333 | ) | (60.7 | ) | |||||||||||||||
Provision (benefit) for income taxes |
7,382 | 2,195 | 5,187 | 236.3 | (998 | ) | 3,076 | (4,074 | ) | (132.4 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net income |
$ | 7,487 | $ | 4,670 | $ | 2,817 | 60.3 | % | $ | 3,808 | $ | 4,067 | $ | (259 | ) | (6.4 | )% | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income. Bank net income for the year ended December 31, 2017 increased $2.8 million to $7.5 million from $4.7 million for the year ended December 31, 2016. The increase in net income reflects an increase of $13.4 million in net interest income and a $1.8 million decrease in provision for loan losses partially offset by a $920,000 decrease in noninterest income, a $6.2 million increase in noninterest expense, and a $5.2 million increase in the income tax provision.
Provision for Loan Losses. We recorded a provision for loan losses of $2.4 million for the year ended December 31, 2017 compared to $4.2 million for the year ended December 31, 2016. The provision reflects the continued growth in commercial loans shifting the composition of the loan portfolio to a higher percentage of commercial lending, which requires a higher level of loan loss reserves than loans secured by automobiles and residential property. Despite a similar commercial portfolio growth level in 2017 as compared to 2016, the provision was lower in 2017 due to updated peer data that resulted in lower general reserve rates on the commercial portfolio. Due to a lack of historical loss experience for our commercial real estate and commercial loan portfolio, we utilize peer loss data for general reserves. The level of net charge-offs was flat, recording $895,000 for the year ended December 31, 2017 as compared to $904,000 for the year ended December 31, 2016. Additionally, credit quality improved as nonaccrual loans declined to $17.9 million at December 31, 2017 from $21.2 million at December 31, 2016.
Noninterest Income. Compared to the year ended December 31, 2016, total noninterest income for the year ended December 31, 2017 decreased $920,000, or 4.6%, to $19.3 million from $20.2 million.
82
Total mortgage banking income decreased $2.1 million, or 52.1%, primarily due to a decrease in mortgage loan originations and sales of approximately 50.0% as compared to 2016. The higher mortgage interest rates and tight real estate inventories contributed to the decreased demand for residential real estate loans.
Other noninterest income increased $1.2 million, or 7.5%, primarily due to a $1.2 million reversal of contingent consideration for the HarborOne Mortgage earn-out agreement that was settled in full in the fourth quarter of 2017. The earn-out was settled in anticipation of a consolidation of HarborOne Mortgage and the Bank's residential mortgage lending division in 2018. In addition, deposit account fees increased $647,000, or 5.6%, primarily due to increased debit card interchange income.
Noninterest Expense. Noninterest expense for the year ended December 31, 2017 increased $6.2 million, or 9.1%, to $74.5 million from $68.3 million for the year ended December 31, 2016.
Compensation and benefits increased $2.3 million, or 5.9%. Contributing to the increase was a $1.9 million increase in salary expense due to a full year of expense for commercial lending and credit support staff and annual salary increases. Also contributing to the increase was the issuance of equity awards in 2017 that amounted to $1.5 million in expense. The increases were partially offset by a $703,000 decrease in supplemental retirement expense due to additional expenses in 2016 for full vesting of the supplemental retirement for an executive.
Occupancy and equipment increased $963,000, or 11.3%, primarily due to increased software licensing costs and other technology and equipment costs.
Marketing increased $1.0 million, or 42.9%, related to marketing costs to broaden our market reach and brand name recognition.
Professional fees increased $1.2 million, or 59.2%, due to increased consulting and audit and tax expenses.
Other expenses increased $858,000, or 22.8%, and primarily reflects a $925,000 expense accrual to freeze the director postretirement benefit plan.
Income Tax Provision. For the year ended December 31, 2017, HarborOne Bank recorded an expense of $7.4 million representing an effective tax rate of 49.6%. For the year ended December 31, 2016, the tax provision expense was $2.2 million representing an effective tax rate of 32.0%. The effective tax rate increase reflects the impact of the enactment of the Tax Act of 2017. The Tax Act of 2017 resulted in significant changes to the U.S. tax code, including a reduction in the top corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the reduction in tax rate, HarborOne Bank revalued its net deferred tax asset as of the enactment date and recorded an additional $2.0 million tax provision in 2017.
Results of Operations for the Year Ended December 31, 2017 and 2016
Net Income. HarborOne Mortgage recorded net income $3.8 million for the year ended December 31, 2017 as compared to $4.1 million for the year ended December 31, 2016. The HarborOne Mortgage segment's results are heavily impacted by prevailing rates, refinancing activity and home sales.
Noninterest Income. For the years ended December 31, 2017 and 2016, noninterest income totaled $35.3 million and $46.9 million, respectively. Noninterest income is primarily from mortgage banking income.
83
For the years ended December 31, 2017 and 2016, HarborOne Mortgage originated $1.02 billion and $1.36 billion, respectively of residential mortgage loans. The following tables provide additional loan production detail:
|
Year Ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2016 | |||||||||||
|
Loan
Amount |
% of Total |
Loan
Amount |
% of Total | |||||||||
|
(dollars in thousands)
|
||||||||||||
Source |
|||||||||||||
Retail Offices |
$ | 819,905 | 80.0 | % | $ | 1,070,722 | 78.9 | % | |||||
Third Party |
204,812 | 20.0 | 286,761 | 21.1 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 1,024,717 | 100.0 | % | $ | 1,357,483 | 100.0 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Product Type |
|||||||||||||
Conventional |
$ | 594,860 | 60.5 | % | $ | 865,972 | 63.8 | % | |||||
Government |
341,266 | 22.1 | 419,794 | 30.9 | |||||||||
State Housing Agency |
20,240 | 7.1 | 55,867 | 4.1 | |||||||||
Jumbo |
67,551 | 10.3 | 15,131 | 1.1 | |||||||||
Seconds |
799 | 0.0 | 719 | | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 1,024,716 | 100.0 | % | $ | 1,357,483 | 100.0 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Purpose |
|||||||||||||
Purchase |
$ | 808,264 | 80.6 | % | $ | 881,381 | 64.9 | % | |||||
Refinance |
216,029 | 17.5 | 476,102 | 35.1 | |||||||||
Construction |
424 | 1.9 | | | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 1,024,717 | 100.0 | % | $ | 1,357,483 | 100.0 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Overall, gain on sale of mortgage loans decreased $10.8 million, or 22.8%, due to decreased residential mortgage demand largely as a result of decreased refinance activity in 2017. Included in the gain on mortgage sales was $2.2 million of originated mortgage servicing rights for the year ended December 31, 2017 as compared to $7.4 million for the year ended December 31, 2016. The decrease in originated mortgage servicing rights was due to a decrease in the volume of servicing-retained sales in 2017 due in part to better pricing on servicing-released mortgage sales in 2017.
Processing, underwriting and closing fees decreased $1.1 million, or 23.2%, consistent with the decrease in origination volume.
Secondary market loan servicing fees, net of guarantee fees increased $1.1 million, or 42.9%, due to the increase in loans serviced. At December 31, 2017, the unpaid balance of the servicing portfolio totaled $1.39 billion as compared to $1.21 billion at December 31, 2016.
During the year ended December 31, 2017, the fair value of mortgage servicing rights decreased $1.3 million as compared to a decrease of $352,000 in 2016. The 10 year CMT decreased 5 basis points for the year ended December 31, 2017 as compared to an increase of 18 basis points for the year ended December 31, 2016. The 10 year CMT decreased 50 basis points in the first quarter of 2016 and, despite increasing over the course of the year, the losses recorded during 2016 were not fully recovered. Decreasing interest rates generally result in a decrease in mortgage servicing rights fair value as the assumed prepayment speeds of the underlying mortgage loans tend to increase. Conversely, as interest rates rise and prepayment speeds slow, mortgage servicing rights fair value tends to increase. At December 31, 2017 and 2016, mortgage servicing rights were $16.0 million and $15.1 million, respectively.
84
Noninterest Expense. Noninterest expense decreased $7.5 million, or 18.0%, to $34.2 million for the year ended December 31, 2017 from $41.7 million.
Compensation and benefits decreased $5.0 million, or 16.6%, due to the decrease in closed loan volume in 2017 as compared to 2016 resulting in a decrease in commission expense of $3.8 million. Additionally, HarborOne Mortgage paid $281,000 in incentives and other benefits in 2017 as compared to $1.3 million in 2016.
Occupancy and equipment increased $511,000, or 30.7%, primarily due to a conversion to a new mortgage origination system in anticipation of the integration of HarborOne Mortgage and HarborOne Bank's residential lending group.
Loan expense decreased $2.9 million, or 34.5%, due to the decrease in closed loan volume in 2017 as compared to 2016.
The following table provides information with respect to our nonperforming assets and troubled debt restructurings at the dates indicated. We did not have any accruing loans past due 90 days or more at the dates presented.
|
December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||
|
(dollars in thousands)
|
|||||||||||||||
Nonaccrual loans: |
||||||||||||||||
Residential real estate: |
||||||||||||||||
One- to four-family |
$ | 12,120 | $ | 13,308 | $ | 16,456 | $ | 25,841 | $ | 31,333 | ||||||
Second mortgages and equity lines of credit |
1,649 | 876 | 1,686 | 2,386 | 1,102 | |||||||||||
Commercial real estate |
298 | 312 | | 173 | 1,241 | |||||||||||
Commercial construction |
| 130 | 134 | 136 | | |||||||||||
Commercial |
3,087 | 3,038 | 2,674 | 558 | 1,053 | |||||||||||
Consumer |
557 | 191 | 230 | 333 | 555 | |||||||||||
| | | | | | | | | | | | | | | | |
Total nonaccrual loans(1) |
17,711 | 17,855 | 21,180 | 29,427 | 35,284 | |||||||||||
Other real estate owned and repossessed assets: |
||||||||||||||||
One- to four-family residential real estate owned |
556 | 665 | 1,767 | 2,286 | 2,915 | |||||||||||
Other repossessed assets |
193 | 97 | | 61 | 11 | |||||||||||
| | | | | | | | | | | | | | | | |
Total nonperforming assets |
18,460 | 18,617 | 22,947 | 31,774 | 38,210 | |||||||||||
| | | | | | | | | | | | | | | | |
Performing troubled debt restructurings |
17,899 | 20,377 | 25,134 | 24,963 | 26,814 | |||||||||||
| | | | | | | | | | | | | | | | |
Total nonperforming assets and performing troubled debt restructurings |
$ | 36,359 | $ | 38,994 | $ | 48,081 | $ | 56,737 | $ | 65,024 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total nonperforming loans to total loans(2) |
0.59 | % | 0.81 | % | 1.06 | % | 1.69 | % | 2.12 | % | ||||||
Total nonperforming assets and performing troubled debt restructurings to total assets |
1.00 | % | 1.45 | % | 1.96 | % | 2.62 | % | 3.18 | % | ||||||
Total nonperforming assets to total assets |
0.51 | % | 0.69 | % | 0.94 | % | 1.47 | % | 1.87 | % |
85
Income related to impaired loans included in interest income for the years ended December 31, 2018, 2017 and 2016 amounted to $1.8 million, $2.3 million and $2.7 million, respectively. If nonperforming and restructured loans had been performing in accordance with their original terms, we estimate the income earned on those loans to be $2.1 million, $2.3 million and $2.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Classified Assets. Federal regulations require us to review and classify assets on a regular basis. In addition, the FDIC and the Massachusetts Commissioner of Banks have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. "Substandard assets" must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. "Doubtful assets" have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as "loss" is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. When management classifies a loan as substandard or doubtful, a specific allowance for loan losses may be established. If management classifies a loan as loss, an amount equal to 100.0% of the portion of the loan classified loss is charged to the allowance for loan losses. The regulations also provide for a "special mention" category, described as loans that do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. We utilize a ten grade internal loan rating system for commercial real estate, commercial construction and commercial loans. Loans not rated consist primarily of residential construction loans and certain smaller balance commercial real estate and commercial loans that are managed by exception.
The following table presents our risk rated loans considered classified or special mention in accordance with our internal risk rating system:
|
December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Classified loans: |
||||||||||
Substandard |
$ | 4,398 | $ | 1,990 | $ | 2,287 | ||||
Doubtful |
1,930 | 827 | 387 | |||||||
Loss |
| | | |||||||
| | | | | | | | | | |
Total classified loans |
6,328 | 2,817 | 2,674 | |||||||
| | | | | | | | | | |
Special mention |
30,296 | 818 | 261 | |||||||
| | | | | | | | | | |
Total criticized loans |
$ | 36,624 | $ | 3,635 | $ | 2,935 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
None of the special mention assets at December 31, 2018, 2017 or 2016 were on nonaccrual. The majority of the increase in special mention loans at December 31, 2018 was caused by a $14.5 million commercial construction loan, a $6.2 million commercial real estate loan and a $4.4 million commercial real estate loan acquired from Coastway, which was downgraded after the acquisition.
At December 31, 2018, our allowance for loan losses was $20.7 million, or 0.69% of total loans and 116.62% of nonperforming loans. At December 31, 2017, our allowance for loan losses was $18.5 million, or 0.84% of total loans and 103.55% of nonperforming loans. The allowance for loan losses as a percent of total loans outstanding decreased from 0.84% to 0.69% due primarily to the addition of Coastway loans. Loans acquired are recorded at fair value and have no corresponding allowance for loan losses as a result. Nonperforming loans at December 31, 2018 were $17.7 million, or 0.59% of total loans, compared to $17.9 million, or 0.81% of total loans, at December 31, 2017. The allowance for loan losses is maintained at a level that represents management's best estimate of losses in the loan portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan losses will be adequate to cover losses which may be realized in the future or that additional provisions for loan losses will not be required.
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Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated.
|
At December 31, | |||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||||||||
|
Days Past Due | Days Past Due | Days Past Due | Days Past Due | Days Past Due | |||||||||||||||||||||||||||||||||||||||||
|
30 - 59 | 60 - 89 |
90 or
more |
30 - 59 | 60 - 89 |
90 or
more |
30 - 59 | 60 - 89 |
90 or
more |
30 - 59 | 60 - 89 |
90 or
more |
30 - 59 | 60 - 89 |
90 or
more |
|||||||||||||||||||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||||||||||||||||||||||||||
Residential real estate: |
||||||||||||||||||||||||||||||||||||||||||||||
One- to four-family |
$ | 1,283 | $ | 4,554 | $ | 6,516 | $ | 3,269 | $ | 1,116 | $ | 5,267 | $ | 4,955 | $ | 1,873 | $ | 7,964 | $ | 5,779 | $ | 419 | $ | 9,978 | $ | 8,072 | $ | 1,455 | $ | 14,670 | ||||||||||||||||
Second mortgages and equity lines of credit |
846 | 237 | 754 | 256 | 110 | 296 | 588 | 190 | 724 | 610 | 164 | 844 | 937 | 645 | 590 | |||||||||||||||||||||||||||||||
Commercial real estate |
| | 298 | | 312 | | | | | | | 173 | | | 279 | |||||||||||||||||||||||||||||||
Commercial construction |
| | | | | | | | 134 | | | 136 | | | | |||||||||||||||||||||||||||||||
Commercial |
34 | 550 | 2,575 | 2 | | 260 | 55 | | 387 | 18 | | | 2,466 | 39 | 349 | |||||||||||||||||||||||||||||||
Consumer |
2,140 | 502 | 457 | 1,673 | 364 | 183 | 2,081 | 338 | 173 | 2,272 | 385 | 193 | 3,429 | 532 | 328 | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
$ | 4,303 | $ | 5,843 | $ | 10,600 | $ | 5,200 | $ | 1,902 | $ | 6,006 | $ | 7,679 | $ | 2,401 | $ | 9,382 | $ | 8,679 | $ | 968 | $ | 11,324 | $ | 14,904 | $ | 2,671 | $ | 16,216 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
87
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:
88
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 uncollectability of a loan balance is confirmed and generally do not exceed the time frame provided in The 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 and peer loss experience adjusted for qualitative factors stratified by our loan segments, each portfolio segment is further segregated by purchased loans not deemed impaired. 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 loss rates 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 our policies or methodology pertaining to the general component of the allowance for loan losses during the year ended December 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 estateWe generally do 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. We generally have 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.
Residential constructionResidential 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 real estateLoans in this segment are primarily secured by income-producing properties and owner occupied commercial properties in southeastern New England. The underlying cash flows generated by the properties and operations can be adversely impacted by a downturn in the local economy, which can lead to increased vacancy rates and diminished cash flows, which in turn, could have an effect on the credit quality in this segment. Management obtains financial statements annually and continually monitors the cash flows of these loans.
Commercial constructionCommercial 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.
CommercialLoans 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.
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ConsumerLoans in this segment are generally secured by automobiles or are 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 restructuring, or "TDR," we do 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 we 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.
We 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 our unseasoned commercial portfolio and use of peer group data to establish general reserves for the commercial portfolio adds another element of imprecision to management's estimates.
90
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated:
|
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||
|
(dollars in thousands)
|
|||||||||||||||
Allowance at beginning of year |
$ | 18,489 | $ | 16,968 | $ | 13,700 | $ | 13,934 | $ | 14,529 | ||||||
| | | | | | | | | | | | | | | | |
Provision for loan losses |
3,828 | 2,416 | 4,172 | 1,257 | 2,589 | |||||||||||
| | | | | | | | | | | | | | | | |
Charge offs: |
||||||||||||||||
Residential real estate: |
||||||||||||||||
One- to four-family |
(50 | ) | (126 | ) | (346 | ) | (860 | ) | (2,223 | ) | ||||||
Second mortgages and equity lines of credit |
| (18 | ) | (56 | ) | (161 | ) | (352 | ) | |||||||
Commercial real estate |
(94 | ) | | | | (67 | ) | |||||||||
Commercial construction |
| | | | (67 | ) | ||||||||||
Commercial |
(990 | ) | (134 | ) | (27 | ) | | (229 | ) | |||||||
Consumer |
(847 | ) | (1,039 | ) | (935 | ) | (1,007 | ) | (949 | ) | ||||||
| | | | | | | | | | | | | | | | |
Total charge-offs |
(1,981 | ) | (1,317 | ) | (1,364 | ) | (2,028 | ) | (3,887 | ) | ||||||
| | | | | | | | | | | | | | | | |
Recoveries: |
||||||||||||||||
Residential real estate: |
||||||||||||||||
One- to four-family |
1 | 96 | 203 | 358 | 393 | |||||||||||
Second mortgages and equity lines of credit |
49 | 70 | 66 | | | |||||||||||
Commercial real estate |
| | | | | |||||||||||
Commercial construction |
| | | | 130 | |||||||||||
Commercial |
14 | 16 | 9 | 7 | 2 | |||||||||||
Consumer |
255 | 240 | 182 | 172 | 178 | |||||||||||
| | | | | | | | | | | | | | | | |
Total recoveries |
319 | 422 | 460 | 537 | 703 | |||||||||||
| | | | | | | | | | | | | | | | |
Net charge-offs |
(1,662 | ) | (895 | ) | (904 | ) | (1,491 | ) | (3,184 | ) | ||||||
| | | | | | | | | | | | | | | | |
Allowance at end of year |
$ | 20,655 | $ | 18,489 | $ | 16,968 | $ | 13,700 | $ | 13,934 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total loans outstanding |
$ | 2,980,252 | $ | 2,188,322 | $ | 1,988,784 | $ | 1,731,071 | $ | 1,651,687 | ||||||
Average loans outstanding |
$ | 2,474,644 | $ | 2,165,806 | $ | 1,931,271 | $ | 1,746,346 | $ | 1,618,958 | ||||||
Allowance for loan losses as a percent of total loans outstanding |
0.69 | % | 0.84 | % | 0.85 | % | 0.79 | % | 0.84 | % | ||||||
Annualized net loans charged off as a percent of average loans outstanding |
0.07 | % | 0.04 | % | 0.05 | % | 0.09 | % | 0.20 | % | ||||||
Allowance for loan losses to nonperforming loans |
116.62 | % | 103.55 | % | 80.11 | % | 46.56 | % | 39.49 | % |
For the years ended December 31, 2018 and 2017, we recorded a provision for loan losses of $3.8 million and $2.4 million, respectively. This increase primarily reflects loan growth in the commercial real estate, commercial construction and commercial loan portfolios partially offset by decreased general reserves on residential real estate due a decrease in balance, excluding loans acquired from Coastway, and a decrease in allocated reserves due to charge-offs on impaired loans.
Management of Market Risk
Net Interest Income Analysis. HarborOne Bank uses income simulation as the primary tool for measuring interest-rate risk inherent in our balance sheet at a given point in time by showing the effect
91
on net interest income, over specified time frames and using different interest rate shocks and ramps. The assumptions include, but are not limited to, management's best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are inherently changeable, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in the balance sheet composition and market conditions. Assumptions are supported with quarterly back testing of the model to actual market rate shifts.
As of December 31, 2018, net interest income simulation results for HarborOne Bank indicated that our exposure over one year to changing interest rates was within our guidelines. The following table presents the estimated impact of interest rate changes on our estimated net interest income over one year:
December 31, 2018 | ||||
---|---|---|---|---|
Changes in Interest Rates
(basis points)(1) |
Change in Net Interest Income
Year One (% change from year one base) |
|||
+300 |
(1.40 | )% | ||
(100) |
(1.20 | )% |
Economic Value of Equity Analysis. HarborOne Bank also uses the net present value of equity at risk, or "EVE," methodology. This methodology calculates the difference between the present value of expected cash flows from assets and liabilities. The comparative scenarios assume an immediate parallel shift in the yield curve up 300 basis points and down 100 basis points.
The board of directors and management review the methodology's measurements for both net interest income and EVE on a quarterly basis to determine whether the exposure resulting from the changes in interest rates remains within established tolerance levels and develops appropriate strategies to manage this exposure.
The table below sets forth, as of December 31, 2018, the estimated changes in the net economic value of equity that would result from the designated changes in the United States Treasury yield curve under an instantaneous parallel shift for HarborOne Bank. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
At December 31, 2018 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
EVE as a Percentage of
Economic Value of Assets |
||||||||||||
|
|
Estimated Increase
(Decrease) in EVE |
||||||||||||||
Changes in
Interest Rates (basis points)(1) |
Estimated EVE | EVE Ratio(2) |
Changes in
Basis Points |
|||||||||||||
Amount | Percent | |||||||||||||||
(dollars in thousands)
|
||||||||||||||||
+300 |
$ | 520,890 | $ | (36,318 | ) | (6.5 | )% | 15.5 | % | 0.18 | ||||||
0 |
557,208 | | | 15.3 | | |||||||||||
100 |
521,931 | (35,277 | ) | (6.3 | ) | 14.0 | (1.24 | ) |
92
Liquidity Management and Capital Resources
Liquidity measures our ability to meet both current and future financial obligations of a short and long term nature. Liquidity planning is necessary for us to ensure it has the ability to respond to the needs of its customers as well as opportunities for earnings enhancements. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and prepayments and sales on loans are greatly influenced by general interest rates, economic conditions and competition.
We have both a liquidity and contingent liquidity policy. The management of both policies is monitored by ALCO which is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. The projected cash flows are stress tested quarterly to estimate the needs for contingent funding outside of the normal course of business. To supplement liquidity, we have available collateral at the Federal Home Loan Bank of Boston, Federal Reserve Bank of Boston and Co-operative Central Bank. At December 31, 2018, HarborOne Bank had $404.3 million of additional borrowing capacity available at the FHLB of Boston, $70.6 million at the Federal Reserve Bank of Boston and $5.0 million with the Co-Operative Central Bank. At December 31, 2018, HarborOne Bank had $519.9 million of borrowings outstanding with the FHLB of Boston.
Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2018 cash and cash equivalents totaled $105.5 million.
Net cash provided by operating activities was $61.2 million for the year ended December 31, 2018 compared to $43.9 million of net cash used by operating activities for the year ended December 31, 2017. Our primary investing activities are originating loans and purchasing securities. Net cash used in investing activities was $215.9 million and $237.4 million for the years ended December 31, 2018 and 2017, respectively. During the years ended December 31, 2018 and 2017, we had $197.6 million and $207.8 million, respectively, of loan originations and participation-in loan purchases, net of principal payments. We also sold portfolio loans of $105.8 million and $5.0 million in 2018 and 2017, respectively. During the year ended December 31, 2018, we purchased $67.7 million of securities and received proceeds from the maturities, prepayments and calls totaling $27.7 million. During the year ended December 31, 2017, those amounts were $59.2 million and $25.4 million, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $179.5 million and $224.1 million for the years ended December 31, 2018 and 2017, respectively. The net increase in deposits was $194.9 million for the year ended December 31, 2018 as compared to a net increase of $209.0 million for the prior year.
HarborOne Bank is subject to various regulatory capital requirements. At December 31, 2018, HarborOne Bank exceeded all regulatory capital requirements and was considered "well capitalized" under regulatory guidelines. See " Supervision and RegulationFederal Banking RegulationCapital Requirements " and Note 21 of the Notes to our Consolidated Financial Statements.
At December 31, 2018, we had outstanding commitments to originate loans of $48.0 million and unadvanced funds on loans of $374.8 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2018 totaled $646.1 million. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may use FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
93
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the accompanying Consolidated Balance Sheets. The contract amount of these instruments reflects the extent of involvement we have in these particular classes of financial instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. Our exposure to credit loss is represented by the contractual amount of the instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments and unadvanced funds on lines-of-credit generally have fixed expiration dates and may expire without being drawn upon. Therefore, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. In addition, from time to time we enter into commitments to sell mortgage loans that we originate. For additional information, see Note 16 of the Notes to our Consolidated Financial Statements.
Contractual Obligations. We are obligated to make future payments according to various contracts. The following table presents the expected future payments of contractual obligations aggregated by obligation type at December 31, 2018. FHLB advances payments are assumed to be at call date, subordinated notes are assumed to be a redemption date and certificate of deposits are assumed to occur at maturity.
|
One year or less |
More than one
year to three years |
More than
three years to five years |
More than
five years |
Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||||||||
FHLB long-term advances |
$ | 120,000 | $ | 108,750 | $ | 199 | $ | 987 | $ | 229,936 | ||||||
Subordinated debt |
| | 35,000 | | 35,000 | |||||||||||
Certificates of deposit |
645,044 | 210,267 | 32,212 | | 887,523 | |||||||||||
Operating leases |
2,045 | 2,872 | 1,821 | 2,990 | 9,728 | |||||||||||
| | | | | | | | | | | | | | | | |
Total contractual obligations |
$ | 767,089 | $ | 321,889 | $ | 69,232 | $ | 3,977 | $ | 1,162,187 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Impact of Inflation and Changing Prices
Our Consolidated Financial Statements, including the notes thereto, and related financial data presented in this prospectus have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
94
The Bank is a Massachusetts stock co-operative bank and will be the wholly-owned subsidiary of New HarborOne, a Massachusetts corporation that will be a fully public stock holding company. New HarborOne will become a registered bank holding company. As a bank holding company, New HarborOne will be subject to regulation, examination and supervision by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, or the "BHCA," and the Massachusetts Commissioner of Banks under Massachusetts law.
As a Massachusetts-chartered co-operative bank, the Bank is subject to regulation, supervision and examination by the Massachusetts Commissioner of Banks under Massachusetts law. The Bank's Rhode Island branches are also subject to regulation, supervision and examination by the Rhode Island Department of Business Regulation, Division of Banking, or the "RI Division of Banking." The Bank's deposits are insured up to applicable limits by the FDIC and by the Share Insurance Fund established by Massachusetts General Laws for amounts in excess of the FDIC insurance limits. The Bank must also comply with consumer protection regulations issued by the Consumer Financial Protection Bureau, or the "CFPB," as enforced by the FDIC. Additionally, under the Dodd-Frank Act, the Federal Reserve may directly examine the subsidiaries of a bank holding company, including the Bank.
The federal and state regulatory framework applicable to bank holding companies and their subsidiaries is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of other creditors or shareholders. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Massachusetts legislature, the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve or the United States Congress, could have a material adverse impact on New HarborOne and the Bank's financial condition and results of operations.
Set forth below are certain material regulatory requirements that are applicable to the Bank and will be applicable to New HarborOne. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on the Bank and New HarborOne.
General. In connection with the conversion, New HarborOne will become a bank holding company within the meaning of the BHCA." As such, New HarborOne will be subject to regulation, supervision and examination by the Federal Reserve, which has the authority, among other things, to order bank holding companies to cease and desist from unsafe or unsound banking practices; to assess civil money penalties; and to order termination of non-banking activities or termination of ownership and control of a non-banking subsidiary by a bank holding company.
Source of Strength. Under the BHCA, as amended by the Dodd-Frank Act, New HarborOne will be required to serve as a source of financial strength for the Bank. This support may be required at times when New HarborOne may not have the resources to provide support to the Bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Acquisitions and Activities. The BHCA prohibits a bank holding company, without prior approval of the Federal Reserve, from acquiring all or substantially all the assets of a bank; acquiring control of
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a bank; merging or consolidating with another bank holding company; or acquiring direct or indirect ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, the acquiring bank holding company would control more than 5% of any class of the voting shares of such other bank or bank holding company.
The BHCA also prohibits a bank holding company from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks. However, a bank holding company may engage in and may own shares of companies engaged in certain activities that the Federal Reserve has determined to be closely related to banking or managing and controlling banks.
Limitations on Acquisitions of Company Common Stock. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting securities of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would constitute the acquisition of control of a bank holding company.
In addition, the BHCA prohibits any company from acquiring control of a bank or bank holding company without first having obtained the approval of the Federal Reserve. Among other circumstances, under the BHCA, a company has control of a bank or bank holding company if the company owns, controls or holds with power to vote 25% or more of a class of voting securities of the bank or bank holding company; controls in any manner the election of a majority of directors or trustees of the bank or bank holding company; or the Federal Reserve has determined, after notice and opportunity for hearing, that the company has the power to exercise a controlling influence over the management or policies of the bank or bank holding company.
General. The Bank is subject to regulation, supervision and examination by the FDIC, the Massachusetts Commissioner of Banks and the RI Division of Banking. The FDIC, the Massachusetts Commissioner of Banks and the RI Division of Banking have the authority to issue orders to banks under their supervision to cease and desist from unsafe or unsound banking practices and violations of laws, regulations, or conditions imposed by, agreements with, or commitments to, the Massachusetts Commissioner of Banks and the RI Division of Banking. The Massachusetts Commissioner of Banks and the RI Division of Banking are also empowered to assess civil money penalties against companies or individuals who violate banking laws, orders or regulations.
Deposit Insurance. The deposit obligations of the Bank are insured by the FDIC's Deposit Insurance Fund, or the "DIF," up to $250,000 per depositor. The Federal Deposit Insurance Act, or the "FDIA," as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to take steps as may be necessary to cause the ratio of deposit insurance reserves to estimated insured deposits, the designated reserve ratio, to reach 1.35% by September 30, 2020, and it mandates that the reserve ratio designated by the FDIC for any year may not be less than 1.35%. Further, the Dodd-Frank Act required that, in setting assessments, the FDIC offset with credits the effect of the increase in the minimum reserve ratio from 1.15% to 1.35% on banks with less than $10 billion in assets.
To satisfy these requirements, in 2016, the FDIC's Board of Directors approved a final rule to increase the DIF's reserve ratio to the statutorily required minimum ratio of 1.35% of estimated insured deposits. The final rule imposes on large banks a surcharge of 4.5 basis points of their assessment base, after making certain adjustments. Large banks, which are generally banks with $10 billion or more in assets, will pay quarterly surcharges in addition to their regular risk-based assessments. Overall regular risk-based assessment rates will decline once the reserve ratio reaches
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1.15%. Small banks, such as the Bank, will receive credits to offset the portion of their assessments that help to raise the reserve ratio from 1.15% to 1.35%. After the reserve ratio reaches 1.38%, the FDIC will automatically apply a small bank's credits to reduce its regular assessment up to the entire amount of the assessment for each period when the ratio is at or above 1.38 percent.
Deposit premiums are based on assets. To determine its deposit insurance premium, the Bank computes the base amount of its average consolidated assets less its average tangible equity (defined as the amount of Tier 1 capital) and the applicable assessment rate. In 2016, the FDIC's Board of Directors adopted a final rule that changed the manner in which deposit insurance assessment rates are calculated for established small banks, generally those banks with less than $10 billion of assets that have been insured for at least five years. The rule utilizes the CAMELS rating system, which is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk. To determine a bank's assessment rate, each of seven financial ratios and a weighted average of CAMELS component ratings are multiplied by a corresponding pricing multiplier. The sum of these products is added to a uniform amount, with the resulting sum being an institution's initial base assessment rate (subject to minimum or maximum assessment rates based on a bank's CAMELS composite rating). This method takes into account various measures, including an institution's leverage ratio, brokered deposit ratio, one year asset growth, the ratio of net income before taxes to total assets and considerations related to asset quality. Assessments for established small banks with a CAMELS rating of 1 or 2 range from 1.5 to 16 basis points, after adjustments, while assessment rates for established small banks with a CAMELS composite rating of 4 or 5 range from 11 to 30 basis points, after adjustments. Assessments for established small banks with a CAMELS rating of 3 range from 3 to 30 basis points.
The FDIC has the authority to adjust deposit insurance assessment rates at any time. In addition, under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. For 2018, the FDIC insurance expense for the Bank was $1.6 million.
Co-operative Central Bank and Share Insurance Fund. HarborOne Bank's deposits are insured up to applicable limits by the FDIC and by the Share Insurance Fund established by Massachusetts General Laws for amounts in excess of the FDIC insurance limits. All Massachusetts-chartered co-operative banks are required to be members of the Co-operative Central Bank, which maintains the Share Insurance Fund that insures co-operative bank deposits in excess of federal deposit insurance coverage. The Co-operative Central Bank is authorized to charge co-operative banks an annual assessment fee on deposit balances in excess of amounts insured by the FDIC. Assessment rates are based on the institution's risk category. For 2018, the Bank's assessment was $492,000, and for 2019, the Bank's assessment is projected to be $220,000.
Acquisitions and Branching. Prior approval from the Massachusetts Commissioner of Banks and the FDIC is required in order for the Bank to acquire another bank or establish a new branch office. Well capitalized and well managed banks may acquire other banks in any state, subject to certain deposit concentration limits and other conditions, pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended by the Dodd-Frank Act. In addition, the Dodd-Frank Act authorizes a state-chartered bank, such as the Bank, to establish new branches on an interstate basis to the same extent a bank chartered by the host state may establish branches.
Activities and Investments of Insured State-Chartered Banks. Section 24 of the FDIA generally limits the types of equity investments an FDIC-insured state-chartered bank, such as the Bank, may make and the kinds of activities in which such a bank may engage, as a principal, to those that are permissible for national banks. Further, the GLBA permits national banks and state banks, to the extent permitted
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under state law, to engage via financial subsidiaries in certain activities that are permissible for subsidiaries of a financial holding company. In order to form a financial subsidiary, a state-chartered bank must be "well capitalized," and such banks must comply with certain capital deduction, risk management and affiliate transaction rules, among other requirements.
Brokered Deposits. Section 29 of the FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution's capital category is "well capitalized" or, with the FDIC's approval, "adequately capitalized." Depository institutions, other than those in the lowest risk category, that have brokered deposits in excess of 10% of total deposits will be subject to increased FDIC deposit insurance premium assessments. However, for institutions that are "well capitalized" and have a CAMELS composite rating of 1 or 2, reciprocal deposits are deducted from brokered deposits. Additionally, depository institutions considered "adequately capitalized" that need regulatory approval to accept, renew or roll over any brokered deposits are subject to additional restrictions on the interest rate they may pay on deposits. Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, or the "Growth Act," which was enacted on May 24, 2018, amends Section 29 of the FDIA to exempt a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions. Specifically, the Growth Act provides that reciprocal deposits received by an agent depository institution that places deposits (other than those obtained by or through a deposit broker) with a deposit placement network are not considered to be funds obtained by or through a deposit broker to the extent the total amount of such reciprocal deposits does not exceed the lesser of $5 billion or 20% of the depository institution's total liabilities. However, a depository institution that is less than well capitalized may not accept or roll over such excluded reciprocal deposits at a rate of interest that is significantly higher than the prevailing rate in its market area or a national rate cap established by the FDIC.
Community Reinvestment Act. The CRA requires the FDIC to evaluate the Bank's performance in helping to meet the credit needs of the entire community it serves, including low- and moderate-income neighborhoods, consistent with its safe and sound banking operations, and to take this record into consideration when evaluating certain applications. The FDIC's CRA regulations are generally based upon objective criteria of the performance of institutions under three key assessment tests: (i) a lending test, to evaluate the institution's record of making loans in its service areas; (ii) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. Failure of an institution to receive at least a "Satisfactory" rating could inhibit the Bank or the Bancorp from undertaking certain activities, including engaging in activities newly permitted as a financial holding company under GLBA and acquisitions of other financial institutions. The Bank has achieved a rating of "Outstanding" on its most recent examination. Massachusetts has also enacted a similar statute that requires the Commissioner to evaluate the performance of the Bank in helping to meet the credit needs of its entire community and to take that record into account in considering certain applications.
Lending Restrictions. Federal law limits a bank's authority to extend credit to its directors, executive officers and persons or companies that own, control or have power to vote more than 10% of any class of securities of a bank or an affiliate of a bank, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital. The Dodd-Frank Act explicitly provides that an extension of credit to an insider includes credit
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exposure arising from a derivatives transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction or securities borrowing transaction. Additionally, the Dodd-Frank Act requires that asset sale transactions with insiders must be on market terms, and if the transaction represents more than 10% of the capital and surplus of the Bank, be approved by a majority of the disinterested directors of the Bank.
Federal Reserve System. Federal Reserve regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Bank's required reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required reserves, in the form of a balance maintained with the Federal Reserve Bank of Boston. The Federal Reserve regulations currently require that reserves be maintained against aggregate transaction accounts except for transaction accounts up to $16.3 million, which are exempt. Transaction accounts greater than $16.3 million up to $124.2 million have a reserve requirement of 3.0%, and those greater than $124.2 million have a reserve requirement of approximately $3.2 million plus 10% of the amount over $124.2 million. The Federal Reserve generally makes annual adjustments to the tiered reserves. The Bank is in compliance with these requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Boston, which is one of the 12 regional Federal Home Loan Banks comprising the FHLB System. Each FHLB serves as a central credit facility primarily for its member institutions as well as other entities involved in home mortgage lending. As a member of the FHLB, HarborOne Bank is required to acquire and hold shares of capital stock in the FHLB. As of December 31, 2018, HarborOne Bank was in compliance with this requirement. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. HarborOne Bank reviews for impairment based on the ultimate recoverability of the cost basis of the FHLB stock. As of December 31, 2018, no impairment has been recognized.
At its discretion, the FHLB may declare dividends on the stock. In 2016, 2017 and 2018, the FHLB of Boston paid quarterly dividends with an annual yield of 3.63%, 4.14%, and 5.56% respectively. There can be no assurance that such dividends will continue in the future. Further, there can be no assurance that the impact of recent or future legislation on the FHLBs also will not cause a decrease in the value of the FHLB stock held by the Bank.
Capital Adequacy and Safety and Soundness
Regulatory Capital Requirements. The Federal Reserve and the FDIC have issued substantially similar risk-based and leverage capital rules applicable to U.S. banking organizations such as the Bank and, following the conversion, New HarborOne. These rules are intended to reflect the relationship between a banking organization's capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet items. The Federal Reserve and the FDIC may from time to time require that a banking organization maintain capital above the minimum levels discussed below, due to the banking organization's financial condition or actual or anticipated growth.
The capital adequacy rules define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets that banking organizations are required to maintain. Common equity Tier 1 generally includes common stock and related surplus, retained earnings and, in certain cases and subject to certain limitations, minority interests in consolidated subsidiaries, less goodwill, other non-qualifying intangible assets and certain other deductions. Tier 1 capital generally consists of the sum of common equity Tier 1 elements, non-cumulative perpetual preferred stock, and related surplus and, in certain cases and subject to limitations, minority interests in consolidated subsidiaries that do not qualify as common equity Tier 1 capital, less certain deductions. Tier 2 capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred stock, and, subject
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to limitations, allowances for loan losses. The sum of Tier 1 and Tier 2 capital less certain required deductions represents qualifying total risk-based capital.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1 capital, Tier 1 capital and total capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned one of several categories of risk weights based primarily on relative risk. Under the Federal Reserve's rules that will be applicable to New HarborOne and the FDIC's capital rules applicable to the Bank, New HarborOne and the Bank are each required to maintain a minimum common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6%, a minimum total capital to risk-weighted assets ratio of 8% and a minimum leverage ratio requirement of 4%. Additionally, subject to a transition schedule, these rules require an institution to establish a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements for "adequately capitalized" institutions of more than 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases. The capital conservation buffer became fully phased on January 1, 2019.
Under the FDIC's prompt corrective action rules, an FDIC-supervised institution is considered well capitalized if it (i) has a total capital to risk-weighted assets ratio of 10.0% or greater; (ii) a Tier 1 capital to risk-weighted assets ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (v) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. The Bank is considered well capitalized under this definition.
Generally, a bank, upon receiving notice that it is not adequately capitalized (i.e., that it is "undercapitalized"), becomes subject to the prompt corrective action provisions of Section 38 of FDIA that, for example, (i) restrict payment of capital distributions and management fees, (ii) require that its federal bank regulator monitor the condition of the institution and its efforts to restore its capital, (iii) require submission of a capital restoration plan, (iv) restrict the growth of the institution's assets and (v) require prior regulatory approval of certain expansion proposals. A bank that is required to submit a capital restoration plan must concurrently submit a performance guarantee by each company that controls the bank. A bank that is "critically undercapitalized" (i.e., has a ratio of tangible equity to total assets that is equal to or less than 2.0%) will be subject to further restrictions, and generally will be placed in conservatorship or receivership within 90 days.
Current capital rules do not establish standards for determining whether a bank holding company is well capitalized. However, for purposes of processing regulatory applications and notices, the Federal Reserve Board's Regulation Y provides that a bank holding company is considered "well capitalized" if (i) on a consolidated basis, the bank holding company maintains a total risk-based capital ratio of 10% or greater; (ii) on a consolidated basis, the bank holding company maintains a Tier 1 risk-based capital ratio of 6% or greater; and (iii) the bank holding company is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Board to meet and maintain a specific capital level for any capital measure.
Section 201 of the Growth Act directs the federal bank regulatory agencies to establish a community bank leverage ratio of tangible capital to average total consolidated assets of not less than 8% or more than 10%. The legislation provides that a qualifying community bank, which the legislation defines as a depository institution or depository institution holding company with total consolidated assets of less than $10 billion, that exceeds the community bank leverage ratio shall be considered to have met the generally applicable leverage capital requirements and the generally applicable risk-based capital requirements. In addition, a depository institution that exceeds the community bank leverage ratio will be regarded as having met the capital ratio requirements that are required in order to be considered well capitalized under Section 38 of the FDIA. The federal banking agencies may exclude
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institutions from availing themselves of this relief based on the institution's risk profile, taking into account off-balance sheet exposures, trading assets and liabilities, total notional derivatives exposures, and such other factors as the federal banking agencies determine appropriate. The federal banking agencies have proposed a community bank leverage ratio of 9%, which means that qualifying institutions with a community bank leverage ratio exceeding 9% would be eligible for the relief provided by Section 201 of the Growth Act. The federal banking agencies have also proposed excluding from this relief institutions with levels of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets and deferred tax assets exceeding certain levels as well as all advanced approaches banking organizations.
Safety and Soundness Standard. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the federal banking agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order restricting asset growth, requiring an institution to increase its ratio of tangible equity to assets or directing other actions of the types to which an undercapitalized institution is subject under the "prompt corrective action" provisions of the FDIA. See "Regulatory Capital Requirements" above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
New HarborOne will be a legal entity separate and distinct from its subsidiaries. The revenue of New HarborOne (on a parent-only basis) will be derived primarily from dividends paid to it by the Bank and New HarborOne's other subsidiaries. The right of New HarborOne, and consequently the right of shareholders of New HarborOne, to participate in any distribution of the assets or earnings of its subsidiaries through the payment of dividends or otherwise is subject to the prior claims of creditors of the subsidiaries, including, with respect to the Bank, depositors of the Bank, except to the extent that certain claims of New HarborOne in a creditor capacity may be recognized.
Restrictions on Bank Holding Company Dividends. The Federal Reserve has the authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company's net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization's capital needs, asset quality and overall financial condition. Further, under the Federal Reserve's capital rules, New HarborOne's ability to pay dividends is restricted if it does not maintain capital above the capital conservation buffer. See "Capital Adequacy and Safety and SoundnessRegulatory Capital Requirements" above.
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Restrictions on Bank Dividends. The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. The payment of dividends by a bank is also restricted pursuant to various state regulatory limitations.
Certain Transactions by Bank Holding Companies with their Affiliates
There are various statutory restrictions on the extent to which bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in "covered transactions" with their insured depository institution subsidiaries. The Dodd-Frank Act amended the definition of affiliate to include an investment fund for which the depository institution or one of its affiliates is an investment adviser. An insured depository institution (and its subsidiaries) may not lend money to, or engage in covered transactions with, its non-depository institution affiliates if the aggregate amount of covered transactions outstanding involving the bank, plus the proposed transaction exceeds the following limits: (i) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and (ii) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. For this purpose, "covered transactions" are defined by statute to include a loan or extension of credit to an affiliate; a purchase of or investment in securities issued by an affiliate; a purchase of assets from an affiliate unless exempted by the Federal Reserve; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company; the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate; securities borrowing or lending transactions with an affiliate that creates a credit exposure to such affiliate; or a derivatives transaction with an affiliate that creates a credit exposure to such affiliate. Covered transactions are also subject to certain collateral security requirements. Covered transactions as well as other types of transactions between a bank and a bank holding company must be on market terms and not otherwise unduly favorable to the holding company or an affiliate of the holding company. Moreover, Section 106 of the Bank Holding Company Act Amendments of 1970 provides that, to further competition, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.
Consumer Protection Regulation
The Bank is, and New HarborOne will be, subject to federal and state laws designed to protect consumers and prohibit unfair, deceptive or abusive business practices, including the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, or the "FACT Act," the GLBA, the Truth in Lending Act, or "TILA," the CRA, the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with clients when taking deposits, making loans, collecting loans and providing other services. Further, the Dodd-Frank Act established the CFPB, which has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The Federal Reserve examines the Bank for compliance with CFPB rules and enforces CFPB rules with respect to the Bank.
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Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower's ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of TILA as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, in each billing statement and for negative amortization loans and hybrid adjustable-rate mortgages. The Growth Act included provisions that ease certain requirements related to mortgage transactions for certain small institutions, which are generally those with less than $10 billion in total consolidated assets.
Privacy and Customer Information Security. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the Bank must provide its clients with an initial and annual disclosure that explains its policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required or permitted by law, the Bank is prohibited from disclosing such information unless otherwise provided in such policies and procedures. However, an annual disclosure is not required to be provided by a financial institution if the financial institution only discloses information under exceptions from GLBA that do not require an opt out to be provided and if there has been no change in its privacy policies and practices since its most recent disclosure provided to consumers. The GLBA also requires that the Bank develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of client information (as defined under GLBA), to protect against anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any client. The Bank is also required to send a notice to clients whose "sensitive information" has been compromised if unauthorized use of the information is "reasonably possible." Most states, including the states in which the Bank operates, have enacted legislation concerning breaches of data security and the duties of the Bank in response to a data breach. In addition, Massachusetts has promulgated data security regulations with respect to personal information of Massachusetts residents. Pursuant to the FACT Act, the Bank has developed and implemented a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations.
The Bank Secrecy Act. Under the Bank Secrecy Act, or "BSA," a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report to the U.S. Treasury any cash transactions involving more than $10,000. In addition, financial institutions are required to file suspicious activity reports for any transaction or series of transactions that involve at least $5,000 and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the "USA PATRIOT Act," which amended the BSA, together with the implementing regulations of various federal regulatory agencies, has caused financial institutions, such as the Bank, to adopt and implement
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additional policies or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis. In evaluating an application under Section 3 of the BHCA to acquire a bank or an application under the Bank Merger Act to merge banks or effect a purchase of assets and assumption of deposits and other liabilities, the applicable federal banking regulator must consider the anti-money laundering compliance record of both the applicant and the target. In addition, under the USA PATRIOT Act, financial institutions are required to take steps to monitor their correspondent banking and private banking relationships as well as, if applicable, their relationships with "shell banks."
OFAC. The U.S. has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the U.S. Treasury's Office of Foreign Assets Control, or "OFAC," take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial or other transactions relating to a sanctioned country, or with certain designated persons and entities; (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons); and (iii) restrictions on certain transactions with or involving certain persons or entities. Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for New HarborOne.
Our common stock will be registered with the SEC under Section 12(b) of the securities Exchange Act of 1934, as amended. We will be subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Exchange Act.
Emerging Growth Company Status
We qualify as an "emerging growth company" under the Jumpstart Our Business startups Act of 2012. For as long as we are an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved, and an exemption from having outside auditors attest as to our internal control over financial reporting. In addition, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.
We could be an emerging growth company for up to five years from when Old HarborOne went public. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of Old HarborOne's initial public offering in 2016, (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.
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HarborOne Mutual Bancshares, Old HarborOne and HarborOne Bank are, and New HarborOne will be, subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent tax matters and is not a comprehensive description of the tax rules applicable to Old HarborOne, New HarborOne, or HarborOne Bank.
Old HarborOne reports its income on a calendar year basis using the accrual method of accounting. The federal income tax laws apply to Old HarborOne in the same manner as to other corporations with some exceptions. Old HarborOne's federal income tax returns have been either audited or closed under the statute of limitations through December 31, 2014. For its 2018 tax year, Old HarborOne's federal income tax rate was 21%.
Massachusetts. Financial institutions in Massachusetts have been required to file combined income tax returns beginning with the year ended December 31, 2009. The current Massachusetts excise tax rate for financial institutions is 9.0% of federal taxable income, adjusted for certain items. Taxable income includes gross income as defined under the Internal Revenue Code, plus interest from bonds, notes and evidences of indebtedness of any state, including Massachusetts, less deductions, but not the credits, allowable under the provisions of the Internal Revenue Code, except for those deductions relating to dividends received and income or franchise taxes imposed by a state or political subdivision. Carryforwards and carrybacks of net operating losses and capital losses are not allowed. Old HarborOne's state tax returns, as well as those of its subsidiaries, are not currently under audit.
A financial institution or business corporation is generally entitled to special tax treatment as a "security corporation" under Massachusetts law provided that: (i) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and not as a broker; and (ii) it has applied for, and received, classification as a "security corporation" by the Commissioner of the Massachusetts Department of Revenue. A security corporation that is also a bank holding company under the Internal Revenue Code must pay a tax equal to 0.33% of its gross income. A security corporation that is not a bank holding company under the Internal Revenue Code must pay a tax equal to 1.32% of its gross income. Legion Parkway Company LLC, HarborOne Security Company LLC and Oak Street Security Company LLC are qualified as security corporations. As such, they have received security corporation classification by the Massachusetts Department of Revenue; and do not conduct any activities deemed impermissible under the governing statutes and the various regulations, directives, letter rulings and administrative pronouncements issued by the Massachusetts Department of Revenue.
New Hampshire. Financial Institutions are subject to tax in New Hampshire under the Business Enterprise Tax, or "BET," and Business Profits Tax, or "BPT," regime.
The tax base for the BET is based on apportioned compensation, interest expense, and dividends paid by the business enterprise. The rate of tax is .675% for taxable years ending after 2018 declining to .5% for tax years ending on or after 2021. The BET is creditable against the BPT and it available as a credit carryforward for a ten year period for years ending on or after December 31, 2014.
The BPT is applied on a unitary basis and is based on federal taxable income adjusted for certain items, including interest on U.S. governmental obligations and the deduction for state income taxes paid or accrued. Net operating losses are available for utilization during a ten year carryforward period. For tax years ending on or after 2018, the BPT tax rate is 7.9% declining to 7.5% for years ending on or after December 31, 2021.
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Rhode Island. Rhode Island requires banks subject to supervision under the Division of Business Regulation to be subject to a separate company bank tax return filing. The tax base is federal taxable income adjusted for certain items including Rhode Island state income taxes paid or accrued and non-security gain or losses. Apportioned Rhode Island state taxable income is subject to a tax rate of 9%.
The Bank has a wholly-owned Rhode Island passive investment corporation as a subsidiary. In Rhode Island, a passive investment company is not subject to the business corporation tax. In order to qualify for the exempt treatment, a corporation, together with all corporations under direct or indirect common ownership that satisfy the other requirements, must maintain an office in the state, employ at least five "full-time equivalent employees" in Rhode Island, and limit its activities to the maintenance and management of intangible investments, and the collection and distribution of income from those investments or tangible property located outside the state.
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Each of the directors of Old HarborOne is also a director of HarborOne Bank. Additionally, each executive officer of Old HarborOne is an executive officer of HarborOne Bank. There will be no change in HarborOne Bank's directors or officers as a result of the conversion. Directors and executive officers of Old HarborOne will become directors and executive officers of New HarborOne upon completion of the conversion.
The following table provides information regarding our directors:
Name
|
Age | Position(s) | Independent |
Director
Since(1) |
Term
Expires |
|||||
---|---|---|---|---|---|---|---|---|---|---|
Joseph F. Barry |
78 | Director | Yes | 1987 | 2019 | |||||
Mandy L. Berman |
48 | Director | Yes | 2019 | 2021 | |||||
James W. Blake |
68 | Chief Executive Officer | No | 1995 | 2019 | |||||
Joseph F. Casey |
58 | President and Chief Operating Officer | No | 2017 | 2020 | |||||
David P. Frenette, Esq. |
63 | Director | Yes | 2007 | 2020 | |||||
Gordon Jezard |
84 | Director | Yes | 1983 | 2021 | |||||
Barry R. Koretz |
74 | Director | Yes | 1987 | 2020 | |||||
Timothy R. Lynch |
63 | Director | Yes | 2011 | 2019 | |||||
William A. Payne |
62 | Director | Yes | 2017 | 2021 | |||||
Wallace H. Peckham, III, MBA, CPA |
76 | Director | Yes | 1981 | 2021 | |||||
Michael J. Sullivan, Esq. |
64 | Chairman of the Board | Yes | 2015 | 2020 | |||||
Damian W. Wilmot, Esq. |
43 | Director | Yes | 2019 | 2019 |
The following includes a brief biography for each of our directors. There are no family relationships among any of our directors or executive officers. Unless otherwise stated, each director has held his or her current occupation for the last five years.
The biographical description below for each director includes specific experience, qualifications, attributes and skills that led to the conclusion by Old HarborOne's nominating and governance committee and the board of directors that such person should serve as a director of Old HarborOne.
In addition to the information presented below regarding each person's specific experience, qualifications, attributes and skills, we also believe all of our directors have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment to service to Old HarborOne and its shareholders.
Joseph F. Barry retired in 2003 as Senior Vice President of HMI, Inc., a travel marketing firm located in Norwood, Massachusetts, after 14 years with the company. Before joining HMI, Inc., Mr. Barry was Vice President at Knapp Shoes, Inc. from 1986 to 1989 and Vice President at Herman Shoe International, Inc. from 1983 to 1986. Mr. Barry was selected to serve as a director because of his business experience and ability to assist us in strategic planning.
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Mandy L. Berman was the Chief Administrative Officer and Executive Vice President, Operations of Bright Horizons Family Solutions, a NYSE listed company headquartered in Watertown, Massachusetts, a position she held from 2016 to February 2019. From 2005 to 2016, Ms. Berman held various roles at Bright Horizons Family Solutions, including Acting CIO (2014 to 2016); Executive Vice President, Global and Back-Up Care Operations (2014 to 2015); Senior Vice President, Back-Up Care Services (2009 to 2013); and Vice President, Back-Up Division (2005 to 2009). Ms. Berman was an executive at ChildrenFirst, Inc. from 2000 to 2005, when the company was acquired by Bright Horizons Family Solutions. Prior to Ms. Berman's tenure at ChildrenFirst, she held positions at Project Achieve, The Parthenon Group and Bain & Company. Ms. Berman holds an A.B. from Princeton University and an M.B.A. from the Harvard Business School, where she graduated with distinction. Ms. Berman serves on the Board of Directors of One Goal Massachusetts, and is a professional development mentor and coach for Education Pioneers. Ms. Berman was selected to serve as a director because of her experience as a global executive with a record of strong financial results and operational performance.
James W. Blake has served as Chief Executive Officer of Old HarborOne since 2016. He has served as Chief Executive Officer of HarborOne Bank since 1995, and served as President of HarborOne Bank from 1995 to 2017, after serving as Chief Operating Officer from 1993 to 1994. Prior to joining HarborOne Bank, Mr. Blake was Senior Vice President of Retail Banking and Marketing at Mechanics Bank in Worcester, Massachusetts, from 1986 to 1993. Mr. Blake has served on the Community Depository Institutions Advisory Council of the Federal Reserve Bank of Boston. Since 2011, he has served on the Signature Healthcare Executive Business Council, and the YMCA Foundation. He also currently serves on the board of the Connecticut Online Computer Center, a position he has held since 2003. He also served on the board of the Massachusetts Credit Union League, from 1998 to 2012. As President and Chief Executive Officer, Mr. Blake is familiar with our banking operations and provides the board of directors with insight into our challenges, opportunities and operations. In addition, he was selected to serve as a director because of his extensive banking experience and familiarity with our market area.
Joseph F. Casey joined HarborOne Bank in 2004. He has served as President and Chief Operating Officer of Old HarborOne since May 2018 and was previously Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer of Old HarborOne from 2016 until 2018. He was appointed President and Chief Operating Officer of HarborOne Bank in February 2017 and has served as Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer since 2015. Prior to his current position, he served as Executive Vice President and Chief Financial Officer of HarborOne Bank from 2006 to 2015 and Senior Vice President and Chief Financial Officer from 2004 to 2006. Before joining HarborOne Bank, Mr. Casey was Vice President at Seacoast Financial Services in New Bedford, Massachusetts and Senior Vice President, Chief Financial Officer and Treasurer at Compass Bank for Savings in New Bedford, Massachusetts from 2003 to 2004, and prior to that held various titles, including Chief Financial Officer, Treasurer, Controller and Internal Auditor during his 17 years with Andover Bancorp, Inc. in Andover, Massachusetts. Mr. Casey was selected to serve as a director because of his extensive banking, financial and accounting experience and familiarity with our banking operations and market area.
David P. Frenette, Esq. is an attorney in solo practice in Brockton, Massachusetts, focusing primarily on elder law, estate planning, residential and commercial real estate and business organization. Mr. Frenette has practiced law for over 25 years. Mr. Frenette was a partner at Frenette & Dukess from 1995 to 2012 and with Wheatley, Frenette & Dukess from 1990 to 1995, specializing in real estate closings for local banks, including HarborOne Bank. Mr. Frenette has served on the Board of Trustees of Signature Healthcare Brockton Hospital since 1999, as well as on the boards at the Old Colony YMCA since 1993. He is also an active member at Rotary Club of Brockton. Mr. Frenette was selected to serve as a director because of his extensive experience in the practice of law, particularly in real estate, and because of his involvement and knowledge of the local community.
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Gordon Jezard retired in 2012 after a 28-year career in the automotive parts and supplies retail business, as owner of and director of operations at Bettridge Auto Parts, Inc. in Brockton, Massachusetts, which he sold in 2012. Prior to his tenure at Bettridge Auto Parts, Inc., Mr. Jezard held management positions at Eastern Edison Co., an electric company in Brockton, Massachusetts. Mr. Jezard is a graduate of Northeastern University with degrees in Business Management and Electrical Engineering. Mr. Jezard was selected to serve as a director because of his knowledge of and experience working with small businesses.
Barry R. Koretz retired from BKA Architects, Inc. in 2017. He was the President and founder of BKA Architects, Inc. in Brockton, Massachusetts, a full-service commercial architecture and design firm he started in 1974. As President of BKA Architects, Inc., Mr. Koretz was responsible for matters related to finance, administration, business development and project management of the 50-person firm with approximately $7 million in annual billings. Mr. Koretz has served as co-chair of the Signature Healthcare Executive Business Council since 2012 and the Signature Healthcare Capital Campaign Steering Committee since 2015, and as a director of the Brockton Boys and Girls Club since 2000. Previously, Mr. Koretz was a member of the Board of Trustees of Brockton Hospital and the boards of directors of Metro South Chamber of Commerce and the United Way of Greater Plymouth County. Mr. Koretz was selected to serve as a director because of his experience owning and managing a business in our market area, which, together with his knowledge of and service to our local community, provides a unique perspective on the needs of customers in our market area.
Timothy R. Lynch has served as Chief Medical Officer at South Shore Hospital since May 2017, Chairman of the Department of Medicine since March 2016, as well as a practicing internist at South Shore Medical Center since 2013. Dr. Lynch was the Chief Medical Officer at South Shore Physician Ambulatory Enterprise (SSPAE) in Weymouth, Massachusetts, from 2015 to 2016. Prior to that, Dr. Lynch was Lead Hospital Physician, South Region at Atrius Health from 2013 to 2015. From 1996 to 2013, Dr. Lynch held the following positions at Signature Healthcare: Vice President of Quality from 2011 to 2013; Vice President of the Medical Staff from 2010 to 2013; Vice Chairman, Physician Hospital Organization Board of Directors from 2003 to 2008; Trustee, Signature Healthcare Corporation from 2002 to 2013; Trustee, Signature Healthcare Brockton Hospital Incorporated from 2002 to 2013; and Patient Care Assessment Coordinator from 1996 to 2013. Dr. Lynch currently serves as a member of the board of directors of the South Shore Physician Health Organization and Connected Care of Southeastern Massachusetts. Dr. Lynch was selected to serve as a director because of his management experience, including strategic planning, budget development and state, federal and industry regulatory compliance.
William A. Payne is a principal and co-founder of PRW Wealth Management, LLC, an independent registered investment advisor serving the planning needs of both the mid-market corporate marketplace and high net worth families for over 30 years. Mr. Payne holds both the series 7 and 63 securities licenses. He also has several professional designations, including Chartered Financial Consultant and Masters in Financial Services. In 1999, Mr. Payne's firm was one of the founding companies in National Financial Partners, a financial services company which became publicly traded on the NYSE in 2003. In addition, Mr. Payne has served on the Board of the Old Colony YMCA since 1995, serving as Board Chairman from 2003-2005. Mr. Payne also serves on the board of Lion Street Inc., a financial services company based in Austin, Texas. Mr. Payne was selected to serve as a director because of his experience in wealth management and knowledge of the financial markets.
Wallace H. Peckham, III, MBA, CPA retired in 2015 from Conley & Wood, CPA's P.C., in South Easton, Massachusetts, where he had worked since 2013 following its merger with the company he founded in 2010, Peckham & Eidlin, CPA's, P.C., in Brockton, Massachusetts. Mr. Peckham has been self-employed since 1982 as a certified public accountant in private practice throughout Brockton, Massachusetts, providing professional services to individuals and the business community. Mr. Peckham has been a member of the Board of Trustees of Signature Healthcare, Brockton Hospital since 2007
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and served as chairman from 2013 to 2014. He is a member of the Rotary Club of Brockton. Mr. Peckham was selected to serve as a director because of his financial and accounting experience, which provides a unique perspective with respect to the preparation and review of our financial statements, the supervision of our independent auditors and the review and oversight of our financial controls and procedures, accounting practices and tax matters.
Michael J. Sullivan, Esq. has been a partner at the Ashcroft Law Firm, LLC in Boston, Massachusetts since 2009. Mr. Sullivan is recognized as an expert in government investigations, corporate compliance and ethics, fraud, corruption, health care and corporate security, with extensive policy and regulatory experience. Prior to joining the Ashcroft Law Firm, LLC, Mr. Sullivan was a United States Attorney for the District of Massachusetts from 2001 to 2009. From 2006 until January 2009, Mr. Sullivan served as Presidentially Nominated Director of the Bureau of Alcohol, Tobacco, Firearms and Explosives in Washington, DC and from 1995 to 2001 he served as the District Attorney for Plymouth County, Massachusetts. Mr. Sullivan has been a member of the board of directors of Signature Healthcare since May 2009, Old Colony YMCA from 1995 until 2001 and from 2009 until present, New Heights Charter School, Continuing Education Institute from 1989 to 1994 and Consumer Credit Counseling Services from 1986 to 1989. Mr. Sullivan was selected to serve as a director because of his extensive policy and regulatory legal experience and continued service to the community.
Damian W. Wilmot, Esq. has served as the Chief Risk and Compliance Officer of Vertex Pharmaceuticals Incorporated since 2017. Mr. Wilmot has held a number of roles at Vertex since joining in 2015, including Interim Head of Human Resources (2017); Vice President & Associate General CounselChief Litigation Counsel (2015 to 2017); and Interim Chief Compliance Officer (2015). Mr. Wilmot was Assistant General Counsel at Sunovion Pharmaceuticals Inc. from 2014 to 2015. Prior to that, Mr. Wilmot was a partner at Goodwin Procter LLP from 2010 to 2014, and an Associate from 2006 to 2010. Mr. Wilmot served as Assistant United States Attorney for Massachusetts from 2004 to 2006, Litigation Associate at Seyfarth Shaw LLP and Judicial Law Clerk for the State of Connecticut Supreme Court from 2000 to 2001. Mr. Wilmot graduated from Trinity College and Suffolk University Law School. Mr. Wilmot is a director of The John F. Kennedy Library Foundations and the Boys & Girls Club of Boston, and previously served on numerous other non-profit and community organizations throughout the greater Boston area. Mr. Wilmot was selected to serve as a director because of his extensive experience as legal counsel to numerous highly-regulated national and global consumer-facing organizations.
Biographical Information Regarding Executive Officers Who Are Not Directors
The following table provides information regarding our executive officers who are not directors. Our executive officers serve at the discretion of our board of directors and hold office until their successors are duly elected and qualified or until the earlier of their death, resignation or removal.
Name
|
Age | Position(s) | ||
---|---|---|---|---|
Wayne F. Dunn |
63 | Senior Vice PresidentChief Technology Officer at HarborOne Bank | ||
Christopher K. Gibbons |
66 | Senior Vice PresidentConsumer Lending at HarborOne Bank | ||
Brenda C. Kerr |
48 | Senior Vice PresidentRetail Banking at HarborOne Bank | ||
Mark T. Langone |
52 | Senior Vice PresidentChief Enterprise Risk Officer at HarborOne Bank | ||
David B. Reilly |
53 | Senior Vice PresidentOperations at HarborOne Bank | ||
H. Scott Sanborn |
55 | Executive Vice PresidentCommercial Lending at HarborOne Bank | ||
Linda H. Simmons |
59 | Senior Vice President, Chief Financial Officer at Old HarborOne and Chief Financial Officer at HarborOne Bank | ||
David E. Tryder |
54 | Senior Vice PresidentChief Marketing Officer at HarborOne Bank | ||
Patricia M. Williams |
59 | Senior Vice PresidentHuman Resources Officer at HarborOne Bank |
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The following is a brief biography of each of our executive officers.
Wayne F. Dunn has served as Senior Vice PresidentChief Technology Officer since joining HarborOne Bank in 2008. Prior to joining HarborOne Bank, Mr. Dunn was Director, Enterprise Solutions at NWN Corporation in Waltham, Massachusetts, from 2007 to 2008; Chief Technology Officer at Clearway Technology Partners in Medway, Massachusetts, in 2007; and Senior Director, Enterprise Computing and Principal Consultant at AimNet Solutions, Inc. (acquired by Cognizant Technology Solutions Corporation) in Holliston, Massachusetts from 2001 to 2007.
Christopher K. Gibbons joined HarborOne Bank in August 1994 and has been the Senior Vice PresidentConsumer Lending since 1999. He served as Senior Vice PresidentConsumer Lending & Collections from 1999 to 2015 and Vice PresidentConsumer Lending from 1994 to 1999. Before joining HarborOne Bank, Mr. Gibbons worked at several banks in Abington, Massachusetts and Brockton, Massachusetts, as Vice PresidentConsumer Lending.
Brenda C. Kerr has served as Senior Vice PresidentRetail Banking since joining HarborOne Bank in September 2018. Prior to joining HarborOne Bank, Ms. Kerr served as Director of Retail Sales, Operations and Support at Century Bank from 2016 to 2018; Senior Vice President, Director of Sales and Service Execution at Santander Bank, N.A. after starting her career at Fleet Bank, Boston, MA and working in multiple positions of increasing authorities while it was acquired and transitioned to Sovereign Bank which became Santander Bank, N.A.
Mark T. Langone has served as Senior Vice PresidentChief Enterprise Risk Officer since joining HarborOne Bank in 2015. Prior to joining HarborOne Bank, Mr. Langone was a bank examiner at the FDIC in Foxboro, Massachusetts, from 1990 to 2003 and 2012 to 2015; Senior Vice PresidentDirector of Risk Governance and Senior Vice PresidentCredit Risk Management at Sovereign Bank (now Santander Bank, N.A.) in Boston, Massachusetts, from 2004 to 2012; and Senior Vice PresidentSenior Risk Management at Compass Bank for Savings in New Bedford, Massachusetts, from 2003 to 2004.
David B. Reilly has served as Senior Vice PresidentOperations since joining HarborOne Bank in 2008. Prior to joining HarborOne Bank, Mr. Reilly was Senior Vice PresidentOperations from 2004 to 2008 and Vice PresidentDirector Alternative Delivery and Customer Service in 2004 at Rockland Trust Company in Rockland, Massachusetts; Technology Integration On-Site Coordinator at Citizens Bank in Providence, Rhode Island in 2003; and Director, Information Technology from 2000 to 2003 and Vice PresidentCall Center Operations and Retail Delivery from 1996 to 2003 at Cambridgeport Bank in Cambridge, Massachusetts.
H. Scott Sanborn joined HarborOne Bank in 2014 as Vice PresidentCommercial Lending and became Executive Vice PresidentCommercial Lending in February 2018. Prior to joining HarborOne Bank, Mr. Sanborn was Regional Vice PresidentMetro Boston & Rhode Island/Southeastern Massachusetts from 2011 to 2014 and Professionals Group Leader, Wealth from 2010 to 2011 at TD Bank in Boston, Massachusetts and Senior Vice PresidentRegional Executive & Professionals Market Leader from 2005 to 2010 and Senior Vice PresidentMarket Manager from 2000 to 2004 at Sovereign Bank (now Santander Bank, N.A.) based in Boston, Massachusetts.
Linda H. Simmons joined HarborOne Bank in May 2017 as the Chief Financial Officer of the Bank and became Senior Vice President and Chief Financial Officer of Old HarborOne in May 2018. Prior to joining HarborOne Bank, Ms. Simmons was Senior Vice President, Chief Financial Officer and Treasurer of The Cooperative Bank of Cape Cod from 2012 to 2017; Executive Vice President, Chief Financial Officer and Treasurer of Bancorp Rhode Island from 2004 to 2011; and held various positions with responsibilities in the asset/liability management area at Bank of America from 1995 to 2004.
David E. Tryder has served as Senior Vice PresidentChief Marketing Officer since joining HarborOne Bank in 2014. Prior to joining HarborOne Bank, Mr. Tryder was DirectorDigital Strategy
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Group in 2013, DirectorInteractive & Relationship Marketing from 2009 to 2013, and Senior ManagerInteractive Marketing from 2005 to 2009 at Dunkin' Donuts in Canton, Massachusetts; Vice PresidentMarketing Director at Modem Media in Norwalk, Connecticut, from 2004 to 2005; Vice PresidentMarketing Director at Digitas, LLC in Boston, Massachusetts, from 2000 to 2004; and Product ManagerATM Network and Online Banking at Fleet Bank in Boston, Massachusetts, from 1997 to 2000.
Patricia M. Williams , Senior Vice PresidentHuman Resources Officer, joined HarborOne in 1986. During her tenure she has held the leadership role in the Human Resources Division and has been responsible for the development, implementation and oversight of Human Resources policies, training and development, benefits, talent acquisition and retention and culture.
The Nasdaq listing rules requires that independent directors compose a majority of a listed company's board of directors. In addition, the Nasdaq listing rules require that, subject to specified exceptions, each member of a listed company's audit, compensation, and nominating and governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act. Under Nasdaq listing rules, a director will only qualify as an "independent director" if, in the opinion of our Board, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent under the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries. In addition to satisfying general independence requirements under the Nasdaq listing rules, a member of a compensation committee of a listed company may not, other than in his or her capacity as a member of the compensation committee, the board of directors or any other board committee, accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries. Additionally, the board of directors of the listed company must consider whether the compensation committee member is an affiliated person of the listed company or any of its subsidiaries and, if so, must determine whether such affiliation would impair the director's judgment as a member of the compensation committee.
Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family and other relationships, including those relationships described under " Transactions with Related Parties " below, our Board determined that each of our directors, with the exception of Mr. Blake and Mr. Casey, is "independent" under the Nasdaq listing rules. Mr. Blake is not considered independent because he currently serves as our Chief Executive Officer. Mr. Casey is not considered independent because he currently serves as President and Chief Operating Officer. Our Board also determined that each member of the audit, compensation, and nominating and governance committees satisfies the independence standards for such committees established by the SEC and the Nasdaq listing rules, as applicable. In making these determinations on the independence of our directors, our Board considered the relationships that each such non-employee director has with our company and all other facts and circumstances our Board deemed relevant in determining independence.
Our independent directors will meet alone in executive session periodically. The purpose of these executive sessions is to promote open and candid discussion among the independent directors.
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Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2018, the members of the compensation committee were David P. Frenette, Gordon Jezard and Wallace H. Peckham, III, each of which are independent directors. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee (or other committee performing equivalent functions) of any entity that has one or more executive officers serving on our board of directors or Compensation Committee. No interlocking relationship exists between any member of the Board of Directors or Compensation Committee (or other committee performing equivalent functions) and any executive, member of our board of directors or member of the compensation committee (or other committee performing equivalent functions) of any other company.
Transactions with Related Parties
The following is a description of transactions, since January 1, 2018, to which we have been a party or will be a party, in which the amount involved exceeded or will exceed $120,000, and in which any of our executive officers or directors, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest, other than compensation, termination and change in control arrangements, which are described under " Executive Compensation " and " Director Compensation " below.
Loans and Extensions of Credit. The Sarbanes-Oxley Act of 2002 generally prohibits loans to our executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for loans by HarborOne Bank to its executive officers and directors in compliance with federal banking regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of insured institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to HarborOne Bank and must not involve more than the normal risk of repayment or present other unfavorable features. We have adopted written policies to implement the requirements of Regulation O, which restricts the extension of credit to directors and executive officers and their family members and other related interests. Under these policies, extensions of credit that exceed regulatory thresholds must be approved by the Board of Directors. We believe that all extensions of credit to our directors and officers satisfy the foregoing conditions. The aggregate amount of our loans to our directors, executive officers and their related entities was $189,000 at December 31, 2018. As of December 31, 2018, these loans were performing according to their original terms.
Other Transactions. Since January 1, 2018, there have been no transactions and there are no currently proposed transactions in which we were or are to be a participant and the amount involved exceeds $120,000, and in which any of our executive officers or directors had or will have a direct or indirect material interest.
Our "named executive officers" for the year ended December 31, 2018 were as follows: James W. Blake, our Chief Executive Officer; Joseph F. Casey, our President and Chief Operating Officer; and Peter F. Makowiecki, our former Senior Vice President, Residential Lending. Mr. Makowiecki resigned on January 17, 2019.
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The following table sets forth information regarding the compensation paid to our named executive officers for the fiscal years ended December 31, 2018 and 2017:
Name and Principal Position
|
Year | Salary | Bonus |
Stock
Awards(1) |
Option
Awards(1) |
Non-Equity
Incentive Plan Compensation(2) |
All Other
Compensation(3) |
Total | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
James W. Blake |
2018 | $ | 739,815 | $ | | $ | | $ | 372,479 | $ | 551,810 | $ | 142,611 | $ | 1,806,715 | ||||||||||
Chief Executive Officer |
2017 | 703,171 | | 2,613,958 | 375,914 | 464,107 | 139,261 | 4,296,410 | |||||||||||||||||
Joseph F. Casey |
2018 |
$ |
501,231 |
$ |
|
$ |
|
$ |
372,479 |
$ |
270,665 |
$ |
93,794 |
$ |
1,238,168 |
||||||||||
President and Chief |
2017 | 472,649 | | 1,835,000 | 375,914 | 163,071 | 91,667 | 2,938,301 | |||||||||||||||||
Operating Officer |
|||||||||||||||||||||||||
Peter F. Makowiecki |
2018 |
$ |
307,962 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
53,897 |
$ |
361,859 |
||||||||||
Senior Vice President, |
2017 | 288,462 | | 266,075 | 177,450 | 55,291 | 52,817 | 840,095 | |||||||||||||||||
Residential Lending |
Name
|
401(k)
Employer Contributions |
Country
Club Membership |
Financial
Planning |
Auto
Allowance & Fuel Reimbursement |
Life & LTD
Insurance Premiums |
ESOP(1) |
ESOP
Restoration(1) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mr. Blake |
$ | 33,931 | $ | 1,370 | $ | 6,000 | $ | 23,869 | $ | 39,231 | $ | 10,892 | $ | 27,318 | ||||||||
Mr. Casey |
33,931 | | 7,000 | 15,354 | 13,542 | 2,691 | 21,276 | |||||||||||||||
Mr. Makowiecki |
33,931 | | | 1,041 | 4,975 | 10,892 | 3,058 |
Employment and Change in Control Agreements
Employment Agreements. HarborOne Bank and Old HarborOne are parties to an employment agreement with each of Mr. Blake and Mr. Casey Mr. Blake's employment agreement provides for a minimum annual base salary of $781,097 and Mr. Casey's employment agreement provides for a minimum annual base salary of $529,200. The employment agreements also provide for discretionary incentive and/or bonus compensation, participation on generally applicable terms and conditions in other compensation and fringe benefit plans, and certain perquisites, including for Mr. Blake: the use of an automobile and reimbursement of automobile-related expenses; club membership; travel to and attendance at industry conferences and seminars; five weeks' paid vacation; life insurance equal to three times the executive's base salary; technology assistance for remote access to HarborOne Bank's and Old HarborOne's systems; and supplemental medical insurance upon reaching age 65. For Mr. Casey, such perquisites include: the use of an automobile and reimbursement of automobile related
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expenses; five weeks' paid vacation; life insurance equal to three times the executive's base salary; technology assistance for remote access to HarborOne Bank's and Old HarborOne's systems; and supplemental medical insurance upon reaching age 65.
HarborOne Bank and Old HarborOne may terminate the employment of either Mr. Blake or Mr. Casey, and each such executive may resign, at any time for any reason. In the event of termination without "cause" or "good reason" (as each such term defined in the respective employment agreement), HarborOne Bank and Old HarborOne will pay to the executive, for a period of two years, severance benefits equal to his monthly base salary in effect at the time of his termination and annual incentive compensation equal to the average incentive compensation received by the executive during the three full fiscal years immediately preceding termination. HarborOne Bank and Old HarborOne will also make an additional payment to the executive in an amount equal to the aggregate amount of employer contributions that would have been made to any qualified pension, profit sharing or 401(k) or similar plan on behalf of the executive if the executive had remained an employee of HarborOne Bank and Old HarborOne for an additional 24-month period. In addition, HarborOne Bank and Old HarborOne will make a monthly cash payment for 18 months or the executive's COBRA health continuation period, whichever ends earlier, in the amount that HarborOne Bank and Old HarborOne would have made to provide health insurance to the executive.
In the event the executive's employment is involuntarily terminated for reasons other than for cause, disability or death, or the executive voluntary resigns for good reason, in either case after a change in control of Old HarborOne, the severance benefits increase from two times the sum of the executive's base salary and average three-year bonus to three times the sum of the executive's base salary and average three-year bonus, and will be paid in a lump sum. Any payments required under the employment agreements will be reduced to the extent necessary to avoid penalties under Section 280G of the Internal Revenue Code if such reduction would result in a higher after-tax amount to Mr. Blake or Mr. Casey. The employment agreements provide for certain post-employment obligations with respect to the executive's ability to compete with HarborOne Bank and Old HarborOne and to solicit customers and employees of HarborOne Bank and Old HarborOne.
Change in Control Agreements. Old HarborOne has entered into change in control agreements with each of its executive officers other than Messrs. Blake and Casey. The agreements for all executive officers are substantially similar, and provide that if the executive's employment is involuntarily terminated for reasons other than for cause, disability or death (as such term is defined in the respective change of control agreement), or the executive voluntarily resigns for "good reason" (as such term is defined in the respective change of control agreement) on or within 12 months after the effective date of a change in control of Old HarborOne, the executive would be entitled to a severance payment equal to his or her base salary and average three-year bonus. Such payment would be payable in a lump sum within ten days following the executive's date of termination. In addition, Old HarborOne will make a monthly cash payment for 18 months or the executive's COBRA health continuation period, whichever ends earlier, in the amount that Old HarborOne would have made to provide health insurance to the executive. Any payments required under the agreements will be reduced to the extent necessary to avoid penalties under Section 280G of the Internal Revenue Code if such reduction would result in a higher after-tax amount to the executive.
Nonqualified Retirement Benefits
Split Dollar Life Insurance Arrangements. In 2000, HarborOne Bank entered into a collateral assignment split dollar life insurance arrangement with Mr. Blake in order to provide a death benefit to the executive's beneficiaries and to allow the executive access to the cash surrender value of the policy in excess of the amount of premiums paid by HarborOne Bank upon his retirement from HarborOne Bank. In anticipation of the reorganization of HarborOne Bank in 2016, HarborOne Bank terminated this arrangement with Mr. Blake, and Mr. Blake transferred the ownership of the life insurance policy
115
to HarborOne Bank and Mr. Blake entered into a new endorsement split dollar life insurance agreement that will provide Mr. Blake with a $1,400,000 lifetime death benefit.
Supplemental Executive Retirement Plan Agreements. HarborOne Bank maintains a supplemental executive retirement plan agreement with each of Messrs. Blake and Casey.
Upon Mr. Blake's "separation from service" (as defined therein), disability or death, Mr. Blake (or his beneficiary in the case of death) shall receive a lump sum payment in an amount equal to the actuarial equivalent of a single life annuity equal to 60.0% of Mr. Blake's final average three-year salary and bonus reduced by the primary Social Security benefits payable upon Mr. Blake's separation from service and the amount payable to Mr. Blake from HarborOne Bank's 401(k) plan attributable to employer contributions. This lump sum payment is further reduced by the amount paid by HarborOne Bank to Mr. Blake when he reached age 65 in 2015 pursuant to his 2008 supplemental executive retirement plan agreement, with interest at a rate of 3.0% per year from the date of payment.
Under the terms of the supplemental executive retirement plan agreement with Mr. Casey, upon the earliest of attaining age 65, termination other than for "cause," disability, death or a "change in control" of HarborOne Bank (as each such term is defined therein), Mr. Casey shall receive a lump sum payment equal to the actuarial equivalent value of a single life annuity equal to 60.0% of the executive's average three-year salary and bonus reduced by projected Social Security benefits and the amount payable to the executive from HarborOne Bank's 401(k) Plan attributable to employer contributions.
Senior Management Long Term Incentive Plan. Under the HarborOne Bank Senior Management Long Term Incentive Plan, all executive officers of HarborOne Bank with a title of Senior Vice President or above, including Messrs. Blake and Casey, but excluding Ms. Kerr as she was hired in the fourth quarter of 2018, may be awarded deferred cash incentive awards. A deferred incentive award is equal to the deferral percentage multiplied by the executive's base salary for the applicable year. The deferral percentage is determined by the Board of HarborOne Bank based on the executive's or HarborOne Bank's achievement of performance goals. The terms "deferred incentive award," "deferred percentage" and "performance goals" are defined in the HarborOne Bank Senior Management Long Term Incentive Plan. Each deferred incentive award is payable three years following the grant of such award, subject to the executive's continued employment with HarborOne Bank. Awards are immediately payable upon the executive's death, disability, retirement or "separation from service" (as defined therein) within 24 months of a "change in control" (as defined therein) of HarborOne Bank or Old HarborOne. Retirement for this purpose means an executive's reaching the age of 62 or older after completing 10 or more years of service with HarborOne Bank. Accordingly, once an executive satisfies the condition for retirement, he would be entitled to the deferred incentive award. The Board of Directors amended this plan effective January 1, 2018 so that no further deferred incentive awards will be granted. The balance of the liability at December 31, 2018 was $1.3 million.
ESOP Restoration Plan. HarborOne Bank provides an ESOP Restoration Plan for the benefit of selected executives whose annual compensation exceeds the amount of annual compensation, which is currently $275,000, permitted to be recognized under the ESOP by the Internal Revenue Code. Under the ESOP Restoration Plan, eligible participants receive a credit each year equal to the amount they would have received under the ESOP but for the Internal Revenue Service-imposed compensation limit. Any benefits earned under the ESOP Restoration Plan become payable the earliest of six months and a day after the participant's "separation from service" from HarborOne Bank, the participant's death, a "change in control" of Old HarborOne or upon the termination of the ESOP Restoration Plan (as each such term is defined therein).
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401(k) Profit Sharing Plans. HarborOne Bank currently maintains the HarborOne 401(k) Plan (the "HarborOne 401(k) Plan") , and HarborOne Mortgage, HarborOne Bank's wholly owned subsidiary, maintains the HarborOne Mortgage Retirement Plan (the "HarborOne Mortgage 401(k) Plan" and together with the HarborOne 401(k) Plan, the "401(k) Plans"), which are tax-qualified profit sharing plans with salary deferral features under Section 401(k) of the Internal Revenue Code. All employees of HarborOne Bank who have attained age 21 and have completed three months of service are eligible to participate in the HarborOne401(k) Plan and make salary deferrals. All employees, other than seasonal employees and nonresident alien employees of HarborOne Mortgage who have completed three months of service, are eligible to participate in the HarborOne Mortgage 401(k) Plan and make salary deferrals. Seasonal employees of HarborOne Mortgage who have attained age 21 and completed 1,000 hours of service are eligible to participate in the HarborOne Mortgage 401(k) Plan.
A participant may contribute up to 100.0% of his or her compensation to the HarborOne 401(k) Plan on a pre-tax or after-tax basis, subject to the limitations imposed by the Internal Revenue Code. A participant may contribute up to 75.0% of his or her compensation to the HarborOne Mortgage 401(k) Plan on a pre-tax basis, subject to the limitations imposed by the Internal Revenue Code. For 2018, the deferral contribution limit was $18,500. A participant over age 50 may contribute an additional $6,000 to the 401(k) Plans. A participant in the HarborOne 401(k) Plan is always 100.0% vested in his or her salary deferral contributions, and will become vested in his or her share of Bank contributions under a six-year vesting schedule with 20.0% vesting after completion of two years of service, and increased by 20.0% for each subsequent year of service. A participant in the HarborOne Mortgage 401(k) Plan is always 100.0% vested in his or her salary deferral contributions, and will become vested in his or her share of employer contributions under a four-year vesting schedule with 25.0% vesting after completion of one year of service, and increased by 25.0% for each subsequent year of service.
Both 401(k) Plans provide certain in-service withdrawals, including hardship withdrawals and full withdrawals after age 59 1 / 2 . Distributions from both 401(k) Plans are available in a lump sum or installments upon a participant's retirement, termination of employment, death or disability.
The 401(k) Plans permit a participant to direct the investment of his or her own account into various investment options. The participants of HarborOne 401(k) Plan were allowed to invest up to 100% of their account balances in common stock of Old HarborOne until the HarborOne 401(k) Plan was modified in 2018 to limit the amount that could be invested in Old HarborOne stock to 25% of the account balance. The HarborOne 401(k) Plan grandfathered amounts held in Old HarborOne stock in excess of 25%, but limits the ability to transfer or contribute any additional amounts into stock until the amount invested falls below the 25% threshold. Participants in the HarborOne 401(k) Plan may also invest future elective deferrals in common stock of Old HarborOne up to the limits described above. Participants in the HarborOne Mortgage 401(k) Plan may invest up to 25% of their account balances and future elective deferrals in common stock of Old HarborOne.
Participants in the 401(k) Plans will be given the opportunity to vote the shares allocated to their accounts. HarborOne Bank, as plan administrator, will vote any shares in the 401(k) Plans for which participants have not issued voting instructions as HarborOne Bank determines in its discretion and will direct the 401(k) Plans trustee accordingly.
Employee Stock Ownership Plan. HarborOne Bank currently maintains an ESOP. Eligible employees who have attained age 21 and have completed one year of service are able to participate in the ESOP. Participants vest in the benefits allocated under the ESOP pursuant to a six-year vesting schedule, with 20.0% vesting after completion of two years of service, and increased by 20.0% for each subsequent completed year of service. A participant becomes fully vested at retirement, upon death or
117
disability or upon termination of the ESOP. Any unvested shares that are forfeited upon a participant's termination of employment will be reallocated among the remaining ESOP participants.
Shares of Old HarborOne common stock purchased by the ESOP through the proceeds of a loan are held in a suspense account for allocation among participants. ESOP shares are released as the loan is repaid. Discretionary contributions to the ESOP and shares released from the suspense account are allocated among participants in accordance with compensation, on a pro rata basis.
2017 Stock Option and Incentive Plan. On August 9, 2017, the shareholders of Old HarborOne approved the 2017 Stock Option and Incentive Plan, or the "Equity Plan," which provided for the grant of stock-based awards to officers, employees and directors of Old HarborOne and its subsidiaries. Under the plan, Old HarborOne may grant options, stock appreciations rights, restricted stock, restricted units, unrestricted stock awards, cash based awards, performance awards, and dividend equivalent rights. Total shares of Old HarborOne's common stock reserved for issuance under the plan are 2,077,577. Both incentive stock options and non-qualified stock options may be granted under the plan, with total shares reserved for options equaling 1,483,984 with 493,464 shares remaining available for grant as options as of December 31, 2018. The total number of shares reserved for restricted stock or restricted units is 593,593, with 69,312 shares currently remaining available for grant as restricted stock or restricted units as of December 31, 2018.
Following the conversion, the Equity Plan will be assumed by us and all awards previously granted under the Equity Plan will continue to remain outstanding in accordance with their terms.
Outstanding Equity Awards at Year End. The following table sets forth information with respect to outstanding equity awards as of December 31, 2018 for the named executive officers. All equity awards reflected in this table were granted pursuant to our Equity Plan, described above and shown below.
|
|
Option Awards | Stock Awards | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name
|
Grant Date |
Number of
Securities Underlying Unexercised Options (#) Exercisable(1) |
Number of
Securities Underlying Unexercised Options (#) Unexercisable(1) |
Option
Exercise Price |
Option
Expiration Date |
Number of
Shares of Stock that Have Vested (#)(1) |
Market Value
of Shares or Units of Stock that Have Vested(2) |
Number of
Shares of Stock that Have Not Vested (#)(1) |
Market Value
of Shares or Units of Stock that Have Not Vested(3) |
|||||||||||||||||
James W. Blake |
8/16/2017 | 24,733 | 49,466 | $ | 18.35 | 8/16/2027 | 47,483 | $ | 908,825 | 94,967 | $ | 1,509,026 | ||||||||||||||
|
11/26/2018 | | 74,199 | $ | 17.56 | 11/25/2028 | ||||||||||||||||||||
Joseph F. Casey |
8/16/2017 |
24,733 |
49,466 |
$ |
18.35 |
8/16/2027 |
33,333 |
$ |
637,994 |
66,667 |
$ |
1,059,339 |
||||||||||||||
|
11/26/2018 | | 74,199 | $ | 17.56 | 11/25/2028 | ||||||||||||||||||||
Peter F. Makowiecki(4) |
8/16/2017 |
11,666 |
23,334 |
$ |
18.35 |
8/16/2027 |
4,833 |
$ |
92,504 |
9,667 |
$ |
153,609 |
In the year ending December 31, 2019, each non-employee director will receive an annual fee which shall be paid in equal monthly installments. The chairman of the Board will receive $75,000, committee chairs will receive $70,000 and all other non-employee directors will receive $65,000 annually. Ms. Berman and Mr. Wilmot joined the Board in January 2019, and did not receive any compensation in 2018.
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The following table sets forth information regarding the compensation paid to our non-employee directors for the fiscal year ended December 31, 2018:
Name(1)(2)
|
Fees Earned or
Paid in Cash(3) |
All Other
Compensation(4) |
Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Joseph F. Barry |
$ | 70,000 | $ | 5,475 | $ | 75,475 | ||||
David P. Frenette, Esq. |
70,000 | 15,462 | 85,462 | |||||||
Gordon Jezard |
70,000 | 932 | 70,932 | |||||||
Edward F. Kent(5) |
54,167 | 451 | 54,618 | |||||||
Barry R. Koretz |
70,000 | 11,595 | 76,595 | |||||||
Timothy R. Lynch |
70,000 | 168 | 70,168 | |||||||
William A. Payne |
65,000 | 6,168 | 71,168 | |||||||
Wallace H. Peckham, III |
70,000 | 602 | 70,602 | |||||||
Michael J. Sullivan, Esq. |
72,500 | 168 | 72,668 |
Director Retirement Plan. Directors of HarborOne Bank in office as of December 31, 2016 were eligible to participate in the HarborOne Bank Director Retirement Plan, which provides for annual payments to directors who have completed six or more years of service, and who have reached the retirement age specified in the participation agreement, of a specified percentage of the total director fees paid to the director in his or her final year serving as director, as follows: 30.0% annually for five years, for directors with at least six years of service; 45.0% annually for 10 years, for directors with at least 11 years of service or 60.0% annually for 10 years, for directors with at least 21 years of service. On December 31, 2017, Old HarborOne elected to freeze the Directors' Retirement Plan and does not intend to replace it at this time. The balance of the liability at December 31, 2018 was $1.9 million and there were payouts of $37,000 in 2018.
Benefits to be Considered Following Completion of the Conversion
Following the offering, we intend to adopt one or more new stock-based benefit plans that will provide for grants of stock options and restricted stock awards. If adopted within 12 months following the completion of the conversion, the aggregate number of shares reserved for the exercise of stock options or available for stock awards under the stock-based benefit plans would be limited to 10.0% and 4.0%, respectively, of the shares sold in the offering.
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The stock-based benefit plans will not be established sooner than six months after the offering, and if adopted within one year after the offering, the plans must be approved by at least two-thirds of the votes eligible to be cast by our shareholders, unless the Massachusetts Commissioner of Banks determines such plans may be approved by a majority of the votes eligible to be cast by our shareholders. If stock-based benefit plans are established more than one year after the offering, they must be approved by a majority of votes cast by our shareholders. The following additional restrictions would apply to our stock-based benefit plans only if such plans are adopted within one year after the offering:
We have not determined whether we will present stock-based benefit plans for shareholder approval prior to or more than 12 months after the completion of the conversion. In the event either federal or state regulators change their regulations or policies regarding stock-based benefit plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.
We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or through stock repurchases, subject to regulatory approval.
We will submit the equity incentive plan to its shareholders for their approval, at which time we will provide shareholders with detailed information about our stock based benefit plans.
The actual value of the shares awarded under the stock-based benefit plan will be based in part on the price of New HarborOne's common stock at the time the shares are awarded. The following table presents the total value of all shares of restricted stock that would be available for issuance under the
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stock-based benefit plan, assuming the shares are awarded when the market price of our common stock ranges from $8.00 per share to $14.00 per share.
|
Share Price |
918,000 Shares at
Minimum of Range |
1,080,000 Shares at
Midpoint of Range |
1,242,000 Shares at
Maximum of Range |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$ | 8.00 | $ | 7,344,000 | $ | 8,640,000 | $ | 9,936,000 | ||||||
10.00 | 9,180,000 | 10,800,000 | 12,420,000 | ||||||||||
12.00 | 11,016,000 | 12,960,000 | 14,904,000 | ||||||||||
14.00 | 12,852,000 | 15,120,000 | 17,388,000 |
The grant-date fair value of the options granted under the stock-based benefit plan will be based in part on the price of New HarborOne common stock at the time the options are granted. The value also will depend on the various assumptions utilized in the option pricing model ultimately adopted. The following table presents the total estimated value of the options to be available for grant under the stock-based benefit plan, assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares is $8.00 per share to $14.00 per share. The Black-Scholes option pricing model provides an estimate only of the fair value of the options, and the actual value of the options may differ significantly from the value set forth in this table.
|
Share Price |
Grant Date
Fair Value |
2,295,000 Shares at
Minimum of Range |
2,700,000 Shares at
Midpoint of Range |
3,105,000 Shares at
Maximum of Range |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$ | 8.00 | $ | 2.36 | $ | 5,416,200 | $ | 6,372,000 | $ | 7,327,800 | |||||||
10.00 | 2.95 | 6,770,250 | 7,965,000 | 9,159,750 | ||||||||||||
12.00 | 3.54 | 8,124,350 | 9,558,000 | 10,991,700 | ||||||||||||
14.00 | 4.13 | 9,478,350 | 11,151,000 | 12,823,650 |
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BENEFICIAL OWNERSHIP OF COMMON STOCK
Security Ownership of Certain Beneficial Owners. Persons and groups who beneficially own in excess of five percent of the common stock are required to file certain reports with the SEC regarding ownership. The following table sets forth, as of the record date, the shares of common stock beneficially owned by each person who was the beneficial owner of more than five percent of our common stock, including shares owned by its directors.
|
Common Stock | ||||||
---|---|---|---|---|---|---|---|
Name and Address of Beneficial Owner
|
Amount and Nature of
Beneficial Ownership |
Percent of
Class |
|||||
HarborOne Mutual Bancshares | 17,281,034 | 53.07 | % | ||||
770 Oak Street | |||||||
Brockton, Massachusetts 02301 |
Security Ownership of Management. The following table details, as of [Record Date], information concerning beneficial ownership of our common stock by each of our directors; each of our named executive officers; and all of our directors and executive officers as a group.
Name(1)
|
Number of Shares(2)(3) |
Percent of Common Stock
Outstanding(4) |
|||||
---|---|---|---|---|---|---|---|
Joseph F. Barry, |
39,013 | (5) | * | ||||
Director |
|||||||
Mandy L. Berman, |
3,355 |
(6) |
* |
||||
Director |
|||||||
James W. Blake, |
229,974 |
(7) |
* |
||||
Chief Executive Officer and Director |
|||||||
Joseph F. Casey, |
185,382 |
(8) |
* |
||||
President, Chief Operating Officer and Director |
|||||||
Wayne F. Dunn, |
38,992 |
(9) |
|||||
Senior Vice President, Chief Technology Officer |
|||||||
David P. Frenette, Esq. |
64,008 |
(10) |
* |
||||
Director |
|||||||
Christopher K. Gibbons, |
67,554 |
(11) |
* |
||||
Senior Vice President, Consumer Lending |
|||||||
Gordon Jezard, |
44,008 |
(12) |
* |
||||
Director |
|||||||
Brenda C. Kerr, |
4,900 |
(13) |
* |
||||
Senior Vice President, Retail Banking |
|||||||
Barry R. Koretz, |
49,008 |
(14) |
* |
||||
Director |
|||||||
Mark T. Langone, |
36,471 |
(15) |
* |
||||
Senior Vice President, Chief Enterprise Risk Officer |
|||||||
Timothy R. Lynch, |
39,008 |
(16) |
* |
||||
Director |
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Name(1)
|
Number of Shares(2)(3) |
Percent of Common Stock
Outstanding(4) |
|||||
---|---|---|---|---|---|---|---|
William A. Payne, |
12,702 | (17) | * | ||||
Director |
|||||||
Wallace H. Peckham, III, |
41,508 |
(18) |
* |
||||
Director |
|||||||
David B. Reilly, |
35,951 |
(19) |
* |
||||
Senior Vice President, Operations |
|||||||
H. Scott Sanborn, |
35,629 |
(20) |
* |
||||
Executive Vice President, Commercial Lending |
|||||||
Linda H. Simmons, |
25,201 |
(21) |
* |
||||
Senior Vice President, Chief Financial Officer |
|||||||
Michael J. Sullivan, Esq., |
39,508 |
(22) |
* |
||||
Chairman of the Board |
|||||||
David E. Tryder, |
24,505 |
(23) |
* |
||||
Senior Vice President, Chief Marketing Officer |
|||||||
Patricia M. Williams, |
38,223 |
(24) |
* |
||||
Senior Vice President, Human Resources |
|||||||
Damian W. Wilmot, Esq., |
3,334 |
(25) |
* |
||||
Director |
|||||||
All directors and executive officers as a group (21 persons) |
1,058,164 |
3.25 |
% |
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124
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SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth, for each of New HarborOne's directors and executive officers, and for all of these individuals as a group, the following information:
In each case, it is assumed that subscription shares are sold at the minimum of the offering range. See "The Conversion and OfferingAdditional Limitations on Common Stock Purchases." Federal and state regulations prohibit our directors and officers from selling the shares they purchase in the offering for one year after the date of purchase. Subscriptions by management through our 401(k) plan are included in the proposed purchases set forth below and will be counted as part of the maximum number of shares such individuals may subscribe for in the offering and as part of the maximum number of shares directors and officers may purchase in the offering.
|
|
Proposed
Purchase of Stock in the Offering(2) |
|
|
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Total Common Stock to be Held at
Minimum of Offering Range(3) |
||||||||||||||
|
Number of
Exchange Shares to Be Held(1) |
|||||||||||||||
Name of Beneficial Owner
|
Number of
Shares |
Amount |
Number of
Shares |
Percentage of Shares
Outstanding |
||||||||||||
Joseph F. Barry |
51,794 | 5,000 | $ | 50,000 | 56,794 | * | ||||||||||
Mandy L. Berman |
4,454 | 5,000 | $ | 50,000 | 9,454 | * | ||||||||||
James W. Blake |
305,313 | 30,000 | $ | 300,000 | 335,313 | * | ||||||||||
Joseph F. Casey |
246,113 | 25,000 | $ | 250,000 | 271,113 | * | ||||||||||
David P. Frenette, Esq. |
84,977 | 40,000 | $ | 400,000 | 124,977 | * | ||||||||||
Gordon Jezard |
58,425 | 5,000 | $ | 50,000 | 63,425 | * | ||||||||||
Barry R. Koretz |
65,063 | 5,000 | $ | 50,000 | 70,063 | * | ||||||||||
Timothy R. Lynch |
51,787 | 5,000 | $ | 50,000 | 56,787 | * | ||||||||||
William A. Payne |
16,863 | 7,500 | $ | 75,000 | 24,363 | * | ||||||||||
Wallace H. Peckham, III |
55,106 | 1,000 | $ | 10,000 | 56,106 | * | ||||||||||
Michael J. Sullivan, Esq. |
52,451 | 10,000 | $ | 100,000 | 62,451 | * | ||||||||||
Damian W. Wilmot, Esq. |
4,426 | 5,000 | $ | 50,000 | 9,426 | * | ||||||||||
Wayne F. Dunn |
51,673 | 500 | $ | 5,000 | 52,173 | * | ||||||||||
Christopher K. Gibbons |
89,685 | 1,000 | $ | 10,000 | 90,685 | * | ||||||||||
Brenda C. Kerr |
6,505 | 5,000 | $ | 50,000 | 11,505 | * | ||||||||||
Mark T. Langone |
48,419 | 10,000 | $ | 100,000 | 58,419 | * | ||||||||||
David B. Reilly |
47,729 | 5,000 | $ | 50,000 | 52,729 | * | ||||||||||
H. Scott Sanborn |
47,301 | 10,000 | $ | 100,000 | 57,301 | * | ||||||||||
Linda H. Simmons |
33,457 | 5,000 | $ | 50,000 | 38,457 | * | ||||||||||
David E. Tryder |
32,533 | 500 | $ | 5,000 | 33,033 | * | ||||||||||
Patricia M. Williams |
50,745 | 1,000 | $ | 10,000 | 51,745 | * | ||||||||||
| | | | | | | | | | | | | | | | |
Total for Directors and Executive Officers |
1,404,819 | 181,500 | $ | 1,815,000 | 1,586,319 | 3.67 | % | |||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
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The board of trustees of HarborOne Mutual Bancshares and the boards of directors of Old HarborOne and HarborOne Bank have approved the plan of conversion. The plan of conversion must also be approved by the members of HarborOne Mutual Bancshares and the shareholders of Old HarborOne. A special meeting of members and a special meeting of shareholders have been called for this purpose. HarborOne Mutual Bancshares has filed an application for approval of the conversion with the Massachusetts Commissioner of Banks, and New HarborOne has filed a bank holding company application with the Federal Reserve. Approval of the Massachusetts Commissioner of Banks is required before we can commence the offering, and both the approval of the Federal Reserve and final approval of the Massachusetts Commissioner of Banks is required before we can consummate the conversion and issue shares of common stock. The approval of the Massachusetts Commissioner of Banks or the Federal Reserve does not constitute a recommendation or endorsement of the plan of conversion.
The board of trustees of HarborOne Mutual Bancshares and the boards of directors of Old HarborOne and HarborOne Bank adopted the plan of conversion on March 5, 2019. Pursuant to the plan of conversion, we are converting from a two-tier mutual holding company form of organization to a fully public stock holding company form. HarborOne Mutual Bancshares, the mutual holding company parent of Old HarborOne, will convert to a stock corporation for a moment in time and merge into Old HarborOne. Old HarborOne, which owns all of the outstanding capital stock of HarborOne Bank, will merge into New HarborOne. As part of the conversion, the approximately 53% ownership interest of HarborOne Mutual Bancshares in Old HarborOne will be offered for sale in this offering.
At the completion of the conversion and offering, all of the outstanding common stock of HarborOne Bank will be owned by New HarborOne, and all of the outstanding common stock of New HarborOne will be owned by public shareholders. HarborOne Mutual Bancshares will cease to exist, and New HarborOne will be the successor corporation to Old HarborOne. A diagram of our corporate structure before and after the conversion is set forth in the "Summary" section of this prospectus.
Under the plan of conversion, at the completion of the conversion and offering, each share of Old HarborOne common stock owned by persons other than HarborOne Mutual Bancshares will be converted automatically into the right to receive new shares of New HarborOne common stock determined pursuant to an exchange ratio. The exchange ratio will ensure that immediately after the exchange of existing shares of Old HarborOne for new shares of New HarborOne, the public shareholders will own the same aggregate percentage of shares of common stock of New HarborOne that they owned in Old HarborOne immediately prior to the conversion, as adjusted for the assets of HarborOne Mutual Bancshares, and excluding any shares they purchased in the offering and their receipt of cash paid in lieu of fractional shares. HarborOne Mutual Bancshares' shares of Old HarborOne will be cancelled.
We intend to retain between $94.5 million and $128.3 million of the net proceeds of the offering and to invest between $112.9 million and $153.1 million of the net proceeds in HarborOne Bank. The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the plan of conversion.
Pursuant to the plan of conversion, we will offer shares of common stock for sale in the subscription offering to our eligible account holders and to our tax-qualified employee benefit plans, including our employee stock ownership plan and 401(k) plans, and the tax-qualified employee plans of HarborOne Mutual Bancshares, Old HarborOne, HarborOne Bank and their respective affiliates, which may subscribe for, in the aggregate, up to 10% of the shares of common stock sold in the offering, and
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our employees, officers, directors, trustees and corporators. In addition, we may offer common stock for sale in a community offering to members of the general public, with a preference given to natural persons and trusts of natural persons residing in the Massachusetts cities and towns of Abington, Acushnet, Attleboro, Avon, Berkley, Braintree, Bridgewater, Brockton, Canton, Carver, Cohasset, Dartmouth, Dighton, Duxbury, East Bridgewater, Easton, Fairhaven, Fall River, Foxboro, Freetown, Halifax, Hanover, Hanson, Hingham, Holbrook, Hull, Kingston, Lakeville, Mansfield, Marion, Marshfield, Mattapoisett, Middleborough, Milton, New Bedford, North Attleboro, Norton, Norwell, Plainville, Pembroke, Plymouth, Plympton, Quincy, Randolph, Raynham, Rehoboth, Rochester, Rockland, Seekonk, Scituate, Sharon, Somerset, Stoughton, Swansea, Taunton, Wareham, West Bridgewater, Westport, Weymouth and Whitman, and the Rhode Island cities and towns of Barrington, Bristol, Burrillville, Central Falls, Charlestown, Coventry, Cranston, Cumberland, East Greenwich, East Providence, Exeter, Foster, Glocester, Hopkinton, Jamestown, Johnston, Lincoln, Little Compton, Middletown, Narragansett, New Shoreham, Newport, North Kingstown, North Providence, North Smithfield, Pawtucket, Portsmouth, Providence, Richmond, Scituate, Smithfield, South Kingstown, Tiverton, Warren, Warwick, West Greenwich, West Warwick, Westerly, and Woonsocket.
We have the right to accept or reject, in whole or in part, any orders to purchase shares of the common stock received in the community offering. The community offering may begin at the same time as the subscription offering and must be completed within 45 days after the completion of the subscription offering unless otherwise extended by us. See "Community Offering."
We also may offer for sale shares of common stock not purchased in the subscription or community offering through a syndicated or firm commitment offering in which Sandler O'Neill & Partners, L.P. will be sole book-running manager. See "Syndicated or Firm Commitment Underwritten Offering."
We determined the number of shares of common stock to be offered in the offering based upon an independent valuation appraisal of the estimated pro forma market value of New HarborOne. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock. The independent valuation will be updated and the final number of the shares of common stock to be issued in the offering will be determined at the completion of the offering. See "Stock Pricing and Number of Shares to be Issued" for more information as to the determination of the estimated pro forma market value of the common stock.
The following is a brief summary of the conversion and is qualified in its entirety by reference to the provisions of the plan of conversion. A copy of the plan of conversion is available for inspection at each branch office of HarborOne Bank. The plan of conversion is also filed as an exhibit to HarborOne Mutual Bancshares' applications to convert from mutual to stock form of which this prospectus is a part, copies of which may be obtained from the Federal Reserve or inspected, without charge, at the Massachusetts Division of Banks. The plan of conversion is also filed as an exhibit to the registration statement we have filed with the SEC, of which this prospectus is a part. Copies of the registration statement may be obtained from the SEC or online at the SEC's website, www.sec.gov . See "Where You Can Find Additional Information."
Reasons for the Conversion and Offering
Our primary reasons for converting and undertaking the offering are to:
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The stock holding company structure will offer us greater flexibility for the structuring of mergers and acquisitions. Our current structure prevents us from offering shares of common stock as consideration for a merger or acquisition. Potential sellers often want stock for at least part of the acquisition consideration. Our new stock holding company structure will enable us to offer stock or cash, or a combination thereof, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise. We have no current arrangements or agreements to acquire other financial institutions, assets or business lines. However, we have considered, and will continue to consider other potential acquisitions as opportunities arise.
The affirmative vote of a majority of the members of HarborOne Mutual Bancshares present and voting at the special meeting called for such purpose is required to approve the plan of conversion. By their approval of the plan of conversion, the members of HarborOne Mutual Bancshares will also be approving the merger of HarborOne Mutual Bancshares into Old HarborOne and the merger of Old HarborOne into New HarborOne. The affirmative vote of the holders of at least two-thirds of the total votes eligible to be cast by shareholders of Old HarborOne at a special meeting of shareholders called for such purpose and the affirmative vote of the holders of a majority of the total votes eligible to be cast by the shareholders of Old HarborOne other than HarborOne Mutual Bancshares at the special meeting of shareholders called for such purpose is also are required to approve the plan of conversion.
HarborOne Mutual Bancshares has filed an application for approval of the conversion with the Massachusetts Commissioner of Banks, and New HarborOne has filed a bank holding company application with the Federal Reserve. Approval of the Massachusetts Commissioner of Banks is required before we can commence the offering, and both the approval of the Federal Reserve and final approval of the Massachusetts Commissioner of Banks is required before we can consummate the conversion and issue shares of common stock.
Share Exchange Ratio for Current Shareholders
At the completion of the conversion, each publicly held share of Old HarborOne common stock will be converted automatically into the right to receive a number of shares of New HarborOne common stock. The number of shares of common stock will be determined pursuant to the exchange ratio, which ensures that the public shareholders will own the same percentage of common stock in New HarborOne after the conversion as they held in Old HarborOne immediately prior to the conversion, exclusive of their purchase of additional shares of common stock in the offering and their receipt of cash in lieu of fractional exchange shares, after taking into account certain assets held by HarborOne Mutual Bancshares other than shares of Old HarborOne common stock. The exchange ratio will not depend on the market value of Old HarborOne common stock. The exchange ratio will be based on the percentage of Old HarborOne common stock held by the public, the assets of HarborOne Mutual Bancshares, the independent valuation of New HarborOne prepared by RP Financial, LC., and the number of shares of common stock issued in the offering. The exchange ratio is expected to range from approximately 1.3276 shares for each publicly held share of Old HarborOne at the minimum of the offering range to 1.7961 shares for each publicly held share of Old HarborOne at the maximum of the offering range.
The following table shows how the exchange ratio will adjust, based on the appraised value of New HarborOne as of February 8, 2019, assuming public shareholders of Old HarborOne own 46.9% of Old HarborOne common stock and HarborOne Mutual Bancshares has net assets of $99,000 immediately prior to the completion of the conversion. The table also shows how many shares of New HarborOne a
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hypothetical owner of Old HarborOne common stock would receive in the exchange for 100 shares of common stock owned at the completion of the conversion, depending on the number of shares issued in the offering.
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|
|
Shares of New
HarborOne to be Issued for Shares of Old HarborOne |
Total Share of
Common Stock to be Issued in Exchange and Offering |
|
Equivalent
Value of Shares Based Upon Offering Price(1) |
Equivalent
Pro Forma Tangible Book Value Per Exchanged Share(2) |
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|
Shares to be Sold
in This Offering |
|
Shares to be
Received for 100 Existing Shares(3) |
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|
Exchange Ratio | |||||||||||||||||||||||||||
|
Amount | Percent | Amount | Percent | ||||||||||||||||||||||||
Minimum |
22,950,000 | 53.08 | % | 20,288,349 | 46.92 | % | 43,238,349 | 1.3276 | $ | 13.28 | $ | 14.66 | 132 | |||||||||||||||
Midpoint |
27,000,000 | 53.08 | % | 23,868,645 | 46.92 | % | 50,868,645 | 1.5618 | $ | 15.62 | $ | 15.74 | 156 | |||||||||||||||
Maximum |
31,050,000 | 53.08 | % | 27,448,942 | 46.92 | % | 58,498,942 | 1.7961 | $ | 17.96 | $ | 16.83 | 179 |
Options to purchase shares of Old HarborOne common stock that are outstanding immediately prior to the completion of the conversion will be converted into options to purchase shares of New HarborOne common stock, with the number of shares subject to the option and the exercise price per share to be adjusted based upon the exchange ratio. The aggregate exercise price, term and vesting period of the options will remain unchanged.
The conversion of outstanding publicly held shares of Old HarborOne common stock into the right to receive shares of New HarborOne common stock will occur automatically at the completion of the conversion. As soon as practicable after the completion of the conversion, our transfer agent will send a transmittal form to each public shareholder of Old HarborOne who holds physical stock certificates. The transmittal form will contain instructions on how to surrender certificates evidencing Old HarborOne common stock in exchange for shares of New HarborOne common stock in book entry form, to be held electronically on the books of our transfer agent. New HarborOne will not issue stock certificates. We expect that a statement reflecting your ownership of shares of common stock of New HarborOne will be distributed by our transfer agent within five business days after the transfer agent receives properly executed transmittal forms, Old HarborOne stock certificates and other required documents. Shares held by public shareholders in street name (such as in a brokerage account) will be exchanged within their accounts automatically upon the completion of the conversion; no transmittal forms will be mailed relating to these shares.
No fractional shares of our common stock will be issued to any public shareholder of Old HarborOne when the conversion is completed. For each fractional share that would otherwise be issued to a shareholder who holds a stock certificate, we will pay by check an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 offering purchase price per share. Payment for fractional shares will be made as soon as practicable after the receipt by the transfer agent of the transmittal forms and the surrendered Old HarborOne stock certificates. If your shares of common stock are held in street name, you will automatically receive cash in lieu of a fractional share in your brokerage account.
You should not forward your stock certificate(s) until you have received a transmittal form, which will include forwarding instructions. After the conversion, shareholders will not receive evidence of their ownership of shares of New HarborOne common stock and will not be paid dividends on the shares of New HarborOne common stock until certificates representing shares of Old HarborOne common stock are surrendered for exchange in compliance with the terms of the transmittal form. For all other purposes, however, each certificate that represents shares of Old HarborOne common stock outstanding at the effective date of the conversion will be considered to evidence ownership of shares
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of New HarborOne common stock into which those shares have been converted by virtue of the conversion.
If a certificate for Old HarborOne common stock has been lost, stolen or destroyed, the shareholder will be required to submit necessary forms to our transfer agent and to purchase a bond from a surety company at the shareholder's expense.
All shares of New HarborOne common stock that we issue in exchange for existing shares of Old HarborOne common stock will be considered to have been issued in full satisfaction of all rights pertaining to such shares of common stock.
Continuity. The conversion will not affect the normal business of HarborOne Bank of accepting deposits and making loans. HarborOne Bank will continue to be a Massachusetts-chartered co-operative bank and will continue to be regulated by the Massachusetts Commissioner of Banks and the FDIC. After the conversion, HarborOne Bank will continue to offer existing services to depositors, borrowers and other customers under current policies. The directors of Old HarborOne serving at the time of the conversion will be the directors of New HarborOne upon the completion of the conversion.
Effect on Deposit Accounts. Pursuant to the plan of conversion, each depositor of HarborOne Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the FDIC to the same extent as before the conversion, and each such account will continue to be insured in full for amounts in excess of FDIC limits by the excess insurer of Massachusetts, co-operative bank deposits, the Share Insurance Fund of the Co-operative Central Bank. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from HarborOne Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed prior to the conversion.
Effect on Voting Rights of Depositors. At present, depositors of HarborOne Bank have limited voting rights in HarborOne Mutual Bancshares. Upon completion of the conversion, depositors will no longer have any voting rights. Upon completion of the conversion, all voting rights in HarborOne Bank will be vested in New HarborOne as the sole shareholder of HarborOne Bank. The shareholders of New HarborOne will possess exclusive voting rights with respect to New HarborOne common stock.
Tax Effects. We will receive opinions of our counsel and tax advisor with regard to federal and state income tax consequences of the conversion to the effect that the conversion will not be a taxable transaction for federal or Massachusetts income tax purposes to HarborOne Mutual Bancshares, Old HarborOne, the public shareholders of Old HarborOne (except for cash paid for fractional shares), HarborOne Bank or the eligible account holders. See "The Conversion and OfferingMaterial Income Tax Consequences."
Effect on Liquidation Rights. Each depositor in HarborOne Bank has both a deposit account in HarborOne Bank and a pro rata ownership interest in the net worth of HarborOne Mutual Bancshares based upon the deposit balance in his or her account. This ownership interest is tied to the depositor's account and has no tangible market value separate from the deposit account. This ownership interest may only be realized in the event of a complete liquidation of HarborOne Mutual Bancshares and HarborOne Bank; however, there has never been a liquidation of a solvent mutual holding company. Any depositor who opens a deposit account obtains a pro rata ownership interest in HarborOne Mutual Bancshares without any additional payment beyond the amount of the deposit. A depositor who
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reduces or closes his or her account receives a portion or all of the balance in the deposit account but nothing for his or her ownership interest in the net worth of HarborOne Mutual Bancshares, which is lost to the extent that the balance in the account is reduced or closed.
Consequently, depositors in a stock depository institution that is a subsidiary of a mutual holding company normally have no way of realizing the value of their ownership interest, which would be realizable only in the unlikely event that HarborOne Mutual Bancshares and HarborOne Bank are liquidated. If this occurs, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of HarborOne Mutual Bancshares after other claims, including claims of depositors to the amounts of their deposits, are paid.
Under the plan of conversion, eligible account holders will receive an interest a liquidation account maintained by New HarborOne in an amount equal to (i) HarborOne Mutual Bancshares' ownership interest in Old HarborOne's total shareholders' equity as of the date of the latest statement of financial condition included in this prospectus, plus (ii) the value of the net assets of HarborOne Mutual Bancshares as of the date of the latest statement of financial condition of HarborOne Mutual Bancshares prior to the consummation of the conversion (excluding its ownership of Old HarborOne). The plan of conversion also provides for the establishment of a parallel liquidation account maintained in HarborOne Bank to support New HarborOne's liquidation account in the event New HarborOne does not have sufficient assets to fund its obligations under New HarborOne's liquidation account. New HarborOne and HarborOne Bank will hold the liquidation accounts for the benefit of eligible account holders who continue to maintain deposits in HarborOne Bank after the conversion. The liquidation accounts are designed to provide payments to depositors of their liquidation interests, if any, in the end of a liquidation of (a) New HarborOne and HarborOne Bank, or (b) HarborOne Bank. See "Liquidation Rights."
Stock Pricing and Number of Shares to be Issued
The plan of conversion and Massachusetts regulations require that the aggregate purchase price of the common stock sold in the offering must be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. We have retained RP Financial, LC. to prepare an independent valuation appraisal. For its services in preparing the initial valuation, RP Financial, LC. will receive a fee of $140,000, as well as payment for reimbursable expenses and an additional $15,000 for each updated valuation prepared. We paid RP Financial, LC. a fee of $120,000 in connection with the 2016 reorganization of HarborOne Bank into a two-tier mutual holding company form of organization. We have agreed to indemnify RP Financial, LC. and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws, arising out of its services as independent appraiser, except where such liability results from RP Financial, LC.'s bad faith or negligence.
The independent valuation was prepared by RP Financial, LC. in reliance upon the information contained in this prospectus, including the Consolidated Financial Statements of Old HarborOne. RP Financial, LC. also considered the following factors, among others:
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The appraisal is based in part on an analysis of a peer group of publicly traded bank holding companies and savings and loan holding companies that RP Financial, LC. considered comparable to New HarborOne. In selecting a peer group of publicly traded institutions with relatively comparable resources, strategies and financial and other operating characteristics, RP Financial, LC considered fully-converted stock institutions traded on an exchange that were not subject to an actual or rumored acquisition and that had been in fully-converted form for at least one year. In addition, RP Financial, LC. limited the peer group companies to the following selection criteria: New England, Mid-Atlantic and Midwestern institutions with assets between $1.75 billion and $6.75 billion, tangible equity-to-assets ratios of greater than 8.0%, positive core earnings and return on average equity ratios of less than 15.0%.
The independent valuation appraisal considered the pro forma effect of the offering. Consistent with federal appraisal guidelines, the appraisal applied three primary methodologies: (i) the pro forma price-to-book value approach applied to both reported book value and tangible book value; (ii) the pro forma price-to-earnings approach applied to reported and core earnings; and (iii) the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based on the current market valuations of the peer group companies. RP Financial, LC. placed the greatest emphasis on the price-to-earnings and price-to-book approaches in estimating pro forma market value. RP Financial, LC. did not consider a pro forma price-to-assets approach to be meaningful in preparing the appraisal, as this approach is more meaningful when a company has low equity or earnings. The price-to-assets approach is less meaningful for a company like us, as we have equity in excess of regulatory capital requirements and positive reported and core earnings.
In applying each of the valuation methods, RP Financial, LC. considered adjustments to the pro forma market value based on a comparison of New HarborOne with the peer group. RP Financial, LC. made a slight upward adjustment for asset growth, a slight upward adjustment for primary market area and a slight downward adjustment for profitability growth and viability of earnings. RP Financial, LC. made no adjustments for financial condition, dividends, liquidity of the shares, marketing of the issue, management, or effect of government regulations and regulatory reform. The slight upward adjustment applied for asset growth was due to New HarborOne's stronger historical asset growth that was supported by stronger loan growth relative to the peer group's comparable growth rates, and New HarborOne's greater pro forma leverage capacity compared to the peer group. The slight upward adjustment applied for primary market area took into consideration Plymouth County's relative strong population growth and relatively low unemployment rate compared to the peer group's primary market area counties. The slight downward adjustment applied for profitability, growth and viability of earnings took into consideration New HarborOne's lower reported earnings, less favorable expense coverage and efficiency ratios, and lower core return on equity on a pro forma basis relative to the comparable peer group measures.
Included in RP Financial, LC.'s independent valuation were certain assumptions as to the pro forma earnings of New HarborOne after the conversion that were used in determining the appraised value. These assumptions included estimated expenses, an assumed after-tax rate of return of 1.83% as of December 31, 2018 on the net offering proceeds and purchases in the open market of 12.0% of the common stock issued in the offering by the stock-based benefit plan at the $10.00 per share purchase price. See "Pro Forma Data" for additional information concerning assumptions included in the independent valuation and used in preparing pro forma data. The use of different assumptions may yield different results.
The independent valuation states that as of February 8, 2019, the estimated pro forma market value of New HarborOne was $508.7 million. Based on federal regulations, this market value forms the midpoint of a range with a minimum of $432.4 million and a maximum of $585.0 million. The aggregate offering price of the shares will be equal to the valuation range multiplied by the percentage of Old HarborOne common stock owned by HarborOne Mutual Bancshares. The number of shares
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offered will be equal to the aggregate offering price of the shares divided by the price per share. Based on the valuation range, the percentage of Old HarborOne common stock owned by HarborOne Mutual Bancshares and the $10.00 price per share, the minimum of the offering range is 22,950,000 shares, the midpoint of the offering range is 27,000,000 shares and the maximum of the offering range is 31,050,000 shares.
The Board of Directors of New HarborOne reviewed the independent valuation and, in particular, considered the following:
All of these factors are set forth in the independent valuation. The Board of Directors also reviewed the methodology and the assumptions used by RP Financial, LC. in preparing the independent valuation and believes that such assumptions were reasonable. The offering range may be amended with the approval of the Federal Reserve and the Massachusetts Commissioner of Banks, if required, as a result of subsequent developments in the financial condition of Old HarborOne or HarborOne Bank or market conditions generally. In the event the independent valuation is updated to amend the pro forma market value of New HarborOne to less than $432.4 million or more than $585.0 million, the appraisal will be filed with the SEC by a post-effective amendment to New HarborOne's registration statement.
The following table presents a summary of selected pricing ratios for New HarborOne (on a pro forma basis) as of and for the twelve months ended December 31, 2018, and for the peer group companies based on earnings and other information as of and for the twelve months ended December 31, 2018, with stock prices as of February 8, 2019, as reflected in the appraisal report. Compared to the average pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 30.4% on a price-to-book value basis, a discount of 26.5% on a price-to-tangible book value basis, and a premium of 96.4% on a price-to-earnings basis. Our board of directors, in reviewing and approving the appraisal, considered the range of price-to-earnings multiples and the range of price-to-book value and price-to-tangible book value ratios at the different amounts of shares to be sold in the offering. The appraisal did not consider one valuation approach to be more important than the other. The estimated appraised value and the resulting premium/discount took into consideration the potential financial effect of the conversion and offering as well as the trading price of Old HarborOne's common stock. The closing price of Old HarborOne's common stock was $15.33 per
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share on February 8, 2019, the effective date of the appraisal, and $16.26 per share on March 4, 2019, the last trading day immediately preceding the announcement of the conversion.
|
Price-to-earnings
multiple(1) |
Price-to-book
value ratio |
Price-to-tangible
book value ratio |
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New HarborOne (on a pro forma basis, assuming completion of the conversion) |
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Maximum |
37.15x | 93.37 | % | 106.72 | % | |||||
Midpoint |
32.27x | 86.06 | % | 99.21 | % | |||||
Minimum |
27.40x | 77.76 | % | 90.58 | % | |||||
Valuation of peer group companies, all of which are fully converted (on an historical basis) |
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Averages |
16.43x | 123.57 | % | 134.98 | % | |||||
Medians |
14.62x | 118.16 | % | 127.78 | % |
The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing our shares of common stock. RP Financial, LC. did not independently verify our Consolidated Financial Statements and other information that we provided to them, nor did RP Financial, LC. independently value our assets or liabilities. The independent valuation considers HarborOne Bank as a going concern and should not be considered as an indication of the liquidation value of HarborOne Bank. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which may change from time to time, no assurance can be given that persons purchasing our common stock in the offering will thereafter be able to sell their shares at prices at or above the $10.00 price per share.
We will not decrease the minimum of the valuation range and the minimum of the offering range without a resolicitation of subscribers. The subscription price of $10.00 per share will remain fixed.
If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $585.0 million and a corresponding increase in the offering range to more than 31,050,000 shares, or a decrease in the minimum of the valuation range to less than $432.4 million and a corresponding decrease in the offering range to fewer than 22,950,000 shares, then we will promptly return with interest our passbook savings rate all funds previously delivered to us to purchase shares of common stock in the subscription and community offerings and cancel interest-bearing deposit account withdrawal authorizations and, after consulting with the Massachusetts Commissioner of Banks and the Federal Reserve, we may terminate the plan of conversion. Alternatively, we may establish a new offering range, extend the offering period and commence a resolicitation of purchasers or take other actions as permitted by the Massachusetts Commissioner of Banks and the Federal Reserve in order to complete the offering. In the event that we extend the offering and conduct a resolicitation due to a change in the independent valuation, we will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. Any single offering extension will not exceed 90 days.
An increase in the number of shares to be issued in the offering would decrease both a subscriber's ownership interest and New HarborOne's pro forma earnings and shareholders' equity on a per share basis while increasing shareholders' equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a subscriber's ownership interest and New HarborOne's pro forma earnings and shareholders' equity on a per share basis, while decreasing shareholders' equity on an aggregate basis.
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Copies of the independent valuation appraisal report of RP Financial, LC. and the detailed memorandum setting forth the method and assumptions used in the appraisal report are filed as exhibits to the documents specified under " Where You Can Find Additional Information. "
Subscription Offering and Subscription Rights
In accordance with the plan of conversion, rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of all subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and on the purchase and ownership limitations set forth in the plan of conversion and as described below under " Additional Limitations on Common Stock Purchases ."
Priority 1: Eligible Account Holders. Each depositor of HarborOne Bank (including certain former depositors of Coastway Bank) with aggregate deposits account balances of $50.00 or more (a "Qualifying Deposit") on February 28, 2018 (an "Eligible Account Holder") will receive, without payment therefor, nontransferable subscription rights to purchase, subject to the overall purchase limitations, up to the greater of $1,000,000 (100,000 shares) of our common stock, 0.10% of the total number of shares of common stock issued in the offering, or 15 times the product of the number of subscription shares offered multiplied by a fraction of which the numerator is the aggregate Qualifying Deposit account balances of the Eligible Account Holder and the denominator is the aggregate Qualifying Deposit account balances of all Eligible Account Holders. See " Additional Limitations on Common Stock Purchases ." If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, any remaining unallocated shares will be allocated to each remaining Eligible Account Holder whose subscription remains unfilled in same the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated among those Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of our shares of common stock, each Eligible Account Holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on February 28, 2018. In the event of an oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. In the event of an oversubscription, the subscription rights of Eligible Account Holders who are also our trustees, directors, officers, corporators, or any of their associates, will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to their increased deposits during the year preceding February 28, 2018.
Priority 2: Tax-Qualified Plans. Our tax-qualified employee plans, including the HarborOne Bank employee stock ownership plan and HarborOne Bank's and HarborOne Mortgage's 401(k) plans, will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan may instead elect to purchase shares in the open market following the completion of the conversion, subject to the approval of the Federal Reserve Board and the Massachusetts Commissioner of Banks. The amount of the subscription requests by the 401(k) plans will be determined by its participants, who will have the right to invest all or a portion of their 401(k) plan accounts in our common stock, subject to the maximum purchase limitations.
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Priority 3: Employees, Officers, Directors, Trustees and Corporators. To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders and tax-qualified plans, each employee, officer, director, trustee and corporator of HarborOne Bank, any subsidiary of HarborOne Bank, or HarborOne Mutual Bancshares at the time of the offering who is not eligible in the first priority or second priority categories will receive, without payment therefor, subject to the overall purchase limitations, non-transferable subscription rights to purchase up to $1,000,000 (100,000 shares) of common stock; provided, however, that the aggregate number of shares of common stock that may be purchased by employees, officers, directors, trustees and corporators in the conversion shall be limited to 25% of the total number of shares of common stock sold in the offering (including shares purchased by employees, officers, directors, trustees and corporators under this priority and under the preceding priority categories, but not including shares purchased by any employee stock ownership plan). In the event that persons in this category subscribe for more shares of stock than are available for purchase by them, shares will be allocated among such subscribing persons on an equitable basis, such as by giving weight to the period of service, compensation, position of the individual subscriber and the amount of the order.
For purposes of the subscription offering, eligible depositors of HarborOne Bank include certain former depositors of Coastway Bank, which bank was recently merged into HarborOne Bank. These depositors are deemed to have opened their account at HarborOne Bank on the dates such accounts were opened at Coastway Bank.
Expiration Date. The subscription offering will expire at 7:00 p.m., Eastern Time, on [Expiration Date], unless extended by us for up to 45 days or such additional periods with the approval of the Massachusetts Commissioner of Banks, if necessary. Subscription rights will expire whether or not each eligible depositor can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. Subscription rights which have not been exercised prior to the expiration date will become void.
We will not execute orders until at least the minimum number of shares of common stock has been sold in the offering. If at least 22,950,000 shares have not been sold in the offering by [Extension Date #1] and the Massachusetts Commissioner of Banks has not consented to an extension, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at our passbook savings rate and all deposit account withdrawal authorizations will be canceled. If an extension beyond [Extension Date #1] is granted by the Massachusetts Commissioner of Banks, we will resolicit subscribers, giving them an opportunity to confirm, change or cancel their orders. We will notify subscribers via U.S. mail of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. If a subscriber does not respond, we will cancel his or her stock order and return his or her subscription funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. Extensions may not go beyond [Expiration Date].
Persons in Non-qualified States or Foreign Countries. We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock pursuant to the plan of conversion reside. However, we are not required to offer stock in the subscription offering to any person who resides in a foreign country.
Restrictions on Transferability of Subscription Rights. Subscription rights are non-transferable. See "Restrictions on Transfer of Subscription Rights and Shares" below for more information.
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To the extent that shares of common stock remain available for purchase after satisfaction of all subscriptions of Eligible Account Holders, tax-qualified employee stock benefit plans and employees, officers, directors, trustees and corporators, we will offer shares pursuant to the plan of conversion to members of the general public in a community offering. Shares may be offered with a preference to natural persons, and trusts of natural persons, residing in our local community, consisting of the Massachusetts cities and towns of Abington, Acushnet, Attleboro, Avon, Berkley, Braintree, Bridgewater, Brockton, Canton, Carver, Cohasset, Dartmouth, Dighton, Duxbury, East Bridgewater, Easton, Fairhaven, Fall River, Foxboro, Freetown, Halifax, Hanover, Hanson, Hingham, Holbrook, Hull, Kingston, Lakeville, Mansfield, Marion, Marshfield, Mattapoisett, Middleborough, Milton, New Bedford, North Attleboro, Norton, Norwell, Plainville, Pembroke, Plymouth, Plympton, Quincy, Randolph, Raynham, Rehoboth, Rochester, Rockland, Seekonk, Scituate, Sharon, Somerset, Stoughton, Swansea, Taunton, Wareham, West Bridgewater, Westport, Weymouth and Whitman, and the Rhode Island cities and towns of Barrington, Bristol, Burrillville, Central Falls, Charlestown, Coventry, Cranston, Cumberland, East Greenwich, East Providence, Exeter, Foster, Glocester, Hopkinton, Jamestown, Johnston, Lincoln, Little Compton, Middletown, Narragansett, New Shoreham, Newport, North Kingstown, North Providence, North Smithfield, Pawtucket, Portsmouth, Providence, Richmond, Scituate, Smithfield, South Kingstown, Tiverton, Warren, Warwick, West Greenwich, West Warwick, Westerly, and Woonsocket.
Subscribers in the community offering may purchase up to $1,000,000 (100,000 shares) of common stock, subject to the overall purchase limitations. See " Additional Limitations on Common Stock Purchases ." The opportunity to purchase shares of common stock in the community offering category is subject to our right, in our sole discretion, to accept or reject any such orders in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. We have not established any set criteria for determining whether to accept or reject a purchase order in the community offering, and, accordingly, any determination to accept or reject purchase orders in the community offering will be based on the facts and circumstances known to us at the time.
If we do not have sufficient shares of common stock available to fill the orders in the community offering, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase 100 shares. Thereafter, unallocated shares will be allocated among natural persons, and trusts of natural persons, residing in the cities and towns listed above, whose orders remain unsatisfied on an equal number of shares basis per order or on such other reasonable basis as we may determine. If, after the allocation of shares to natural persons, and trusts of natural persons, residing in the cities and towns listed above, we do not have sufficient shares of common stock available to fill the orders of other members of the general public, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the number of shares subscribed for by such person, not to exceed 2.0% of the shares issued in the offering and thereafter, unallocated shares will be allocated among members of the general public whose orders remain unsatisfied on an equal number of shares basis per order or on such other reasonable basis as we may determine.
The term "residing" or "resident" as used in this prospectus means any person who occupies a dwelling within the counties listed above, has a present intent to remain within the community for a period of time and manifests the genuineness of that intent by establishing an ongoing physical presence within the community, together with an indication that this presence within the community is something other than merely transitory in nature. We may utilize deposit or loan records or other evidence provided to us to decide whether a person is a resident. In all cases, however, the determination shall be in our sole discretion.
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Expiration Date. The community offering, if any, will begin concurrently with, during or promptly after the subscription offering, and is currently expected to terminate at the same time as the subscription offering, and must terminate no more than 45 days following the subscription offering, unless extended. We may decide to extend the community offering for any reason and are not required to give purchasers notice of any such extension unless such period extends beyond [Extension Date #1]. If an extension beyond [Extension Date #1] is granted by the Federal Reserve and the Massachusetts Commissioner of Banks, we will cancel stock orders accepted in the community offering and return purchase funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. We will then resolicit persons whose orders we accept in the community offering, giving them an opportunity to place a new order. These extensions may not go beyond [Extension Date #2].
Syndicated or Firm Commitment Offering
If feasible, our board of directors may decide to offer for sale shares of common stock not subscribed for or purchased in the subscription and community offerings in a syndicated or firm commitment underwritten offering, subject to such terms, conditions and procedures as we may determine, in a manner that will achieve a wide distribution of our shares of common stock.
If a syndicated or firm commitment underwritten offering is held, Sandler O'Neill & Partners, L.P. will serve as sole book-running manager. In the event that shares of common stock are sold in a syndicated or firm commitment underwritten offering, we will pay fees of 5.0% of the aggregate amount of common stock sold in the syndicated or firm commitment underwritten offering to Sandler O'Neill & Partners, L.P. and any other broker-dealers included in the syndicated or firm commitment underwritten offering. The shares of common stock will be sold at the same price per share ($10.00 per share) that the shares are sold in the subscription offering and the community offering.
In the event of a syndicated offering, it is currently expected that investors would follow the same general procedures applicable to purchasing shares in the subscription and community offerings (the use of order forms and the submission of funds directly to New HarborOne for the payment of the purchase price of the shares ordered) except that payment must be in immediately available funds (bank checks, money orders, deposit account withdrawals from accounts at HarborOne Bank or wire transfers). See " Procedure for Purchasing Shares in Subscription and Community Offerings ." "Sweep" arrangements and delivery versus payment settlement will only be used in a syndicated offering to the extent consistent with Rules 10b-9 and 15c2-4 and then-existing guidance and interpretations thereof of the SEC regarding the conduct of "min/max" offerings.
In the event of a firm commitment underwritten offering, the proposed underwriting agreement will not be entered into with Sandler O'Neill & Partners, L.P. and New HarborOne, HarborOne Bank, Old HarborOne and HarborOne Mutual Bancshares until immediately prior to the completion of the firm commitment underwritten offering. At that time, Sandler O'Neill & Partners, L.P. and any other broker-dealers included in the firm commitment underwritten offering will represent that they have received sufficient indications of interest to complete the offering. Pursuant to the terms of the underwriting agreement, and subject to certain customary provisions and conditions to closing, upon execution of the underwriting agreement, Sandler O'Neill & Partners, L.P. and any other underwriters will be obligated to purchase all the shares subject to the firm commitment underwritten offering.
If for any reason we cannot effect a syndicated or firm commitment underwritten offering of shares of common stock not purchased in the subscription and community offerings, or in the event that there are an insignificant number of shares remaining unsold after such offerings, we will try to make other arrangements for the sale of unsubscribed shares. The Federal Reserve, the Massachusetts Commissioner of Banks and the Financial Industry Regulatory Authority, or "FINRA," must approve any such arrangements.
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Additional Limitations on Common Stock Purchases
The plan of conversion includes the following additional limitations on the number of shares of common stock that may be purchased in the offering:
Depending upon market or financial conditions, our board of directors, with regulatory approval and without further approval of the members of HarborOne Mutual Bancshares (depositors of HarborOne Bank), may decrease or increase the purchase limitations. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be given the opportunity to increase their orders up to the then applicable limit. The effect of this type of resolicitation will be an increase in the number of shares of common stock owned by persons who choose to increase their orders. In the event that the maximum purchase limitation is increased to 5% of the shares sold in the offering, such limitation may be further increased to 9.99%, provided that orders for shares of common stock exceeding 5% of the shares sold in the offering shall not exceed in the aggregate 10% of the total shares sold in the offering.
The term "associate" of a person means:
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The following relatives of directors and officers will be considered "associates" of these individuals regardless of whether they share a household with the director or officer: any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law. This also includes adoptive relationships.
The term "acting in concert" means persons seeking to combine or pool their voting or other interests in the securities of an issuer for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. When persons act together for such purpose, their group is deemed to have acquired their stock. The determination of whether a group is acting in concert shall be made solely by the board of trustees of HarborOne Mutual Bancshares or officers delegated by such Board and may be based on any evidence upon which the such Board or delegates choose to rely, including, without limitation, joint account relationships or the fact that such persons have filed joint Schedules 13D with the SEC with respect to other companies; provided, however, that the determination of whether a group is acting in concert remains subject to review by the Massachusetts Commissioner of Banks. Persons living at the same address, whether or not related, will be deemed to be acting in concert unless otherwise determined by the board of trustees or such delegates. Directors and trustees of HarborOne Mutual Bancshares, Old HarborOne, New HarborOne and HarborOne Bank are not treated as associates of each other solely because of their membership on the boards of directors or trustees.
Common stock purchased in the offering will be freely transferable except for shares purchased by directors and certain officers of New HarborOne or HarborOne Bank and except as described below. Any purchases made by any associate of New HarborOne or HarborOne Bank for the explicit purpose of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution. In addition, under Financial Industry Regulatory Authority guidelines, members of the Financial Industry Regulatory Authority and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. For a further discussion of limitations on purchases of our shares of common stock at the time of conversion and thereafter, see " Certain Restrictions on Purchase or Transfer of Our Shares after Conversion " and " Restrictions on Acquisition of New HarborOne ."
Plan of Distribution; Selling Agent and Underwriter Compensation
Subscription and Community Offerings. To assist in the marketing of our shares of common stock in the subscription and community offerings, we have retained Sandler O'Neill & Partners, L.P., which is a broker-dealer registered with FINRA. Sandler O'Neill & Partners, L.P. will assist us on a best efforts basis in the subscription and community offerings by:
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For these services, Sandler O'Neill & Partners, L.P. will receive a fee of 0.75% of the aggregate purchase price of all shares of common stock sold in the subscription offering and 1.50% of the aggregate purchase price of all shares of common stock sold in the community offering. No fee will be payable to Sandler O'Neill & Partners, L.P. with respect to shares purchased by directors, officers, employees or their immediate families and their personal trusts, shares purchased by our employee benefit plans or trusts, and no sales fee will be payable with respect to the exchange shares.
Syndicated or Firm Commitment Underwritten Offering. In the event that shares of common stock are sold in a syndicated or firm commitment underwritten offering, we will pay fees of 5.0% of the aggregate dollar amount of common stock sold in the syndicated offering or firm commitment underwritten offering to Sandler O'Neill & Partners, L.P. and any other broker-dealers included in the syndicated offering or firm commitment underwritten offering.
Expenses. Sandler O'Neill & Partners, L.P. also will be reimbursed for reasonable expenses, including legal fees, in an amount not to exceed $110,000, which will automatically be increased to $150,000 if a syndicated or firm commitment underwritten offering is undertaken. If the plan of conversion is terminated or if Sandler O'Neill & Partners, L.P.'s engagement is terminated in accordance with the provisions of the agency agreement, Sandler O'Neill & Partners, L.P. will only receive reimbursement of its reasonable out-of-pocket expenses and will return any amounts paid or advanced by us in excess of these amounts.
We have also engaged Sandler O'Neill & Partners, L.P. as records agent in connection with the conversion and the subscription and community offerings. In its role as records agent, Sandler O'Neill & Partners, L.P., will assist us in the offering by:
Sandler O'Neill & Partners, L.P. will receive fees of $90,000 for these services. Sandler O'Neill & Partners, L.P. also will be reimbursed for reasonable expenses in an amount not to exceed $50,000.
We will indemnify Sandler O'Neill & Partners, L.P. against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering materials for the common stock, including liabilities under the Securities Act of 1933, as amended, as well as certain other claims and litigation arising out of Sandler O'Neill & Partners, L.P.'s engagement with respect to the conversion.
Solicitation of Offers by Officers and Directors
Some of our directors and executive officers may participate in the solicitation of offers to purchase common stock in the subscription and community offerings. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other regular employees of HarborOne Bank may assist in the offering, but only in ministerial capacities, and may provide clerical work in effecting a sales transaction. No offers or sales may be made by tellers or at
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the teller counters. Investment-related questions of prospective purchasers will be directed to executive officers or registered representatives of Sandler O'Neill & Partners, L.P. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with their participation in the offering.
Procedure for Purchasing Shares in Subscription and Community Offerings
Expiration Date. The subscription and community offerings will expire at 7:00 p.m., Eastern Time, on [Expiration Date], unless we extend one or both for up to 45 days, with the approval of the Massachusetts Commissioner of Banks, if required. This extension may be approved by us, in our sole discretion, without notice to purchasers in the offering. Any extension of the subscription and/or community offerings beyond [Extension Date #1] would require the Massachusetts Commissioner of Banks' approval. If the offering is so extended, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest at our passbook savings rate or cancel your deposit account withdrawal authorization. If the offering range is decreased below the minimum of the offering range or is increased above the maximum of the offering range, all subscribers' stock orders will be cancelled, their deposit account withdrawal authorizations will be cancelled, and funds submitted to us will be returned promptly, with interest at our passbook savings rate for funds received in the subscription and community offerings. We will then resolicit the subscribers, giving them an opportunity to place a new stock order for a period of time.
We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal authorizations and promptly return all funds submitted, with interest at our passbook savings rate from the date of receipt as described above.
Use of Order Forms in the Subscription and Community Offerings. In order to purchase shares of common stock in the subscription and community offerings, you must properly complete an original stock order form and remit full payment. We are not required to accept orders submitted on photocopied or facsimiled order forms. All order forms must be received (not postmarked) prior to 7:00 p.m., Eastern Time, on [Expiration Date]. We are not required to accept order forms that are not received by that time, are not signed or are otherwise executed defectively or are received without full payment or without appropriate interest-bearing deposit account withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed order forms, and we have the right to waive or permit the correction of incomplete or improperly executed order forms. We do not represent, however, that we will do so and we have no affirmative duty to notify any prospective subscriber of any such defects. You may submit your order form and payment by mail using the stock order return envelope provided, or by overnight delivery to our Stock Information Center, which will be located at [location]. You may also hand-deliver stock order forms to the Stock Information Center. Hand-delivered stock order forms will only be accepted at this location. We will not accept stock order forms at our banking offices. Please do not mail stock order forms to HarborOne Bank's offices.
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Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering. If you are ordering shares in the subscription offering, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of conversion. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order forms will be final.
By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by HarborOne Bank, the FDIC, the federal government or the Share Insurance Fund of the Co-operative Central Bank, and that you received a copy of this prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Payment for Shares. Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares in the subscription and community offerings may be made by:
Appropriate means for designating withdrawals from interest-bearing deposit accounts at HarborOne Bank are provided on the order form. The funds designated must be available in the account(s) at the time the order form is received. A hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the contractual rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest at the statement savings rate subsequent to the withdrawal. In the case of payments made by personal check, these funds must be available in the account(s). Checks and money orders received in the subscription and community offerings will be immediately cashed and placed in a segregated account at HarborOne Bank and will earn interest at our passbook savings rate from the date payment is processed until the offering is completed or terminated.
You may not remit cash, HarborOne Bank line of credit checks or any type of third-party checks (including those payable to you and endorsed over to New HarborOne). You may not designate on your stock order form direct withdrawal from a HarborOne Bank retirement account. See " Using Individual Retirement Account Funds ." If permitted by the Massachusetts Commissioner of Banks and the Federal Reserve, in the event we resolicit large purchasers, as described above in " Additional Limitations on Common Stock Purchases ," such purchasers who wish to increase their purchases will not be able to use personal checks to pay for the additional shares, but instead must pay for the additional shares using immediately available funds. No wire transfer will be accepted without our prior approval.
Once we receive your executed stock order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by [Extension Date]. If the subscription and community offerings are extended past [Extension Date], all subscribers will be notified and given an
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opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest at our passbook savings rate or cancel your deposit account withdrawal authorization. We may resolicit purchasers for a specified period of time.
Regulations prohibit HarborOne Bank from lending funds or extending credit to any persons to purchase shares of common stock in the offering.
We shall have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for the shares of common stock for which they subscribe in the community offering at any time prior to 48 hours before the completion of the conversion. This payment may be made by wire transfer.
If our employee stock ownership plan purchases shares in the offering, it will not be required to pay for such shares until completion of the offering, provided that there is a loan commitment from an unrelated financial institution, New HarborOne to lend to the employee stock ownership plan the necessary amount to fund the purchase. In addition, if our 401(k) plan purchases shares in the offering, it will not be required to pay for such shares until completion of the offering.
Using Individual Retirement Account Funds. If you are interested in using funds in your individual retirement account or other retirement account to purchase shares of common stock, you must do so through a self-directed retirement account. By regulation, HarborOne Bank's retirement accounts are not self-directed, so they cannot be invested in our shares of common stock. Therefore, if you wish to use funds that are currently in a HarborOne Bank retirement account, you may not designate on the order form that you wish funds to be withdrawn from the account for the purchase of common stock. The funds you wish to use for the purchase of common stock will instead have to be transferred to an independent trustee or custodian, such as a brokerage firm, offering self-directed retirement accounts. The purchase must be made through that account. If you do not have such an account, you will need to establish one before placing a stock order. An annual administrative fee may be payable to the independent trustee or custodian. There will be no early withdrawal or Internal Revenue Service interest penalties for these transfers. Individuals interested in using funds in an individual retirement account or any other retirement account, whether held at HarborOne Bank or elsewhere , to purchase shares of common stock should contact our Stock Information Center for guidance as soon as possible, preferably at least two weeks prior to the [Expiration Date] offering deadline. Processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.
Delivery of Shares of Common Stock. All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering or the next business day. Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they ordered, even though the shares of common stock will have begun trading. Your ability to sell the shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.
Other Restrictions. Notwithstanding any other provision of the plan of conversion, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state "blue sky" regulations, or would violate regulations or policies of the Financial Industry Regulatory Authority, particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or
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her purchase and we may refuse to honor any purchase order if an opinion is not timely furnished. In addition, we are not required to offer shares of common stock to any person who resides in a foreign country, or in a State of the United States with respect to which any of the following apply:
Restrictions on Transfer of Subscription Rights and Shares
Applicable banking regulations prohibit any person with subscription rights, including the Eligible Account Holders and employees, officers and directors, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the plan of conversion or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for his or her account. When registering your stock purchase on the order form, you cannot add the name(s) of others for joint stock registration unless they are also named on the qualifying deposit account, and you cannot delete names of others except in the case of certain orders placed through an IRA, Keogh, 401(k) or similar plan, and except in the event of the death of a named eligible depositor. Doing so may jeopardize your subscription rights. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise prior to completion of the offering.
We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.
If you have any questions regarding the conversion or the offering, please call our Stock Information Center at [phone number], Monday through Friday between [time] a.m. and [time] p.m., Eastern Time. You may also visit our Stock Information Center, located at [location], which is open Monday through Friday between [time] a.m. and [time] p.m. The Stock Information Center will be closed on weekends and bank holidays.
Liquidation prior to the conversion. In the unlikely event that HarborOne Mutual Bancshares is liquidated prior to the conversion, all claims of creditors of HarborOne Mutual Bancshares would be paid first. Thereafter, if there were any assets of HarborOne Mutual Bancshares remaining, these assets would first be distributed to certain depositors of HarborOne Bank based on such depositors' liquidation rights. The amount received by such depositors would be equal to their pro rata interest in the remaining value of HarborOne Mutual Bancshares after claims of creditors, based on the relative size of their deposit accounts.
Liquidation following the conversion. The plan of conversion provides for the establishment, upon the completion of the conversion, of a liquidation account by New HarborOne for the benefit of
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Eligible Account Holders in an amount equal to (i) HarborOne Mutual Bancshares' ownership interest in Old HarborOne's total shareholders' equity as of the date of the latest statement of financial condition contained in this prospectus plus (ii) the value of the net assets of HarborOne Mutual Bancshares as of the date of the latest statement of financial condition of HarborOne Mutual Bancshares prior to the consummation of the conversion (excluding its ownership of Old HarborOne). The plan of conversion also provides for the establishment of a parallel liquidation account in HarborOne Bank to support the New HarborOne liquidation account in the event New HarborOne does not have sufficient assets to fund its obligations under the New HarborOne liquidation account.
In the unlikely event that HarborOne Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first. However, except with respect to the liquidation account to be established in Old HarborOne, a depositor's claim would be solely for the principal amount of his or her deposit accounts plus accrued interest. Depositors generally would not have an interest in the value of the assets of HarborOne Bank or New HarborOne above that amount.
The liquidation account established by New HarborOne is designed to provide qualifying depositors a liquidation interest (exchanged for the liquidation interests such persons had in HarborOne Mutual Bancshares) after the conversion in the event of a complete liquidation of New HarborOne and HarborOne Bank or a liquidation solely of HarborOne Bank. Specifically, in the unlikely event that either (i) HarborOne Bank or (ii) New HarborOne and HarborOne Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by a distribution to depositors as of February 28, 2018 of their interests in the liquidation account maintained by New HarborOne. Also, in a complete liquidation of both entities, or of HarborOne Bank only, when New HarborOne has insufficient assets (other than the stock of HarborOne Bank) to fund the liquidation account distribution owed to Eligible Account Holders and HarborOne Bank has positive net worth, then HarborOne Bank shall immediately make a distribution to fund New HarborOne's remaining obligations under the liquidation account. In no event will any Eligible Account Holder be entitled to a distribution that exceeds such holder's interest in the liquidation account maintained by New HarborOne as adjusted from time to time pursuant to the plan of conversion and federal regulations. If New HarborOne is completely liquidated or sold apart from a sale or liquidation of HarborOne Bank, then the New HarborOne liquidation account will cease to exist and Eligible Account Holders will receive an equivalent interest in the HarborOne Bank liquidation account, subject to the same rights and terms as the New HarborOne liquidation account.
Pursuant to the plan of conversion, after two years from the date of conversion and upon the written request of the Federal Reserve and, if necessary the Division of Banks of the Commonwealth of Massachusetts, New HarborOne will transfer the liquidation account and the depositors' interests in such account to HarborOne Bank and the liquidation account shall thereupon be subsumed into the liquidation account of HarborOne Bank.
Under the rules and regulations of the Federal Reserve, a post-conversion merger, consolidation, or similar combination or transaction with another depository institution or depository institution holding company in which New HarborOne or HarborOne Bank is not the surviving institution, would not be considered a liquidation. In such a transaction, the liquidation account would be assumed by the surviving institution or company.
Each Eligible Account Holder would have an initial pro-rata interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50.00 or more held in HarborOne Bank on February 28, 2018 equal to the proportion that the balance of each Eligible Account Holder's deposit account on February 28, 2018 bears to the balance of all deposit accounts of Eligible Account Holders in HarborOne Bank on such date.
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If, however, on any December 31 annual closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account on February 28, 2018, or any other annual closing date, then the liquidation account as well as the interest in the liquidation account relating to such deposit account would be reduced from time to time by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositor. Any assets remaining after the above liquidation rights of Eligible Account Holders are satisfied would be available for distribution to shareholders.
Material Income Tax Consequences
Completion of the conversion is subject to the prior receipt of an opinion of counsel with respect to the federal and state income tax consequences of the conversion to HarborOne Mutual Bancshares, Old HarborOne, New HarborOne, HarborOne Bank, Eligible Account Holders and employees, officers, directors, trustees and corporators. Unlike private letter rulings, an opinion of counsel or tax advisor is not binding on the Internal Revenue Service or any state taxing authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that New HarborOne or HarborOne Bank would prevail in a judicial proceeding.
HarborOne Mutual Bancshares, Old HarborOne, HarborOne Bank and New HarborOne have received an opinion of counsel, Goodwin Procter LLP, regarding all of the material federal income tax consequences of the conversion, which includes the following:
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The tax opinion also concludes that the Massachusetts state income tax consequences are consistent with the federal income tax consequences.
We believe that the tax opinion summarized above addresses all material federal and Massachusetts income tax consequences that are generally applicable to HarborOne Mutual Bancshares, Old HarborOne, HarborOne Bank, New HarborOne and persons receiving subscription rights and shareholders of Old HarborOne. With respect to items 16 and 17 above, Goodwin Procter LLP noted that the subscription rights will be granted at no cost to the recipients, are legally
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non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of common stock at the same price to be paid by members of the general public in any community offering. The firm further noted that RP Financial, LC. has issued a letter that the subscription rights have no ascertainable market value. The firm also noted that the Internal Revenue Service has not in the past concluded that subscription rights have value. Based on the foregoing, Goodwin Procter LLP has assumed for purposes of its opinion that the nontransferable subscription rights to purchase shares of common stock have no value. However, the issue of whether or not the nontransferable subscription rights have value is based on all the facts and circumstances. If the subscription rights granted to Eligible Account Holders, officers, directors, trustees and corporators are deemed to have an ascertainable value, receipt of these rights could result in taxable gain to those Eligible Account Holders, officers, directors, trustees and corporators who exercise the subscription rights in an amount equal to the ascertainable value, and we could recognize gain on a distribution. Eligible Account Holders, officers, directors, trustees and corporators are encouraged to consult with their own tax advisors as to the tax consequences in the event that subscription rights are deemed to have an ascertainable value.
The opinion as to item 8 above is based on the position that: (i) no holder of an interest in a liquidation account has ever received any payment attributable to a liquidation account; (ii) the interests in the liquidation accounts are not transferable; (iii) the amounts due under the liquidation account with respect to each Eligible Account Holder will be reduced as their deposits in HarborOne Bank are reduced; and (iv) the HarborOne Bank liquidation account payment obligation arises only if New HarborOne lacks sufficient assets to fund the liquidation account. In addition, we have represented that we expect that New HarborOne will at all times be able to satisfy any liquidation account payment obligations and that the HarborOne Bank liquidation account is expected to provide no current or potential value to the Eligible Account Holders. Based on the foregoing, Goodwin Procter LLP has assumed for purposes of its opinion that such rights in the HarborOne Bank liquidation account have no value. If such rights are subsequently found to have an economic value, income may be recognized by each Eligible Account Holder in the amount of such fair market value as of the date of the conversion.
The opinion of Goodwin Procter LLP, unlike a letter ruling issued by the Internal Revenue Service or the Massachusetts Department of Revenue, is not binding on the Internal Revenue Service or the Massachusetts Department of Revenue, and the conclusions expressed therein may be challenged at a future date. The Internal Revenue Service has issued favorable rulings for transactions substantially similar to the proposed conversion and stock offering, but any such ruling may not be cited as precedent by any taxpayer other than the taxpayer to whom the ruling is addressed. We do not plan to apply for a letter ruling from either the Internal Revenue Service or the Massachusetts Department of Revenue concerning the transactions described herein.
The tax opinion has been filed with the SEC as an exhibit to New HarborOne's registration statement.
Certain Restrictions on Purchase or Transfer of Our Shares after Conversion
All shares of common stock purchased in the offering by a director, trustee, corporator or certain officers of HarborOne Bank, Old HarborOne, New HarborOne or HarborOne Mutual Bancshares generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death or substantial disability of the individual. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split, or otherwise, with respect to the restricted stock will be
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similarly restricted. The directors and executive officers of New HarborOne also will be restricted by the insider trading rules under the Securities Exchange Act of 1934.
Purchases of shares of our common stock by any of our directors, certain officers and their associates, during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the SEC, except with the prior written approval of the Federal Reserve and the Massachusetts Commissioner of Banks. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to purchases of our common stock by our stock option plan or any of our, or HarborOne Bank's tax-qualified employee stock benefit plans or non-tax-qualified employee stock benefit plans, including any restricted stock plans.
Federal regulations prohibit New HarborOne from repurchasing its shares of common stock during the first year following conversion unless compelling business reasons exist for such repurchases, or to fund management recognition plans that have been ratified by shareholders (with regulatory approval) or tax-qualified employee stock benefit plans. In addition, the repurchase of shares of common stock is subject to Federal Reserve policy related to repurchases of shares by financial institution holding companies. Massachusetts regulations prohibit New HarborOne from repurchasing its shares of our common stock during the first three years following the completion of the conversion except to fund tax-qualified or nontax-qualified employee stock benefit plans, or except in amounts not greater than 5% of our outstanding shares of common stock where compelling and valid business reasons are established to the satisfaction of the Massachusetts Commissioner of Banks.
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COMPARISON OF SHAREHOLDERS' RIGHTS FOR EXISTING SHAREHOLDERS OF HARBORONE BANCORP, INC.
General. As a result of the conversion and exchange, existing shareholders of Old HarborOne will become shareholders of New HarborOne. Old HarborOne and New HarborOne are both organized under the laws of Massachusetts. Except as noted below, the rights of shareholders of Old HarborOne and shareholders of New HarborOne are substantially identical. See " Where You Can Find Additional Information " for procedures for obtaining a copy of Old HarborOne's articles of organization and bylaws.
Authorized Capital Stock. The authorized capital stock of Old HarborOne consists of 90,000,000 shares of common stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, no par value per share.
The authorized capital stock of New HarborOne consists of 150,000,000 shares of common stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, no par value per share.
Issuance of Capital Stock. Pursuant to applicable laws and regulations, HarborOne Mutual Bancshares is required to own not less than a majority of the outstanding shares of Old HarborOne common stock. HarborOne Mutual Bancshares will no longer exist following consummation of the conversion.
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RESTRICTIONS ON ACQUISITION OF NEW HARBORONE
The following discussion is a general summary of the material provisions of Massachusetts law, New HarborOne's articles of organization and bylaws, and certain other regulatory provisions that may be deemed to have an "anti-takeover" effect. The following description is not intended to be a complete description of the document or regulatory provision in question. New HarborOne's articles of organization and bylaws are included as part of New HarborOne's application to conduct an offering filed with the Federal Reserve and New HarborOne's registration statement filed with the SEC. See "Where You Can Find Additional Information."
Articles of Organization and Bylaws of New HarborOne
New HarborOne's articles of organization and bylaws contain a number of provisions, relating to corporate governance and rights of shareholders that might discourage future takeover attempts. As a result, shareholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the board of directors or management of New HarborOne more difficult. The following description is a summary of the provisions of the articles of organization and bylaws. See the section of this prospectus entitled " Where You Can Find Additional Information " as to how to review a copy of these documents.
Classified Board. New HarborOne's articles of organization provide that the board of directors will be divided into three classes, with directors in each class elected for three-year staggered terms. Thus, it would take two annual elections to replace a majority of New HarborOne's board. New HarborOne's articles of organization provide that the size of the board of directors may be increased or decreased only by the board.
Vacancies; Removal. The articles of organization provide that any vacancy occurring in the board of directors, including a vacancy created by an increase in the number of directors, shall be filled for the remainder of the unexpired term by a majority vote of the directors then in office. The articles of organization also provide that a director may only be removed for cause by the affirmative vote of either a majority of the board of directors of New HarborOne or a majority of the shares eligible to vote.
No Cumulative Voting. Under the Massachusetts Business Corporation Act, the right to vote cumulatively does not exist unless the articles of organization or bylaws specifically authorize cumulative voting. Our articles of organization and bylaws do not authorize cumulative voting and therefore our shareholders will not have cumulative voting rights in the election of directors. No cumulative voting means that directors will be elected by a plurality of the votes cast at annual meetings.
Restrictions on Call of Special Meetings. The articles of organization provide that a special meeting of shareholders may be called by the board of directors of New HarborOne, the chairman of the board of directors, the president, or by the secretary or any other officer upon written application of one or more shareholders holding at least 66 2 / 3 of the capital stock entitled to vote at the meeting.
Advance Notice. The articles of organization and bylaws impose notice and information requirements in connection with the nomination by shareholders of candidates for election to the board of directors or the proposal by shareholders of business to be acted upon at an annual meeting of shareholders.
Authorization of Preferred Stock. The articles of organization authorize 1,000,000 shares of serial preferred stock, no par value per share. New HarborOne is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the board of directors is authorized to fix the designations, and relative preferences, limitations, voting rights, if any, including
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without limitation, offering rights of such shares (which could be multiple or as a separate class). In the event of a proposed merger, tender offer or other attempt to gain control of New HarborOne that the board of directors does not approve, it might be possible for the board of directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of that transaction. An effect of the possible issuance of preferred stock, therefore, may be to deter a future attempt to gain control of New HarborOne. The board of directors has no present plan or intention to issue any preferred stock.
Restrictions on Voting of Shares. Any person who beneficially owns more than 10% of the then-outstanding shares of New HarborOne's common stock will not be entitled or permitted to vote any shares of common stock held in excess of the 10% limit during the three-year period following the conversion and offering. Thereafter, shares of common stock in excess of the 10% limit will be entitled to cast 1/100 th of a vote per share.
Amendment to Articles of Organization and Bylaws. The articles of organization may be amended by the affirmative vote of two-thirds of the total votes eligible to be cast by shareholders, voting together as a single class; provided, however, that if at least two-thirds of the directors recommend approval of the amendment, then such amendment shall require the affirmative vote of a majority of the total votes eligible to be cast by shareholders, voting together as a single class.
The bylaws may be amended by the board of directors or by the affirmative vote of two-thirds of the total votes eligible to be cast by shareholders at a duly constituted meeting; provided, however, that if at least two-thirds of the directors recommend approval of the amendment, then such amendment shall require the affirmative vote of a majority of the total votes eligible to be cast by shareholders at a duly constituted meeting.
These provisions could have the effect of discouraging a tender offer or other takeover attempt where the ability to make fundamental changes through bylaw amendments is an important element of the takeover strategy of the acquirer.
Anti-Takeover Effects of New HarborOne's Articles of Organization, Bylaws and Benefit Plans Adopted in the Conversion
The provisions described above are intended to reduce New HarborOne's vulnerability to takeover attempts and other transactions which have not been negotiated with and approved by members of its board of directors. The provisions of the employment and change in control agreements, severance pay plan, supplemental executive retirement plan, benefit restoration plan, directors' deferred compensation plan and the equity incentive plan to be established may also discourage takeover attempts by increasing the costs to be incurred by HarborOne Bank and New HarborOne in the event of a takeover. See the section of this prospectus entitled " Executive and Director CompensationEmployment and Change in Control Agreements and Severance Arrangements " and " Nonqualified Retirement Benefits ."
New HarborOne's board of directors believes that the provisions of the articles of organization, bylaws and benefit plans to be established are in the best interests of New HarborOne and its shareholders. An unsolicited non-negotiated proposal can seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the board of directors believes it is in the best interests of New HarborOne and its shareholders to encourage potential acquirers to negotiate directly with management and that these provisions will encourage such negotiations and discourage non-negotiated takeover attempts. It is also the board of directors' view that these provisions should not discourage persons from proposing a merger or other transaction at a price that reflects the true value of New HarborOne and that otherwise is in the best interests of all shareholders.
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DESCRIPTION OF CAPITAL STOCK OF NEW HARBORONE FOLLOWING THE CONVERSION
New HarborOne is authorized to issue 150,000,000 shares of common stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, no par value per share. New HarborOne currently expects to issue in the offering up to 31,050,000 shares of common stock and exchange up to 27,488,518 shares of common stock, at the maximum of the offering range. New HarborOne will not issue shares of preferred stock in the conversion. Each share of New HarborOne common stock will have the same relative rights as, and will be identical in all respects to, each other share of common stock.
The shares of common stock of New HarborOne will represent non-withdrawable capital, will not be an account of an insurable type, and will not be insured by the FDIC or any other government agency.
Dividends. New HarborOne may pay dividends on its common stock if, after giving effect to the distribution, it would be able to pay its indebtedness as the indebtedness comes due in the usual course of business and its total assets exceed the sum of its liabilities and the amount needed, if New HarborOne were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of any holders of capital stock who have a preference in the event of dissolution. In addition, New HarborOne would be restricted from paying dividends that would reduce its assets below its then-adjusted liquidation account. The holders of common stock of New HarborOne will be entitled to receive and share equally in dividends as may be declared by our board of directors out of funds legally available therefor. If New HarborOne issues shares of preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends.
Voting Rights. Upon completion of the offering and exchange, the holders of common stock of New HarborOne will have exclusive voting rights in New HarborOne. They will elect New HarborOne's board of directors and act on other matters as are required to be presented to them under Massachusetts law or as are otherwise presented to them by the board of directors. Generally, each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Any person who beneficially owns more than 10% of the then-outstanding shares of New HarborOne's common stock, however, will not be entitled or permitted to vote any shares of common stock held in excess of the 10% limit during the three-year period following the exchange; thereafter, shares of common stock in excess of the 10% limit will be entitled to cast 1/100 th of a vote per share. If New HarborOne issues shares of preferred stock, holders of the preferred stock may also possess voting rights. Amendments to the articles of organization require a two-thirds shareholder vote; provided, however, that if at least two-thirds of the directors recommend approval of the amendment, then such amendment shall require the affirmative vote of a majority of the total votes eligible to be cast by shareholders, voting together as a single class.
As a stock co-operative bank, corporate powers and control of HarborOne Bank are vested in its board of directors, who elect the officers of HarborOne Bank and who fill any vacancies on the board of directors. Voting rights of HarborOne Bank are vested exclusively in the owners of the shares of capital stock of HarborOne Bank, which will be New HarborOne. Shares of HarborOne Bank's stock will be voted at the direction of New HarborOne's board of directors. Consequently, the holders of the common stock of New HarborOne will not have direct control of HarborOne Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of HarborOne Bank, New HarborOne, as the holder of 100.0% of HarborOne Bank's capital stock, would be entitled to receive all assets of HarborOne Bank available for distribution, after payment or provision for payment of all debts and liabilities of HarborOne Bank, including all deposit accounts and accrued interest thereon,
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and after distribution of the balance in the liquidation account to eligible account holders. In the event of liquidation, dissolution or winding up of New HarborOne, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of New HarborOne available for distribution, and eligible account holders will be treated as surrendering their rights to the New HarborOne liquidation account and receiving an equivalent interest in the HarborOne Bank liquidation account. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of New HarborOne will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock cannot be redeemed.
Fully Paid and Nonassessable. Upon payment of the subscription price for the common stock, in accordance with the plan of conversion, all of the shares of common stock will be duly authorized, fully paid and nonassessable.
None of the shares of New HarborOne's authorized preferred stock will be issued as part of the offering or the conversion. Preferred stock may be issued with preferences and designations as our board of directors may from time to time determine. Our board of directors may, without shareholder approval, issue shares of preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and that could assist management in impeding an unfriendly takeover or attempted change in control.
The transfer agent and registrar for New HarborOne's common stock is Continental Stock Transfer & Trust Company.
Old HarborOne's common stock is currently traded on the Nasdaq Global Select Market under the trading symbol "HONE," and we expect the shares of New HarborOne common stock will also trade on the Nasdaq Global Select Market under the symbol "HONE."
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The validity of the shares of New HarborOne common stock to be issued in this offering and the federal income tax consequences of the conversion have been passed upon by Goodwin Procter LLP, Boston, Massachusetts. Certain legal matters relating to this offering will be passed upon for Sandler O'Neill & Partners, L.P. by Luse Gorman, PC, Washington, DC.
The Consolidated Financial Statements of Old HarborOne and subsidiaries as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018, have been included herein and in the registration statement in reliance upon the report of Wolf & Company, P.C., independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
RP Financial, LC. has consented to the publication herein of the summary of its report setting forth its opinion as to the estimated pro forma market value of the shares of common stock upon completion of the conversion and offering and its letters with respect to subscription rights and the liquidation accounts.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the Securities Act of 1933 with respect to the shares of common stock offered hereby. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement. For further information pertaining to us and our common stock, you should refer to the registration statement and to its exhibits, including the appraisal report. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including us. You can read our SEC filings, including the registration statement and its exhibits, at the SEC's website. We also maintain a website at www.harborone.com. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions of the material terms of, and should be read in conjunction with, such contract or document.
HarborOne Mutual Bancshares has filed an application for approval of the conversion with the Massachusetts Commissioner of Banks, and New HarborOne has filed a bank holding company application with the Federal Reserve. The application for conversion filed with the Massachusetts Commissioner of Banks may be inspected, without charge, at the offices of the Massachusetts Division of Banks, 1000 Washington Street, 10th Floor, Boston, Massachusetts. To obtain a copy of the application filed with the Federal Reserve, you may contact Scott Chu, Supervisory Analyst, of the Federal Reserve Bank of Boston, at 617-933-3088.
The plan of conversion is available, upon request, at each of HarborOne Bank's offices.
In connection with the offering, New HarborOne will register its common stock under Section 12(b) of the Securities Exchange Act of 1934 and, upon such registration, New HarborOne and the holders of its common stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on common stock purchases and sales by directors, officers and greater than 10% shareholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934. Under the plan of conversion, we have undertaken that it will not terminate such registration for a period of at least three years following the offering.
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Index to Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of HarborOne Bancorp, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HarborOne Bancorp, Inc. (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Wolf & Company, P.C.
We
have served as the Company's auditor since 2008.
Boston, Massachusetts
March 11, 2019
F-2
HarborOne Bancorp, Inc.
Consolidated Balance Sheets
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
(in thousands, except share data)
|
2018 | 2017 | |||||
Assets |
|||||||
Cash and due from banks |
$ | 27,686 | $ | 16,348 | |||
Short-term investments |
77,835 | 64,443 | |||||
| | | | | | | |
Total cash and cash equivalents |
105,521 | 80,791 | |||||
Securities available for sale, at fair value |
209,293 |
170,853 |
|||||
Securities held to maturity, at amortized cost |
44,688 | 46,869 | |||||
Federal Home Loan Bank stock, at cost |
24,969 | 15,532 | |||||
Loans held for sale, at fair value |
42,107 | 59,460 | |||||
Loans |
2,985,507 | 2,194,967 | |||||
Less: Allowance for loan losses |
(20,655 | ) | (18,489 | ) | |||
| | | | | | | |
Net loans |
2,964,852 | 2,176,478 | |||||
Accrued interest receivable |
9,996 | 6,545 | |||||
Other real estate owned and repossessed assets |
749 | 762 | |||||
Mortgage servicing rights, at fair value |
22,217 | 21,092 | |||||
Property and equipment, net |
57,045 | 24,487 | |||||
Retirement plan annuities |
12,931 | 12,498 | |||||
Bank-owned life insurance |
44,635 | 40,446 | |||||
Deferred income taxes, net |
6,727 | 843 | |||||
Goodwill and other intangible assets |
78,467 | 13,497 | |||||
Other assets |
28,924 | 14,767 | |||||
| | | | | | | |
Total assets |
$ | 3,653,121 | $ | 2,684,920 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liabilities and Stockholders' Equity |
|||||||
Deposits: |
|||||||
Noninterest-bearing deposits |
$ | 412,906 | $ | 264,453 | |||
Interest-bearing deposits |
2,194,647 | 1,675,795 | |||||
Brokered deposits |
77,508 | 73,490 | |||||
| | | | | | | |
Total deposits |
2,685,061 | 2,013,738 | |||||
Short-term borrowed funds |
290,000 | 44,000 | |||||
Long-term borrowed funds |
229,936 | 246,365 | |||||
Subordinated debt |
33,799 | | |||||
Mortgagors' escrow accounts |
4,551 | 5,221 | |||||
Accrued interest payable |
1,611 | 518 | |||||
Other liabilities and accrued expenses |
50,589 | 31,594 | |||||
| | | | | | | |
Total liabilities |
3,295,547 | 2,341,436 | |||||
| | | | | | | |
Commitments and contingencies (Notes 10, 16 and 17) |
|||||||
Common stock, $0.01 par value; 90,000,000 shares authorized; 32,645,161 and 32,662,295 shares issued; 32,563,485 and 32,647,395 shares outstanding at December 31, 2018 and 2017, respectively |
327 |
327 |
|||||
Additional paid-in capital |
152,156 | 147,060 | |||||
Retained earnings |
219,088 | 207,590 | |||||
Treasury stock, at cost, 81,676 and 14,900 shares at December 31, 2018 and 2017, respectively |
(1,548 | ) | (280 | ) | |||
Accumulated other comprehensive loss |
(2,358 | ) | (528 | ) | |||
Unearned compensationESOP |
(10,091 | ) | (10,685 | ) | |||
| | | | | | | |
Total stockholders' equity |
357,574 | 343,484 | |||||
| | | | | | | |
Total liabilities and stockholders' equity |
$ | 3,653,121 | $ | 2,684,920 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-3
HarborOne Bancorp, Inc.
Consolidated Statements of Operations
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except share data)
|
2018 | 2017 | 2016 | |||||||
Interest and dividend income: |
||||||||||
Interest and fees on loans |
$ | 105,432 | $ | 81,114 | $ | 67,172 | ||||
Interest on loans held for sale |
2,205 | 2,739 | 2,695 | |||||||
Interest on taxable securities |
5,624 | 4,404 | 3,223 | |||||||
Interest on non-taxable securities |
856 | 867 | 889 | |||||||
Other interest and dividend income |
1,591 | 1,160 | 777 | |||||||
| | | | | | | | | | |
Total interest and dividend income |
115,708 | 90,284 | 74,756 | |||||||
| | | | | | | | | | |
Interest expense: |
||||||||||
Interest on deposits |
20,563 | 10,962 | 8,710 | |||||||
Interest on FHLB borrowings |
5,474 | 4,974 | 5,051 | |||||||
Interest on subordinated debentures |
741 | | | |||||||
| | | | | | | | | | |
Total interest expense |
26,778 | 15,936 | 13,761 | |||||||
| | | | | | | | | | |
Net interest and dividend income |
88,930 | 74,348 | 60,995 | |||||||
Provision for loan losses |
3,828 | 2,416 | 4,172 | |||||||
| | | | | | | | | | |
Net interest income, after provision for loan losses |
85,102 | 71,932 | 56,823 | |||||||
| | | | | | | | | | |
Noninterest income: |
||||||||||
Mortgage banking income: |
||||||||||
Changes in mortgage servicing rights fair value |
(1,396 | ) | (2,056 | ) | (1,130 | ) | ||||
Other |
32,005 | 39,251 | 52,129 | |||||||
| | | | | | | | | | |
Total mortgage banking income |
30,609 | 37,195 | 50,999 | |||||||
Deposit account fees |
13,500 | 12,311 | 11,664 | |||||||
Income on retirement plan annuities |
433 | 455 | 436 | |||||||
Gain on sale of consumer loans |
| 78 | 79 | |||||||
Gain on sale and call of securities, net |
5 | | 283 | |||||||
Bank-owned life insurance income |
1,728 | 1,024 | 1,088 | |||||||
Other income |
2,923 | 3,471 | 2,554 | |||||||
| | | | | | | | | | |
Total noninterest income |
49,198 | 54,534 | 67,103 | |||||||
| | | | | | | | | | |
Noninterest expense: |
||||||||||
Compensation and benefits |
70,568 | 66,223 | 69,073 | |||||||
Occupancy and equipment |
13,212 | 11,715 | 10,230 | |||||||
Data processing |
6,789 | 6,157 | 5,867 | |||||||
Loan expenses |
5,382 | 6,881 | 9,746 | |||||||
Marketing |
3,333 | 3,595 | 2,599 | |||||||
Deposit expenses |
1,320 | 1,349 | 1,656 | |||||||
Postage and printing |
1,494 | 1,388 | 1,284 | |||||||
Professional fees |
3,832 | 4,233 | 2,710 | |||||||
Prepayment penalties on Federal Home Loan Bank advances |
| | 400 | |||||||
Foreclosed and repossessed assets |
95 | 62 | 167 | |||||||
Deposit insurance |
2,097 | 1,717 | 1,466 | |||||||
Charitable foundation contributions |
| | 4,820 | |||||||
Merger expenses |
5,092 | | | |||||||
Other expenses |
6,879 | 6,094 | 4,680 | |||||||
| | | | | | | | | | |
Total noninterest expense |
120,093 | 109,414 | 114,698 | |||||||
| | | | | | | | | | |
Income before income taxes |
14,207 | 17,052 | 9,228 | |||||||
Income tax provision |
2,813 |
6,673 |
3,297 |
|||||||
| | | | | | | | | | |
Net income |
$ | 11,394 | $ | 10,379 | $ | 5,931 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Earnings per common share: |
||||||||||
Basic |
$ | 0.36 | $ | 0.33 | N/A | |||||
Diluted |
$ | 0.36 | $ | 0.33 | N/A | |||||
Weighted average shares outstanding: |
||||||||||
Basic |
31,574,356 | 31,228,317 | N/A | |||||||
Diluted |
31,574,356 | 31,228,317 | N/A |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
HarborOne Bancorp, Inc.
Consolidated Statements of Comprehensive Income
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
2018 | 2017 | 2016 | |||||||
Net income |
$ | 11,394 | $ | 10,379 | $ | 5,931 | ||||
| | | | | | | | | | |
Other comprehensive income (loss): |
||||||||||
Securities available for sale: |
|
|
|
|||||||
Unrealized holding gains (losses) |
(2,212 | ) | 211 | (951 | ) | |||||
Reclassification adjustment for net realized gains |
| | (283 | ) | ||||||
| | | | | | | | | | |
Net unrealized gains (losses) |
(2,212 | ) | 211 | (1,234 | ) | |||||
Related tax effect |
486 | (74 | ) | 430 | ||||||
| | | | | | | | | | |
Net-of-tax amount |
(1,726 | ) | 137 | (804 | ) | |||||
| | | | | | | | | | |
Supplemental director retirement plan: |
||||||||||
Reclassification adjustment for amortization of prior service cost and actuarial gains |
| 1,162 | 235 | |||||||
Gain (loss) and prior service cost |
| (146 | ) | (36 | ) | |||||
| | | | | | | | | | |
Net unrealized gains |
| 1,016 | 199 | |||||||
Related tax effect |
| (391 | ) | (93 | ) | |||||
| | | | | | | | | | |
Net-of-tax amount |
| 625 | 106 | |||||||
| | | | | | | | | | |
Total other comprehensive (loss) income |
(1,726 | ) | 762 | (698 | ) | |||||
| | | | | | | | | | |
Comprehensive income |
$ | 9,668 | $ | 11,141 | $ | 5,233 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Realized gains on securities available for sale are included in gain on sale and call of securities, net, in the Consolidated Statements of Operations. The related income tax expense on reclassifications for securities available for sale for the year ended December 31, 2016 was $113,000. Amortization of prior service cost is included in compensation and benefits in the Consolidated Statements of Operations. The related income tax benefit on reclassification adjustment for amortization of prior service cost for the years ended December 31, 2017 and 2016 was $391,000 and $93,000, respectively.
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
HarborOne Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity
|
Common Stock |
|
|
|
|
|
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
Accumulated
Other Comprehensive Loss |
|
|
|||||||||||||||||||
(in thousands, except share data)
|
Outstanding
Shares |
Amount |
Additional
Paid-in Capital |
Retained
Earnings |
Treasury
Stock, at Cost |
Unearned
Compensation ESOP |
Total
Stockholders' Equity |
||||||||||||||||||
Balance at December 31, 2015 |
| | | 191,280 | | (592 | ) | | 190,688 | ||||||||||||||||
Comprehensive income (loss) |
| | | 5,931 | | (698 | ) | | 5,233 | ||||||||||||||||
Issuance of common stock to the mutual holding company |
17,281,034 | 172 | | | | | | 172 | |||||||||||||||||
Issuance of common stock for initial public offering, net of costs of $3,914 |
14,454,396 | 145 | 140,212 | | | | | 140,357 | |||||||||||||||||
Issuance of common stock to the HarborOne Foundation |
385,450 | 4 | 3,851 | | | | | 3,855 | |||||||||||||||||
Purchase of 1,187,188 shares by the ESOP |
| | | | | | (11,872 | ) | (11,872 | ) | |||||||||||||||
ESOP shares committed to be released (59,359 shares) |
| | 357 | | | | 594 | 951 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 |
32,120,880 | 321 | 144,420 | 197,211 | | (1,290 | ) | (11,278 | ) | 329,384 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income |
| | | 10,379 | | 762 | | 11,141 | |||||||||||||||||
ESOP shares committed to be released (59,359 shares) |
| | 550 | | | | 593 | 1,143 | |||||||||||||||||
Restricted stock awards granted |
541,415 | 6 | (6 | ) | | | | | | ||||||||||||||||
Share-based compensation expense |
| | 2,096 | | | | | 2,096 | |||||||||||||||||
Treasury stock purchased |
(14,900 | ) | | | | (280 | ) | | (280 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 |
32,647,395 | 327 | 147,060 | 207,590 | (280 | ) | (528 | ) | (10,685 | ) | 343,484 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) |
| | | 11,394 | | (1,726 | ) | | 9,668 | ||||||||||||||||
Reclassification of stranded effect of tax rate change (Note 1) |
| | | 104 | | (104 | ) | | | ||||||||||||||||
ESOP shares committed to be released (59,359 shares) |
| | 503 | | | | 594 | 1,097 | |||||||||||||||||
Restricted stock awards forfeited, net of awards issued |
(17,134 | ) | | | | | | | | ||||||||||||||||
Share-based compensation expense |
| | 4,593 | | | | | 4,593 | |||||||||||||||||
Treasury stock purchased |
(66,776 | ) | | | | (1,268 | ) | | | (1,268 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 |
32,563,485 | $ | 327 | $ | 152,156 | $ | 219,088 | $ | (1,548 | ) | $ | (2,358 | ) | $ | (10,091 | ) | $ | 357,574 | |||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
HarborOne Bancorp, Inc.
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
HarborOne Bancorp, Inc. (the "Company") is a mid-tier stock holding company whose principal subsidiary is HarborOne Bank (the "Bank"). The Bank is a state-chartered co-operative bank whose primary subsidiary is a residential mortgage banking company, HarborOne Mortgage, LLC ("HarborOne Mortgage"). HarborOne Mortgage was acquired as Merrimack Mortgage, LLC on July 1, 2015 and effective April 3, 2018 became HarborOne Mortgage. The 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 and HarborOne Bank; and the Bank's wholly-owned subsidiaries. In addition to HarborOne Mortgage, the Bank has two security corporation subsidiaries and one passive investment subsidiary. The security corporations were established for the purpose of buying, holding and selling securities on their own behalf. The Company established Legion Parkway Company LLC for the same purpose. 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 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, the Company's mutual holding company parent (the "MHC") and 385,450 shares to The HarborOne Foundation (the "Foundation"), a charitable foundation that was formed in connection with the stock offering and is 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 is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in an eligible account holder's qualifying deposits do not restore such holder's interest in the liquidation account.
Nature of Operations
The Company, originally established in 1917 as a state-chartered credit union, converted to a state-chartered co-operative bank on July 1, 2013. The Company provides a variety of financial services to individuals and businesses through its 24 full-service bank branches in Massachusetts and Rhode Island, one limited-service bank branch, and a commercial lending office in each of Boston, Massachusetts and Providence, Rhode Island. HarborOne Mortgage maintains 34 offices in Massachusetts, Rhode Island, New Hampshire, Maine, and New Jersey and is also licensed to lend in five additional states.
The Company's primary deposit products are checking, money market, savings and term certificate of deposit accounts while its primary lending products are commercial real estate, commercial,
F-8
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
residential mortgages and consumer loans, including indirect automobile lease loans. The Company also originates, sells and services residential mortgage loans primarily through HarborOne Mortgage.
Use of Estimates
In preparing the 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 and the valuations of mortgage servicing rights, derivatives, goodwill and deferred tax assets.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting whereby the Company records the fair value of the assets acquired and liabilities assumed, immediately expenses transaction costs and accounts for restructuring plans separately from the business combination. There is no separate recognition of the acquired allowance for loan losses on the company's balance sheet as credit related factors are incorporated directly into the fair value of the loans recorded at the acquisition date. The excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. Alternatively, a bargain purchase gain is recorded equal to the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid.
Results of operations of the acquired business are included on the Consolidated Statements of Operations from the effective date of acquisition.
Fair values are subject to refinement for up to a year after the closing date of an acquisition as information relative to closing date fair values becomes available. Adjustments recorded to the acquired assets and liabilities are applied prospectively.
Significant Group Concentration of Credit Risk
The Company has cash and federal fund balances on deposit at correspondent banks that exceed insurable limits. The Company has not experienced any losses on such amounts. At December 31, 2018, the Company had a concentration of cash on deposit at the Federal Reserve Bank amounting to $77.8 million. Most of the Company's lending activities are with borrowers located within southeastern New England. The ability and willingness of residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers' geographic area and real estate values. Note 7 provides the detail of the Company's loan portfolio and Note 5 provides the detail of the Company's investment portfolio. The Company does not have any significant concentrations to any one industry or customer.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current year's presentation.
F-9
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
Cash equivalents include amounts due from banks and short-term investments with original maturities of less than 90 days at time of purchase. Short-term investments mature daily or on demand and are stated at cost, which approximates fair value.
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost, adjusted for the amortization of premiums or the accretion of discounts. Securities not classified as held to maturity are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss).
Gains or losses on disposition of securities are recorded on the trade date and are determined using the specific identification method. Premiums and discounts are recognized in interest income using the effective interest method over the terms of the securities, except for premiums on callable securities, which are amortized to the earliest call date.
Each reporting period, the Company evaluates all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary ("OTTI").
OTTI is required to be recognized if (1) the Company intends to sell the security; (2) it is "more likely than not" that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income (loss), net of applicable taxes.
Federal Home Loan Bank Stock
The Company, as a member of the Federal Home Loan Bank ("FHLB") system, is required to maintain an investment in capital stock of the FHLB of Boston. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB may declare dividends on the stock. The Company reviews FHLB stock for impairment based on the ultimate recoverability of the cost basis. As of December 31, 2018, no impairment has been recognized.
Mortgage Loans Held for Sale
Residential mortgage loans originated with the intent to sell are classified as held-for-sale and are carried at fair value. Loan origination costs for loans held for sale that the Company accounts for under the fair value option are recognized in noninterest expense when incurred. Changes in fair value are recognized in mortgage banking income.
Interest income on mortgage loans held for sale is recorded in interest income.
F-10
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans held for investment are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any unamortized deferred origination fees and costs.
Loan origination fees are offset with related direct incremental loan origination costs and the resulting net amount is deferred and amortized to interest income using the level-yield method over the remaining life of the loan.
Accrual of interest on loans is discontinued when collectability of principal or interest is uncertain or when payments of principal or interest have become contractually past due 90 days or more. Past due status is based on contractual terms of the loan. However, a loan may remain on accrual status if both the value of any collateral securing the loan is sufficient to cover principal and accrued interest thereon, and the loan is in the process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
Interest received on nonaccrual loans is either applied against principal or reported as income according to management's judgment as to the collectability of principal. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
The Company's loan portfolio includes residential real estate, commercial real estate, construction, commercial and consumer segments. Residential real estate loans include classes for one- to four-family and second mortgages and equity lines of credit. Consumer loans include classes for auto and personal loans.
The Company's acquired loans are recorded at fair value with no carryover of the allowance for loan losses. Net discount on performing loans acquired are recognized as interest income over the remaining life of the loan.
Acquired loans determined to have evidence of deterioration in credit quality and when it is probable, at acquisition, that all contractually required payments will not be collected, are deemed to be purchased credit impaired ("PCI") loans. For PCI loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the "accretable yield", is accreted into interest income over the life of the loans using the effective yield method. The Company monitors actual cash flows to determine any deterioration from those forecasted at the acquisition date, which is evaluated and recorded through the allowance for loan losses.
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 uncollectability of a loan balance is confirmed and generally do not exceed the time frame provided in The 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
F-11
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and peer loss experience adjusted for qualitative factors stratified by the Company's loan segments. Each portfolio segment is further segregated by purchased loans not deemed impaired. 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 loss rates 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 the year ended December 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 estateThe 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.
Residential constructionResidential 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 real estateLoans in this segment are primarily secured by income-producing properties and owner occupied commercial properties in southeastern New England. The underlying cash flows generated by the properties and operations can be adversely impacted by a downturn in the local economy, which can lead to increased vacancy rates and diminished cash flows, which in turn, could have an effect on the credit quality in this segment. Management obtains financial statements annually and continually monitors the cash flows of these loans.
Commercial constructionCommercial 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.
CommercialLoans 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.
F-12
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ConsumerLoans in this segment are generally secured by automobiles or are 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 ("TDR") 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 TDR, 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 imprecision to management's estimates.
Property and Equipment
Land is carried at cost. Buildings, leasehold improvements, and furniture and equipment are carried at cost, less accumulated depreciation and amortization, computed on the straight-line method over the estimated useful lives of the assets or the terms of the leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. Maintenance and repairs are charged to expense as incurred and improvements are capitalized.
F-13
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Retirement Plan Annuities
Retirement plan annuities are reflected on the Consolidated Balance Sheets at the face amount of the policies. Changes in recorded value are reflected in income on retirement plan annuities on the Consolidated Statements of Operations.
Bank-owned life insurance
Bank-owned life insurance policies are reflected on the Consolidated Balance Sheets at net cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in bank-owned life insurance income on the Consolidated Statements of Operations and are not subject to income taxes. The Company is the beneficiary on these life insurance policies which are purchased for select employees of the Company.
Employee Stock Ownership Plan
Compensation expense for the Company's ESOP is recorded at an amount equal to the shares committed to be allocated by the ESOP multiplied by the average fair market value of the shares during the year. The Company recognizes compensation expense ratably over the year based upon the Company's estimate of the number of shares committed to be allocated by the ESOP. The difference between the average fair market value and the cost of the shares committed to be allocated by the ESOP is recorded as an adjustment to additional paid-in capital.
Mortgage Servicing Rights
The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets and are carried at fair value.
For all mortgage servicing assets, fair value is estimated using market prices when available or, alternatively, using a third party valuation model that calculates the present value of estimated future cash flows based on current prepayment assumptions.
Derivative Financial Instruments
The Company is party to a variety of derivative transactions, including derivative loan commitments, forward loan sale commitments and interest rate swap contracts. The Company enters into derivative contracts in order to meet the financing needs of its customers. The Company also enters into derivative contracts as a means of reducing its interest rate risk and market risk.
Derivative Loan Commitments
Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the Consolidated Balance Sheets in other assets and other liabilities with changes in their fair values recorded in mortgage banking income.
F-14
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Forward Loan Sale Commitments
To protect against the price risk inherent in derivative loan commitments, the Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Generally, the Company's best efforts contracts meet the definition of derivative instruments when the loans to the underlying borrowers close, and are accounted for as derivative instruments at that time. Forward loan sale commitments are recognized at fair value on the Consolidated Balance Sheets in other assets and other liabilities with changes in their fair values recorded in mortgage banking income.
Interest Rate Swaps
The Company's interest rate swap contracts are transacted to meet the financing needs of the Company's commercial customers. Offsetting swap agreements are simultaneously transacted to effectively eliminate the Company's market and interest rate risk associated with the swaps. Interest rate swaps are recognized on the Consolidated Balance Sheets in other assets and other liabilities with changes in their fair values recorded in other income.
Transfers of Financial Assets
Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.
During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sale treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.
Other Real Estate Owned and Repossessed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell when legal title is obtained, establishing a new cost basis. Subsequently, valuations are periodically updated by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. The excess (deficiency) of any consideration received as compared to the carrying value of other real estate owned is recorded as a gain (loss) on sale of other real estate owned. Revenues and expenses from operations and changes in the valuation allowance and any direct write-downs are included in foreclosed and repossessed assets expense. Repossessed assets includes automobiles to be sold which are recorded at estimated fair value, less costs to sell, with the initial charge to the allowance for loan losses and the subsequent gain or loss on sale recorded to foreclosed and repossessed assets expense.
F-15
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Identifiable Intangible Assets
The assets (including identifiable intangible assets) and liabilities acquired in a business combination are recorded at fair value at the date of acquisition. Goodwill is recognized for the excess of the acquisition cost over the fair values of the net assets acquired and is not subsequently amortized. Identifiable intangible assets include core deposit premium and non-compete contracts and are being amortized over their estimated lives. Management assesses the recoverability of goodwill at least on an annual basis and all intangible assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The impairment test uses a combined qualitative and quantitative approach. The initial qualitative approach assesses whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after this assessment, the Company determines that it is more likely than not that the fair value is less than the carrying value, a quantitative impairment test is performed. The quantitative impairment test compares book value to the fair value of the reporting unit. If the carrying amount exceeds fair value, an impairment charge is recorded through earnings. Management has identified two reporting units for purposes of testing goodwill for impairment. The Company's reporting units are the same as the segments used for segment reportingthe Bank, including the two security corporations, one passive investment company, and HarborOne Mortgage. No impairment has been recognized as of December 31, 2018.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws in the period on enactment. Accordingly, changes resulting from the Tax Act of 2017 enacted on December 22, 2017 have been recognized in the Consolidated Financial Statements as of and for the year ended December 31, 2017 (see Note 15). A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company elected to early adopt Accounting Standard Update ("ASU") 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, therefore excess tax benefits or deficiencies are recorded in the consolidated statement of operations as part of the provision for income taxes on a prospective basis. For interim reporting purposes, the excess tax benefits or deficiencies are recorded as discrete items in the period in which they occur. In addition, when calculating incremental shares for earnings per share, excess tax benefits are excluded from assumed proceeds. There was no income tax benefit recorded in the provision for income taxes relating to excess tax benefits on share-based compensation for the years ended December 31, 2018 and 2017.
The Company records uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the
F-16
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management's judgment. The Company records interest and penalties as part of income tax expense.
Share-based Compensation Plans
The Company's share-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 has elected to recognize 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).
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.
Treasury Stock
Any shares repurchased under the Company's share repurchase programs were purchased in open-market transactions and are held as treasury stock. All treasury stock is held at cost. The Company adopted a share repurchase program on October 27, 2017. The Company may repurchase up to 1,633,155 shares of the Company's common stock, or approximately 5% of the Company's then current issued and outstanding shares. As of December 31, 2018, the Company had repurchased 81,676 shares, including 42,076 shares acquired by the Company in connection with the satisfaction of tax obligations on vested restricted stock issued pursuant to the Stock Option and Incentive Plan in August 2018. These shares were not repurchased as part of the repurchase plan.
Recent Accounting Pronouncements
As an "emerging growth company" ("EGC") 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
F-17
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
pronouncements are made applicable to non-public companies. As of December 31, 2018, there is no significant difference in the comparability of the financial statements as a result of this extended transition period. The Company's EGC status is scheduled to end December 31, 2021 unless a triggering event occurs sooner.
In October 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-16, Derivatives and Hedging (Topic 815)Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedging Accounting Purposes . The purpose of ASU 2018-16 is to permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The amendments in ASU 2018-16 are effective for public business entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, if ASU 2017-12 has already been adopted. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted in any interim period upon issuance of ASU 2018-16 if a public business entity has adopted ASU 2017-12. The amendments in ASU 2018-16 should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company does not have any derivatives within the scope of the ASU.
In August 2018, the FASB issued ASU 2018-13, Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement . This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this standard is not expected to have a material effect on the Company's Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02, Income StatementReporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . ASU 2018-02 amends ASU Topic 220 and allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017("Tax Act")(See Note 15) to eliminate the stranded tax effects resulting from the Tax Act of 2017. The Company early adopted this amendment in the first quarter of 2018 and reclassified $104,000 from accumulated other comprehensive loss to retained earnings.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. This guidance changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line as the hedged item. This guidance also provides new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged item in fair value hedges of interest rate risk, reducing the complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method, and reducing the risk of material error corrections if a company applies the shortcut method
F-18
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
inappropriately. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not currently have any hedging derivatives within the scope of the ASU.
In June 2016, FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326) , which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. For public entities that are SEC filers, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management has identified an implementation team that is in the process of developing an understanding of this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation. The adoption of the ASU may result in an increase in the allowance for loan losses but the magnitude of the increase and its impact has not yet been quantified and depends on economic conditions at the time of adoption.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842) . This update requires a lessee to record a right-to-use asset and a liability representing the obligation to make lease payments for long-term leases. For public business entities, this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For non-public business entities, this update is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. While we are currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities but no material impact to the Consolidated Statement of Operations, for arrangements previously accounted for as operating leases.
In January 2016, FASB issued ASU 2016-01, Financial InstrumentsOverall, (Subtopic 825-10) . The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Targeted improvements to generally accepted accounting principles include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, the elimination of the requirement for non-public business entities to disclose the fair value of financial instruments measured at amortized cost and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. This update also requires companies to utilize and "exit price" fair value methodology when measuring the fair value of financial instruments. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For non-public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Management currently does not expect this to have a material impact on the Company's Consolidated Financial Statements as the Company does not currently hold any equity securities.
F-19
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . The amendments in this update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, a company should apply a five step approach to revenue recognition. For public business entities, this ASU is effective for annual reporting periods, including interim periods, beginning after December 15, 2017. For non-public business entities, this ASU is effective for annual reporting periods beginning after December 31, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early application is permitted, but only for annual reporting periods beginning after December 15, 2016. The Bank's primary source of revenue is interest income on financial assets and income from mortgage banking activities, which are explicitly excluded from the scope of the new guidance. As a result, adoption will not have a material impact on the Company's Consolidated Financial Statements.
2. BUSINESS COMBINATIONS
Effective October 5, 2018, the Company completed the acquisition of Coastway Bancorp, Inc. ("Coastway"), the holding company of Coastway Community Bank, a Rhode Island chartered savings bank headquartered in Warwick, Rhode Island with $835.1 million in total assets, $736.2 million in gross loans and $478.3 million in total deposits. Pursuant to the merger agreement, each share of Coastway common outstanding was converted into the right to receive $28.25 in cash. With this acquisition the Company established a broader market position in Rhode Island and increased its loan and deposit base.
Goodwill in the amount of $56.4 million was recognized in the Coastway acquisition. HarborOne Mortgage acquired their primary third party originator, Cumberland Mortgage, and recorded $327,000 in goodwill. Goodwill recognized in these transactions is not deductible for income tax purposes.
The following table represents the assets acquired and liabilities assumed of Coastway as of October 5, 2018 and the fair value adjustments and amounts recorded by the Company in 2018 under
F-20
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
2. BUSINESS COMBINATIONS (Continued)
the acquisition method of accounting, which are subject to adjustment for up to one year after the merger date:
|
Coastway
Carrying Value |
Fair Value
Adjustment |
Fair Value | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||
Assets Acquired |
||||||||||
Cash and cash equivalents |
$ | 45,453 | $ | | $ | 45,453 | ||||
Loans held for sale |
9,071 | | 9,071 | |||||||
Loans, gross |
727,148 | (23,234 | ) | 703,914 | ||||||
Allowance for loan losses |
(3,480 | ) | 3,480 | | ||||||
Fixed assets |
30,965 | (711 | ) | 30,254 | ||||||
Core deposit intangible |
| 8,952 | 8,952 | |||||||
Deferred tax assets |
1,144 | 3,114 | 4,258 | |||||||
Other assets |
24,783 | (287 | ) | 24,496 | ||||||
| | | | | | | | | | |
Total assets acquired |
$ | 835,084 | $ | (8,686 | ) | $ | 826,398 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Liabilities Assumed |
||||||||||
Deposits |
$ | 478,336 | $ | (1,814 | ) | $ | 476,522 | |||
Borrowings |
276,750 | | 276,750 | |||||||
Other liabilities |
10,082 | | 10,082 | |||||||
| | | | | | | | | | |
Total liabilities assumed |
765,168 | (1,814 | ) | 763,354 | ||||||
| | | | | | | | | | |
Net acquired |
$ | 69,916 | $ | (6,872 | ) | $ | 63,044 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Consideration paid |
119,440 | |||||||||
| | | | | | | | | | |
Goodwill recognized |
$ | 56,396 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The fair value adjustment for loans represents the write-off of $5.4 million of deferred loan costs and the write down of the unpaid principal balance of loans to their estimated fair value based on interest rates and expected cash flows as of the acquisition date, which includes an estimate of expected loan loss inherent in the portfolio. Non-impaired loans had an unpaid principal balance of $716.4 million and a fair value of $698.8 resulting in a $17.5 million fair value adjustment that is accretable in earnings. Purchased credit impaired loans had an unpaid principal balance of $5.4 million and a fair value of $5.1 million.
The core deposit intangible asset represents the value of the core deposit base assumed in the acquisition. The asset was recorded as an identifiable intangible asset and will be amortized over the estimated useful life of the deposit base.
The fair value of time deposits were determined based on the present value of the contractual cash flows over the remaining period to maturity using a market interest rate.
Fair value adjustments to assets acquired and liabilities assumed are generally amortized using either an effective yield or straight-line basis over periods consistent with the average life, useful life and/or contractual term of the related assets and liabilities.
F-21
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
2. BUSINESS COMBINATIONS (Continued)
Pro Forma Information (unaudited)
The Company has determined it is impractical to report the amounts of revenue and earnings of Coastway since the acquisition date. Due to the integration of operations, the Company does not record revenue and earnings separately. The revenue and earnings of Coastway's operations are included in the Consolidated Statement of Operations.
The following table presents selected unaudited pro forma financial information reflecting the acquisition of Coastway assuming the acquisition was completed as of January 1, 2017. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments. These adjustments would have been different if they had been recorded on January 1, 2017, and they do not include the impact of prepayments.
The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and the acquisition had the transaction actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period.
The unaudited pro forma information, for the years ended December 31, 2018 and 2017, set forth below reflects adjustments related to (a) amortization and accretion of purchase accounting fair value adjustments; (b) amortization of core deposit intangibles; and (c) an estimated tax rate of 28 percent. Excluded from the pro forma results of operations for the year ended December 31, 2018 are merger-related costs of $6.7 million, net of tax, recognized by both the Company and Coastway in the aggregate.
The unaudited pro forma information does not reflect management's estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition.
|
Pro Forma (unaudited) | ||||||
---|---|---|---|---|---|---|---|
|
Year Ended
December 31, |
||||||
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Net interest income, after provision for loan losses |
$ | 101,117 | $ | 91,699 | |||
Noninterest income |
$ | 54,603 | $ | 62,072 | |||
Net income |
$ | 18,399 | $ | 11,544 |
3. CASH AND DUE FROM BANKS
The Company is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2018 and 2017, reserve balances amounted to $6.0 million and $2.3 million, respectively.
4. SHORT-TERM INVESTMENTS
Short-term investments consist of interest-bearing deposit accounts with balances of $77.8 million and $64.4 million as of December 31, 2018 and 2017, respectively.
F-22
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
5. SECURITIES
The amortized cost and fair value of securities with gross unrealized gains and losses is as follows:
|
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
||||||||||||
December 31, 2018: |
|||||||||||||
Securities available for sale |
|||||||||||||
U.S. government and government-sponsored enterprise obligations |
$ | 27,997 | $ | 71 | $ | 527 | $ | 27,541 | |||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
105,340 | 335 | 1,658 | 104,017 | |||||||||
U.S. government-sponsored collateralized mortgage obligations |
31,293 | | 365 | 30,928 | |||||||||
SBA asset-backed securities |
47,686 | 106 | 985 | 46,807 | |||||||||
| | | | | | | | | | | | | |
Total securities available for sale |
$ | 212,316 | $ | 512 | $ | 3,535 | $ | 209,293 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Securities held to maturity |
|||||||||||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
$ | 15,025 | $ | 63 | $ | 481 | $ | 14,607 | |||||
U.S. government-sponsored collateralized mortgage obligations |
1,724 | 29 | | 1,753 | |||||||||
SBA asset-backed securities |
5,818 | 42 | 41 | 5,819 | |||||||||
Municipal bonds |
22,121 | 406 | | 22,527 | |||||||||
| | | | | | | | | | | | | |
Total securities held to maturity |
$ | 44,688 | $ | 540 | $ | 522 | $ | 44,706 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
December 31, 2017: |
|||||||||||||
Securities available for sale |
|||||||||||||
U.S. government and government-sponsored enterprise obligations |
$ | 17,985 | $ | | $ | 178 | $ | 17,807 | |||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
74,368 | 132 | 630 | 73,870 | |||||||||
U.S. government-sponsored collateralized mortgage obligations |
36,753 | 35 | 106 | 36,682 | |||||||||
SBA asset-backed securities |
42,558 | 102 | 166 | 42,494 | |||||||||
| | | | | | | | | | | | | |
Total securities available for sale |
$ | 171,664 | $ | 269 | $ | 1,080 | $ | 170,853 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Securities held to maturity |
|||||||||||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
$ | 17,452 | $ | 97 | $ | 214 | $ | 17,335 | |||||
U.S. government-sponsored collateralized mortgage obligations |
2,042 | 54 | | 2,096 | |||||||||
SBA asset-backed securities |
2,991 | | 14 | 2,977 | |||||||||
Municipal bonds |
24,384 | 882 | | 25,266 | |||||||||
| | | | | | | | | | | | | |
Total securities held to maturity |
$ | 46,869 | $ | 1,033 | $ | 228 | $ | 47,674 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
F-23
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
5. SECURITIES (Continued)
There were no securities pledged as collateral as of December 31, 2018 and 2017.
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2018 is as follows:
|
Available for Sale | Held to Maturity | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
|||||||||
|
(in thousands)
|
||||||||||||
After 5 years through 10 years |
$ | 27,997 | $ | 27,541 | $ | 4,394 | $ | 4,462 | |||||
Over 10 years |
| | 17,727 | 18,065 | |||||||||
| | | | | | | | | | | | | |
|
27,997 | 27,541 | 22,121 | 22,527 | |||||||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
105,340 | 104,017 | 15,025 | 14,607 | |||||||||
U.S. government-sponsored collateralized mortgage obligations |
31,293 | 30,928 | 1,724 | 1,753 | |||||||||
SBA asset-backed securities |
47,686 | 46,807 | 5,818 | 5,819 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 212,316 | $ | 209,293 | $ | 44,688 | $ | 44,706 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
U.S. government-sponsored residential mortgage-backed securities, collateralized mortgage obligations and securities whose underlying assets are loans from the U.S. Small Business Administration ("SBA asset-backed securities") have stated maturities of four to twenty-nine years; however, it is expected that such securities will have shorter actual lives due to prepayments.
The following table shows proceeds and gross realized gains and losses related to the sales and calls of securities for the periods indicated:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Sales |
||||||||||
Proceeds(1) |
$ | 1,015 | $ | | $ | 8,735 | ||||
Gross gains |
5 | | 242 | |||||||
Gross losses |
| | | |||||||
Calls |
|
|
|
|||||||
Proceeds |
$ | 1,025 | $ | 400 | $ | 15,725 | ||||
Gross gains |
| | 41 | |||||||
Gross losses |
| | |
F-24
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
5. SECURITIES (Continued)
Information pertaining to securities with gross unrealized losses at December 31, 2018 and December 31, 2017 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
|
Less Than Twelve
Months |
Twelve Months and
Over |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross
Unrealized Losses |
Fair
Value |
Gross
Unrealized Losses |
Fair
Value |
|||||||||
|
(in thousands)
|
||||||||||||
December 31, 2018: |
|||||||||||||
Securities available for sale |
|||||||||||||
U.S. government and government-sponsored enterprise obligations |
$ | | $ | | $ | 527 | $ | 17,460 | |||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
55 | 12,714 | 1,603 | 67,060 | |||||||||
U.S. government-sponsored collateralized mortgage obligations |
| | 365 | 30,928 | |||||||||
SBA asset-backed securities |
| | 985 | 36,860 | |||||||||
| | | | | | | | | | | | | |
|
$ | 55 | $ | 12,714 | $ | 3,480 | $ | 152,308 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Securities held to maturity |
|||||||||||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
$ | | $ | | $ | 481 | $ | 12,938 | |||||
SBA asset-backed securities |
| | 41 | 2,834 | |||||||||
| | | | | | | | | | | | | |
|
$ | | $ | | $ | 522 | $ | 15,772 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
December 31, 2017: |
|||||||||||||
Securities available for sale |
|||||||||||||
U.S. government and government-sponsored enterprise obligations |
$ | 20 | $ | 4,980 | $ | 158 | $ | 9,827 | |||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
155 | 31,684 | 475 | 26,123 | |||||||||
U.S. government-sponsored collateralized mortgage obligations |
53 | 10,886 | 53 | 2,870 | |||||||||
SBA asset-backed securities |
95 | 24,205 | 71 | 4,730 | |||||||||
| | | | | | | | | | | | | |
|
$ | 323 | $ | 71,755 | $ | 757 | $ | 43,550 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Securities held to maturity |
|||||||||||||
U.S. government agency and government-sponsored residential mortgage-backed securities |
$ | 91 | $ | 8,211 | $ | 123 | $ | 6,970 | |||||
SBA asset-backed securities |
14 | 2,977 | | | |||||||||
| | | | | | | | | | | | | |
|
$ | 105 | $ | 11,188 | $ | 123 | $ | 6,970 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
F-25
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
5. SECURITIES (Continued)
Management evaluates securities for OTTI at each reporting period, and more frequently when economic or market concerns warrant such evaluation.
At December 31, 2018, sixty-three debt securities with an amortized cost of $184.9 million have unrealized losses with aggregate depreciation of 2.19% from the Company's amortized cost basis.
The unrealized losses on the Company's securities were primarily caused by changes in interest rates. All of these investments are guaranteed by government-sponsored enterprises. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be OTTI at December 31, 2018.
6. LOANS HELD FOR SALE
At December 31, 2018 and 2017, there were no mortgage loans held for sale that were greater than ninety days past due.
The following table provides the fair value and contractual principal balance outstanding of mortgage loans held for sale accounted for under the fair value option:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Loans held for sale, fair value |
$ | 42,107 | $ | 59,460 | |||
Loans held for sale, contractual principal outstanding |
40,692 | 57,575 | |||||
| | | | | | | |
Fair value less unpaid principal balance |
$ | 1,415 | $ | 1,885 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Changes in the fair value of mortgage loans held for sale are classified in mortgage banking income in the Consolidated Statements of Operations. None of the changes in fair value for 2018 or 2017 are attributable to instrument-specific credit risk. Included in mortgage banking income is $23.2 million, $30.5 million and $43.0 million of gains on the sale of mortgage loans held for sale, including originated mortgage servicing rights, for the years ended December 31, 2018, 2017 and 2016, respectively.
F-26
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
7. LOANS
A summary of the balances of loans follows:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Residential real estate: |
|||||||
One- to four-family |
$ | 942,659 | $ | 677,837 | |||
Second mortgages and equity lines of credit |
158,138 | 89,080 | |||||
Residential real estate construction |
14,659 | 11,904 | |||||
Commercial real estate |
934,420 | 655,419 | |||||
Commercial construction |
161,660 | 116,739 | |||||
| | | | | | | |
Total mortgage loans on real estate |
2,211,536 | 1,550,979 | |||||
| | | | | | | |
Commercial |
277,271 | 109,523 | |||||
| | | | | | | |
Consumer loans: |
|||||||
Auto |
478,863 | 513,728 | |||||
Personal |
12,582 | 14,092 | |||||
| | | | | | | |
Total consumer loans |
491,445 | 527,820 | |||||
| | | | | | | |
Total loans |
2,980,252 | 2,188,322 | |||||
Allowance for loan losses |
(20,655 |
) |
(18,489 |
) |
|||
Net deferred loan costs |
5,255 | 6,645 | |||||
| | | | | | | |
Loans, net |
$ | 2,964,852 | $ | 2,176,478 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Company did not sell any indirect auto loans during the year ended December 31, 2018. During the years ended December 31, 2017 and 2016, the Company sold indirect auto loans of $5.0 million and $10.0 million, respectively, and recognized gains on sale of consumer loans of $78,000 and $79,000, respectively. The unpaid principal balance of indirect auto loans serviced for others was $12.4 million and $22.4 million at December 31, 2018 and 2017, respectively.
The Company transferred residential portfolio loans with a fair value of $105.4 million to held for sale during the year ended December 31, 2018, recognized a gain of $395,000 and these loans were subsequently sold. The Company did not sell any residential portfolio loans during the year ended December 31, 2017. During the year ended December 31, 2016, the Company sold residential portfolio loans of $29.5 million, and recognized gains on sales of $572,000.
The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company's accompanying Consolidated Balance Sheets. The Company and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower's lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At December 31, 2018 and 2017, the Company was servicing loans for participants aggregating $140.9 million and $85.2 million, respectively.
F-27
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
7. LOANS (Continued)
Acquired Loans
The loans purchased from Coastway included $5.4 million in purchased credit impaired loans. The purchased credit impaired loans were primarily residential real estate loans. The contractual amount outstanding and carrying value of these loans at December 31, 2018 were $4.7 million and $4.6 million, respectively. The expected cash flow of the pool is $5.3 million and the accretable yield is $186,000. During the year ended December 31, 2018, $34,000 was accreted into interest income. Purchased credit impaired loans are not included in the Company's impaired loan balances in the following tables. At December 31, 2018, $2.2 million of PCI loans are included in the delinquency table and $500,000 are included in the nonaccrual table.
The following is the activity in the allowance for loan losses for the years ended December 31, 2018, 2017 and 2016 follows:
|
Mortgage Loans |
|
|
|
|
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Residential |
Commercial
Real Estate |
Commercial
Construction |
Commercial | Consumer | Unallocated | Total | |||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||
Balance at December 31, 2015 |
$ | 5,816 | $ | 4,365 | $ | 581 | $ | 1,454 | $ | 830 | $ | 654 | $ | 13,700 | ||||||||
Provision (credit) for loan losses |
(720 |
) |
2,785 |
343 |
484 |
703 |
577 |
4,172 |
||||||||||||||
Charge-offs |
(402 | ) | | | (27 | ) | (935 | ) | | (1,364 | ) | |||||||||||
Recoveries |
269 | | | 9 | 182 | | 460 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 |
$ | 4,963 | $ | 7,150 | $ | 924 | $ | 1,920 | $ | 780 | $ | 1,231 | $ | 16,968 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Provision (credit) for loan losses |
(985 |
) |
685 |
886 |
452 |
1,019 |
359 |
2,416 |
||||||||||||||
Charge-offs |
(144 | ) | | | (134 | ) | (1,039 | ) | | (1,317 | ) | |||||||||||
Recoveries |
166 | | | 16 | 240 | | 422 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 |
$ | 4,000 | $ | 7,835 | $ | 1,810 | $ | 2,254 | $ | 1,000 | $ | 1,590 | $ | 18,489 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Provision (credit) for loan losses |
(761 |
) |
2,318 |
897 |
1,008 |
746 |
(380 |
) |
3,828 |
|||||||||||||
Charge-offs |
(50 | ) | (94 | ) | | (990 | ) | (847 | ) | | (1,981 | ) | ||||||||||
Recoveries |
50 | | | 14 | 255 | | 319 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 |
$ | 3,239 | $ | 10,059 | $ | 2,707 | $ | 2,286 | $ | 1,154 | $ | 1,210 | $ | 20,655 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
F-28
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
7. LOANS (Continued)
Allocation of the allowance to loan segments at December 31, 2018 and 2017 follows:
|
Mortgage Loans |
|
|
|
|
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Residential |
Commercial
Real Estate |
Commercial
Construction |
Commercial | Consumer | Unallocated | Total | |||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||
December 31, 2018: |
||||||||||||||||||||||
Loans: |
||||||||||||||||||||||
Impaired loans |
$ | 30,720 | $ | 2,502 | $ | | $ | 3,826 | $ | | $ | | $ | 37,048 | ||||||||
Non-impaired loans |
1,084,736 | 931,918 | 161,660 | 273,445 | 491,445 | | 2,943,204 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total loans |
$ | 1,115,456 | $ | 934,420 | $ | 161,660 | $ | 277,271 | $ | 491,445 | $ | | $ | 2,980,252 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: |
||||||||||||||||||||||
Impaired loans |
$ | 1,205 | $ | | $ | | $ | 53 | $ | | $ | | $ | 1,258 | ||||||||
Non-impaired loans |
2,034 | 10,059 | 2,707 | 2,233 | 1,154 | 1,210 | 19,397 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total allowance for loan losses |
$ | 3,239 | $ | 10,059 | $ | 2,707 | $ | 2,286 | $ | 1,154 | $ | 1,210 | $ | 20,655 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017: |
|
|
|
|
|
|
|
|||||||||||||||
Loans: |
||||||||||||||||||||||
Impaired loans |
$ | 34,440 | $ | 312 | $ | | $ | 3,069 | $ | | $ | | $ | 37,821 | ||||||||
Non-impaired loans |
744,381 | 655,107 | 116,739 | 106,454 | 527,820 | | 2,150,501 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total loans |
$ | 778,821 | $ | 655,419 | $ | 116,739 | $ | 109,523 | $ | 527,820 | $ | | $ | 2,188,322 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: |
||||||||||||||||||||||
Impaired loans |
$ | 1,242 | $ | | $ | | $ | 739 | $ | | $ | | $ | 1,981 | ||||||||
Non-impaired loans |
2,758 | 7,835 | 1,810 | 1,515 | 1,000 | 1,590 | 16,508 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total allowance for loan losses |
$ | 4,000 | $ | 7,835 | $ | 1,810 | $ | 2,254 | $ | 1,000 | $ | 1,590 | $ | 18,489 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
F-29
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
7. LOANS (Continued)
The following is a summary of past due and non-accrual loans at December 31, 2018 and 2017:
|
30 - 59 Days
Past Due |
60 - 89 Days
Past Due |
90 Days
or More Past Due |
Total
Past Due |
Loans on
Non-accrual |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||||||||
December 31, 2018 |
||||||||||||||||
Residential real estate: |
||||||||||||||||
One- to four-family |
$ | 1,283 | $ | 4,554 | $ | 6,516 | $ | 12,353 | $ | 12,120 | ||||||
Second mortgages and equity lines of credit |
846 | 237 | 754 | 1,837 | 1,649 | |||||||||||
Commercial real estate |
| | 298 | 298 | 298 | |||||||||||
Commercial |
34 | 550 | 2,575 | 3,159 | 3,087 | |||||||||||
Consumer: |
||||||||||||||||
Auto |
2,099 | 446 | 452 | 2,997 | 541 | |||||||||||
Personal |
41 | 56 | 5 | 102 | 16 | |||||||||||
| | | | | | | | | | | | | | | | |
Total |
$ | 4,303 | $ | 5,843 | $ | 10,600 | $ | 20,746 | $ | 17,711 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
December 31, 2017 |
|
|
|
|
|
|||||||||||
Residential real estate: |
||||||||||||||||
One- to four-family |
$ | 3,269 | $ | 1,116 | $ | 5,267 | $ | 9,652 | $ | 13,308 | ||||||
Second mortgages and equity lines of credit |
256 | 110 | 296 | 662 | 876 | |||||||||||
Commercial real estate |
| 312 | | 312 | 312 | |||||||||||
Commercial construction |
| | | | 130 | |||||||||||
Commercial |
2 | | 260 | 262 | 3,038 | |||||||||||
Consumer: |
||||||||||||||||
Auto |
1,641 | 342 | 165 | 2,148 | 162 | |||||||||||
Personal |
32 | 22 | 18 | 72 | 29 | |||||||||||
| | | | | | | | | | | | | | | | |
Total |
$ | 5,200 | $ | 1,902 | $ | 6,006 | $ | 13,108 | $ | 17,855 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
At December 31, 2018 and 2017, there were no loans past due 90 days or more and still accruing.
F-30
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
7. LOANS (Continued)
The following information pertains to impaired loans:
|
December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||||||||||||||
|
Recorded
Investment |
Unpaid
Principal Balance |
Related
Allowance |
Recorded
Investment |
Unpaid
Principal Balance |
Related
Allowance |
|||||||||||||
|
(in thousands)
|
||||||||||||||||||
Impaired loans without a valuation allowance: |
|||||||||||||||||||
Residential |
$ | 11,518 | $ | 12,054 | $ | | $ | 12,561 | $ | 13,171 | $ | | |||||||
Commercial real estate |
2,502 | 2,596 | | 312 | 312 | | |||||||||||||
Commercial construction |
| | | 130 | 130 | | |||||||||||||
Commercial |
3,761 | 4,672 | | | | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
17,781 | 19,322 | | 13,003 | 13,613 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Impaired loans with a valuation allowance: |
|
|
|
|
|
|
|||||||||||||
Residential |
19,202 | 19,634 | 1,205 | 21,749 | 22,457 | 1,242 | |||||||||||||
Commercial real estate |
| | | | | | |||||||||||||
Commercial |
65 | 65 | 53 | 3,069 | 3,153 | 739 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
19,267 | 19,699 | 1,258 | 24,818 | 25,610 | 1,981 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total impaired loans |
$ |
37,048 |
$ |
39,021 |
$ |
1,258 |
$ |
37,821 |
$ |
39,223 |
$ |
1,981 |
|||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
Year Ended December 31, | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||||||||||||||||||||
|
Average
Recorded Investment |
Interest
Income Recognized |
Interest
Income Recognized on Cash Basis |
Average
Recorded Investment |
Interest
Income Recognized |
Interest
Income Recognized on Cash Basis |
Average
Recorded Investment |
Interest
Income Recognized |
Interest
Income Recognized on Cash Basis |
|||||||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||||||||
Residential |
$ | 32,186 | $ | 1,764 | $ | 1,379 | $ | 38,931 | $ | 2,146 | $ | 1,699 | $ | 48,541 | $ | 2,599 | $ | 2,458 | ||||||||||
Commercial real estate |
744 | | | 78 | | | 121 | | | |||||||||||||||||||
Commercial construction |
26 | | | 132 | 13 | 13 | 135 | 9 | 9 | |||||||||||||||||||
Commercial |
2,729 | 35 | 32 | 3,629 | 122 | 121 | 2,056 | 59 | 58 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
$ | 35,685 | $ | 1,799 | $ | 1,411 | $ | 42,770 | $ | 2,281 | $ | 1,833 | $ | 50,853 | $ | 2,667 | $ | 2,525 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income recognized and interest income recognized on a cash basis in the table above represents interest income for the years ended December 31, 2018, 2017 and 2016, not for the time period designated as impaired. No additional funds are committed to be advanced in connection with impaired loans.
F-31
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
7. LOANS (Continued)
There were no material TDR loan modifications during the year ended December 31, 2018. During the year ended December 31, 2017, there were two commercial TDRs in the second quarter of 2017, which paid off in the fourth quarter of 2017. During the year ended December 31, 2016, there was one material TDR consisting of a $2.3 million commercial loan.
For 2016 through 2018, residential real estate troubled debt restructurings included rate reductions ranging from 0.50% to 5.625% for periods of two to twenty-eight years, interest only periods of two to thirty-six months and extensions of maturity dates of eighteen months to twenty-eight years. There was one commercial troubled debt restructuring in 2016, which included an extension of maturity date and compliance with specific covenants.
The recorded investment of troubled debt restructurings was $22.0 million and $26.4 million at December 31, 2018 and 2017, respectively. Of these loans, $4.3 million and $6.1 million were on non-accrual at December 31, 2018 and 2017, respectively.
Although not general practice, there were modifications that included extending maturity dates. These amounts show an increase from the pre-modification balance due to capitalized delinquent interest and/or escrow. All TDR loans are considered impaired and management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each loan. TDR loans which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In either case, any reserve required is recorded as part of the allowance for loan losses.
For the years ended December 31, 2018, 2017 and 2016, there were no significant troubled debt restructures that defaulted in the first twelve months of restructure. A default is defined as two or more payments in arrears.
Credit Quality Information
The Company uses a ten grade internal loan rating system for commercial real estate, commercial construction and commercial loans, as follows:
Loans rated 1 - 6 are considered "pass" rated loans with low to average risk.
Loans rated 7 are considered "special mention." These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 8 are considered "substandard." Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 9 are considered "doubtful." Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 10 are considered "uncollectible" (loss), and of such little value that their continuance as loans is not warranted.
Loans not rated consist primarily of certain smaller balance commercial real estate and commercial loans that are managed by exception.
F-32
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
7. LOANS (Continued)
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. Annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.
On a monthly basis, the Company reviews the residential construction, residential real estate and consumer installment portfolios for credit quality primarily through the use of delinquency reports.
The following table presents the Company's loans by risk rating at December 31, 2018 and 2017:
|
December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||||||||||||||
|
Commercial
Real Estate |
Commercial |
Commercial
Construction |
Commercial
Real Estate |
Commercial |
Commercial
Construction |
|||||||||||||
|
(in thousands)
|
||||||||||||||||||
Loans rated 1 - 6 |
$ | 919,305 | $ | 268,280 | $ | 147,124 | $ | 652,625 | $ | 105,888 | $ | 116,739 | |||||||
Loans rated 7 |
10,595 | 5,165 | 14,536 | | 818 | | |||||||||||||
Loans rated 8 |
2,502 | 1,896 | | | 1,990 | | |||||||||||||
Loans rated 9 |
| 1,930 | | | 827 | | |||||||||||||
Loans rated 10 |
| | | | | | |||||||||||||
Loans not rated |
2,018 | | | 2,794 | | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
|
$ | 934,420 | $ | 277,271 | $ | 161,660 | $ | 655,419 | $ | 109,523 | $ | 116,739 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
8. MORTGAGE LOAN SERVICING
The Company sells residential mortgages to government-sponsored entities and other parties. The Company retains no beneficial interests in these loans, but may retain the servicing rights of the loans sold. Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The risks inherent in mortgage servicing rights ("MSRs") relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The unpaid principal balances of mortgage loans serviced for others were $1.99 billion and $1.93 billion as of December 31, 2018 and 2017, respectively.
The Company accounts for MSRs at fair value. The Company obtains valuations from independent third parties to determine the fair value of MSRs. Key assumptions used in the estimation of fair value include prepayment speeds, discount rates, default rates, cost to service, and contractual servicing fees. At December 31, 2018 and 2017, the following weighted average assumptions were used in the calculation of fair value of MSRs:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
Prepayment speed |
9.45 | % | 9.79 | % | |||
Discount rate |
9.32 | 9.26 | |||||
Default rate |
2.06 | 2.23 |
F-33
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
8. MORTGAGE LOAN SERVICING (Continued)
The following summarizes changes to mortgage servicing rights for the years ended December 31, 2018, 2017 and 2016:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Balance, beginning of year |
$ | 21,092 | $ | 20,333 | $ | 12,958 | ||||
Additions |
2,521 | 2,815 | 8,505 | |||||||
Changes in fair value due to: |
||||||||||
Reductions from loans paid off during the year |
(1,795 | ) | (1,686 | ) | (1,779 | ) | ||||
Changes in valuation inputs or assumptions |
399 | (370 | ) | 649 | ||||||
| | | | | | | | | | |
Balance, end of year |
$ | 22,217 | $ | 21,092 | $ | 20,333 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
For the years ended December 31, 2018, 2017 and 2016, contractually specified servicing fees included in other mortgage banking income amounted to $5.4 million, $5.2 million, and $4.1 million respectively.
9. OTHER REAL ESTATE LOANS AND REPOSSESSED ASSETS
Income and expenses applicable to foreclosed and repossessed assets include the following:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Gain on sales of real estate, net |
$ | (126 | ) | $ | (40 | ) | $ | (343 | ) | |
Net loss on sales of repossessed assets |
106 | 81 | 59 | |||||||
Write-downs of real estate |
5 | 57 | 212 | |||||||
Operating expenses |
110 | (36 | ) | 239 | ||||||
| | | | | | | | | | |
|
$ | 95 | $ | 62 | $ | 167 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Foreclosed and repossessed assets consist of two and four residential real estate properties with recorded values of $556,000 and $665,000 at December 31, 2018 and 2017, respectively. Foreclosed and repossessed assets also includes real estate properties and automobiles with total recorded values of $193,000 and $97,000 at December 31, 2018 and 2017, respectively. All foreclosed and repossessed assets are held for sale. Mortgage loans in the process of foreclosure totaled $4.8 million and $4.5 million as of December 31, 2018 and 2017, respectively, and are reported in loans.
F-34
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
10. PROPERTY AND EQUIPMENT
A summary of the cost and accumulated depreciation of property and equipment follows:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Land |
$ | 12,605 | $ | 5,466 | |||
Buildings and leasehold improvements |
51,076 | 29,553 | |||||
Furniture, equipment and vehicles |
25,246 | 20,437 | |||||
Fixed assets in process |
2,883 | 554 | |||||
| | | | | | | |
|
91,810 | 56,010 | |||||
Less accumulated depreciation and amortization |
(34,765 | ) | (31,523 | ) | |||
| | | | | | | |
Property and equipment, net |
$ | 57,045 | $ | 24,487 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Depreciation and amortization expense amounted to $3.2 million, $2.9 million and $2.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
At December 31, 2018 and 2017, fixed assets in process represents building improvements and equipment not placed in service.
Pursuant to the terms of noncancelable operating lease agreements in effect at December 31, 2018, pertaining to property and equipment, future minimum lease payments under various operating leases are as follows:
Years Ending December 31,
|
(in thousands) | |||
---|---|---|---|---|
2019 |
$ | 2,045 | ||
2020 |
1,569 | |||
2021 |
1,303 | |||
2022 |
992 | |||
2023 |
829 | |||
Thereafter |
2,990 | |||
| | | | |
|
$ | 9,728 | ||
| | | | |
| | | | |
| | | | |
The noncancelable lease agreements contain options to extend for periods from three to twenty-five years, the cost of which is not included above. Rent expense amounted to $2.0 million, $1.7 million and $1.6 million for the years ended December 31, 2018, 2017 and 2016 and is included in occupancy and equipment expenses in the accompanying Consolidated Statements of Operations.
F-35
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
11. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table presents changes in the carrying value of goodwill for the periods indicated:
|
Year Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Balance, beginning of year |
$ | 13,365 | $ | 13,365 | |||
Goodwill acquiredCoastway |
56,396 | | |||||
Goodwill acquiredCumberland Mortgage |
327 | | |||||
| | | | | | | |
Balance, end of year |
$ | 70,088 | $ | 13,365 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
HarborOne Mortgage is identified as a reporting unit for purposes of goodwill impairment testing. HarborOne Mortgage goodwill was evaluated for impairment in the fourth quarter of 2018 with no impairment loss recognition considered necessary.
Core Deposit Intangible
The Company recognized core deposit intangibles ("CDI") of $9.0 million in connection with the Coastway acquisition. The Company's change in the gross amount of core deposit intangibles and the related accumulated amortization consisted of the following:
|
Year Ended
December 31, 2018 |
|||
---|---|---|---|---|
|
(in thousands)
|
|||
Gross amount of CDI: |
||||
Balance, beginning of year |
$ | | ||
Additions due to acquisitions |
8,952 | |||
| | | | |
Balance, end of year |
8,952 | |||
| | | | |
Accumulated amortization: |
||||
Balance, beginning of year |
| |||
Amortization |
(618 | ) | ||
| | | | |
Balance, end of year |
(618 | ) | ||
| | | | |
Net CDI, end of year |
$ | 8,334 | ||
| | | | |
| | | | |
| | | | |
The estimated aggregate amortization expense related to the Company's core deposit intangible assets for each of the next five years is $2.3 million, $1.7 million, $1.2 million, $900,000 and $800,000. The weighted average original amortization period is 7.3 years.
Other Intangible Assets
The non-compete intangible asset was recognized in connection with HarborOne Mortgage and it is being amortized over the four year period of the agreement. Amortization expense for this asset of $88,000, $88,000, and $89,000 was recorded in 2018, 2017, and 2016, respectively, with the remaining amortization of $45,000 to occur in 2019.
F-36
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
12. DEPOSITS
A summary of deposit balances, by type, is as follows:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
NOW and demand deposit accounts |
$ | 556,517 | $ | 395,153 | |||
Regular savings and club accounts |
482,088 | 356,300 | |||||
Money market deposit accounts |
758,933 | 721,021 | |||||
| | | | | | | |
Total non-certificate accounts |
1,797,538 | 1,472,474 | |||||
| | | | | | | |
Term certificate accounts greater than $250,000 |
180,305 | 78,165 | |||||
Term certificate accounts less than or equal to $250,000 |
629,710 | 389,609 | |||||
Brokered deposits |
77,508 | 73,490 | |||||
| | | | | | | |
Total certificate accounts |
887,523 | 541,264 | |||||
| | | | | | | |
Total deposits |
$ | 2,685,061 | $ | 2,013,738 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions. The reciprocal deposit program provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. At December 31, 2018 and 2017, total reciprocal deposits were $110.4 million and $174.2 million, respectively, consisting primarily of money market accounts.
A summary of certificate accounts by maturity at December 31, 2018 is as follows:
|
Amount |
Weighted
Average Rate |
|||||
---|---|---|---|---|---|---|---|
|
(dollars in thousands)
|
||||||
Within 1 year |
$ | 646,130 | 2.06 | % | |||
Over 1 year to 2 years |
124,312 | 2.11 | |||||
Over 2 years to 3 years |
84,875 | 1.91 | |||||
Over 3 years to 4 years |
25,002 | 1.96 | |||||
Over 4 years to 5 years |
8,954 | 2.10 | |||||
| | | | | | | |
Total certificate deposits |
889,273 | 2.05 | % | ||||
Less unaccreted acquisition discount |
(1,750 | ) | |||||
| | | | | | | |
Total certificate deposits, net |
$ | 887,523 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
F-37
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
13. FHLB BORROWINGS
Borrowed funds at December 31, 2018 and 2017 consisted of FHLB advances. Short-term advances were $290.0 million and $44.0 million at December 31, 2018 and 2017, respectively, with a weighted average rate of 2.65% and 1.50%, respectively. Long-term advances are summarized below:
|
December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||||||||||||||
|
Amount by
Scheduled Maturity* |
Amount by
Call Date(1) |
Weighted
Average Rate(2) |
Amount by
Scheduled Maturity* |
Amount by
Call Date(1) |
Weighted
Average Rate(2) |
|||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||
Year ending December 31: |
|||||||||||||||||||
2018 |
$ | | $ | | | % | $ | 111,250 | $ | 111,250 | 1.47 | % | |||||||
2019 |
90,000 | 120,000 | 2.06 | 60,000 | 60,000 | 1.66 | |||||||||||||
2020 |
77,000 | 87,000 | 2.25 | 50,000 | 50,000 | 1.84 | |||||||||||||
2021 |
41,750 | 21,750 | 1.95 | 20,000 | 20,000 | 1.79 | |||||||||||||
2022 |
| | | | | | |||||||||||||
2023 |
20,199 | 199 | 1.56 | 5,115 | 5,115 | 0.65 | |||||||||||||
2024 and thereafter |
987 | 987 | | | | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
|
$ | 229,936 | $ | 229,936 | 2.05 | % | $ | 246,365 | $ | 246,365 | 1.60 | % | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The FHLB advances are secured by a blanket security agreement on qualified collateral defined primarily as 81% of the carrying value of first mortgage loans on residential property and a portion of the commercial real estate loans deemed acceptable to the FHLB of Boston.
The Company also has an available line of credit with the Federal Reserve Bank secured by 75% of the carrying value of indirect auto loans with an amortized balance amounting to $70.6 million and $136.1 million, respectively, of which no amount was outstanding at December 31, 2018 and 2017.
14. SUBORDINATED DEBENTURES
On August 30, 2018, the Company issued $35.0 million in fixed-to-floating rate subordinated notes due 2028 (the "Notes") in a private placement transaction to institutional accredited investors. The Notes bear interest at annual fixed rate of 5.625% until September 1, 2023 at which time the interest rate resets quarterly to an interest rate per annum equal to the three-month LIBOR plus 278 basis points. Interest is payable semi-annually on March 1 and September 1 each year through September 1, 2023 and quarterly thereafter. The Notes can be redeemed partially or in whole, prior to the maturity date beginning September 1, 2023 and on any scheduled interest payment date thereafter, at par. The Notes are carried on the Consolidated Balance Sheets net of issuance costs of $1.2 million, which are being amortized over the period to maturity date using the interest method. At December 31, 2018, the Notes qualified as Tier 2 Capital for regulatory capital purposes.
F-38
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
15. INCOME TAXES
Allocation of the federal and state income taxes between current and deferred portions for the years ended December 31, 2018, 2017 and 2016 are as follows:
|
2018 | 2017 | 2016 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||
Current tax provision: |
||||||||||
Federal |
$ | 2,576 | $ | 6,000 | $ | 3,571 | ||||
State |
1,377 | 1,371 | 988 | |||||||
| | | | | | | | | | |
|
3,953 | 7,371 | 4,559 | |||||||
| | | | | | | | | | |
Deferred tax benefit: |
||||||||||
Federal |
(740 | ) | (442 | ) | (1,099 | ) | ||||
State |
(400 | ) | (256 | ) | (163 | ) | ||||
| | | | | | | | | | |
|
(1,140 | ) | (698 | ) | (1,262 | ) | ||||
| | | | | | | | | | |
Income tax provision |
$ | 2,813 | $ | 6,673 | $ | 3,297 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The reasons for the differences between the statutory federal income tax and the actual income tax provision for the years ended December 31, 2018, 2017 and 2016 are summarized as follows:
|
2018 | 2017 | 2016 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands)
|
|||||||||
Statutory tax rate |
21 | % | 35 | % | 34 | % | ||||
Statutory tax provision |
$ | 2,983 | $ | 5,968 | $ | 3,138 | ||||
Increase (decrease) resulting from: |
||||||||||
State taxes, net of federal tax benefit |
772 | 694 | 545 | |||||||
Bank-owned life insurance |
(358 | ) | (359 | ) | (370 | ) | ||||
Non-deductible merger expenses |
196 | | | |||||||
Non-deductible stock offering expenses |
| | 100 | |||||||
Employee Stock Ownership Plan expenses |
106 | 195 | 122 | |||||||
Tax exempt income |
(180 | ) | (303 | ) | (302 | ) | ||||
Effect of tax rate change |
| 243 | | |||||||
Reduction in uncertain tax positions |
(801 | ) | | | ||||||
Other, net |
95 | 235 | 64 | |||||||
| | | | | | | | | | |
Income tax provision |
$ | 2,813 | $ | 6,673 | $ | 3,297 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
F-39
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
15. INCOME TAXES (Continued)
The tax effects of each item that give rise to deferred taxes at December 31, 2018 and 2017 are as follows:
|
2018 | 2017 | |||||
---|---|---|---|---|---|---|---|
|
(in thousands)
|
||||||
Deferred tax assets: |
|||||||
Allowance for loan losses |
$ | 5,776 | $ | 5,197 | |||
Employee benefit plans |
5,288 | 3,322 | |||||
Mark-to-market loans |
4,728 | 540 | |||||
Accrued expenses not deducted for tax purposes |
976 | 181 | |||||
HarborOne Mortgage loan repurchase reserve |
212 | 193 | |||||
Charitable contribution and other carryforwards |
380 | 1,046 | |||||
Net unrealized loss on securities available for sale |
665 | 179 | |||||
Other |
661 | 179 | |||||
| | | | | | | |
|
18,686 | 10,837 | |||||
| | | | | | | |
Deferred tax liabilities: |
|||||||
Deferred income annuities |
(1,352 | ) | (1,237 | ) | |||
Depreciation and amortization |
(294 | ) | (167 | ) | |||
Deferred loan fees |
(1,742 | ) | (2,661 | ) | |||
Mortgage servicing rights |
(6,241 | ) | (5,929 | ) | |||
Core deposit intangible |
(2,330 | ) | | ||||
| | | | | | | |
|
(11,959 | ) | (9,994 | ) | |||
| | | | | | | |
Net deferred tax asset |
$ | 6,727 | $ | 843 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
A summary of the change in the net deferred tax asset (liability) for the years ended December 31, 2018, 2017 and 2016 is as follows:
|
2018 | 2017 | 2016 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||
Balance at beginning of year |
$ | 843 | $ | 610 | $ | (989 | ) | |||
Deferred tax benefit |
1,140 | 698 | 1,262 | |||||||
Coastway net deferred tax asset acquired |
4,258 | | | |||||||
Change in directors' retirement plan |
| (391 | ) | (93 | ) | |||||
Change in securities available for sale |
486 | (74 | ) | 430 | ||||||
| | | | | | | | | | |
Balance at end of year |
$ | 6,727 | $ | 843 | $ | 610 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The Tax Act of 2017 was enacted on December 22, 2017, resulting in changes in U.S. corporate tax rates, business-related exclusions, deductions and credits. Enactment of the Tax Act of 2017 required the Company to reflect the changes associated with the law's provisions in its Consolidated Financial Statements as of the enactment date. Accordingly, the Company revalued its deferred tax assets and liabilities and recorded a net reduction in the Company's net deferred tax asset and an additional income tax provision in the amount of $243,000 in the Company's Consolidated Financial Statements.
F-40
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
15. INCOME TAXES (Continued)
The Company's income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service ("IRS") and Massachusetts Department of Revenue for the years ended December 31, 2015 through 2018.
At December 31, 2018, the Bank had a net operating loss carryforward in the state of New Hampshire of $2.8 million related to the acquisition of HarborOne Mortgage with a recorded deferred tax asset of $22,000 at December 31, 2018. The net operating loss expires on December 31, 2024. The state of New Hampshire limits the use of acquired net operating losses that can be used by the Bank each year based on Internal Revenue Code Section 382. This limitation is $552,000 per year. Management believes it is more likely than not that it will be able to utilize the New Hampshire net operating loss carryforward prior to expiration.
The Company may carryforward charitable contributions to the succeeding five taxable years. The utilization of the charitable contribution carryforward may not exceed 10% of taxable income as defined by the federal taxation laws. At December 31, 2018, the Company had a charitable contribution carryforward of $1.1 million. This carryforward was generated from the Company's creation of the Foundation to which it contributed 385,450 shares of its common stock and $965,000 in cash in connection with the offering in June 2016. Management believes it is more likely than not that it will utilize the benefit over the five year carryforward period.
During 2017, federal and state amended tax returns were filed that requested tax refunds of approximately $3.2 million. These refunds reflected the change in the tax basis of certain assets not reflected on the original tax return filings. In addition, net operating loss carryforwards for 2016 and related uncertain tax benefits were recognized on the 2016 and 2017 tax return filings. The amended tax return filings net of the tax impact of a temporary difference adjustment of $320,000 reflect "unrecognized tax benefits", which are defined as the aggregate differences between tax return positions and the benefits recognized in the Consolidated Financial Statements. Interest on the uncertain tax positions was reflected in the determination of tax expense for 2018 and 2017. Federal tax refunds for years 2014 and 2015 in the amount of $826,000 and $1.3 million, respectively, were received during 2018.
The balance of unrecognized tax benefits, the amount of related interest accrued and what management believes to be the range of reasonably possible changes in the next 12 months, are:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Unrecognized tax benefits |
$ | 3,635 | $ | 4,570 | |||
Accrued interest on unrecognized tax benefits |
134 | 34 | |||||
Portion that, if recognized, would reduce tax expense and effective tax rate |
3,769 | 4,604 | |||||
Reasonably possible reduction to the balance of unrecognized tax in subsequent year |
1,032 | 1,959 | |||||
Portion that, if recognized, would reduce tax expense and effective tax rate |
1,032 | 1,959 |
F-41
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
15. INCOME TAXES (Continued)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods the deferred tax assets are expected to be deductible, management believes it is more likely than not that its deferred tax assets are realizable. It should be noted, however, that factors beyond management's control, such as the general economy and real estate values, can affect future levels of taxable income, and no assurance can be given that sufficient taxable income will be generated to fully absorb gross deductible temporary differences.
16. OTHER COMMITMENTS AND CONTINGENCIES
Loan Commitments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and advance funds on various lines of credit. Those commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying Consolidated Financial Statements.
The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
The following off-balance sheet financial instruments were outstanding at December 31, 2018 and 2017. The contract amounts represent credit risk.
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Commitments to grant loans |
$ | 47,958 | $ | 86,790 | |||
Unadvanced funds on home equity lines of credit |
138,227 | 77,117 | |||||
Unadvanced funds on revolving lines of credit |
125,257 | 71,151 | |||||
Unadvanced funds on construction loans |
111,333 | 144,918 |
Commitments to extend credit and unadvanced portion of construction loans are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments to grant loans generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for unadvanced funds on construction loans, home equity and revolving lines of credit may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. Commitments to grant loans, unadvanced construction loans and home equity lines of credit are collateralized by real estate, while revolving lines of credit are unsecured.
F-42
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
16. OTHER COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
The Company has entered into employment agreements with certain executive officers. The term of the agreements commenced on the effective date of the signed agreements and continues thereafter until terminated, as defined by the agreements. The agreements generally provide for a specified minimum annual compensation and the continuation of benefits currently received. However, such employment can be terminated for cause, as defined, without incurring any continuing obligations. In addition, all of the agreements provide for severance payments to the officers following a change in control, as defined.
The Company entered into an employment agreement with the former President and Chief Executive Officer of Coastway as part of the merger agreement. The agreement has a five year term that provides total compensation of $2.2 million. Generally, in the event of termination after the first 12 months, the remaining total compensation is payable. The Company is expensing the total compensation over the 12 months and recognized $509,000 in compensation for the year ended December 31, 2018 and the remaining $1.7 million will be recognized in 2019.
Reserve for Residential Mortgage Loan Repurchase Losses
The Company sells residential mortgage loans on a "whole-loan" basis to government-sponsored entities ("GSEs" or "Agencies") Fannie Mae and Freddie Mac and also to non-agency investors. These loan sales occur under industry standard contractual provisions that include various representations and warranties, which typically cover ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan and other similar matters. The Company may be required to repurchase certain loans sold with identified defects, indemnify the investor, or reimburse the investor for any credit losses incurred. The Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management's estimate for which we have a repurchase obligation. The reserves are established by a charge to loan expenses in our Consolidated Statements of Operations. At December 31, 2018 and 2017, this reserve totaled $757,000 and $688,000, respectively, and is included in other liabilities and accrued expenses on the Consolidated Balance Sheets.
The repurchase reserve is applicable to loans the Company originated and sold with representations and warranties, which is representative of the entire sold portfolio. The repurchase loss liability is estimated by origination year and to the extent that repurchase demands are made by investors, we may be able to successfully appeal such repurchase demands. The reserve considers anticipated future losses and the Company's lack of historical experience with the make-whole demands. The reserve for residential mortgage loan repurchase losses represents our best estimate of the probable loss that we may incur due to the representations and warranties in our loan sales contracts with investors. Repurchase losses depend upon economic factors and other external conditions that may change over the life of the underlying loans. Additionally, lack of access to the servicing records of loans sold on a service released basis adds difficulty to the estimation process. To the extent that future investor repurchase demand and appeals success differ from past experience, the Company could have increased demands and increased loss severities on repurchases, causing future additions to the repurchase reserve.
Certain loans were sold with recourse provisions, and at both December 31, 2018 and 2017, the related maximum contingent liability related to loans sold amounted to $1.6 million. Based on
F-43
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
16. OTHER COMMITMENTS AND CONTINGENCIES (Continued)
discounted cash flow of projected losses on sold loans in this portfolio at December 31, 2018 and 2017, the Company had no recourse liability.
Contingent Consideration
A portion of the purchase price of HarborOne Mortgage was contingent on future results of HarborOne Mortgage. The Company recorded a contingent liability of $3.5 million in July 2015, at the time of the acquisition. The contingent liability was based on estimated future pre-tax earnings for the four-year period ending June 30, 2019. The contingency was settled in full in the fourth quarter of 2017 and the Company reversed the $1.2 million remaining contingent liability which was included in other income.
Other
In the ordinary course of business, various legal claims arise from time to time and, in the opinion of management based on discussion with legal counsel, management does not believe these claims will have a material effect on the Company's financial position or results of operations.
17. DERIVATIVES
Interest Rate Risk ManagementDerivative Instruments Not Designated As Hedging Instruments
The Company is party to a variety of derivative transactions, including derivative loan commitments, forward loan sale commitments and interest rate swap contracts. The Company enters into derivative contracts in order to meet the financing needs of its customers. The Company also enters into derivative contracts as a means of reducing its interest rate risk and market risk.
All derivatives are recognized in the Consolidated Balance Sheets at fair value. Changes in the fair value of derivatives are recognized in earnings. The Company did not have any fair value hedges or cash flow hedges at December 31, 2018 or 2017.
Derivative Loan Commitments
Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.
Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.
F-44
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
17. DERIVATIVES (Continued)
Forward Loan Sale Commitments
The Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.
With a "mandatory delivery" contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a "pair-off" fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.
With a "best efforts" contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).
The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.
Interest Rate Swaps
The Company enters into interest rate swap agreements that are transacted to meet the financing needs of its commercial customers. Offsetting interest rate swap agreements are simultaneously transacted with a third-party financial institution to effectively eliminate the Company's interest rate risk associated with the customer swaps. The primary risks associated with these transactions arise from exposure to the ability of the counterparties to meet the terms of the contract. The interest rate swap notional amount below is the aggregate notional amount of the customer swap and the offsetting third-party swap.
F-45
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
17. DERIVATIVES (Continued)
The following tables present the fair values of derivative instruments in the Consolidated Balance Sheets:
|
|
Assets | Liabilities | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Notional
Amount |
Balance Sheet
Location |
Fair
Value |
Balance Sheet
Location |
Fair
Value |
|||||||||
|
(in thousands)
|
|||||||||||||
December 31, 2018: |
||||||||||||||
Derivative loan commitments |
$ | 71,325 | Other assets | $ | 1,261 | Other liabilities | $ | 112 | ||||||
Forward loan sale commitments |
54,500 | Other assets | | Other liabilities | 518 | |||||||||
Interest rate swaps |
285,541 | Other assets | 3,193 | Other liabilities | 3,193 | |||||||||
Risk participation agreements |
80,418 | Other assets | | Other liabilities | | |||||||||
| | | | | | | | | | | | | | |
Total |
$ | 4,454 | $ | 3,823 | ||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
December 31, 2017: |
||||||||||||||
Derivative loan commitments |
$ | 81,604 | Other assets | $ | 1,047 | Other liabilities | $ | 27 | ||||||
Forward loan sale commitments |
95,680 | Other assets | 46 | Other liabilities | 92 | |||||||||
Interest rate swaps |
246,704 | Other assets | 2,153 | Other liabilities | 2,153 | |||||||||
Risk participation agreements |
42,856 | | | |||||||||||
| | | | | | | | | | | | | | |
Total |
$ | 3,246 | $ | 2,272 | ||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The following table presents information pertaining to the Company's derivative instruments on the Consolidated Statements of Operations:
|
|
Amount of Gain (Loss) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Year Ended December 31, | ||||||||||
|
Location of Gain (Loss) | 2018 | 2017 | 2016 | ||||||||
|
|
(in thousands)
|
||||||||||
Derivative loan commitments |
Mortgage banking income | $ | 129 | $ | (1,211 | ) | 799 | |||||
Forward loan sale commitments |
Mortgage banking income | (472 | ) | 39 | (225 | ) | ||||||
| | | | | | | | | | | | |
Total |
$ | (343 | ) | $ | (1,172 | ) | 574 | |||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
18. COMPENSATION AND BENEFIT PLANS
Defined Contribution Plan
The Company provides a savings plan which qualifies under Section 401(k) of the Internal Revenue Code and provides for voluntary contributions by participating employees up to the maximum amount permitted by law. The Company may contribute 9.3% of each employee's compensation plus 5.7% of the employee's compensation in excess of the social security wage base on a discretionary basis up to regulatory maximums. Contributions expensed were $2.3 million, $2.1 million and $2.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
F-46
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
18. COMPENSATION AND BENEFIT PLANS (Continued)
Management Incentive Program
The Company from time to time creates incentive compensation plans for senior management and other officers to participate in at varying levels. In addition, the Company may also pay a discretionary bonus to senior management, officers, and/or nonofficers of the Company. These programs are administered by the Compensation Committee of the Board of Directors. The expense for the incentive plans amounted to $3.3 million, $2.0 million and $2.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Supplemental Retirement Plans
The Company provides supplemental retirement benefits to two senior executive officers of the Company under the terms of the Supplemental Executive Retirement Plan Agreements (the "Agreements"). Benefits to be paid under the Agreements are based primarily on the officer's compensation and estimated mortality. The Agreements are funded with annuities purchased by the Company. At December 31, 2018, 2017 and 2016, included in other liabilities and accrued expenses is the Company's obligation under the plans of $5.3 million, $4.7 million and $3.8 million, respectively. The retirement benefits, as defined in the Agreements, are accrued by charges to compensation expense over the required service periods of the officers. Expense related to these benefits was $628,000, $933,000 and $1.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company assumed a supplemental retirement plan in the Coastway acquisition. At December 31, 2018, the Company's obligation under the plan of $3.4 million is included in other liabilities and accrued expenses. Compensation expense related to this benefit was $90,000 for the year ended December 31, 2018. The plan was frozen as part of the merger agreement and the settlement of the plan will be completed in the first quarter of 2019.
Split-Dollar Life Insurance Arrangements
The Company has collateral assignment split dollar life insurance agreements with an executive officer and a retired executive, whereby the Company made annual premium payments for the executives' life insurance policies. The Company has the unqualified right to receive from the insurer an amount which is equal to the lesser of the cash surrender value of the policy or the aggregate un-reimbursed amount of premium payments with respect to the policy for which the Company paid. The final payment was made in 2016. In 2016, the Company terminated the agreement with one of the officers and ownership of the policy was transferred to the Company to fully reimburse the Company for premiums paid on the policy of $1.2 million. An endorsement split dollar life insurance agreement was established for the officer whereby the Company will pay to the executives' estates or beneficiaries a portion of the death benefit that the Company will receive as beneficiary of such policy. Expense associated with this post retirement benefit for the years ended December 31, 2018, 2017 and 2016 amounted to $73,000, $106,000 and $101,000, respectively. The cash surrender value of the new policy is included in bank-owned life insurance on the Consolidated Balance Sheets.
Deferred Compensation Plan
The Company is the sole owner of an annuity policy pertaining to one of the Company's executives. The Company has an agreement with this executive whereby upon retirement the Company
F-47
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
18. COMPENSATION AND BENEFIT PLANS (Continued)
will pay to the executive an amount equal to the cash surrender value of the annuity less premiums paid accumulated at an interest rate of 1.5% per year. At December 31, 2018, 2017 and 2016, included in other liabilities and accrued expenses is the Company's obligation under the plan of $322,000, $293,000 and $265,000, respectively. For the years ended December 31, 2018, 2017 and 2016, the expense amounted to $29,000, $28,000 and $27,000, respectively.
The Company has agreements with two executive officers whereby the Company will pay the cost of the premium for individual supplemental medical and prescription drug coverage for their lifetime upon retirement at age 65 or later. Spousal coverage is provided each year the executive is eligible for coverage and the spouse is age 65 or over. At December 31, 2018, 2017 and 2016, included in other liabilities and accrued expenses is the Company's obligation under the plan of $229,000, $226,000 and $216,000, respectively. For the years ended December 31, 2018, 2017 and 2016, the expense amounted to $3,000, $10,000 and $33,000, respectively.
The Company assumed a deferred compensation plan in the Coastway acquisition. At December 31, 2018, other assets included $1.5 million in plan assets and other liabilities and accrued expenses included a liability for the benefit obligation of $1.5 million. Compensation expense related to this plan for the year ended December 31, 2018 was $46,000.
Long-Term Incentive Plan
During 2015, the Company entered into a long-term incentive plan with several executive officers. Benefits are earned annually based on the Company's achievement of performance goals. The plan is administered by the Company's Board of Directors. Included in other liabilities and accrued expenses at December 31, 2018, 2017 and 2016 is $1.3 million, $1.3 million and $810,000, respectively, for this plan. For the years ended December 31, 2018, 2017 and 2016, the expense amounted to $56,000, $453,000 and $474,000, respectively. The plan was amended effective January 1, 2018 and no further incentive awards will be awarded under the plan.
Post-Retirement Life Insurance
Employees who are covered under the Company's bank-owned life insurance program can elect to participate in the benefits of the program while employed by the Company. The Company granted post-employment coverage to certain executives. This post retirement benefit is included in other liabilities and accrued expenses at December 31, 2018, 2017 and 2016 in the amount of $171,000, $142,000 and $136,000, respectively. For the years ended December 31, 2018, 2017 and 2016, the expense amounted to $29,000, $7,000 and $57,000, respectively.
Employee Stock Ownership Plan
On June 29, 2016, the Company established an ESOP to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified retirement plan for the benefit of the eligible Company employees. The ESOP shares were purchased through a loan from the Company and as the debt is repaid, shares are released. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The unreleased shares are deducted from stockholders' equity as unearned ESOP shares in the accompanying Consolidated Balance Sheets. The number of shares committed to be released per year is 59,359 through 2035.
F-48
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
18. COMPENSATION AND BENEFIT PLANS (Continued)
The following table presents share information held by the ESOP:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
Allocated shares |
118,719 | 59,359 | |||||
Shares committed to be allocated |
59,359 | 59,359 | |||||
Unallocated shares |
1,009,110 | 1,068,470 | |||||
| | | | | | | |
Total shares |
1,187,188 | 1,187,188 | |||||
| | | | | | | |
Fair value of unallocated shares |
$ | 16,035,000 | $ | 20,472,000 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total compensation expense recognized in connection with the ESOP was $1.1 million, $1.1 million and $951,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
ESOP Restoration Plan
During 2016, the Company also adopted an ESOP Restoration Plan for the benefit of ESOP eligible employees whose annual compensation exceeds the amount of annual compensation permitted to be recognized under the ESOP by the Internal Revenue Code. Under the ESOP Restoration Plan, eligible participants would receive a credit each year equal to the amount they would have received under the ESOP but for the Internal Revenue Service imposed compensation limit. Any benefits earned under the ESOP Restoration Plan would become payable at the earliest of six months and a day after the participant's separation of service from the Bank, the participant's death, a change in control of the Company or upon termination of the ESOP Restoration Plan. These benefits are accrued over the period during which employees provide services to earn these benefits. For the year ended December 31, 2018, 2017 and 2016, $24,000, $182,000 and $13,000, respectively, was accrued for the ESOP Restoration Plan.
Defined Benefit Plan
The Company assumed a frozen noncontributory defined benefit pension plan in the Coastway acquisition. At December 31, 2018 the fair value of the plan assets were $1.4 million and the projected benefit obligation was $1.6 million. The unfunded liability balance of $202,000 is included in other liabilities and accrued expenses.
Directors' Retirement Plan
The Company has an unfunded director fee continuation plan which provides postretirement benefits to eligible directors of the Company. Participants in the plan must have at least six years of service as a director to be vested in the benefit which is determined based on number of years of service. The Company elected to curtail the plan in 2017.
F-49
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
18. COMPENSATION AND BENEFIT PLANS (Continued)
Based on the actuarial analysis, the funded status of the plan and the components of net periodic cost are as follows:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Change in projected benefit obligation: |
||||||||||
Benefit obligation at beginning of year |
$ | 1,837 | $ | 1,536 | $ | 1,369 | ||||
Service cost |
| 87 | 75 | |||||||
Interest cost |
76 | 69 | 56 | |||||||
Loss |
| 145 | 36 | |||||||
Benefits paid |
(37 | ) | | | ||||||
| | | | | | | | | | |
Benefit obligation and funded status at end of year |
$ | 1,876 | $ | 1,837 | $ | 1,536 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Accumulated benefit obligation |
$ | 1,876 | $ | 1,837 | $ | 1,380 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Service cost |
$ | | $ | 87 | $ | 75 | ||||
Interest cost |
76 | 69 | 56 | |||||||
Loss recognized |
| 200 | 3 | |||||||
Prior service cost recognized |
| 962 | 232 | |||||||
| | | | | | | | | | |
Net periodic cost |
$ | 76 | $ | 1,318 | $ | 366 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The following assumptions were used to determine the benefit obligation and net periodic cost at or for the years ended December 31:
|
2018 | 2017 | 2016 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Discount rate |
4.14 | % | 4.00 | % | 4.00 | % | ||||
Rate of compensation increase |
N/A | N/A | % | 3.00 | % |
The following is a summary of benefit payments expected to be paid by the director's retirement plan over the next ten years:
Years Ending December 31,
|
(in thousands) | |||
---|---|---|---|---|
2019 |
$ | 37 | ||
2020 |
385 | |||
2021 |
226 | |||
2022 |
226 | |||
2023 |
226 | |||
2024 - 2028 |
1,009 |
19. RELATED PARTY TRANSACTIONS
The Bank has made loans to directors and officers, in the ordinary course of business at arms-length terms, amounting to $189,000 and $500,000 at December 31, 2018 and 2017, respectively. There were no new loans granted in 2018 and 2017. Loan repayments and reductions due to officer retirements were $311,000 and $720,000 in 2018 and 2017, respectively.
F-50
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
20. STOCK-BASED COMPENSATION
Under the HarborOne Bancorp, Inc. 2017 Stock Option and Incentive Plan (the "Equity Plan"), adopted on August 9, 2017, the Company may grant options, stock appreciation rights, restricted stock, restricted units, unrestricted stock awards, cash based awards, performance share awards, and dividend equivalent rights to its directors, officers and employees. Total shares reserved for issuance under the plan are 2,077,577. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan, with the total shares reserved for options equaling 1,483,984. The exercise price of each option equals the market price of the Company's stock on the date of grant and the maximum term of each option is ten years. The total number of shares reserved for restricted stock or restricted units is 593,593. Options and awards vest ratably over three years. The fair value of shares awarded is based on the market price at the date of grant.
Expense related to options and restricted stock granted to directors is recognized within other noninterest expense.
The following table presents the pre-tax expense associated with stock options and restricted stock awards and the related tax benefits recognized for the years presented:
The Company has standard form agreements used for stock option and restricted stock awards. The standard form agreements used for the Chief Executive Officer and all other executive officers have previously been disclosed in Securities and Exchange Commission filings and generally provide that: (1) any unvested options or unvested restricted stock vest upon a Change in Control, which is an event described in Section 280G of the Internal Revenue Code of 1986; and, that (2) any stock options which vest pursuant to a Change in Control, will be cashed out at the difference between the acquisition price and the exercise price of the stock option.
F-51
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
20. STOCK-BASED COMPENSATION (Continued)
Stock Options
The Company made the following awards of nonqualified options to purchase shares of common stock in 2018 and 2017:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2018 | 2017 | |||||||
Date of grant |
11/26/2018 | 9/26/2018 | 8/17/2017 | |||||||
Options granted |
148,398 | 13,062 | 883,311 | |||||||
Vesting period (years) |
3 | 3 | 3 | |||||||
Expiration date |
11/26/2028 | 9/26/2028 | 8/17/2027 | |||||||
Expected volatility |
22 | % | 24 | % | 24 | % | ||||
Expected life (years) |
6 | 6 | 6 | |||||||
Expected dividend yield |
| % | | % | | % | ||||
Risk free interest rate |
2.93 | % | 2.98 | % | 1.88 | % | ||||
Fair value per option |
$ | 5.02 | $ | 5.78 | $ | 5.07 |
F-52
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
20. STOCK-BASED COMPENSATION (Continued)
A summary of the status of the Company's stock option grants at December 31, 2018, is presented in the table below:
|
Outstanding | Nonvested | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Stock Option
Awards |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Term (years) |
Aggregate
Intrinsic Value |
Stock Option
Awards |
Weighted
Average Grant Date Fair Value |
|||||||||||||
Balance at January 1, 2018(1) |
883,311 | $ | 18.35 | 883,311 | $ | 5.07 | |||||||||||||
Granted |
161,460 | 17.68 | 161,460 | 5.08 | |||||||||||||||
Vested |
(294,427 | ) | 5.07 | ||||||||||||||||
Forfeited |
(54,251 | ) | 18.35 | (54,251 | ) | 5.07 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 |
990,520 | $ | 18.24 | 8.60 | $ | | 696,093 | $ | 5.07 | ||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Exercisable at December 31, 2018 |
294,427 | $ | 18.35 | 7.85 | $ | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Unrecognized cost inclusive of directors' awards |
$ | 2,989,000 | |||||||||||||||||
Weighted average remaining recognition period (years) |
1.96 |
Restricted Stock
Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the plan. The fair market value of shares awarded, based on the market price at the date of grant, is unearned compensation to be amortized over the applicable vesting period.
F-53
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
20. STOCK-BASED COMPENSATION (Continued)
The following table presents the activity in non-vested stock awards under the Equity Plan for the year ended December 31, 2018:
|
Restricted
Stock Awards |
Weighted Average
Grant Price |
|||||
---|---|---|---|---|---|---|---|
Non-vested stock awards at January 1, 2018 |
541,415 | $ | 18.35 | ||||
Vested |
(180,465 | ) | 18.35 | ||||
Granted |
4,900 | 19.03 | |||||
Forfeited |
(22,034 | ) | 18.35 | ||||
| | | | | | | |
Non-vested stock awards at December 31, 2018 |
343,816 | $ | 18.36 | ||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Unrecognized cost inclusive of directors' awards |
$ | 5,136,167 | |||||
Weighted average remaining recognition period (years) |
1.65 |
21. STOCKHOLDERS' EQUITY
Minimum Regulatory Capital Requirements
The Company and Bank are subject to various regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (the "FDIC"). Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's Consolidated Financial Statements.
Under the capital rules, risk-based capital ratios are calculated by dividing Tier 1 and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several risk-weight categories, based primarily on relative risk. The rules require banks and bank holding companies to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a leverage ratio of 4.0%. Additionally, subject to a transition schedule, the capital rules require a bank holding company to establish a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements equal to 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.
The FDIC has amended its prompt corrective action rules to reflect the revisions made by the revised capital rules described above. Under the FDIC's revised rules, which became effective January 1, 2015, an insured state nonmember bank is considered "well capitalized" if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (v) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A bank holding company is considered "well capitalized" if the bank holding company (i) has a total risk-based capital ratio of at least 10.0%, (ii) has a Tier 1 risk-based capital ratio of at least 6.0%, and (iii) is not subject to any written agreement order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Prompt corrective action provisions are not applicable to bank holding companies.
F-54
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
21. STOCKHOLDERS' EQUITY (Continued)
At December 31, 2018, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes and also exceeded the minimum capital requirements including the applicable capital conservation buffer of 1.875% (which increased to 2.5% on January 1, 2019 and thereafter).
The Company's and Bank's regulatory capital ratios as of December 31, 2018 and 2017 are presented in the table below.
|
Actual |
Minimum
Required for Capital Adequacy Purposes |
Minimum
Required to be Considered "Well Capitalized" Under Prompt Corrective Action Provisions |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||
HarborOne Bancorp, Inc. |
|||||||||||||||||||
December 31, 2018 |
|||||||||||||||||||
Common equity Tier 1 capital to risk-weighted assets |
$ | 283,738 | 9.9 | % | $ | 129,246 | 4.5 | % | N/A | N/A | |||||||||
Tier 1 capital to risk-weighted assets |
283,738 | 9.9 | 172,328 | 6.0 | N/A | N/A | |||||||||||||
Total capital to risk-weighted assets |
339,393 | 11.8 | 229,771 | 8.0 | N/A | N/A | |||||||||||||
Tier 1 capital to average assets |
283,738 | 8.2 | 137,919 | 4.0 | N/A | N/A | |||||||||||||
December 31, 2017 |
|
|
|
|
|
|
|||||||||||||
Common equity Tier 1 capital to risk-weighted assets |
$ | 330,514 | 15.1 | % | $ | 98,292 | 4.5 | % | N/A | N/A | |||||||||
Tier 1 capital to risk-weighted assets |
330,514 | 15.1 | 131,056 | 6.0 | N/A | N/A | |||||||||||||
Total capital to risk-weighted assets |
349,002 | 16.0 | 174,741 | 8.0 | N/A | N/A | |||||||||||||
Tier 1 capital to average assets |
330,514 | 12.5 | 105,423 | 4.0 | N/A | N/A | |||||||||||||
HarborOne Bank |
|
|
|
|
|
|
|||||||||||||
December 31, 2018 |
|||||||||||||||||||
Common equity Tier 1 capital to risk-weighted assets |
$ | 296,738 | 10.3 | % | $ | 129,250 | 4.5 | % | $ | 186,694 | 6.5 | % | |||||||
Tier 1 capital to risk-weighted assets |
296,738 | 10.3 | 172,333 | 6.0 | 229,778 | 8.0 | |||||||||||||
Total capital to risk-weighted assets |
317,393 | 11.1 | 229,778 | 8.0 | 287,222 | 10.0 | |||||||||||||
Tier 1 capital to average assets |
296,738 | 8.6 | 137,784 | 4.0 | 172,230 | 5.0 | |||||||||||||
December 31, 2017 |
|
|
|
|
|
|
|||||||||||||
Common equity Tier 1 capital to risk-weighted assets |
$ | 249,532 | 11.4 | % | $ | 98,266 | 4.5 | % | $ | 141,939 | 6.5 | % | |||||||
Tier 1 capital to risk-weighted assets |
249,532 | 11.4 | 131,021 | 6.0 | 174,695 | 8.0 | |||||||||||||
Total capital to risk-weighted assets |
268,021 | 12.3 | 174,695 | 8.0 | 218,368 | 10.0 | |||||||||||||
Tier 1 capital to average assets |
249,532 | 9.6 | 104,264 | 4.0 | 130,329 | 5.0 |
F-55
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
21. STOCKHOLDERS' EQUITY (Continued)
Dividend Restrictions
The Bank is subject to dividend restrictions imposed by various regulators, including a limitation on the total of all dividends that the Bank may pay to the Company in any calendar year. The total of all dividends shall not exceed the Bank's net income for the current year (as defined by statute), plus the Bank's net income retained for the two previous years, without regulatory approval. Dividends from the Bank are an important source of funds to the Company to make dividend payments on its common stock and for its other cash needs. The ability of the Company and the Bank to pay dividends is dependent on regulatory policies and regulatory capital requirements. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies relating to capital, safety and soundness, and other regulatory concerns.
Preferred Stock
The Company has 1,000,000 zero par value, preferred shares authorized and none issued or outstanding.
22. COMPREHENSIVE INCOME (LOSS)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the retained earnings section of the balance sheets, such items, along with net income, are components of comprehensive income (loss).
The components of accumulated other comprehensive loss, included in stockholders' equity, are as follows:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Securities available for sale: |
|||||||
Net unrealized loss |
$ | (3,023 | ) | $ | (811 | ) | |
Related tax effect |
665 | 179 | |||||
Stranded effect of tax rate changes (Note 1) |
| 104 | |||||
| | | | | | | |
Total accumulated other comprehensive loss |
$ | (2,358 | ) | $ | (528 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
F-56
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
22. COMPREHENSIVE INCOME (LOSS) (Continued)
The following tables present changes in accumulated other comprehensive loss by component for the years ended December 31, 2018, 2017 and 2016:
|
Year Ended December 31, | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||||||||||||||
|
Available
for Sale Securities |
Available
for Sale Securities |
Directors'
Retirement Plan |
Total |
Available
for Sale Securities |
Directors'
Retirement Plan |
Total | |||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||
Balance at beginning of year |
$ | (528 | ) | $ | (665 | ) | $ | (625 | ) | $ | (1,290 | ) | $ | 139 | $ | (731 | ) | $ | (592 | ) | ||
| | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications |
(2,212 | ) | 211 | | 211 | (951 | ) | | (951 | ) | ||||||||||||
Reclassification of stranded effect of tax rate change (Note 1) |
(104 | ) | | | | | | | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income |
| | 1,162 | 1,162 | (283 | ) | 235 | (48 | ) | |||||||||||||
Gains (losses) arising during the period and prior service cost |
| | (146 | ) | (146 | ) | | (36 | ) | (36 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Net current period other comprehensive income (loss) |
(2,316 | ) | 211 | 1,016 | 1,227 | (1,234 | ) | 199 | (1,035 | ) | ||||||||||||
Related tax effect |
486 | (74 | ) | (391 | ) | (465 | ) | 430 | (93 | ) | 337 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance at end of year |
$ | (2,358 | ) | $ | (528 | ) | $ | | $ | (528 | ) | $ | (665 | ) | $ | (625 | ) | $ | (1,290 | ) | ||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
23. FAIR VALUE OF ASSETS AND LIABILITIES
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Cash and cash equivalents The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.
Securities All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. Securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing
F-57
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
23. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.
Federal Home Loan Bank stock The fair value of FHLB stock is equal to cost based on redemption provisions.
Mortgage loans held for sale Fair values are based on prevailing market prices for similar commitments.
Loans Fair values for mortgage loans and other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Retirement plan annuities The carrying value of the annuities are based on their contract values which approximate fair value.
Mortgage servicing rights Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.
Deposits and mortgagors' escrow accounts The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) and mortgagors' escrow accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Borrowed funds The fair values of borrowed funds are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
Accrued interest The carrying amounts of accrued interest approximate fair value.
Forward loan sale commitments and derivative loan commitments Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. The assumptions for pull-through rates are derived from internal data and adjusted using management judgment. Derivative loan commitments include the non-refundable costs of originating the loan based on the Company's internal cost analysis that is not observable and the value of servicing. The weighted average pull-through rate for derivative loan commitments was 86% at both December 31, 2018 and 2017.
Interest rate swaps The Company's interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined by a third party utilizing models that use primarily market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instrument's fixed and variable cash flows, which are then discounted using an appropriate yield curve to arrive at the fair value of each swap. The pricing models do not contain a high level of subjectivity
F-58
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
23. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
as the methodologies used do not require significant judgment. The Company incorporates credit valuation analysis for counterparty nonperformance risk in the fair value measurement, including the impact of netting applicable credit enhancements such as available collateral.
Off-balance sheet credit-related instruments Fair values for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of off-balance sheet instruments are immaterial.
Fair Value Hierarchy
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation.
Transfers between levels are recognized at the end of the reporting period, if applicable. Transfers did not occur in the periods presented.
F-59
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
23. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
Level 1 | Level 2 | Level 3 |
Total
Fair Value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
||||||||||||
December 31, 2018 |
|||||||||||||
Assets |
|||||||||||||
Securities available for sale |
$ |
|
$ |
209,293 |
$ |
|
$ |
209,293 |
|||||
Loans held for sale |
| 42,107 | | 42,107 | |||||||||
Mortgage servicing rights |
| 22,217 | | 22,217 | |||||||||
Derivative loan commitments |
| | 1,261 | 1,261 | |||||||||
Interest rate swaps |
| 3,193 | | 3,193 | |||||||||
| | | | | | | | | | | | | |
|
$ | | $ | 276,810 | $ | 1,261 | $ | 278,071 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Liabilities |
|||||||||||||
Derivative loan commitments |
$ |
|
$ |
|
$ |
112 |
$ |
112 |
|||||
Forward loan sale commitments |
| | 518 | 518 | |||||||||
Interest rate swaps |
| 3,193 | | 3,193 | |||||||||
| | | | | | | | | | | | | |
|
$ | | $ | 3,193 | $ | 630 | $ | 3,823 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
December 31, 2017 |
|||||||||||||
Assets |
|||||||||||||
Securities available for sale |
$ |
|
$ |
170,853 |
$ |
|
$ |
170,853 |
|||||
Loans held for sale |
| 59,460 | | 59,460 | |||||||||
Mortgage servicing rights |
| 21,092 | | 21,092 | |||||||||
Derivative loan commitments |
| | 1,047 | 1,047 | |||||||||
Forward loan sale commitments |
| | 46 | 46 | |||||||||
Interest rate swaps |
| 2,153 | | 2,153 | |||||||||
| | | | | | | | | | | | | |
|
$ | | $ | 253,558 | $ | 1,093 | $ | 254,651 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Liabilities |
|||||||||||||
Derivative loan commitments |
$ |
|
$ |
|
$ |
27 |
$ |
27 |
|||||
Forward loan sale commitments |
| | 92 | 92 | |||||||||
Interest rate swaps |
| 2,153 | | 2,153 | |||||||||
| | | | | | | | | | | | | |
|
$ | | $ | 2,153 | $ | 119 | $ | 2,272 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
F-60
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
23. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
The table below presents, for the years ended December 31, 2018, 2017 and 2016, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis.
Assets Measured at Fair Value on a Non-recurring Basis
The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2018 and 2017. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets.
|
December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||||||||||||||
|
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||
|
(in thousands)
|
||||||||||||||||||
Impaired loans |
$ | | $ | | $ | 2,086 | $ | | $ | | $ | 3,277 | |||||||
Other real estate owned and repossessed assets |
| | 749 | | | 762 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
|
$ | | $ | | $ | 2,835 | $ | | $ | | $ | 4,039 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
F-61
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
23. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
Losses in the following table represent the amount of the fair value adjustments recorded during the period on the carrying value of the assets held at December 31, 2018 and 2017, respectively.
|
Year Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Impaired loans |
$ | 409 | $ | 415 | |||
Other real estate owned and repossessed assets |
88 | 138 | |||||
| | | | | | | |
|
$ | 497 | $ | 553 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Losses applicable to write-downs of impaired loans and other real estate owned and repossessed assets are based on the appraised value of the underlying collateral less estimated costs to sell. The losses on impaired loans is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. The losses on other real estate owned and repossessed assets represent adjustments in valuation recorded during the time period indicated and not for losses incurred on sales. Appraised values are typically based on a blend of (a) an income approach using observable cash flows to measure fair value, and (b) a market approach using observable market comparables. These appraised values may be discounted based on management's historical knowledge, expertise or changes in market conditions from time of valuation.
Summary of Fair Values of Financial Instruments
The estimated fair values, and related carrying or notional amounts, of the Company's financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt
F-62
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
23. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
|
December 31, 2018 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Fair Value | ||||||||||||||
|
Carrying
Amount |
|||||||||||||||
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
(in thousands)
|
|||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 105,521 | $ | 105,521 | $ | | $ | | $ | 105,521 | ||||||
Securities available for sale |
209,293 | | 209,293 | | 209,293 | |||||||||||
Securities held to maturity |
44,688 | | 44,706 | | 44,706 | |||||||||||
Federal Home Loan Bank stock |
24,969 | | | 24,969 | 24,969 | |||||||||||
Loans held for sale |
42,107 | | 42,107 | | 42,107 | |||||||||||
Loans, net |
2,964,852 | | | 2,959,333 | 2,959,333 | |||||||||||
Retirement plan annuities |
12,931 | | | 12,931 | 12,931 | |||||||||||
Mortgage servicing rights |
22,217 | | 22,217 | | 22,217 | |||||||||||
Accrued interest receivable |
9,996 | | 9,996 | | 9,996 | |||||||||||
Financial liabilities: |
|
|
|
|
|
|||||||||||
Deposits |
2,685,061 | | | 2,678,989 | 2,678,989 | |||||||||||
Borrowed funds |
519,936 | | 518,224 | | 518,224 | |||||||||||
Subordinated debt |
33,799 | | | 34,338 | 34,338 | |||||||||||
Mortgagors' escrow accounts |
4,551 | | | 4,551 | 4,551 | |||||||||||
Accrued interest payable |
1,611 | | 1,611 | | 1,611 | |||||||||||
Derivative loan commitments: |
|
|
|
|
|
|||||||||||
Assets |
1,261 | | | 1,261 | 1,261 | |||||||||||
Liabilities |
112 | | | 112 | 112 | |||||||||||
Interest rate swap agreements: |
|
|
|
|
|
|||||||||||
Assets |
3,193 | | 3,193 | | 3,193 | |||||||||||
Liabilities |
3,193 | | 3,193 | | 3,193 | |||||||||||
Forward loan sale commitments: |
|
|
|
|
|
|||||||||||
Assets |
| | | | | |||||||||||
Liabilities |
518 | | | 518 | 518 |
F-63
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
23. FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
|
December 31, 2017 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Fair Value | ||||||||||||||
|
Carrying
Amount |
|||||||||||||||
|
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
(in thousands)
|
|||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 80,791 | $ | 80,791 | $ | | $ | | $ | 80,791 | ||||||
Securities available for sale |
170,583 | | 170,853 | | 170,853 | |||||||||||
Securities held to maturity |
46,869 | | 47,674 | | 47,674 | |||||||||||
Federal Home Loan Bank stock |
15,532 | | | 15,532 | 15,532 | |||||||||||
Mortgage loans held for sale |
59,460 | | 59,460 | | 59,460 | |||||||||||
Loans, net |
2,176,478 | | | 2,175,423 | 2,175,423 | |||||||||||
Retirement plan annuities |
12,498 | | | 12,498 | 12,498 | |||||||||||
Mortgage servicing rights |
21,092 | | 21,092 | | 21,092 | |||||||||||
Accrued interest receivable |
6,545 | | 6,545 | | 6,545 | |||||||||||
Financial liabilities: |
|
|
|
|
|
|||||||||||
Deposits |
2,013,738 | | | 2,010,052 | 2,010,052 | |||||||||||
Borrowed funds |
290,365 | | 288,939 | | 288,939 | |||||||||||
Mortgagors' escrow accounts |
5,221 | | | 5,221 | 5,221 | |||||||||||
Accrued interest payable |
518 | | 518 | | 518 | |||||||||||
Derivative loan commitments: |
|
|
|
|
|
|||||||||||
Assets |
1,047 | | | 1,047 | 1,047 | |||||||||||
Liabilities |
27 | | | 27 | 27 | |||||||||||
Interest rate swap agreements: |
|
|
|
|
|
|||||||||||
Assets |
2,153 | | 2,153 | | 2,153 | |||||||||||
Liabilities |
2,153 | | 2,153 | | 2,153 | |||||||||||
Forward loan sale commitments: |
|
|
|
|
|
|||||||||||
Assets |
46 | | | 46 | 46 | |||||||||||
Liabilities |
92 | | | 92 | 92 |
F-64
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
24. EARNINGS PER SHARE ("EPS")
Basic EPS represents net income attributable to common shareholders divided by the weighted-average number of common shares outstanding during the period. Unvested restricted shares are participating securities and included in the computation of basic earnings per share. Diluted EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding, plus the effect of potential dilutive common stock equivalents outstanding during the period. Unallocated ESOP shares are not deemed outstanding for EPS calculations. For the years ended December 31, 2018 and 2017, earnings per common share have been computed based on the following:
|
Year Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
Net income applicable to common stock (in thousands) |
$ | 11,394 | $ | 10,379 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Average number of common shares outstanding |
32,610,540 | 32,323,862 | |||||
Less: Average unallocated ESOP shares |
(1,036,184 | ) | (1,095,545 | ) | |||
| | | | | | | |
Average number of common shares outstanding used to calculate basic earnings per common share |
31,574,356 | 31,228,317 | |||||
Common stock equivalents |
| | |||||
| | | | | | | |
Average number of common shares outstanding used to calculate diluted earnings per common share |
31,574,356 | 31,228,317 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings per common share: |
|||||||
Basic |
$ | 0.36 | $ | 0.33 | |||
Diluted |
$ | 0.36 | $ | 0.33 |
Options for 990,520 and 883,311 shares were not included in the computation of diluted earnings per share for the years ended December 31, 2018 and December 31, 2017, respectively, because to do so would have been antidilutive.
25. SEGMENT REPORTING
The Company has two reportable segments: HarborOne Bank and HarborOne Mortgage. Revenue from HarborOne Bank consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from HarborOne Mortgage comprises interest earned on loans and fees received as a result of the residential mortgage origination, sale and servicing process.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Segment profit and loss is measured by net income on a legal entity basis. Intercompany transactions are eliminated in consolidation.
F-65
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
25. SEGMENT REPORTING (Continued)
Information about the reportable segments and reconciliation to the Consolidated Financial Statements at December 31, 2018, 2017 and 2016, and for the years then ended are presented in the tables below.
|
Year Ended December 31, 2018 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
HarborOne
Bank |
HarborOne
Mortgage |
HarborOne
Bancorp, Inc. |
Eliminations | Consolidated | |||||||||||
|
(in thousands)
|
|||||||||||||||
Net interest and dividend income |
$ | 88,478 | $ | 1,018 | $ | 39,434 | $ | (40,000 | ) | $ | 88,930 | |||||
Provision for loan losses |
3,828 | | | | 3,828 | |||||||||||
| | | | | | | | | | | | | | | | |
Net interest income, after provision for loan losses |
84,650 | 1,018 | 39,434 | (40,000 | ) | 85,102 | ||||||||||
| | | | | | | | | | | | | | | | |
Mortgage banking income: |
||||||||||||||||
Changes in mortgage servicing rights fair value |
(375 | ) | (1,021 | ) | | | (1,396 | ) | ||||||||
Other |
2,024 | 29,981 | | | 32,005 | |||||||||||
| | | | | | | | | | | | | | | | |
Total mortgage banking income |
1,649 | 28,960 | | | 30,609 | |||||||||||
Other noninterest income |
18,587 | 2 | | | 18,589 | |||||||||||
| | | | | | | | | | | | | | | | |
Total noninterest income |
20,236 | 28,962 | | | 49,198 | |||||||||||
Noninterest expense |
86,586 | 31,639 | 1,868 | | 120,093 | |||||||||||
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes |
18,300 | (1,659 | ) | 37,566 | (40,000 | ) | 14,207 | |||||||||
Provision (benefit) for income taxes |
3,463 | (262 | ) | (388 | ) | | 2,813 | |||||||||
| | | | | | | | | | | | | | | | |
Net income (loss) |
$ | 14,837 | $ | (1,397 | ) | $ | 37,954 | $ | (40,000 | ) | $ | 11,394 | ||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total assets at year end |
$ | 3,657,982 | $ | 89,461 | $ | 391,692 | $ | (486,014 | ) | $ | 3,653,121 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Goodwill at year end |
$ | 59,582 | $ | 10,506 | $ | | $ | | $ | 70,088 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
F-66
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
25. SEGMENT REPORTING (Continued)
|
Year Ended December 31, 2017 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
HarborOne
Bank |
HarborOne
Mortgage |
HarborOne
Bancorp, Inc. |
Eliminations | Consolidated | |||||||||||
|
(in thousands)
|
|||||||||||||||
Net interest and dividend income |
$ | 72,495 | $ | 1,707 | $ | 146 | $ | | $ | 74,348 | ||||||
Provision for loan losses |
2,416 | | | | 2,416 | |||||||||||
| | | | | | | | | | | | | | | | |
Net interest income, after provision for loan losses |
70,079 | 1,707 | 146 | | 71,932 | |||||||||||
| | | | | | | | | | | | | | | | |
Mortgage banking income: |
||||||||||||||||
Changes in mortgage servicing rights fair value |
(785 | ) | (1,271 | ) | | | (2,056 | ) | ||||||||
Other |
2,740 | 36,511 | | | 39,251 | |||||||||||
| | | | | | | | | | | | | | | | |
Total mortgage banking income |
1,955 | 35,240 | | | 37,195 | |||||||||||
Other noninterest income |
17,295 | 44 | | | 17,339 | |||||||||||
| | | | | | | | | | | | | | | | |
Total noninterest income |
19,250 | 35,284 | | | 54,534 | |||||||||||
Noninterest expense |
74,460 | 34,181 | 773 | | 109,414 | |||||||||||
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes |
14,869 | 2,810 | (627 | ) | | 17,052 | ||||||||||
Provision (benefit) for income taxes |
7,382 | (998 | ) | 289 | | 6,673 | ||||||||||
| | | | | | | | | | | | | | | | |
Net income (loss) |
$ | 7,487 | $ | 3,808 | $ | (916 | ) | $ | | $ | 10,379 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total assets at year end |
$ | 2,647,510 | $ | 96,462 | $ | 343,896 | $ | (402,948 | ) | $ | 2,684,920 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Goodwill at year end |
$ | 3,186 | $ | 10,179 | $ | | $ | | $ | 13,365 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
F-67
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
25. SEGMENT REPORTING (Continued)
|
Year Ended December 31, 2016 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
HarborOne
Bank |
HarborOne
Mortgage |
HarborOne
Bancorp Inc. |
Eliminations | Consolidated | |||||||||||
|
(in thousands)
|
|||||||||||||||
Net interest and dividend income |
$ | 59,122 | $ | 1,873 | $ | | $ | | $ | 60,995 | ||||||
Provision for loan losses |
4,172 | | | | 4,172 | |||||||||||
| | | | | | | | | | | | | | | | |
Net interest income, after provision for loan losses |
54,950 | 1,873 | | | 56,823 | |||||||||||
| | | | | | | | | | | | | | | | |
Mortgage banking income: |
||||||||||||||||
Changes in mortgage servicing rights fair value |
(778 | ) | (352 | ) | | | (1,130 | ) | ||||||||
Other |
4,857 | 47,272 | | | 52,129 | |||||||||||
| | | | | | | | | | | | | | | | |
Total mortgage banking income |
4,079 | 46,920 | | | 50,999 | |||||||||||
Other noninterest income |
16,091 | 13 | | | 16,104 | |||||||||||
| | | | | | | | | | | | | | | | |
Total noninterest income |
20,170 | 46,933 | | | 67,103 | |||||||||||
Noninterest expense |
68,255 | 41,663 | 4,780 | | 114,698 | |||||||||||
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes |
6,865 | 7,143 | (4,780 | ) | | 9,228 | ||||||||||
Provision (benefit) for income taxes |
2,195 | 3,076 | (1,974 | ) | | 3,297 | ||||||||||
| | | | | | | | | | | | | | | | |
Net income (loss) |
$ | 4,670 | $ | 4,067 | $ | (2,806 | ) | $ | | $ | 5,931 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total assets at year end |
$ | 2,446,613 | $ | 121,585 | $ | 329,409 | $ | (449,297 | ) | $ | 2,448,310 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Goodwill at year end |
$ | 3,186 | $ | 10,179 | $ | | $ | | $ | 13,365 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
26. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Condensed financial information relative to HarborOne Bancorp, Inc.'s balance sheet at December 31, 2018 and 2017 and the related statements of net income and cash flows for the years ended December 31, 2018, 2017 and 2016 are presented below. The statement of stockholders' equity is not presented below as the parent company's stockholders' equity is that of the consolidated company.
F-68
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
26. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2018 | 2017 | |||||
|
(in thousands)
|
||||||
Assets |
|||||||
Cash and due from banks |
$ | 9,952 | $ | 69,414 | |||
Investment in common stock of HarborOne Bank |
370,574 | 262,504 | |||||
Loan receivableESOP |
10,440 | 10,844 | |||||
Other assets |
726 | 1,134 | |||||
| | | | | | | |
Total assets |
$ | 391,692 | $ | 343,896 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liabilities and Stockholders' Equity |
|||||||
Subordinated debt |
$ | 33,799 | $ | | |||
Other liabilities and accrued expenses |
180 | 412 | |||||
Due to subsidiary |
139 | | |||||
Stockholders' equity |
357,574 | 343,484 | |||||
| | | | | | | |
Total liabilities and stockholders' equity |
$ | 391,692 | $ | 343,896 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Dividends from subsidiary |
$ | 40,000 | $ | | $ | | ||||
Interest from bank deposits |
163 | 63 | | |||||||
Interest on short-term investments |
12 | 83 | | |||||||
Interest on ESOP loan |
488 | 422 | 211 | |||||||
| | | | | | | | | | |
Total income |
40,663 | 568 | 211 | |||||||
| | | | | | | | | | |
Interest expense |
741 | | | |||||||
Operating expenses |
2,356 | 1,195 | 4,991 | |||||||
| | | | | | | | | | |
Total expenses |
3,097 | 1,195 | 4,991 | |||||||
| | | | | | | | | | |
Income (loss) before income taxes and equity in undistributed net income of HarborOne Bank |
37,566 | (627 | ) | (4,780 | ) | |||||
Income tax provision (benefit) |
(388 | ) | 289 | (1,974 | ) | |||||
| | | | | | | | | | |
Income (loss) before equity in income of subsidiaries |
37,954 | (916 | ) | (2,806 | ) | |||||
Equity in undistributed net income (loss) of HarborOne Bank |
(26,560 | ) | 11,295 | 8,737 | ||||||
| | | | | | | | | | |
Net income |
$ | 11,394 | $ | 10,379 | $ | 5,931 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
F-69
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
26. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2016 | |||||||
|
(in thousands)
|
|||||||||
Cash flows from operating activities: |
||||||||||
Net income |
$ | 11,394 | $ | 10,379 | $ | 5,931 | ||||
Adjustments to reconcile net income to net cash used by operating activities: |
||||||||||
Equity in undistributed net (income) loss of HarborOne Bank |
26,560 | (11,295 | ) | (8,737 | ) | |||||
Issuance of common stock to the HarborOne Foundation |
| | 3,855 | |||||||
Deferred income tax provision (benefit) |
440 | 445 | (1,548 | ) | ||||||
Share-based compensation |
1,568 | 600 | | |||||||
Net change in other assets |
(841 | ) | 1,065 | (1,096 | ) | |||||
Net change in other liabilities |
577 | 385 | 25 | |||||||
| | | | | | | | | | |
Net cash provided (used) by operating activities |
39,698 | 1,579 | (1,570 | ) | ||||||
| | | | | | | | | | |
Cash flows from investing activities: |
||||||||||
Investment in HarborOne Bank |
(10,000 | ) | | (60,000 | ) | |||||
Repayment of ESOP loan |
404 | 417 | 611 | |||||||
Cash paid for acquisitions, net of cash acquired |
(122,235 | ) | | | ||||||
| | | | | | | | | | |
Net cash provided (used) by investing activities |
(131,831 | ) | 417 | (59,389 | ) | |||||
| | | | | | | | | | |
Cash flows from financing activities: |
||||||||||
Issuance of common stock |
| | 140,529 | |||||||
Repurchase of common stock |
(1,267 | ) | (280 | ) | | |||||
Purchase of shares by ESOP |
| | (11,872 | ) | ||||||
Proceeds from advance from subsidiary |
139 | | | |||||||
Proceeds from subordinated debt issuance |
33,720 | | | |||||||
Amortization of subordinated debt issuance costs |
79 | | | |||||||
| | | | | | | | | | |
Net cash provided (used) by financing activities |
32,671 | (280 | ) | 128,657 | ||||||
| | | | | | | | | | |
Net change in cash and cash equivalents |
(59,462 | ) | 1,716 | 67,698 | ||||||
Cash and cash equivalents at beginning of year |
69,414 | 67,698 | | |||||||
| | | | | | | | | | |
Cash and cash equivalents at end of year |
$ | 9,952 | $ | 69,414 | $ | 67,698 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
F-70
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
27. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018(1) | 2017 | |||||||||||||||||
|
(in thousands, except share data)
|
||||||||||||||||||||||||
Interest and dividend income |
$ | 24,685 | $ | 21,149 | $ | 26,251 | $ | 21,912 | $ | 27,849 | $ | 23,414 | $ | 36,923 | $ | 23,809 | |||||||||
Interest expense |
4,561 | 3,717 | 5,356 | 3,697 | 6,728 | 4,145 | 10,133 | 4,377 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest and dividend income |
20,124 | 17,432 | 20,895 | 18,215 | 21,121 | 19,269 | 26,790 | 19,432 | |||||||||||||||||
Provision for loan losses |
808 | 265 | 886 | 470 | 632 | 921 | 1,502 | 760 | |||||||||||||||||
Other noninterest income |
11,349 | 11,454 | 12,557 | 14,299 | 13,640 | 14,627 | 11,647 | 14,154 | |||||||||||||||||
Realized securities gains and impairment losses, net |
| | | | | | 5 | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total noninterest income |
11,349 | 11,454 | 12,557 | 14,299 | 13,640 | 14,627 | 11,652 | 14,154 | |||||||||||||||||
Total noninterest expenses |
27,599 | 24,405 | 28,518 | 26,878 | 27,383 | 28,438 | 36,593 | 29,693 | |||||||||||||||||
Provision (benefit) for income taxes |
814 | 1,481 | 945 | 1,953 | 818 | 1,699 | 236 | 1,540 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) |
$ | 2,252 | $ | 2,735 | $ | 3,103 | $ | 3,213 | $ | 5,928 | $ | 2,838 | $ | 111 | $ | 1,593 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share |
$ | 0.07 | $ | 0.09 | $ | 0.10 | $ | 0.10 | $ | 0.19 | $ | 0.09 | $ | | $ | 0.05 | |||||||||
Diluted earnings per share |
$ | 0.07 | $ | 0.09 | $ | 0.10 | $ | 0.10 | $ | 0.19 | $ | 0.09 | $ | | $ | 0.05 | |||||||||
Weighted average common shares, basic |
31,569,811 | 30,998,163 | 31,578,961 | 31,013,002 | 31,575,210 | 31,303,281 | 31,571,467 | 31,582,069 | |||||||||||||||||
Weighted average common shares, diluted |
31,569,811 | 30,998,163 | 31,578,961 | 31,013,002 | 31,575,811 | 31,303,281 | 31,571,467 | 31,582,069 |
28. SUBSEQUENT EVENT.
On March 5, 2019, the Board of Trustees of HarborOne Mutual Bancshares ("HarborOne Mutual")and the Boards of Directors of the Company and the Bank adopted a Plan of Conversion (the "Plan"). Pursuant to the Plan, HarborOne Mutual will convert from the mutual holding company form of organization to the fully public form. HarborOne Mutual will be merged into the Company, and HarborOne Mutual will no longer exist. The Company will then merge into a new Massachusetts corporation named HarborOne NorthEast Bancorp, Inc., which will change its name to HarborOne Bancorp, Inc. upon completion of the conversion. As part of the conversion, HarborOne Mutual's ownership interest in the Company will be offered for sale in a public offering. The existing publicly held shares of the Company, which represent the remaining ownership interest in the Company, will be exchanged for new shares of common stock of HarborOne NorthEast Bancorp, Inc., the new Massachusetts corporation. The exchange ratio will ensure that immediately after the conversion and
F-71
HarborOne Bancorp, Inc.
Notes to Consolidated Financial Statements (Continued)
28. SUBSEQUENT EVENT. (Continued)
public offering, the public shareholders of the Company will own the same aggregate percentage of common stock of the new Massachusetts corporation that they owned immediately prior to the completion of the conversion and public offering (excluding shares purchased in the stock offering and cash received in lieu of fractional shares), giving effect to certain assets held by HarborOne Mutual. When the conversion and public offering are completed, all of the capital stock of the Bank will be owned by the new Massachusetts corporation. The Plan provides for the establishment, upon the completion of the conversion, of special "liquidation accounts" for the benefit of certain depositors of the Bank in an amount equal to HarborOne Mutual's ownership interest in the equity of the Company as of the date of the latest balance sheet contained in the prospectus plus the value of the net assets of HarborOne Mutual as of the date of the latest statement of financial condition of HarborOne Mutual prior to the consummation of the conversion (excluding its ownership of the Company). Following the completion of the conversion, HarborOne Bancorp, Inc. and the Bank will not be permitted to pay dividends on their capital stock if HarborOne Bancorp, Inc.'s shareholders' equity or the Bank's shareholder's equity would be reduced below the amount of HarborOne Bancorp, Inc.'s or the Bank's liquidation account, as applicable. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation accounts. Direct costs of the conversion and public offering will be deferred and reduce the proceeds from the shares sold in the public offering. Direct costs incurred totaling $207,000 have been deferred as of March 5, 2019 related to the conversion.
F-72
No person has been authorized to give any information or to make any representation other than as contained in this prospectus and, if given or made, such other information or representation must not be relied upon as having been authorized by HarborOne NorthEast Bancorp, Inc. or HarborOne Bank. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of HarborOne NorthEast Bancorp, Inc. or HarborOne Bank since any of the dates as of which information is furnished herein or since the date hereof.
Up to 31,050,000 Shares
HARBORONE NORTHEAST
BANCORP, INC.
(Proposed Holding Company for
HarborOne Bank)
COMMON STOCK
par value $0.01 per share
PROSPECTUS
Sandler O'Neill + Partners, L.P.
[Prospectus Date]
These securities are not deposits or accounts and are not federally insured or guaranteed.
Until , 2019, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
to be held on [meeting date]
Dear Shareholder:
HarborOne Bancorp, Inc. (the "Company" or "Old HarborOne") is soliciting shareholder votes regarding our conversion from a two-tier mutual holding company structure to a fully public stock holding company structure. As part of the conversion, HarborOne Mutual Bancshares, the mutual holding company parent of Old HarborOne, will merge with and into Old HarborOne, with Old HarborOne as the resulting entity. Old HarborOne, which owns 100% of HarborOne Bank, will be merged with and into a new Massachusetts corporation named HarborOne NorthEast Bancorp, Inc. ("New HarborOne"). HarborOne NorthEast Bancorp, Inc. will then own 100% of HarborOne Bank, and will change its name to HarborOne Bancorp, Inc.
In addition, to receiving final regulatory approval, our shareholders must approve the Plan of Conversion, including the merger of Old HarborOne into New HarborOne, before we can complete the conversion. Enclosed is a proxy statement/prospectus describing the proposals being presented at our special meeting of shareholders. Please promptly vote the enclosed proxy card. Our Board of Directors urges you to vote "FOR" the approval of the Plan of Conversion and "FOR" the adjournment of the special meeting, if necessary.
At the conclusion of the conversion, your shares of Old HarborOne common stock will be exchanged for shares of New HarborOne common stock. The number of new shares that you receive will be based on an exchange ratio that is described in the proxy statement/prospectus. Shortly after the completion of the conversion, our exchange agent will send a transmittal form to each shareholder of Old HarborOne who holds stock certificates. The transmittal form explains the procedure to follow to exchange your shares. Please do not deliver your certificate(s) before you receive the transmittal form. Shares of Old HarborOne that are held in street name (e.g., in a brokerage account) will be converted automatically at the conclusion of the conversion; no action or documentation is required of you.
We are offering the shares of common stock of New HarborOne for sale at $10.00 per share. The shares of New HarborOne being offered in this offering represent the 53% ownership interest in Old HarborOne currently held by HarborOne Mutual Bancshares. The shares are first being offered in a subscription offering to eligible depositors of HarborOne Bank, including certain former depositors of Coastway Community Bank. If all shares are not subscribed for in the subscription offering, shares would be available in a community offering and then to the general public in a syndicated offering. If you may be interested in purchasing shares of our common stock, contact our Stock Information Center at [stock center phone number] to receive a stock order form and prospectus. The stock offering period is expected to expire on [expiration date].
If you have any questions, please refer to the Questions & Answers section herein.
We thank you for your support as a shareholder of HarborOne Bancorp, Inc.
|
Sincerely, |
|
|
James W. Blake |
|
|
Chief Executive Officer and Secretary |
These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation, any other government agency or the Share Insurance Fund of the Co-operative Central Bank. None of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved of these securities or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
PROSPECTUS OF HARBORONE NORTHEAST BANCORP, INC.
PROXY STATEMENT OF HARBORONE BANCORP, INC.
HarborOne Bank is converting from the two-tiered mutual holding company structure to a fully public stock holding company structure. Currently, HarborOne Bank is a wholly-owned subsidiary of Old HarborOne, a Massachusetts corporation, which we sometimes refer to in this document as "Old HarborOne," and HarborOne Mutual Bancshares owns 53% of Old HarborOne's common stock. The remaining 47% of Old HarborOne's common stock is owned by public shareholders.
As a result of the conversion, a newly formed Massachusetts corporation named HarborOne NorthEast Bancorp, Inc. ("New HarborOne") will replace Old HarborOne as the holding company of HarborOne Bank. Each share of Old HarborOne common stock owned by the public will be exchanged for between 1.3276 and 1.7961 shares of common stock of New HarborOne so that, immediately after the conversion, Old HarborOne's existing public shareholders will own approximately the same percentage of New HarborOne common stock as they owned of Old HarborOne's common stock immediately prior to the conversion, excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares, after taking into account certain assets held by HarborOne Mutual Bancshares other than shares of Old HarborOne common stock. The actual number of shares that you will receive will depend on the percentage of Old HarborOne common stock held by the public at the completion of the conversion, the final independent appraisal of New HarborOne and the number of shares of New HarborOne common stock sold in the offering described below. It will not depend on the market price of Old HarborOne common stock. See "Proposal 1Approval of the Plan of ConversionShare Exchange Ratio" for a discussion of the exchange ratio.
Based on the $[price] per share closing price of Old HarborOne common stock as of the last trading day prior to the date of this proxy statement/prospectus, unless at least 22,950,000 shares of New HarborOne common stock are sold in the offering (which is minimum of the offering range), the initial value of the New HarborOne common stock you receive in the share exchange would be less than the market value of the Old HarborOne common stock you currently own. See "Risk FactorsThe market value of New HarborOne common stock received in the share exchange may be less than the market value of Old HarborOne common stock exchanged."
Concurrently with the exchange offer, we are offering for sale up to 31,050,000 shares of common stock of New HarborOne, representing the ownership interest of HarborOne Mutual Bancshares in Old HarborOne. We are offering the shares of common stock to eligible depositors of HarborOne Bank, including certain former depositors of Coastway Community Bank ("Coastway Bank"); to HarborOne Bank's tax qualified benefit plans; and to our employees, officers, trustees, directors and corporators, at a price of $10.00 per share.
The conversion of HarborOne Mutual Bancshares and the offering and exchange of common stock by New HarborOne is referred to herein as the "conversion and offering." After the conversion and offering are completed, HarborOne Bank will be a wholly-owned subsidiary of New HarborOne, and 100% of the common stock of New HarborOne will be owned by public shareholders. As a result of the conversion and offering, Old HarborOne and HarborOne Mutual Bancshares will cease to exist.
Old HarborOne's common stock is currently traded on the Nasdaq Global Select Market under the trading symbol "HONE," and we expect New HarborOne's shares of common stock will also trade on the Nasdaq Global Select Market under the symbol "HONE."
The conversion and offering cannot be completed unless the shareholders of Old HarborOne approve the Plan of Conversion of HarborOne Mutual Bancshares, which may be referred to herein as the "plan of conversion." Old HarborOne is holding a special meeting of shareholders at [meeting location], on [meeting date], at [meeting time] a.m., Eastern Time, to consider and vote upon the plan of conversion. We must obtain the affirmative vote of the holders of (i) two-thirds of the total number of votes entitled to be cast at the special meeting by Old HarborOne shareholders, including shares held by HarborOne Mutual Bancshares, and (ii) a majority of the total number of votes entitled to be cast at the special meeting by Old HarborOne shareholders excluding shares held by HarborOne
Mutual Bancshares. Old HarborOne's board of directors unanimously recommends that shareholders vote "FOR" the plan of conversion.
This document serves as the proxy statement for the special meeting of shareholders of Old HarborOne and the prospectus for the shares of New HarborOne common stock to be issued in exchange for shares of Old HarborOne common stock. We urge you to read this entire document carefully. You can also obtain information about us from documents that we have filed with the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System and the Massachusetts Commissioner of Banks. This document does not serve as the prospectus relating to the offering by New HarborOne of its shares of common stock in the offering, which is being made pursuant to a separate prospectus. Shareholders of Old HarborOne are not required to participate in the stock offering.
This proxy statement/prospectus contains information that you should consider in evaluating the plan of conversion. In particular, you should carefully read the section captioned "Risk Factors" beginning on page [page] for a discussion of certain risk factors relating to the conversion and offering.
These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, or the Share Insurance Fund of the Co-operative Central bank.
None of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved of these securities or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
For answers to your questions, please read this proxy statement/prospectus including the Questions and Answers section, beginning on page [page]. Questions about voting on the plan of conversion may be directed to [proxy solicitor], at [proxy solicitor phone number], Monday through Friday from [time] a.m. to [time] p.m., Eastern Time.
The date of this proxy statement/prospectus is [proxy date], and it is first being mailed to shareholders of Old HarborOne on or about [mailing date].
HARBORONE BANCORP, INC.
770 Oak Street
Brockton, Massachusetts
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Dear Shareholder:
You are invited to attend the special meeting of shareholders of HarborOne Bancorp, Inc., which will be held on [meeting date] at [meeting time], local time, at [meeting location]. The special meeting will be held for the following purposes:
In addition, shareholders may be asked to consider and vote upon any other matters that may properly be brought before the special meeting and at any adjournments or postponements thereof.
Any action may be taken on the foregoing matters at the special meeting on the date specified above, or on any date or dates to which the special meeting may be adjourned, or to which the special meeting may be postponed.
Our Board of Directors has fixed the close of business on [record date] as the record date for determining the shareholders entitled to notice of, and to vote at, the special meeting and at any adjournments or postponements thereof.
We make proxy materials available to our shareholders on the internet. You can access proxy materials at www.harboronebancorp.com. You also may authorize your proxy via the internet by following the instructions on that website. In order to authorize your proxy via the internet you must have the shareholder identification number that appears on the enclosed Notice of Internet Availability of Proxy Materials. You also may request a paper or an e-mail copy of our proxy materials and a paper proxy card by following the instructions included in the Notice of Internet Availability of Proxy Materials.
Please complete and sign the enclosed proxy card, which is solicited by the board of directors, and mail it promptly in the enclosed envelope. The proxy will not be used if you attend the meeting and vote in person.
By Order of the Board of Directors, | ||
|
|
James W. Blake Chief Executive Officer and Secretary |
Brockton, Massachusetts
[document date] |
Whether or not you plan to attend the special meeting, please carefully read the proxy statement and other proxy materials and complete a proxy for your shares as soon as possible. You may authorize your proxy via the internet by following the instructions on the website indicated in the Notice of Internet Availability of Proxy Materials that you received in the mail. You also may request a paper or an e-mail copy of our proxy materials and a paper proxy card at any time. If you attend the special meeting, you may vote in person if you wish, even if you previously have submitted your proxy. However, please note that if your shares are held of record by a bank, broker or other nominee and you wish to vote in person at the special meeting, you must obtain a proxy issued in your name from such bank, broker or other nominee.
QUESTIONS AND ANSWERS
FOR SHAREHOLDER OF HARBORONE BANCORP, INC.
REGARDING THE PLAN OF CONVERSION
You should read this document for more information about the conversion. The application that includes the plan of conversion described herein has been approved by HarborOne Bancorp, Inc.'s primary federal regulator, the Board of Governors of the Federal Reserve System (the "Federal Reserve"). We have filed an application with respect to the conversion with the Massachusetts Commissioner of Banks, and the Massachusetts Commissioner of Banks has authorized us to commence the offering. However, the final approval of the Massachusetts Commissioner of Banks is required before we can consummate the conversion and issue shares of common stock. Any approval by the Massachusetts Commissioner of Banks or the Federal Reserve does not constitute a recommendation or endorsement of the plan of conversion.
Who is entitled to vote at the special meeting?
Holders of record of our common stock, $0.01 par value per share, at the close of business on [record date], the record date for the special meeting, are entitled to receive notice of the special meeting and to vote at the special meeting. If you are a holder of record of our common stock as of the record date, you may vote the shares that you held on the record date even if you sell such shares after the record date. Each outstanding share of common stock as of the record date entitles its holder to cast one vote for each matter to be voted upon.
What is the purpose of the special meeting?
At the special meeting, you will be asked to vote on the following proposals:
You also may be asked to consider acting upon any other matters that may properly be brought before the special meeting and at any adjournments or postponements thereof.
The presence, in person or by proxy, of holders of a majority of the votes entitled to be cast at the special meeting is necessary to constitute a quorum for the transaction of any business at the special
meeting. As of [record date], there were [number of shares outstanding] shares outstanding and entitled to vote at the special meeting.
Each share of common stock outstanding on the record date is entitled to one vote on each matter properly submitted at the special meeting. Abstentions will be counted for purposes of determining whether a quorum is present for the transaction of business at the special meeting. Broker non-votes ( i.e. , shares represented at the meeting held by brokers, as to which instructions have not been received from the beneficial owners or persons entitled to vote such shares and with respect to which, on a particular matter, the broker does not have discretionary voting power to vote such shares). will not be counted for purposes of determining whether a quorum is present for the transaction of business at the special meeting.
What vote is required to approve each proposal?
With respect to Proposal 1, the Plan of Conversion must be approved by an affirmative vote of the holders of (i) two-thirds of the outstanding common stock of Old HarborOne entitled to be cast at the special meeting, including shares held by HarborOne Mutual Bancshares, and (ii) a majority of the outstanding shares of common stock of Old HarborOne entitled to be cast at the special meeting, excluding shares held by HarborOne Mutual Bancshares.
Proposal 2 will be approved if the votes cast in favor of the proposal exceed the votes cast against the proposal.
What are the reasons for the conversion and related offering?
The primary reasons for the conversion and offering are to:
As a fully converted stock holding company, we will have greater flexibility for the structuring of mergers and acquisitions. Our current structure prevents us from offering shares of common stock as consideration for a merger or acquisition. Potential sellers often want stock for at least part of the acquisition consideration. Our new stock holding company structure will enable us to offer stock or cash, or a combination thereof, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise. We have no current arrangements or agreements to acquire other financial institutions, assets or business lines. However, we have considered, and will continue to consider other potential acquisitions as opportunities arise.
What will shareholders receive for their existing Old HarborOne Shares?
As more fully described in "Proposal 1Approval of the Plan of ConversionShare Exchange Ratio," depending on the number of shares sold in the offering, each share of common stock that you own at the time of the completion of the conversion will be exchanged for between 1.3276 shares at the minimum and 1.7961 shares at the maximum of the offering range of New HarborOne common stock (cash will be paid in lieu of any fractional shares). For example, if you own 100 shares of Old HarborOne common stock, and the exchange ratio is 1.7961 (at the maximum of the offering range),
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after the conversion you will receive 179 shares of New HarborOne common stock and $6.10 in cash, the value of the fractional share based on the $10.00 per share purchase price of stock in the offering.
If you own shares of Old HarborOne common stock in a brokerage account in "street name," your shares will be automatically exchanged within your account, and you do not need to take any action to exchange your shares of common stock or receive cash in lieu of fractional shares. If you own shares in the form of Old HarborOne stock certificates, after the completion of the conversion and stock offering, our exchange agent will mail to you a transmittal form with instructions to surrender your stock certificates. A statement reflecting your ownership of shares of common stock of New HarborOne and a check representing cash in lieu of fractional shares will be mailed to you within five business days after the transfer agent receives a properly executed transmittal form and your existing Old HarborOne stock certificate(s). New HarborOne will not issue stock certificates. You should not submit a stock certificate until you receive a transmittal form.
Why will the shares that I receive be based on a price of $10.00 per share rather than the trading price of the HarborOne Bancorp, Inc. common stock prior to completion of the conversion?
The shares will be based on a price of $10.00 per share because that is the price at which New HarborOne will sell shares in its stock offering. The amount of common stock New HarborOne will issue at $10.00 per share in the offering and the exchange is based on an independent appraisal of the estimated market value of New HarborOne, assuming the conversion and offering are completed. RP Financial, LC., an appraisal firm experienced in the appraisal of financial institutions, has estimated that, as of February 8, 2019, this market value was $508.7 million. Based on federal regulations, the market value forms the midpoint of a range with a minimum of $432.4 million and a maximum of $585.0 million. Based on this valuation and the valuation range, the number of shares of common stock of New HarborOne that existing public shareholders of Old HarborOne will receive in exchange for their shares of Old HarborOne common stock is expected to range from 22,950,000 to 31,050,000, with a midpoint of 27,00,000 (a value of approximately $229,500,000 to $310,500,000, with a midpoint of $270,000,000, at $10.00 per share). The number of shares received by the existing public shareholders of Old HarborOne is intended to maintain their existing ownership in our organization (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares), after giving effect to certain assets held by HarborOne Mutual Bancshares. The independent appraisal is based in part on Old HarborOne's financial condition and results of operations, the pro forma impact of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of 10 publicly traded bank holding companies and savings and loan holding companies that RP Financial, LC. considered comparable to Old HarborOne
Does the Exchange Ratio depend on the trading price of Old HarborOne common stock?
No, the exchange ratio will not be based on the market price of Old HarborOne common stock. Instead, the exchange ratio will be based on the appraised value of New HarborOne. The purpose of the exchange ratio is to maintain the ownership percentage of existing public shareholders of Old HarborOne, adjusted downward to reflect certain assets held by HarborOne Mutual Bancshares. Therefore, changes in the price of Old HarborOne common stock between now and the completion of the conversion and offering will not affect the calculation of the exchange ratio.
Should I submit my stock certificates now?
No. If you hold stock certificate(s), instructions for exchanging the certificates will be sent to you by our exchange agent after completion of the conversion. If your shares are held in "street name" (e.g., in a brokerage account) rather than in certificate form, the share exchange will be reflected automatically in your account upon completion of the conversion.
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Voting in Person at the Special Meeting. If you hold your shares in your own name as a holder of record with our transfer agent, Continental Stock Transfer & Trust Company, and attend the special meeting, you may vote in person at the special meeting. If your shares are held by a bank, broker or other nominee, that is, in "street name," and you wish to vote in person at the special meeting, you will need to obtain a "legal proxy" from the bank, broker or other nominee that holds your shares of record.
Voting by Proxy. If your shares are registered directly in your name with our transfer agent, the Notice of Internet Availability of Proxy Materials was sent directly to you by us. In that case, you may instruct the proxy holders named in the proxy card how to vote your shares of common stock in one of the following ways:
Vote online. You can access proxy materials at [proxy website] and vote at [voting website]. To vote online, you must have a shareholder identification number provided in the Notice of Internet Availability of Proxy Materials.
Vote by regular mail. If you received printed materials and would like to vote by mail, then please mark, sign and date your proxy card and return it promptly in the postage-paid envelope provided.
Voting by Proxy for Shares Registered in Street Name. If your shares are held in street name, you will receive instructions from your broker, bank or other nominee that you must follow in order to have your shares of common stock voted.
Even if you plan to attend the special meeting, we recommend that you submit a proxy to vote your shares in advance so that your vote will be counted if you later are unable to attend the special meeting.
Can I change my vote after I submit my proxy card?
If you cast a vote by proxy, you may revoke it at any time before it is vote by:
If you attend the special meeting, you may vote in person whether or not you previously have given a proxy, but your presence (without further action) at the special meeting will not constitute revocation of a previously given proxy. Unless you have received a legal proxy to vote the shares, if you hold your shares through a bank, broker or other nominee, that is, in "street name," only that bank, broker or other nominee can revoke your proxy on your behalf.
You may revoke a proxy for shares held by a bank, broker or other nominee by submitting new voting instructions to the bank, broker or other nominee or, if you have obtained a legal proxy from the bank, broker or other nominee giving you the right to vote the shares at the special meeting, by attending the special meeting and voting in person.
May I place an order to purchase shares in the community offering, in addition to the shares that I will receive in the exchange?
Yes. If you would like to receive a prospectus and stock order form, you must call our Stock Information Center at [stock center phone number], Monday through Friday between [time] a.m. and [time] p.m., Eastern Time. The Stock Information Center is closed bank holidays.
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Eligible depositors of HarborOne Bank (including certain former depositors of Coastway Bank) have priority subscription rights allowing them to purchase common stock in a subscription offering. Shares not purchased in the subscription offering may be available for sale to the public in a community offering, as described herein. In the event orders for New HarborOne common stock in a community offering exceed the number of shares available for sale, shares may be allocated in a manner that the available shares are allocated among those persons in a manner that permits each of them, to the extent possible, to purchase 100 shares.
Shareholders of Old HarborOne are subject to an ownership limitation. Shares of common stock purchased in the offering by a shareholder and his or her associates or individuals acting in concert with the shareholder, plus any shares a shareholder and these individuals receive in the exchange for existing shares of Old HarborOne common stock, may not exceed 9.9% of the total shares of common stock of New HarborOne to be issued and outstanding after the completion of the conversion.
Please note that properly completed and signed stock order forms, with full payment, must be received (not postmarked) no later than [time] p.m., Eastern Time on [date].
Will the conversion have any effect on deposit and loan accounts at HarborOne Bank?
No. The account number, amount, interest rate and withdrawal rights of deposit accounts will remain unchanged. Deposits will continue to be federally insured by the Federal Deposit Insurance Corporation up to the legal limit, with continued additional insurance from the Share Insurance Fund of the Co-operative Central Bank. Loans and rights of borrowers will not be affected. Corporators will no longer have voting rights in HarborOne Mutual Bancshares as to matters currently requiring such vote. HarborOne Mutual Bancshares will cease to exist after the conversion and offering. Only shareholders of New HarborOne will have voting rights after the conversion and offering.
For answers to other questions, please read this proxy statement/prospectus. Questions about voting on the plan of conversion may be directed to [proxy solicitor], at [proxy solicitor phone number], Monday through Friday from [time] a.m. to [time] p.m., Eastern Time. Questions about the stock offering may be directed to our Stock Information Center at [stock center phone number], Monday through Friday between [time] a.m. and [time] p.m., Eastern Time. The Stock Information Center is closed on bank holidays.
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This summary highlights material information from this proxy statement/prospectus and may not contain all the information that is important to you. To understand the conversion and other proposal fully, you should read this entire document carefully, including the sections entitled "Risk Factors," "Proposal 1Approval of The Plan of Conversion," "Proposal 2Adjournment of the Special Meeting" and the consolidated financial statements and the notes to the consolidated financial statements.
Date, Time and Place. Old HarborOne will hold its special meeting of shareholders at [meeting location], on [meeting date], at [meeting time] a.m., Eastern Time.
The Proposals. Shareholders will be voting on the following proposals at the special meeting:
Such other business that may properly come before the meeting.
Vote Required for Approval of Proposals by the Shareholders of Old HarborOne
Proposal 1: Approval of the Plan of Conversion. We must obtain the affirmative vote of the holders of (i) two-thirds of the total number of votes entitled to be cast at the special meeting by Old HarborOne shareholders, including shares held by HarborOne Mutual Bancshares, and (ii) a majority of the total number of votes entitled to be cast at the special meeting by Old HarborOne shareholders other than HarborOne Mutual Bancshares.
Proposal 1 must also be approved by the members of HarborOne Mutual Bancshares at a special meeting of members called for that purpose. Members will receive separate informational materials from HarborOne Mutual Bancshares about the special meeting of members.
Proposal 2: Approval of the adjournment of the special meeting. The votes cast in favor of this proposal exceed the votes cast against the proposal.
At this time, we know of no other matters that may be presented at the special meeting.
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You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must advise the corporate secretary of Old HarborOne in writing before your common stock has been voted at the special meeting, deliver a later-dated proxy or attend the special meeting and vote your shares in person. Attendance at the special meeting will not in itself constitute revocation of your proxy.
Vote by HarborOne Mutual Bancshares
Management anticipates that HarborOne Mutual Bancshares, our majority shareholder, will vote all of its shares of common stock in favor of all the matters set forth above. If HarborOne Mutual Bancshares votes all of its shares in favor of each proposal, the approval of the adjournment of the special meeting, if necessary, would be assured.
As of [record date] the directors and executive officers of Old HarborOne beneficially owned [number of shares] shares, or approximately [percent]% of the outstanding shares of Old HarborOne common stock, and HarborOne Mutual Bancshares owned 17,281,034 shares, or approximately 53% of the outstanding shares of Old HarborOne common stock.
Your Board unanimously recommends that you vote "FOR" the plan of conversion and "FOR" the adjournment of the special meeting, if necessary.
[Same as prospectus]
[Same as prospectus]
The Boards of Directors of Old HarborOne, HarborOne Mutual Bancshares, HarborOne Bank and New HarborOne have adopted a plan of conversion pursuant to which HarborOne Bank will reorganize from a two-tier mutual holding company structure to a fully public stock holding company structure. Public shareholders of Old HarborOne will receive shares in New HarborOne in exchange for their shares of Old HarborOne common stock based on an exchange ratio. See "The Exchange of Existing Shares of Old HarborOne Common Stock." The conversion to a stock holding company structure also includes the offering by New HarborOne of shares of its common stock. Following the conversion and offering, HarborOne Mutual Bancshares and Old HarborOne will no longer exist, and New HarborOne will be the parent company of HarborOne Bank.
The conversion and offering cannot be completed unless the shareholders of Old HarborOne approve the plan of conversion. Old HarborOne's shareholders will vote on the plan of conversion at Old HarborOne's special meeting. This document is the proxy statement used by Old HarborOne's Board to solicit proxies for the special meeting. It is also the prospectus of New HarborOne regarding the shares of New HarborOne common stock to be issued to Old HarborOne's shareholders in the share exchange. This document does not serve as the prospectus relating to the offering by New HarborOne of its shares of common stock in the subscription offering and any community offering or syndicated community offering, which will be made pursuant to a separate prospectus.
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Our Organizational Structure and the Proposed Conversion
[Same as prospectus]
Reasons for the Conversion and Offering
[Same as prospectus]
See "Proposal 1Approval of the Plan of Conversion" for a more complete discussion of our reasons for conducting the conversion and offering.
[Same as prospectus]
Persons Who May Order Shares of Common Stock in the Subscription and Community Offerings
[Same as prospectus]
How We Determined the Offering Range, the Exchange Ratio and the $10.00 Per Share Stock Price
[Same as prospectus]
Effect of HarborOne Mutual Bancshares' Assets on Minority Stock Ownership
[Same as prospectus]
The Exchange of Existing Shares of Old HarborOne Common Stock
[Same as prospectus]
Possible Change in the Offering Range
[Same as prospectus]
How We Intend to Use the Proceeds From the Offering
[Same as prospectus]
Limits on How Much Common Stock you May Purchase
[Same as prospectus]
How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering
[Same as prospectus]
Using Individual Retirement Account Funds to Purchase Shares of Common Stock
[Same as prospectus]
Deadline for Orders of Common Stock
[Same as prospectus]
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Delivery of Shares of Common Stock
[Same as prospectus]
Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares
[Same as prospectus]
Conditions to Completion of the Conversion
[Same as prospectus]
You May Not Sell or Transfer Your Subscription Rights
[Same as prospectus]
Purchases by Directors and Executive Officers
[Same as prospectus]
Benefits to Management and Potential Dilution to Shareholders Resulting from the Conversion
[Same as prospectus]
[Same as prospectus]
[Same as prospectus]
Material Income Tax Consequences
[Same as prospectus]
Emerging Growth Company Status
[Same as prospectus]
How You Can Obtain Additional Information
[Same as prospectus]
[Same as prospectus]
Changes in Shareholders' Rights for Existing Shareholders of Old HarborOne
As a result of the conversion, existing shareholders of Old HarborOne will become shareholders of New HarborOne. Old HarborOne and New HarborOne are both organized under the laws of Massachusetts. Except as noted under "Comparison of Shareholders' Rights For Existing Shareholders of Old HarborOne," the rights of shareholders of Old HarborOne and shareholders of New HarborOne are substantially identical. See "Comparison of Shareholders' Rights For Existing Shareholders of Old HarborOne."
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Shareholders of Old HarborOne do not have dissenters' rights in connection with the conversion and offering.
Important Risks in Owning New HarborOne's Common Stock
Before you vote on the conversion, you should read "Risk Factors," beginning on page [page] of this proxy statement/prospectus.
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You should consider carefully the following risk factors when deciding how to vote on the conversion and before purchasing shares of New HarborOne common stock.
[Same as prospectus]
Risks Related to the Offering and the Exchange
The market value of New HarborOne common stock received in the share exchange may be less than the market value of Old HarborOne common stock exchanged.
The number of shares of New HarborOne common stock you receive will be based on an exchange ratio that will be determined as of the date of completion of the conversion and offering. The exchange ratio will be based on the percentage of Old HarborOne common stock held by the public prior to the completion of the conversion and offering, the final independent appraisal of New HarborOne common stock prepared by RP Financial, LC. and the number of shares of common stock sold in the offering. The exchange ratio will ensure that existing public shareholders of Old HarborOne common stock will own the same percentage of New HarborOne common stock after the conversion and offering as they owned of Old HarborOne common stock immediately prior to completion of the conversion and offering (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares), adjusted downward to reflect certain assets held by HarborOne Mutual Bancshares. The exchange ratio will not depend on the market price of Old HarborOne common stock.
The exchange ratio ranges from 1.3276 shares at the minimum and 1.7961 shares at the maximum of the offering range of New HarborOne common stock per share of HarborOne Mutual Bancshares common stock. Shares of New HarborOne common stock issued in the share exchange will have an initial value of $10.00 per share. Depending on the exchange ratio and the market value of Old HarborOne common stock at the time of the exchange, the initial market value of the New HarborOne common stock that you receive in the share exchange could be less than the market value of the Old HarborOne common stock that you currently own. Based on the most recent closing price of Old HarborOne common stock prior to the date of this proxy statement /prospectus, which was $[price], unless at least 22,950,000 shares of New HarborOne common stock are sold in the offering (which is the minimum of the offering range), the initial value of the New HarborOne common stock you receive in the share exchange would be less than the market value of the Old HarborOne common stock you currently own.
[Remaining risk factors same as prospectus]
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INFORMATION ABOUT THE SPECIAL MEETING
This proxy statement/prospectus is being furnished to you in connection with the solicitation by the Board of Directors of Old HarborOne of proxies to be voted at the special meeting of shareholders to be held at [meeting location], on [meeting date], at [meeting time], a.m. Eastern Time, and any adjournment or postponement thereof.
The purpose of the special meeting is to consider and vote upon the Plan of Conversion of HarborOne Mutual Bancshares (referred to herein as the "plan of conversion").
In addition, shareholders will vote on a proposal to approve the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal.
Voting in favor of or against the plan of conversion includes a vote for or against the conversion of HarborOne Mutual Bancshares to a stock holding company as contemplated by the plan of conversion. Voting in favor of the plan of conversion will not obligate you to purchase any shares of common stock in the offering and will not affect the balance, interest rate or deposit insurance of any deposits at HarborOne Bank.
You are entitled to vote your Old HarborOne common stock if our records show that you held your shares as of the close of business on [record date]. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your broker or nominee. As the beneficial owner, you have the right to direct your broker or nominee how to vote.
As of the close of business on [record date], there were [number of shares] shares of Old HarborOne common stock outstanding. Each share of common stock has one vote.
If you are a shareholder as of the close of business on [record date], you may attend the meeting. However, if you hold your shares in street name, you will need proof of ownership to be admitted to the meeting. A recent brokerage statement or a letter from a bank or broker are examples of proof of ownership. If you want to vote your shares of Old HarborOne common stock held in street name in person at the meeting, you will have to get a written proxy in your name from the broker, bank or other nominee who holds your shares.
The special meeting will be held only if there is a quorum. A quorum exists if a majority of the outstanding shares of common stock entitled to vote, represented in person or by proxy, is present at the meeting. If you return valid proxy instructions or attend the meeting in person, your shares will be counted for purposes of determining whether there is a quorum, even if you abstain from voting. Broker non-votes also will be counted for purposes of determining the existence of a quorum. A broker non-vote occurs when a broker, bank or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner.
Proposal 1: Approval of the Plan of Conversion. We must obtain the affirmative vote of the holders of (i) two-thirds of the outstanding common stock of Old HarborOne entitled to be cast at the special meeting, including shares held by HarborOne Mutual Bancshares, and (ii) a majority of the
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outstanding shares of common stock of Old HarborOne entitled to be cast at the special meeting, excluding shares held by HarborOne Mutual Bancshares.
Proposal 2: Approval of the adjournment of the special meeting. Proposal 2 will be approved if the votes cast in favor of the proposal exceed the votes cast against the proposal.
Shares Held by HarborOne Mutual Bancshares and Our Officers and Directors
As of [record date], HarborOne Mutual Bancshares beneficially owned 17,281,034 shares of Old HarborOne common stock. This equals approximately 53% of our outstanding shares. We expect that HarborOne Mutual Bancshares will vote all of its shares in favor of Proposals 1 and 2.
As of [record date], our officers and directors beneficially owned [number of shares] shares of Old HarborOne common stock. This equals [percent]% of our outstanding shares and [percent]% of shares held by persons other than HarborOne Mutual Bancshares.
Our Board is sending you this proxy statement/prospectus to request that you allow your shares of Old HarborOne common stock to be represented at the special meeting by the persons named in the enclosed proxy card. All shares of Old HarborOne common stock represented at the meeting by properly executed and dated proxies will be voted according to the instructions indicated on the proxy card. If you sign, date and return a proxy card without giving voting instructions, your shares will be voted as recommended by our Board. Our Board recommends that you vote "FOR" approval of the plan of conversion and "FOR" approval of the adjournment of the special meeting, if necessary.
If any matters not described in this proxy statement/prospectus are properly presented at the special meeting, the Board will use their judgment to determine how to vote your shares. We do not know of any other matters to be presented at the special meeting.
If your Old HarborOne common stock is held in street name, you will receive instructions from your broker, bank or other nominee that you must follow to have your shares voted. Your broker, bank or other nominee may allow you to deliver your voting instructions via the telephone or the Internet. Please see the instruction form provided by your broker, bank or other nominee that accompanies this proxy statement/prospectus.
If you cast a vote by proxy, you may revoke it at any time before it is vote by:
You may revoke a proxy for shares held by a bank, broker or other nominee by submitting new voting instructions to the bank, broker or other nominee or, if you have obtained a legal proxy from the bank, broker or other nominee giving you the right to vote the shares at the special meeting, by attending the special meeting and voting in person.
We will pay the cost of solicitation of proxies. Our directors, officers and employees may solicit proxies personally, by telephone, via the internet or by mail without additional compensation for such activities. We also will request persons, firms and corporations holding shares in their names or in the names of their nominees, which are beneficially owned by others, to send a Notice of Internet
13
Availability of Proxy Materials to and obtain proxies from such beneficial owners. We will reimburse such holders for their reasonable expenses. We have engaged [proxy solicitor], to solicit proxies held by brokers and nominees for a fee of $[fee], and will reimburse it for reasonable out-of-pocket expenses incurred in the solicitation of proxies.
We will also reimburse banks, brokers, nominees and other fiduciaries for the expenses they incur in forwarding the proxy materials to you.
Participants in the Employee Stock Ownership Plan and 401(k) Plan
If you participate in HarborOne Bank Employee Stock Ownership Plan or if you hold Old HarborOne common stock through the HarborOne Bank 401(k) Plan or HarborOne Mortgage 401(k) Plan, you will receive vote authorization form(s) that reflect all shares you may direct the trustees to vote on your behalf under the plans. Under the terms of the Employee Stock Ownership Plan, the Employee Stock Ownership Plan trustee votes all shares held by the Employee Stock Ownership Plan, but each Employee Stock Ownership Plan participant may direct the trustee how to vote the shares of common stock allocated to his or her account. The Employee Stock Ownership Plan trustee, subject to the exercise of its fiduciary duties, will vote all unallocated shares of Old HarborOne common stock held by the Employee Stock Ownership Plan and allocated shares for which no voting instructions are received in the same proportion as shares for which it has received timely voting instructions. Although not required by the terms of the 401(k) Plans, HarborOne Bank is providing a participant the opportunity to provide voting instructions for all shares credited to his or her 401(k) Plan account and held in the HarborOne Bancorp, Inc. Stock Fund. Shares for which no voting instructions are given or for which instructions were not timely received will be voted at the discretion of the 401(k) plan trustee. The deadline for returning your voting instructions is [return date].
The Board recommends that you promptly sign and mark the enclosed proxy in favor of the above described proposals, including the adoption of the plan of conversion, and promptly return it in the enclosed envelope. Voting the proxy card will not prevent you from voting in person at the special meeting. For information on submitting your proxy, please refer to the instructions on the enclosed proxy card.
Your prompt vote is very important. Failure to vote will have the same effect as voting against the plan of conversion.
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PROPOSAL 1APPROVAL OF THE PLAN OF CONVERSION
The board of trustees of HarborOne Mutual Bancshares has approved the Plan of Conversion, referred to herein as the "plan of conversion." The plan of conversion must also be approved by the members of HarborOne Mutual Bancshares and the shareholders of Old HarborOne. A special meeting of members and a special meeting of shareholders have been called for this purpose. The Federal Reserve has approved the application that includes the plan of conversion. We have filed an application with respect to the conversion with the Massachusetts Commissioner of Banks, and the Massachusetts Commissioner of Banks has authorized us to commence the offering. However, the final approval of the Massachusetts Commissioner of Banks is required before we can consummate the conversion and issue shares of common stock. Any approval by the Massachusetts Commissioner of Banks or the Federal Reserve does not constitute a recommendation or endorsement of the plan of conversion.
Pursuant to the plan of conversion, our organization will convert from the mutual holding company form of organization to the fully stock form. Currently, HarborOne Bank is a wholly-owned subsidiary of Old HarborOne and HarborOne Mutual Bancshares owns approximately 53% of Old HarborOne's common stock. The remaining 47% of Old HarborOne's common stock is owned by public shareholders. As a result of the conversion, a newly formed company, New HarborOne, will become the holding company of HarborOne Bank. Each share of Old HarborOne common stock owned by the public will be exchanged for between 22,950,000 shares at the minimum and 31,050,000 shares at the maximum of the offering range of New HarborOne common stock, so that Old HarborOne's existing public shareholders will own the same percentage of New HarborOne common stock as they owned of Old HarborOne's common stock immediately prior to the conversion (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares), after giving effect to certain assets held by HarborOne Mutual Bancshares. The actual number of shares that you will receive will depend on the percentage of Old HarborOne common stock held by the public immediately prior to the completion of the conversion, the final independent appraisal of New HarborOne and the number of shares of New HarborOne common stock sold in the offering described in the following paragraph. It will not depend on the market price of Old HarborOne common stock.
Concurrently with the exchange offer, New HarborOne is offering up to 31,050,000 shares of common stock for sale, representing the ownership interest of HarborOne Mutual Bancshares in Old HarborOne, to eligible depositors and to the public at a price of $10.00 per share. After the conversion and offering are completed, HarborOne Bank will be a wholly-owned subsidiary of New HarborOne, and 100% of the common stock of New HarborOne will be owned by public shareholders. As a result of the conversion and offering, Old HarborOne and HarborOne Mutual Bancshares will cease to exist.
New HarborOne intends to contribute between $112.9 million and $153.1 million of the net proceeds to HarborOne Bank and to retain between $94.5 million and $128.3 million of the net proceeds. The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the plan of conversion.
The plan of conversion provides that we will offer shares of common stock in a "subscription offering" in the following descending order of priority:
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aggregate up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase up to 8% of the shares of common stock sold in the stock offering, although we reserve the right to have the employee stock ownership plan purchase more than 8% of the shares sold in the offering to the extent necessary to complete the offering at the minimum of the offering range; and
Shares of common stock not purchased in the subscription offering will be offered for sale to the general public in a direct community offering, with a preference given first to natural persons residing in the Massachusetts cities and towns of Abington, Acushnet, Attleboro, Avon, Berkley, Braintree, Bridgewater, Brockton, Canton, Carver, Cohasset, Dartmouth, Dighton, Duxbury, East Bridgewater, Easton, Fairhaven, Fall River, Foxboro, Freetown, Halifax, Hanover, Hanson, Hingham, Holbrook, Hull, Kingston, Lakeville, Mansfield, Marion, Marshfield, Mattapoisett, Middleborough, Milton, New Bedford, North Attleboro, Norton, Norwell, Plainville, Pembroke, Plymouth, Plympton, Quincy, Randolph, Raynham, Rehoboth, Rochester, Rockland, Seekonk, Scituate, Sharon, Somerset, Stoughton, Swansea, Taunton, Wareham, West Bridgewater, Westport, Weymouth and Whitman, and the Rhode Island cities and towns of Barrington, Bristol, Burrillville, Central Falls, Charlestown, Coventry, Cranston, Cumberland, East Greenwich, East Providence, Exeter, Foster, Glocester, Hopkinton, Jamestown, Johnston, Lincoln, Little Compton, Middletown, Narragansett, New Shoreham, Newport, North Kingstown, North Providence, North Smithfield, Pawtucket, Portsmouth, Providence, Richmond, Scituate, Smithfield, South Kingstown, Tiverton, Warren, Warwick, West Greenwich, West Warwick, Westerly, and Woonsocket.
To the extent shares of common stock remain available, we will also offer the shares to members of the general public. Subscribers in the community offering may purchase up to $1,000,000 (100,000 shares) of common stock. The direct community offering is expected to begin concurrently with the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering or the direct community offering through a syndicated community offering or a firm commitment underwritten offering. Sandler O'Neill & Partners, L.P. will act as sole book-running manager for the syndicated community or firm commitment underwritten offering. We have the right to accept or reject, in our sole discretion, orders received in the direct community offering or syndicated community or firm commitment underwritten offering. Any determination to accept or reject stock orders in the direct community offering or syndicated community or firm commitment underwritten offering will be based on the facts and circumstances available to management at the time of the determination.
We determined the number of shares of common stock to be offered in the offering based upon an independent valuation of the estimated pro forma market value of New HarborOne. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock in the offering. The independent valuation will be updated and the final number of shares of common stock to be issued in the offering will be determined at the completion of the offering. See "Stock Pricing and Number of Shares to be Issued" for more information as to the determination of the estimated pro forma market value of the common stock.
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A copy of the plan of conversion is available for inspection at each branch office of HarborOne Bank and at the Federal Reserve Bank of Boston and the Massachusetts Division of Banks. The plan of conversion is also filed an exhibit to HarborOne Mutual Bancshares' applications to convert from mutual to stock form of which this proxy statement/prospectus is a part, copies of which may be obtained from the Board of Governors of the Federal Reserve System and inspected at the Massachusetts Division of Banks. The plan of conversion is also filed as an exhibit to the registration statement we have filed with the Securities and Exchange Commission, of which this proxy statement/prospectus is a part, copies of which may be obtained from the Securities and Exchange Commission or online at the Securities and Exchange Commission's website. See "Where You Can Find Additional Information."
The Board recommends that you vote "FOR" the Plan of Conversion of HarborOne Mutual Bancshares.
[Remaining sections same as Prospectus under "The Conversion and Offering," with the following to be added:]
Exchange of Existing Shareholders' Stock Certificates
The conversion of existing outstanding shares of Old HarborOne common stock into the right to receive shares of New HarborOne common stock will occur automatically at the completion of the conversion. As soon as practicable after the completion of the conversion, our exchange agent will send a transmittal form to each public shareholder of Old HarborOne who holds physical stock certificates. The transmittal form will contain instructions on how to surrender certificates evidencing Old HarborOne common stock in exchange for shares of New HarborOne common stock in book entry form, to be held electronically on the books of our transfer agent. New HarborOne will not issue stock certificates. We expect that a statement reflecting your ownership of shares of common stock of New HarborOne common stock will be distributed within five business days after the exchange agent receives properly executed transmittal forms, Old HarborOne stock certificates and other required documents. Shares held by public shareholders in street name (such as in a brokerage account) will be exchanged automatically upon the completion of the conversion; no transmittal forms will be mailed relating to these shares.
No fractional shares of New HarborOne common stock will be issued to any public shareholder of Old HarborOne when the conversion is completed. For each fractional share that would otherwise be issued to a shareholder who holds a stock certificate, we will pay by check an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 offering purchase price per share. Payment for fractional shares will be made as soon as practicable after the receipt by the exchange agent of the transmittal forms and the surrendered Old HarborOne stock certificates. If your shares of common stock are held in street name, you will automatically receive cash in lieu of fractional shares in your account.
You should not forward your stock certificates until you have received transmittal forms, which will include forwarding instructions . After the conversion, shareholders will not receive shares of New HarborOne common stock and will not be paid dividends on the shares of New HarborOne common stock until existing certificates representing shares of Old HarborOne common stock are surrendered for exchange in compliance with the terms of the transmittal form. When shareholders surrender their certificates, any unpaid dividends will be paid without interest. For all other purposes, however, each certificate that represents shares of Old HarborOne common stock outstanding at the effective date of the conversion will be considered to evidence ownership of shares of New HarborOne common stock into which those shares have been converted by virtue of the conversion.
If a certificate for Old HarborOne common stock has been lost, stolen or destroyed, our exchange agent will issue a new stock certificate upon receipt of appropriate evidence as to the loss, theft or
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destruction of the certificate, appropriate evidence as to the ownership of the certificate by the claimant, and appropriate and customary indemnification, which is normally effected by the purchase of a bond from a surety company at the shareholder's expense.
All shares of New HarborOne common stock that we issue in exchange for existing shares of Old HarborOne common stock will be considered to have been issued in full satisfaction of all rights pertaining to such shares of common stock, subject, however, to our obligation to pay any dividends or make any other distributions with a record date prior to the effective date of the conversion that may have been declared by us on or prior to the effective date, and which remain unpaid at the effective date.
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PROPOSAL 2ADJOURNMENT OF THE SPECIAL MEETING
If there are not sufficient votes to constitute a quorum or to approve the plan of conversion at the time of the special meeting, the proposals may not be approved unless the special meeting is adjourned to a later date or dates in order to permit further solicitation of proxies. In order to allow proxies that have been received by Old HarborOne at the time of the special meeting to be voted for an adjournment, if necessary, Old HarborOne has submitted the question of adjournment to its shareholders as a separate matter for their consideration. The Board of Old HarborOne recommends that shareholders vote "FOR" the adjournment proposal. If it is necessary to adjourn the special meeting, no notice of the adjourned special meeting is required to be given to shareholders (unless a new record date is fixed), other than an announcement at the special meeting before adjournment of the date, time and place to which the special meeting is adjourned.
The Board recommends that you vote "FOR" the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
[Same as prospectus]
[Same as prospectus]
[Same as prospectus]
[Same as prospectus]
[Same as prospectus]
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
[Same as prospectus]
[Same as prospectus]
[Same as prospectus]
BUSINESS OF NEW HARBORONE AND OLD HARBORONE
[Same as prospectus]
[Same as prospectus]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[Same as prospectus]
[Same as prospectus]
[Same as prospectus]
[Same as prospectus]
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BENEFICIAL OWNERSHIP OF COMMON STOCK
[Same as prospectus]
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
[Same as prospectus]
[Same as prospectus]
COMPARISON OF SHAREHOLDERS' RIGHTS FOR EXISTING SHAREHOLDERS OF HARBORONE BANCORP, INC.
[Same as prospectus]
RESTRICTIONS ON ACQUISITION OF NEW HARBORONE
[Same as prospectus]
DESCRIPTION OF CAPITAL STOCK OF NEW HARBORONE FOLLOWING THE CONVERSION
[Same as prospectus]
[Same as prospectus]
[Same as prospectus]
WHERE YOU CAN FIND ADDITIONAL INFORMATION
[Same as prospectus]
In order to be eligible for inclusion in our proxy materials for our 2020 Annual Meeting of Shareholders, any shareholder proposal to take action at such meeting must be received by our Corporate Secretary no later than December 1, 2019. Any such proposals shall be subject to the requirements of the proxy rules adopted under the Exchange Act.
ADVANCE NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING
Provisions of Old HarborOne's Bylaws. Under Old HarborOne's Bylaws, any shareholder desiring to make a proposal for new business at a meeting of shareholders or to nominate one or more candidates for election as directors must submit written notice filed with the Corporate Secretary of Old HarborOne not less than 90 days nor more than 120 days in advance of the first anniversary of the date of Old HarborOne's proxy statement for the previous year's annual meeting. If next year's annual meeting is held on a date more than 30 calendar days from the prior year's annual meeting, a shareholder's notice must be received not later than the close of business on the 10th calendar day following the day on which notice of the date of the scheduled annual meeting is publicly disclosed. The shareholder must also provide certain information in the notice, as set forth in Old HarborOne's
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Bylaws. Failure to comply with these advance notice requirements will preclude such nominations or new business from being considered at the meeting.
Provisions of New HarborOne's Bylaws. New HarborOne's Bylaws provide an advance notice procedure for certain business, or nominations to the Board of Directors, to be brought before an annual meeting of shareholders. In order for a shareholder to properly bring business before an annual meeting, or to propose a nominee to the board of directors, New HarborOne's Secretary must receive written notice not earlier than the 120th day nor later than the 90th day prior to date of the annual meeting; provided , however , that in the event the date of the annual meeting is advanced more than 30 days prior to the anniversary of the preceding year's annual meeting, then, to be timely, notice by the shareholder must be so received not later than the tenth day following the day on which public announcement of the date of such meeting is first made.
The notice with respect to shareholder proposals that are not nominations for director must set forth as to each matter such shareholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) any material interest in such business of such shareholder, (iii) the beneficial owner(s), if any, on whose behalf the proposal is made, and the names and addresses of other shareholders (including beneficial owners) known by the shareholder proposing such business to support such proposal; and (iv) the class or series and number of shares of capital stock of New HarborOne which are owned beneficially or of record by such shareholder and such beneficial owner(s).
The notice with respect to director nominations must include: (a) as to each person whom the shareholder proposes to nominate for election as a director, such information relating to such person that is required to be disclosed in connection with solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule or regulation; and (b) as to the shareholder giving the notice: (i) the name and address of such shareholder as they appear on New HarborOne's books and of the beneficial owner, if any, on whose behalf the nomination is made; (ii) the class or series and number of shares of capital stock of New HarborOne which are owned beneficially or of record by such shareholder and such beneficial owner; (iii) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder; (iv) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice; and (v) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act or any successor rule or regulation.
If the conversion is not completed, advance written notice for certain business, or nominations to the Board of Directors, to be brought before the next annual meeting must be given to us between [date], 2019 and [date], 2019. If notice is received before [date], 2019 or after [date], 2019, it will be considered untimely, and we will not be required to present the matter at the shareholders meeting.
Nothing in this proxy statement/prospectus shall be deemed to require us to include in our proxy statement and proxy relating to an annual meeting any shareholder proposal that does not meet all of the requirements for inclusion established by the Securities and Exchange Commission in effect at the time such proposal is received.
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IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING
The Notice of Special Meeting of Shareholders, Proxy Statement/Prospectus and Proxy Card are available at [proxy website].
As of the date of this document, the Board is not aware of any business to come before the special meeting other than the matters described above in the proxy statement/prospectus. However, if any matters should properly come before the special meeting, it is intended that the holders of the proxies will act in accordance with the discretion of the proxy holders.
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Part II
Information not required in prospectus
Item 13.
Other expenses of issuance and distribution
The following table sets forth the estimated costs and expenses payable by the registrant in connection with the registration of securities being registered under this Registration Statement. All amounts except the SEC registration fee are estimates.
|
|
Amount(1) | ||||
---|---|---|---|---|---|---|
* |
Registrant's Legal Fees and Expenses |
$ | 550,000 | |||
* |
Registrant's Accounting Fees and Expenses |
150,000 | ||||
* |
Marketing Agent Fees(1) |
2,239,000 | ||||
* |
Records Management Fees and Expenses(1) |
140,000 | ||||
* |
Appraisal Fees and Expenses |
140,000 | ||||
* |
Printing, Postage, Mailing and EDGAR Fees |
760,000 | ||||
* |
Filing Fees (Nasdaq, FINRA, SEC and Commonwealth of Massachusetts) |
180,000 | ||||
* |
Transfer Agent Fees and Expenses |
20,000 | ||||
* |
Business Plan Fees and Expenses |
85,000 | ||||
* |
Other |
15,000 | ||||
| | | | | | |
* |
Total |
$ | 4,279,000 | |||
| | | | | | |
| | | | | | |
| | | | | | |
Item 14.
Indemnification of directors and officers
Sections 6.5 and 6.6 of the Articles of Organization of HarborOne NorthEast Bancorp, Inc. set forth circumstances under which directors, officers, employees and agents of HarborOne NorthEast Bancorp, Inc. may be insured or indemnified against liability which they incur in their capacities as such:
Section 6.5. Indemnification of Directors and Others.
(a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise (hereinafter a "Proceeding"), by reason of the fact that he or she is or was (a) a Director of the Corporation, or (b) serving, at the request of the Corporation as evidenced by a resolution of the Board of Directors prior to the occurrence of the event to which the indemnification relates, as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (such persons described in (a) and (b) are sometimes hereinafter referred to as an "Indemnitee"), whether the basis of such Proceeding is alleged action in an official capacity as such a Director or officer of the Corporation or as such other director, officer, employee or agent or in any other capacity while serving as such a Director or officer of the Corporation or as such other director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Massachusetts Business Corporation Act (the "MBCA"), as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior
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thereto), against all expense, liability and loss (including, but not limited to, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith and such indemnification shall continue as to an Indemnitee who has ceased to be such a director, officer, employee or agent and shall inure to the benefit of the Indemnitee's heirs, executors and administrators; provided, however, that, except as provided in Section 6.5(c) with respect to Proceedings to enforce rights to indemnification, the Corporation shall indemnify any such Indemnitee in connection with a Proceeding (or part thereof) initiated by such Indemnitee only if such Proceeding (or part thereof) was authorized or ratified by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 6.5 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any Proceeding in advance of its final disposition (hereinafter an "Advancement of Expenses"); provided, however, that, if the MBCA so requires, an Advancement of Expenses incurred by an Indemnitee shall be made only upon delivery to the Corporation of an undertaking made in accordance with the MBCA (hereinafter an "Undertaking"), by or on behalf of such Indemnitee, which shall include, without limitation, an undertaking to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "Final Adjudication") that such Indemnitee is not entitled to be indemnified for such expenses under this Section 6.5 or otherwise.
(b) Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and to an Advancement of Expenses, to any officer, employee or agent of the Corporation to the fullest extent of the provisions of this Section 6.5.
(c) Right of Indemnitee to Bring Suit. If a claim under this Section 6.5 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an Advancement of Expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time hereafter bring suit against the Corporation to recover the unpaid amount of the claim. If the Indemnitee is successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an Advancement of Expenses pursuant to the terms of an Undertaking, the Indemnitee shall also be entitled to be paid the expense of prosecuting or defending such suit. In any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an Advancement of Expenses) it shall be a defense that the Indemnitee has not met the applicable standard of conduct set forth in the MBCA. In addition, in any suit by the Corporation to recover an Advancement of Expenses pursuant to the terms of an Undertaking, the Corporation shall be entitled to recover such expenses upon a Final Adjudication that the Indemnitee has not met the applicable standard of conduct set forth in the MBCA. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or Shareholders) to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in the MBCA, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or Shareholders) that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an Advancement of Expenses hereunder, or by the Corporation to recover an Advancement of Expenses pursuant to the terms of an Undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified, or to such Advancement of Expenses, under this Section 6.5 or otherwise shall be on the Corporation.
(d) Non-Exclusivity of Rights. The rights to indemnification and to Advancement of Expenses conferred in this Section 6.5 shall not be exclusive of any other right which any person may have or
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hereafter acquire under these By-laws, the Articles of Organization or any statute, agreement, vote of Shareholders or of disinterested Directors or otherwise.
(e) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any Director, officer, employee or agent of the Corporation or any director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the MBCA. The Corporation's obligation to provide indemnification under this Section 6.5 shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the Corporation or any other person.
(f) Amendments. Without the consent of a person entitled to the indemnification and other rights provided in this Section 6.5 (unless otherwise required by the MBCA), no amendment modifying or terminating such rights shall adversely affect such person's rights under this Section 6.5 with respect to the period prior to such amendment.
(g) Savings Clause. If this Section 6.5 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any liabilities and expenses with respect to any proceeding to the fullest extent permitted by any applicable portion of this Section 6.5 that shall not have been invalidated and to the fullest extent permitted by applicable law.
Section 6.6. Limitation of Liability of Directors.
(a) Limitation of Liability. No Director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a Director notwithstanding any provision of law imposing such liability; provided, however, that this Section 6.6 shall not eliminate or limit any liability of a Director (a) for any breach of the Director's duty of loyalty to the Corporation or its shareholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) for improper distributions under Section 6.40 of Chapter 156D of the Massachusetts General Laws or (d) with respect to any transaction from which the Director derived an improper personal benefit.
(b) Amendment. No amendment or repeal of this Section 6.6 shall adversely affect the rights and protection afforded to a Director of this Corporation under this Section 6.6 for acts or omissions occurring prior to such amendment or repeal. If the Massachusetts General Laws is hereafter amended to further eliminate or limit the personal liability of Directors or to authorize corporate action to further eliminate or limit such liability, then the liability of the Directors of this Corporation shall be eliminated or limited to the fullest extent permitted by the Massachusetts General Laws as so amended.
Item 15.
Recent sales of unregistered securities
On August 30, 2018, Old HarborOne sold and issued an aggregate principal amount of $35.0 million 5.625% Fixed-to-Floating Rate Subordinated Notes due September 1, 2028 (the "Notes") to certain institutional accredited investors. The Notes were offered and sold by Old HarborOne to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended, and the provisions of Regulation D thereunder. Old HarborOne used the net proceeds of the offering for general corporate purposes, including improving the liquidity position at the Old HarborOne and HarborOne Bank.
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Item 16.
Exhibits and financial statement schedules
(a) Exhibits. The exhibits and financial statement schedules filed as part of this registration statement are as follows:
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10.18 | Form of Registration Rights Agreement, dated August 30, 2018, by and among HarborOne Bancorp, Inc. and the Purchasers (incorporated by reference to Exhibit 10.2 to HarborOne Bancorp, Inc.'s Form 8-K filed with the Securities and Exchange Commission on August 30, 2018) | ||
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Subsidiaries of the Registrant |
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Consent of Goodwin Procter LLP (contained in Opinions included as Exhibits 5.1 and 8.1 ) |
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23.2 |
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Consent of RP Financial, LC. |
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23.3 |
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Consent of Wolf & Company, P.C. |
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Power of Attorney (set forth on signature page) |
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99.1 |
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Appraisal Agreement between HarborOne Bank and RP Financial, LC. |
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99.2 |
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Appraisal Report of RP Financial, LC. |
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99.3 |
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Letter of RP Financial, LC. with respect to Subscription Rights |
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Marketing Materials* |
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99.5 |
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Stock Order and Certification Form* |
(b) Financial Statement Schedule. No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the
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securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(5) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(6) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(7) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
(8) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brockton, Commonwealth of Massachusetts, on this 11 th day of March, 2019.
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HarborOne Bancorp, Inc. | |||
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By: |
/s/ JAMES W. BLAKE
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We, the undersigned directors and officers of HarborOne Bancorp, Inc. hereby severally constitute and appoint James W. Blake and Joseph F. Casey, and each of them, as our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said James W. Blake and Joseph F. Casey, and each of them, may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of the Company's common stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said James W. Blake and Joseph F. Casey, and each of them, shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
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/s/ JAMES W. BLAKE
James W. Blake |
Chief Executive Officer, Clerk (Principal Executive Officer) and Director | March 11, 2019 | ||
/s/ LINDA H. SIMMONS Linda H. Simmons |
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Chief Financial Officer (Principal Financial and Accounting Officer) |
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March 11, 2019 |
/s/ JOSEPH F. CASEY Joseph F. Casey |
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President, Chief Operating Officer and Director |
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March 11, 2019 |
/s/ MICHAEL SULLIVAN Michael Sullivan, Esq. |
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Chairman of the Board |
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March 11, 2019 |
/s/ JOSEPH F. BARRY Joseph F. Barry |
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Director |
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March 11, 2019 |
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/s/ MANDY L. BERMAN
Mandy L. Berman |
Director | March 11, 2019 | ||
/s/ DAVID P. FRENETTE David P. Frenette, Esq. |
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Director |
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March 11, 2019 |
/s/ GORDON JEZARD Gordon Jezard |
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Director |
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March 11, 2019 |
/s/ BARRY R. KORETZ Barry R. Koretz |
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Director |
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March 11, 2019 |
/s/ TIMOTHY LYNCH Timothy Lynch |
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Director |
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March 11, 2019 |
/s/ WILLIAM A. PAYNE William A. Payne |
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Director |
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March 11, 2019 |
/s/ WALLACE H. PECKHAM, III Wallace H. Peckham, III |
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Director |
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March 11, 2019 |
/s/ DAMIAN W. WILMOT Damian W. Wilmot |
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Director |
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March 11, 2019 |
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January 4, 2019
Board of Trustees
HarborOne Mutual Bancshares
HarborOne Bancorp, Inc. (MHC)
HarborOne Bank (MHC)
770 Oak Street
Brockton, Massachusetts 02301
Attention: Mr. James W. Blake
Chief Executive Officer, Secretary and Director
Ladies and Gentlemen:
We understand that the Board of Trustees of HarborOne Mutual Bancshares (the MHC) is considering the adoption of a Plan of Conversion (the Plan) pursuant to which the MHC will be converted from mutual holding company to stock holding company form, and all of the shares of HarborOne Bancorp, Inc. (MHC) (the Holding Company) currently outstanding will be exchanged for shares of common stock of a successor stock holding company to be formed in connection with the conversion (NewCo). Concurrently with the conversion, NewCo also intends to offer and sell certain shares of its common stock (the Shares) in a public offering. The MHC, the Holding Company, NewCo and HarborOne Bank (MHC) (the Bank) are sometimes collectively referred to herein as the Company and their respective Boards of Trustees are collectively referred to herein as the Board.
Under the terms of the Plan and applicable regulations, the Shares will be offered first to members of the MHC (eligible depositors of the Bank), the Companys tax-qualified employee stock benefit plans and the Companys directors, officers and employees in a subscription offering. Subject to the prior rights of subscribers in the subscription offering, the Shares may be offered in a community offering (the Community Offering), with a preference given in the community offering to residents of the Banks community (the subscription offering and the community offering being collectively referred to herein as the Subscription Offering). Shares not subscribed for in the Subscription Offering may be offered to the general public by Sandler ONeill & Partners, L.P. (Sandler O'Neill) on a best efforts basis (Syndicated Offering) and/or in a firm commitment public offering (Firm Commitment Offering, and together with the Subscription Offering and Syndicated Offering, the Offering). Sandler ONeill may, in consultation with the Company, form a syndicate of registered dealers to assist in any Syndicated
SANDLER ONEILL + PARTNERS, L.P. |
1251 Avenue of the Americas, 6th Floor, New York, NY 10020 |
T: (212) 466-7700 / (800) 635-6855 |
www.sandleroneill.com |
Offering or Firm Commitment Offering. Sandler ONeill is pleased to assist the Company with the Offering and this letter (this Agreement) is to confirm the terms and conditions of our engagement.
Services
Sandler ONeill will work with the Company and its management, counsel, accountants and other advisors in preparing for and completing the Offering and anticipate that our services will include the following:
1. Consulting as to the financial and marketing implications of the Plan;
2. Reviewing with the Board the financial impact of the Offering on the Company, based upon the independent appraisers appraisal of the Holding Companys common stock;
3. Reviewing all offering documents, including the Prospectus, stock order forms and related offering materials (it being understood that preparation and filing of such documents will be the responsibility of the Company and its counsel);
4. Assisting in the design and implementation of a marketing strategy for the Offering;
5. Assisting Company management in scheduling and preparing for meetings with potential investors and/or other broker-dealers in connection with the Offering; and
6. Providing such other general advice and assistance as may be reasonably necessary to promote the successful completion of the Offering.
Sandler ONeill will act as exclusive marketing agent for the Company in the Subscription Offering and will serve as sole book-running manager of the Syndicated Offering and/or Firm Commitment Offering. It is understood that neither Sandler ONeill nor any other broker/dealer shall be obligated to take or purchase any Shares in the Offering other than as may be expressly agreed to by such firms and the Company in an underwriting agreement for a Firm Commitment Offering.
Fees
If the Offering is consummated, the Company agrees to pay Sandler ONeill for its marketing agent services a fee of 75 basis points (0.75%) of the aggregate Actual Purchase Price of all Shares sold in the Subscription Offering, excluding Shares purchased by or on behalf of (i) any employee benefit plan or trust of the Company established for the benefit of its directors,
officers and employees, (ii) any director, officer or employee of the Company or members of their immediate families (whether directly or through a personal trust), as to which no fee shall be payable.
With respect to any Shares sold in the in the Community Offering, the Company agrees to pay Sandler ONeill a fee of 1.50% of the aggregate Actual Purchase Price of all Shares sold in the Community Offering.
With respect to any Shares sold in the Syndicated Offering and/or Firm Commitment Offering, the Company agrees to pay Sandler ONeill and any other participating broker/dealers an aggregate fee of 5.0% of the aggregate Actual Purchase Price of all Shares sold in the Syndicated Offering and/or Firm Commitment Offering.
For purposes of this letter, the term Actual Purchase Price shall mean the price at which the Shares are sold in the Offering. It is understood and agreed that no fee shall be paid to Sandler ONeill with respect to any Shares issued to minority stockholders of the Holding Company in exchange for their current shares as a result of the reorganization. All fees payable hereunder shall be payable in immediately available funds by wire transfer at the time of the closing of the Offering.
Expenses
In addition to any fees that may be payable to Sandler ONeill hereunder and the expenses to be borne by the Company pursuant to the following paragraph, the Company agrees to reimburse Sandler ONeill, upon request made from time to time, for its reasonable legal fees and expenses incurred in connection with its engagement hereunder, regardless of whether the Offering is consummated, up to a maximum of $110,000, which expense cap shall be automatically increased to $150,000 if a Syndicated Offering is undertaken. The provisions of this paragraph are not intended to apply to or in any way impair the indemnification provisions of this letter.
As is customary, the Company will bear all other expenses incurred in connection with the Offering, including, without limitation, (i) the cost of obtaining all securities and bank regulatory approvals, including any required FINRA filing fees; (ii) the cost of printing and distributing the offering materials; (iii) the costs of blue sky qualification (including fees and expenses of blue sky counsel) of the Shares in the various states; (iv) listing fees; (v) all fees and disbursements of the Companys counsel, accountants, transfer agent and other advisors; and (vi) the establishment and operational expenses for the Stock Information Center (e.g., postage, telephones, supplies, temporary employees, etc.). In the event Sandler ONeill incurs any such fees and expenses on behalf of the Company, the Company will reimburse Sandler ONeill for such fees and expenses whether or not the Offering is consummated.
Due Diligence Review
Sandler ONeills obligation to perform the services contemplated by this letter shall be subject to the satisfactory completion of such investigation and inquiries relating to the Company and its directors, officers, agents and employees as Sandler ONeill and its counsel in their sole discretion may deem appropriate under the circumstances. In this regard, the Company agrees that, at its expense, it will make available to Sandler ONeill all information that Sandler ONeill reasonably requests, and will allow Sandler ONeill the opportunity to discuss with the management of the Company the financial condition, business and operations of the Company. The Company acknowledges that Sandler ONeill will rely upon the accuracy and completeness of all information received from the Company and its directors, officers, employees, agents, independent accountants and counsel.
Blue Sky Matters
Sandler ONeill and the Company agree that the Companys counsel shall serve as counsel with respect to blue sky matters in connection with the Offering. The Company will cause such counsel to prepare a Blue Sky Memorandum related to the Subscription Offering and, if applicable, the Firm Commitment Offering, including Sandler ONeills participation therein, and shall furnish Sandler ONeill a copy thereof addressed to Sandler ONeill or upon which such counsel shall state Sandler ONeill may rely.
Confidentiality
Except as contemplated in connection with the performance of its services under this agreement, as authorized by the Company or as required by law, regulation or legal process, Sandler ONeill agrees that it will treat as confidential all material, non-public information relating to the Company obtained in connection with its engagement hereunder (the Confidential Information); provided, however, that Sandler ONeill may disclose such information to its agents and advisors who are assisting or advising Sandler ONeill in performing its services hereunder and who have agreed to comply with the terms and conditions of this paragraph. As used in this paragraph, the term Confidential Information shall not include information which (a) is or becomes generally available to the public other than as a result of a disclosure by Sandler ONeill in breach of the confidentiality obligations contained herein, (b) was available to Sandler ONeill on a non-confidential basis prior to its disclosure to Sandler ONeill by the Company, (c) becomes available to Sandler ONeill on a non-confidential basis from a person other than the Company who is not otherwise known to Sandler ONeill to be bound not to disclose such information pursuant to a contractual, legal or fiduciary obligation, or (d) is independently developed by Sandler ONeill without use of or reference to the Confidential Information disclosed hereunder.
The Company hereby acknowledges and agrees that the financial models and presentations
used by Sandler ONeill in performing its services hereunder have been developed by and are proprietary to Sandler ONeill and are protected under applicable copyright laws. The Company agrees that it will not reproduce or distribute all or any portion of such models or presentations without the prior written consent of Sandler ONeill.
Indemnification
Since Sandler ONeill will be acting on behalf of the Company in connection with the Offering, each of the MHC, the Bank and the Holding Company agrees to, and shall cause NewCo to, indemnify and hold Sandler ONeill and its affiliates and their respective partners, directors, officers, employees, agents and controlling persons within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934 (Sandler ONeill and each such person being an Indemnified Party) harmless from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or arising out of the Offering or the engagement of Sandler ONeill pursuant to, or the performance by Sandler ONeill of the services contemplated by, this letter, and will reimburse, and cause NewCo to reimburse, any Indemnified Party for all expenses (including reasonable legal fees and expenses) as they are incurred, including expenses incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense (i) arises out of or is based upon any untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make not misleading any statements contained in any final prospectus, or any amendment or supplement thereto, made in reliance on and in conformity with written information furnished to the Company by Sandler ONeill expressly for use therein, or (ii) is found in a final judgment by a court of competent jurisdiction to have resulted primarily from the gross negligence, willful misconduct or bad faith of Sandler ONeill. If the foregoing indemnification is unavailable for any reason, the Company agrees to contribute to such losses, claims, damages, liabilities and expenses in the proportion that its financial interest in the Offering bears to that of Sandler ONeill. Each of the MHC, the Bank and the Holding Company further agrees, and shall cause the NewCo to agree, that neither Sandler ONeill nor any of its controlling persons, affiliates, partners, directors, officers, employees or consultants shall have any liability to the MHC, Holding Company, the Bank or NewCo or any person asserting claims on behalf of or in right of the MHC, Holding Company, the Bank or NewCo for any losses, claims, damages, liabilities or expenses arising out of or relating to this Agreement or the services to be rendered by Sandler ONeill hereunder, unless it is finally judicially determined that such losses, claims, damages, liabilities or expenses resulted directly from the gross negligence or willful misconduct of Sandler ONeill. The Company agrees to notify Sandler ONeill promptly of the assertion against it or any other person of any claim or the commencement of any action or proceeding relating to any transaction contemplated by this agreement.
Definitive Agreement
Sandler ONeill and the Company agree that (a) except as set forth in clause (b) below, the foregoing represents the general intention of the Company and Sandler ONeill with respect to the services to be provided by Sandler ONeill in connection with the Offering, which will serve as a basis for Sandler ONeill commencing activities, and (b) the only legal and binding obligations of the Company and Sandler ONeill with respect to the Offering (such obligation to survive any termination of this Agreement) shall be (1) the Companys obligation to reimburse costs and expenses pursuant to the section captioned Costs and Expenses, (2) those set forth under the captions Confidentiality and Indemnification, and (3) as set forth in a duly negotiated and executed definitive Agency Agreement to be entered into prior to the commencement of the Subscription Offering, and a duly negotiated and executed Underwriting Agreement to be entered into prior to the commencement of any Firm Commitment Offering. Such Agency Agreement and Underwriting Agreement shall be in form and content satisfactory to Sandler ONeill and the Company and their respective counsel and shall contain standard indemnification and contribution provisions consistent herewith.
Sandler ONeills execution of such Agency Agreement and Underwriting Agreement shall also be subject to (i) Sandler ONeills satisfaction with its investigation of the Companys business, financial condition and results of operations, (ii) preparation of offering materials that are satisfactory to Sandler ONeill and its counsel, (iii) compliance with all relevant legal and regulatory requirements to the reasonable satisfaction of Sandler ONeill and its counsel, (iv) agreement that the price established by the independent appraiser is reasonable, and (v) market conditions at the time of the proposed offering.
This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and can be altered only by written consent signed by the parties. This Agreement shall be construed and enforced in accordance with the laws of the State of New York, without regard to the conflicts of laws principles thereof.
[ Signature page to follow .]
Please confirm that the foregoing correctly sets forth our agreement by signing and returning to Sandler ONeill the duplicate copy of this letter enclosed herewith.
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Very truly yours, |
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SANDLER ONEILL & PARTNERS, L.P. |
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Sandler ONeill & Partners Corp., |
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the sole general partner |
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/s/ Derek Szot |
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Derek Szot |
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Authorized Signatory |
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Accepted and agreed to as of
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HARBORONE MUTUAL BANCSHARES |
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/s/ James W. Blake |
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James W. Blake |
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Chief Executive Officer, Secretary and Director |
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HARBORONE BANCORP, INC. (MHC) |
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/s/ James W. Blake |
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James W. Blake |
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Chief Executive Officer, Secretary and Director |
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HARBORONE BANK (MHC) |
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/s/ James W. Blake |
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James W. Blake |
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Chief Executive Officer, Secretary and Director |
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January 4, 2019
Board of Trustees
HarborOne Mutual Bancshares
HarborOne Bancorp, Inc. (MHC)
HarborOne Bank (MHC)
770 Oak Street
Brockton, Massachusetts 02301
Attention: Mr. James W. Blake
Chief Executive Officer, Secretary and Director
Ladies and Gentlemen:
Sandler ONeill & Partners, L.P. (Sandler ONeill) is pleased to act as records management agent (Records Management Agent) for HarborOne Bancorp, Inc. (MHC) (together with any successor holding company, the Holding Company), HarborOne Mutual Bancshares (MHC) and HarborOne Bank (MHC) (the Bank) in connection with the offer and sale of certain shares of the common stock of the Holding Company in a public offering to the Banks eligible account holders and certain others in a subscription offering and to members of the Banks community in a community offering and in certain circumstances to the general public (collectively, the Offering) pursuant to the terms of a Plan of Conversion to be adopted by the Board of Trustees of the MHC (the Plan). The MHC, the Holding Company and the Bank are sometimes collectively referred to herein as the Company. This letter (this Agreement) is to confirm the terms and conditions of our engagement.
SERVICES AND FEES
In our role as Records Management Agent, we anticipate that our services will include the services outlined below, each as may be necessary and as the Company may reasonably request:
I. Consolidation of Deposit Accounts for Voting and Offering
II. Coordinate Vote Solicitation and Special Meeting Services
III. Design and Preparation of Stock Order Forms for the Offering
IV. Organization and Supervision of the Stock Information Center
V. Subscription Services
SANDLER ONEILL + PARTNERS, L.P.
1251 Avenue of the Americas, 6th Floor, New York, NY 10020
T: (212) 466-7700 / (800) 635-6855
www.sandleroneill.com
Each of these services is further described in Appendix A to this agreement.
For its services hereunder, the Company agrees to pay Sandler ONeill a fee of $90,000. This fee is based upon the requirements of current regulations and the Plan as currently contemplated. The Company will inform Sandler ONeill within a reasonable period of time of any changes in the Plan or regulations that require changes in Sandler ONeills services.
All fees under this agreement shall be payable in cash, as follows: (a) $10,000 payable upon execution of this agreement; (b) $40,000 payable upon the mailing of voting materials to depositors, and (c) the balance upon the mailing of offering materials to depositors.
COSTS AND EXPENSES
It is understood that all expenses associated with the operation of the Stock Information Center will be borne by the Company. The Company also agrees to reimburse Sandler ONeill, upon request made from time to time, for its reasonable out-of-pocket expenses incurred in connection with its engagement hereunder, regardless of whether the Offering is consummated, including, without limitation, travel, lodging, food, telephone, postage, communications and other similar expenses, up to a maximum of $50,000; provided, however, that Sandler ONeill shall document such expenses to the reasonable satisfaction of the Company. The provisions of this paragraph are not intended to apply to or in any way impair the indemnification provisions of this agreement.
RELIANCE ON INFORMATION PROVIDED; CONFIDENTIALITY
The Company will furnish Sandler ONeill with such information as Sandler ONeill reasonably believes appropriate to its assignment (all such information so furnished being the Records). The Company recognizes and confirms that Sandler ONeill (a) will use and rely primarily on the Records without having independently verified the same, and (b) does not assume responsibility for the accuracy or completeness of the Records.
Except as contemplated in connection with the performance of its services under this agreement, as authorized by the Company or as required by law, regulation or legal process, Sandler ONeill agrees that it will treat the Records as confidential; provided, however, that Sandler ONeill may disclose such information to its agents and advisors who are assisting or advising Sandler ONeill in performing its services hereunder and who have agreed to comply with the terms and conditions of this paragraph.
LIMITATIONS
Sandler ONeill, as Records Management Agent hereunder, (a) shall have no duties or obligations other than those specifically set forth herein; (b) will be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value or genuineness of any order form, and will not be
required to and will make no representations as to the validity, value or genuineness of the offer; (c) shall not be liable to any person, firm or corporation including the Company by reason of any error of judgment or for any act done by it in good faith, or for any mistake of law or fact in connection with this agreement and the performance hereof unless caused by or arising out of its own willful misconduct, bad faith or gross negligence; (d) will not be obliged to take any legal action hereunder which might in its reasonable judgment involve any expense or liability, unless it shall have been furnished with reasonable indemnity satisfactory to it; and (e) may rely on and shall be protected in acting in reliance upon any certificate, instrument, opinion, notice, letter, telex, telegram, or other document or security delivered to it and in good faith believed by it to be genuine and to have been signed by the proper party or parties. Anything in this agreement to the contrary notwithstanding, in no event shall Sandler ONeill be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if Sandler ONeill has been advised of the likelihood of such loss or damage and regardless of the form of action.
INDEMNIFICATION
The Company agrees to indemnify and hold Sandler ONeill and its affiliates and their respective partners, directors, officers, employees, agents and controlling persons (Sandler ONeill and each such person being an Indemnified Party) harmless from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or arising out of the engagement of Sandler ONeill pursuant to, and the performance by Sandler ONeill of the services contemplated by, this letter, and will reimburse any Indemnified Party for all expenses (including reasonable counsel fees and expenses) as they are incurred, including expenses incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party. The Company will not be liable under the foregoing indemnification provision to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted primarily from Sandler ONeills willful misconduct, bad faith or gross negligence.
MISCELLANEOUS
The following addresses shall be sufficient for written notices to each other: |
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If to you: |
HarborOne Bank |
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770 Oak Street |
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Brockton, Massachusetts 02301 |
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Attention: Mr. James W. Blake |
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If to us: |
Sandler ONeill & Partners, L.P. |
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1251 Avenue of the Americas, 6 th Floor |
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New York, New York 10020 |
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Attention: General Counsel |
The Agreement and the appendix hereto constitute the entire Agreement between the parties with respect to the subject matter hereof and can be altered only by written consent signed by the parties. This Agreement is governed by the laws of the State of New York.
It is understood that the provisions relating to the payment of fees and expenses and those contained under the captions Limitations and Indemnification will survive any termination of this Agreement.
[Signature page to follow.]
Please confirm that the foregoing correctly sets forth our agreement by signing and returning to Sandler ONeill the duplicate copy of this letter enclosed herewith.
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Very truly yours, |
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SANDLER ONEILL & PARTNERS, L.P. |
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By: |
Sandler ONeill & Partners Corp., the sole general partner |
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By: |
/s/ Derek Szot |
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Derek Szot |
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Authorized Signatory |
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Accepted and agreed to as of the date first above written: |
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HARBORONE MUTUAL BANCSHARES |
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By: |
/s/ James W. Blake |
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James W. Blake |
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Chief Executive Officer, Secretary and Director |
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HARBORONE BANCORP, INC. (MHC) |
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By: |
/s/ James W. Blake |
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James W. Blake |
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Chief Executive Officer, Secretary and Director |
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HARBORONE BANK (MHC) |
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By: |
/s/ James W. Blake |
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James W. Blake |
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Chief Executive Officer, Secretary and Director |
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APPENDIX A
OUTLINE OF RECORDS MANAGEMENT AGENT SERVICES
I. Consolidation of Deposit Accounts for Voting and Offering
1. Consolidate files in accordance with regulatory guidelines and create central file.
2. Our EDP format will be provided to your IT representatives.
II. Coordinate Vote Solicitation and Special Meeting Services
1. Vote Calculation.
2. Prepare deposit account holder data for Information Statement mailing
3. Coordinate with Bank and other advisors in designing and executing vote campaign.
4. If required, delete voting record date accounts closed prior to special meeting.
5. Act as or support inspector of election, it being understood that Sandler ONeill will not act as inspector of election in the case of a contested election.
III. Design and Preparation of Stock Order Forms for the Offering
1. Assist in designing stock order forms for ordering stock.
2. Prepare deposit account holder data for stock order forms.
IV. Organization and Supervision of Stock Information Center
1. Advising on the physical organization of the Stock Information Center, including materials requirements.
2. Assist in the training of all Bank personnel and temporary employees who will be staffing the Stock Information Center.
3. Establish reporting procedures.
4. On-site supervision of the Stock Information Center during the offering period.
V. Subscription Services
1. Produce list of depositors by state (Blue Sky report).
2. Production of subscription rights and research books.
3. Stock order form processing.
4. Acknowledgment letter to confirm receipt of stock order.
5. Daily reports and analysis.
6. Proration calculation and share allocation in the event of an oversubscription.
7. Produce charter shareholder list.
8. Interface with Transfer Agent for DRS Statement issuance to shareholders.
9. Refund and interest calculations.
10. Confirmation letter to confirm purchase of stock.
11. Notification of full/partial rejection of orders.
12. Production of 1099/Debit tape.
HARBORONE MUTUAL BANCSHARES
PLAN OF CONVERSION
Adopted by the Board of Trustees on March 5, 2019
TABLE OF CONTENTS
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Page |
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ARTICLE 1. INTRODUCTION BUSINESS PURPOSE |
1 |
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ARTICLE 2. DEFINITIONS |
3 |
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ARTICLE 3. GENERAL PROCEDURE FOR THE CONVERSION |
10 |
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3.1 |
Preconditions to the Conversion |
10 |
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3.2 |
Submission of Plan to Commissioner and FRB |
10 |
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3.3 |
Special Meeting of Members to Approve the Plan |
11 |
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3.4 |
Completion of the Conversion and the Offering |
11 |
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3.5 |
Bank Articles of Organization and Bylaws |
11 |
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ARTICLE 4. THE CONVERSION |
11 |
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4.1 |
Effectuation of Conversion |
11 |
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4.2 |
Approvals |
11 |
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4.3 |
The Exchange Offering |
12 |
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4.4 |
Conversion to Stock Holding Company |
12 |
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4.5 |
Offer and Sale of Holding Company Common Stock |
13 |
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ARTICLE 5. SHARES TO BE OFFERED |
13 |
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5.1 |
Holding Company Common Stock |
13 |
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5.2 |
Independent Valuation |
13 |
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5.3 |
Subscription Price |
14 |
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5.4 |
Number of Shares |
14 |
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5.5 |
Increase or Decrease in Number of Shares |
14 |
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5.6 |
Confirmation of Valuation |
14 |
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ARTICLE 6. SUBSCRIPTION RIGHTS AND ORDERS FOR COMMON STOCK |
15 |
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6.1 |
Distribution of Prospectus |
15 |
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6.2 |
Order Forms |
15 |
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6.3 |
Undelivered, Defective or Late Order Form; Insufficient Payment |
16 |
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6.4 |
Payment for Stock |
16 |
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ARTICLE 7. STOCK PURCHASE PRIORITIES |
17 |
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7.1 |
Priorities for Offering |
17 |
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7.2 |
Certain Determinations |
17 |
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7.3 |
Minimum Purchase; No Fractional Shares |
18 |
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7.4 |
Overview of Priorities |
18 |
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7.5 |
Priorities For Subscription Offering |
18 |
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7.6 |
Priorities for Direct Community Offering |
20 |
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7.7 |
Priorities for Syndicated Community Offering or Firm Commitment Underwritten Offering |
21 |
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ARTICLE 8. ADDITIONAL LIMITATIONS ON PURCHASES |
22 |
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8.1 |
General |
22 |
8.2 |
Individual Maximum Purchase Limit |
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8.3 |
Group Maximum Purchase Limit |
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8.4 |
Purchases by Officers, Directors, Trustees and Corporators |
23 |
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8.5 |
Special Rule for Tax-Qualified Employee Plans |
23 |
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8.6 |
Increase in the Total Number of Shares Offered |
23 |
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8.7 |
Illegal Purchases |
23 |
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8.8 |
Rejection of Orders |
24 |
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8.9 |
Subscribers in Non-Qualified States or in Foreign Countries |
24 |
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8.10 |
No Offer to Transfer Shares |
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8.11 |
Confirmation by Purchasers |
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ARTICLE 9. POST OFFERING MATTERS |
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9.1 |
Stock Purchases After the Conversion |
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9.2 |
Resales of Stock by Management Persons |
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9.3 |
Stock Certificates |
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9.4 |
Restriction on Financing Stock Purchases |
25 |
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9.5 |
Stock Benefit Plans |
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9.6 |
Market for Holding Company Common Stock |
27 |
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9.7 |
Liquidation Accounts |
27 |
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9.8 |
Repurchase of Stock |
30 |
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9.9 |
Conversion Expenses |
30 |
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9.10 |
Public Inspection of Applications |
30 |
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9.11 |
Enforcement of Terms and Conditions |
30 |
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9.12 |
Voting Rights Following the Conversion |
31 |
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9.13 |
Restrictions on Acquisition of Bank and Stock Holding Company |
31 |
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ARTICLE 10. MISCELLANEOUS |
32 |
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10.1 |
Interpretation of Plan |
32 |
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10.2 |
Amendment or Termination of the Plan |
32 |
EXHIBITS |
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Exhibit 1.1 |
Form of Agreement of Merger between HarborOne Mutual Bancshares and HarborOne Bancorp, Inc. |
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Exhibit 1.2 |
Form of Agreement of Merger between HarborOne Bancorp, Inc. and HarborOne NorthEast Bancorp, Inc. |
HARBORONE MUTUAL BANCSHARES
PLAN OF CONVERSION
ARTICLE 1.
Introduction Business Purpose
This Plan of Conversion (the Plan) provides for the conversion and reorganization of HarborOne Mutual Bancshares, a Massachusetts mutual holding company (the MHC), into the capital stock form of organization and all steps incident or necessary thereto (the Conversion). The MHC currently owns approximately 53% of the common stock of HarborOne Bancorp, Inc., a Massachusetts corporation (the Mid-Tier Holding Company), which owns 100% of the common stock of HarborOne Bank (the Bank). The Bank is a Massachusetts-chartered co-operative bank headquartered in Brockton, Massachusetts. Capitalized terms used in the Plan shall have the meaning ascribed to them in Article 2 of the Plan.
The primary purposes of the Conversion are to: (1) enhance the Banks capital position and support future growth and profitability, including through capital investments in facilities and technology; (2) transition the Bank to a more familiar and flexible holding company structure; (3) improve the trading liquidity of the Mid-Tier Holding Companys shares of common stock; (4) facilitate the Mid-Tier Holding Companys ability to pay cash dividends; and (5) facilitate future mergers and acquisitions.
The Bank became a stock-form subsidiary of the Mid-Tier Holding Company when the Bank reorganized into the two-tier mutual holding company structure in 2016. Accordingly, the Conversion will not affect the corporate existence of the Bank. The Banks business and operations will not be affected or interrupted by the Conversion, and the Bank will continue as the same legal entity after the Conversion. The Conversion will have no impact on depositors, borrowers or other customers of the Bank. Upon the Conversion, each deposit account holder of the Bank will continue to hold exactly the same deposit account as the holder held immediately before the Conversion, and such deposit account holder shall have all of the same rights and privileges after the Conversion. All deposit accounts in the Bank following the Conversion will continue to be insured up to the legal maximum by the Deposit Insurance Fund of the FDIC and the Share Insurance Fund established by the MGL for amounts in excess of FDIC coverage limits, in the same manner as such deposit accounts were insured immediately before the Conversion. There will be no change in the Banks loans. The Conversion will not result in any reduction of the Banks reserves or net worth.
The Plan, which has been adopted by the Board of Trustees of the MHC, the Board of Directors of the Mid-Tier Holding Company and the Board of Directors of the Bank, is to be carried out under the laws of the Commonwealth of Massachusetts, applicable Regulations of the Massachusetts Division of Banks (the Division) and the Board of Governors of the Federal Reserve System (the FRB), and other applicable laws and regulations. The Board of Trustees of the MHC currently contemplates that, following the Conversion, all of the capital stock of the Bank will be held by a Massachusetts corporation (the Stock Holding Company) and that the Stock Holding Company will issue and sell shares of its common stock (the Holding Company Common Stock) in a Subscription Offering upon the terms and conditions set forth herein to
Eligible Account Holders, Supplemental Eligible Account Holders (if any), Tax-Qualified Employee Plans established by the Bank or the Stock Holding Company, and Employees, Officers, Directors, Trustees or Corporators of the MHC or the Bank, according to the respective priorities set forth in the Plan. Any shares not subscribed for in the Subscription Offering may be offered for sale to certain members of the public directly by the Stock Holding Company through a Direct Community Offering and/or a Syndicated Community Offering. Alternatively, any shares not subscribed for in the Subscription Offering and any Direct Community Offering may be offered for sale in a Firm Commitment Underwritten Offering, or in any other manner permitted by the Bank Regulators. All sales of Holding Company Common Stock in a Direct Community Offering, in a Syndicated Community Offering, in a Firm Commitment Underwritten Offering, or in any other manner permitted by the Bank Regulators, will be at the sole discretion of the Board of Trustees of the MHC and the Board of Directors of the Stock Holding Company. As part of the Conversion, each Minority Stockholder will receive Holding Company Common Stock in exchange for Minority Shares.
The Plan is subject to the approval of various regulatory agencies, and must be approved by a majority of the total votes of the Members present and voting at the Special Meeting called for such purpose. The Plan also must be approved by at least (i) two-thirds of the total votes eligible to be cast by Stockholders at the Meeting of Stockholders and (ii) a majority of the total votes eligible to be cast by Minority Stockholders at the Meeting of Stockholders.
The Conversion is to be effectuated as follows, or in any other manner that is consistent with the purposes of the Plan and applicable laws and regulations. The Mid-Tier Holding Company will establish the Stock Holding Company as a first-tier stock holding company subsidiary. The MHC will convert from mutual to stock form and merge with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the resulting entity pursuant to Section 9 of Chapter 167H of the MGL and the Agreement and Plan of Merger attached hereto as Exhibit 1.1 (the MHC Merger). As part of the MHC Merger, shares of Mid-Tier Holding Company common stock held by the MHC will be canceled and all persons holding liquidation rights in the MHC will constructively receive liquidation rights in the Mid-Tier Holding Company in exchange for their liquidation rights in the MHC. Immediately after the MHC Merger, the Mid-Tier Holding Company will merge with the Stock Holding Company, with the Stock Holding Company as the resulting entity (the Mid-Tier Merger), pursuant to the Agreement and Plan of Merger attached hereto as Exhibit 1.2, whereby the Bank will become the wholly owned subsidiary of the Stock Holding Company. As part of the Mid-Tier Merger, the liquidation rights held by persons in the Mid-Tier Holding Company pursuant to the MHC Merger will automatically, without further action on the part of such persons, be exchanged for an interest in the Stock Holding Company Liquidation Account. Immediately after the Mid-Tier Merger, the Stock Holding Company will offer for sale shares of Holding Company Common Stock in the Offering (the Offering Shares). The Stock Holding Company will contribute at least 50% of the net proceeds of the Offering to the Bank in constructive exchange for additional shares of common stock of the Bank and in exchange for the Bank Liquidation Account.
The foregoing is subject to modification as necessary to address tax or regulatory considerations. Upon the Conversion, Eligible Account Holders and the Supplemental Eligible Account Holders (if a Supplemental Eligibility Record Date is established) will be granted
interests in the liquidation account to be established by the Bank and the Stock Holding Company pursuant to Section 9.7 hereof.
ARTICLE 2.
Definitions
As used in this Plan, the terms set forth below have the following meanings:
Acting in Concert . The term Acting in Concert means Persons seeking to combine or pool their voting or other interests (such as subscription rights) in the securities of an issuer for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. When Persons act together for such purpose, their group is deemed to have acquired their stock. The determination of whether a group is Acting in Concert shall be made solely by the Board of Trustees of the MHC or Officers delegated by such Board and may be based on any evidence upon which the Board or such delegate(s) chooses to rely, including, without limitation, joint account relationships or the fact that such Persons have filed joint Schedules 13D with the SEC with respect to other companies. Persons living at the same address, whether or not related, will be deemed to be Acting in Concert unless otherwise determined by the Board or such delegate(s). Directors of the Bank, the Mid-Tier Holding Company, and the Stock Holding Company or Trustees of the MHC shall not be deemed to be Acting in Concert solely as a result of their membership on any such board or boards, including the Board of Corporators.
Affiliate . An Affiliate of, or a Person Affiliated with, a specified Person, is a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Person specified.
Application . The application, including a copy of the Plan, submitted by the MHC to the Commissioner for approval of the Conversion.
Associate . The term Associate, when used to indicate a relationship with any Person, means: (a) any corporation or organization (other than the Bank, the Mid-Tier Holding Company, the Stock Holding Company, the MHC or a majority-owned subsidiary of any thereof) of which such Person is an Officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (b) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; or (c) any relative or spouse of such Person or any relative of such spouse, who has the same home as such Person or who is a Director, Trustee or Officer of the MHC, the Stock Holding Company, the Mid-Tier Holding Company or the Bank, or any subsidiary thereof; provided , however , that any Tax-Qualified or Non-Tax-Qualified Employee Plan shall not be deemed to be an Associate of any Director, Trustee or Officer of the MHC, the Mid-Tier Holding Company, the Stock Holding Company, or the Bank. When used to refer to a Person other than an Officer, Director or Trustee of the Bank, the MHC, the Stock Holding Company, or the Mid-Tier Holding Company, the MHC, in its sole discretion may determine the Persons that are Associates of other Persons. Trustees of the MHC and Directors of the Mid-Tier Holding Company, the Stock Holding Company, and the Bank shall not be deemed to be Associates solely as a result of their membership on such Board.
Bank . HarborOne Bank, a Massachusetts-chartered stock co-operative bank with its main office in Brockton, Massachusetts, together with its subsidiaries.
Bank Liquidation Account . The account established in the Bank representing the liquidation interests received by Eligible Account Holders and Supplemental Eligible Account Holders (if any) in connection with the Conversion.
Bank Regulators . The Commissioner, the FRB and other bank regulatory agencies, if any, responsible for reviewing and approving the Conversion, including the ownership of the Bank by the Stock Holding Company and the mergers required to effect the Conversion.
BHC Act . The Bank Holding Company Act of 1956, as amended.
Code . The Internal Revenue Code of 1986, as amended.
Commissioner . The Commissioner of Banks of the Commonwealth of Massachusetts.
Community Offering . A Direct Community Offering and/or a Syndicated Community Offering.
Control . The term Control (including the terms controlling, controlled by, and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.
Conversion . The Conversion of the MHC to stock form pursuant to the Plan, and all steps incident or necessary thereto.
Conversion Shares . The Offering Shares and the Exchange Shares.
Corporator . A member of the Board of Corporators of the MHC.
Demand Account . Non-interest-bearing demand deposits that are subject to check or to withdrawal or transfer on negotiable or transferable order to the Bank and that are permitted to be issued by statute, regulation, or otherwise and are payable on demand.
Deposit Account . Any withdrawable deposit account offered by the Bank or by Coastway Community Bank (before its merger with and into the Bank), including, without limitation, savings accounts, NOW account deposits, certificates of deposit, demand deposits, Keogh Plans, SEPs and Individual Retirement Accounts for which the Bank acts as custodian or trustee, and such other types of deposit accounts as may then have been authorized by Massachusetts or federal law and regulations, but not including repurchase agreements, savings bank life insurance policies, certain escrow accounts, or trust department accounts held separately from deposit accounts in accordance with Section 4 of Chapter 167G of the MGL.
Direct Community Offering . The offering for sale directly by the Stock Holding Company of Holding Company Common Stock (a) to the Local Community, as provided in Section 7.6 of the Plan, with preference given to natural persons residing in the Local
Community, and then (b) to the public at large. The Direct Community Offering may be conducted simultaneously with the Subscription Offering.
Director . A member of the Board of Directors of the Bank, the Mid-Tier Holding Company and/or the Stock Holding Company, as the context may dictate.
Division . The Division of Banks of the Commonwealth of Massachusetts.
Eligibility Record Date . February 28, 2018, the date for determining who qualifies as an Eligible Account Holder.
Eligible Account Holder . Any Person holding a Qualifying Deposit on the Eligibility Record Date.
Employee . All Persons who are employed by the Mid-Tier Holding Company, the Stock Holding Company, the MHC, the Bank, or any subsidiary of the Bank. The term Employee does not include a Trustee, Director or Officer.
Employee Plan . Any Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Benefit Plan.
ESOP . The employee stock ownership plan established by the Bank.
Estimated Valuation Range . The range of the estimated consolidated pro forma market value of the Stock Holding Company, which shall also be equal to the range of the estimated pro forma market value of the aggregate Conversion Shares and Exchange Shares to be issued in the Conversion. The Estimated Valuation Range shall be based on the Independent Valuation determined by the Independent Appraiser prior to the Subscription Offering, as it may be amended from time to time thereafter. The Independent Valuation of the pro forma market value of the Stock Holding Company established by the Independent Appraiser shall form the midpoint of the Estimated Valuation Range. The maximum of the Estimated Valuation Range may vary as much as 15% above the midpoint of the Estimated Valuation Range (the Maximum of the Estimated Valuation Range) and 15% below the midpoint of the Estimated Valuation Range. The Maximum of the Estimated Valuation Range may be increased by up to 15% subsequent to the commencement of the Offering to reflect changes in demand for the Holding Company Common Stock or changes in market conditions.
E xchange Act . The Securities Exchange Act of 1934, as amended.
Exchange Offering . The offering of Holding Company Common Stock to Minority Stockholders in exchange for Minority Shares.
Exchange Ratio . The rate at which shares of Holding Company Common Stock are exchanged for Minority Shares upon consummation of the Conversion. The Exchange Ratio (which shall be rounded to four decimal places) shall be determined such that as of the closing of the Conversion the rate will result in the Minority Stockholders owning in the aggregate the same percentage of the outstanding shares of Holding Company Common Stock immediately upon completion of the Conversion as the percentage of Mid-Tier Holding Company common
stock owned by them in the aggregate immediately prior to the consummation of the Conversion before giving effect to (a) cash in lieu of any fractional shares and (b) any shares of Offering Shares purchased by Minority Stockholders in the Offering.
Exchange Shares . The shares of Holding Company Common Stock issued to Minority Stockholders in the Exchange Offering.
FDIC . The Federal Deposit Insurance Corporation.
Firm Commitment Underwritten Offering . The offering, at the sole discretion of the Stock Holding Company, of Offering Shares not subscribed for in the Subscription Offering and any Direct Community Offering, to members of the general public through one or more underwriters. A Firm Commitment Underwritten Offering may occur following the Subscription Offering and the Direct Community Offering, if any.
FRB . The Board of Governors of the Federal Reserve System.
FRB Applications . The FRB Conversion Application to be submitted to the FRB by the MHC and the Holding Company Application to be submitted to the FRB by the Stock Holding Company.
FRB Conversion Application . The FRB Conversion Application seeking the FRBs prior approval of, or non-objection to, the MHCs conversion from mutual to stock form.
Group Maximum Purchase Limit . The limitation on the purchase of shares of Holding Company Common Stock established by Section 8.3 of the Plan, as such limit may be increased pursuant to said Section 8.3.
Holding Company Application . The Holding Company Application on Form FR Y-3 for the FRBs prior approval of the Stock Holding Companys acquisition of the Bank.
Holding Company Common Stock . The shares of common stock to be issued by the Stock Holding Company in the Conversion.
Independent Appraiser . The appraiser retained by the MHC to prepare an appraisal of the pro forma market value of the Conversion Shares.
Independent Valuation . The independent valuation of the pro forma market value of the Conversion Shares as determined by the Independent Appraiser.
Individual Maximum Purchase Limit . The limitation on the purchase of shares of Holding Company Common Stock established by Section 8.2 of the Plan, as such limit may be increased pursuant to said Section 8.2.
Information Statement . The information statement required to be sent to the Members in connection with the Special Meeting.
IRS . The United States Internal Revenue Service.
Local Community . The Massachusetts cities and towns of Abington, Acushnet, Attleboro, Avon, Berkley, Braintree, Bridgewater, Brockton, Canton, Carver, Cohasset, Dartmouth, Dighton, Duxbury, East Bridgewater, Easton, Fairhaven, Fall River, Foxboro, Freetown, Halifax, Hanover, Hanson, Hingham, Holbrook, Hull, Kingston, Lakeville, Mansfield, Marion, Marshfield, Mattapoisett, Middleborough, Milton, New Bedford, North Attleboro, Norton, Norwell, Plainville, Pembroke, Plymouth, Plympton, Quincy, Randolph, Raynham, Rehoboth, Rochester, Rockland, Seekonk, Scituate, Sharon, Somerset, Stoughton, Swansea, Taunton, Wareham, West Bridgewater, Westport, Weymouth and Whitman, and the Rhode Island cities and towns of Barrington, Bristol, Burrillville, Central Falls, Charlestown, Coventry, Cranston, Cumberland, East Greenwich, East Providence, Exeter, Foster, Glocester, Hopkinton, Jamestown, Johnston, Lincoln, Little Compton, Middletown, Narragansett, New Shoreham, Newport, North Kingstown, North Providence, North Smithfield, Pawtucket, Portsmouth, Providence, Richmond, Scituate, Smithfield, South Kingstown, Tiverton, Warren, Warwick, West Greenwich, West Warwick, Westerly, and Woonsocket.
Majority Ownership Interest . A fraction, the numerator of which is equal to the number of shares of MidTier Holding Company common stock owned by the MHC immediately prior to the completion of the Conversion, and the denominator of which is equal to the total number of shares of MidTier Holding Company common stock issued and outstanding immediately prior to the completion of the Conversion.
Marketing Agent . The broker-dealer responsible for managing the Offering and sale of Holding Company Common Stock.
Market Maker . A broker-dealer ( i.e ., any Person who engages directly or indirectly as agent, broker, or principal in the business of offering, buying, selling or otherwise dealing or trading in securities issued by another Person) who, with respect to a particular security, (i) regularly publishes a bona fide, competitive bid and offers quotations in a recognized inter-dealer quotation system, (ii) furnishes bona fide competitive bid and offer quotations on request, and (iii) is ready, willing and able to effect transactions in reasonable quantities at the dealers quoted prices with other brokers or dealers.
Meeting of Stockholders . The special or annual meeting of stockholders of the Mid-Tier Holding Company and any adjournments thereof held to consider and vote upon the Plan.
Member . A Person who is recorded on the books of the MHC as the holder of one or more shares or accounts of the MHC.
MG L . The General Laws of the Commonwealth of Massachusetts.
MHC . HarborOne Mutual Bancshares, the mutual holding company for the Bank.
MHC Merger . The merger of MHC with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company as the resulting entity.
Mid-Tier Holding Company . HarborOne Bancorp, Inc., a Massachusetts corporation.
Mid-Tier Merger . The merger of the Mid-Tier Holding Company with the Stock Holding Company, with the Stock Holding Company as the resulting entity.
Minority Shares . Any outstanding common stock of the Mid-Tier Holding Company, or shares of common stock of the Mid-Tier Holding Company issuable upon the exercise of options or grant of stock awards, owned by persons other than the MHC.
Minority Stockholder . Any owner of Minority Shares.
Non-Tax-Qualified Employee Benefit Plan . Any defined benefit plan or defined contribution plan of the MHC, the Mid-Tier Holding Company, the Stock Holding Company, the Bank or any of their Affiliates which is not qualified under Section 401 of the Code.
Offering . The Subscription Offering, the Direct Community Offering, if any, the Syndicated Community Offering, if any, and the Firm Commitment Underwritten Offering, if any. The term Offering does not include Holding Company Common Stock issued in the Exchange Offering.
Offering Range . The range of the number of shares of Holding Company Common Stock offered for sale in the Offering. The Offering Range will be equal to the Estimated Valuation Range multiplied by the Majority Ownership Interest divided by the Subscription Price.
Offering Shares . The shares of Holding Company Common Stock offered and sold in the Offering. Offering Shares do not include Exchange Shares.
Officer . The Chairman of the Board of Directors, the President, any officer of the level of vice president or above, the Clerk, the Secretary, and the Treasurer of the MHC, the Mid-Tier Holding Company, the Stock Holding Company, the Bank or any subsidiary of the Bank as the case may be.
Order Form . Any form (together with any cover letter and acknowledgments) sent to any Participant or Person containing among other things a description of the alternatives available to such Person under the Plan and by which any such Person may make elections regarding subscriptions for Offering Shares.
Participant . Any Eligible Account Holder, Supplemental Eligible Account Holder, Tax-Qualified Employee Plan, or any Employee, Officer, Director, Trustee or Corporator of the MHC, the Mid-Tier Holding Company or the Bank.
Person . An individual, corporation, partnership, association, joint-stock company, trust (including Keogh Plans, SEPs and Individual Retirement Accounts), unincorporated organization, government entity or political subdivision thereof or any other entity.
Plan . This Plan of Conversion, including any amendments hereto.
Qualifying Deposit . The aggregate balances of all Deposit Accounts of an Eligible Account Holder as of the close of business on the Eligibility Record Date or of a Supplemental
Eligible Account Holder (if any) as of the close of business on the Supplemental Eligibility Record Date (if required), as the case may be, provided that, in either case, such aggregate balance is not less than $50. In determining the aggregate balance, any Deposit Account having a negative balance on the Eligibility Record Date or Supplemental Eligibility Record Date shall be disregarded.
Range Maximum . The number of Offering Shares that is 15% above the midpoint of the Offering Range.
Range Minimum . The number of Offering Shares that is 15% below the midpoint of the Offering Range.
Regulations . The regulations of the Division regarding the conversion of Massachusetts mutual holding companies to stock form and the regulations of the FRB regarding the conversion of mutual holding companies to stock form (to the extent deemed applicable by the FRB).
Savings Account . Any withdrawable account, except a Demand Account, a tax and loan account, a note account, a United States Treasury general account, or a United States Treasury time deposit-open account.
SEC . The Securities and Exchange Commission.
Special Meeting . The special meeting of Members of the MHC called for the purpose of voting on the Plan.
Stock Holding Company . The stock-form holding company that will (a) be a Massachusetts corporation known as HarborOne NorthEast Bancorp, Inc., (b) issue Holding Company Common Stock in the Conversion and (c) own 100% of the common stock of the Bank upon consummation of the Conversion.
Stock Holding Company Liquidation Account . The account established by the Stock Holding Company representing the liquidation interests received by Eligible Account Holders and Supplemental Eligible Account Holders (if any) in connection with the Conversion in exchange for their interests in the MHC immediately prior to the Conversion.
Stockholder . Any owner of the outstanding common stock of the Mid-Tier Holding Company, including the MHC.
Subscription Offering . The offering of Holding Company Common Stock for subscription by Persons holding subscription rights pursuant to the Plan.
Subscription Price . The price per share, determined as provided in Section 5.3 of the Plan, at which the Holding Company Common Stock will be sold in the Offering.
Supplemental Eligible Account Holder . Any Person (other than Officers, Directors, Trustees, or Corporators of the MHC, the Mid-Tier Holding Company, the Stock Holding Company, or the Bank and their Associates) holding a Qualifying Deposit on the Supplemental Eligibility Record Date (if established).
Supplemental Eligibility Record Date . If the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application filed prior to approval of the Application by the Commissioner, a supplemental record date shall be established for determining who qualifies as a Supplemental Eligible Account Holder. If required, the Supplemental Eligibility Record Date is June 30, 2018.
Syndicated Community Offering . At the sole discretion of the MHC, the offering of Offering Shares not subscribed for in the Subscription Offering or the Direct Community Offering to members of the general public following or contemporaneously with the Direct Community Offering through a syndicate of broker-dealers.
Tax-Qualified Employee Plan . Any defined benefit plan or defined contribution plan (including the ESOP, any stock bonus plan, profit-sharing plan, 401(k) plan or other plan) of the MHC, the Mid-Tier Holding Company, the Stock Holding Company, the Bank or any of their Affiliates, which, with its related trusts, meets the requirements to be qualified under Section 401 of the Code.
Trustees . The Trustees of the MHC.
Voting Record Date . The date fixed by the Trustees for determining eligibility to vote at the Special Meeting and/or the date fixed by the Board of Directors of the Mid-Tier Holding Company to vote at the Meeting of Stockholders, as the context may dictate.
ARTICLE 3.
General Procedure for the Conversion
3.1 Preconditions to the Conversion . The Conversion is expressly conditioned upon prior occurrence of the following:
(a) Approval of the Plan by the affirmative vote of a majority of the Members present and voting at the Special Meeting.
(b) Approval of the Plan by (i) two-thirds of the total votes eligible to be cast by Stockholders at the Meeting of Stockholders, and (ii) a majority of the total votes eligible to be cast by Minority Stockholders at the Meeting of Stockholders.
(c) Issuance of the Exchange Shares.
(d) Prior receipt of the private letter rulings or opinions of counsel set forth in Section 3.2 of the Plan.
(e) Approval by the Commissioner of the Application, including the Plan and all exhibits hereto.
(f) Approval by the FRB of the FRB Applications.
3.2 Submission of Plan to Commissioner and FRB . Upon approval by at least two-thirds of all Trustees of the MHC, the Plan will be submitted to the Commissioner as part of the
Application, and to the FRB as part of the FRB Applications, together with a copy of the proposed Information Statement and all other material required by the Regulations, for approval by the Commissioner and approval or non-objection, as applicable, by the FRB. The MHC must also receive either private letter rulings from the IRS and the Massachusetts Department of Revenue or opinions of its counsel as to the federal income tax consequences of the Conversion and of its tax accountants as to the Massachusetts income tax consequences of the Conversion, in either case substantially to the effect that the Conversion will not result in a taxable transaction to the MHC, the Bank, the Mid-Tier Holding Company, the Stock Holding Company, or (provided the subscription rights have no value) the Banks depositors under the Code, or Massachusetts law. Upon a determination by the Commissioner that the Application is complete, the MHC will publish and post public announcements and notices of the Application as required by the Commissioner and the Regulations. The MHC, the Mid-Tier Holding Company, and the Stock Holding Company will also publish any notice required in connection with the FRB Applications.
3.3 Special Meeting of Members to Approve the Plan . Following approval of the Plan and the proposed Information Statement by the Commissioner, the Special Meeting shall be scheduled in accordance with the MHCs Bylaws. The Plan (as may be revised in response to comments received from the Commissioner, and the FRB), and any information required pursuant to the Regulations, will be submitted to the Members for their consideration and approval at the Special Meeting. The MHC will mail to each Member a copy of the Information Statement not less than twenty (20) days before the Special Meeting. Following approval of the Plan by the Members, the MHC intends to take such steps as may be appropriate pursuant to applicable laws and regulations to effect the Conversion.
3.4 Completion of the Conversion and the Offering . The Board of Trustees of the MHC and the Board of Directors of the Mid-Tier Holding Company, the Stock Holding Company and the Bank will take all necessary steps to complete the Conversion and the Offering, including the timely filing of all necessary applications to appropriate regulatory authorities, and the filing with the SEC of a registration statement to register the sale and/or issuance of Conversion Shares and preliminary proxy materials, applications and other information in connection with the solicitation of Stockholder approval of the Plan.
3.5 Bank Articles of Organization and Bylaws . The current Articles of Organization and Bylaws of the Bank are to be amended to add the Bank Liquidation Account.
ARTICLE 4.
The Conversion
4.1 Effectuation of Conversion . The Conversion will be effected in any manner selected by the Board of Trustees of the MHC that is consistent with the purposes of the Plan and applicable laws and regulations. The choice of which method to use to effect the Conversion will be made by the Board of Trustees of the MHC immediately prior to the consummation of the Conversion.
4.2 Approvals . Approval of the Plan by the Board of Trustees and Members of the MHC shall also constitute (a) approval of the formation of the Stock Holding Company as set
forth herein, (b) approval by the MHC (on its own behalf and as the sole shareholder of the Mid-Tier Holding Company) of a combination, by merger or otherwise, as provided herein, of the MHC with and into the Mid-Tier Holding Company with the Mid-Tier Holding Company being the surviving entity and whereby the existing outstanding shares of capital stock of the Mid-Tier Holding Company held by the MHC will be canceled and all persons holding liquidation rights in the MHC will constructively receive liquidation rights in the Mid-Tier Holding Company in exchange for their liquidation rights in the MHC, (c) approval by the Mid-Tier Holding Company of the combination, by merger or otherwise, of the Mid-Tier Holding Company with and into the Stock Holding Company with the Stock Holding Company being the surviving entity and whereby (i) the existing outstanding shares of capital stock of the Stock Holding Company held by the Mid-Tier Holding Company will be canceled, (ii) the former holders of liquidation rights in the MHC who constructively received liquidation rights in the Mid-Tier Holding Company will receive an interest in the Stock Holding Company Liquidation Account in exchange for their constructive liquidation rights in the Mid-Tier Holding Company, and (iii) each of the Minority Shares shall be converted into and become the right to receive Holding Company Common Stock based upon the Exchange Ratio, (d) approval by the Bank to constructively issue additional shares of common stock to the Stock Holding Company and to establish the Bank Liquidation Account in exchange for a portion of the net proceeds of the Offering, and (e) approval of any other of the transactions that are necessary to implement the Plan.
4.3 The Exchange Offering . As part of the Conversion, each of the Minority Shares outstanding immediately prior to consummation of the Conversion shall automatically, without further action on the part of the holders thereof, be converted into and become the right to receive Holding Company Common Stock based upon the Exchange Ratio. The basis for exchange of Minority Shares for Holding Company Common Stock shall be fair and reasonable. Options to purchase shares of Mid-Tier Holding Company common stock which are outstanding immediately prior to the consummation of the Conversion shall be converted into options to purchase shares of Holding Company Common Stock, with the number of shares subject to the option and the exercise price per share to be adjusted based upon the Exchange Ratio so that the aggregate exercise price remains unchanged, and with the duration of the option remaining unchanged.
4.4 Conversion to Stock Holding Company . Upon the consummation of the Conversion, the Stock Holding Company will be authorized to exercise any and all powers, rights and privileges, and will be subject to all limitations applicable to bank holding companies under applicable laws and regulations. The Officers of the Mid-Tier Holding Company immediately prior to the Conversion shall be the Officers of the Stock Holding Company immediately following the Conversion, in each case to serve until their terms of office expire and until their successors are elected and qualified. The Stock Holding Company will own 100% of the common stock of the Bank upon consummation of the Conversion in exchange for a portion of the net proceeds received from the sale of the Offering Shares and in exchange for the establishment of the Bank Liquidation Account.
4.5 Offer and Sale of Holding Company Common Stock .
4.5.1 Subject to approval of the Plan by the Members, and the receipt of all required regulatory approvals, the Holding Company Common Stock will be offered for sale in a Subscription Offering simultaneously to Eligible Account Holders, Supplemental Eligible Account Holders (if any), and any Tax-Qualified Employee Benefit Plans in the manner set forth in Article 7 hereof. The Subscription Offering period will run for no less than twenty (20) but no more than forty-five (45) days from the date of distribution of the Subscription Offering materials, unless extended by the MHC with the approval of the Commissioner and the FRB, if required. If feasible, any Offering Shares remaining may then be sold to the general public through a Direct Community Offering as provided in Article 7 hereof, which may be held either subsequent to or concurrently with the Subscription Offering.
4.5.2 If feasible, any Offering Shares remaining unsold after completion of the Subscription Offering and any Direct Community Offering may, in the sole discretion of the Stock Holding Company, be sold in a Syndicated Community Offering or a Firm Commitment Underwritten Offering, or in any manner receiving the required approval of the Bank Regulators and other applicable regulatory agencies that will achieve a widespread distribution of the Holding Company Common Stock. The issuance of Holding Company Common Stock in the Subscription Offering and any Direct Community Offering will be consummated simultaneously on the date the sale of Holding Company Common Stock is consummated in any Syndicated Community Offering or Firm Commitment Underwritten Offering, and only if the required minimum number of shares of Holding Company Common Stock has been issued. The sale of all shares of Holding Company Common Stock to be sold pursuant to the Plan must be completed within forty-five (45) days after expiration of the Subscription Offering; subject to the extension of such forty-five (45) day period by the Stock Holding Company with the approval of the Commissioner and the FRB, if required. The Stock Holding Company may seek one or more extensions of such forty-five (45) day period if necessary to complete the sale of all shares of Holding Company Common Stock. If all available shares of Holding Company Common Stock are sold in the Subscription Offering and any Direct Community Offering, there will be no Syndicated Community Offering or Firm Commitment Underwritten Offering and the Conversion will be consummated upon completion of the Subscription Offering or the Direct Community Offering, as the case may be.
ARTICLE 5.
Shares to be Offered
5.1 Holding Company Common Stock . The Conversion Shares, when issued in accordance with the Plan, shall be fully paid and nonassessable. The total number of shares of Holding Company Common Stock authorized under the Stock Holding Companys Articles of Organization will exceed the number of shares of Holding Company Common Stock to be issued in the Conversion. HOLDING COMPANY COMMON STOCK WILL NOT BE COVERED BY DEPOSIT INSURANCE.
5.2 Independent Valuation . An Independent Appraiser shall be employed by the MHC to provide it with an Independent Valuation as required by the Regulations, which value shall be included in the prospectus (as described in Section 6.1 of the Plan) filed with the Commissioner, the FRB and the SEC. The Trustees of the MHC shall thoroughly review and analyze the methodology and reasonableness of the Independent Valuation. The Independent
Valuation will be made by a written report to the MHC, contain the factors upon which the Independent Valuation was made and conform to procedures adopted by the Commissioner and the FRB. The Independent Valuation of the pro forma market value of the Conversion Shares established by the Independent Appraiser shall form the midpoint of the Estimated Valuation Range. The maximum of the Estimated Valuation Range may vary as much as 15% above the midpoint of the Estimated Valuation Range (Range Maximum) and 15% below the midpoint of the Estimated Valuation Range (Range Minimum). The Independent Appraiser shall also present to the MHC at the close of the Subscription Offering a valuation of the pro forma market value of the Conversion Shares.
5.3 Subscription Price . All shares sold in the Offering will be sold at a uniform price per share (the Subscription Price), preliminarily set at $10.00 per share, which price will be definitively determined before the commencement of the Offering. If there is a Syndicated Community Offering or Firm Commitment Underwritten Offering, the price per share at which the Holding Company Common Stock is sold in such Syndicated Community Offering or Firm Commitment Underwritten Offering shall be equal to the per share purchase price of the shares sold in the Subscription Offering and the Direct Community Offering.
5.4 Number of Shares . The total number of shares (and a range thereof) of Offering Shares to be offered for sale in the Offering will be determined by the Board of Trustees of the MHC and the Board of Directors of the Stock Holding Company immediately before the commencement of the Subscription Offering based on the Independent Valuation, the Estimated Valuation Range and the Subscription Price. The Independent Valuation, and such number of shares, shall be subject to adjustment thereafter if necessitated by market or financial conditions, with the approval of the Commissioner and the FRB, if necessary. In particular, the total number of shares may be increased by up to 15% above the Range Maximum if the Independent Valuation is increased subsequent to the commencement of the Subscription Offering to reflect changes in market and financial conditions or demand for the Holding Company Common Stock and the resulting aggregate purchase price is not more than 15% above the Range Maximum.
5.5 Increase or Decrease in Number of Shares . The Offering Range may be increased or decreased by the Stock Holding Company, subject to the following provisions. In the event that the number of Offering Shares ordered is below the Range Minimum, or materially above the Range Maximum, resolicitation of purchasers may be required, provided, however , that a resolicitation will not be required if the number of shares increases by up to 15% above the Range Maximum. Any such resolicitation shall be effected in such manner and within such time as the Stock Holding Company shall establish, with the approval of the Commissioner and the FRB, if required.
5.6 Confirmation of Valuation . Notwithstanding the foregoing, no shares of Holding Company Common Stock may be issued unless, before the consummation of the Offering, the Independent Appraiser confirms to the MHC and the Stock Holding Company, and to the Commissioner and the FRB (if required), that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the aggregate value of all Offering Shares to be sold in the Offering, at the Subscription Price, is incompatible with its estimate of the aggregate consolidated pro forma market value of the Conversion Shares. An
increase in the aggregate value of the Offering Shares by up to 15% above the Range Maximum would not be deemed to be material. If such confirmation is not received, the Stock Holding Company may cancel the Offering and the Exchange Offering, resolicit and extend the Offering and establish a new Subscription Price and/or Estimated Valuation Range, extend, reopen or hold a new Offering and Exchange Offering, or take such other action as the Commissioner and the FRB may permit.
ARTICLE 6.
Subscription Rights and Orders for Common Stock
6.1 Distribution of Prospectus . The Offering shall be conducted in compliance with the Regulations and applicable SEC regulations. As soon as practicable after the Stock Holding Companys registration statement (including the prospectus therein) has been declared effective by the SEC and approved for use by the Commissioner (and the FRB, if required), and the SEC, copies of the prospectus and Order Forms will be distributed to all eligible Participants in the Subscription Offering at their last known addresses appearing on the records of the Bank and the MHC for the purpose of subscribing for shares of Holding Company Common Stock in the Subscription Offering. The prospectus also will be made available (if and when a Community Offering is held) for use by those Persons to whom shares of Holding Company Common Stock are offered in the Community Offering.
6.2 Order Forms . Each Order Form will be preceded or accompanied by the prospectus describing the Stock Holding Company, the Bank, the Holding Company Common Stock and the Subscription and Community Offerings. Each Order Form will contain, among other things, the following:
6.2.1 A specified date by which all Order Forms must be received by the Stock Holding Company, which date shall be not less than twenty (20) nor more than forty-five (45) days following the date on which the Order Forms are first mailed by the Stock Holding Company, and which date will constitute the expiration of the Subscription Offering, unless extended;
6.2.2 The Subscription Price per share for shares of Holding Company Common Stock to be sold in the Offering;
6.2.3 A description of the minimum and maximum number of shares of Holding Company Common Stock that may be subscribed for pursuant to the exercise of subscription rights or otherwise purchased in the Offering;
6.2.4 Instructions as to how the recipient of the Order Form is to indicate thereon the number of shares of Holding Company Common Stock for which such Person elects to subscribe and the available alternative methods of payment therefor;
6.2.5 An acknowledgment that the recipient of the Order Form has received a copy of the prospectus before execution of the Order Form;
6.2.6 A statement indicating the consequences of failing to properly complete and return the Order Form, including a statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can only be exercised by delivering to the Stock Holding Company within the Subscription Offering period such properly completed and executed Order Form, together with payment in the full amount of the purchase price as specified in the Order Form (including, if the MHC so permits, by authorization of withdrawal from a Savings Account or certificate of deposit at the Bank) for the shares of Holding Company Common Stock for which the recipient elects to subscribe in the Subscription Offering; and
6.2.7 A statement to the effect that the executed Order Form, once received by the Stock Holding Company, may not be modified or amended by the subscriber without the consent of the Stock Holding Company.
6.3 Undelivered, Defective or Late Order Form; Insufficient Payment . In the event Order Forms (a) are not delivered for any reason or are returned undelivered to the Stock Holding Company by the United States Postal Service, (b) are not received back by the Stock Holding Company or are received by the Stock Holding Company after the expiration date specified thereon, (c) are defectively filled out or executed, (d) are not accompanied by the full required payment for the shares of Holding Company Common Stock subscribed for (including cases in which Savings Accounts or certificates of deposit from which withdrawals are authorized are insufficient to cover the amount of the required payment), or (e) are not mailed pursuant to a no mail order placed in effect by the account holder, the subscription rights of the Person to whom such rights have been granted will lapse as though such Person failed to return the completed Order Form within the time period specified thereon; provided, however , that the Stock Holding Company may, but will not be required to, waive any immaterial irregularity on any Order Form or require the submission of corrected Order Forms or the remittance of full payment for subscribed shares by such date as the Stock Holding Company may specify, and all interpretations by the MHC and the Stock Holding Company, as applicable, of terms and conditions of the Plan and of the Order Forms will be final, subject to the review and approval of the Commissioner. The Stock Holding Company reserves the right in its sole discretion to accept or reject orders received on photocopied or faxed Order Forms.
6.4 Payment for Stock .
6.4.1 All payments for Holding Company Common Stock subscribed for or ordered in the Offering must be delivered in full to the Stock Holding Company, together with a properly completed and executed Order Form, except in the case of the Syndicated Community Offering or the Firm Commitment Underwritten Offering, on or before the expiration date specified on the Order Form, unless such date is extended by the MHC and the Stock Holding Company; provided, however , that if any Employee Plan subscribes for shares during the Subscription Offering, such plans will not be required to pay for the shares at the time they subscribe but rather may pay for such shares of Holding Company Common Stock subscribed for by such plans at the Subscription Price immediately prior to consummation of the Offering, provided, further , that, in the case of the ESOP, there is in force from the time of its subscription until the consummation of the Offering a loan commitment to lend to the ESOP, at such time, the aggregated Subscription Price of the shares for which it subscribed. Payment for Holding Company Common Stock may also be made by a participant in an Employee Plan (including the Banks 401(k) plan) causing funds held for such participants benefit by an Employee Plan to be
paid over for such purchase to the extent that such plan allows participants or any related trust established for the benefit of such participants to direct that some or all of their individual accounts or sub-accounts be invested in Holding Company Common Stock.
6.4.2 Payment for Holding Company Common Stock shall be made either by personal check, bank draft or money order, or if a purchaser has a Savings Account or certificate of deposit in the Bank (and if the MHC has elected to permit such withdrawals from the type of Savings Account or certificate of deposit maintained by such Person), such purchaser may pay for the shares subscribed for by authorizing the Bank to make a withdrawal from the purchasers Savings Account or certificate of deposit at the Bank in an amount equal to the aggregate purchase price of such shares. Wire transfers may be accepted at the sole discretion of the Stock Holding Company. Any authorized withdrawal from a Savings Account or a certificate of deposit shall be without penalty as to premature withdrawal. If the authorized withdrawal is from a certificate of deposit, and the remaining balance does not meet the applicable minimum balance requirements, the certificate shall be canceled at the time of withdrawal, without penalty, and the remaining balance will earn interest at the statement savings rate. Funds for which a withdrawal is authorized will remain in the purchasers account but may not be used by the purchaser pending consummation of the Offering or expiration of the 45-day period (or such longer period as may be approved by the Commissioner) following termination of the Subscription Offering, whichever occurs first. Upon consummation of the Offering, the withdrawal will be given effect only to the extent necessary to satisfy the subscription (to the extent it can be filled) at the Subscription Price. Interest will continue to be earned on any amounts authorized for withdrawal until such withdrawal is given effect. Interest on checks, money orders and bank drafts will be paid by the Bank at the Banks statement savings rate. Such interest will be paid from the date payment is received by the Bank until consummation or termination of the Offering. If for any reason the Offering is not consummated, all payments made by subscribers in the Offering will be refunded to them with interest. In case of amounts authorized for withdrawal from Savings Accounts or certificates of deposit, refunds will be made by canceling the authorization for withdrawal.
ARTICLE 7.
Stock Purchase Priorities
7.1 Priorities for Offering . All purchase priorities established by this Article 7 shall be subject to the purchase limitations set forth in, and shall be subject to adjustment as provided in, Article 8 of the Plan. In addition to the priorities set forth in this Article 7, the MHC may establish other priorities for the purchase of Holding Company Common Stock, subject to the approval of the Commissioner and the FRB, if required.
7.2 Certain Determinations . All interpretations or determinations of whether prospective purchasers are residents, Associates, or Acting in Concert, or whether a purchase conflicts with the purchase limitations in the Plan or otherwise violates any provision of the Plan, and any other interpretations of any and all other provisions of the Plan shall be made by and at the sole discretion of the MHC or the Stock Holding Company, and may be based on whatever evidence the Stock Holding Company may choose to use in making any such determination; provided, however, that the determination of whether a group is Acting in Concert remains subject to review by the Division. Such determination shall be conclusive, final and
binding on all Persons and the MHC or the Stock Holding Company (as applicable) may take any remedial action, including, without limitation, rejecting the purchase or referring the matter to the Commissioner for action, as in its sole discretion the MHC or the Stock Holding Company may deem appropriate.
7.3 Minimum Purchase; No Fractional Shares . The minimum purchase by any Person shall be 25 shares (to the extent that shares of Holding Company Common Stock are available for purchase); provided, however , that the aggregate purchase price for any minimum share purchase shall not exceed $500. No fractional shares will be allocated or issued.
7.4 Overview of Priorities . In descending order of priority, the opportunity to purchase Holding Company Common Stock shall be given in the Subscription Offering to: (a) Eligible Account Holders; (b) Supplemental Eligible Account Holders (if any); (c) Tax-Qualified Employee Plans; and (d) Employees, Officers, Trustees, Directors and Corporators of the MHC, the Mid-Tier Holding Company, the Stock Holding Company or the Bank or any subsidiary of the Bank. Any shares of Holding Company Common Stock that are not subscribed for in the Subscription Offering at the discretion of the Stock Holding Company may be offered for sale in a Direct Community Offering and/or a Syndicated Community Offering on terms and conditions and procedures satisfactory to the Stock Holding Company. Alternatively, if feasible, any shares of Holding Company Common Stock not sold in the Subscription Offering or in the Direct Community Offering, if any, may be offered for sale in a Firm Commitment Underwritten Offering subject to such terms, conditions and procedures as may be determined by the MHC and the Stock Holding Company.
7.5 Priorities For Subscription Offering .
7.5.1 First Priority: Eligible Account Holders . Upon approval of the Plan by the Members and the receipt of permission from the Commissioner and the FRB, if required, and the SEC to offer the Holding Company Common Stock for sale, each Eligible Account Holder shall receive, without payment therefor, nontransferable subscription rights on a first priority basis to subscribe for a number of shares of Holding Company Common Stock equal to the greatest of (a) a number determined by dividing the Individual Maximum Purchase Limit (as such term is defined in Section 8.2) by the per share Subscription Price, (b) one-tenth of one percent (.10%) of the shares offered in the Conversion, or (c) 15 times the product (rounded down to the nearest whole number) obtained by multiplying (1) the total number of shares of Holding Company Common Stock to be sold in the Offering by (2) a fraction, of which the numerator is the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders. If there are insufficient shares available to satisfy all subscriptions of Eligible Account Holders, shares will be allocated to Eligible Account Holders so as to permit each such subscribing Eligible Account Holder to purchase a number of shares of Holding Company Common Stock sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares of Holding Company Common Stock will be allocated pro rata to remaining subscribing Eligible Account Holders whose subscriptions remain unfilled in the same proportion that each such subscribers Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. Subscription rights to purchase Holding Company Common Stock received by Officers,
Directors, Trustees, and Corporators of the MHC and the Bank (and their Associates) based on their increased deposits in the Bank in the one year preceding the Eligibility Record Date shall be subordinated to the subscription rights of other Eligible Account Holders, unless the Bank Regulators permit otherwise. To ensure proper allocation of stock, each Eligible Account Holder must list on his or her subscription Order Form all Deposit Accounts in which he had an ownership interest as of the Eligibility Record Date.
7.5.2 Second Priority: Supplemental Eligible Account Holders . To the extent there are shares remaining after satisfaction of subscriptions by Eligible Account Holders, each Supplemental Eligible Account Holder (if any) shall receive non-transferable subscription rights to subscribe for a number of shares of Holding Company Common Stock equal to the greatest of (a) a number determined by dividing the Individual Maximum Purchase Limit by the per share Subscription Price, (b) one-tenth of one percent (.10%) of the shares offered in the Conversion, or (c) 15 times the product (rounded down to the nearest whole number) obtained by multiplying (1) the total number of shares of Holding Company Common Stock to be sold in the Offering by (2) a fraction, of which the numerator is the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders. In the event Supplemental Eligible Account Holders (if any) subscribe for a number of shares of Holding Company Common Stock which, when added to the shares subscribed for by Eligible Account Holders, exceed available shares, the available shares of Holding Company Common Stock will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each subscribing Supplemental Eligible Account Holder to purchase a number of shares of Holding Company Common Stock sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated to each subscribing Supplemental Eligible Account Holder whose subscription remains unfilled in the same proportion that such subscribers Qualifying Deposit on the Supplemental Eligibility Record Date bears to the total amount of Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled.
7.5.3 Third Priority: Tax-Qualified Employee Plans . To the extent there are shares remaining after satisfaction of subscriptions by Eligible Account Holders and Supplemental Eligible Account Holders (if any), the Tax-Qualified Employee Plans shall be given the opportunity to purchase in the aggregate up to 10% of the Holding Company Common Stock issued in the Conversion. In the event that the total number of shares of Holding Company Common Stock offered in the Conversion is increased to an amount greater than the Range Maximum, the Tax-Qualified Employee Plans shall have a priority right to purchase any such additional shares offered (up to an aggregate of 10% of Holding Company Common Stock issued in the Conversion). If the Tax-Qualified Employee Plans are not able to fill their orders in full in the Offering, then the Tax-Qualified Employee Plans may purchase shares in the open market following consummation of the Offering or utilize authorized but unissued shares of Mid-Tier Common Stock only with prior Commissioner approval. The Employee Plans shall not be deemed to be Associates or Affiliates of or Persons Acting in Concert with any Director, Trustee, Officer or Corporator of the MHC, the Stock Holding Company or the Bank.
7.5.4 Fourth Priority: Employees, Officers, Directors, Trustees and Corporators . To the extent there are shares remaining after satisfaction of subscriptions by
Eligible Account Holders, Supplemental Eligible Account Holders (if any), and any Tax-Qualified Employee Plans, each Employee, Officer, Director, Trustee and Corporator of the MHC or the Bank who is not an Eligible Account Holder or a Supplemental Eligible Account Holder shall receive non-transferable subscription rights to subscribe for Offering Shares in an amount equal to the Individual Maximum Purchase Limit; provided, however , that the aggregate number of Offering Shares that may be purchased by Employees, Officers, Directors, and Trustees of the MHC or the Bank in the Offering shall be limited to 25% of the total number of Offering Shares sold in the Offering (including shares purchased by Employees, Officers, Directors and Trustees under this Section 7.5.4 and under the preceding priority categories, but not including shares purchased by the ESOP). In the event that Employees, Officers, Directors and Trustees subscribe under this Section 7.5.4 for more Offering Shares than are available for purchase by them, the Offering Shares available for purchase will be allocated by the Stock Holding Company among such subscribing Persons on an equitable basis, such as by giving weight to the period of service, compensation and position of the individual subscriber and the amount of the order.
7.6 Priorities for Direct Community Offering .
7.6.1 Any shares of Holding Company Common Stock not subscribed for in the Subscription Offering may be offered for sale in a Direct Community Offering. This will involve an offering of all unsubscribed shares of Holding Company Common Stock directly to the general public. The Direct Community Offering, if any, shall be for a period of not more than forty-five (45) days unless extended by the Stock Holding Company, and shall commence concurrently with, during or promptly after the Subscription Offering. The Stock Holding Company may use broker-dealers or investment banking firms on a best efforts basis to assist in selling the unsubscribed shares in the Subscription and Direct Community Offering. The Stock Holding Company may pay a commission or other fee to such broker-dealers or investment banking firms as to the shares sold the Subscription and Direct Community Offering and may also reimburse such firm or firms for reasonable expenses incurred in connection with the sale. The Holding Company Common Stock will be offered and sold in the Direct Community Offering, in accordance with the Regulations, so as to achieve the widest distribution of the Holding Company Common Stock. In making the Direct Community Offering, the Stock Holding Company will give preference to natural persons (including trusts of natural persons) residing in the Local Community. No Person may subscribe for or purchase more than the Individual Maximum Purchase Limit of Holding Company Common Stock in the Direct Community Offering. The Stock Holding Company, in its sole discretion, may reject subscriptions, in whole or in part, received from any Person under this Section 7.6.
7.6.2 In the event of an oversubscription for shares in the Direct Community Offering, available shares will be allocated (to the extent shares remain available) first to cover orders of natural Persons residing in the Local Community, and second to the general public, so that each such Person may receive 100 shares, and thereafter, on a pro rata basis to such Persons based on the amount of their respective subscriptions basis or on such other reasonable basis as may be determined by the Stock Holding Company. If oversubscription does not occur among natural Persons residing in the Local Community, orders accepted in the Direct Community Offering shall be filled up to a maximum not to exceed 2% of the Holding Company Common
Stock, and thereafter remaining shares shall be allocated on an equal number of shares per order basis until all orders have been filled or all shares are allocated.
7.6.3 Unless context otherwise clearly requires, the terms residence, reside, or residing as used herein with respect to any Person shall mean any Person who occupies a dwelling within the Local Community, has a present intent to remain in the Local Community for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within the Local Community together with an indication that such presence within the Local Community is not merely transitory in nature. To the extent the Person is a corporation or other business entity, the principal place of business or headquarters must be in the Local Community. To the extent a Person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans or trusts, circumstances of the Trustee shall be examined for purposes of this definition. The MHC and the Bank may use deposit or loan records or such other evidence provided to it to determine whether a Person is a resident. In all cases, however, such a determination shall be in the sole discretion of the Stock Holding Company.
7.6.4 If (i) aggregate subscriptions for shares totaling at least the Range Minimum are not received in the Subscription Offering and Direct Community Offering, and the Stock Holding Company, in its sole discretion, determines that neither a Syndicated Community Offering nor a Firm Commitment Underwritten Offering is in the best interests of the Stock Holding Company or (ii) aggregate subscriptions and orders totaling at least the Range Minimum are not received in the Subscription Offering, Direct Community Offering and the Syndicated Community Offering or Firm Commitment Underwritten Offering, then the Stock Holding Company may, in its sole discretion, apply unsubscribed / unordered Holding Company Common Stock in any manner that facilitates the completion of the Conversion.
7.7 Priorities for Syndicated Community Offering or Firm Commitment Underwritten Offering .
7.7.1 Any shares of Holding Company Common Stock not sold in the Subscription Offering or in the Direct Community Offering, if any, may be offered for sale to the general public by a selling group of broker-dealers in a Syndicated Community Offering, subject to terms, conditions and procedures as may be determined by the MHC and the Stock Holding Company in a manner that is intended to achieve the widest distribution of the Holding Company Common Stock subject to the rights of the Stock Holding Company to accept or reject in whole or in part all orders in the Syndicated Community Offering. No Person may purchase in the Syndicated Community Offering more than the Individual Maximum Purchase Limit of Holding Company Common Stock. It is expected that any Syndicated Community Offering will commence as soon as practicable after termination of the Direct Community Offering, if any. The Syndicated Community Offering shall be completed within forty-five (45) days after the expiration of the Subscription Offering, unless such period is extended as provided herein. The commission in the Syndicated Community Offering shall be determined by a marketing agreement between the Stock Holding Company and the Marketing Agent. Such agreement shall be filed with the Division and the FRB, if required, and the SEC.
7.7.2 Alternatively, if feasible, any shares of Holding Company Common Stock not sold in the Subscription Offering or in the Direct Community Offering, if any, may be offered for sale in a Firm Commitment Underwritten Offering subject to such terms, conditions and procedures as may be determined by the MHC and the Stock Holding Company, subject to the right of the Stock Holding Company to accept or reject in whole or in part any orders in the Firm Commitment Underwritten Offering. Provided the Subscription Offering has begun, the Stock Holding Company may begin the Firm Commitment Underwritten Offering at any time.
7.7.3 If for any reason a Syndicated Community Offering or Firm Commitment Underwritten Offering of unsubscribed shares of Holding Company Common Stock cannot be effected or is not deemed to be advisable, and any shares remain unsold after the Subscription Offering and the Direct Community Offering, if any, the Stock Holding Company may seek to make other arrangements for the sale of the remaining shares in order to meet the Range Minimum. Such other arrangements will be subject to the approval of the Commissioner and the FRB, if required, and to compliance with applicable state and federal securities laws.
ARTICLE 8.
Additional Limitations on Purchases
8.1 General . Purchases of Holding Company Common Stock in the Offering will be subject to the purchase limitations set forth in this Article 8.
8.2 Individual Maximum Purchase Limit . This Section 8.2 sets forth the Individual Maximum Purchase Limit. No Person, through one or more qualifying Deposit Accounts, or Persons exercising subscription rights through a single qualifying Deposit Account held jointly, may purchase in the Offering (including the Subscription Offering, the Direct Community Offering and the Syndicated Community Offering or Firm Commitment Underwritten Offering) more than $1,000,000 of Holding Company Common Stock, except that: (a) the Stock Holding Company may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, (i) increase such Individual Maximum Purchase Limit to up to 5% of the number of shares of Holding Company Common Stock offered in the Offering or (ii) decrease such Individual Maximum Purchase Limit to no less than one-tenth of one percent (.10%) of the number of shares of Holding Company Common Stock offered in the Conversion; and (b) Tax-Qualified Employee Plans may purchase up to 10% of the Conversion Shares issued in the Conversion. If the Stock Holding Company increases the Individual Maximum Purchase Limit (as permitted by this Section 8.2), subscribers in the Subscription Offering who ordered the previously-effective maximum amount will be, and certain other large subscribers in the sole discretion of the Stock Holding Company may be, given the opportunity to increase their subscriptions up to the then applicable limit. Requests to purchase additional shares of Holding Company Common Stock under this provision will be determined by the Stock Holding Company, in its sole discretion. In the event that the Individual Maximum Purchase Limit is increased to 5% of the number of Offering Shares, such limitation may be further increased to 9.99% of the Offering Shares; provided that orders for Holding Company Common Stock exceeding 5% of the Offering Shares shall not exceed in the aggregate 10% of the Offering Shares. Requests to purchase additional shares of the Holding Company Common Stock in the event that the purchase limitation is so increased will be determined by the Board of Directors of the Stock Holding Company in its sole discretion.
8.3 Group Maximum Purchase Limit . This Section 8.3 sets forth the Group Maximum Purchase Limit. No Person and his or her Associates or group of Persons Acting in Concert, may purchase in the Offering (including the Subscription Offering, the Direct Community Offering and the Syndicated Community Offering or Firm Commitment Underwritten Offering) more than $2,000,000 of Holding Company Common Stock, except that: (a) the Stock Holding Company may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, (i) increase such Group Maximum Purchase Limit to up to 5% of the number of shares of Holding Company Common Stock offered in the Offering or (ii) decrease such Group Maximum Purchase Limit to no less than one-tenth of one percent (.10%) of the number of shares of Holding Company Common Stock offered in the Conversion; and (b) Tax-Qualified Employee Plans may purchase up to 10% of the Conversion Shares issued in the Conversion. Notwithstanding the foregoing, in the event that the Stock Holding Company increases the Individual Maximum Purchase Limit (as permitted by Section 8.2) to a number that is in excess of the Group Maximum Purchase Limit established by this Section 8.3, the Group Maximum Purchase Limit shall automatically be increased so as to be equal to the Individual Maximum Purchase Limit, as adjusted. The maximum number of shares of Holding Company Common Stock that may be subscribed for or purchased in all categories of the Offering by any Person or Participant together with any Associate or group or Persons Acting in Concert, combined with Exchange Shares received by any such Person or Participant together with any Associate or group of Persons Acting in Concert, shall not exceed 9.9% of the Conversion Shares; provided , that this limitation shall not apply to the Employee Plans.
8.4 Purchases by Officers, Directors, Trustees and Corporators . The aggregate number of shares of Holding Company Common Stock to be purchased in the Offering by Officers, Directors, Trustees and Corporators of the MHC and the Bank (and their Associates) shall not exceed 25% of the total number of shares of Offering Shares.
8.5 Special Rule for Tax-Qualified Employee Plans . Shares of Holding Company Common Stock purchased by any individual participant (Plan Participant) in a Tax-Qualified Employee Plan using funds therein pursuant to the exercise of subscription rights granted to such Participant in his individual capacity as an Eligible Account Holder or Supplemental Eligible Account Holder shall not be deemed to be purchases by a Tax-Qualified Employee Plan for purposes of calculating the maximum amount of Holding Company Common Stock that Tax-Qualified Employee Plans may purchase pursuant to the Plan, if the individual Plan Participant controls or directs the investment authority with respect to such account or subaccount.
8.6 Increase in the Total Number of Shares Offered . In the event that (a) the total number of shares of Holding Company Common Stock offered in the Offering is increased to an amount greater than the Range Maximum, and (b) there shall be additional shares of Holding Company Common Stock available after the Tax-Qualified Employee Plans shall have exercised their priority right (established pursuant to Section 7.5.3) to purchase shares exceeding the Range Maximum, any additional shares not purchased by the Tax-Qualified Employee Plans will be issued to fill unfulfilled subscriptions of other subscribers according to their respective priorities set forth in the Plan.
8.7 Illegal Purchases . Notwithstanding any other provision of the Plan, no Person shall be entitled to purchase any Holding Company Common Stock to the extent such purchase
would be illegal under any federal law or state law or regulation or would violate regulations or policies of the Financial Industry Regulatory Authority. The Stock Holding Company and/or its agents may ask for an acceptable legal opinion from any purchaser as to the legality of such purchase and may refuse to honor any purchase order if such opinion is not timely furnished.
8.8 Rejection of Orders . The Stock Holding Company has the right in its sole discretion to reject any order submitted by a Person whose representations the Stock Holding Company believes to be false or who it otherwise believes, either alone or Acting in Concert with others, is violating, circumventing, or intends to violate, evade or circumvent the terms and conditions of the Plan.
8.9 Subscribers in Non-Qualified States or in Foreign Countries . The Stock Holding Company will make reasonable efforts to comply with the securities laws of any state in the United States in which its depositors reside, and will only offer and sell the Holding Company Common Stock in states in which the offers and sales comply with such states securities laws. However, no Person will be offered or allowed to purchase any Holding Company Common Stock under the Plan if he or she resides (a) in a foreign country or (b) in a state of the United States with respect to which any of the following apply: (i) a small number of Persons otherwise eligible to purchase shares under the Plan reside in such state; (ii) the offer or sale of shares of Holding Company Common Stock to such Persons would require the Stock Holding Company or its Employees to register, under the securities laws of such state, as a broker or dealer or to register or otherwise qualify its securities for sale in such state; or (iii) such registration or qualification would be impracticable for reasons of cost or otherwise.
8.10 No Offer to Transfer Shares . Before the consummation of the Offering, no Person shall offer to transfer, or enter into any agreement or understanding to transfer the legal or beneficial ownership of any subscription rights or shares of Holding Company Common Stock, except pursuant to the Plan. The following shall not constitute impermissible transfers under the Plan. Any Person having subscription rights in his individual capacity as an Eligible Account Holder or Supplemental Eligible Account Holder may exercise such subscription rights by causing a tax-qualified plan to make such purchase using funds allocated to such Person in such tax-qualified plan if such individual plan participant controls or directs the investment authority with respect to such account or subaccount. A tax-qualified plan that maintains an Eligible Deposit Account in the Bank as Trustee for or for the benefit of a Person who controls or directs the investment authority with respect to such account or subaccount (Beneficiary) may, in exercising its subscription rights, direct that the Holding Company Common Stock be issued in the name of such individual Beneficiary in his or her individual capacity.
8.11 Confirmation by Purchasers . Each Person ordering Holding Company Common Stock in the Offering will be deemed to confirm that such purchase does not conflict with the purchase limitations in the Plan.
ARTICLE 9.
Post Offering Matters
9.1 Stock Purchases After the Conversion . For a period of three years after the Offering, no Officer or Director of the Stock Holding Company or the Bank, or their Associates, may purchase, without the prior written approval of the Commissioner and the FRB, if required, any Holding Company Common Stock, except from a broker-dealer registered with the SEC, provided that the foregoing shall not apply to (a) negotiated transactions involving more than 1% of the outstanding Holding Company Common Stock or (b) purchases of stock made by and held by or otherwise made pursuant to any Employee Plan even if such stock is attributable to Officers or Directors of the Bank or the Stock Holding Company or their Associates.
9.2 Resales of Stock by Management Persons . Holding Company Common Stock purchased in the Offering by Officers, Directors, Trustees and Corporators of the Bank, the Mid-Tier Holding Company, the Stock Holding Company, or the MHC may not be resold for a period of at least one year following the date of purchase, except in the case of death or substantial disability, as determined by the Commissioner, of such Person, or upon the written approval of the Commissioner.
9.3 Stock Certificates . Shares of Holding Company Common Stock will be issued in book entry form. Stock certificates will not be issued. Appropriate instructions shall be issued to the Stock Holding Companys transfer agent with respect to applicable restrictions on transfers of stock set forth in Section 9.2. Any shares of stock issued as a stock dividend, stock split or otherwise with respect to such restricted stock shall be subject to the same restrictions as apply to the restricted stock.
9.4 Restriction on Financing Stock Purchases . The Stock Holding Company will not knowingly offer or sell any of the Holding Company Common Stock proposed to be issued to any Person whose purchase would be financed by funds loaned, directly or indirectly, to the Person by the Stock Holding Company, the Bank or any of their Affiliates; provided, however, that the Stock Holding Company, or a subsidiary thereof, may loan funds to the ESOP for the purchase of Holding Company Common Stock.
9.5 Stock Benefit Plans .
9.5.1 As a result of the Conversion, the Stock Holding Company shall be deemed to have ratified and approved all employee stock benefit plans maintained by the Bank and the Mid-Tier Holding Company and shall have agreed to issue (and reserve for issuance) Holding Company Common Stock in lieu of common stock of the Mid-Tier Holding Company pursuant to the terms of such benefit plans. Upon consummation of the Conversion, the Mid-Tier Holding Company common stock held by such benefit plans shall be converted into Holding Company Common Stock based upon the Exchange Ratio. Also upon consummation of the Conversion, (i) all rights to purchase, sell or receive Mid-Tier Holding Company common stock and all rights to elect to make payment in Mid-Tier Holding Company common stock under any agreement between the Bank or the Mid-Tier Holding Company and any Director, Officer or Employee thereof or under any plan or program of the Bank or the Mid-Tier Holding Company, shall automatically, by operation of law, be converted into and shall become an identical right to
purchase, sell or receive Holding Company Common Stock and an identical right to make payment in Holding Company Common Stock under any such agreement between the Bank or the Mid-Tier Holding Company and any Director, Officer or Employee thereof or under such plan or program of the Bank, and (ii) rights outstanding under all stock option plans shall be assumed by the Stock Holding Company and thereafter shall be rights only for shares of Holding Company Common Stock, with each such right being for a number of shares of Holding Company Common Stock based upon the Exchange Ratio and the number of shares of Mid-Tier Holding Company common stock that were available thereunder immediately prior to consummation of the Conversion, with the price adjusted to reflect the Exchange Ratio but with no change in any other term or condition of such righ t.
9.5.2 The Board of Directors of the Bank and/or the Stock Holding Company are permitted under the Regulations, and may decide, to adopt one or more stock benefit plans for the benefit of the Employees, Officers and Directors of the Bank and Stock Holding Company, including an ESOP, stock award plans and stock option plans, which will be authorized to purchase Holding Company Common Stock and grant options for Holding Company Common Stock. However, only the Tax-Qualified Employee Plans will be permitted to purchase Holding Company Common Stock in the Conversion subject to the purchase priorities set forth in the Plan. Pursuant to the Regulations, the Stock Holding Company may authorize the Tax-Qualified Employee Plans, including the ESOP, to purchase up to 10% of the Holding Company Common Stock to be issued in the Conversion. The Bank or the Stock Holding Company may make scheduled discretionary contributions to one or more Tax-Qualified Employee Plans to purchase Holding Company Common Stock or to purchase issued and outstanding shares of Holding Company Common Stock or authorized but unissued shares of Holding Company Common Stock subsequent to the completion of the Conversion; provided, however , that such contributions do not cause the Bank to fail to meet any of its regulatory capital requirements. The Plan specifically authorizes the grant and issuance by the Stock Holding Company of (i) awards of Holding Company Common Stock after the Conversion pursuant to one or more stock recognition and award plans in an amount equal to up to 4% of the number of shares of Holding Company Common Stock issued in the Conversion, (ii) options to purchase a number of shares of Holding Company Common Stock in an amount equal to up to 10% of the number of shares of Holding Company Common Stock issued in the Conversion, and shares of Holding Company Common Stock issuable upon exercise of such options, and (iii) at the closing of the Conversion or at any time thereafter, Holding Company Common Stock in an amount equal to 8% of the number of shares of Holding Company Common Stock issued in the Conversion to the ESOP and an amount equal to up to 2% of the number of shares of Holding Company Common Stock issued in the Conversion to the Banks 401(k) plan. Shares awarded to the Tax Qualified Employee Plans or pursuant to the recognition and award plans, and shares issued upon exercise of options may be authorized but unissued shares of the Holding Company Common Stock, or shares of Holding Company Common Stock purchased by the Stock Holding Company or such plans in the open market. Such limitations shall only apply if the Stock recognition and award plans or stock option plans are adopted one year or less following the completion of the Offering. No Stock recognition and award plans or stock option plans have yet been adopted by the Board of the Stock Holding Company, and no such plans will be submitted for the approval of the Stock Holding Companys stockholders at a meeting held earlier than six months after completion of the Conversion.
9.6 Market for Holding Company Common Stock . If, at the close of the Offering, the Stock Holding Company has more than 300 shareholders of any class of stock, the Stock Holding Company shall use its best efforts to:
9.6.1 Encourage and assist a Market Maker to establish and maintain a market for that class of stock;
9.6.2 List that class of stock on a national or regional securities exchange, including the NASDAQ Stock Market; and
9.6.3 Promptly register the Holding Company Common Stock with the SEC pursuant to the Exchange Act, and undertake not to deregister such Holding Company Common Stock for a period of three years thereafter.
9.7 Liquidation Accounts .
9.7.1 The Bank shall, at the time of the Conversion, in exchange for at least 50% of the net proceeds of the Offering, establish a Bank Liquidation Account in an amount equal to the MHCs total equity as set forth in the latest consolidated statement of financial condition contained in the final prospectus distributed in connection with the Conversion. The function of the Bank Liquidation Account is to establish a priority on liquidation for Eligible Account Holders and Supplemental Eligible Account Holders (if any). Following the Conversion, the Bank Liquidation Account will be maintained for the benefit of the Eligible Account Holders and Supplemental Eligible Account Holders (if any) who continue to maintain Deposit Accounts with the Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder (if any) shall, with respect to each Deposit Account, hold a related inchoate interest in a portion of the Bank Liquidation Account balance, in relation to each Deposit Account balance at the Eligibility Record Date or Supplemental Eligibility Record Date (if established), as the case may be, or to such balance as it may be subsequently reduced, as hereinafter provided. The initial Bank Liquidation Account balance shall not be increased, and shall be subject to downward adjustment to the extent of any downward adjustment of any subaccount balance of any Eligible Account Holder or Supplemental Eligible Account Holder (if any) in accordance with 209 CMR 33.05(12). In addition, the Stock Holding Company shall, at the time of the Mid-Tier Merger, also establish a Stock Holding Company Liquidation Account in an amount equal to the product of (i) the Majority Ownership Interest and (ii) the Mid-Tier Holding Companys total equity as set forth in the latest consolidated statement of financial condition contained in the final prospectus distributed in connection with the Conversion, plus the value of the net assets of the MHC as reflected in the latest statement of financial condition of the MHC prior to the effective date of the Conversion (excluding its ownership of Mid-Tier Holding Company common stock). The Stock Holding Company Liquidation Account also shall be maintained for the benefit of the Eligible Account Holders and Supplemental Eligible Account Holders (if any) who continue to maintain their Deposit Accounts at the Bank. Except as otherwise provided in this Section 9.7, the existence of the Stock Holding Company Liquidation Account shall not operate to restrict the use or application of any of the net worth accounts of the Stock Holding Company.
9.7.2 In the unlikely event of a complete liquidation of (i) the Bank or (ii) the Bank and the Stock Holding Company (and only in such event), following all liquidation payments to creditors (including those to account holders to the extent of their Deposit Accounts), each Eligible Account Holder and Supplemental Eligible Account Holder (if any) shall be entitled to receive a liquidating distribution from the Stock Holding Company Liquidation Account, in the amount of the then-adjusted subaccount balances for his or her Deposit Accounts then held, before any liquidating distribution may be made to any holders of the Stock Holding Companys capital stock. No merger, consolidation, reorganization, or purchase of bulk assets with assumption of Deposit Accounts and other liabilities, or similar transactions, in which the Stock Holding Company and/or the Bank is not the surviving institution, shall be deemed to be a complete liquidation for this purpose. In such transactions, the Stock Holding Company Liquidation Account shall be assumed by the surviving holding company or institution.
9.7.3 In the unlikely event of a complete liquidation of (i) the Bank or (ii) the Bank and the Stock Holding Company (and only in such event), following all liquidation payments to creditors of the Bank (including those to depositors to the extent of their Deposit Accounts), at a time when the Bank has a positive net worth and the Stock Holding Company does not have sufficient assets (other than the stock of the Bank) at the time of liquidation to fund the obligations under the Stock Holding Company Liquidation Account, the Bank with respect to the Bank Liquidation Account shall immediately pay directly to each Eligible Account Holder and Supplemental Eligible Account Holder (if any) an amount necessary to fund the Stock Holding Companys remaining obligation under the Stock Holding Company Liquidation Account, before any liquidation distribution may be made to any holders of the Banks capital stock and without making such amount subject to the Stock Holding Companys creditors. Each Eligible Account Holder and Supplemental Eligible Account Holder (if any) shall be entitled to receive a distribution from the Stock Holding Company Liquidation Account, in the amount of the then adjusted subaccount balance for his Deposit Account then held, before any distribution may be made to any holders of the Stock Holding Companys capital stock.
9.7.4 In the event of a complete liquidation of the Stock Holding Company where the Bank is not also completely liquidating, or in the event of a sale or other disposition of the Stock Holding Company apart from the Bank, each Eligible Account Holder and Supplemental Eligible Account Holder (if any) shall be treated as surrendering such Persons rights to the Stock Holding Company Liquidation Account and receiving from the Stock Holding Company an equivalent interest in the Bank Liquidation Account. Each such holders interest in the Bank Liquidation Account shall be subject to the same rights and terms as if the Bank Liquidation Account were the Stock Holding Company Liquidation Account (except that the Stock Holding Company shall cease to exist).
9.7.5 The initial subaccount balance for a Deposit Account held by an Eligible Account Holder and/or Supplemental Eligible Account Holder (if any) shall be determined by multiplying the opening balance in the Bank Liquidation Account by a fraction, the numerator of which is the amount of such Eligible Account Holders or Supplemental Eligible Account Holders Qualifying Deposit and the denominator of which is the total amount of all Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible Account Holders. For Deposit Accounts in existence on both dates, separate subaccounts shall be determined on the
basis of the Qualifying Deposits in such Deposit Accounts on such record dates. Such initial subaccount balance shall not be increased by additional Deposits, but shall be subject to downward adjustment as described below. The initial subaccount balance in the Stock Holding Company Liquidation Account for a Deposit Account held by an Eligible Account Holder and/or Supplemental Eligible Account Holder (if any) shall be determined in the same manner as their interest in the Bank Liquidation Account is determined.
9.7.6 If, at the close of business on the last day of any period for which the Stock Holding Company has prepared audited financial statements subsequent to the effective date of the Conversion, the deposit balance in the Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder (if any) is less than the lesser of: (a) the balance in the Deposit Account at the close of business on the last day of any period for which the Stock Holding Company has prepared audited financial statements subsequent to the Eligibility Record Date or Supplemental Eligibility Record Date (if established), or (b) the amount in such Deposit Account as of the Eligibility Record Date or Supplemental Eligibility Record Date (if established), then the subaccount balance for such Deposit Account shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in the balance of such Deposit Account. In the event of such downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any subsequent increase in the deposit balance of the related Deposit Account. If any such Deposit Account is closed, the related subaccount shall be reduced to zero. For purposes of this Section 9.7, a time account shall be deemed to be closed upon its maturity date regardless of any renewal thereof. A distribution of each subaccount balance in the Stock Holding Company Liquidation Account may be made only in the event of a complete liquidation of the Stock Holding Company subsequent to the Conversion and only out of funds available for such purpose after payment of all creditors.
9.7.7 The creation and maintenance of the Stock Holding Company Liquidation Account shall not operate to restrict the use or application of any of the equity accounts of the Stock Holding Company or the Bank, except that neither the Stock Holding Company nor the Bank shall declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect thereof would cause its net worth to be reduced below (i) the amount required for the Stock Holding Company Liquidation Account or Bank Liquidation Account, as applicable, or (ii) the regulatory capital requirements of the Stock Holding Company (to the extent applicable) or the Bank. Neither the Stock Holding Company nor the Bank shall be required to set aside funds in connection with its obligations hereunder relating to the Stock Holding Company Liquidation Account or Bank Liquidation Account, as applicable. Eligible Account Holders and Supplemental Eligible Account Holders (if any) do not retain any voting rights in either the Stock Holding Company or the Bank based on their liquidation subaccounts.
9.7.8 The amount of the Stock Holding Company Liquidation Account shall equal at all times the amount of the Bank Liquidation Account, and in no event will any Eligible Account Holder or Supplemental Eligible Account Holder (if any) be entitled to a distribution exceeding such holders subaccount balance in the Stock Holding Company Liquidation Account or Bank Liquidation Account. A distribution to an Eligible Account Holder or Supplemental Eligible Account Holder (if any) from the Stock Holding Company Liquidation Account will extinguish the right of the Eligible Account Holder or Supplemental Eligible Account Holder (if any) to receive a distribution from the Bank Liquidation Account.
9.7.9 For the three-year period following the completion of the Conversion, the Stock Holding Company will not without prior approval of the Commissioner and the FRB: (i) sell or liquidate the Stock Holding Company, or (ii) cause the Bank to be sold or liquidated. Upon the written request of the FRB and, if necessary, the Commissioner, the Stock Holding Company shall, or upon the prior written approval of the FRB and, if necessary, the Commissioner, the Stock Holding Company may, at any time after two years from the completion of the Conversion, transfer the Stock Holding Company Liquidation Account to the Bank, at which time the Stock Holding Company Liquidation Account shall be assumed by the Bank and the interests of Eligible Account Holders and Supplemental Eligible Account Holders (if any) will be solely and exclusively established in the Bank Liquidation Account. In the event such transfer occurs, the Stock Holding Company shall be deemed to have transferred the Stock Holding Company Liquidation Account to the Bank and such Liquidation Account shall be subsumed into the Bank Liquidation Account and shall not be subject in any manner or amount to the claims of the Stock Holding Companys creditors. Approval of the Plan by the Members shall constitute approval of the transactions described herein.
9.8 Repurchase of Stock . Based upon facts and circumstances following the Conversion and subject to applicable regulatory and accounting requirements, the Board of Directors of the Stock Holding Company may determine to repurchase stock in the future. Such facts and circumstances may include but not be limited to: (a) market and economic factors, such as the price at which the Holding Company Common Stock is trading in the market, the volume of trading, the attractiveness of other investment alternatives in terms of the rate of return and risk involved in the investment, the ability to increase the book value and/or earnings per share of the remaining outstanding shares, and the opportunity to improve the Stock Holding Companys return on equity; (b) the avoidance of dilution to stockholders by not having to issue additional shares to cover the exercise of stock options or the purchase of shares by the ESOP in the event the ESOP is unable to acquire shares in the Subscription Offering, or to fund any stock plans adopted after the consummation of the Conversion; and (c) any other circumstances in which repurchases would be in the best interests of the Stock Holding Company and its shareholders.
9.9 Conversion Expenses . The Regulations require that the expenses of the Conversion must be reasonable. The MHC will use its best efforts to assure that the expenses incurred by the MHC and the Stock Holding Company in effecting the Conversion will be reasonable.
9.10 Public Inspection of Applications . The Bank and the MHC will maintain a copy of the non-confidential portion of the Application in the main banking office of the Bank and such copy will be available for public inspection.
9.11 Enforcement of Terms and Conditions . Each of the MHC and the Stock Holding Company shall have the right to take all such action as they, in its sole discretion, may deem necessary, appropriate or advisable in order to monitor and enforce the terms, conditions, limitations and restrictions contained in the Plan and the terms, conditions and representations contained in the Order Forms, including, but not limited to, the right to require any subscriber or purchaser to provide evidence, in a form satisfactory to the MHC and the Stock Holding Company, of such Persons eligibility to subscribe for or purchase shares of the Holding
Company Common Stock under the terms of the Plan and the absolute right (subject only to any necessary regulatory approvals or concurrence) to reject, limit or revoke acceptance of any subscription or order and to delay, terminate or refuse to consummate any sale of Holding Company Common Stock that it believes might violate, or is designed to, or is any part of a plan to, evade or circumvent such terms, conditions, limitations, restrictions and representations. Any such action shall be final, conclusive and binding on all Persons, and the MHC, the Stock Holding Company, the Bank and their Trustees, Directors, Officers, Employees, Corporators and agents shall be free from any liability to any Person on account of any such action.
9.12 Voting Rights Following the Conversion . Following the Conversion, the holders of the capital stock of the Stock Holding Company shall have exclusive voting rights in the Stock Holding Company.
9.13 Restrictions on Acquisition of Bank and Stock Holding Company .
9.13.1 The Articles of Organization of the Bank may contain a provision stipulating that no person, except the Stock Holding Company, for a period of three years following the closing date of the Conversion, may directly or indirectly acquire or offer to acquire the beneficial ownership of more than 10% of any class of equity security of the Bank, without the prior written approval of the Commissioner. In addition, such Articles of Organization may also provide that for a period of three years following the closing date of the Conversion, shares beneficially owned in violation of the above-described Articles of Organization provision shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to stockholders for a vote.
9.13.2 For a period of three years from the date of consummation of the Conversion, no person, other than the Stock Holding Company, shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of the Bank without the prior written consent of the FRB. Nothing in the Plan shall prohibit the Stock Holding Company from taking actions permitted under 12 C.F.R. 239.63(f).
9.13.3 The Articles of Incorporation of the Stock Holding Company may contain a provision stipulating that in no event shall any record owner of any outstanding shares of Holding Company Common Stock who beneficially owns in excess of 10% of such outstanding shares be entitled or permitted to any vote with respect to any shares held in excess of 10%. In addition, the Articles of Incorporation and Bylaws of the Stock Holding Company may contain, in addition to any other permissible provisions, provisions which provide for, or prohibit, as the case may be, staggered terms of the Directors, noncumulative voting for Directors, limitations on the calling of special meetings, a fair price provision for certain business combinations and certain notice requirements.
9.13.4 For the purposes of this Section 9.13:
(1) the term person includes an individual, a firm, a corporation or other entity;
(2) the term offer includes every offer to buy or acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value;
(3) the term acquire includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise; and
(4) the term security includes non-transferable subscription rights issued pursuant to a plan of conversion as well as a security as defined in 15 U.S.C. § 77b(a)(1).
ARTICLE 10.
Miscellaneous
10.1 Interpretation of Plan . All interpretations of the Plan and application of its provisions to particular circumstances by the MHC and the Stock Holding Company shall be final, subject to the authority of the Commissioner and the FRB. When a reference is made in the Plan to Sections or Exhibits, such reference shall be to a Section of or Exhibit to the Plan unless otherwise indicated. References to Sections include subsections, which are part of the related Section ( e.g. , a section numbered Section 5.5.1 would be part of Section 5.5 and references to Section 5.5 would also refer to material contained in the subsection described as Section 5.5.1). The table of contents and headings contained in the Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of the Plan. Whenever the words include, includes or including are used in the Plan, they shall be deemed to be followed by the words without limitation.
10.2 Amendment or Termination of the Plan . If deemed necessary or desirable, the terms of the Plan may be substantively amended by a majority vote of the Board of Trustees of the MHC as a result of comments from regulatory authorities at any time prior to approval of the Plan by the Commissioner and the FRB and at any time thereafter with the concurrence of the Commissioner and the FRB. If amendments to the Plan are made after the Special Meeting, no further approval of the Members will be necessary unless otherwise required by the Commissioner or the FRB. The Plan may be terminated by the Board of Trustees of the MHC in its sole discretion, at any time prior to the Special Meeting and at any time thereafter with the concurrence of the Commissioner and the FRB. The Plan will terminate if the Conversion is not completed within twenty-four months from the date of approval of the Plan by the Members of the MHC.
Dated: March 5, 2019
EXHIBIT 1.1
FORM OF AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the MHC Merger Agreement), dated as of [], 2019, is made by and between HarborOne Mutual Bancshares, a Massachusetts mutual holding company (the MHC), and HarborOne Bancorp, Inc., a Massachusetts corporation (the Mid-Tier Holding Company). Capitalized terms have the respective meanings given them in the Plan of Conversion (the Plan) of the MHC, unless otherwise defined herein.
WHEREAS, the MHC is a Massachusetts mutual holding company that owns 53% of the common stock of the Mid-Tier Holding Company.
NOW, THEREFORE , in consideration of the premises and mutual agreements contained herein, the parties hereto have agreed as follows:
1. Merger . At the Effective Time (as hereinafter defined), the MHC shall merge with and into the Mid-Tier Holding Company, with the Mid-Tier Holding Company as the resulting entity (the Surviving Company).
2. Effect of Merger . At the Effective Time,
(a) Shares of Mid-Tier Holding Company common stock held by the MHC will be canceled;
(b) Persons having liquidation interests in the MHC will constructively receive liquidation interests in the Mid-Tier Holding Company in exchange for their liquidation interests in the MHC; and
(c) The Surviving Company shall continue in existence as the surviving entity and, by virtue of the Merger succeed to and possess all of the rights, privileges and powers of the MHC and the Mid-Tier Holding Company, and all of the assets and property of whatever kind and character of the MHC and the Mid-Tier Holding Company shall vest in the Surviving Company without further act or deed; thereafter, the Surviving Company, as the surviving entity, shall be liable for all of the liabilities and obligations of the MHC and the Mid-Tier Holding Company, and any claim or judgment against the MHC and the Mid-Tier Holding Company may be enforced against the Surviving Company, as the surviving entity.
3. Effective Time . The MHC Merger shall become effective on such date and at such time (the Effective Time) as specified in a filing accepted by the Massachusetts Commissioner of Banks.
4. Name . The name of the Surviving Company shall be HarborOne Bancorp, Inc.
5. Articles of Organization and Bylaws . The Articles of Organization and the Bylaws of the Mid-Tier Holding Company, as in effect immediately prior to Effective Time, shall be the Articles of Organization and the Bylaws of the Surviving Company.
6. Offices . The main office of the Surviving Company shall be 770 Oak Street, Brockton, Massachusetts 02301.
7. Directors and Officers . The directors and officers of the Mid-Tier Holding Company immediately prior to the Effective Time shall be the directors and officers of the Surviving Company after the Effective Time.
8. Other Terms . The Plan is incorporated herein by this reference and made a part hereof to the extent necessary or appropriate to effect and consummate the terms of this MHC Merger Agreement and the Conversion.
IN WITNESS WHEREOF , the MHC and the Mid-Tier Holding Company have caused this MHC Merger Agreement to be executed as of the date first above written.
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HARBORONE BANCORP, INC. |
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EXHIBIT 1.2
FORM OF AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the Mid-Tier Merger Agreement), dated as of [], 2019, is made by and between HarborOne Bancorp, Inc., a Massachusetts corporation (the Mid-Tier Holding Company), and HarborOne NorthEast Bancorp, Inc., a Massachusetts corporation (the Stock Holding Company). Capitalized terms have the respective meanings given them in the Plan of Conversion of HarborOne Mutual Bancshares (the Plan) unless otherwise defined herein.
WHEREAS, the Stock Holding Company is a newly-formed, wholly-owned subsidiary of the Mid-Tier Holding Company.
NOW, THEREFORE , in consideration of the premises and mutual agreements contained herein, the parties hereto have agreed as follows:
1. Merger . At the Effective Time (as hereinafter defined), the Mid-Tier Holding Company will merge with and into the Stock Holding Company, with the Stock Holding Company as the resulting corporation (the Surviving Company).
2. Effect of Merger . At the Effective Time,
(a) Persons who constructively received liquidation interests in the Mid-Tier Holding Company in connection with the merger of HarborOne Mutual Bancshares (the MHC) with and into the Mid-Tier Holding Company will exchange those liquidation interests for interests in the Bank Liquidation Account and the Stock Holding Company Liquidation Account;
(b) Shares of the Mid-Tier Holding Company held by persons other than the MHC immediately prior to the Conversion will convert automatically into the right to receive shares of the Stock Holding Company in the Exchange Offering; and
(c) T he Surviving Company shall continue in existence as the surviving entity and, by virtue of the Merger, succeed to and possess all of the rights, privileges and powers of the Mid-Tier Holding Company and the Stock Holding Company, and all of the assets and property of whatever kind and character of the Mid-Tier Holding Company and the Stock Holding Company shall vest in the Surviving Company without further act or deed; thereafter, the Surviving Company, as the surviving entity, shall be liable for all of the liabilities and obligations of the Mid-Tier Holding Company and the Stock Holding Company, and any claim or judgment against the Mid-Tier Holding Company and the Stock Holding Company may be enforced against the Surviving Company, as the surviving entity.
3. Effective Time . The Mid-Tier Merger shall become effective on such date and at such time ( the Effective Time) as specified in articles of merger filed with the Secretary of the Commonwealth of the Commonwealth of Massachusetts.
4. Name . The name of the Surviving Company shall be changed to HarborOne Bancorp, Inc.
5. Articles of Organization and Bylaws . Subject to Section 4 above, the Articles of Organization and the Bylaws of the Stock Holding Company, as in effect immediately prior to Effective Time, shall be the Articles of Organization and the Bylaws of the Surviving Company.
6. Offices . The main office of the Surviving Company shall be 770 Oak Street, Brockton, Massachusetts 02301.
7. Directors and Officers . The directors and officers of the Stock Holding Company immediately prior to the Effective Time shall be the directors and officers of the Surviving Company after the Effective Time.
8. Other Terms . The Plan is incorporated herein by this reference and made a part hereof to the extent necessary or appropriate to effect and consummate the terms of this Mid-Tier Merger Agreement and the Conversion.
[Signature page follows]
IN WITNESS WHEREOF, the Mid-Tier Holding Company and the Stock Holding Company have caused this Mid-Tier Merger Agreement to be executed as of the date first above written.
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HARBORONE NORTHEAST BANCORP, INC. |
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The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
Articles of Organization
(General Laws Chapter 156D, Section 2.02; 950 CMR 113.16)
ARTICLE I
The exact name of the corporation is:
HarborOne NorthEast Bancorp, Inc.
ARTICLE II
Unless the articles of organization otherwise provide, all corporations formed pursuant to G.L. Chapter 156D have the purpose of engaging in any lawful business. Please specify if you want a more limited purpose:
The purpose of the Corporation is to engage in the following business activities: to buy, sell, deal in, or hold securities of every kind and description; to operate as a holding company and to carry on any business permitted to holding companies under applicable laws and regulations; and in general to carry on any business permitted to corporations organized under Chapter 156D of the Massachusetts General Laws as now in force or hereafter amended.
ARTICLE III
State the total number of shares and par value, if any, of each class of stock that the corporation is authorized to issue. All corporations must authorize stock. If only one class or series is authorized, it is not necessary to specify any particular designation.
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ARTICLE IV
Prior to the issuance of shares of any class or series, the articles of organization must set forth the preferences, limitations and relative rights of that class or series. The articles may also limit the type or specify the minimum amount of consideration for which shares of any class or series may be issued. Please set forth the preferences, limitations and relative rights of each class or series and, if desired, the required type and minimum amount of consideration to be received.
See Appendix A.
ARTICLE V
The restrictions, if any, imposed by the articles of organization upon the transfer of shares of any class or series of stock are:
See Appendix B.
ARTICLE VI
Other lawful provisions, and if there are no such provisions, this article may be left blank.
See Appendix C.
ARTICLE VII
The effective date of organization of the corporation is the date and time the articles were received for filing if the articles are not rejected within the time prescribed by law. If a later effective date is desired, specify such date, which may not be later than the 90th day after the articles are received for filing:
Effective upon filing.
ARTICLE VIII
The information contained in this article is not a permanent part of the articles of organization.
a. The street address of the initial registered office of the corporation in the commonwealth:
155 Federal Street, Suite 700, Boston, MA 02110
b. The name of its initial registered agent at its registered office:
C T Corporation System
c. The names and street addresses of the individuals who will serve as the initial directors, president, treasurer and secretary of the corporation (an address need not be specified if the business address of the officer or director is the same as the principal office location):
Chief Executive Officer: |
James W. Blake |
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Joseph F. Casey |
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Linda H. Simmons |
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Secretary: |
James W. Blake |
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Joseph F. Barry |
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Mandy L. Berman |
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James W. Blake |
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Joseph F. Casey |
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David P. Frenette |
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Gordon Jezard |
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Barry R. Koretz |
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Timothy R. Lynch |
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William A. Payne |
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Wallace H. Peckham, III |
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Michael Sullivan, Esq. |
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Damian W. Wilmot |
d. The fiscal year end of the corporation:
December
e. A brief description of the type of business in which the corporation intends to engage:
The purpose of the Corporation is to engage in the following business activities: to buy, sell, deal in, or hold securities of every kind and description; to operate as a holding company and to carry on any business permitted to holding companies under applicable laws and regulations; and in general to carry on any business permitted to corporations organized under Chapter 156D of the Massachusetts General Laws as now in force or hereafter amended.
f. The street address of the principal office of the corporation:
770 Oak Street, Brockton, MA 02301
g. The street address where the records of the corporation required to be kept in the commonwealth are located is:
770 Oak Street, Brockton, MA 02301, which is
(number, street, city or town, state, zip code)
o its principal office;
o an office of its transfer agent;
o an office of its secretary/assistant secretary;
o its registered office.
Signed this 1st day of March, 2019 by the incorporator(s):
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/s/ Samantha M. Kirby |
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Samantha M. Kirby, Esq. |
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APPENDIX A
TO THE
ARTICLES OF ORGANIZATION OF
HARBORONE NORTHEAST BANCORP, INC.
ARTICLE IV
CAPITAL STOCK
Section 4.1 Common Stock . Except as provided by law or in this ARTICLE IV (or in any Articles of Amendment), holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote on all matters for each share held by such holder. Shareholders shall not be permitted to cumulate their votes for election of directors.
Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when and as declared by the Board of Directors.
In the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid to or set aside for the holders of any class having preferences over the common stock in the event of liquidation, dissolution or winding up of the full preferential amounts of which they are respectively entitled, the holders of the common stock, and of any class or series of stock entitled to participate therewith, in whole or in part, as to distribution of assets, shall be entitled, after (i) payment or provision for payment of all debts and liabilities of the Corporation and (ii) distributions or provision for distributions in settlement of the Liquidation Account established by the Corporation as described in Section 4.3 below, to receive the remaining assets of the Corporation available for distribution, in cash or in kind, in proportion to their holdings.
Each share of common stock shall have the same relative rights as, and be identical in all respects with, all the other shares of common stock.
Section 4.2 Preferred Stock . Subject to any limitations prescribed by law, the Board of Directors of the Corporation is authorized, by vote or votes from time to time adopted, to provide for the issuance of one or more classes of preferred stock, which shall be separately identified. The Board of Directors shall have the authority to divide any authorized class of preferred stock of the Corporation into one or more series, to establish or change from time to time the number of shares to be included in each such series, and to fix and state the voting powers, designations, preferences and relative, participating, optional or other special rights of the shares of any series so established and the qualifications, limitations and restrictions thereof. Each series shall be separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of one or more of the following:
(a) the distinctive serial designation and the number of shares constituting such series;
(b) the dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends;
(c) the voting powers, full or limited, if any, of shares of such series;
(d) whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed;
(e) the amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation;
(f) whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such fund;
(g) whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and if so convertible or exchangeable, the conversion price or prices or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;
(h) the price or other consideration for which the shares of such series shall be issued;
(i) whether the shares of such series that are redeemed or converted shall have the status of authorized but unissued shares of preferred stock and whether such shares may be reissued as shares of the same or any other series of stock; and
(j) such other powers, preferences, rights, qualifications, limitations and restrictions thereof as are permitted by law and as the Board of Directors of the Corporation may deem advisable.
Each share of each series of preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series. Subject to the authority of the Board of Directors as set forth in subsection (i) above, any shares of preferred stock shall, upon reacquisition thereof by the Corporation, be restored to the status of authorized but unissued preferred stock under this Section 4.2.
Except as specifically provided in these Articles, the holders of preferred stock or common stock shall not be entitled to any vote and shall not have any voting rights concerning the designation or issuance of any shares of preferred stock authorized by and complying with
the conditions of these Articles, and subject to the authority of the Board of Directors or any authorized committee thereof as set forth above, the right to any such vote is expressly waived by all present and future holders of the capital stock of the Corporation.
Section 4.3 Liquidation Account. Under regulations of Board of Governors of the Federal Reserve System and the Massachusetts Division of Banks, the Corporation must establish and maintain a liquidation account (the Liquidation Account) for the benefit of certain Eligible Account Holders and Supplemental Eligible Account Holders, as defined in the Plan of Conversion of HarborOne Mutual Bancshares, as amended from time to time, (the Plan of Conversion). In the event of a complete liquidation involving (i) the Corporation or (ii) HarborOne Bank, a Massachusetts-chartered co-operative bank and wholly-owned subsidiary of the Corporation, the Corporation must comply with the regulations of the Board of Governors of the Federal Reserve System and the Massachusetts Division of Banks and the provisions of the Plan of Conversion with respect to the amount and priorities of each Eligible Account Holders and Supplemental Eligible Account Holders interests in the Liquidation Account. The interest of an Eligible Account Holder or Supplemental Eligible Account Holder in the Liquidation Account does not entitle such account holders to voting rights.
APPENDIX B
TO THE
ARTICLES OF ORGANIZATION OF
HARBORONE NORTHEAST BANCORP, INC
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ARTICLE V
LIMITATION ON BENEFICIAL OWNERSHIP OF STOCK
Section 5.1 Applicability of Article . The provisions of this ARTICLE V shall become effective upon (i) the consummation of the conversion of HarborOne Mutual Bancshares into stock holding company form (the Conversion) and (ii) the related stock offering by the Corporation (the Effective Date). All terms used in this ARTICLE V and not otherwise defined herein shall have the meanings ascribed to such terms in Section 6.1 through Section 6.10 below.
Section 5.2 Prohibitions Relating to Beneficial Ownership of Voting Stock . No Person (as defined in Section 5.7) other than the Corporation, any Subsidiary (as defined in Section 5.7) or any pension, profit-sharing, stock bonus or other compensation plan maintained by the Corporation or any Subsidiary is a member for the benefit of the employees of the Corporation or any Subsidiary, or any trust or custodial arrangement established in connection with any such plan) shall directly or indirectly acquire or hold the beneficial ownership of more than ten percent (10%) of the issued and outstanding shares of Voting Stock (as defined in Section 5.7) of the Corporation. Any Person so prohibited who directly or indirectly acquires or holds the beneficial ownership of more than ten percent (10%) of the issued and outstanding shares of Voting Stock in violation of this Section 5.2 shall be subject to the provisions of Section 5.3 and Section 5.4. The Corporation is authorized to refuse to recognize a transfer or attempted transfer of any shares of Voting Stock to any Person who beneficially owns, or who the Corporation believes would become by virtue of such transfer the beneficial owner of, more than 10% of shares of the Voting Stock.
Section 5.3 Excess Shares . If, notwithstanding the foregoing prohibition, a Person subject to the foregoing prohibition shall voluntarily or involuntarily become or attempt to become the purported beneficial owner (the Purported Owner) of shares of Voting Stock in excess of 10% of the issued and outstanding shares of Voting Stock, (i) during the period of three years following the date of the completion of the Conversion (the Initial Period), the number of shares in excess of ten percent (10%) shall be deemed to be Excess Shares, and shall not be counted as shares entitled to vote, shall not be voted by any person or counted as voting shares in connection with any matter submitted to the shareholders for a vote, and shall not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the shareholders for a vote; or (ii) following the Initial Period, the holder of any Excess Shares shall be entitled to cast only one one-hundredth (1/100) of one vote per share for each Excess Share.
The restrictions set forth in this ARTICLE V shall be noted conspicuously on all certificates evidencing ownership of shares of Voting Stock.
Section 5.4 Powers of the Board of Directors .
(a) The Board of Directors may, to the extent permitted by law, from time to time establish, modify, amend or rescind, by By-law or otherwise, regulations and procedures not inconsistent with the express provisions of this ARTICLE V for the application, administration and implementation of the provisions of this ARTICLE V.
(b) When it appears that a particular Person has become a Purported Owner of Excess Shares in violation of Section 5.2 and Section 5.3, or of the regulations or procedures of the Board of Directors with respect to this ARTICLE V, and that the provisions of this ARTICLE V require application, interpretation or construction, then a majority of the Directors of the Corporation shall have the power and duty to interpret all of the terms and provisions of this ARTICLE V and to determine on the basis of information known to them after reasonable inquiry all facts necessary to ascertain compliance with this ARTICLE V, including, without limitation, (i) the number of shares of Voting Stock beneficially owned by any Person or Purported Owner, (ii) whether a Person or Purported Owner is an Affiliate (as defined in Section 5.7) or Associate (as defined in Section 5.7) of, or is acting in concert with, any other Person or Purported Owner, (iii) whether a Person or Purported Owner has an agreement, arrangement or understanding with any other Person or Purported Owner as to the voting or disposition of any shares of the Voting Stock, (iv) the application of any other definition or operative provision of this ARTICLE V to the given facts or (v) any other matter relating to the applicability or effect of this ARTICLE V.
The Board of Directors shall have the right to demand that any Person who is reasonably believed to be a Purported Owner of Excess Shares (or who holds of record shares of Voting Stock beneficially owned by any Person reasonably believed to be a Purported Owner in excess of such limit) supply the Corporation with information as to (x) the record owner(s) of all shares of Voting Stock beneficially owned by such Person or Purported Owner and (y) any other factual matter relating to the applicability or effect of this ARTICLE V as may reasonably be requested of such Person or Purported Owner.
Any applications, interpretations, constructions or any other determinations made by the Board of Directors pursuant to this ARTICLE V, in good faith and on the basis of such information and assistance as was then reasonably available for such purpose, shall be conclusive and binding upon the Corporation and its shareholders, and no shareholder shall have the right to challenge any such application, interpretation, construction or determination.
Section 5.5 Severability . In the event any provision (or portion thereof) of this ARTICLE V shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this ARTICLE V shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of this Corporation and its shareholders that each such remaining provision (or portion thereof) of this ARTICLE V remain, to the fullest extent permitted by law, applicable and enforceable as to all shareholders, including Purported Owners, if any, notwithstanding any such finding.
Section 5.6 Exclusions . This ARTICLE V shall not apply to (a) any offer or sale with a view towards public resale made exclusively by the Corporation to any underwriter or underwriters acting on behalf of the Corporation, or to the selling group acting on such underwriters or underwriters behalf, in connection with a public offering of the Common Stock; or (b) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction or reorganization that does not have the effect, directly or indirectly, of changing the beneficial ownership interests of the Corporations shareholders, other than pursuant to the exercise of any dissenters appraisal rights, except as a result of immaterial changes due to fractional share adjustments, which changes do not exceed, in the aggregate, one percent (1%) of the issued and outstanding shares of such class of equity or convertible securities.
Section 5.7 Definitions . For the purposes of these Articles of Organization:
(a) A Person shall include an individual, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities or any other entity.
(b) Affiliate and Associate shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, as in effect on the date of filing of these Articles.
(c) Subsidiary means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation.
(d) Voting Stock means the then-outstanding shares of stock of the Corporation entitled to vote in the election of Directors (the Voting Stock).
APPENDIX C
TO THE
ARTICLES OF ORGANIZATION OF
HARBORONE NORTHEAST BANCORP, INC.
ARTICLE VI
ADDITIONAL PROVISIONS
Section 6.1 Corporate Governance .
The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its Directors and shareholders:
(a) Board of Directors . The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by these Articles or the By-laws of the Corporation, the Directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.
(b) Shareholder Meetings . Any action to be taken by the shareholders of the Corporation may be effected at a duly called annual or special meeting of shareholders of the Corporation or by the unanimous consent in writing of all shareholders entitled to vote on the action.
(c) Special Shareholder Meetings .
(i) Subject to the rights of the holders of any class or series of preferred stock of the Corporation, special meetings of the shareholders entitled to vote may be called by the Board of Directors, the Chairman of the Board or the President.
(ii) If the Corporation shall not have a class of voting stock registered under the Securities Exchange Act of 1934, as amended (the Exchange Act), special meetings of the shareholders entitled to vote shall be called by the Secretary, or in case of the death, absence, incapacity or refusal of the Secretary, by any other officer, upon written application of the holders of at least ten percent (10%) of all the votes entitled to be cast on any issue to be considered at the proposed meeting.
(iii) If the Corporation shall have a class of voting stock registered under the Exchange Act, special meetings of the shareholders entitled to vote shall be called by the Secretary, or in case of the death, absence, incapacity or refusal of the Secretary, by any other officer, upon written application of one or more shareholders who hold at least (i) sixty-six and two-thirds percent (66 2 / 3 %) in interest of the capital stock of the Corporation entitled to vote at such meeting, or (ii) such lesser percentage, if any, (but not less than forty percent (40%)) as shall be determined to be the maximum percentage which the Corporation is permitted by applicable law to establish for the call of such meeting.
Section 6.2 Directors .
(a) Composition . The number of Directors of the Corporation shall be fixed solely and exclusively by resolution duly adopted from time to time by the Board of Directors. The Directors shall be divided into three classes, with the term of office of the first class to expire at the first annual meeting of shareholders, the term of office of the second class to expire at the annual meeting of shareholders one year thereafter and the term of office of the third class to expire at the annual meeting of shareholders two years thereafter. At each annual meeting of shareholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of shareholders after their election.
(b) Vacancies and Newly Created Directorships . Subject to the rights of the holders of any series of preferred stock the outstanding and except as otherwise required by applicable law, any and all vacancies in the Board of Directors, however occurring including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a Director, shall be filled solely and exclusively by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum. A vacancy that will occur at a specific later date may be filled before the vacancy occurs but the new Director may not take office until the vacancy occurs. Directors so chosen shall hold office for a term expiring at the annual meeting of shareholders at which the term of office of the class to which they have been chosen expires. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director.
(c) Shareholder Nominations . Advance notice of shareholder nominations for the election of Directors and of business to be brought by shareholders before any meeting of the shareholders of the Corporation shall be given in the manner provided in the By-laws of the Corporation.
(d) Removal . Subject to the rights of the holders of any series of Preferred Stock then outstanding, any Director may be removed from office at any time, but only for cause and only by the affirmative vote of either (i) a majority of the directors then in office or (ii) the holders of at least a majority of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors, voting together as a single class.
Section 6.3 Amendment to By-Laws .
The By-laws of the Corporation may be amended or repealed in whole or in part by the affirmative vote of the holders of at least two-thirds of the outstanding shares of each class of the capital stock at the time outstanding and entitled to vote at any annual meeting of shareholders or special meeting of shareholders; provided, however, that if the Board of Directors recommends, by the affirmative vote of at least two-thirds of the Directors then in office at a duly constituted meeting of the Board of Directors, that shareholders approve such amendment at such meeting of shareholders, such amendment shall only require the affirmative vote of a majority of the outstanding shares of each class of capital stock at the time outstanding and entitled to vote at such meeting; provided, further, that notice of the substance of the proposed amendment is stated
in the notice of such meeting. The Directors may make, amend or repeal the By-laws, in whole or in part, except with respect to any provision thereof which by law, these Articles of Organization or the By-laws requires action by the shareholders. Not later than the time of giving notice of the meeting of shareholders next following the making, amending or repealing by the Directors of any By-law, notice thereof stating the substance of such change shall be given to all shareholders entitled to vote on amending the By-laws. Any By-law adopted or amended by the Directors may be amended or reinstated by the shareholders entitled to vote on amending the By-laws following the procedures outlined above.
Section 6.4 Pre-Emptive Rights .
Holders of the capital stock of the Corporation shall not be entitled to preemptive rights with respect to any shares of the capital stock of the Corporation which may be issued.
Section 6.5 Indemnification of Directors and Others .
(a) Right to Indemnification . Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise (hereinafter a Proceeding), by reason of the fact that he or she is or was (a) a Director of the Corporation, or (b) serving, at the request of the Corporation as evidenced by a resolution of the Board of Directors prior to the occurrence of the event to which the indemnification relates, as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (such persons described in (a) and (b) are sometimes hereinafter referred to as an Indemnitee), whether the basis of such Proceeding is alleged action in an official capacity as such a Director or officer of the Corporation or as such other director, officer, employee or agent or in any other capacity while serving as such a Director or officer of the Corporation or as such other director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Massachusetts Business Corporation Act (the MBCA), as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including, but not limited to, attorneys fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith and such indemnification shall continue as to an Indemnitee who has ceased to be such a director, officer, employee or agent and shall inure to the benefit of the Indemnitees heirs, executors and administrators; provided, however, that, except as provided in Section 6.5(c) with respect to Proceedings to enforce rights to indemnification, the Corporation shall indemnify any such Indemnitee in connection with a Proceeding (or part thereof) initiated by such Indemnitee only if such Proceeding (or part thereof) was authorized or ratified by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 6.5 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any Proceeding in advance of its final disposition (hereinafter an Advancement of Expenses); provided, however, that, if the MBCA so requires, an Advancement of Expenses incurred by an Indemnitee shall be made only upon delivery to the Corporation of an undertaking made in accordance with the MBCA (hereinafter an Undertaking), by or on behalf of such Indemnitee, which shall include, without
limitation, an undertaking to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a Final Adjudication) that such Indemnitee is not entitled to be indemnified for such expenses under this Section 6.5 or otherwise.
(b) Indemnification of Employees and Agents of the Corporation . The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and to an Advancement of Expenses, to any officer, employee or agent of the Corporation to the fullest extent of the provisions of this Section 6.5.
(c) Right of Indemnitee to Bring Suit . If a claim under this Section 6.5 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an Advancement of Expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time hereafter bring suit against the Corporation to recover the unpaid amount of the claim. If the Indemnitee is successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an Advancement of Expenses pursuant to the terms of an Undertaking, the Indemnitee shall also be entitled to be paid the expense of prosecuting or defending such suit. In any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an Advancement of Expenses) it shall be a defense that the Indemnitee has not met the applicable standard of conduct set forth in the MBCA. In addition, in any suit by the Corporation to recover an Advancement of Expenses pursuant to the terms of an Undertaking, the Corporation shall be entitled to recover such expenses upon a Final Adjudication that the Indemnitee has not met the applicable standard of conduct set forth in the MBCA. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or Shareholders) to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in the MBCA, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or Shareholders) that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an Advancement of Expenses hereunder, or by the Corporation to recover an Advancement of Expenses pursuant to the terms of an Undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified, or to such Advancement of Expenses, under this Section 6.5 or otherwise shall be on the Corporation.
(d) Non-Exclusivity of Rights . The rights to indemnification and to Advancement of Expenses conferred in this Section 6.5 shall not be exclusive of any other right which any person may have or hereafter acquire under these By-laws, the Articles of Organization or any statute, agreement, vote of Shareholders or of disinterested Directors or otherwise.
(e) Insurance . The Corporation may maintain insurance, at its expense, to protect itself and any Director, officer, employee or agent of the Corporation or any director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the MBCA. The Corporations obligation to provide indemnification under this Section 6.5 shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the Corporation or any other person.
(f) Amendments . Without the consent of a person entitled to the indemnification and other rights provided in this Section 6.5 (unless otherwise required by the MBCA), no amendment modifying or terminating such rights shall adversely affect such persons rights under this Section 6.5 with respect to the period prior to such amendment.
(g) Savings Clause . If this Section 6.5 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any liabilities and expenses with respect to any proceeding to the fullest extent permitted by any applicable portion of this Section 6.5 that shall not have been invalidated and to the fullest extent permitted by applicable law.
(h) Compliance with Law . Notwithstanding anything herein to the contrary, any indemnification hereunder shall be provided only to the extent permitted by 12 U.S.C. Section 1828(k) and the regulations issued thereunder.
Section 6.6 Limitation of Liability of Directors .
(a) Limitation of Liability . No Director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a Director notwithstanding any provision of law imposing such liability; provided, however, that this Section 6.6 shall not eliminate or limit any liability of a Director (a) for any breach of the Directors duty of loyalty to the Corporation or its shareholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) for improper distributions under Section 6.40 of Chapter 156D of the Massachusetts General Laws or (d) with respect to any transaction from which the Director derived an improper personal benefit.
(b) Amendment . No amendment or repeal of this Section 6.6 shall adversely affect the rights and protection afforded to a Director of this Corporation under this Section 6.6 for acts or omissions occurring prior to such amendment or repeal. If the Massachusetts General Laws is hereafter amended to further eliminate or limit the personal liability of Directors or to authorize corporate action to further eliminate or limit such liability, then the liability of the Directors of this Corporation shall be eliminated or limited to the fullest extent permitted by the Massachusetts General Laws as so amended.
Section 6.7 Transactions with Interested Persons .
(a) Transactions with Interested Persons not Void or Voidable . Unless entered into in bad faith, no contract or transaction by the Corporation shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. For the purposes of this Section 6.7, Interested Person means any person or organization in any way interested in the Corporation whether as a director, officer, shareholder, employee or otherwise, and any other entity in which any such person or organization of the Corporation is in any way interested.
(b) Interested Persons not Liable . Unless such contract or transaction was entered into in bad faith, no Interested Person, because of such interest, shall be liable to the Corporation or to any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction.
(c) Interested Person Necessary for Quorum or Vote . The provisions of this Section 6.7 shall be operative notwithstanding the fact that the presence of an Interested Person was necessary to constitute a quorum at a meeting of Directors or shareholders of the Corporation at which such contract or transaction was authorized or that the vote of an Interested Person was necessary for the authorization of such contract or transaction.
Section 6.8 Acting As a Partner .
The Corporation may be a partner in any business enterprise which it would have power to conduct by itself.
Section 6.9 Shareholders Meetings .
Meetings of shareholders may be held at such place in the Commonwealth of Massachusetts or, if permitted by applicable law, elsewhere in the United States as the Board of Directors, the Chairman of the Board or the President may determine.
Section 6.10 Amendment to Articles of Organization .
These Articles may be amended at a duly constituted meeting of shareholders called expressly for such purpose, by the affirmative vote of at least two-thirds of the total votes eligible to be cast by shareholders on such amendment, voting together as a single class; provided, however, that if the Board of Directors recommends, by the affirmative vote of at least two-thirds of the Directors then in office at a duly constituted meeting of the Board of Directors, that shareholders approve such amendment at such meeting of shareholders, such amendment shall only require the affirmative vote of a majority of the total votes eligible to be cast by shareholders on such amendment, voting together as a single class.
TABLE OF CONTENTS
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Page |
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ARTICLE I ARTICLES OF ORGANIZATION |
1 |
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Section 1.1 |
Articles of Organization |
1 |
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ARTICLE II SHAREHOLDERS |
1 |
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Section 2.1 |
Annual Meetings |
1 |
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Section 2.2 |
Special Meetings |
1 |
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Section 2.3 |
Place of Meetings |
2 |
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Section 2.4 |
Notice of Meetings |
2 |
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Section 2.5 |
Notice of Shareholder Business and Nominations |
3 |
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Section 2.6 |
Rescheduling of Meetings; Adjournments |
7 |
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Section 2.7 |
Quorum |
7 |
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Section 2.8 |
Voting and Proxies |
8 |
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Section 2.9 |
Action at Meeting |
9 |
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Section 2.10 |
Action without Meeting |
9 |
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Section 2.11 |
Form of Shareholder Action |
9 |
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Section 2.12 |
Shareholders List for Meeting |
10 |
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Section 2.13 |
Conduct of Business |
10 |
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Section 2.14 |
Voting Procedures and Inspectors of Elections |
10 |
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ARTICLE III BOARD OF DIRECTORS |
11 |
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Section 3.1 |
Powers |
11 |
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Section 3.2 |
Enumeration, Election and Term of Office |
11 |
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Section 3.3 |
Vacancies |
11 |
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Section 3.4 |
Regular Meetings |
11 |
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Section 3.5 |
Special Meetings |
12 |
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Section 3.6 |
Notice |
12 |
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Section 3.7 |
Quorum, Action at a Meeting |
12 |
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Section 3.8 |
Action Without a Meeting |
12 |
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Section 3.9 |
Manner of Participation |
13 |
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Section 3.10 |
Resignations and Removals |
13 |
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Section 3.11 |
Presumption of Assent |
13 |
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Section 3.12 |
Committees |
13 |
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Section 3.13 |
Powers of Executive Committee |
14 |
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ARTICLE IV OFFICERS |
14 |
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Section 4.1 |
Enumeration |
14 |
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Section 4.2 |
Election |
14 |
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Section 4.3 |
Qualification |
14 |
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Section 4.4 |
Resignation and Removal |
14 |
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Section 4.5 |
Chairman of the Board |
15 |
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Section 4.6 |
Chief Executive Officer |
15 |
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Section 4.7 |
President and Vice Presidents |
15 |
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Section 4.8 |
Treasurer and Assistant Treasurers |
15 |
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Section 4.9 |
Secretary and Assistant Secretaries |
15 |
Section 4.10 |
Other Powers and Duties |
15 |
Section 4.11 |
Absence, Disability and Vacancies |
15 |
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ARTICLE V CAPITAL STOCK |
16 |
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Section 5.1 |
Authorized Capital Stock |
16 |
Section 5.2 |
Certificate of Stock |
16 |
Section 5.3 |
Transfer of Shares of Stock |
16 |
Section 5.4 |
Transfer Agents and Registrars; Further Regulations |
17 |
Section 5.5 |
Loss of Certificates |
17 |
Section 5.6 |
Record Date |
17 |
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ARTICLE VI MISCELLANEOUS PROVISIONS |
17 |
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Section 6.1 |
Fiscal Year |
17 |
Section 6.2 |
Seal |
17 |
Section 6.3 |
Execution of Instruments |
17 |
Section 6.4 |
Voting of Securities |
18 |
Section 6.5 |
Resident Agent |
18 |
Section 6.6 |
Corporation Records |
18 |
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ARTICLE VII AMENDMENTS |
18 |
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ARTICLE VIII CONTROL SHARE ACQUISITION STATUTE |
19 |
ARTICLE I
ARTICLES OF ORGANIZATION
Section 1.01 Articles of Organization . The name and purposes of the Corporation shall be as set forth in the Articles of Organization. These By-Laws, the powers of the Corporation and of its Directors and shareholders, and all matters concerning the conduct and regulation of the business of the Corporation shall be subject to such provisions in regard thereto, if any, as are set forth in the Articles of Organization. All references in these By-Laws to the Articles of Organization shall be construed to mean the Articles of Organization of the Corporation as from time to time amended.
ARTICLE II
SHAREHOLDERS
Section 2.01 Annual Meetings . The annual meeting of shareholders shall be held each year on the date and at the time and place as shall be fixed by the Board of Directors, the Chairman of the Board or the President. The purposes for which the annual meeting is to be held, in addition to those prescribed by law, by the Articles of Organization or by these By-Laws, may be specified by the Board of Directors, the Chairman of the Board or the President and shall be specified in the notice of the meeting. In the event the time for an annual meeting is not fixed in accordance with these By-Laws to be held within 13 months after the last annual meeting was held, the Board of Directors may designate a special meeting held thereafter as a special meeting in lieu of the annual meeting, and such special meeting shall have, for purposes of these By-Laws or otherwise, all the force and effect of an annual meeting. Any and all references hereafter in these By-Laws to an annual meeting or annual meetings shall be deemed to refer also to any special meeting(s) in lieu thereof.
Section 2.02 Special Meetings .
(a) Subject to the rights of the holders of any class or series of preferred stock of the Corporation, special meetings of the shareholders entitled to vote may be called by the Board of Directors, the Chairman of the Board or the President.
(b) If the Corporation shall not have a class of voting stock registered under the Securities Exchange Act of 1934, as amended (the Exchange Act), special meetings of the shareholders entitled to vote shall be called by the Secretary, or in case of the death, absence, incapacity or refusal of the Secretary, by any other officer, upon written application of the holders of at least 10% of all the votes entitled to be cast on any issue to be considered at the proposed meeting.
(c) If the Corporation shall have a class of voting stock registered under the Exchange Act, special meetings of the shareholders entitled to vote shall be called by the Secretary, or in case of the death, absence, incapacity or refusal of the Secretary, by any other officer, upon written application of the holders of one or more shareholders who hold at least (i) 66 2 / 3 % in interest of the capital stock of the Corporation entitled to vote at
such meeting, or (ii) such lesser percentage, if any, (but not less than 40%) as shall be determined to be the maximum percentage which the Corporation is permitted by applicable law to establish for the call of such meeting.
(d) Only business within the purpose or purposes described in the meeting notice may be conducted at a special meeting, unless otherwise provided by law.
Section 2.03 Place of Meetings . All meetings of the shareholders shall be held at the principal office of the Corporation, unless a different place within or without the Commonwealth of Massachusetts is designated by the Chief Executive Officer or by a majority of the Directors acting by resolution or by written instrument or instruments signed by them. Any adjourned session of any meeting of the shareholders shall be held at such place as is designated in the vote of adjournment.
Section 2.04 Notice of Meetings . A written notice of the place, date and hour of all meetings of shareholders (other than adjournments governed by Section 2.06 of this ARTICLE II) stating the purposes of the meeting shall be given at least seven days and not more than 60 days before the meeting to each shareholder entitled to vote thereat and to each shareholder who is otherwise entitled by law, the Articles of Organization or these By-Laws to such notice. Notice may be given to a shareholder by any means permitted under applicable law, including, without limitation, by leaving such notice with him or her or at his or her residence or usual place of business, or by mailing it, postage prepaid, and addressed to such shareholder at his or her address as it appears in the records of the Corporation. Such notice shall be given by the Secretary, or in case of the death, absence, incapacity, or refusal of the Secretary, by any other officer or by a person designated either by the Secretary, by the person or persons calling the meeting or by the Board of Directors. If notice is given by mail, such notice shall be deemed given when dispatched. If notice is not given by mail and is given by leaving such notice at the shareholders residence or usual place of business, it shall be deemed given when so left. Without limiting the generality of the foregoing, notice may be given to a shareholder by electronic transmission in a manner specified by the shareholder, including, without limitation, by facsimile transmission, electronic mail or posting on an electronic network. Notwithstanding the foregoing, in case of any special meeting called upon the written demands of shareholders, such meeting shall be scheduled not less than 60 nor more than 90 days after the date on which the Secretary has received sufficient demands to require that such meeting be called and written notice thereof shall be given in accordance with this Section 2.04 within 30 days of receipt of such demands.
Notice of an annual or special meeting of shareholders need not be given to a shareholder if a written waiver of notice is signed before or after such meeting by such shareholder or such shareholders authorized attorney, if communication with such shareholder is unlawful, or if such shareholder attends such meeting unless (i) the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting or (ii) the shareholder objects to the consideration of a particular matter at the meeting as not within the purpose or purposes described in the meeting notice when the matter is presented. Neither the business to be transacted at, nor the purpose of, any annual meeting or special meeting of shareholders need be specified in any written waiver of notice.
Section 2.05 Notice of Shareholder Business and Nominations .
(a) Annual Meetings of Shareholders .
(i) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of other business to be considered by the shareholders may be made at an annual meeting of shareholders (A) by or at the direction of the Board of Directors or (B) by any shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting, who is present at the meeting and who complies with the notice procedures set forth in this By-Law as to such nomination or business. For the avoidance of doubt, for a shareholder to bring nominations or business before an annual meeting of shareholders (other than matters properly brought under Rule 14a-8 (or any successor rule) under the Exchange Act), such shareholder must comply with the procedures set forth in this Section 2.05 and this shall be the exclusive means for a shareholder to bring such nominations or business properly before an annual meeting of shareholders. In addition to the other requirements set forth in this By-Law, for any proposal of business to be considered at an annual meeting, such proposal must be a proper subject for action by shareholders of the Corporation under Massachusetts law.
(ii) For nominations or other business to be properly brought before an annual meeting of shareholders by a shareholder pursuant to clause (B) of paragraph (a)(i) of this By-Law, in addition to other applicable requirements, the shareholder must (1) have given Timely Notice (as defined below) thereof in writing to the Secretary of the Corporation and (2) have provided any updates or supplements to such notice at the times and in the forms required by this By-Law. To be timely, a shareholders notice under this paragraph (a)(ii) shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding years annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days before or delayed by more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made (such notice within such time periods shall be referred to as Timely Notice). Such shareholders Timely Notice shall set forth:
(A) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including
such persons written consent to being named in the proxy statement as a nominee and to serving as a Director if elected);
(B) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, any material interest in such business of such shareholder and the beneficial owner(s), if any, on whose behalf the proposal is made, and the names and addresses of other shareholders (including beneficial owners) known by the shareholder proposing such business to support such proposal, and the class and number of shares of the Corporations capital stock beneficially owned by such other shareholder(s) or other beneficial owner(s); and
(C) as to the shareholder giving the notice and the beneficial owner(s), if any, on whose behalf the nomination or proposal is made: (i) the name and address of such shareholder, as they appear on the Corporations books, and of such beneficial owner(s); (ii) (a) the class or series and number of shares of the Corporation which are, directly or indirectly, owned beneficially and of record by such shareholder and any such beneficial owner(s), (b) any derivative, swap or other transaction or series of transactions engaged in, directly or indirectly, by such shareholder and/or any such beneficial owner(s) the purpose or effect of which is to give such shareholder and/or any such beneficial owner(s) economic benefit and/or risk similar to ownership of shares of any class or series of the Corporation, in whole or in part, including due to the fact that such derivative, swap or other transaction provides, directly or indirectly, the opportunity to profit or avoid a loss from any increase or decrease in the value of shares of any class or series of the Corporation (Synthetic Equity Interests) and such disclosure shall identify the counterparty to each such Synthetic Equity Interest and shall include, for each such Synthetic Equity Interest, whether or not (x) such Synthetic Equity Interest conveys any voting rights, directly or indirectly, in such shares to such shareholder and/or any such beneficial owner(s), (y) such Synthetic Equity Interest is required to be, or is capable of being, settled through delivery of such shares and (z) such shareholder, any such beneficial owner(s) and/or, to their knowledge, the counterparty to such Synthetic Equity Interest has entered into other transactions that hedge or mitigate the economic effect of such Synthetic Equity Interest, (c) any proxy (other than a revocable proxy given in response to a public proxy solicitation made pursuant to, and in accordance with, the Exchange Act), agreement, arrangement, understanding or relationship pursuant to which such shareholder and/or any such beneficial owner(s) has or shares a right to vote any shares of any class or series of the Corporation, (d) any agreement, arrangement, understanding or relationship (which disclosure shall identify the counterparty thereto), including any hedge, repurchase or similar so-called stock borrowing agreement or arrangement, engaged in, directly or
indirectly, by such shareholder and/or any such beneficial owner(s), the purpose or effect of which is to mitigate loss to, reduce the economic risk of shares of any class or series of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such shareholder and/or any such beneficial owner(s) with respect to the shares of any class or series of the Corporation, or which provides, directly or indirectly, the opportunity to profit from any decrease in the value of the shares of any class or series of the Corporation (Short Interests), (e) any rights to dividends or other distributions on the shares of any class or series of the Corporation owned beneficially by such shareholder and/or any such beneficial owner(s) that are separated or separable from the underlying shares of the Corporation, (f) any performance-related fees (other than an asset based fee) that such shareholder and/or any such beneficial owner(s) is entitled to based on any increase or decrease in the value of shares of any class or series of the Corporation, any Synthetic Equity Interests or Short Interests, if any (the disclosures to be made pursuant to the foregoing clauses (a) through (f) are referred to as Material Ownership Interests); and (iii) a description of all arrangements or understanding among such shareholder and/or any such beneficial owner(s) and each proposed nominee and any other person or persons (including their names) pursuant to which the nominations are to be made.
(iii) A shareholder providing Timely Notice of nominations or business proposed to be brought before an annual meeting of shareholders shall further update and supplement such notice, if necessary, so that the information (including, without limitation, the Material Ownership Interests information) provided or required to be provided in such notice pursuant to this By-Law shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to such annual meeting, and such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the fifth business day after the record date for the meeting (in the case of the update and supplement required to be made as of the record date), and not later than the close of business on the 8th business day prior to the date for the meeting (in the case of the update and supplement required to be made as of ten business days prior to the meeting).
(iv) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this By-Law to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for Director or specifying the size of the increased Board of Directors made by the Corporation at least 85 days prior to the first anniversary of the preceding years annual meeting, a shareholders notice required by this paragraph (a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation.
(b) General .
(i) Only such persons who are nominated in accordance with the provisions of this By-Law shall be eligible for election and to serve as Directors and only such business shall be conducted at an annual meeting of shareholders as shall have been brought before the meeting in accordance with the provisions of this By-Law. The Board of Directors or a designated committee thereof shall have the power to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the provisions of this By-Law. If neither the Board of Directors nor such designated committee makes a determination as to whether any shareholder proposal or nomination was made in accordance with the provisions of this By-Law, the presiding officer of the annual meeting shall have the power and duty to determine whether the shareholder proposal or nomination was made in accordance with the provisions of this By-Law. If the Board of Directors or a designated committee thereof or the presiding officer, as applicable, determines that any shareholder proposal or nomination was not made in accordance with the provisions of this By-Law, such proposal or nomination shall be disregarded and shall not be presented for action at the annual meeting.
(ii) Except as otherwise required by law, nothing contained in this Section 2.05 shall obligate the Corporation or the Board of Directors to include in any proxy statement or other shareholder communication distributed on behalf of the Corporation or the Board of Directors information with respect to any nominee for Director submitted by a shareholder.
(iii) Notwithstanding the foregoing provisions of this Section 2.05, if the shareholder (or a qualified representative of the shareholder) does not appear at the annual meeting to present a nomination or any business, such nomination or business shall be disregarded, notwithstanding the proxies in respect of such vote may have been received by the Corporation. For purposes of this paragraph (iii), to be considered a qualified representative of the shareholder, a person must be authorized by a written instrument executed by such shareholder or an electronic transmission delivered by such shareholder to act for such shareholder as proxy at the meeting of shareholders and such person must produce such written instrument or electronic transmission, or a reliable reproduction of the written instrument or electronic transmission, at the meeting of shareholders.
(iv) For purposes of this By-Law, public announcement shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
(v) Notwithstanding the foregoing provisions of this By-Law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth
in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of (i) shareholders to have proposals included in the Corporations proxy statement pursuant to Rule 14a-8 (or any successor rule) under the Exchange Act and, to the extent required by such rule, have such proposals considered and voted on at an annual meeting of shareholders or (ii) the holders of any series of undesignated preferred stock to elect Directors under specified circumstances.
Section 2.06 Rescheduling of Meetings; Adjournments . Notwithstanding any other provision in these By-Laws, the Board of Directors may change the date, time and location of any annual or special meeting of the shareholders (other than a special meeting called upon the written application of shareholders (a Meeting Requested by Shareholders)), and a record date with respect thereto, prior to the time for such meeting, including, without limitation, by postponing or deferring the date of any such annual or special meeting (other than a Meeting Requested by Shareholders) previously called or by canceling any special meeting previously called (other than a Meeting Requested by Shareholders). This action may be taken regardless of whether any notice or public disclosure with respect to any such meeting or record date has been sent or made pursuant to Section 2.04 of this ARTICLE II hereof or otherwise. In no event shall the public announcement of an adjournment, postponement or rescheduling of any previously scheduled annual meeting of shareholders commence a new time period for the giving of a shareholders notice under Section 2.05 of ARTICLE II of these By-Laws.
When any meeting is convened, the presiding officer may adjourn the meeting if (a) no quorum is present for the transaction of business, (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the shareholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to shareholders, or (c) the Board of Directors determines in its sole discretion that adjournment is otherwise in the best interests of the Corporation. When any annual meeting or special meeting of shareholders is adjourned to another date, time or place, notice need not be given of the adjourned meeting other than an announcement at the meeting at which the adjournment is taken of the date, time and place to which the meeting is adjourned; provided, however, that if a new record date for the adjourned meeting is fixed, notice of the adjourned meeting shall be given under this ARTICLE II to persons who are shareholders as of the new record date.
A meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present. Any business which could have been transacted at any meeting of the shareholders as originally called may be transacted at any adjournment thereof.
Section 2.07 Quorum .
(a) Unless otherwise provided by law, or in the Articles of Organization, these By-Laws or a resolution of the Directors requiring satisfaction of a greater quorum requirement for any voting group, a majority of the votes entitled to be cast on the matter by a voting group constitutes a quorum of that voting group for action on that matter. As used in these By-Laws, a voting group includes all shares of one or more classes or series that, under the Articles of Organization or the Massachusetts Business Corporation Act, as in effect from time to time (or any successor statute) (the MBCA), are entitled
to vote and to be counted together collectively on a matter at a meeting of shareholders. Shares owned by the Corporation in a fiduciary capacity shall be deemed outstanding for quorum purposes.
(b) A share once represented for any purpose at the meeting is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless (i) the shareholder attends solely to object to lack of notice, defective notice or the conduct of the meeting on other grounds and does not vote the shares or otherwise consent that they are to be deemed present, or (ii) in the case of adjournment, a new record date is or shall be set for the adjournment meeting.
Section 2.08 Voting and Proxies . Unless otherwise provided by law or by the Articles of Organization, each shareholder shall have, with respect to each matter voted upon at a meeting of shareholders, one vote for each share of stock entitled to vote owned by such shareholder of record according to the books of the Corporation. A shareholder may vote his or her shares either in person or may appoint a proxy to vote or otherwise act for him or her by signing an appointment form, either personally or by his or her attorney-in-fact. An appointment of a proxy is effective when received by the Secretary or other officer or agent authorized to tabulate votes. Unless otherwise provided in the appointment form, an appointment is valid for a period of 11 months from the date the shareholder signed the form or, if undated, from the date of its receipt by such officer or agent. Any shareholders proxy may be transmitted by facsimile or other electronic means in a manner complying with applicable law. Except as otherwise permitted by law or limited therein, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting but shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by one of them if the person signing appears to be acting on behalf of all the co-owners unless at or prior to exercise of the proxy, the Corporation receives a specific written notice to the contrary from any one of them. Subject to the provisions of Section 7.24 of the MBCA (or any successor provision thereof) and to any express limitation on the proxys authority provided in the appointment form, the Corporation is entitled to accept the proxys vote or other action as that of the shareholder making the appointment. A proxy purporting to be executed by or on behalf of a shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger.
Unless otherwise provided in the Articles of Organization, if authorized by the Board of Directors, subject to such guidelines and procedures as the Board of Directors may adopt, shareholders and proxyholders not physically present at a meeting of shareholders may, by means of remote communications: (i) participate in a meeting of shareholders; and (ii) be deemed present in person and vote at a meeting of shareholders, provided that: (a) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a shareholder or proxyholder; (b) the Corporation shall implement reasonable measures to provide such shareholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the shareholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings; and (c) if any shareholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation.
Section 2.09 Action at Meeting . If a quorum of a voting group exists, favorable action on a matter, other than election of Directors, is taken by a voting group if the votes cast within the group favoring the action exceed the votes cast opposing the action, unless a greater number of affirmative votes is required by the MBCA, the Articles of Organization, these By-Laws or a resolution of the Board of Directors requiring receipt of a greater affirmative vote of the shareholders, including one or more separate voting groups. Unless otherwise provided in the Articles of Organization or these By-Laws, Directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. No ballot shall be required for any election unless requested by a shareholder present or represented at the meeting and entitled to vote in the election. Absent special circumstances, shares of the Corporations stock are not entitled to vote if they are owned, directly or indirectly, by the Corporation or by another entity of which the Corporation owns, directly or indirectly, a majority of the voting interests. Notwithstanding the preceding sentence, however, the Corporation may vote any share of stock held by it, directly or indirectly, in a fiduciary capacity.
Section 2.10 Action without Meeting . Any action required or permitted to be taken at any annual or special meeting of Shareholders (including any actions or powers reserved to the Shareholders under these By-Laws) may be taken without a meeting provided that all Shareholders entitled to vote on the matter consent to the action in writing and the written consents describe the action taken, are signed by all such Shareholders, bear the date of the signatures of such Shareholders, and are delivered to the Corporation for inclusion with the records of the meetings of Shareholders within 60 days of the earliest dated consent required to be delivered under this Section 2.10. Such consents shall be treated for all purposes as a vote at a meeting.
Section 2.11 Form of Shareholder Action .
(a) Any vote, consent, waiver, proxy appointment or other action by a shareholder or by the proxy or other agent of any shareholder shall be considered given in writing, dated and signed, if, in lieu of any other means permitted by law, it consists of an electronic transmission that is permitted under applicable law, including, without limitation, an electronic transmission that sets forth or is delivered with information from which the Corporation can determine (i) that the electronic transmission was transmitted by the shareholder, proxy or agent or by a person authorized to act for the shareholder, proxy or agent and (ii) the date on which such shareholder, proxy, agent or authorized person transmitted the electronic transmission. The date on which the electronic transmission is transmitted shall be considered to be the date on which it was signed. The electronic transmission shall be considered received by the Corporation if it has been sent to any address specified by the Corporation for the purpose or, if no address has been specified, to the principal office of the Corporation, addressed to the Secretary or other officer or agent having custody of the records of proceedings of shareholders, or is otherwise received by the Corporation in a manner permitted by applicable law.
(b) Any copy, facsimile or other reliable reproduction of a vote, consent, waiver, proxy appointment or other action by a shareholder or by the proxy or other agent of any shareholder may be substituted or used in lieu of the original writing for any
purpose for which the original writing could be used, but the copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing.
Section 2.12 Shareholders List for Meeting .
(a) After fixing a record date for a meeting of shareholders, the Corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of the meeting. The list shall be arranged by voting group, and within each voting group by class or series of shares, and shall show the address of and number of shares held by each shareholder, but need not include an electronic mail address or other electronic contact information for any shareholder.
(b) The shareholders list shall be available for inspection by any shareholder, beginning two business days after notice is given of the meeting for which the list was prepared and continuing through the meeting: (1) at the Corporations principal office or at a place identified in the meeting notice in the city where the meeting will be held; or (2) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting.
(c) The Corporation shall make the shareholders list available at the meeting, and any shareholder or his or her agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment.
Section 2.13 Conduct of Business . The Chairman of the Board or his or her designee, or, if there is no Chairman of the Board or such designee, then the Chief Executive Officer or his or her designee, or, if the office of Chief Executive Officer shall be vacant, then a person appointed by a majority of the Board of Directors, shall preside at any meeting of shareholders as the chairman of the meeting. In addition to his or her powers pursuant to Section 2.05(b)(i), the person presiding at any meeting of shareholders shall determine the order of business and the procedures at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order.
Section 2.14 Voting Procedures and Inspectors of Elections . In advance of any meeting of shareholders, the Board of Directors may appoint one or more inspectors to act at an annual or special meeting of shareholders and make a written report thereon. Any inspector may, but need not, be an officer, employee or agent of the Corporation. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspector(s) may appoint or retain other persons or entities to assist the inspector(s) in the performance of their duties. The presiding officer may review all determinations made by the inspector(s), and in so doing the presiding officer shall be entitled to exercise his or her sole judgment and discretion and he or she shall not be bound by any determinations made by the
inspector(s). All determinations by the inspector(s) and, if applicable, presiding officer, shall be subject to further review by the Board of Directors and any court of competent jurisdiction.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01 Powers . The business of the Corporation shall be managed by a Board of Directors who shall have and may exercise (or grant authority to be exercised) all the powers of the Corporation except as otherwise reserved to the shareholders by law, by the Articles of Organization or by these By-Laws. Without limiting the generality of the foregoing, the Board of Directors shall have the power, unless otherwise provided by law, to purchase and to lease, pledge, mortgage and sell all property of the Corporation (including to issue or sell the authorized but unissued stock of the Corporation and to determine, subject to applicable requirements of law, the consideration for which stock is to be issued and the manner of allocating such consideration between capital and surplus) and to make such contracts and agreements as they deem advantageous, to fix the price to be paid for or in connection with any property or rights purchased, sold, or otherwise dealt with by the Corporation, to borrow money, issue bonds, notes and other obligations of the Corporation, and to secure payment thereof by mortgage or pledge of all or any part of the property of the Corporation. The Board of Directors may determine the compensation of Directors. The Board of Directors or such officer or committee as the Board of Directors may designate, may determine the compensation and duties, in addition to those prescribed by these By-Laws, of all officers, agents and employees of the Corporation.
Section 3.02 Enumeration, Election and Term of Office . The number of Directors of the Corporation shall be fixed solely and exclusively by resolution duly adopted from time to time by the Board of Directors. The Directors shall hold office in the manner provided in the Articles of Organization. Each Director shall have such qualifications as are required by applicable law.
Section 3.03 Vacancies . The Board of Directors may act notwithstanding a vacancy or vacancies in its membership. Subject to the rights of the holders of any series of preferred stock the outstanding and except as otherwise required by applicable law, any and all vacancies in the Board of Directors, however occurring including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a Director, shall be filled solely and exclusively by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum. A vacancy that will occur at a specific later date may be filled before the vacancy occurs but the new Director may not take office until the vacancy occurs.
Section 3.04 Regular Meetings . Regular meetings of the Board of Directors may be held at such times and places within or without the Commonwealth of Massachusetts as the Board of Directors may fix from time to time and, when so fixed, no notice thereof need by given, provided that any Director who is absent when such times and places are fixed shall be given notice of the fixing of such times and places. The first meeting of the Board of Directors following the annual meeting of the shareholders may be held without notice immediately after
and at the same place as the annual meeting of the shareholders or the special meeting held in lieu thereof. If in any year a meeting of the Board of Directors is not held at such time and place, any action to be taken may be taken at any later meeting of the Board of Directors with the same force and effect as if held or transacted at such meeting.
Section 3.05 Special Meetings . Special meetings of the Directors may be held at any time and at any place designated in the call of the meeting (which may be oral or in writing), when called by the President or the Treasurer or by one or more Directors, reasonable notice thereof being given to each Director by the Secretary or an Assistant Secretary, or by the officer or one of the Directors calling the meeting.
Section 3.06 Notice . Notice of the time, date and place of all special meetings of the Board of Directors shall be given to each Director by the Secretary or Assistant Secretary, or in case of the death, absence, incapacity or refusal of such persons, by the officer or one of the Directors calling the meeting. Notice shall be given to each Director in person or by telephone, voice mail, telegraph, teletype or other electronic means or by facsimile sent to his or her business or home address, at least 24 hours in advance of the meeting, or by written notice mailed to his or her business or home address at least 48 hours in advance of the meeting. Written notice, other than notice by electronic, telephone or similar means, is effective upon deposit in the United States mail, postage prepaid, and addressed to the Directors address shown in the Corporations records. Notice need not be given to any Director who waives notice. A Director may waive any notice before or after the date and time of the meeting. The waiver shall be in writing, signed by the Director entitled to the notice, or in the form of an electronic transmission by the Director to the Corporation, and filed with the minutes or corporate records. A Directors attendance at or participation in a meeting waives any required notice to him or her of the meeting unless the Director at the beginning of the meeting, or promptly upon his or her arrival, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.
Section 3.07 Quorum, Action at a Meeting . At any meeting of the Directors, a quorum for any election or for the consideration of any question shall consist of a majority of the Directors then in office, but a smaller number may constitute a quorum pursuant to Section 8.55 or Section 8.56 of the MBCA in making a determination that indemnification or advancement of expenses is permissible in a specific proceeding. Whether or not a quorum is present any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, and the meeting may be held as adjourned without further notice. When a quorum is present at any meeting, the votes of a majority of the Directors present shall be requisite and sufficient for appointment to any office and shall decide any question brought before such meeting, except in any case where a larger vote is required by law, by the Articles of Organization or by these By-Laws.
Section 3.08 Action Without a Meeting . Unless the Articles of Organization otherwise provide, any action required or permitted to be taken at any meeting of the Directors may be taken without a meeting if a written consent thereto is signed by all the Directors, or delivered to the Corporation by means of electronic transmission, and such written consent is filed with the records of the meetings of the Directors. Action taken under this Section 3.08 is effective when the last Director signs or delivers the consent, unless the consent specifies a different effective
date. Such consent shall be treated as a vote at a meeting for all purposes. Such consents may be executed in one or more counterparts and not every Director need sign the same counterpart.
Section 3.09 Manner of Participation . Members of the Board of Directors or any committee designated thereby may participate in a meeting of such Board or committee by, or conduct the meeting through the use of, any means of communication by which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting.
Section 3.10 Resignations and Removals . Any Director may resign at any time by delivering his or her resignation in writing to the President or the Secretary or to a meeting of the Directors. Such resignations shall take effect at such time as is specified therein, or if no such time is so specified, then upon delivery thereof to the President or the Secretary or to a meeting of the Directors.
No Director or officer who resigns or is removed shall have any right to any compensation as such Director or officer for any period following his or her resignation or removal, or any right to damages on account of such removal whether his or her compensation be by the month or by the year or otherwise; provided, however, that the foregoing provision shall not prevent such Director or officer from obtaining damages for breach of any contract of employment legally binding upon the Corporation.
Section 3.11 Presumption of Assent . A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any Corporation matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention has been entered in the minutes of the meeting or unless he or she has filed a written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or has forwarded such dissent by registered mail to the Secretary of the Corporation within five days after the date such dissenting Director receives a copy of the minutes of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action.
Section 3.12 Committees . The Board of Directors, by vote of a majority of all of the Directors then in office, shall elect an Audit Committee, a Compensation Committee, an Executive Committee, and a Governance Committee, and may elect such other committees as it deems appropriate. The Board of Directors may delegate to such committees some or all of its powers except those which by law or by these By-Laws may not be delegated. Any such committee shall consist of not less than three members of the Board of Directors. No member of the Audit Committee shall be an operating officer of the Corporation. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-Laws for the Board of Directors. All members of such committees shall hold such offices at the pleasure of the Board of Directors. The Board of Directors may abolish any committee (other than the Audit Committee, the Compensation Committee, the Executive Committee and the Governance Committee) at any time, subject to applicable law. Any committee to which the Board of Directors delegates any of its powers or duties shall keep records of its meetings and shall report
its action to the Board of Directors. The Board of Directors shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect.
Section 3.13 Powers of Executive Committee . In addition to the powers and duties provided by law, the Executive Committee, when the Board of Directors is not in session, may act as an executive committee and exercise general supervision and control in all matters pertaining to the interests of the Corporation not otherwise provided by law or in these By-Laws, subject at all times to the direction and control of the Board of Directors.
ARTICLE IV
OFFICERS
Section 4.01 Enumeration . The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Treasurer, and a Secretary, and shall include such other officers, including without limitation a Chairman of the Board, a Chief Executive Officer, and one or more Assistant Vice Presidents, Assistant Treasurers, or Assistant Secretaries, as the Board of Directors may determine.
Section 4.02 Election . The Chairman of the Board, the Chief Executive Officer, the President, the Treasurer, and the Secretary and all officers at the level of Executive Vice President or above shall be elected by the Board of Directors at their meeting next following the annual meeting of shareholders. All other officers may be elected by the Board of Directors or appointed by the Chief Executive Officer.
Section 4.03 Qualification . Each officer shall have such qualifications as are required by law. No officer shall serve as a corporator, trustee, director or officer of any other bank holding company or savings and loan holding company, as a trustee, director or officer of any bank, credit union or thrift institution which is not a subsidiary of the Corporation, or as a trustee, director or officer of any holding company for any bank, credit union or thrift institution which is not a subsidiary of the Corporation if such service would violate the Depository Institution Management Interlocks Act or applicable sections of the Massachusetts General Laws, or a successor statute, unless such officer has received a permit from the Massachusetts Commissioner of Banks and such service would not otherwise violate the Depository Institution Management Interlocks Act.
Section 4.04 Resignation and Removal . Any officer may resign by delivering his or her written resignation to the Corporation at its main office addressed to the Chief Executive Officer, President or Secretary. Such resignation shall be effective upon receipt thereof by the Chief Executive Officer, President or Secretary, unless it is specified to be effective at some other time or upon the happening of some other event. Any officer elected by the Board of Directors may, in addition to other provisions for removal contained in applicable laws, be removed at any time by the affirmative vote of a majority of the Board of Directors. Any officer appointed by the Chief Executive Officer, and any employee or agent of the Corporation, may be removed at any time with or without cause by the Chief Executive Officer or by the Board of Directors.
Section 4.05 Chairman of the Board . The Board of Directors may elect a Chairman of the Board annually or at such other frequency as the Directors may determine. The Chairman of the Board shall preside, when present, at all meetings of the Board of Directors.
Section 4.06 Chief Executive Officer . The Chief Executive Officer shall have, subject to the direction of the Board of Directors, general supervision and control of the Corporations business. Unless otherwise provided by the Board of Directors, the Chief Executive Officer shall preside, when present, at all meetings of shareholders and at all meetings of the Board of Directors if there is no Chairman of the Board or if the Chairman of the Board does not attend such meetings.
Section 4.07 President and Vice Presidents . The President shall have such powers and shall perform such duties as the Board of Directors may from time to time designate and shall serve as the Chief Executive Officer of the Corporation unless the Board of Directors otherwise provides.
Any Vice President shall have such powers and shall perform such duties as the Board of Directors or the Chief Executive Officer may from time to time designate.
Section 4.08 Treasurer and Assistant Treasurers . The Treasurer shall have, subject to the direction of the Board of Directors, general charge of the financial affairs of the Corporation and shall cause to be kept accurate books of account. He shall have custody of all funds, securities, and valuable documents of the Corporation, except as the Board of Directors may otherwise provide. The Treasurer shall also perform such other duties as the Board of Directors may from time to time designate. Any Assistant Treasurer shall have such powers and perform such duties as the Board of Directors, the Chief Executive Officer or the Treasurer may from time to time designate.
Section 4.09 Secretary and Assistant Secretaries . The Secretary shall keep a record of the meetings of the Board of Directors and the shareholders. In the absence of the Secretary from any such meeting, an Assistant Secretary if one be elected, otherwise a Temporary Secretary designated by the person presiding at the meeting, shall perform the duties of the Secretary.
Section 4.10 Other Powers and Duties . Subject to these By-Laws, each officer of the Corporation shall have in addition to the duties and powers specifically set forth in these By-Laws, such duties and powers as are customarily incident to his or her office, and such duties and powers as may be designated from time to time by the Board of Directors or the Chief Executive Officer.
Section 4.11 Absence, Disability and Vacancies . In the event of the absence or disability of any officer, the Board of Directors may designate another officer to act temporarily in such office, or the Executive Committee may make such designation until the Board of Directors shall take other action. In the case of a vacancy in any office, the vacancy may be filled by the Board of Directors to the extent provided by law, and the Executive Committee may designate a person to fill such office until the next meeting of the Board of Directors.
ARTICLE V
CAPITAL STOCK
Section 5.01 Authorized Capital Stock . The authorized amount of the capital stock and the par value, if any, of the shares shall be as fixed in the Articles of Organization. At all times when there are two or more classes of stock, the several classes of stock shall conform to the description and terms, and have the respective preferences, voting powers, restrictions and qualifications set forth in the Articles of Organization.
Section 5.02 Certificate of Stock . The Board of Directors may authorize the issue without certificates of some or all of the shares of any and all of the Corporations classes or series of stock. Except to the extent the Board of Directors has determined to issue shares without certificates, each shareholder shall be entitled to a certificate of the capital stock of the Corporation owned by him or her, in such form as shall, in conformity to law, be prescribed from time to time by the Board of Directors. Such certificate shall be signed by either the President or a Vice President, and by either the Treasurer or an Assistant Treasurer, and shall bear the corporate seal or its facsimile; but when any such certificate is signed by a transfer agent or by a registrar other than a Director, officer, or employee of the Corporation, the signature of the President or a Vice President and of the Treasurer or an Assistant Treasurer of the Corporation, or either or both such signatures may be facsimile. If any officer who has signed, or whose facsimile signature has been placed on, any such certificate shall have ceased to be such officer before such certificate is issued, the certificate may be issued by the Corporation with the same effect as if he or she were such officer at the time of issue.
Every certificate for shares of stock which are subject to any restriction on transfer pursuant to law, the Articles of Organization, these By-Laws or any agreement to which the Corporation is a party shall have the restriction noted conspicuously on the front or back of the certificate. Every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall set forth on its front or back either a summary of the variations in the rights, preferences and limitations applicable to each class and series, and the authority of the Board to determine variations for any future class or series, or a conspicuous statement that the Corporation will furnish a copy of such information to the holder of such certificate upon written request and without charge.
Section 5.03 Transfer of Shares of Stock . Subject to the restrictions, if any, stated or noted on the stock certificates, shares of stock may be transferred on the books of the Corporation only by the surrender to the Corporation, or its transfer agent, of the certificate therefor properly endorsed or accompanied by a written assignment or power of attorney properly executed, with all requisite stock transfer stamps affixed, and with such proof of the authenticity and effectiveness of the signature as the Corporation or its transfer agent shall reasonably require. Except as may otherwise be required by law, the Articles of Organization, or these By-Laws, the Corporation shall have the right to treat the person registered on the stock transfer books as the owner of any shares of the Corporations stock as the owner-in-fact thereof for all purposes, including the payment of dividends, liability for assessments, the right to vote with respect thereto and otherwise, and accordingly shall not be bound to recognize any attempted transfer, pledge or other disposition thereof, or any equitable or other claim with
respect thereto, whether or not it shall have actual or other notice thereof, until such shares shall have been transferred on the Corporations books in accordance with these By-Laws. It shall be the duty of each shareholder to notify the Corporation of his or her post office address.
Section 5.04 Transfer Agents and Registrars; Further Regulations . The Board of Directors may appoint one or more banks, trust companies or corporations doing a corporate trust business, in good standing under the laws of the United States or any state therein, to act as the Corporations transfer agent and/or registrar for shares of capital stock, and the Board may make such other and further regulations, not inconsistent with applicable law, as it may deem expedient concerning the issue, transfer and registration of capital stock and stock certificates of the Corporation.
Section 5.05 Loss of Certificates . In the case of the alleged loss, destruction, or wrongful taking of a certificate of stock, a duplicate certificate may be issued in place thereof upon receipt by the Corporation of such evidence of loss and such indemnity bond, with or without surety, as shall be satisfactory to the President and the Treasurer, or otherwise upon such terms, consistent with law, as the Board of Directors may prescribe.
Section 5.06 Record Date . The Directors may fix in advance a time, which shall not be more than 70 days before the date of any meeting of shareholders or the date for the payment of any dividend or the making of any distribution to shareholders, or the last day on which the consent or dissent of shareholders may be effectively expressed for any purpose, as the record date for determining the shareholders having the right to notice of and to vote at, such meeting and any adjournment thereof, or the right to receive such dividend or distribution, or the right to give such consent or dissent, and in such case, only shareholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Corporation after the record date. If a record date for a specific action is not fixed by the Board of Directors, and is not otherwise specified by applicable law, the record date shall be the close of business either on the day before the first notice is sent to shareholders, or if no notice is sent, on the day before the meeting. A determination of shareholders entitled to notice of or to vote at a meeting of shareholders is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 6.01 Fiscal Year . Except as otherwise determined by the Board of Directors, the fiscal year of the Corporation shall end on the last day of the month of December.
Section 6.02 Seal . The Board of Directors shall have power to adopt and alter the seal of the Corporation.
Section 6.03 Execution of Instruments . All deeds, leases, transfers, contracts, bonds, notes and other instruments and obligations to be entered into by the Corporation in the ordinary course of its business without Board of Directors action may be executed on behalf of the
Corporation by the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, Treasurer or, as the Board of Directors may authorize, any other officer, employee or agent of the Corporation.
Section 6.04 Voting of Securities . Unless otherwise provided by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or any other officer or agent designated by the Board of Directors may waive notice of and act on behalf of the Corporation, or appoint another person or persons to act as proxy or attorney in fact for the Corporation with or without discretionary power and/or power of substitution, at any meeting of stockholders or shareholders of any other organization, any of whose securities are held by the Corporation.
Section 6.05 Resident Agent . The Board of Directors may appoint a resident agent upon whom legal process may be served in any action or proceeding against the Corporation. Said resident agent shall be either an individual who is a resident of and has a business address in Massachusetts, a corporation organized under the laws of The Commonwealth of Massachusetts, or a corporation organized under the laws of any other state of the United States, which has qualified to do business in, and has an office in, Massachusetts.
Section 6.06 Corporation Records . The original, or attested copies, of the Articles of Organization, By-Laws and record of all meetings of the Directors shall be kept in Massachusetts at the main office of the Corporation, or at an office of its Secretary or resident agent.
ARTICLE VII
AMENDMENTS
Except as otherwise provided in the Articles of Organization, these By-Laws may be amended or repealed in whole or in part by the affirmative vote of the holders of at least two-thirds of the outstanding shares of each class of the capital stock at the time outstanding and entitled to vote at any annual meeting of shareholders or special meeting of shareholders; provided, however, that if the Board of Directors recommends, by the affirmative vote of at least two-thirds of the Directors then in office at a duly constituted meeting of the Board of Directors, that shareholders approve such amendment at such meeting of shareholders, such amendment shall only require the affirmative vote of a majority of the outstanding shares of each class of capital stock at the time outstanding and entitled to vote at such meeting; provided, further, that notice of the substance of the proposed amendment is stated in the notice of such meeting. If authorized by the Articles of Organization, the Directors may make, amend or repeal the By-Laws, in whole or in part, except with respect to any provision thereof which by law, the Articles of Organization or the By-Laws requires action by the shareholders. Not later than the time of giving notice of the meeting of shareholders next following the making, amending or repealing by the Directors of any By-Law, notice thereof stating the substance of such change shall be given to all shareholders entitled to vote on amending the By-Laws.
Any By-Law adopted or amended by the Directors may be amended or reinstated by the shareholders entitled to vote on amending the By-Laws following the procedures outlined above.
ARTICLE VIII
CONTROL SHARE ACQUISITION STATUTE
The provisions of Chapter 110D of the Massachusetts General Laws shall not be applicable to the Corporation.
Exhibit 4.1
SEE LEGENDS ON REVERSE SIDE OF CERTIFICATE
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Shares |
*0* |
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Incorporated Under
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*0* |
HarborOne NorthEast Bancorp, Inc.
Common Stock
Par Value $0.01
THIS CERTIFIES THAT **SPECIMEN** is the record holder of Zero (0) Shares of the Common Stock, Par Value $0.01, of HARBORONE NORTHEAST BANCORP, INC. transferable only on the books of the Corporation by the holder hereof, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed or assigned.
A statement of the rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of shares of stock of the Corporation and upon the holders thereof as established by the Certificate of Incorporation, and the number of shares constituting each series and the designations thereof, may be obtained by any stockholder upon request and without charge at the principal office of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its duly authorized officers this day of 20 .
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President |
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Secretary |
THE CAPITAL STOCK EVIDENCED HEREBY IS NOT AN ACCOUNT OF AN INSURABLE TYPE AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL OR STATE GOVERNMENTAL AGENCY.
The following abbreviations when used in the inscription of the face of this certificate shall be construed as though they were written out in full according to applicable laws or regulations.
TEN COM |
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as tenants in common |
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UNIF GIFT MIN ACT |
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Custodian |
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TEN ENT |
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as tenants by the entireties |
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Under Uniform Gifts to Minors Act |
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JT TEN |
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as joint tenants with right of survivorship and not as tenants in common |
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(State) |
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Additional abbreviates may also be used through not in the above list
For value Received, hereby sell, assign and transfer unto Shares of the Common Stock of the within named Corporation, represented by the within Certificate and do hereby irrevocably constitute and appoint Attorney to transfer the said shares of said Common Stock on the books of the said Corporation, pursuant to the provisions of the By-Laws thereof, with full powers of substitution in the premises.
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Dated: A.D. |
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In Presence of: |
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NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE SHAREHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICLAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
[Goodwin Procter LLP Letterhead]
March 11, 2019
HarborOne NorthEast Bancorp, Inc.
770 Oak Street
Brockton, Massachusetts 02301
Re: Securities Being Registered under Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to you in connection with your filing of a Registration Statement on Form S-1 (as amended or supplemented, the Registration Statement) pursuant to the Securities Act of 1933, as amended (the Securities Act). The Registration Statement relates to the offering by HarborOne NorthEast Bancorp, Inc., a Massachusetts corporation (the Company) of up to 31,050,000 shares of the Companys common stock, $0.01 par value per share (the Company Shares) as described in the Plan of Conversion of HarborOne Mutual Bancshares, dated March 5, 2019 (the Plan of Conversion), and the offering by the Company of up to 27,488,517 Company Shares that may be issued to the shareholders of HarborOne Bancorp, Inc. in connection with the merger contemplated by the Plan of Conversion (the Exchange Shares).
We have reviewed such documents and made such examination of law as we have deemed appropriate to give the opinions set forth below. We have relied, without independent verification, on certificates of public officials and, as to matters of fact material to the opinions set forth below, on certificates of officers of the Company.
The opinion set forth below is limited to the Massachusetts Business Corporation Act (which includes reported judicial decisions interpreting the Massachusetts Business Corporation Act).
Based on the foregoing, we are of the opinion that the Company Shares have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms of the Plan of Conversion, the Company Shares will be validly issued, fully paid and non-assessable, and that the Exchange Shares have been duly authorized and, upon issuance and delivery in exchange for the outstanding capital stock of HarborOne Bancorp, Inc. in accordance with the terms of the Plan of Conversion, will be validly issued, fully paid and non-assessable.
We hereby consent to the inclusion of this opinion as Exhibit 5.1 to the Registration Statement and to the references to our firm under the caption Legal and Tax Matters in the Registration Statement. In giving our consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations thereunder.
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Very truly yours, |
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/s/ Goodwin Procter LLP |
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GOODWIN PROCTER LLP |
[Goodwin Procter LLP Letterhead]
March 11, 2019
HarborOne Mutual Bancshares
770 Oak Street
Brockton, Massachusetts 02301
RE: Federal and Massachusetts Tax Consequences Relating to Conversion from Mutual Holding Company Structure to Stock Holding Company Structure
Ladies and Gentlemen:
You have requested our opinion on certain federal and Massachusetts tax consequences relating to the proposed reorganization and conversion by HarborOne Mutual Bancshares, a Massachusetts mutual holding company (the MHC), and its majority-owned subsidiary, HarborOne Bancorp, Inc., a Massachusetts corporation (Old HarborOne), from a mutual holding company with majority ownership in an intermediate stock holding company to a full stock holding company structure (the Conversion) pursuant to the Plan of Conversion, dated March 5, 2019, adopted by the board of trustees of the MHC, the board of directors of Old HarborOne, and the board of directors of HarborOne Bank, a Massachusetts-chartered cooperative bank and wholly-owned subsidiary of Old HarborOne (the Plan).(1)
For purposes of the opinions set forth below, we have reviewed and relied upon the Plan, the Subscription and Community Offering Prospectus of HarborOne NorthEast Bancorp, Inc. (the Prospectus), included in the Registration Statement on Form S-1 filed by HarborOne NorthEast Bancorp, Inc., a Massachusetts corporation (New HarborOne),(2) with the Securities and Exchange Commission on the date hereof (the Registration Statement), and such other documents, records and instruments as we have deemed necessary or appropriate as a basis for our opinions. In addition, in rendering our opinions we have relied upon certain statements, representations and warranties made by the parties to the Conversion (including, without limitation, those contained in certain certified representations and those contained in or made pursuant to the Plan), which we have neither investigated nor verified. We have assumed that such statements, representations and warranties are true, correct, complete and not breached and will continue to be so through the completion of the Conversion, that no actions that are inconsistent with such statements, representations and warranties will be taken, and that all representations, statements, and warranties made to the best knowledge of any person(s) or party(ies) or with similar qualification are and will be true, correct and complete as if made without such qualification.
(1) Capitalized terms used herein and not otherwise defined shall have the meanings given such terms in the Plan.
(2) HarborOne NorthEast Bancorp, Inc. will change its name to HarborOne Bancorp, Inc., following the Conversion.
HarborOne Mutual Bancshares
March 11, 2019
We also have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies, the authority and capacity of the individual or individuals who executed any such documents on behalf of any person, the conformity to the final documents of all documents submitted to us as drafts, and the accuracy and completeness of all records made available to us. In addition, we have assumed that the Conversion will be consummated in accordance with the Plan; that each of the merger of the MHC into Old HarborOne and the merger of Old HarborOne into New HarborOne will qualify as a merger under the applicable laws of Massachusetts; that each of the parties to the Conversion will comply with all reporting obligations with respect to the Conversion required under the Internal Revenue Code of 1986, as amended (the Code), the Treasury Regulations thereunder, and the Massachusetts General Laws; and that the Plan is valid and binding in accordance with its terms.
Any inaccuracy in, or breach of, any of the aforementioned statements, representations, warranties and assumptions or any change after the date hereof in applicable law could adversely affect our opinions. No ruling has been or will be sought from the Internal Revenue Service, the Massachusetts Department of Revenue, or any other taxing authority by any party to the Conversion as to the federal or Massachusetts income tax consequences of any aspect of the Conversion.
I. Background .
Following its conversion from a credit union in July 2013, HarborOne Bank became a Massachusetts-chartered mutual co-operative bank engaged in banking and banking-related activities. HarborOne Bank is regulated by the Massachusetts Commissioner of Banks, as its chartering agency, and by the Federal Deposit Insurance Corporation (FDIC), its primary federal regulator and deposit insurer. HarborOne Banks deposits are insured up to applicable limits by the FDIC and by the Share Insurance Fund established by the Massachusetts General Laws for amounts in excess of the FDIC insurance limits. It is headquartered in Brockton, Massachusetts. Pursuant to a reorganization consummated in 2016, the MHC was formed, along with Old HarborOne as an intermediate stock holding company, and HarborOne Bank converted to a stock form and became a wholly-owned subsidiary of Old HarborOne. The MHC currently owns approximately 53% of the common stock of Old HarborOne. As a mutual holding company, the MHC has no authorized capital stock. Instead, a membership interest in the MHC (MHC Equity Interest) arises from the ownership of a deposit account in HarborOne Bank and is inextricably tied to the bank deposit account from the time of deposit. The MHC Equity Interest entitles the depositor to vote for the board of trustees of the MHC and to receive assets and other consideration in the event of the liquidation, dissolution, or winding up of the MHC or HarborOne Bank. The rights inherent in each MHC Equity Interest are created by operation of Massachusetts law solely as a result of the depositors ownership of a bank deposit account in
HarborOne Mutual Bancshares
March 11, 2019
HarborOne Bank and cannot be transferred separately from that bank deposit account. Further, if a bank deposit account is surrendered by the depositor, the MHC Equity Interest ceases to exist, having no continuing value.
In steps occurring sequentially and contemporaneously following the receipt of all required approvals, the expiration of all required waiting periods, and the satisfaction or waiver of all of the other applicable conditions to the consummation of such steps, the following transactions will occur in the Conversion pursuant to the Plan:
(1) Subscription rights (Subscription Rights) to purchase shares of the common stock of New HarborOne (New HarborOne Common Stock) will be issued without payment therefor to Eligible Account Holders, Supplemental Eligible Amount Holders (if any), and Tax-Qualified Employee Plans (as such persons are defined in the Plan). In addition, Subscription Rights will be issued to Directors, Trustees, Officers, Corporators, and Employees of the MHC and HarborOne Bank, in a fourth priority category, who do not otherwise qualify as Eligible or Supplemental Eligible Account Holders.
(2) Old HarborOne will establish New HarborOne as a first-tier stock holding company subsidiary.
(3) The MHC will convert from mutual to stock form and merge with and into Old HarborOne, with Old HarborOne as the surviving entity, pursuant to Section 9 of Chapter 167H of the Massachusetts General Laws (the MHC Merger). As part of the MHC Merger, shares of Old HarborOne held by the MHC will be cancelled and all Eligible Account Holders will constructively receive liquidation rights in Old HarborOne (the Old HarborOne Equity Interests) in exchange for their MHC Equity Interests. Other MHC Equity Interests, including those arising from deposit accounts at HarborOne Bank that were opened after February 28, 2018, will be cancelled for no consideration.
(4) Immediately after the MHC Merger, Old HarborOne will merge with and into New HarborOne, with New HarborOne as the surviving entity (the Mid-Tier Merger), whereby HarborOne Bank will become a wholly-owned subsidiary of New HarborOne. As part of the Mid-Tier Merger, the Old HarborOne Equity Interests, i.e. , the liquidation rights held by persons in Old HarborOne pursuant to the MHC Merger, will automatically, without further action on the part of such persons, be exchanged for an interest in the New HarborOne Liquidation Account (the New HarborOne Equity Interests). Shareholders of Old HarborOne will receive New HarborOne Common Stock in exchange for their Old HarborOne shares.
(5) Immediately after the Mid-Tier Merger, New HarborOne will sell shares of New HarborOne Common Stock in a subscription offering (Subscription Offering) in order of priority to Eligible Account Holders, Supplemental Eligible Account Holders, Tax-Qualified
HarborOne Mutual Bancshares
March 11, 2019
Employee Plans, and Directors, Trustees, Officers, Corporators, and Employees of the MHC and HarborOne Bank. Any shares of New HarborOne Common Stock remaining unsold after the Subscription Offering may be sold to the public through a Direct Community Offering (as defined in the Plan) and/or a Syndicated Community Offering (as defined in the Plan). Alternatively, any shares not subscribed for in the Subscription Offering or in any Direct Community Offering may be offered for sale in a Firm Commitment Underwritten Offering, or in any other manner permitted by the Bank Regulators. Collectively, the Subscription Offering, the Direct Community Offering, if any, the Syndicated Community Offering, if any, and the Firm Commitment Underwritten Offering, if any, are referred to herein as the Offerings.
(6) New HarborOne will contribute at least 50% of the net proceeds received by New HarborOne in the Offerings to HarborOne Bank in constructive exchange for additional shares of HarborOne Bank common stock and in exchange for the Bank Liquidation Account.
All Eligible Account Holders who had liquidation rights pursuant to Chapter 167H, Section 2, of the Massachusetts General Laws with respect to the MHC prior to the Conversion shall continue to have such rights solely with respect to New HarborOne. As described in the Prospectus, New HarborOne intends sell up to 53% of its common stock in the Subscription Offering, representing the ownership interest in Old HarborOne currently held by the MHC, in order of priority to (1) depositors of HarborOne Bank with aggregate balances of at least $50 as of the close of business on February 28, 2018, (2) tax-qualified employee benefit plans of HarborOne Bank or any of its Affiliates, and (3) employees, officers, directors of, and trustees and corporators of the MHC or HarborOne Bank who are not already eligible under (1) above, pursuant to Subscription Rights that will be issued without payment therefor to such persons. Eligible depositors of HarborOne Bank include certain former depositors of Coastway Bank. These depositors are deemed to have opened their account at HarborOne Bank on the dates such accounts were opened at Coastway Bank. Any shares remaining after the Subscription Offering may be sold in a Community Offering, with preference given first to natural persons and trusts of natural persons residing in certain Massachusetts cities and towns.
II. Representations .
The following representations have been made by the MHC, Old HarborOne, New HarborOne, and/or HarborOne Bank (each, a Party and, collectively, the Parties) with respect to the Conversion:
(a) The facts relating to the Conversion described in the Plan and the Prospectus are true, correct, and complete in all material respects. The Plan represents the entire understanding of the MHC, Old HarborOne, New HarborOne, and HarborOne Bank with respect to the Conversion. The Conversion will be consummated in compliance with the terms and conditions of the Plan, and there is no plan or intention to waive or modify any such term or condition.
HarborOne Mutual Bancshares
March 11, 2019
(b) The fair market value of the New HarborOne Equity Interests received by each Eligible Account Holder pursuant to the Conversion will approximately equal the fair market value of the MHC Equity Interests surrendered in exchange therefor.
(c) The fair market value of the New HarborOne Common Stock received by each Old HarborOne shareholder (other than the MHC) pursuant to the Conversion will approximately equal the fair market value of the Old HarborOne common stock surrendered in exchange therefor.
(d) No Party is aware of any plan or intention by the any holder of New HarborOne Equity Interests to sell, exchange, or otherwise dispose of any of the New HarborOne Equity Interests received in the Conversion, other than solely as a consequence of withdrawals in the ordinary course of business from deposit accounts in HarborOne Bank.
(e) Prior to the Conversion, the MHC will not have reacquired any of its MHC Equity Interests, other than solely as a consequence of withdrawals in the ordinary course of business from deposit accounts in HarborOne Bank, and will not have made any distributions with respect thereto.
(f) New HarborOne has no plan or intention to reacquire any of its New HarborOne Equity Interests issued in the Conversion or make any distributions with respect thereto.
(g) New HarborOne has no plan or intention to liquidate either itself or HarborOne Bank, to merge HarborOne with and into another corporation or other entity, or to sell or otherwise dispose of any of its assets.
(h) The liabilities of the MHC assumed by Old HarborOne Bank in the MHC Merger and the liabilities to which the transferred assets are subject were incurred by the MHC in the ordinary course of its business.
(i) The liabilities of Old HarborOne assumed by New HarborOne in the Mid-Tier Merger and the liabilities to which the transferred are subject either were incurred by Old HarborOne in the ordinary course of its business or were acquired by Old HarborOne in the MHC Merger.
(j) Following the Conversion, New HarborOne will either continue the historic business of the MHC or use at least fifty percent (50%) of the MHCs historic business assets in a business. For purposes of this representation, assets sold or otherwise disposed of by the MHC prior to and in contemplation of the merger will be taken into account as part of the historic business assets of the MHC.
HarborOne Mutual Bancshares
March 11, 2019
(k) The Parties and the Eligible Account Holders will pay their respective expenses incurred in connection with the Conversion, other than expenses of a Party solely and directly related to the merger in accordance with the guidelines established in Revenue Ruling 73-54, 1973-1 C.B. 187.
(l) There is no intercorporate indebtedness existing between any Party that was issued, acquired, or will be settled at a discount.
(m) None of the MHC, Old HarborOne, or New HarborOne is a regulated investment company, a real estate investment trust, or a corporation fifty percent (50%) or more of the value of whose total assets are stock and securities and eighty percent (80%) or more of the value of whose total assets are held for investment. In making the percentage determinations under the preceding sentence, stock and securities in any subsidiary corporation are disregarded and the parent corporation is deemed to own its ratable share of the subsidiarys assets, and a corporation is considered a subsidiary if the parent owns fifty percent (50%) or more of the combined voting power of all classes of stock entitled to vote or fifty percent (50%) or more of the total value of all shares of all classes of stock outstanding.
(n) Neither the MHC nor Old HarborOne is under the jurisdiction of a court in a case under Title 11 of the United States Code, or under the jurisdiction of a federal or state court in a receivership, conservatorship, foreclosure, or similar proceeding.
(o) The fair market value of the assets of the MHC transferred to Old HarborOne in the MHC Merger will equal or exceed the sum of the liabilities assumed by Old HarborOne, plus the amount of liabilities, if any, to which the transferred assets are subject.
(p) The fair market value of the assets of Old HarborOne transferred to New HarborOne in the Mid-Tier Merger will equal or exceed the sum of the liabilities assumed by New HarborOne, plus the amount of liabilities, if any, to which the transferred assets are subject.
(q) No stock or other property of HarborOne Bank will be issued in the Conversion. As part of the Conversion, HarborOne Bank will establish the Bank Liquidation Account. Amounts are payable from the Bank Liquidation Account to Eligible Account Holders only in the unlikely event of a complete liquidation of HarborOne Bank, or HarborOne Bank and New HarborOne, and further only if New HarborOne is unable to satisfy its obligations under the New HarborOne Liquidation Account pursuant to the New HarborOne Equity Interests. The Parties intend and expect that New HarborOne at all times will be able to satisfy any potential obligations under the New HarborOne Equity Interests, and that in any event the Bank Liquidation Account will provide no current or potential value, bargained for or otherwise, to the Eligible Account Holders.
HarborOne Mutual Bancshares
March 11, 2019
(r) The MHC and Old HarborOne will report the MHC Merger on their U.S. federal income and Massachusetts corporate excise tax returns in a manner consistent with the MHC Merger constituting a reorganization within the meaning of Section 368(a)(1)(A) of the Code and will comply with all reporting obligations of such a reorganization set forth in the Code and the Treasury Regulations thereunder and the Massachusetts General Laws and applicable regulations thereunder.
(s) Old HarborOne and New HarborOne will report the Mid-Tier Merger on their U.S. federal income and Massachusetts corporate excise tax returns in a manner consistent with the Mid-Tier Merger constituting a reorganization within the meaning of Section 368(a)(1)(F) of the Code and will comply with all reporting obligations of such a reorganization set forth in the Code and the Treasury Regulations thereunder and the Massachusetts General Laws and applicable regulations thereunder.
(t) The MHC Merger, the Mid-Tier Merger, and other aspects of the Conversion serve genuine and legitimate corporate business purposes that collectively are the principal motivation for the MHC Merger, the Mid-Tier Merger, and the Conversion.
III. Opinion .
Based upon and subject to the foregoing, as well as the limitations set forth below, it is our opinion with respect to the Conversion that, under present law:
(i) The merger of the MHC with and into Old HarborOne, and the constructive issuance of the Old HarborOne Equity Interests to the depositors of HarborOne Bank as consideration for the surrender of their MHC Equity Interests, will constitute a reorganization under Section 368(a)(1)(A) of Code. The MHC and Old HarborOne each will be a party to a reorganization within the meaning of Section 368(b) of the Code.
(ii) The constructive exchange of Eligible Account Holders liquidation interests in the MHC for liquidation interests in Old HarborOne in connection with the MHC Merger will satisfy the continuity of interest requirement of Treasury Regulations Section 1.368-1(b).
(iii) None of the MHC, Old HarborOne, or the Eligible Account Holders will recognize gain or loss for federal income or Massachusetts corporate excise or personal income tax purposes on the transfer of the assets of the MHC to Old HarborOne and the assumption by Old HarborOne of the liabilities of the MHC and the related constructive exchange by the Eligible Account Holders of their MHC Equity Interests for Old HarborOne Equity Interests, in connection with the MHC Merger.
HarborOne Mutual Bancshares
March 11, 2019
(iv) For federal income and Massachusetts corporate excise tax purposes, the tax basis of the MHCs assets acquired by Old HarborOne in the MHC Merger will be the same to Old HarborOne as the tax basis of such assets to the MHC immediately prior to the MHC Merger, and the holding period of the assets of the MHC in the hands of Old HarborOne will include the period during which those assets were held by the MHC.
(v) The merger of Old HarborOne with and into New HarborOne, the issuance of the New HarborOne Equity Interests to the Eligible Account Holders as consideration for the surrender of their Old HarborOne Equity Interests that were constructively issues to them in the MHC Merger, and the issuance of New HarborOne Common Stock to the shareholders of Old HarborOne in exchange for their Old HarborOne shares, will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of Code and, therefore, will qualify as a reorganization under Section 368(a)(1)(F) of the Code. Old HarborOne and New HarborOne each will be a party to a reorganization within the meaning of Section 368(b) of the Code.
(vi) For federal income and Massachusetts corporate excise tax purposes, neither Old HarborOne nor New HarborOne will recognize gain or loss as a result of the Mid-Tier Merger.
(vii) For federal income and Massachusetts corporate excise tax purposes, the tax basis of Old HarborOnes assets acquired by New HarborOne in the Mid-Tier Merger will be the same to New HarborOne as the tax basis of such assets to Old HarborOne immediately prior to the Mid-Tier Merger, and the holding period of the assets of Old HarborOne in the hands of New HarborOne will include the period during which those assets were held by Old HarborOne.
(viii) No gain or loss will be recognized for federal income or Massachusetts corporate excise or personal income tax purposes by the shareholders of Old HarborOne on the receipt of the New HarborOne Common Stock in exchange for their Old HarborOne common stock in connection with the Mid-Tier Merger.
(ix) No gain or loss will be recognized for federal income or Massachusetts corporate excise or personal income tax purposes by the Eligible Account Holders on the constructive exchange of their Old HarborOne Equity Interests for New HarborOne Equity Interests in connection with the Mid-Tier Merger.
(x) For federal income and Massachusetts corporate excise and personal income tax purposes, each Old HarborOne shareholders aggregate basis in New HarborOne Common Stock (including fractioned share interests) received in the exchange in connection with the Mid-Tier Merger will be the same as the aggregate basis of the Old HarborOne common stock surrendered in the exchange.
HarborOne Mutual Bancshares
March 11, 2019
(xi) For federal income and Massachusetts corporate excuse and personal income tax purposes, each Old HarborOne shareholders holding period in his or her New HarborOne Common Stock received in the exchange in connection with the Mid-Tier Merger will include the period during which the Old HarborOne common stock was held, provided that the Old HarborOne common stock surrendered was a capital asset in the hands of the shareholder on the date of the exchange.
(xii) For federal income and Massachusetts corporate excise and personal income tax purposes, cash received by any shareholder of Old HarborOne in lieu of a fractional share interest in New HarborOne Common Stock will be treated as having been received as a distribution in full payment in exchange for a fractional share interest of New HarborOne Common Stock, which such shareholder would otherwise be entitled to receive. Accordingly, a shareholder will recognize gain or loss equal to the difference between the cash received and the basis of the fractional share. If the stock is held as a capital asset, the gain or loss will be capital gain or loss.
(xiii) New HarborOne will succeed to and take into account the tax attributes of the MHC and Old HarborOne described in Section 381(c) of the Code, subject to the provisions and limitations specified in Sections 381 through 384 of the Code and the regulations thereunder.
(xiv) New HarborOne will recognize no income, gain or loss for federal income or Massachusetts corporate excise tax purposes upon the receipt of cash in the Offerings in exchange for New HarborOne Common Stock.
(xv) New HarborOne will recognize no income, gain or loss for federal income or Massachusetts corporate excise tax purposes upon the transfer of a portion of the net proceeds received by New HarborOne in the Offerings to HarborOne Bank.
(xvi) HarborOne Bank will recognize no income, gain or loss for federal income or Massachusetts corporate excise tax purposes upon the receipt of the contributed Offerings proceeds from New HarborOne.
(xvii) No income, gain or loss will be recognized by New HarborOne for federal income or Massachusetts corporate excise tax purposes as a result of the distribution of the Subscription Rights to eligible depositors of HarborOne Bank and other persons.
(xviii) No income, gain or loss will be recognized for federal income or Massachusetts corporate excise or personal income tax purposes by the eligible HarborOne Bank depositors and other persons described in the Plan who will receive Subscription Rights as a result of the distribution to the eligible HarborOne Bank depositors and such other persons of the Subscription Rights, provided the Subscription Rights have no value at the time of receipt. Such
HarborOne Mutual Bancshares
March 11, 2019
HarborOne Bank depositors and other recipients of Subscription Rights will not recognize income, gain or loss as a result of the exercise of such Subscription Rights to purchase shares of New HarborOne stock, provided that the amount to be paid for such stock is equal to the fair market value of such stock. The basis of the stock to the New HarborOnes stockholders will be the purchase price thereof plus the basis, if any, of the Subscription Rights (which, as described below, we have assumed is zero).
Under past rulings of the Internal Revenue Service (the IRS), gain may be recognized by a recipient of Subscription Rights to the extent of the fair market value of the Subscription Rights received. Whether the Subscription Rights have a market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. The IRS will not issue rulings on whether subscription rights have a market value. However, we are unaware of any instance in which the IRS has taken the position that nontransferable subscription rights issued by a converting financial institution have a market value. We note that you have received a letter of RP Financial, LC., which states its belief, without undertaking any independent investigation of state or federal law or the position of the IRS, that as a factual matter the Subscription Rights will have no ascertainable market value. The letter of RP Financial, LC., has no binding effect on the IRS. We express no opinion on the fair market value of the Subscription Rights and, insofar as our opinion in paragraph (xviii) relates to the federal income tax consequences of the distribution of Subscription Rights, we are relying upon and assuming the accuracy of the conclusion expressed in the letter of RP Financial, LC., regarding the valuation of the Subscription Rights.
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We express no opinion herein other than the opinions expressly set forth above. In particular, no opinion is expressed as to the tax consequences of any of the transactions under any foreign, state (other than Massachusetts), or local tax law, or as to the qualification of New HarborOne as a security corporation for Massachusetts tax purposes. You should recognize that our opinions are not binding on the IRS or on the Massachusetts Department of Revenue (the DOR) and that a court or the IRS or the DOR may disagree with the opinions contained herein. Although we believe that our opinions will be sustained if challenged, there can be no assurance that this will be the case. The discussion and conclusions set forth above are based upon current provisions of the Code, the Income Tax Regulations and Procedure and Administration Regulations promulgated thereunder, the Massachusetts General Laws, the regulations promulgated thereunder, and existing administrative and judicial interpretations thereof (collectively, Applicable Law), all of which are subject to change, potentially with retroactive effect. Changes in Applicable Law could adversely affect our opinions. We do not undertake to advise you as to any changes after the date hereof in Applicable Law that may affect our opinions.
HarborOne Mutual Bancshares
March 11, 2019
This opinion letter is being provided to you in connection with the filing of the Registration Statement. This opinion letter may be used by the FDIC, Massachusetts Division of Banks and the Board of Governors of the Federal Reserve System as part of their review and approval of the Reorganization, including the FDICs notice pursuant to 12 C.F.R. § 303.161. We hereby consent to the inclusion of this opinion as Exhibit 8.1 to the Registration Statement and to the references to our firm under the caption Legal and Tax Matters in the Registration Statement. In giving our consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations thereunder.
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Very truly yours, |
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/s/ Goodwin Procter LLP |
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Goodwin Procter LLP |
Exhibit 21.1
Subsidiaries of Registrant
(a) Upon completion of the conversion described in the Plan of Conversion filed with this Registration Statement as Exhibit 2.1, the subsidiaries of the registrant will be as follows:
Subsidiary Name |
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State of Incorporation or Organization |
HarborOne Bank |
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MA |
Legion Parkway Company LLC |
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MA |
(b) Upon completion of the conversion described in the Plan of Conversion filed with this Registration Statement as Exhibit 2.1, the subsidiaries of HarborOne Bank will be as follows:
Subsidiary Name |
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State of Incorporation or Organization |
HarborOne Mortgage, LLC |
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MA |
HarborOne Security Corporation, LLC |
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MA |
Oak Street Security Corporation, LLC |
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MA |
Rhode Island Passive Investment Corp. |
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RI |
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RP
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FINANCIAL, LC.
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March 11, 2019
Boards of Trustees
HarborOne Mutual Bancshares
Board of Directors
HarborOne Bancorp, Inc.
HarborOne Bank
770 Oak Street
Brockton, Massachusetts 02301
Members of the Boards of Trustees and Directors:
We hereby consent to the use of our firms name in the Registration Statement on Form S-1, and any amendments thereto, to be filed with the Securities and Exchange Commission. We also hereby consent to the inclusion of, summary of and references to our Valuation Appraisal Report and any Valuation Appraisal Report Updates in such filings including the prospectus of HarborOne Bancorp, Inc. We also consent to the reference to our firm under the heading Experts in the prospectus.
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Sincerely, |
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RP ® FINANCIAL, LC. |
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Washington Headquarters |
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4250 North Fairfax Drive |
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Telephone: (703) 528-1700 |
Suite 600 |
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Fax No.: (703) 528-1788 |
Arlington, VA 22203 |
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Toll-Free No.: (866) 723-0594 |
www.rpfinancial.com |
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E-Mail: mail@rpfinancial.com |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Prospectus and Registration Statement on Form S-1 of our report dated March 11, 2019 on the consolidated financial statements of HarborOne Bancorp, Inc. as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, appearing in the Prospectus, which is a part of this Registration Statement on Form S-1. We further consent to the use of our name and the reference to us appearing under the heading Experts in this Prospectus and Registration Statement.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 11, 2019
November 26, 2018
Ms. Linda H. Simmons
Senior Vice President and Chief Financial Officer
HarborOne Bancorp, Inc. / HarborOne Bank
770 Oak Street
Brockton, MA 02301
Dear Ms. Simmons:
This letter sets forth the agreement between HarborOne Bank, Brockton, Massachusetts (the Bank), a state-chartered co-operative bank wholly-owned by HarborOne Bancorp, Inc. (the Company), which in turn is a financial services holding company majority owned by HarborOne Mutual Bancshares (the MHC), collectively HarborOne, and RP ® Financial, LC. (RP Financial), whereby RP Financial will provide the independent conversion appraisal services in conjunction with HarborOnes second step conversion offering.
The scope, timing and fee structure for these appraisal services are described below. These appraisal services will be directed by the undersigned, with the assistance of a Director of RP Financial and appropriate research staff.
Description of Appraisal Services
Pursuant to this appraisal engagement, RP Financial will conduct financial due diligence of HarborOne, including senior management interviews and reviews of historical and pro forma financial information to be included in the prospectus and other documents and records, to gain insight into the operations, financial condition, profitability, market area, risks and various internal and external factors, for the purpose of estimating the pro forma market value of the Company in accordance with the applicable regulatory appraisal guidelines. RP Financial will prepare a detailed written valuation report of the Company consistent with applicable regulatory appraisal guidelines and standard pro forma valuation practices. The appraisal report will include an analysis of the Companys financial condition and operating results, as well as an assessment of the interest rate, credit, and liquidity risks. The appraisal report will incorporate an evaluation of the Companys business strategies, recent transactions, market area, future prospects, and intended use of proceeds. RP Financial will select a peer group of relatively comparable public banking companies for the purpose of determining appropriate valuation adjustments for the Company relative to the peer groups pricing ratios based on key fundamental differences.
We will review pertinent sections of the Companys prospectus and conduct discussions with representatives of the Company and its other conversion advisors to obtain necessary data and information for the appraisal report, including key deal elements such as dividend policy, use of proceeds, reinvestment rate, tax rate, offering expenses, and characteristics of stock plans.
Washington Headquarters |
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4250 N. Fairfax Drive, Suite 600 |
Direct: (703) 647-6543 |
Arlington, VA 22203 |
Main: (703) 528-1700 |
www.rpfinanical.com | rriggins@rpfinancial.com |
Fax: (703) 528-1788 |
Ms. Linda H. Simmons
November 26, 2018
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The original appraisal report will establish a midpoint pro forma market value in accordance with applicable regulatory requirements. The appraisal report may be periodically updated throughout the conversion process, and there will be at least one updated appraisal that would be prepared at the time of the closing of the stock offering to determine the number of shares to be issued in accordance with the conversion regulations. In the event of a syndicated community offering, it will be necessary to file an update in conjunction with the close of the subscription offering and prior to the pricing phase in the syndicated community offering.
RP Financial agrees to deliver the original appraisal report and subsequent updates, in writing, to the Company at the above address in conjunction with the filing of the regulatory conversion applications and amendments thereto. Subsequent updates, upon authorization by the Company, will be filed promptly as certain events occur which would warrant the preparation and filing of such appraisal updates pursuant to regulatory guidelines. Further, RP Financial agrees to perform such other services as are necessary or required in connection with the regulatory review of the appraisal and respond to the regulatory comments, both Federal and state regulators, regarding the original appraisal and subsequent updates.
In the event of a syndicated community offering phase, RP Financial will participate in the various all hands calls regarding the offering results, pricing discussions and timing.
RP Financial will formally present the appraisal report, including the appraisal methodology, peer group selection and assumptions, to the Board of Directors for review and consideration. If appropriate, RP Financial will present subsequent updates to the Board. It is understood that this appraisal may be presented either in person or telephonically.
Fee Structure and Payment Schedule
The Company agrees to pay RP Financial fees for preparation and delivery of the original appraisal report and subsequent appraisal updates as shown in the detail below, plus reimbursable expenses. Payment of these fees shall be made according to the following schedule:
· $15,000 upon execution of this letter of agreement engaging RP Financials appraisal services;
· $125,000 upon delivery of the completed original appraisal report; and
· $15,000 upon delivery of each subsequent appraisal update report required in conjunction with the regulatory application and stock offering. Under the conversion regulations a closing appraisal update is required in conjunction with the completion of the offering. In addition, there may appraisal updates required prior to commencement of the offering if interim changes in market conditions or financial results dictate. Also, if there is a syndicated offering phase, it will be necessary to prepare an update immediately upon completion of the subscription/ community offering and prior to the commencement of the syndicated phase of the offering.
Ms. Linda H. Simmons
November 26, 2018
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The Company will reimburse RP Financial for reasonable out-of-pocket expenses incurred in preparation of the original appraisal and subsequent updates. Such out-of-pocket expenses will likely include travel, printing, communications, shipping, computer and data services, and will not exceed $10,000 in the aggregate, without the Companys authorization to exceed this level.
In the event the Company shall, for any reason, discontinue the proposed transaction prior to delivery of the completed original appraisal report or subsequent updates and payment of the corresponding fees, the Company agrees to compensate RP Financial according to RP Financials standard billing rates for consulting services based on accumulated and verifiable time expenses, not to exceed the respective fee caps noted above, after applying full credit to the initial retainer fee towards such payment, together with reasonable out-of-pocket expenses, subject to the cap on such expenses as set forth above. RP Financials standard billing rates range from $75 per hour for research associates to $450 per hour for managing directors.
If during the course of the proposed transaction, unforeseen events occur so as to materially change the nature or the work content of the services described in this contract, the terms of said contract shall be subject to renegotiation by the Company and RP Financial. Such unforeseen events shall include, but not be limited to, material changes to the structure of the transaction such as inclusion of a simultaneous business combination transaction, material changes in the conversion regulations, appraisal guidelines or processing procedures as they relate to conversion appraisals, material changes in management or procedures, operating policies or philosophies, and excessive delays or suspension of processing of conversion applications by the regulators such that completion of the conversion transaction requires the preparation by RP Financial of a new appraisal.
Covenants, Representations and Warranties
The Company and RP Financial agree to the following:
1. The Company agrees to make available or to supply to RP Financial such information with respect to its business and financial condition as RP Financial may reasonably request in order to provide the aforesaid valuation. Such information heretofore or hereafter supplied or made available to RP Financial shall include: annual financial statements, periodic regulatory filings and material agreements, debt instruments, off balance sheet assets or liabilities, commitments and contingencies, unrealized gains or losses and corporate books and records. All information provided by the Company to RP Financial shall remain strictly confidential (unless such information is otherwise made available to the public), and if the conversion is not consummated or the services of RP Financial are terminated hereunder, RP Financial shall promptly return to the Company the original and any copies of such information.
2. The Company represents and warrants to RP Financial that any information provided to RP Financial does not and will not, to the best of the Companys knowledge, at the times it is provided to RP Financial, contain any untrue statement of a material fact or in response to informational requests by RP Financial fail to state a material fact necessary to make the statements therein not false or misleading in light of the circumstances under which they were made.
Ms. Linda H. Simmons
November 26, 2018
Page
4
3. (a) The Company agrees that it will indemnify and hold harmless RP Financial, any affiliates of RP Financial, the respective members, officers, agents and employees of RP Financial or their successors and assigns who act for or on behalf of RP Financial in connection with the services called for under this agreement (hereinafter referred to as RP Financial), from and against any and all losses, claims, damages and liabilities (including, but not limited to, reasonable attorneys fees, and all losses and expenses in connection with claims under the federal securities laws) attributable to (i) any untrue statement or alleged untrue statement of a material fact contained in the financial statements or other information furnished or otherwise provided by the Company to RP Financial, either orally or in writing; (ii) the omission or alleged omission of a material fact from the financial statements or other information furnished or otherwise made available by the Company to RP Financial; or (iii) any action or omission to act by the Company, or the Companys respective officers, directors, employees or agents, which action or omission is undertaken in bad faith or is negligent. The Company will be under no obligation to indemnify RP Financial hereunder if a court determines that RP Financial was negligent or acted in bad faith with respect to any actions or omissions of RP Financial related to a matter for which indemnification is sought hereunder. Reasonable time devoted by RP Financial to situations for which RP Financial is deemed entitled to indemnification hereunder, shall be an indemnifiable cost payable by the Company at the normal hourly professional rate chargeable by such employee.
(b) RP Financial shall give written notice to the Company of such claim or facts within thirty days of the assertion of any claim or discovery of material facts upon which RP Financial intends to base a claim for indemnification hereunder, including the name of counsel that RP Financial intends to engage in connection with any indemnification related matter. In the event the Company elects, within seven days of the receipt of the original notice thereof, to contest such claim by written notice to RP Financial, the Company shall not be obligated to make payments under Section 3(c), but RP Financial will be entitled to be paid any amounts payable by the Company hereunder within five days after the final non-appealable determination of such contest either by written acknowledgement of the Company or a decision of a court of competent jurisdiction or alternative adjudication forum, unless it is determined in accordance with Section 3(c) hereof that RP Financial is not entitled to indemnity hereunder. If the Company does not so elect to contest a claim for indemnification by RP Financial hereunder, RP Financial shall (subject to the Companys receipt of the written statement and undertaking under Section 3(c) hereof) be paid promptly and in any event within thirty days after receipt by the Company of detailed billing statements or invoices for which RP Financial is entitled to reimbursement under Section 3(c) hereof.
(c) Subject to the Companys right to contest under Section 3(b) hereof, the Company shall pay for or reimburse the reasonable expenses, including reasonable attorneys fees, incurred by RP Financial in advance of the final disposition of any proceeding within thirty days of the receipt of such request if RP Financial furnishes the Company: (1) a written statement of RP Financials good faith belief that it is entitled to indemnification hereunder; (2) a written undertaking to repay the advance if it ultimately is determined in a final, non-appealable adjudication of such proceeding that RP Financial is not entitled to such indemnification; and (3) a detailed invoice of the expenses for which reimbursement is sought.
(d) In the event the Company does not pay any indemnified loss or make advance reimbursements of expenses in accordance with the terms of this agreement, RP Financial shall have all remedies available at law or in equity to enforce such obligation.
Ms. Linda H. Simmons
November 26, 2018
Page
5
(e) Any indemnification payments to be made by the Company hereunder are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act (12 USC 1828(k)) and the Regulations promulgated thereunder by the Federal Deposit Insurance Corporation (12 CFR Part 359).
This agreement constitutes the entire understanding of the Company and RP Financial concerning the subject matter addressed herein, and such contract shall be governed and construed in accordance with the Commonwealth of Massachusetts. This agreement may not be modified, supplemented or amended except by written agreement executed by both parties.
The Company and RP Financial are not affiliated, and neither the Company nor RP Financial has an economic interest in, or is held in common with, the other and has not derived a significant portion of its gross revenues, receipts or net income for any period from transactions with the other. RP Financial represents and warrants that it is not aware of any fact or circumstance that would cause it not to be independent within the meaning of the conversion regulations of the federal banking agencies or otherwise prohibit or restrict in anyway RP Financial from serving in the role of independent appraiser for the Company.
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Please acknowledge your agreement to the foregoing by signing as indicated below and returning to RP Financial a signed copy of this letter, together with the initial retainer fee of $15,000.
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Sincerely, |
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/s/ Ronald S. Riggins |
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Ronald S. Riggins |
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President and Managing Director |
Agreed to and Accepted by: |
Ms. Linda H. Simmons |
/s/ Linda H. Simmons |
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Senior Vice President and Chief Financial Officer |
For: HarborOne Bank, subsidiary of HarborOne Bancorp, Inc., Brockton, Massachusetts
Date Executed: |
12/14/2018 |
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RP
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FINANCIAL, LC.
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February 8, 2019
Board of Trustees
HarborOne Mutual Bancshares
Board of Directors
HarborOne Bancorp, Inc.
HarborOne Bank
770 Oak Street
Brockton, Massachusetts 02301
Members of the Boards of Trustees and Directors:
At your request, we have completed and hereby provide an independent appraisal (Appraisal) of the estimated pro forma market value of the common stock which is to be issued in connection with the mutual-to-stock conversion transaction described below.
This Appraisal is furnished pursuant to the requirements stipulated in the Code of Federal Regulations and has been prepared in accordance with the Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization of the Office of Thrift Supervision (OTS) and accepted by the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Massachusetts Commissioner of Banks (the Commissioner), and applicable regulatory interpretations thereof.
Description of Plan of Conversion
On March 5, 2019, the Board of Trustees of HarborOne Mutual Bancshares (the MHC) and the Board of Directors of HarborOne Bancorp, Inc. (HONE) and HarborOne Bank adopted a plan of conversion whereby the MHC will convert to stock form. As a result of the conversion, HONE, which currently owns all of the issued and outstanding common stock of HarborOne Bank, Brockton, Massachusetts (the Bank), will be succeed by a Massachusetts corporation with the name of HarborOne Bancorp, Inc. (HarborOne Bancorp or the Company). Following the conversion, the MHC will no longer exist. For purposes of this document, the existing consolidated entity will hereinafter also be referred to as HarborOne Bancorp or the Company, unless otherwise identified as HONE. As of December 31, 2018, the MHC had a majority ownership interest in, and its principal asset consisted of, approximately 53.07% of the common stock (the MHC Shares) of HONE. The remaining 46.93% of HONEs common stock is owned by public stockholders.
It is our understanding that HarborOne Bancorp will offer its stock, representing the majority ownership interest held by the MHC, in a subscription offering to Eligible Account Holders, Tax-Qualified Plans including the Banks employee stock ownership plan (the ESOP) and Employees, Officers, Directors, Trustees and Corporators, as such terms are defined for
Washington Headquarters |
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4250 North Fairfax Drive |
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Telephone: (703) 528-1700 |
Suite 600 |
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Fax No.: (703) 528-1788 |
Arlington, VA 22203 |
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Toll-Free No.: (866) 723-0594 |
www.rpfinancial.com |
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E-Mail: mail@rpfinancial.com |
purposes of applicable federal regulatory requirements governing mutual-to-stock conversions. To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, the shares may be offered for sale to the public at large in a community offering and a syndicated offering or firm commitment underwritten offering. Upon completing the mutual-to-stock conversion and stock offering (the second-step conversion), the Company will be 100% owned by public shareholders, the publicly-held shares of HONE will be exchanged for shares in the Company at a ratio that retains their ownership interest at the time the conversion is completed and the MHC assets will be consolidated with the Company.
RP ® Financial, LC.
RP ® Financial, LC. (RP Financial) is a financial consulting firm serving the financial services industry nationwide that, among other things, specializes in financial valuations and analyses of business enterprises and securities, including the pro forma valuation for savings institutions converting from mutual-to-stock form. The background and experience of RP Financial is detailed in Exhibit V-1. We believe that, except for the fee we will receive for the Appraisal, we are independent of the Company, the Bank, the MHC and the other parties engaged by the Bank or the Company to assist in the stock conversion process.
Valuation Methodology
In preparing our Appraisal, we have reviewed the regulatory applications of the Company, the Bank and the MHC, including the prospectus as filed with the FRB, the FDIC, the Commissioner and the Securities and Exchange Commission (SEC). We have conducted a financial analysis of the Company, the Bank and the MHC that has included a review of audited financial information for the years ended December 31, 2014 through December 31, 2018, a review of various unaudited information and internal financial reports through December 31, 2018, and due diligence related discussions with the Companys management; Wolf & Company, P.C., the Companys independent auditor; Goodwin Proctor LLP, the Companys conversion counsel and Sandler ONeill & Partners, L.P., the Companys marketing advisor in connection with the stock offering. All assumptions and conclusions set forth in the Appraisal were reached independently from such discussions. In addition, where appropriate, we have considered information based on other available published sources that we believe are reliable. While we believe the information and data gathered from all these sources are reliable, we cannot guarantee the accuracy and completeness of such information.
We have investigated the competitive environment within which HarborOne Bancorp operates and have assessed HarborOne Bancorps relative strengths and weaknesses. We have kept abreast of the changing regulatory and legislative environment for financial institutions and analyzed the potential impact on HarborOne Bancorp and the industry as a whole. We have analyzed the potential effects of the stock conversion on HarborOne Bancorps operating characteristics and financial performance as they relate to the pro forma market value of HarborOne Bancorp. We have analyzed the assets held by the MHC, which will be consolidated with HarborOne Bancorps assets and equity pursuant to the completion of the second-step conversion. We have reviewed the economic and demographic characteristics of the Companys primary market area. We have compared HarborOne Bancorps financial performance and condition with selected publicly-traded thrifts in accordance with the Valuation
Guidelines, as well as all publicly-traded thrifts and thrift holding companies. We have reviewed the current conditions in the securities markets in general and the market for thrift stocks in particular, including the market for existing thrift issues, initial public offerings by thrifts and thrift holding companies, and second-step conversion offerings. We have excluded from such analyses thrifts subject to announced or rumored acquisition, and/or institutions that exhibit other unusual characteristics.
The Appraisal is based on HarborOne Bancorps representation that the information contained in the regulatory applications and additional information furnished to us by HarborOne Bancorp and its independent auditor, legal counsel and other authorized agents are truthful, accurate and complete. We did not independently verify the financial statements and other information provided by HarborOne Bancorp, or its independent auditor, legal counsel and other authorized agents nor did we independently value the assets or liabilities of HarborOne Bancorp. The valuation considers HarborOne Bancorp only as a going concern and should not be considered as an indication of HarborOne Bancorps liquidation value.
Our appraised value is predicated on a continuation of the current operating environment for HarborOnel Bancorp and for all thrifts and their holding companies. Changes in the local, state and national economy, the legislative and regulatory environment for financial institutions and mutual holding companies, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the value of HarborOne Bancorps stock alone. It is our understanding that there are no current plans for selling control of HarborOne Bancorp following completion of the second-step conversion. To the extent that such factors can be foreseen, they have been factored into our analysis.
The estimated pro forma market value is defined as the price at which HarborOne Bancorps common stock, immediately upon completion of the second-step stock offering, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
In preparing the pro forma pricing analysis we have taken into account the pro forma impact of the MHCs net assets (i.e., unconsolidated equity) that will be consolidated with the Company and thus will slightly increase equity. After accounting for the impact of the MHCs net assets, the public shareholders ownership interest was reduced by approximately 0.01%. Accordingly, for purposes of the Companys pro forma valuation, the public shareholders pro forma ownership interest was reduced from 46.93% to 46.92% and the MHCs ownership interest was increased from 53.07% to 53.08%.
Valuation Conclusion
It is our opinion that, as of February 8, 2019, the estimated aggregate pro forma valuation of the shares of the Company to be issued and outstanding at the end of the conversion offering including (1) newly-issued shares representing the MHCs current ownership interest in the Company and (2) exchange shares issued to existing public shareholders of HONE was $508,686,450 at the midpoint, equal to 50,868,645 shares at $10.00 per share. The resulting range of value and pro forma shares, all based on $10.00 per
share, are as follows: $432,383,490 or 43,238,349 shares at the minimum and $584,989,420 or 58,498,942 shares at the maximum.
Based on this valuation and taking into account the ownership interest represented by the shares owned by the MHC, the midpoint of the offering range is $270,000,000 equal to 27,000,000 shares at $10.00 per share. The resulting offering range and offering shares, all based on $10.00 per share, are as follows: $229,500,000 or 22,950,000 shares at the minimum and $310,500,000 or 31,050,000 shares at the maximum.
Establishment of the Exchange Ratio
The conversion regulations provide that in a conversion of a mutual holding company, the minority stockholders are entitled to exchange the public shares for newly issued shares in the fully converted company. The Boards of Trustees of the MHC and the Board of Directors of, HONE and the Bank have independently determined the exchange ratio, which has been designed to preserve the current aggregate percentage ownership in the Company (adjusted for the dilution resulting from the consolidation of the MHCs unconsolidated net assets into the Company). The exchange ratio to be received by the existing minority shareholders of the Company will be determined at the end of the offering, based on the total number of shares sold in the offering and the final appraisal. Based on the valuation conclusion herein, the resulting offering value and the $10.00 per share offering price, the indicated exchange ratio at the midpoint is 1.5618 shares of the Companys stock for every one share held by public shareholders. Furthermore, based on the offering range of value, the indicated exchange ratio is 1.3276 at the minimum and 1.7961 at the maximum. RP Financial expresses no opinion on the proposed exchange of newly issued Company shares for the shares held by the public stockholders or on the proposed exchange ratio.
Limiting Factors and Considerations
The valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the common stock. Moreover, because such valuation is determined in accordance with applicable regulatory guidelines and is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of common stock in the conversion offering, or prior to that time, will thereafter be able to buy or sell such shares at prices related to the foregoing valuation of the estimated pro forma market value thereof. The appraisal reflects only a valuation range as of this date for the pro forma market value of HarborOne Bancorp immediately upon issuance of the stock and does not take into account any trading activity with respect to the purchase and sale of common stock in the secondary market on the date of issuance of such securities or at anytime thereafter following the completion of the second-step conversion.
RP Financials valuation was based on the financial condition, operations and shares outstanding of HarborOne Bancorp as of December 31, 2018, the date of the financial data included in the prospectus. The proposed exchange ratio to be received by the current public stockholders of HONE and the exchange of the public shares for newly issued shares of HarborOne Bancorps common stock as a full public company was determined independently by the Board of Trustees of the MHC and the Board of Directors of HONE and the Bank. RP
Financial expresses no opinion on the proposed exchange ratio to public stockholders or the exchange of public shares for newly issued shares.
RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a policy which prohibits RP Financial, its principals or employees from purchasing stock of its client institutions.
This valuation will be updated as provided for in the conversion regulations and guidelines. These updates will consider, among other things, any developments or changes in the financial performance and condition of HarborOne Bancorp, management policies, and current conditions in the equity markets for thrift shares, both existing issues and new issues. These updates may also consider changes in other external factors which impact value including, but not limited to: various changes in the legislative and regulatory environment for financial institutions, the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in the update at the date of the release of the update. The valuation will also be updated at the completion of HarborOne Bancorps stock offering.
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Respectfully submitted, |
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RP ® FINANCIAL, LC. |
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Ronald S. Riggins |
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President and Managing Director |
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Gregory E. Dunn |
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Director |
TABLE OF CONTENTS
HARBORONE BANCORP, INC.
HARBORONE BANK
Brockton, Massachusetts
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PAGE |
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DESCRIPTION |
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NUMBER |
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CHAPTER ONE |
OVERVIEW AND FINANCIAL ANALYSIS |
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Introduction |
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I.1 |
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Plan of Conversion |
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I.2 |
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Strategic Overview |
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I.2 |
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Balance Sheet Trends |
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I.5 |
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Income and Expense Trends |
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I.9 |
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Interest Rate Risk Management |
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I.12 |
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Lending Activities and Strategy |
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I.13 |
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Asset Quality |
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I.16 |
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Funding Composition and Strategy |
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I.17 |
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Subsidiaries |
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I.18 |
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Legal Proceedings |
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I.18 |
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CHAPTER TWO |
MARKET AREA ANALYSIS |
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Introduction |
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II.1 |
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National Economic Factors |
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II.1 |
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Market Area Demographics |
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II.4 |
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Regional Economy |
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II.7 |
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Unemployment Trends |
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II.9 |
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Market Area Deposit Characteristics and Competition |
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II.9 |
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CHAPTER THREE |
PEER GROUP ANALYSIS |
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Peer Group Selection |
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III.1 |
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Financial Condition |
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III.5 |
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Income and Expense Components |
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III.8 |
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Loan Composition |
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III.11 |
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Interest Rate Risk |
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III.13 |
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Credit Risk |
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III.13 |
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Summary |
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III.16 |
TABLE OF CONTENTS
HARBORONE BANCORP, INC.
HARBORONE BANK
Brockton, Massachusetts
(continued)
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PAGE |
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DESCRIPTION |
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NUMBER |
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CHAPTER FOUR |
VALUATION ANALYSIS |
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Introduction |
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IV.1 |
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Appraisal Guidelines |
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IV.1 |
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RP Financial Approach to the Valuation |
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IV.1 |
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Valuation Analysis |
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IV.2 |
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1. |
Financial Condition |
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IV.3 |
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2. |
Profitability, Growth and Viability of Earnings |
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IV.4 |
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3. |
Asset Growth |
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IV.6 |
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4. |
Primary Market Area |
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IV.6 |
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5. |
Dividends |
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IV.8 |
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6. |
Liquidity of the Shares |
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IV.8 |
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7. |
Marketing of the Issue |
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IV.9 |
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A. |
The Public Market |
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IV.9 |
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B. |
The New Issue Market |
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IV.12 |
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C. |
The Acquisition Market |
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IV.13 |
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D. |
Trading in HarborOne Bancorps Stock |
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IV.15 |
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8. |
Management |
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IV.15 |
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9. |
Effect of Government Regulation and Regulatory Reform |
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IV.16 |
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Summary of Adjustments |
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IV.16 |
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Valuation Approaches |
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IV.16 |
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1. |
Price-to-Earnings (P/E) |
|
IV.18 |
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2. |
Price-to-Book (P/B) |
|
IV.19 |
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3. |
Price-to-Assets (P/A) |
|
IV.21 |
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Comparison to Recent Offerings |
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IV.21 |
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Valuation Conclusion |
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IV.22 |
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Establishment of the Exchange Ratio |
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IV.23 |
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LIST OF TABLES
HARBORONE BANCORP, INC.
HARBORONE BANK
Brockton, Massachusetts
TABLE |
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NUMBER |
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DESCRIPTION |
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PAGE |
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1.1 |
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Historical Balance Sheet Data |
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I.6 |
1.2 |
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Historical Income Statements |
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I.10 |
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2.1 |
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Summary Demographic Data |
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II.6 |
2.2 |
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Primary Market Area Employment Sectors |
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II.7 |
2.3 |
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Boston and Providence Market Area Largest Employers |
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II.8 |
2.4 |
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Unemployment Trends |
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II.9 |
2.5 |
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Deposit Summary |
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II.10 |
2.5 |
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Market Area Deposit Competitors |
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II.12 |
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3.1 |
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Peer Group of Publicly-Traded Thrifts |
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III.3 |
3.2 |
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Balance Sheet Composition and Growth Rates |
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III.6 |
3.3 |
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Income as a % of Average Assets and Yields, Costs, Spreads |
|
III.9 |
3.4 |
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Loan Portfolio Composition and Related Information |
|
III.12 |
3.5 |
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Interest Rate Risk Measures and Net Interest Income Volatility |
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III.14 |
3.6 |
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Credit Risk Measures and Related Information |
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III.15 |
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4.1 |
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Market Area Unemployment Rates |
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IV.7 |
4.2 |
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Pricing Characteristics and After-Market Trends |
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IV.14 |
4.3 |
|
Public Market Pricing Versus Peer Group |
|
IV.20 |
I. OVERVIEW AND FINANCIAL ANALYSIS
Introduction
HarborOne Bank, or the Bank, is a Massachusetts chartered co-operative bank headquartered in Brockton, Massachusetts. The Bank was established in 1917 as Brockton Credit Union and converted to a Massachusetts co-operative bank in 2013. HarborOne Bank serves the Boston metropolitan area through 15 full service branch offices, one limited service branch, two commercial loan offices in Providence, Rhode Island and Boston, Massachusetts and a residential loan office in Westford, Massachusetts. In connection with the recently completed acquisition of Coastway Bancorp, Inc. (Coastway Bancorp), which was completed on October 5, 2018, the Bank added nine full service branch offices in the greater Providence area of Rhode Island. Additionally, through its wholly-owned subsidiary HarborOne Mortgage Company, LLC (HarborOne Mortgage), the Bank conducts mortgage banking operations through 34 offices in Massachusetts, Rhode Island, New Hampshire, New Jersey and Maine. HarborOne Mortgage is also licensed to lend in five additional states. A map of HarborOne Banks full serve branch office locations is provided in Exhibit I-1. HarborOne Bank is a member of the Federal Home Loan Bank (FHLB) system and its deposits are insured up to the maximum allowable amount by the Federal Deposit Insurance Corporation (FDIC).
HarborOne Bancorp, Inc. (HONE) is the Massachusetts-chartered mid-tier holding company of the Bank. HONE owns 100% of the outstanding common stock of the Bank. Since being formed in 2016, HONE has been engaged primarily in the business of holding the common stock of the Bank. HONE completed its initial public offering on June 30, 2016, pursuant to which it sold 14,454,396 shares or 45.0% of its outstanding common stock to the public and issued 17,281,034 shares or 53.8% of its common stock outstanding to HarborOne Mutual Bancshares (the MHC), the mutual holding company parent of HONE. Additionally, HONE contributed $964,000 in cash and issued 385,450 shares of common stock or 1.2% of its common stock outstanding to The HarborOne Foundation (the Foundation). The MHC and HONE are subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board or the FRB). At December 31, 2018, HONE had total consolidated assets of $3.7 billion, deposits of $2.7 billion, equity of $357.6 million and tangible equity of $279.1 million or 7.64% of total assets. HONEs audited financial statements for the most recent period are included by reference as Exhibit I-2.
Plan of Conversion
On March 5, 2019 the Board of Trustees of the MHC and the Board of Directors of HONE and HarborOne Bank adopted the plan of conversion, whereby the MHC will convert to stock form. As a result of the conversion, HONE, which currently owns all of the issued and outstanding common stock of the Bank, will be succeeded by a Massachusetts corporation with the name of HarborOne Bancorp, Inc. (HarborOne Bancorp or the Company). Following the conversion, the MHC will no longer exist. For purposes of this document, the existing consolidated entity will also hereinafter be referred to as HarborOne Bancorp or the Company, unless otherwise identified as HONE. As of December 31, 2018, the MHC had a majority ownership interest of 17,281,034 shares or 53.07% of HarborOne Bancorps common stock (the MHC Shares). The remaining 15,282,451 shares or approximately 46.93% of HarborOne Bancorps common stock was owned by public shareholders.
It is our understanding that HarborOne Bancorp will offer its stock, representing the majority ownership interest held by the MHC, in a subscription offering to Eligible Account Holders, Tax-Qualified Plans including the Banks employee stock ownership plan (the ESOP), and to Employees, Officers, Trustees, Directors and Corporators. To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, the shares may be offered for sale to the public at large in a community offering and a syndicated offering or a firm commitment underwritten offering. Upon completing the mutual-to-stock conversion and stock offering (the second-step conversion), the Company will be 100% owned by public shareholders, the publicly-held shares of HONE will be exchanged for shares in the Company at a ratio that retains their ownership interest at the time the conversion is completed and the MHC assets will be consolidated with the Company.
Strategic Overview
HarborOne Bancorp maintains a local community banking emphasis, with a primary strategic objective of meeting the borrowing and savings needs of its local customer base. Historically, as a credit union, the Companys lending activities were concentrated in the origination of 1-4 family permanent mortgage loans and consumer loans that emphasized the origination of indirect auto loans and leases. Pursuant to its conversion to a co-operative bank, the Company embarked on a new strategic direction designed to build a full-service community banking franchise. In connection with the implementation of a full service community banking
strategy, the Company invested in infrastructure and personnel to manage and facilitate growth strategies. Most notably, in support of implementation of a diversified lending strategy, the Company built a team of commercial lenders experienced in developing full service commercial banking relationships in the local market. Through implementation of these strategic initiatives, the Company has realized significant loan portfolio diversification primarily driven by growth of commercial real estate loans and, to a lesser extent, growth of commercial business loans and construction loans. In connection with the implementation of a more diversified lending strategy, the Company has pursued a funding strategy emphasizing growth of lower cost core deposits. Core deposit growth has been in part facilitated by growth of commercial lending relationships, pursuant to which the Company establishes full service banking relationship with its commercial loan customers through offering a full range of commercial loan products that can be packaged with lower cost commercial deposit products.
Since converting to a co-operative bank charter, the Company has completed two major acquisitions in support of building a full-service, community banking franchise. In July 2015, the Bank acquired Merrimack Mortgage Company, LLC, an independent residential mortgage company headquartered in Manchester, New Hampshire (Merrimack Mortgage). In 2018, Merrimack Mortgage changed its name to HarborOne Mortgage. While the acquisition of Merrimack Mortgage had a relatively small impact on the Banks balance sheet, it has had a significant impact on the Banks earnings with respect to increasing non-interest operating revenues and operating expenses. Total non-interest income increased from $15.6 million during 2014 to $35.4 million during 2015 and equaled $49.2 million during 2018. Operating expenses increased from $54.3 million during 2014 to $78.0 million during 2015 and equaled $120.1 million during 2018. Non-interest operating income and operating expenses for 2018 include one quarter of Coastway Bancorps earnings.
In October 2018, the Company completed the acquisition of Coastway Bancorp and its wholly-owned subsidiary, Coastway Community Bank. Through the acquisition of Coastway Bancorp, which was an $835.1 million institution based in Warwick, Rhode Island, the Company significantly increased its market presence in the greater Providence area of Rhode Island.
Investments serve as a supplement to the Companys lending activities and the investment portfolio is considered to be indicative of a low risk investment philosophy. Mortgage-backed securities guaranteed by government sponsored enterprises (GSEs) constitute the largest portion of the Banks investment portfolio, with other investments
consisting of municipal bonds, U.S. Government and GSE obligations and Small Business Administration (SBA) asset-backed securities.
Deposits have consistently served as the primary funding source for the Company, with supplemental funding provided by utilization of borrowings as an alternative funding source for purposes of managing funding costs and interest rate risk. Additionally, the Company issued subordinated debt in August 2018 for purposes of increasing the Banks regulatory capital in connection with the Coastway Bancorp acquisition. Core deposits, consisting of transaction and savings account deposits constitute the largest portion of the Companys deposit base. Other than the subordinated debt, borrowings currently held by the Company consist of short- and long-term FHLB advances.
HarborOne Bancorps earnings base is largely dependent upon net interest income and operating expense levels. The Company has experienced net interest margin expansion over the past five years, which has been largely attributable to asset growth driven by growth of higher yielding loans that has provided for a higher overall yield on interest-earning assets. Comparatively, after the Companys funding costs declined from 2014 through 2016, the increase in the Companys funding costs during 2017 and 2018 was less than the increase in yield earned on interest-earning assets.
Non-interest operating income and operating expenses increased significantly as the result of the Companys acquisition of Merrimack Mortgage and, given the largely offbalance sheet operations of Merrimack Mortgage, non-interest operating income and operating expenses also increased significantly as a percent of average assets. Mortgage banking income, which is the largest source of non-interest operating income for the Company, has declined over the past two years due largely to a decline in refinance volume.
A key component of the Companys business plan is to complete a second-step conversion offering. The Companys strengthened capital position will increase operating flexibility and facilitate implementation of planned growth strategies. The Companys strengthened capital position will also provide more of a cushion against potential credit quality related losses in future periods. HarborOne Bancorps higher capital position resulting from the infusion of stock proceeds will also serve to reduce interest rate risk, particularly through enhancing the Companys interest-earning assets/interest-bearing liabilities (IEA/IBL) ratio. The additional funds realized from the stock offering will serve to raise the level of interest-earning assets funded with equity and, thereby, reduce the ratio of interest-earning assets
funded with interest-bearing liabilities as the balance of interest-bearing liabilities will initially remain relatively unchanged following the conversion, which may facilitate a reduction in HarborOne Bancorps funding costs. Notably, as a fully-converted institution, the Companys stronger capital position and greater capacity to offer stock as consideration for an acquisition may facilitate increased opportunities to grow through acquisitions. At this time, the Company has no specific plans for further expansion through additional acquisitions.
The projected uses of proceeds are highlighted below.
· HarborOne Bancorp, Inc. The Company is expected to retain up to 50% of the net offering proceeds. At present, funds at the Company level, net of the loan to the ESOP, are expected to be invested initially into liquid funds held as a deposit at HarborOne Bank. Over time, the funds may be utilized for various corporate purposes, possibly including repurchases of common stock, the payment of cash dividends, infusing additional equity into the Bank and acquisitions.
· HarborOne Bank. Approximately 50% of the net stock proceeds will be infused into the Bank in exchange for all of the Banks stock. Cash proceeds (i.e., net proceeds less deposits withdrawn to fund stock purchases) infused into the Bank are anticipated to become part of general operating funds, and are expected to be primarily utilized to fund loan growth over time.
Overall, it is the Companys objective to pursue growth that will serve to increase returns, while, at the same time, growth will not be pursued that could potentially compromise the overall risk associated with HarborOne Bancorps operations.
Balance Sheet Trends
Table 1.1 shows the Companys historical balance sheet data for the past five years. Asset growth trends show assets trended higher throughout the five-year period, with total assets increasing from $2.0 billion at yearend 2014 to $3.7 billion at yearend 2018. Asset growth was most significant during 2018, which was largely attributable to the acquisition of Coastway Bancorp. Overall, the Companys assets increased at a 15.65% annual rate from yearend 2014 through yearend 2018. A summary of HarborOne Bancorps key operating ratios for the past five years is presented in Exhibit I-3.
Asset growth was mostly sustained by loan growth, which paralleled asset growth trends. Commercial real estate loans and the loans acquired in the Coastway Bancorp acquisition were the primary sources of loan growth during the five-year period. Overall, net loans receivable increased at an annual rate of 15.75% from yearend 2014 through yearend
Table 1.1
HarborOne Bancorp, Inc.
Historical Balance Sheet Data
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12/31/14- |
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12/31/18 |
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|||||
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At December 31, |
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Annual. |
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|||||||||||||||||||||||
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|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
Growth Rate |
|
|||||||||||||||
|
|
Amount |
|
Pct(1) |
|
Amount |
|
Pct(1) |
|
Amount |
|
Pct(1) |
|
Amount |
|
Pct(1) |
|
Amount |
|
Pct(1) |
|
Pct |
|
|||||
|
|
($000) |
|
(%) |
|
($000) |
|
(%) |
|
($000) |
|
(%) |
|
($000) |
|
(%) |
|
($000) |
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(%) |
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(%) |
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|||||
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|||||
Total Amount of: |
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|||||
Assets |
|
$ |
2,041,879 |
|
100.00 |
% |
$ |
2,163,142 |
|
100.00 |
% |
$ |
2,448,310 |
|
100.00 |
% |
$ |
2,684,920 |
|
100.00 |
% |
$ |
3,653,121 |
|
100.00 |
% |
15.65 |
% |
Cash and cash equivalents |
|
52,983 |
|
2.59 |
% |
40,652 |
|
1.88 |
% |
50,215 |
|
2.05 |
% |
80,791 |
|
3.01 |
% |
105,521 |
|
2.89 |
% |
18.80 |
% |
|||||
Investment securities |
|
206,399 |
|
10.11 |
% |
192,120 |
|
8.88 |
% |
184,346 |
|
7.53 |
% |
217,722 |
|
8.11 |
% |
253,981 |
|
6.95 |
% |
5.32 |
% |
|||||
Loans held for sale |
|
3,525 |
|
0.17 |
% |
63,797 |
|
2.95 |
% |
86,443 |
|
3.53 |
% |
59,460 |
|
2.21 |
% |
42,107 |
|
1.15 |
% |
85.91 |
% |
|||||
Loans receivable, net |
|
1,651,894 |
|
80.90 |
% |
1,729,388 |
|
79.95 |
% |
1,981,747 |
|
80.94 |
% |
2,176,478 |
|
81.06 |
% |
2,964,852 |
|
81.16 |
% |
15.75 |
% |
|||||
FHLB stock |
|
18,631 |
|
0.91 |
% |
18,735 |
|
0.87 |
% |
15,749 |
|
0.64 |
% |
15,532 |
|
0.58 |
% |
24,969 |
|
0.68 |
% |
7.59 |
% |
|||||
Bank-owned life insurance |
|
35,378 |
|
1.73 |
% |
38,333 |
|
1.77 |
% |
39,421 |
|
1.61 |
% |
40,446 |
|
1.51 |
% |
44,635 |
|
1.22 |
% |
5.98 |
% |
|||||
Goodwill and other intangible assets |
|
3,324 |
|
0.16 |
% |
13,674 |
|
0.63 |
% |
13,585 |
|
0.55 |
% |
13,497 |
|
0.50 |
% |
78,467 |
|
2.15 |
% |
120.42 |
% |
|||||
|
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|
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|
|||||
Deposits |
|
$ |
1,500,115 |
|
73.47 |
% |
$ |
1,691,212 |
|
78.18 |
% |
$ |
1,804,753 |
|
73.71 |
% |
$ |
2,013,738 |
|
75.00 |
% |
$ |
2,685,061 |
|
73.50 |
% |
15.67 |
% |
Borrowings |
|
329,602 |
|
16.14 |
% |
249,598 |
|
11.54 |
% |
275,119 |
|
11.24 |
% |
290,365 |
|
10.81 |
% |
553,735 |
|
15.16 |
% |
13.85 |
% |
|||||
|
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|
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|
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|
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|
|
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|
|||||
Equity |
|
$ |
183,458 |
|
8.98 |
% |
$ |
190,688 |
|
8.82 |
% |
$ |
329,384 |
|
13.45 |
% |
$ |
343,484 |
|
12.79 |
% |
$ |
357,574 |
|
9.79 |
% |
18.16 |
% |
Tangible equity |
|
180,134 |
|
8.82 |
% |
177,014 |
|
8.18 |
% |
315,799 |
|
12.90 |
% |
329,987 |
|
12.29 |
% |
279,107 |
|
7.64 |
% |
11.57 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Loans/Deposits |
|
|
|
110.12 |
% |
|
|
102.26 |
% |
|
|
109.81 |
% |
|
|
108.08 |
% |
|
|
110.42 |
% |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Number of Full Service Offices |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
24 |
|
|
|
(1) Ratios are as a percent of ending assets.
Sources: HarborOne Bancorps prospectus, auditedfinancial statements, and RP Financial calculations.
2018 and equaled 81.16% of assets at yearend 2018 versus 80.90% of assets at yearend 2014. Net loans receivable at December 31, 2018 totaled $2.965 billion.
From yearend 2014 through yearend 2018, the Companys loan portfolio composition shifted towards higher concentrations of commercial real estate, commercial business and construction loans. Trends in the Companys loan portfolio composition since yearend 2014 show that the concentration of 1-4 family mortgage loans comprising total loans decreased from 46.51% of total loans receivable at yearend 2014 to 31.63% of total loans receivable at yearend 2018. Similarly, consumer loans decreased from 34.64% of total loans receivable at yearend 2014 to 16.49% of total loans receivable at yearend 2018. Comparatively, from yearend 2014 through yearend 2018, commercial real estate loans (including multi-family loans) increased from 8.62% of total loans receivable to 31.35% of total loans receivable and commercial business loans increased from 2.87% of total loans receivable to 9.30% of total loans receivable. Over the same time period, the relative concentrations of construction loans increased from 1.58% of total loans receivable to 5.92% of total loans and home equity loans and lines of credit decreased from 5.78% of total loans receivable to 5.31% of total loans receivable. Additionally, loans held for sale, which currently consist of HarborOne Mortgages loan production, fluctuated from a low of $3.5 million or 0.17% of assets at yearend 2014 to a high of $86.4 million or 3.53% of assets at yearend 2016 and equaled $42.1 million or 1.15% of assets at yearend 2018.
The intent of the Companys investment policy is to provide adequate liquidity and to generate a favorable return within the context of supporting HarborOne Bancorps overall credit and interest rate risk objectives. Since yearend 2014, the Companys level of cash and investment securities (inclusive of FHLB stock) ranged from a low of 10.22% of assets at yearend 2016 to a high of 13.61% of assets at yearend 2014 and equaled 10.52% of assets at yearend 2018. Mortgage-backed securities totaling $151.7 million comprised the most significant component of the Companys investment portfolio at December 31, 2018. Other investments held by the Company at December 31, 2018 consisted of municipal bonds ($22.1 million), SBA asset-backed securities ($52.6 million) and U.S. Government and GSE obligations ($27.5 million). As of December 31, 2018, investments maintained as held to maturity totaled $44.7 million and investments maintained as available-for sale totaled $209.3 million. As of December 31, 2018, the available for sale investment portfolioand had a net unrealized loss of $3.0 million. Exhibit I-4 provides historical detail of the Companys investment portfolio. As of
December 31, 2018, t he Company also held $105.5 million of cash and cash equivalents and $25.0 million of FHLB stock.
The Company also maintains an investment in bank-owned life insurance (BOLI) policies, which cover the lives of certain officers of the Bank. The purpose of the investment is to provide funding for employee benefit plans. The life insurance policies earn tax-exempt income through cash value accumulation and death proceeds. As of December 31, 2018, the cash surrender value of the Companys BOLI equaled $44.6 million.
Over the past five years, HarborOne Bancorps funding needs have been addressed through a combination of deposits, borrowings and internal cash flows. From yearend 2014 through yearend 2018, the Banks deposits increased at a 15.67% annual rate. Deposits trended higher throughout the five-year period, with the most significant deposit growth recorded in 2018 which was primarily related to the acquisition of Coastway Bancorp. Deposit growth trends in recent years reflect that deposit growth primarily consisted of certificates of deposit (CDs). Transaction and savings account deposits comprised 68.00%% of average total deposits during 2018, versus 73.55% of average total deposits during 2016.
Borrowings serve as an alternative funding source for the Company to address funding needs for growth and to support management of deposit costs and interest rate risk. From year-end 2014 through yearend 2018, borrowings increased at an annual rate of 13.85%. Overall, borrowings increased from $329.6 million or 16.14% of assets at yearend 2014 to $553.7 million or 15.16% of assets at yearend 2018. Most of the increase in the Companys borrowings occurred during 2018, as the Company assumed $276.8 million of short-term FHLB borrowings in the acquisition of Coastway Bancorp and issued $35.0 million of subordinated debt for purposes of increasing regulatory capital. Except for the subordinated debt, all of the Companys borrowings consist of FHLB advances.
The Companys equity increased at an 18.16% annual rate from yearend 2014 through yearend 2018, with most of the growth occurring in 2016 in connection with the capital raised in the Companys first-step public stock offering. Slightly strong capital growth relative to asset growth provided for an increase in the Companys equity-to-assets ratio from 8.98% at yearend 2014 to 9.79% at yearend 2018. Comparatively, as the result of the goodwill and intangibles created primarily from the Merrimack Mortgage and Coastway Bancorp acquisitions, the Companys tangible equity-to-assets ratio decreased from 8.82% at yearend 2014 to 7.64% at yearend 2018. Goodwill and other intangibles totaled $78.5 million or 2.15% of assets at
December 31, 2018. The Bank maintained capital surpluses relative to all of its regulatory capital requirements at December 31, 2018. The addition of stock proceeds will serve to strengthen the Companys capital position, as well as support growth opportunities. At the same time, the significant increase in HarborOne Bancorps pro forma capital position will initially depress its ROE.
Income and Expense Trends
Table 1.2 shows the Companys historical income statements for the past five years. The Companys reported earnings over the past five years ranged from a low of $2.6 million or 0.13% of average assets in 2014 to a high of $11.4 million or 0.39% of average assets in 2018. Net interest income and operating expenses represent the primary components of the Companys earnings, while non-operating income is also a fairly significant contributor to the Companys earnings largely due to revenues generated by HarborOne Mortgage. Loan loss provisions have had a varied impact on the Companys earnings over the past five years, while non-operating gains and losses have generally been a limited factor in the Companys earnings over the past five years.
Over the past five years, the Companys net interest income to average assets ratio ranged from a low of 2.28% during 2014 to a high of 3.04% during 2018. The upward trend in the Companys net interest income ratio since 2014 has been primarily due to an increase in the interest income ratio. Notably, asset growth during the period was driven by loan growth, which consisted mostly of higher yielding types of loans such as commercial real estate loans and commercial business loans. Comparatively, the Companys funding costs over the five-year period have been relatively stable and the significant increase in capital realized from the first-step offering completed in 2016 served to reduce the level of interest-bearing liabilities funding assets. Overall, during the past five years, the Companys interest rate spread increased from a low of 2.26% during 2014 to a high of 2.99% during 2018. The Companys net interest rate spreads and yields and costs for the past five years are set forth in Exhibit I-3 and Exhibit I-5.
With the acquisition of Merrimack Mortgage in July 2015, non-interest operating income became a significantly larger contributor to the Companys earnings. Most notably, mortgage banking income increased from $1.9 million during 2014 to $20.2 million during 2015 and to $51.0 million in 2016. However, during the past two years mortgage banking revenues have declined and equaled $30.6 million during 2018. The decrease in mortgage banking income
Table 1.2
HarborOne Bancorp, Inc.
Historical Income Statements
|
|
For the Year Ended December 31, |
|
|||||||||||||||||||||||
|
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
|||||||||||||||
|
|
Amount |
|
Pct(1) |
|
Amount |
|
Pct(1) |
|
Amount |
|
Pct(1) |
|
Amount |
|
Pct(1) |
|
Amount |
|
Pct(1) |
|
|||||
|
|
($000) |
|
(%) |
|
($000) |
|
(%) |
|
($000) |
|
(%) |
|
($000) |
|
(%) |
|
($000) |
|
(%) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest income |
|
$ |
61,079 |
|
3.08 |
% |
$ |
66,800 |
|
3.15 |
% |
$ |
74,756 |
|
3.28 |
% |
$ |
90,284 |
|
3.50 |
% |
$ |
115,708 |
|
3.96 |
% |
Interest expense |
|
(15,878 |
) |
-0.80 |
% |
(14,575 |
) |
-0.69 |
% |
(13,761 |
) |
-0.60 |
% |
(15,936 |
) |
-0.62 |
% |
(26,778 |
) |
-0.92 |
% |
|||||
Net interest income |
|
$ |
45,201 |
|
2.28 |
% |
$ |
52,225 |
|
2.46 |
% |
$ |
60,995 |
|
2.68 |
% |
$ |
74,348 |
|
2.88 |
% |
$ |
88,930 |
|
3.04 |
% |
Provision for loan losses |
|
(2,589 |
) |
-0.13 |
% |
(1,257 |
) |
-0.06 |
% |
(4,172 |
) |
-0.18 |
% |
(2,416 |
) |
-0.09 |
% |
(3,828 |
) |
-0.13 |
% |
|||||
Net interest income after provisions |
|
$ |
42,612 |
|
2.15 |
% |
$ |
50,968 |
|
2.40 |
% |
$ |
56,823 |
|
2.49 |
% |
$ |
71,932 |
|
2.79 |
% |
$ |
85,102 |
|
2.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage banking income/Gain on sale of loans |
|
$ |
1,912 |
|
0.10 |
% |
$ |
20,230 |
|
0.95 |
% |
$ |
50,999 |
|
2.24 |
% |
$ |
37,195 |
|
1.44 |
% |
$ |
30,609 |
|
1.05 |
% |
Other non-interest operating income |
|
13,215 |
|
0.67 |
% |
14,848 |
|
0.70 |
% |
15,821 |
|
0.69 |
% |
17,339 |
|
0.67 |
% |
18,584 |
|
0.64 |
% |
|||||
Operating expense |
|
(54,302 |
) |
-2.73 |
% |
(78,014 |
) |
-3.68 |
% |
(114,698 |
) |
-5.03 |
% |
(109,414 |
) |
-4.24 |
% |
(115,001 |
) |
-3.93 |
% |
|||||
Net operating income |
|
$ |
3,437 |
|
0.17 |
% |
$ |
8,032 |
|
0.38 |
% |
$ |
8,945 |
|
0.39 |
% |
$ |
17,052 |
|
0.66 |
% |
$ |
19,294 |
|
0.66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Non-Operating Income/(Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Gain (loss) on sale and call of securities, net |
|
$ |
483 |
|
0.02 |
% |
$ |
295 |
|
0.01 |
% |
$ |
283 |
|
0.01 |
% |
$ |
0 |
|
0.00 |
% |
$ |
5 |
|
0.00 |
% |
Merger expenses |
|
0 |
|
0.00 |
% |
0 |
|
0.00 |
% |
0 |
|
0.00 |
% |
0 |
|
0.00 |
% |
(5,092 |
) |
-0.17 |
% |
|||||
Net non-operating income(losses) |
|
$ |
483 |
|
0.02 |
% |
$ |
295 |
|
0.01 |
% |
$ |
283 |
|
0.01 |
% |
$ |
0 |
|
0.00 |
% |
$ |
(5,087 |
) |
-0.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income before tax |
|
$ |
3,920 |
|
0.20 |
% |
$ |
8,327 |
|
0.39 |
% |
$ |
9,228 |
|
0.40 |
% |
$ |
17,052 |
|
0.66 |
% |
$ |
14,207 |
|
0.49 |
% |
Income tax provision |
|
(1,350 |
) |
-0.07 |
% |
(2,559 |
) |
-0.12 |
% |
(3,297 |
) |
-0.14 |
% |
(6,673 |
) |
-0.26 |
% |
(2,813 |
) |
-0.10 |
% |
|||||
Net income (loss) |
|
$ |
2,570 |
|
0.13 |
% |
$ |
5,768 |
|
0.27 |
% |
$ |
5,931 |
|
0.26 |
% |
$ |
10,379 |
|
0.40 |
% |
$ |
11,394 |
|
0.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Adjusted Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
$ |
2,570 |
|
0.13 |
% |
$ |
5,768 |
|
0.27 |
% |
$ |
5,931 |
|
0.26 |
% |
$ |
10,379 |
|
0.40 |
% |
$ |
11,394 |
|
0.39 |
% |
Add(Deduct): Non-operating income |
|
(483 |
) |
-0.02 |
% |
(295 |
) |
-0.01 |
% |
(283 |
) |
-0.01 |
% |
0 |
|
0.00 |
% |
5,087 |
|
0.17 |
% |
|||||
Tax effect (2) |
|
193 |
|
0.01 |
% |
118 |
|
0.01 |
% |
113 |
|
0.00 |
% |
0 |
|
0.00 |
% |
(1,373 |
) |
-0.05 |
% |
|||||
Adjusted earnings |
|
$ |
2,280 |
|
0.11 |
% |
$ |
5,591 |
|
0.26 |
% |
$ |
5,761 |
|
0.25 |
% |
$ |
10,379 |
|
0.40 |
% |
$ |
15,108 |
|
0.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Expense Coverage Ratio (3) |
|
0.84x |
|
|
|
0.67x |
|
|
|
0.53x |
|
|
|
0.68x |
|
|
|
0.77x |
|
|
|
|||||
Efficiency Ratio (4) |
|
89.51 |
% |
|
|
89.54 |
% |
|
|
89.66 |
% |
|
|
84.97 |
% |
|
|
83.09 |
% |
|
|
(1) Ratios are as a percent of average assets.
(2) Assumes a 40.0% effective tax rate for 2014 through 2017 and a 27.0% effective tax rate for 2018.
(3) Expense coverage ratio calculated as net interest income before provisions for loan losses divided by operating expenses.
(4) Efficiency ratio calculated as operating expenses divided by the sum of net interest income before provisions for loan losses plus non-interest operating income.
Sources: HarborOne Bancorps prospectus, audited financial statements and RP Financial calculations.
has been largely due to a decrease in gains on the sale of mortgage loans, as the result of a decline in residential mortgage originations. Other than mortgage banking income, deposit account fees constitute the other major component of the Companys non-interest operating income. Throughout the period shown in Table 1.2, non-interest operating income ranged from a low of $15.1 million or 0.77% of average assets during 2014 to a high of $66.8 million or 2.93% of average assets during 2016. For 2018, non-interest operating income amounted to $49.2 million or 1.69% of average assets. Mortgage banking income accounted for 62.2% of the Companys non-interest operating income during 2018.
Operating expenses represent the other major component of the Companys earnings, ranging from a low of $54.3 million or 2.73% of average assets during 2014 to a high of $115.0 million or 3.93% of average assets during 2018. Consistent with the sharp increase in the Companys non-interest operating revenues realized in connection with the acquisition of Merrimack Mortgage, the increase in the Companys operating expenses since 2014 has been mostly related to the operations of HarborOne Mortgage. After declining in 2017, the increase in operating expenses reported for 2018 includes operating expenses added in connection with the acquisition of Coastway Bancorp, which was completed on October 5 th .
Overall, during the past f ive years, the Companys expense coverage ratios (net interest income divided by operating expenses) ranged from a low of 0.53x during 2016 to a high of 0.84x during 2014 and equaled 0.77x during 2018. The decrease in the expense coverage ratio since 2014 was largely due to the acquisition of Merrimack Mortgage, which significantly increased the Companys operating expenses and had a minimal impact on the Companys net interest income. Comparatively, the Companys efficiency ratio (operating expenses as a percent of the sum of net interest income and other operating income) ranged from a high of 89.66% during 2016 to a low of 83.09% during 2018.
During the period covered in Table 1.2, the amount of loan loss provisions established ranged from a low of $1.3 million or 0.06% of average assets during 2015 to a high of $4.2 million or 0.18% of average assets during 2016. For 2018, the Company recorded $3.8 million of loan loss provisions or 0.13% of average assets. Loan loss provisions established during the past five years have been largely related to loan growth, as the balance of non-performing loans has trended lower since yearend 2014. As of December 31, 2018 the Company maintained loan loss allowances of $20.7 million, equal to 0.69% of total loans receivable and 116.62% of
non- performing loans. Exhibit I-6 sets forth the Companys loan loss allowance activity for the past five years.
Non-operating gains from the sale of investment securities have had a limited impact on the Companys earnings during the period covered in Table 1.2, ranging from a high of $483,000 or 0.02% of average assets during 2014 to a low of no gains reported during 2017. For 2018, the Company reported $5,000 of gains on the sale of investment securities. Also, in 2018, the Company recorded non-recurring merger expenses of $5.1 million or 0.17% of average assets in connection with the acquisition of Coastway Bancorp.
The Companys effective tax rate ranged from a low of 19.80% in 2018 to a high of 39.13% in 2017. As set forth in the prospectus, the Companys effective marginal tax rate is 27.0%.
Interest Rate Risk Management
The Companys model simulation analysis measures interest rate risk in two ways: 1) the change in net interest income and earnings caused by a change in interest rates; and 2) the change in market value of portfolio equity caused by changes in the values of assets and liabilities, which fluctuate due to changes in interest rates. The market value of portfolio equity, also referred to as the economic value of equity (EVE), is defined as the present value of expected cash flows from existing assets, minus the present value of expected cash flows from existing liabilities. As shown in Exhibit I-7, the primary interest rate risk exposure measurement applied to the entire balance sheet is the effect on net interest income of a change in market interest rates of plus 300 basis points or minus 100 basis points over a one year time horizon, and the effect on EVE of a change in market interest rates of plus 300 basis points or minus 100 basis points for all projected future cash flows. As of December 31, 2018, based on a 300 basis point increase in interest rates, the Companys economic value of equity would decrease by 6.5% and net interest income would decrease by 1.4% in year one, which are within the Companys policy guidelines. Comparatively, as of December 31, 2018, based on a 100 basis point decrease in interest rates, the Companys EVE would decrease by 6.3% and net interest income would decrease by 1.2% in year one, which are within the Companys policy guidelines.
The Company pursues a number of strategies to manage interest rate risk, particularly with respect to seeking to limit the repricing mismatch between interest rate sensitive assets and liabilities. The Company manages interest rate risk from the asset side of the balance
sheet through investing in investment securities with adjustable interest rates, emphasizing origination of adjustable rate and shorter term fixed rate loans for retention in the Companys loan portfolio and selling origination of longer term fixed rate 1-4 family permanent mortgage loans in the secondary market. The Company also hedges a portion of its fixed rate commercial business loan portfolio with interest rate swap contracts. As of December 31, 2018, of the Companys total loans due after December 31, 2018, ARM loans comprised 37.99%% of total loans receivable (see Exhibit I-8). On the liability side of the balance sheet, management of interest rate risk has been pursued through emphasizing growth of lower costing and less interest rate sensitive transaction and savings accounts and utilizing fixed rate FHLB advances to fund commercial real estate loan growth. Transaction and savings accounts comprised 68.00% of the Companys average total deposits during 2018.
The infusion of stock proceeds will serve to further limit the Companys interest rate risk exposure, as most of the net proceeds will be redeployed into interest-earning assets and the increase in the Companys capital position will lessen the proportion of interest rate sensitive liabilities funding assets.
Lending Activities and Strategy
Historically, HarborOne Bancorps lending activities have been concentrated in 1-4 family permanent mortgage loans and indirect auto loans and leases. However, pursuant to the Companys strategic plan of implementing a more diversified lending strategy that has emphasized commercial real estate loans and commercial business loans as the primary areas of targeted loan growth, commercial loans currently comprise the largest concentration of the loan portfolio with commercial real estate loans accounting for the largest segment of the commercial loan portfolio. Other areas of lending diversification for the Company include construction loans, home equity loans and lines of credit and other consumer loans. The origination of 1-4 family permanent mortgage loans is expected to remain a highly active area of lending for the Company, particularly with respect to loan production generated through HarborOne Mortgage. However, growth of the 1-4 family loan portfolio will be constrained by the sale of most originations of longer term, fixed rate 1-4 family permanent mortgage loans. Exhibit I-9 provides historical detail of HarborOne Bancorps loan portfolio composition for the past five years and Exhibit I-10 provides the contractual maturity of the Companys loan portfolio by loan type as of December 31, 2018.
Commercial Real Estate Loans. The commercial real estate loan portfolio consists of loans which are collateralized by properties in the Companys regional lending area. HarborOne Bank originates commercial real estate loans up to a maximum LTV ratio of 80% and requires a minimum debt-coverage ratio of 1.25 times. The Company supplements originations of commercial real estate loans with purchases of loan participations, which are secured by properties in the Companys regional lending area and are subject to the Companys underwriting standards for commercial real estate loans. HarborOne Bancorp also sells participation interests in commercial real estate loans to local financial institutions, primarily the portion that exceeds the Companys policy lending limit. Commercial real estate loans are originated as either fixed rate or adjustable rate loans with for terms of up to 25 years. Fixed rate loans are generally offered with a shorter term balloon provision. Adjustable rate commercial estate loans typically adjust every three, five or seven years and are indexed to the corresponding FHLB Classic Advance borrowing rate. Properties securing the commercial real estate loan portfolio include office buildings, apartments, retail development, manufacturing facilities, warehouse distribution facilities, hotels and restaurants. The Companys four largest commercial real estate loans at December 31, 2018 ranged from $14.0 million to $16.0 million and all of those loans were performing in accordance with their original terms at December 31, 2018. As of December 31, 2018, the Companys outstanding balance of commercial real estate loans totaled $934.4 million equal to 31.35% of total loans receivable.
Commercial Business Loans. The commercial business loan portfolio is generated through extending loans to businesses operating in the local market area. Expansion of commercial business lending activities has been an area of targeted loan growth for the Company, pursuant to which the Company is building full service banking relationships through offering a full range of commercial loan products that can be packaged with lower cost commercial deposit products. Commercial business loans offered by the Bank consist of floating lines of credit indexed to LIBOR or The Wall Street Journal prime rate and fixed rate term loans are based on a corresponding FHLB rate, plus a margin. The commercial business loan portfolio consists substantially of loans secured by business assets such as accounts receivable, inventory and equipment. The Companys four largest commercial business loans at December 31, 2018 ranged from $5.5 million to $11.1 million and all of those loans were performing in accordance with their original terms at December 31, 2018. As of December 31, 2018, the Companys outstanding balance of commercial business loans equaled $277.3 million or 9.30% of total loans receivable.
Construction Loans. Construction loans originated by the Company consist of loans to finance the construction of 1-4 family residences and commercial/multi-family properties. The Banks 1-4 family construction lending activities consist of originations to professional developers, contractors and builders, and, to a lesser extent, to individuals. Construction loans for commercial development include industrial buildings, retail and office buildings and speculative residential real estate. Construction loans are generally offered as fixed rate interest only loans during the construction period, which is usually 12-36 months, and are originated up to a maximum LTV ratio of 80% of the appraised value of the completed property. At December 31, 2018, the Companys largest construction loan relationship was $14.5 million and was secured by a first mortgage to develop an apartment building. This loan was performing according to its original terms at December 31, 2018. As of December 31, 2018, the Companys outstanding balance of construction loans equaled $176.3 million or 5.92% of total loans receivable and consisted of $161.7 million of commercial construction loans and $14.7 million or residential construction loans.
1-4 Family Residential Loans. HarborOne Bancorp offers both fixed rate and adjustable rate 1-4 family permanent mortgage loans. Loans are generally underwritten to secondary market guidelines, as the Companys current philosophy has been to sell most originations of conforming 1-4 family fixed rate loans with terms of 15 years or more. The majority of loans are currently sold on a servicing released basis. ARM loans offered by the Bank have initial repricing terms of three to seven years and then reprice annually for the balance of the loan term. ARM loans are indexed to the 1-year Treasury rate or LIBOR. As of December 31, 2018, the Companys outstanding balance of 1-4 family loans equaled $942.7 million or 31.63% of total loans receivable.
Home Equity Loans and Lines of Credit. The Banks 1-4 family lending activities include home equity loans and lines of credit. Home equity loans are originated as fixed rate loans with amortization terms up 15 years. Home equity lines of credit are tied to the prime rate as published in The Wall Street Journal and are offered for terms of up to a ten year draw period followed by a repayment term between five and twenty years. The Company will originate home equity loans and lines of credit up to a maximum loan-to value (LTV) ratio of 80%, inclusive of other liens on the property. As of December 31, 2018, the Companys outstanding balance of home equity loans and lines of credit totaled $158.1 million or 5.31% of total loans receivable.
Consumer Loans. Historically, the Companys consumer lending activities were concentrated in indirect auto loans and leases, but currently are limited to funding indirect auto lease loans for new and used vehicles through the Companys relationship with Credit Union Leasing of America (CULA). The balance of the consumer loan portfolio consists primarily of small balances of unsecured lines of credit and personal loans. As of December 31, 2018, the consumer loan portfolio totaled $491.4 million or 16.49% of total loans receivable and consisted of $478.9 million of auto loans and leases and $12.6 million of other consumer loans.
Loan Originations, Purchases, and Sales. Exhibit I-11 provides a summary of the Companys lending activities over the past three years. Total loans originated ranged from a high of $2.2 billion during 2016 to a low of $1.5 billion during 2018. The decrease in loans originated since 2016 was primarily due to decreased originations of 1-4 family permanent mortgage loans. Originations of 1-4 family permanent mortgage loans decreased from $1.6 billion during 2016 to $936.3 million during 2018. Similarly, loan sales of 1-4 family permanent mortgage loans decreased from $1.5 billion during 2016 to $943.5 million during 2018. 2018 originations of construction loans and consumer loans decreased as well compared to 2016 originations, while 2018 originations of commercial real estate loans, commercial business loans and home equity loans and lines of credit were higher compared to 2016 originations. Loans purchased by the Company ranged from a low of $73.6 million during 2017 to a high of $804.9 million during 2018, which includes the loans acquired from Coastway Bancorp. Total loans sold ranged from a low of $977.4 million during 2018 to a high of $1.5 billion during 2016. Total principal repayments ranged from a low of $354.0 million during 2017 to a high of $432.9 million during 2018. Net loan growth was recorded during each of the past three years. Overall, net loans receivable increased from $2.0 billion at yearend 2016 to $3.0 billion at yearend 2018.
Asset Quality
Historically, the Companys lending emphasis on lending in local and familiar markets generally supported maintenance of relatively favorable credit quality measures. However, following the national recession and bursting of the housing bubble in 2008, the Company experienced elevated levels of problems assets. As the Companys lending markets recovered from the downturn, the Company has experienced improving credit quality trends. Over the past five years, HarborOne Bancorps balance of non-performing assets declined from a high of $38.2 million or 1.87% of assets at yearend 2014 to a low of $18.5 million or 0.51% of assets at yearend 2018. As shown in Exhibit I-12, non-performing assets at December 31, 2018
consisted of $17.7 million of non-accruing loans and $749,000 of other real estate owned and other repossessed assets. Non-accruing loans held by the Company at December 31, 2108 were concentrated in 1-4 family permanent mortgage loans ($12.1 million). The Company also held $17.9 million of performing troubled debt restructurings at December 31, 2018.
To track the Companys asset quality and the adequacy of valuation allowances, HarborOne Bancorp has established detailed asset classification policies and procedures which are consistent with regulatory guidelines. Classified assets are reviewed monthly by senior management and the Board. The loan portfolio is also reviewed by an independent third party. Pursuant to these procedures, when needed, the Company establishes additional valuation allowances to cover anticipated losses in classified or non-classified assets. As of December 31 2018, the Company maintained loan loss allowances of $20.7 million, equal to 0.69% of total loans receivable and 116.62% of non-performing loans.
Funding Composition and Strategy
Deposits have consistently served as the Companys primary funding source and at December 31, 2018 deposits accounted for 82.90% of HarborOne Bancorps combined balance of deposits and borrowings. Exhibit I-13 sets forth the Banks deposit composition for the past three years. Transaction and savings account deposits comprised 68.00% of average total deposits during 2018, as compared to 73.55% of average total deposits during 2016 The decrease in the concentration of core deposits comprising total deposits since 2016 was due to a comparatively stronger rate of CD growth relative to the rate of core deposit growth. Money market deposits comprised the largest concentration of the Companys core deposits during 2018, averaging $704.9 million or 46.41% of average core deposits during 2018.
The balance of the Companys deposits consists of CDs, which equaled 32.00% of average total deposits during 2018 compared to 26.45% of average total deposits during 2016. Exhibit I-14 sets forth the maturity schedule of the Companys CDs, which shows that as of December 31, 2018 72.66% of the CDs were scheduled to mature in less than one year.
Borrowings serve as an alternative funding source for the Company to facilitate management of funding costs and interest rate risk. Borrowings totaled $553.7 million at December 31, 2018 and consisted entirely of FHLB advances with the exception of $33.8 million of subordinated debt. At December 31, 2018, the FHLB borrowings had a weighted average rate of 2.37%.
On August 30, 2018, the Company issued $35.0 million in fixed-to-floating rate subordinated debt due 2028 for purposes of increasing regulatory capital. The subordinated debt bears an annual fixed rate of 5.625% until September 1, 2023 at which time the interest rate resets quarterly to an annual interest rate equal to the three-month LIBOR plus 278 basis points. The subordinated debt is carried on the balance sheet net of issuance costs of $1.1 million, which are being amortized over the period to maturity date. Exhibit I-15 provides further detail of the Companys FHLB borrowing activities during the past three years.
Subsidiaries
HarborOne Bank is a wholly owned subsidiary of HarborOne Bancorp. HarborOne Bancorp also owns all of the common stock of Legion Parkway Company LLC, a Massachusetts limited liability company formed in 2016 to engage in buying, selling and holding securities. In addition to HarborOne Mortgage, HarborOne Bank has three wholly-owned subsidiaries, HarborOne Security Corporation, LLC and Oak Street Security Corporation, LLC, each a Massachusetts limited liability company, that are each engaged in buying, selling, dealing in and holding securities, and Rhode Island Passive Investment Corp., a Rhode Island passive investment corporation.
Legal Proceedings
The Company is involved in routine legal proceedings in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Companys financial condition, results of operations and cash flows.
II. MARKET AREA
Introduction
HarborOne Bancorp is headquartered in Brockton, Massachusetts and currently serves the Boston metropolitan area through 15 full-service banking offices and one limited service office. With the acquisition of Coastway, the Company added nine full-service branches in the Providence metropolitan area. The branches are located in the Massachusetts counties of Plymouth (seven offices including the main office), Bristol (five offices) and Norfolk (two offices) and the Rhode Island counties of Providence (six offices) and Kent (thee offices). The Bank also maintains a commercial loan office in Providence, Rhode Island. Details regarding the Companys office properties are set forth in Exhibit II-1.
With operations in major metropolitan area s, the Companys competitive environment includes a significant number of thrifts, commercial banks and other financial services companies, some of which have a regional or national presence and are larger than the Bank in terms of deposits, loans, scope of operations, and number of branches. These institutions also have greater resources at their disposal than the Company. The Boston and Providence MSAs have highly developed economies, with a relatively high concentration of skilled workers who are employed in a number of different industry clusters including healthcare, financial services and technology.
Future growth opportunities for HarborOne Bancorp depend on the future growth and stability of the local and regional economy, demographic growth trends and the nature and intensity of the competitive environment. These factors have been briefly examined to help determine the growth potential that exists for the Company, the relative economic health of the Companys market area, and the resultant impact on value.
National Economic Factors
The future success of the Companys operations is partially dependent upon various national and local economic trends. In assessing national economic trends over the past few quarters, The July 2018 unemployment rate fell to 3.9%, with the U.S. economy adding 157,000 jobs in July which was less than expected. Manufacturing and service sector activity for July expanded at slower rates, with respective readings of 58.1 and 55.7. July retail sales showed a healthy 0.5% increase, while July U.S. housing starts increased 0.9%. Comparatively, July
sales of existing and new homes declined by 0.7% and 1.7%, respectively. The pace of manufacturing activity for August accelerated to a 14-year high, with an index reading of 61.3. Similarly, August service sector expanded at a higher rate, based on an index reading of 58.5. The U.S. economy added 201,000 jobs in August, which was more than expected, and the August unemployment rate held steady at 3.9%. Existing home sales for August were unchanged from the prior month, while new home sales bounced back in August increasing 3.5% compared to July. Manufacturing activity for September expanded at a slower rate with an index reading of 59.8, while September service sector activity accelerated to a 10-year high index reading of 61.6. The September unemployment rate for the U.S. fell to a new generational low of 3.7%, which was the lowest unemployment rate since December 1969. The U.S. economy added 134,000 jobs during September. However, notwithstanding the robust economic data, the housing market continued to languish. September existing home sales declined 3.4%, while September new home sales declined 5.5% and stood at their lowest level in nearly two years. Third quarter GDP increased at an annual rate of 3.5% (subsequently revised to 3.4%), which exceeded expectations.
Manufacturing and service sector activity for October 2018 expanded at slower rates, with respective readings of 57.7 and 60.3. U.S. employers added 250,000 jobs in October and the October unemployment rate held steady at 3.7%. October retail sales increased 0.8% and, after six straight months of declines, existing home sales for October increased 1.4%. Comparatively, new home sales for October fell 8.9% and October pending home sales declined by 2.6%. November manufacturing activity accelerated to an index reading of 59.3, while service sector activity for November increased to an index reading of 60.7. The U.S. economy added 155,000 jobs in November, while the November unemployment rate held steady at 3.7%. November existing and new home sales increased by1.9% and 16.9%, respectively. Manufacturing activity slowed in December to a reading of 54.1, which was the largest one month drop since the end of 2008. Service sector activity for December edged lower to an index reading of 58.0. The U.S. economy added 312,000 jobs in December, which beat economists expectations. The December unemployment rate edged up to 3.9%, as more people entered the labor force. Existing home sales for December fell 6.4%, which was the weakest level since 2015. For all of 2018, existing home sales were the lowest report in three years.
The U.S. economy added 304,000 jobs in January 2019, which exceeded expectations, and the January unemployment rate increased to 4.0% as more people entered the labor force.
Manufacturing activity accelerated in January with an index reading of 56.6, while service activity declined for a second consecutive month with an index reading of 56.7.
In terms of interest rates trends over the past few quarters, the 10-year Treasury yield stabilized around 2.85% during the first half of July 2018, with June consumer price data showing U.S. inflation hitting its highest rate in more than six years. In late-July, Treasury yields surged higher as investors dumped government bonds in favor of stocks amid strong second quarter earnings results and signs of U.S. economic growth accelerating. The Federal Reserve concluded its early-August policy meeting keeping its target interest rate unchanged as expected and gave an upbeat assessment of the economy, suggesting another rate increase was likely at its next meeting. The outcome of the Federal Reserve meeting and news of rising federal budget deficits helped to push the 10-year Treasury yield up to 3.0% following the Federal Reserve meeting. For the balance of August, the 10-year Treasury yield edged down to slightly below 3.0%. The favorable employment report for August helped to push the 10-year Treasury yield back above 3.0% in mid-September, as the benchmark rate approached a seven-year high. Long-term Treasury yields stabilized through the end of September, as the Federal Reserve concluded its late-September policy meeting voting to lift interest rates by another quarter point and signaled they would continue to implement a path of gradual rate hikes.
Long-term Treasury yields hit fresh highs in early-October 2018, as robust economic data and an easing of trade tensions across North America sparked fresh optimism about the global growth outlook. After climbing up to 3.23% with the release of the September employment report, the 10-year Treasury yield edged lower through the end of October and then bounced higher in early-November. The October employment report, which showed that U.S. wages grew at the fastest rate since April 2009, was the primary catalyst that drove Treasury yields higher. The Federal Reserve held rates steady at its early-November policy meeting and suggested another rate increase was likely by the end of the year. Following the Federal Reserve meeting, long-term Treasury yields drifted lower into late-November. The downward trend in long-term Treasury yields continued into December, as doubts over the U.S.-China trade truce renewed concerns about the pace of economic growth. Treasury yields further declined after the Federal Reserves mid-December policy meeting concluded with a 0.25% rate increase to its target rate to a range between 2.25% and 2.5%, as investors gravitated toward safe-haven investments in the closing weeks of 2018 amid significant volatility in the stock market.
Long-term Treasury yields continued to edge lower at the start of 2019, as an index reading for manufacturing activity in December posted its largest one month decline since the end of 2008. Stronger-than-expected job growth reported for December served to reverse the downward trend in long-term Treasury yields at the end of the first week of 2019, which was followed by interest rates stabilizing through late-January. Long-term Treasury yields edged lower at the end of January after the Federal Reserve concluded its policy meeting electing to hold their benchmark rate steady and indicated that it was done raising rates for now. As of February 8, 2019, the bond equivalent yields for U.S. Treasury bonds with terms of one and ten years equaled 2.54% and 2.63%, respectively, versus comparable year ago yields of 1.91% and 2.85%. Exhibit II-2 provides historical interest rate trends.
Based on the consensus outlook of economists surveyed by The Wall Street Journal in January 2019, GDP growth was projected to decrease to 2.2% in 2019. The unemployment rate was forecasted to equal 3.6% in June 2019 and in December 2019. An average of 157,000 jobs were projected to be added per month during 2019. On average, the economists forecasted an increase in the federal funds rate to 2.59% in June 2019 and to 2.75% in December 2019. On average, the economists forecasted that the 10-year Treasury yield would increase to 2.96% in June 2019 and increase to 3.10% by the end of 2019. The surveyed economists also forecasted home prices would rise 3.8% in 2019 and housing starts were forecasted to increase slightly in 2019.
The January 2019 mortgage finance forecast from the Mortgage Bankers Association (the MBA) was for 2019 existing home sales to increase by 3.4% from 2018 sales and new home sales were forecasted to increase by 3.8% in 2019 from sales in 2018. The 2019 median sale prices for new and existing homes were forecasted to increase by 2.6% and 4.9%, respectively. Total mortgage production was forecasted to decline in 2019 to $1.613 trillion, compared to $1.643 trillion in 2018. The forecasted decrease in 2019 originations was based on a 4.0% increase in purchase volume and a 16.8% decrease in refinancing volume. Purchase mortgage originations were forecasted to total $1.232 trillion in 2019, versus refinancing volume totaling $381 billion. Housing starts for 2019 were projected to increase by 2.0% to total 1.285 million.
Market Area Demographics
Demographic and economic growth trends, measured by changes in population, number of households, age distribution and median household income, provide key insight into the
health of the market area served by HarborOne Bank. Demographic data for Bristol, Norfolk, Plymouth, Providence and Kent Counties, as well as for Massachusetts and Rhode Island, and the U.S., is provided in Table 2.1.
Population and household data indicate that the market area served by the Companys branches is a mix of urban and suburban markets. Norfolk County is the most populous county in the Companys market area with a total population of 705,000, while Kent County has the smallest population with a total population of 164,000. For the 2014 to 2019 period, Plymouth County recorded the strongest population growth with an annual growth rate of 0.7%. Comparatively, Kent County recorded no change in population over the past five years. Five year annual population growth rates for the U.S., Massachusetts and Rhode Island equaled 0.7%, 0.6% and 0.3%, respectively.
Household growth rates for the primary market area counties paralleled population growth trends, with Plymouth County and Kent County displaying the highest and lowest household growth rate for the past five years. Over the next five years, population and household growth rates for the primary area counties are generally projected to be relatively consistent with recent historical trends.
Income measures show that the counties of Norfolk and Plymouth are relatively affluent markets, with household and per capita income measures that were well above the comparable U.S. measures. Household and per capita income measures for Bristol and Kent Counties also exceeded the U.S. measures, while Providence Countys household and per capita income were lower than the U.S. measures. Over the next five years, median household income annual growth rates ranged from a low of 0.9% for Kent County to a high of 2.6% for Bristol County compared to 1.7% for the U.S, 2.2% for Massachusetts and 1.4% for Rhode Island.
A comparison of household income distribution measures provides another indication of the relative affluence of Norfolk and Plymouth Counties, which maintained significantly higher percentages of households with incomes above $100,000 compared to the U.S. Comparatively, Providence County was the only primary market area county that maintained a lower percentage of households with incomes above $100,000 compared to the U.S. Age distribution measures for the primary market area counties were fairly similar to the comparable U.S. and state measures, although Providence County had a relatively older population.
Table 2.1
HarborOne Bancorp, Inc.
Summary Demographic Data
|
|
Year |
|
Growth Rate |
|
|||||||
|
|
2014 |
|
2019 |
|
2024 |
|
2014-2019 |
|
2019-2024 |
|
|
|
|
|
|
|
|
|
|
(%) |
|
(%) |
|
|
Population (000) |
|
|
|
|
|
|
|
|
|
|
|
|
USA |
|
317,199 |
|
329,236 |
|
340,950 |
|
0.7 |
% |
0.7 |
% |
|
Massachusetts |
|
6,704 |
|
6,917 |
|
7,132 |
|
0.6 |
% |
0.6 |
% |
|
Rhode Island |
|
1,049 |
|
1,062 |
|
1,070 |
|
0.3 |
% |
0.1 |
% |
|
Bristol, MA |
|
553 |
|
565 |
|
578 |
|
0.4 |
% |
0.5 |
% |
|
Norfolk, MA |
|
688 |
|
705 |
|
726 |
|
0.5 |
% |
0.6 |
% |
|
Plymouth, MA |
|
502 |
|
520 |
|
536 |
|
0.7 |
% |
0.6 |
% |
|
Providence, RI |
|
629 |
|
640 |
|
648 |
|
0.3 |
% |
0.2 |
% |
|
Kent, RI |
|
164 |
|
164 |
|
163 |
|
0.0 |
% |
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Households (000) |
|
|
|
|
|
|
|
|
|
|
|
|
USA |
|
120,163 |
|
125,019 |
|
129,684 |
|
0.8 |
% |
0.7 |
% |
|
Massachusetts |
|
2,613 |
|
2,711 |
|
2,805 |
|
0.7 |
% |
0.7 |
% |
|
Rhode Island |
|
414 |
|
421 |
|
425 |
|
0.3 |
% |
0.2 |
% |
|
Bristol, MA |
|
215 |
|
221 |
|
228 |
|
0.6 |
% |
0.5 |
% |
|
Norfolk, MA |
|
264 |
|
272 |
|
281 |
|
0.6 |
% |
0.6 |
% |
|
Plymouth, MA |
|
185 |
|
193 |
|
201 |
|
0.9 |
% |
0.7 |
% |
|
Providence, RI |
|
243 |
|
248 |
|
251 |
|
0.4 |
% |
0.3 |
% |
|
Kent, RI |
|
68 |
|
69 |
|
69 |
|
0.2 |
% |
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Median Household Income ($) |
|
|
|
|
|
|
|
|
|
|
|
|
USA |
|
51,579 |
|
63,174 |
|
68,744 |
|
4.1 |
% |
1.7 |
% |
|
Massachusetts |
|
65,736 |
|
82,084 |
|
91,580 |
|
4.5 |
% |
2.2 |
% |
|
Rhode Island |
|
56,249 |
|
64,127 |
|
68,904 |
|
2.7 |
% |
1.4 |
% |
|
Bristol, MA |
|
57,890 |
|
71,507 |
|
81,215 |
|
4.3 |
% |
2.6 |
% |
|
Norfolk, MA |
|
85,780 |
|
102,311 |
|
112,109 |
|
3.6 |
% |
1.8 |
% |
|
Plymouth, MA |
|
71,517 |
|
89,164 |
|
99,439 |
|
4.5 |
% |
2.2 |
% |
|
Providence, RI |
|
48,703 |
|
56,727 |
|
62,296 |
|
3.1 |
% |
1.9 |
% |
|
Kent, RI |
|
63,610 |
|
68,459 |
|
71,434 |
|
1.5 |
% |
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Capita Income ($) |
|
|
|
|
|
|
|
|
|
|
|
|
USA |
|
27,721 |
|
34,902 |
|
38,568 |
|
4.7 |
% |
2.0 |
% |
|
Massachusetts |
|
27,721 |
|
46,799 |
|
52,558 |
|
11.0 |
% |
2.3 |
% |
|
Rhode Island |
|
27,721 |
|
36,037 |
|
39,148 |
|
5.4 |
% |
1.7 |
% |
|
Bristol, MA |
|
27,721 |
|
38,348 |
|
44,250 |
|
6.7 |
% |
2.9 |
% |
|
Norfolk, MA |
|
27,721 |
|
56,601 |
|
61,911 |
|
15.3 |
% |
1.8 |
% |
|
Plymouth, MA |
|
27,721 |
|
45,313 |
|
51,376 |
|
10.3 |
% |
2.5 |
% |
|
Providence, RI |
|
27,721 |
|
31,953 |
|
35,199 |
|
2.9 |
% |
2.0 |
% |
|
Kent, RI |
|
27,721 |
|
37,637 |
|
39,895 |
|
6.3 |
% |
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Age Distribution (%) |
|
0-14 Yrs. |
|
15-34 Yrs. |
|
35-54 Yrs. |
|
55-69 Yrs. |
|
70+ Yrs. |
|
|
USA |
|
18.6 |
|
26.9 |
|
25.3 |
|
18.5 |
|
10.7 |
|
|
Massachusetts |
|
16.3 |
|
27.2 |
|
25.8 |
|
19.6 |
|
11.1 |
|
|
Rhode Island |
|
15.8 |
|
27.6 |
|
24.9 |
|
20.1 |
|
11.7 |
|
|
Bristol, MA |
|
16.5 |
|
25.6 |
|
26.2 |
|
20.1 |
|
11.6 |
|
|
Norfolk, MA |
|
16.9 |
|
25.1 |
|
26.4 |
|
20.0 |
|
11.6 |
|
|
Plymouth, MA |
|
17.0 |
|
24.0 |
|
25.4 |
|
21.6 |
|
11.9 |
|
|
Providence, RI |
|
17.0 |
|
29.0 |
|
25.3 |
|
18.1 |
|
10.6 |
|
|
Kent, RI |
|
15.0 |
|
23.3 |
|
26.2 |
|
22.7 |
|
12.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
$25,000 to |
|
$50,000 to |
|
|
|
|
|
|
2019 HH Income Dist. (%) |
|
25,000 |
|
50,000 |
|
100,000 |
|
$100,000+ |
|
|
|
|
USA |
|
19.6 |
|
21.5 |
|
29.2 |
|
29.7 |
|
|
|
|
Massachusetts |
|
16.5 |
|
16.3 |
|
25.7 |
|
41.5 |
|
|
|
|
Rhode Island |
|
20.6 |
|
20.6 |
|
27.8 |
|
30.9 |
|
|
|
|
Bristol, MA |
|
18.7 |
|
18.9 |
|
26.9 |
|
35.5 |
|
|
|
|
Norfolk, MA |
|
12.0 |
|
12.7 |
|
24.4 |
|
51.0 |
|
|
|
|
Plymouth, MA |
|
12.8 |
|
15.8 |
|
26.6 |
|
44.8 |
|
|
|
|
Providence, RI |
|
23.8 |
|
22.0 |
|
27.4 |
|
26.8 |
|
|
|
|
Kent, RI |
|
17.4 |
|
20.9 |
|
28.8 |
|
32.9 |
|
|
|
|
Source: S&P Global Market Intelligence.
Regional Economy
Comparative employment data shown in Table 2.2 shows that , except for Plymouth County, employment in education/healthcare/social services followed by services were the largest and second largest employment sectors in all of the primary market area counties, as well as Massachusetts and Rhode Island. Service jobs constituted the largest employment sector for Plymouth County, followed by employment in education/healthcare/social services. Wholesale/retail trade jobs were the third largest employment sector for all three of the primary area counties, as well as for Massachusetts and Rhode Island. Other noteworthy employment sectors for the primary market area counties included manufacturing, finance/insurance/real estate and construction jobs. Overall, the distribution of employment exhibited in the primary market area is indicative of a diverse economic environment.
Table 2.2
HarborOne Bancorp, Inc.
Primary Market Area Employment Sectors
(Percent of Labor Force)
|
|
|
|
|
|
Bristol |
|
Norfolk |
|
Plymouth |
|
Kent |
|
Providence |
|
Employment Sector |
|
Massachusetts |
|
Rhode Island |
|
County |
|
County |
|
County |
|
County |
|
County |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
26.9 |
% |
25.2 |
% |
22.1 |
% |
26.6 |
% |
25.7 |
% |
24.6 |
% |
23.8 |
% |
Education,Healthcare, Soc. Serv. |
|
28.1 |
% |
27.3 |
% |
26.6 |
% |
28.2 |
% |
24.8 |
% |
27.5 |
% |
25.5 |
% |
Government |
|
3.8 |
% |
4.1 |
% |
4.2 |
% |
3.4 |
% |
4.4 |
% |
3.6 |
% |
5.1 |
% |
Wholesale/Retail Trade |
|
12.9 |
% |
14.8 |
% |
16.8 |
% |
12.3 |
% |
15.3 |
% |
15.6 |
% |
14.6 |
% |
Finance/Insurance/Real Estate |
|
7.4 |
% |
6.5 |
% |
5.4 |
% |
11.1 |
% |
8.5 |
% |
6.4 |
% |
7.3 |
% |
Manufacturing |
|
9.1 |
% |
11.3 |
% |
11.7 |
% |
6.8 |
% |
7.1 |
% |
11.9 |
% |
12.5 |
% |
Construction |
|
5.4 |
% |
5.3 |
% |
7.1 |
% |
5.1 |
% |
6.7 |
% |
4.7 |
% |
5.6 |
% |
Information |
|
2.4 |
% |
1.6 |
% |
1.7 |
% |
2.6 |
% |
2.0 |
% |
1.7 |
% |
1.5 |
% |
Transportation/Utility |
|
3.7 |
% |
3.6 |
% |
3.8 |
% |
3.7 |
% |
5.3 |
% |
3.9 |
% |
4.1 |
% |
Agriculture |
|
0.4 |
% |
0.4 |
% |
0.5 |
% |
0.2 |
% |
0.3 |
% |
0.2 |
% |
0.1 |
% |
Other |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
|
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
Source: S&P Global Market Intelligence.
The market area served by the Company, characterized primarily as the Boston and Providence MSAs, has a highly developed and diverse economy, with the regions many colleges and universities serving to attract industries in need of a highly skilled and educated workforce. Healthcare, high-tech and financial services companies constitute major sources of employment in the Companys regional market area, as well as the colleges and universities that populate the Boston and Providences MSAs. Tourism also is a prominent component of Boston MSA economy, as Boston annually ranks as one of the nations top tourist destinations. Table 2.3 lists in detail the major employers in the Companys market area.
Table 2.3
HarborOne Bank
Boston Market Area Largest Employers
Company/Institution |
|
Industry |
|
Employees |
|
|
|
|
|
|
|
Massachusetts General Hospital |
|
Health Care |
|
16,999 |
|
Brigham and Womens Hospital |
|
Health Care |
|
13,303 |
|
Childrens Hospital, Boston |
|
Health Care |
|
8,000 |
|
Boston Childrens-Neurology |
|
Health Care |
|
8,000 |
|
Beth Israel Deaconess Med. Center |
|
Health Care |
|
7,743 |
|
Liberty Mutual Group |
|
Finance and Insurance |
|
7,000 |
|
Massachusetts Bay Transportation |
|
Transportation |
|
6,001 |
|
Boston University |
|
Higher Education |
|
5,955 |
|
Boston Medical Center |
|
Health Care |
|
5,335 |
|
Boston University Medical Campus |
|
Health Care |
|
5,000 |
|
Floating Hospital for Children |
|
Health Care |
|
5,000 |
|
John Hancock |
|
Finance and Insurance |
|
5,000 |
|
Dana-Farber Cancer Institute |
|
Health Care |
|
4,098 |
|
Faulkner Hospital Psychiatry |
|
Health Care |
|
4,000 |
|
Source: Infogroup, 2019
Providence Market Area Largest Employers
Company/Institution |
|
Industry |
|
Employees |
|
|
|
|
|
|
|
Citizens Bank |
|
Finance and Insurance |
|
17,300 |
|
Lifespan |
|
Health Care |
|
16,046 |
|
Nortek |
|
Information Technology |
|
11,400 |
|
United Natural Foods |
|
Wholesale/Retail Trade |
|
9,554 |
|
Rhode Island Hospital |
|
Health Care |
|
7,274 |
|
Johnson & Wales University |
|
Higher Education |
|
4,280 |
|
Providence College |
|
Higher Education |
|
3,000 |
|
Rhode Island School of Design |
|
Higher Education |
|
3,000 |
|
Women & Infants |
|
Health Care |
|
2,800 |
|
LIN Television Corporation |
|
Communications |
|
2,786 |
|
Source: www.zippia.com/advice/largest-companies-in-rhode-island/
Unemployment Trends
Comparative unemployment rates for the primary market area counties, as well as for the U.S., Massachusetts and Rhode Island, are shown in Table 2.4. December 2018 unemployment rates for the primary market area counties ranged from a low of 2.4% for Norfolk County to a high of 4.1% for Providence County. Comparative unemployment rates for the U.S., Massachusetts and Rhode Island equaled 3.7%, 2.7% and 3.8%, respectively. Consistent with the national and state trends, all of the primary market area counties reported lower unemployment rates for December 2018 compared to a year ago.
Table 2.4
HarborOne Bancorp, Inc.
Unemployment Trends
|
|
December 2017 |
|
December 2018 |
|
Region |
|
Unemployment |
|
Unemployment |
|
USA |
|
3.9 |
% |
3.7 |
% |
Massachusetts |
|
3.1 |
% |
2.7 |
% |
Rhode Island |
|
4.2 |
% |
3.8 |
% |
Bristol, MA |
|
3.9 |
% |
3.4 |
% |
Norfolk, MA |
|
2.7 |
% |
2.4 |
% |
Plymouth, MA |
|
3.2 |
% |
2.8 |
% |
Providence, RI |
|
4.4 |
% |
4.1 |
% |
Kent, RI |
|
4.0 |
% |
3.5 |
% |
Source: S&P Global Market Intelligence.
Market Area Deposit Characteristics and Competition
The Companys deposit base is closely tied to the economic fortunes of the Boston and Providence MSAs and, in particular, the areas that are nearby to one of HarborOne Bancorps branches. The Kent County and Providence County branches were maintained as Coastway branches for both dates shown in Table 2.5. Table 2.5 displays deposit market trends from June 30, 2013 through June 30, 2018 for all commercial bank and savings institution branches located in the market area counties, as well as Massachusetts and Rhode Island. Consistent with Massachusetts and Rhode Island, commercial banks maintained a larger market share of deposits than savings institutions in all the primary market area counties. Overall, from June 30, 2013 to June 30, 2018, bank and thrift deposits increased in all of the primary market area counties.
Table 2.5
HarborOne Bancorp, Inc.
Deposit Summary
|
|
As of June 30, |
|
|
|
||||||||||||
|
|
2013 |
|
2018 |
|
Deposit |
|
||||||||||
|
|
|
|
Market |
|
No. of |
|
|
|
Market |
|
No. of |
|
Growth Rate |
|
||
|
|
Deposits |
|
Share |
|
Branches |
|
Deposits |
|
Share |
|
Branches |
|
2013-2018 |
|
||
|
|
(Dollars in Thousands) |
|
(%) |
|
||||||||||||
Massachusetts |
|
$ |
288,381,000 |
|
100.0 |
% |
2,218 |
|
$ |
397,358,000 |
|
100.0 |
% |
2,156 |
|
6.6 |
% |
Commercial Banks |
|
225,589,000 |
|
78.2 |
% |
1,320 |
|
314,437,000 |
|
79.1 |
% |
1,270 |
|
6.9 |
% |
||
Savings Institutions |
|
62,792,000 |
|
21.8 |
% |
898 |
|
82,921,000 |
|
20.9 |
% |
886 |
|
5.7 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Rhode Island |
|
$ |
28,829,000 |
|
100.0 |
% |
258 |
|
35,089,000 |
|
100.0 |
% |
251 |
|
4.0 |
% |
|
Commercial Banks |
|
25,825,000 |
|
89.6 |
% |
212 |
|
31,625,000 |
|
90.1 |
% |
202 |
|
4.1 |
% |
||
Savings Institutions |
|
3,005,000 |
|
10.4 |
% |
46 |
|
3,465,000 |
|
9.9 |
% |
49 |
|
2.9 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Bristol County |
|
$ |
8,309,000 |
|
100.0 |
% |
153 |
|
$ |
10,970,000 |
|
100.0 |
% |
151 |
|
5.7 |
% |
Commercial Banks |
|
4,817,000 |
|
58.0 |
% |
89 |
|
5,685,000 |
|
51.8 |
% |
76 |
|
3.4 |
% |
||
Savings Institutions |
|
3,492,000 |
|
42.0 |
% |
64 |
|
5,285,000 |
|
48.2 |
% |
75 |
|
8.6 |
% |
||
HarborOne Bancorp(1) |
|
NA |
|
NA |
|
NA |
|
386,851 |
|
3.5 |
% |
5 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Norfolk County |
|
$ |
20,222,000 |
|
100.0 |
% |
245 |
|
$ |
28,073,000 |
|
100.0 |
% |
254 |
|
6.8 |
% |
Commercial Banks |
|
14,691,000 |
|
72.6 |
% |
169 |
|
17,223,000 |
|
61.4 |
% |
144 |
|
3.2 |
% |
||
Savings Institutions |
|
5,530,000 |
|
27.3 |
% |
76 |
|
10,850,000 |
|
38.6 |
% |
110 |
|
14.4 |
% |
||
HarborOne Bancorp(1) |
|
NA |
|
NA |
|
NA |
|
298,109 |
|
1.1 |
% |
2 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Plymouth County |
|
$ |
8,102,000 |
|
100.0 |
% |
152 |
|
$ |
12,091,000 |
|
100.0 |
% |
150 |
|
8.3 |
% |
Commercial Banks |
|
5,446,000 |
|
67.2 |
% |
98 |
|
7,536,000 |
|
62.3 |
% |
98 |
|
6.7 |
% |
||
Savings Institutions |
|
2,656,000 |
|
32.8 |
% |
54 |
|
4,555,000 |
|
37.7 |
% |
52 |
|
11.4 |
% |
||
HarborOne Bancorp(1) |
|
NA |
|
NA |
|
NA |
|
1,525,276 |
|
12.6 |
% |
7 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Kent County |
|
$ |
3,083,000 |
|
100.0 |
% |
43 |
|
$ |
3,709,000 |
|
100.0 |
% |
43 |
|
3.8 |
% |
Commercial Banks |
|
2,163,000 |
|
70.2 |
% |
32 |
|
2,499,000 |
|
67.4 |
% |
30 |
|
2.9 |
% |
||
Savings Institutions |
|
920,000 |
|
29.8 |
% |
11 |
|
1,210,000 |
|
32.6 |
% |
13 |
|
5.6 |
% |
||
HarborOne Bancorp(1) |
|
161,256 |
|
5.2 |
% |
3 |
|
251,517 |
|
6.8 |
% |
5 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Providence County |
|
$ |
20,083,000 |
|
100.0 |
% |
143 |
|
$ |
24,272,000 |
|
100.0 |
% |
136 |
|
3.9 |
% |
Commercial Banks |
|
19,307,000 |
|
96.1 |
% |
128 |
|
23,663,000 |
|
97.5 |
% |
122 |
|
4.2 |
% |
||
Savings Institutions |
|
776,000 |
|
3.9 |
% |
15 |
|
609,000 |
|
2.5 |
% |
14 |
|
-4.7 |
% |
||
HarborOne Bancorp(1) |
|
105,152 |
|
0.5 |
% |
4 |
|
255,836 |
|
1.1 |
% |
6 |
|
|
|
(1) HarborOne Bancorp was a credit union as of June 30, 2013.
Source: FDIC.
The Company maintains its largest balance of deposits in Plymouth County, where the Company is headquartered and maintains its largest branch presence. Based on June 30, 2018 deposit data, HarborOne Bancorps $1.5 billion of deposits provided for a 12.6% market share of bank and thrift deposits in Plymouth County. The Banks deposit market share in the primary market area counties ranged from 1.1% in Norfolk County and Providence County to 12.6% in Providence County. HarborOne Bank converted from a credit union to a bank in July 2013 and, therefore, FDIC deposit data for the Bank was not available as of June 30, 2013.
C ompetition among financial institutions in the Companys market area is significant. Among the Companys competitors are much larger and more diversified institutions, which have greater resources than maintained by HarborOne Bancorp. Financial institution competitors in the Companys primary market area include other locally based thrifts and banks, as well as regional, super regional and money center banks. From a competitive standpoint, HarborOne Bancorphas sought to emphasize its community orientation in the markets served by its branches. Table 2.6 lists the Companys largest competitors in the market area counties, based on deposit market share as noted parenthetically.
Table 2.6
HarborOne Bancorp, Inc.
Market Area Deposit Competitors
Location |
|
Name |
|
Market Share (%) |
|
Rank |
|
Bristol County, MA |
|
Bank of America Corporation (NC) |
|
16.30 |
|
|
|
|
|
Beacon Bancorp (MA) |
|
14.51 |
|
|
|
|
|
Banco Santander |
|
11.80 |
|
|
|
|
|
Narragansett Financial Corp. (MA) |
|
9.92 |
|
|
|
|
|
Citizens Financial Group Inc. (RI) |
|
8.63 |
|
|
|
|
|
HarborOne Bancorp, Inc. (MA) |
|
3.53 |
|
11 out of 16 |
|
|
|
|
|
|
|
|
|
Norfolk County, MA |
|
Bank of America Corporation (NC) |
|
23.31 |
|
|
|
|
|
Citizens Financial Group Inc. (RI) |
|
15.33 |
|
|
|
|
|
Banco Santander |
|
5.50 |
|
|
|
|
|
Independent Bank Corp. (MA) |
|
5.09 |
|
|
|
|
|
Needham Bank (MA) |
|
4.97 |
|
|
|
|
|
HarborOne Bancorp, Inc. (MA) |
|
1.05 |
|
21 out of 44 |
|
|
|
|
|
|
|
|
|
Plymouth County, MA |
|
Independent Bank Corp. (MA) |
|
23.29 |
|
|
|
|
|
HarborOne Bancorp, Inc. (MA) |
|
12.61 |
|
2 out of 21 |
|
|
|
Citizens Financial Group Inc. (RI) |
|
11.68 |
|
|
|
|
|
Hingham Instit. for Savings (MA) |
|
10.90 |
|
|
|
|
|
Eastern Bank Corp. (MA) |
|
8.74 |
|
|
|
|
|
|
|
|
|
|
|
Kent County, RI |
|
Citizens Financial Group Inc. (RI) |
|
28.58 |
|
|
|
|
|
Centreville Bank (RI) |
|
19.30 |
|
|
|
|
|
Bank of America Corporation (NC) |
|
9.41 |
|
|
|
|
|
Brookline Bancorp Inc. (MA) |
|
9.24 |
|
|
|
|
|
Banco Santander |
|
7.65 |
|
|
|
|
|
HarborOne Bancorp, Inc. (MA) |
|
6.78 |
|
7 out of 12 |
|
|
|
|
|
|
|
|
|
Providence County, RI |
|
Bank of America Corporation (NC) |
|
45.95 |
|
|
|
|
|
Citizens Financial Group Inc. (RI) |
|
33.71 |
|
|
|
|
|
Banco Santander |
|
7.29 |
|
|
|
|
|
Brookline Bancorp Inc. (MA) |
|
4.98 |
|
|
|
|
|
Washington Trust Bancorp Inc. (RI) |
|
2.76 |
|
|
|
|
|
HarborOne Bancorp, Inc. (MA) |
|
1.05 |
|
8 out of 16 |
|
Source: S&P Gobal Market Intelligence.
III. PEER GROUP ANALYSIS
This chapter presents an analysis of HarborOne Bancorps operations versus a group of comparable savings institutions (the Peer Group) selected from the universe of all publicly-traded savings institutions in a manner consistent with the regulatory valuation guidelines. The basis of the pro forma market valuation of HarborOne Bancorp is derived from the pricing ratios of the Peer Group institutions, incorporating valuation adjustments for key differences in relation to the Peer Group. Since no Peer Group can be exactly comparable to HarborOne Bancorp, key areas examined for differences are: financial condition; profitability, growth and viability of earnings; asset growth; primary market area; dividends; liquidity of the shares; marketing of the issue; management; and effect of government regulations and regulatory reform.
Peer Group Selection
The Peer Group selection process is governed by the general parameters set forth in the regulatory valuation guidelines. Accordingly, the Peer Group is comprised of only those publicly-traded savings institutions whose common stock is either listed on the NYSE or NASDAQ, since their stock trading activity is regularly reported and generally more frequent than non-publicly traded and closely-held institutions. Institutions that are not listed on the NYSE or NASDAQ are inappropriate, since the trading activity for thinly-traded or closely-held stocks are typically highly irregular in terms of frequency and price and thus may not be a reliable indicator of market value. We have also excluded from the Peer Group those companies under acquisition or subject to rumored acquisition, mutual holding companies and recent conversions, since their pricing ratios are subject to unusual distortion and/or have limited trading history. A recent listing of the universe of all publicly-traded savings institutions is included as Exhibit III-1.
Ideally, the Peer Group, which must have at least 10 members to comply with the regulatory valuation guidelines, should be comprised of locally- or regionally-based institutions with comparable resources, strategies and financial characteristics. There are approximately 126 publicly-traded institutions nationally and, thus, it is typically the case that the Peer Group will be comprised of institutions with relatively comparable characteristics. To the extent that differences exist between the converting institution and the Peer Group, valuation adjustments will be applied to account for the differences. Since HarborOne Bancorp will be a full public
company upon completion of the offering, we considered only full public companies to be viable candidates for inclusion in the Peer Group. From the universe of publicly-traded thrifts, we selected ten institutions with characteristics similar to those of HarborOne Bancorp. In the selection process, we applied three screens to the universe of all public companies that were eligible for consideration:
· Screen #1 New England institutions with assets between $1.75 billion and $6.75 billion, tangible equity-to-assets ratios of greater than 8.0%, positive core earnings and return on average equity ratios of less than 15.0% Three companies met the criteria for Screen #1 and two were included in the Peer Group: Meridian Bancorp, Inc. of Massachusetts and Western New England Bancorp, Inc. of Massachusetts. Blue Hills Bancorp, Inc. of Massachusetts met the selection criteria, but was excluded from the Peer Group as the result of being the target of an announced acquisition. Exhibit III-2 provides financial and public market pricing characteristics of all publicly-traded New England thrifts.
· Screen #2 Mid-Atlantic institutions with assets between $1.75 billion and $6.75 billion, tangible equity-to-assets ratios of greater than 8.0%, positive core earnings and return on average equity ratios of less than 15.0%. Seven companies met the criteria for Screen #2 and six were included in the Peer Group: Dime Community Bancshares, Inc. of New York, ESSA Bancorp, Inc. of Pennsylvania, Kearny Financial Corp. of New Jersey, Northfield Bancorp, Inc. of New Jersey, Oritani Financial Corp. of New Jersey and TrustCo Bank Corp. of New York. Beneficial Bancorp, Inc. of Pennsylvania met the selection criteria, but was excluded from the Peer Group as the result of being the target of an announced acquisition. Exhibit III-3 provides financial and public market pricing characteristics of all publicly-traded Mid-Atlantic thrifts.
· Screen #3 Mid-West institutions with assets between $1.75 billion and $6.75 billion, tangible equity-to-assets ratios of greater than 8.0%, positive core earnings and return on average equity ratios of less than 15.0%. Two companies met the criteria for Screen #2 and both were included in the Peer Group: First Defiance Financial Corp. of Ohio and Waterstone Financial Inc. of Wisconsin. Exhibit III-4 provides financial and public market pricing characteristics of all publicly-traded Mid-West thrifts.
Table 3.1 shows the general characteristics of each of the ten Peer Group companies and Exhibit III-5 provides summary demographic and deposit market share data for the primary market areas served by each of the Peer Group companies. While there are expectedly some differences between the Peer Group companies and HarborOne Bancorp, we believe that the Peer Group companies, on average, provide a good basis for valuation subject to valuation adjustments. The following sections present a comparison of HarborOne Bancorps financial condition, income and expense trends, loan composition, interest rate risk and credit risk versus the Peer Group as of the most recent publicly available date. Comparative data for
Table 3.1
Peer Group of Publicly-Traded Thrifts
As of September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 8, 2019 |
|
||
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Fiscal |
|
|
Stock |
|
Market |
|
Ticker |
|
Financial Institution |
|
Exchange |
|
City |
|
State |
|
Assets |
|
Offices |
|
Year End |
|
|
Price |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
($Mil) |
|
|
|
|
|
|
($) |
|
($Mil) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DCOM |
|
Dime Community Bancshares, Inc. |
|
NASDAQ |
|
Brooklyn |
|
NY |
|
6,294 |
|
29 |
|
Dec |
|
|
19.84 |
|
716.08 |
|
ESSA |
|
ESSA Bancorp, Inc. |
|
NASDAQ |
|
Stroudsburg |
|
PA |
|
1,834 |
|
23 |
|
Sep |
|
|
15.25 |
|
167.65 |
|
FDEF |
|
First Defiance Financial Corp. |
|
NASDAQ |
|
Defiance |
|
OH |
|
3,098 |
|
44 |
|
Dec |
|
|
29.39 |
|
593.56 |
|
KRNY |
|
Kearny Financial Corp. |
|
NASDAQ |
|
Fairfield |
|
NJ |
|
6,656 |
|
54 |
|
Jun |
|
|
12.95 |
|
1,163.43 |
|
EBSB |
|
Meridian Bancorp, Inc. |
|
NASDAQ |
|
Peabody |
|
MA |
|
5,775 |
|
37 |
|
Dec |
|
|
15.77 |
|
805.94 |
|
NFBK |
|
Northfield Bancorp, Inc. |
|
NASDAQ |
|
Woodbridge |
|
NJ |
|
4,286 |
|
40 |
|
Dec |
|
|
14.59 |
|
716.77 |
|
ORIT |
|
Oritani Financial Corp. |
|
NASDAQ |
|
Township of Washington |
|
NJ |
|
4,110 |
|
27 |
|
Jun |
|
|
16.88 |
|
767.92 |
|
TRST |
|
TrustCo Bank Corp NY |
|
NASDAQ |
|
Glenville |
|
NY |
|
4,885 |
|
148 |
|
Dec |
|
|
8.01 |
|
774.24 |
|
WSBF |
|
Waterstone Financial, Inc. |
|
NASDAQ |
|
Wauwatosa |
|
WI |
|
1,919 |
|
13 |
|
Dec |
|
|
16.24 |
|
425.31 |
|
WNEB |
|
Western New England Bancorp, Inc. |
|
NASDAQ |
|
Westfield |
|
MA |
|
2,151 |
|
24 |
|
Dec |
|
|
9.80 |
|
271.39 |
|
Source: S&P Global Market Intelligence
all publicly-traded thrifts and publicly-traded Massachusetts thrifts have been included in the Chapter III tables as well.
In addition to the selection criteria used to identify the Peer Group companies, a summary description of the key comparable characteristics of each of the Peer Group companies relative to HarborOne Bancorps characteristics is detailed below.
· Dime Community Bancshares, Inc. of New York. Comparable due to competes in a large metropolitan market area, similar concentration of loans comprising assets and similar interest-bearing funding composition.
· ESSA Bancorp, Inc. of Pennsylvania. Comparable due to similar size of branch network, similar interest-bearing funding composition, similar return on average assets, lending diversification emphasis on commercial real estate loans and similar credit measures for non-performing assets and non-performing loans.
· First Defiance Financial Corp. of Ohio. Comparable due to similar asset size, similar concentration of loans comprising assets, relatively operating expenses as a percent of average assets, lending diversification on commercial real estate loans and similar credit quality measures for non-performing assets and non-performing loans.
· Kearny Financial Corp. of New Jersey. Comparable due to completed second-step conversion in May 2015, competes in a large metropolitan market area and similar return on average assets.
· Meridian Bancorp, Inc. of Massachusetts. Comparable due to completed second-step conversion in July 2014, located in the Boston metropolitan area, similar interest-bearing funding composition, similar net interest income to average assets ratio and lending diversification emphasis on commercial real estate loans.
· Northfield Bancorp, Inc. of New Jersey. Comparable due to completed second-step conversion in January 2013, competes in a large metropolitan market area, similar asset size, similar interest-bearing funding composition and similar credit quality measures for non-performing assets and non-performing loans.
· Oritani Financial Corp. of New Jersey. Comparable due to completed second-step conversion in June 2010, competes in a large metropolitan market area, similar size of branch network, similar asset size, similar interest-earning asset composition and similar interest-bearing funding composition.
· TrustCo Bancorp of New York. Comparable due to similar net interest income to average assets ratio and similar credit quality measures for non-performing assets and non-performing loans.
· Waterstone Financial, Inc. of Wisconsin. Comparable due to completed second-step conversion in January 2104, similar interest-earning asset composition, similar net interest income to average assets ratio, significant earnings contribution from gain on sale of loans, relatively higher operating expenses as a percent of average assets and similar credit quality measures for non-performing assets and non-performing loans.
· Western New England Bancorp, Inc. of Massachusetts. Selected due to similar size of branch network, similar interest-earning asset composition, similar interest-bearing funding composition, similar net interest income to average assets ratio, lending
diversification emphasis on commercial real estate loans and similar credit quality measures for non-performing assets and non-performing loans.
In aggregate, the Peer Group companies maintained a similar level of tangible equity as the industry average (12.30% of assets versus 11.90% for all public companies), generated higher earnings as a percent of average assets (1.04% core ROAA versus 0.87% for all public companies) and earned a slightly higher ROE (7.74% core ROE versus 6.91% for all public companies). Overall, the Peer Groups average P/TB ratio and average core P/E multiple were below the respective averages for all publicly-traded thrifts.
|
|
All |
|
|
|
||
|
|
Publicly-Traded |
|
Peer Group |
|
||
|
|
|
|
|
|
||
Financial Characteristics (Averages) |
|
|
|
|
|
||
Assets ($Mil) |
|
$ |
4,355 |
|
$ |
4,174 |
|
Market capitalization ($Mil) |
|
$ |
616 |
|
$ |
644 |
|
Tangible equity/assets (%) |
|
11.90 |
% |
12.30 |
% |
||
Core return on average assets (%) |
|
0.87 |
|
1.04 |
|
||
Core return on average equity (%) |
|
6.91 |
|
7.74 |
|
||
|
|
|
|
|
|
||
Pricing Ratios (Averages) (1) |
|
|
|
|
|
||
Core price/earnings (x) |
|
16.89x |
|
16.26x |
|
||
Price/tangible book (%) |
|
140.26 |
% |
133.57 |
% |
||
Price/assets (%) |
|
15.07 |
|
15.80 |
|
(1) Based on market prices as of February 8, 2019.
Ideally, the Peer Group companies would be comparable to HarborOne Bancorp in terms of all of the selection criteria, but the universe of publicly-traded thrifts does not provide for an appropriate number of such companies. However, in general, the companies selected for the Peer Group were fairly comparable to HarborOne Bancorp, as will be highlighted in the following comparative analysis. Comparative data for all publicly-traded thrifts and publicly-traded Massachusetts thrifts have been included in the Chapter III tables as well.
Financial Condition
Table 3.2 shows comparative balance sheet measures for HarborOne Bancorp and the Peer Group, reflecting the expected similarities and some differences given the selection procedures outlined above. The Companys and the Peer Groups ratios reflect balances as of December 31, 2018 and September 30, 2018, respectively, unless indicated otherwise for the Peer Group companies. HarborOne Bancorps equity-to-assets ratio of 9.79% was lower than
Table 3.2
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of September 30, 2018
|
|
|
|
Balance Sheet as a Percent of Assets |
|
Balance Sheet Annual Growth Rates |
|
Regulatory Capital |
|
|||||||||||||||||||||||||||||||||||
|
|
|
|
Cash & |
|
MBS & |
|
|
|
Net |
|
|
|
Borrowed |
|
Sub. |
|
Total |
|
Goodwill |
|
Tangible |
|
|
|
MBS, Cash & |
|
|
|
|
|
Borrows. |
|
Total |
|
Tangible |
|
Tier 1 |
|
Tier 1 |
|
Risk-Based |
|
|
|
|
|
|
Equivalents |
|
Invest |
|
BOLI |
|
Loans (1) |
|
Deposits |
|
Funds |
|
Debt |
|
Equity |
|
& Intang |
|
Equity |
|
Assets |
|
Investments |
|
Loans |
|
Deposits |
|
&Subdebt |
|
Equity |
|
Equity |
|
Leverage |
|
Risk-Based |
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HarborOne Bancorp, Inc. |
|
MA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
|
2.89 |
% |
7.64 |
% |
1.28 |
% |
82.31 |
% |
73.50 |
% |
14.23 |
% |
0.93 |
% |
9.79 |
% |
2.15 |
% |
7.64 |
% |
36.06 |
% |
22.43 |
% |
34.48 |
% |
33.33 |
% |
90.70 |
% |
4.10 |
% |
-15.42 |
% |
8.61 |
% |
10.33 |
% |
11.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Public Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages |
|
|
|
4.66 |
% |
13.88 |
% |
1.63 |
% |
76.31 |
% |
74.05 |
% |
11.41 |
% |
0.46 |
% |
12.91 |
% |
1.00 |
% |
11.90 |
% |
7.95 |
% |
4.71 |
% |
11.79 |
% |
9.79 |
% |
-5.17 |
% |
11.75 |
% |
10.42 |
% |
11.46 |
% |
16.76 |
% |
17.83 |
% |
|
Medians |
|
|
|
3.19 |
% |
10.66 |
% |
1.76 |
% |
78.14 |
% |
75.20 |
% |
10.74 |
% |
0.00 |
% |
11.88 |
% |
0.30 |
% |
10.78 |
% |
5.66 |
% |
-3.18 |
% |
7.76 |
% |
6.18 |
% |
-4.39 |
% |
2.49 |
% |
2.92 |
% |
11.26 |
% |
15.15 |
% |
15.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of MA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages |
|
|
|
5.29 |
% |
7.37 |
% |
1.45 |
% |
83.85 |
% |
75.13 |
% |
12.92 |
% |
0.20 |
% |
11.10 |
% |
0.23 |
% |
10.44 |
% |
9.48 |
% |
-9.29 |
% |
13.08 |
% |
12.78 |
% |
10.25 |
% |
3.22 |
% |
4.81 |
% |
10.62 |
% |
13.00 |
% |
12.95 |
% |
|
Medians |
|
|
|
4.35 |
% |
8.96 |
% |
1.15 |
% |
83.50 |
% |
74.74 |
% |
12.13 |
% |
0.00 |
% |
11.49 |
% |
0.00 |
% |
10.46 |
% |
8.31 |
% |
-9.99 |
% |
11.70 |
% |
13.55 |
% |
14.72 |
% |
3.23 |
% |
4.78 |
% |
11.55 |
% |
12.71 |
% |
13.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages |
|
|
|
3.17 |
% |
12.30 |
% |
2.32 |
% |
79.07 |
% |
71.73 |
% |
13.20 |
% |
0.30 |
% |
13.34 |
% |
1.04 |
% |
12.30 |
% |
7.16 |
% |
15.45 |
% |
8.33 |
% |
8.48 |
% |
2.94 |
% |
3.54 |
% |
2.84 |
% |
12.72 |
% |
16.60 |
% |
17.69 |
% |
|
Medians |
|
|
|
2.64 |
% |
10.70 |
% |
2.29 |
% |
78.47 |
% |
73.09 |
% |
12.89 |
% |
0.00 |
% |
12.23 |
% |
0.79 |
% |
10.92 |
% |
3.30 |
% |
-1.36 |
% |
6.26 |
% |
5.59 |
% |
-5.37 |
% |
2.22 |
% |
2.46 |
% |
11.43 |
% |
14.87 |
% |
15.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DCOM |
Dime Community Bancshares, Inc. |
|
NY |
|
2.11 |
% |
8.43 |
% |
1.76 |
% |
85.67 |
% |
69.62 |
% |
16.57 |
% |
1.81 |
% |
9.59 |
% |
0.88 |
% |
8.71 |
% |
-2.33 |
% |
146.62 |
% |
-9.48 |
% |
0.25 |
% |
-13.10 |
% |
2.99 |
% |
3.31 |
% |
8.96 |
% |
11.66 |
% |
14.54 |
% |
ESSA |
ESSA Bancorp, Inc. |
|
PA |
|
2.40 |
% |
20.96 |
% |
2.11 |
% |
71.17 |
% |
72.90 |
% |
16.28 |
% |
0.00 |
% |
9.77 |
% |
0.83 |
% |
8.94 |
% |
2.72 |
% |
-4.04 |
% |
5.53 |
% |
4.86 |
% |
-4.21 |
% |
-1.94 |
% |
-1.84 |
% |
9.28 |
% |
12.70 |
% |
13.59 |
% |
FDEF |
First Defiance Financial Corp. |
|
OH |
|
3.21 |
% |
9.65 |
% |
2.17 |
% |
78.80 |
% |
81.48 |
% |
3.37 |
% |
1.16 |
% |
12.70 |
% |
3.33 |
% |
9.37 |
% |
5.56 |
% |
-1.04 |
% |
7.93 |
% |
6.94 |
% |
-17.41 |
% |
6.94 |
% |
10.13 |
% |
11.30 |
% |
12.35 |
% |
13.36 |
% |
KRNY |
Kearny Financial Corp. |
|
NJ |
|
0.67 |
% |
20.66 |
% |
3.78 |
% |
69.55 |
% |
59.42 |
% |
21.32 |
% |
0.00 |
% |
18.57 |
% |
3.26 |
% |
15.31 |
% |
38.44 |
% |
18.58 |
% |
43.11 |
% |
33.93 |
% |
75.55 |
% |
21.87 |
% |
12.53 |
% |
15.69 |
% |
23.68 |
% |
24.45 |
% |
EBSB |
Meridian Bancorp, Inc. |
|
MA |
|
5.79 |
% |
1.12 |
% |
0.71 |
% |
90.50 |
% |
76.38 |
% |
11.27 |
% |
0.00 |
% |
11.76 |
% |
0.39 |
% |
11.37 |
% |
13.54 |
% |
-9.89 |
% |
16.01 |
% |
11.81 |
% |
38.15 |
% |
6.05 |
% |
4.78 |
% |
11.55 |
% |
11.95 |
% |
12.85 |
% |
NFBK |
Northfield Bancorp, Inc. |
|
NJ |
|
1.37 |
% |
18.33 |
% |
3.57 |
% |
74.17 |
% |
73.28 |
% |
10.29 |
% |
0.00 |
% |
15.27 |
% |
0.92 |
% |
14.35 |
% |
6.98 |
% |
33.04 |
% |
2.31 |
% |
14.84 |
% |
-24.41 |
% |
1.45 |
% |
1.60 |
% |
14.86 |
% |
17.48 |
% |
18.26 |
% |
ORIT |
Oritani Financial Corp. |
|
NJ |
|
0.69 |
% |
9.63 |
% |
2.41 |
% |
85.20 |
% |
71.14 |
% |
12.80 |
% |
0.00 |
% |
13.70 |
% |
0.00 |
% |
13.70 |
% |
-0.23 |
% |
9.41 |
% |
-1.68 |
% |
0.14 |
% |
-3.68 |
% |
-0.61 |
% |
-0.61 |
% |
13.36 |
% |
15.10 |
% |
15.88 |
% |
TRST |
TrustCo Bank Corp NY |
|
NY |
|
9.53 |
% |
11.06 |
% |
0.00 |
% |
77.40 |
% |
85.97 |
% |
3.61 |
% |
0.00 |
% |
9.77 |
% |
0.01 |
% |
9.75 |
% |
0.31 |
% |
-19.07 |
% |
6.99 |
% |
0.83 |
% |
-18.54 |
% |
4.88 |
% |
4.88 |
% |
9.92 |
% |
18.49 |
% |
19.75 |
% |
WSBF |
Waterstone Financial, Inc. |
|
WI |
|
3.07 |
% |
10.35 |
% |
3.50 |
% |
80.08 |
% |
52.33 |
% |
23.50 |
% |
0.00 |
% |
21.08 |
% |
0.03 |
% |
21.05 |
% |
3.52 |
% |
-17.43 |
% |
8.08 |
% |
4.98 |
% |
3.59 |
% |
-1.77 |
% |
-1.78 |
% |
21.33 |
% |
27.91 |
% |
28.82 |
% |
WNEB |
Western New England Bancorp, Inc. |
|
MA |
|
2.88 |
% |
12.78 |
% |
3.20 |
% |
78.14 |
% |
74.82 |
% |
12.99 |
% |
0.00 |
% |
11.22 |
% |
0.76 |
% |
10.46 |
% |
3.07 |
% |
-1.68 |
% |
4.48 |
% |
6.19 |
% |
-6.53 |
% |
-4.46 |
% |
-4.62 |
% |
10.99 |
% |
14.64 |
% |
15.38 |
% |
(1) Includes loans held for sale.
(2) Ratios are based on the date of the most recent financial statements disclosed in the offering prospectus.
Source: S&P Global Market Intelligence and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2019 by RP ® Financial, LC.
the Peer Groups average net worth ratio of 13.34%. However, with the infusion of the net conversion proceeds, the Companys pro forma equity-to-assets ratio will exceed the Peer Groups equity-to-assets ratio. Tangible equity-to-assets ratios for the Company and the Peer Group equaled 7.64% and 12.30%, respectively. The increase in HarborOne Bancorps pro forma capital position will be favorable from a risk perspective and in terms of future earnings potential that could be realized through leverage and lower funding costs. At the same time, the Companys higher pro forma capitalization will initially depress return on equity. Both HarborOne Bancorps and the Peer Groups capital ratios reflected capital surpluses with respect to the regulatory capital requirements.
The interest-earning asset compositions for the Company and the Peer Group were somewhat similar, with loans constituting the bulk of interest-earning assets for both HarborOne Bancorp and the Peer Group. The Companys loans-to-assets ratio of 82.31% was slightly higher than the comparable Peer Group ratio of 79.07%. Comparatively, the Companys cash and investments-to-assets ratio of 10.53% was lower than the comparable Peer Group ratio of 15.47%. Overall, HarborOne Bancorps interest-earning assets amounted to 92.84% of assets, which was less than the comparable Peer Group ratio of 94.54%. The Peer Groups non-interest earning assets included bank-owned life insurance (BOLI) equal to 2.32% of assets and goodwill/intangibles equal to 1.04% of assets, while the Company maintained BOLI equal to 1.28% of assets and goodwill/intangibles equal to 2.15% of assets.
HarborOne Bancorps funding liabilities reflected a funding strategy that was somewhat similar to that of the Peer Groups funding composition. The Companys deposits equaled 73.50% of assets, which was slightly above the Peer Groups ratio of 71.73%. The Company also maintained a slightly higher level of borrowings than the Peer Group, as indicated by borrowings-to-assets ratios of 15.16% and 13.50% for HarborOne Bancorp and the Peer Group, respectively. Total interest-bearing liabilities maintained by the Company and the Peer Group, as a percent of assets, equaled 88.66% and 85.23%, respectively.
A key measure of balance sheet strength for a thrift institution is its IEA/IBL ratio. Presently, the Companys IEA/IBL ratio is lower than the Peer Groups ratio, based on IEA/IBL ratios of 104.71% and 110.92%, respectively. The additional capital realized from stock proceeds should serve to provide HarborOne Bancorp with an IEA/IBL ratio that is more comparable to the Peer Groups ratio, as the increase in capital provided by the infusion of stock proceeds will serve to lower the level of interest-bearing liabilities funding assets and will be primarily deployed into interest-earning assets.
The growth rate section of Table 3.2 shows annual growth rates for key balance sheet items. HarborOne Bancorps and the Peer Groups growth rates are based on annual growth for the twelve months ended December 31, 2018 and September 30, 2018, respectively, or the most recent twelve month period available for the Peer Group companies. The Peer Groups balance sheet growth rates were impacted by acquisition related growth, as the result of an acquisition completed by Kearny Financial Corp. Likewise, HarborOne Bancorps growth rates were significantly impacted by the acquisition of Coastway Bancorp. HarborOne Bancorp recorded a 36.06% increase in assets, versus asset growth of 7.16% recorded by the Peer Group. Asset growth for HarborOne Bancorp included a 22.43% increase in cash and investments and a 34.48% increase in loans. Asset growth for the Peer Group was primarily realized through an 8.33% increase in loans and was supplemented by a 15.45% increase in cash and investments.
The Companys asset growth was funded by a 33.33% increase in deposits and a 90.70% increase in borrowings. Comparatively, asset growth for the Peer Group was funded through deposit growth of 8.48% and a 2.94% increase in borrowings. The Companys tangible capital decreased by 15.42%, largely due to the goodwill and intangibles that were created by the acquisition of Coastway Bancorp. Comparatively, the Peer Groups tangible capital growth rate equaled 2.84%. The Companys post-conversion capital growth rate will initially be constrained by maintenance of a higher pro forma capital position. Additional stock repurchases and implementation of any dividend payments, pursuant to regulatory limitations and guidelines, could also slow the Companys capital growth rate in the longer term following the stock offering.
Income and Expense Components
Table 3.3 displays statements of operations for the Company and the Peer Group. The Companys and the Peer Groups ratios are based on earnings for the twelve months ended December 31, 2018 and September 30, 2018, respectively. HarborOne Bancorp and the Peer Group reported net income to average assets ratios of 0.39% and 0.90%, respectively. Lower levels of loan loss provisions and operating expenses, as well as a positive contribution from non-operating income supported the Peer Groups higher return. HarborOne Bancorp maintained comparative earnings advantages relative to the Peer Group with respect to net interest income, non-interest operating income and effective tax rate.
Table 3.3
Income as Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the 12 Months Ended September 30, 2018
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Net Interest Income |
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Non-Interest Income |
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Non-Op. Items |
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Yields, Costs, and Spreads |
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||||||||||||||||
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Loss |
|
NII |
|
Gain |
|
Other |
|
Total |
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|
Provision |
|
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|
|
MEMO: |
|
MEMO: |
|
||
|
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|
|
Net |
|
|
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|
|
|
Provis. |
|
After |
|
on Sale of |
|
Non-Int |
|
Non-Int |
|
Net Gains/ |
|
Extrao. |
|
for |
|
Yield |
|
Cost |
|
Yld-Cost |
|
Assets/ |
|
Effective |
|
||
|
|
|
|
Income |
|
Income |
|
Expense |
|
NII |
|
on IEA |
|
Provis. |
|
Loans |
|
Income |
|
Expense |
|
Losses (1) |
|
Items |
|
Taxes |
|
On IEA |
|
Of IBL |
|
Spread |
|
FTE Emp. |
|
Tax Rate |
|
||
|
|
|
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
|
|
(%) |
|
||
HarborOne Bancorp, Inc. |
|
MA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
December 31, 2018 |
|
|
|
0.39 |
% |
3.96 |
% |
0.92 |
% |
3.04 |
% |
0.13 |
% |
2.91 |
% |
1.05 |
% |
0.64 |
% |
3.93 |
% |
-0.17 |
% |
0.00 |
% |
0.10 |
% |
4.19 |
% |
1.20 |
% |
2.99 |
% |
$ |
5,552 |
|
19.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
||
All Public Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Averages |
|
|
|
0.78 |
% |
3.90 |
% |
0.81 |
% |
3.09 |
% |
0.08 |
% |
3.01 |
% |
0.43 |
% |
0.52 |
% |
2.80 |
% |
0.02 |
% |
0.00 |
% |
0.40 |
% |
4.14 |
% |
1.12 |
% |
3.01 |
% |
$ |
8,386 |
|
36.57 |
% |
|
Medians |
|
|
|
0.75 |
% |
3.71 |
% |
0.87 |
% |
2.97 |
% |
0.07 |
% |
2.90 |
% |
0.02 |
% |
0.41 |
% |
2.66 |
% |
0.00 |
% |
0.00 |
% |
0.39 |
% |
3.99 |
% |
1.18 |
% |
2.81 |
% |
$ |
6,302 |
|
34.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
||
State of MA |
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Averages |
|
|
|
0.57 |
% |
3.78 |
% |
0.93 |
% |
2.85 |
% |
0.09 |
% |
2.76 |
% |
0.23 |
% |
0.27 |
% |
2.37 |
% |
0.05 |
% |
0.00 |
% |
0.37 |
% |
3.93 |
% |
1.16 |
% |
2.75 |
% |
$ |
12,220 |
|
37.09 |
% |
|
Medians |
|
|
|
0.58 |
% |
3.86 |
% |
0.97 |
% |
2.94 |
% |
0.08 |
% |
2.87 |
% |
0.00 |
% |
0.23 |
% |
1.96 |
% |
0.03 |
% |
0.00 |
% |
0.43 |
% |
4.04 |
% |
1.18 |
% |
2.90 |
% |
$ |
11,414 |
|
34.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
||
Comparable Group |
|
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|
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|
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|
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|
|
|
|
|
||
Averages |
|
|
|
0.90 |
% |
3.67 |
% |
0.85 |
% |
2.82 |
% |
0.05 |
% |
2.77 |
% |
0.63 |
% |
0.37 |
% |
2.40 |
% |
0.02 |
% |
0.00 |
% |
0.49 |
% |
3.92 |
% |
1.09 |
% |
2.83 |
% |
$ |
9,994 |
|
36.87 |
% |
|
Medians |
|
|
|
0.91 |
% |
3.66 |
% |
0.92 |
% |
2.80 |
% |
0.04 |
% |
2.73 |
% |
0.00 |
% |
0.30 |
% |
1.84 |
% |
0.00 |
% |
0.00 |
% |
0.48 |
% |
3.86 |
% |
1.18 |
% |
2.82 |
% |
$ |
11,414 |
|
36.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
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|
|
|
|
||
Comparable Group |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
|
|
|
|
||
DCOM |
Dime Community Bancshares, Inc. |
|
NY |
|
0.86 |
% |
3.46 |
% |
1.11 |
% |
2.34 |
% |
0.01 |
% |
2.33 |
% |
0.03 |
% |
0.13 |
% |
1.37 |
% |
0.19 |
% |
0.00 |
% |
0.44 |
% |
3.58 |
% |
1.29 |
% |
2.29 |
% |
$ |
15,541 |
|
33.78 |
% |
ESSA |
ESSA Bancorp, Inc. |
|
PA |
|
0.36 |
% |
3.55 |
% |
0.90 |
% |
2.66 |
% |
0.22 |
% |
2.44 |
% |
0.00 |
% |
0.42 |
% |
2.17 |
% |
-0.02 |
% |
0.00 |
% |
0.31 |
% |
3.83 |
% |
NA |
|
NA |
|
|
|
46.45 |
% |
|
FDEF |
First Defiance Financial Corp. |
|
OH |
|
1.45 |
% |
3.98 |
% |
0.48 |
% |
3.50 |
% |
0.03 |
% |
3.46 |
% |
0.17 |
% |
1.17 |
% |
3.07 |
% |
0.11 |
% |
0.00 |
% |
0.40 |
% |
4.49 |
% |
0.72 |
% |
3.77 |
% |
$ |
4,687 |
|
21.57 |
% |
KRNY |
Kearny Financial Corp. |
|
NJ |
|
0.45 |
% |
3.36 |
% |
1.01 |
% |
2.36 |
% |
0.07 |
% |
2.29 |
% |
0.01 |
% |
0.22 |
% |
1.69 |
% |
-0.12 |
% |
0.00 |
% |
0.27 |
% |
3.67 |
% |
1.35 |
% |
2.32 |
% |
$ |
12,102 |
|
37.50 |
% |
EBSB |
Meridian Bancorp, Inc. |
|
MA |
|
0.96 |
% |
3.99 |
% |
1.02 |
% |
2.97 |
% |
0.07 |
% |
2.91 |
% |
0.01 |
% |
0.19 |
% |
1.71 |
% |
0.09 |
% |
0.00 |
% |
0.52 |
% |
4.14 |
% |
1.18 |
% |
2.96 |
% |
$ |
11,414 |
|
34.92 |
% |
NFBK |
Northfield Bancorp, Inc. |
|
NJ |
|
0.69 |
% |
3.47 |
% |
0.77 |
% |
2.70 |
% |
0.05 |
% |
2.65 |
% |
0.00 |
% |
0.23 |
% |
1.64 |
% |
0.01 |
% |
0.00 |
% |
0.56 |
% |
3.69 |
% |
1.05 |
% |
2.64 |
% |
$ |
12,040 |
|
44.74 |
% |
ORIT |
Oritani Financial Corp. |
|
NJ |
|
1.07 |
% |
3.70 |
% |
1.08 |
% |
2.62 |
% |
-0.05 |
% |
2.67 |
% |
0.00 |
% |
0.09 |
% |
0.92 |
% |
-0.07 |
% |
0.00 |
% |
0.70 |
% |
3.90 |
% |
1.30 |
% |
2.60 |
% |
$ |
18,688 |
|
39.65 |
% |
TRST |
TrustCo Bank Corp NY |
|
NY |
|
1.08 |
% |
3.62 |
% |
0.37 |
% |
3.25 |
% |
0.02 |
% |
3.23 |
% |
0.00 |
% |
0.37 |
% |
1.97 |
% |
0.00 |
% |
0.00 |
% |
0.55 |
% |
3.68 |
% |
0.43 |
% |
3.25 |
% |
$ |
6,054 |
|
33.69 |
% |
WSBF |
Waterstone Financial, Inc. |
|
WI |
|
1.52 |
% |
3.87 |
% |
0.95 |
% |
2.92 |
% |
-0.06 |
% |
2.97 |
% |
6.10 |
% |
0.41 |
% |
7.21 |
% |
0.00 |
% |
0.00 |
% |
0.76 |
% |
4.16 |
% |
1.34 |
% |
2.82 |
% |
$ |
1,966 |
|
33.21 |
% |
WNEB |
Western New England Bancorp, Inc. |
|
MA |
|
0.59 |
% |
3.74 |
% |
0.84 |
% |
2.90 |
% |
0.10 |
% |
2.80 |
% |
0.00 |
% |
0.42 |
% |
2.20 |
% |
0.01 |
% |
0.00 |
% |
0.45 |
% |
4.03 |
% |
1.12 |
% |
2.84 |
% |
$ |
7,457 |
|
43.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net gains/losses includes gain/loss on sale of securities and nonrecurring income and expense.
(2) Ratios are based on the date of the most recent financial statements disclosed in the offering prospectus.
Source: S&P Global Market Intelligence and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2019 by RP ® Financial, LC.
The Companys higher net interest income ratio was realized through maintenance of a higher interest income ratio, which was partially offset by the Peer Groups lower interest expense ratio. The Companys higher interest income ratio was supported by maintaining a higher overall yield earned on interest-earning assets (4.19% versus 3.92% for the Company), while the Peer Groups lower interest expense ratio was supported by a lower cost of funds (1.09% versus 1.20% for the Company) and maintenance of a lower level of interest-bearing liabilities funding assets. Overall, HarborOne Bancorp and the Peer Group reported net interest income to average assets ratios of 3.04% and 2.82%, respectively.
In another key area of core earnings strength, the Company maintained a higher level of operating expenses than the Peer Group. For the period covered in Table 3.3, the Company and the Peer Group reported operating expense to average assets ratios of 3.93% and 2.40%, respectively. The Companys higher operating expense ratio was consistent with the comparatively higher number of employees maintained relative to its asset size, which is largely attributable to the significance of the Companys mortgage banking operations relative to its asset size. Assets per full time equivalent employee equaled $5.552 million for the Company, versus $9.994 million for the Peer Group.
When viewed together, net interest income and operating expenses provide considerable insight into a thrifts earnings strength, since those sources of income and expenses are typically the most prominent components of earnings and are generally more predictable than losses and gains realized from the sale of assets or other non-recurring activities. In this regard, as measured by their expense coverage ratios (net interest income divided by operating expenses), the Companys earnings were less favorable than the Peer Groups. Expense coverage ratios for HarborOne Bancorp and the Peer Group equaled 0.77x and 1.18x, respectively.
The Companys mortgage banking activities also contributed to its higher level of non-interest operating income compared to the Peer Group, with such income amounting to 1.69% and 1.00% of HarborOne Bancorps and the Peer Groups average assets, respectively. Taking non-interest operating income into account in comparing the Companys and the Peer Groups earnings, HarborOne Bancorps efficiency ratio (operating expenses as a percent of the sum of non-interest operating income and net interest income) of 83.04% was less favorable than the Peer Groups efficiency ratio of 62.83%.
Loan loss provisions had a slightly larger impact on the Companys earnings, with loan loss provisions established by the Company and the Peer Group equaling 0.13% and 0.05% of average assets, respectively.
Net non-operating gains and losses were a more significant factor in the Companys earnings, as the Company reported a non-operating loss equal to 0.17% of average assets that was attributable to non-recurring merger expenses. Comparatively, the Peer Groups earnings reflected a net non-operating gain equal to 0.02% of average assets. Typically, gains and losses generated from the sale of assets and other non-operating activities are viewed as earnings with a relatively high degree of volatility and, therefore, are not considered to be part of an institutions core operations. Extraordinary items were not a factor in either the Companys or the Peer Groups earnings.
Taxes had a larger impact on the Peer Groups earnings, as the Company and the Peer Group posted effective tax rates of 19.80% and 36.87%, respectively. As indicated in the prospectus, the Companys effective marginal tax rate is equal to 27.00%.
Loan Composition
Table 3.4 presents data related to the Companys and the Peer Groups loan portfolio compositions (including the investment in mortgage-backed securities). The Companys loan portfolio composition reflected a higher concentration of 1-4 family permanent mortgage loans and mortgage-backed securities compared to the Peer Group (34.28% of assets versus 30.48% for the Peer Group), as the Companys higher concentration of 1-4 family permanent mortgage loans was only partially offset by the Peer Groups higher concentration of mortgage-backed securities. Loan servicing intangibles constituted a more significant balance sheet item for the Company, which was indicative of the greater influence of mortgage banking activities on the Companys operations.
Diversification into higher risk and higher yielding types of lending was more significant for the Peer Group, due to the Peer Groups higher concentration of multi-family loans (24.82% of assets versus 3.31% for the Company). Comparatively, the Companys loan portfolio composition reflected higher concentrations of commercial real estate loans (22.27% of assets versus 21.57% of assets for the Peer Group), commercial business loans (7.59% of assets versus 3.88% of assets for the Peer Group), consumer loans (13.45% of assets versus 2.70% for the Peer Group) and construction/land loans (4.83% of assets versus 2.72% of assets for the
Table 3.4
Loan Portfolio Composition and Related Information
Comparable Institution Analysis
As of September 30, 2018
|
|
|
|
Portfolio Composition as a Percent of Assets |
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|
1-4 |
|
Constr. |
|
Multi- |
|
|
|
Commerc. |
|
|
|
RWA/ |
|
Servicing |
|
||
|
|
|
|
MBS |
|
Family |
|
& Land |
|
Family |
|
Comm RE |
|
Business |
|
Consumer |
|
Assets |
|
Assets |
|
||
|
|
|
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
($000) |
|
||
HarborOne Bancorp, Inc. |
|
MA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
December 31, 2018 |
|
|
|
4.15 |
% |
30.13 |
% |
4.83 |
% |
3.31 |
% |
22.27 |
% |
7.59 |
% |
13.45 |
% |
78.55 |
% |
$ |
22,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
All Public Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Averages |
|
|
|
7.19 |
% |
30.84 |
% |
3.95 |
% |
13.70 |
% |
17.38 |
% |
5.37 |
% |
3.75 |
% |
70.54 |
% |
$ |
9,822 |
|
|
Medians |
|
|
|
5.99 |
% |
26.71 |
% |
2.62 |
% |
4.96 |
% |
16.31 |
% |
3.21 |
% |
2.15 |
% |
69.61 |
% |
$ |
450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
State of |
MA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages |
|
|
|
1.84 |
% |
40.87 |
% |
6.82 |
% |
8.61 |
% |
21.40 |
% |
2.35 |
% |
3.73 |
% |
79.43 |
% |
$ |
1,543 |
|
|
Medians |
|
|
|
0.24 |
% |
44.54 |
% |
5.42 |
% |
4.06 |
% |
16.31 |
% |
1.71 |
% |
3.17 |
% |
75.80 |
% |
$ |
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Averages |
|
|
|
7.73 |
% |
22.75 |
% |
2.72 |
% |
24.82 |
% |
21.57 |
% |
3.88 |
% |
2.70 |
% |
77.42 |
% |
$ |
1,355 |
|
|
Medians |
|
|
|
7.85 |
% |
15.16 |
% |
0.77 |
% |
23.52 |
% |
17.61 |
% |
1.72 |
% |
1.13 |
% |
76.60 |
% |
$ |
254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
DCOM |
Dime Community Bancshares, Inc. |
|
NY |
|
7.40 |
% |
1.04 |
% |
0.18 |
% |
63.80 |
% |
17.58 |
% |
3.30 |
% |
0.11 |
% |
75.43 |
% |
$ |
1,357 |
|
ESSA |
ESSA Bancorp, Inc. |
|
PA |
|
14.11 |
% |
36.36 |
% |
3.71 |
% |
2.74 |
% |
14.39 |
% |
2.87 |
% |
7.91 |
% |
72.20 |
% |
$ |
206 |
|
FDEF |
First Defiance Financial Corp. |
|
OH |
|
5.40 |
% |
10.33 |
% |
5.64 |
% |
8.72 |
% |
33.74 |
% |
14.22 |
% |
5.33 |
% |
87.64 |
% |
$ |
10,054 |
|
KRNY |
Kearny Financial Corp. |
|
NJ |
|
8.63 |
% |
19.37 |
% |
0.48 |
% |
30.26 |
% |
17.65 |
% |
1.12 |
% |
1.17 |
% |
63.48 |
% |
$ |
0 |
|
EBSB |
Meridian Bancorp, Inc. |
|
MA |
|
0.24 |
% |
10.95 |
% |
10.40 |
% |
16.79 |
% |
44.78 |
% |
1.71 |
% |
1.10 |
% |
95.29 |
% |
$ |
301 |
|
NFBK |
Northfield Bancorp, Inc. |
|
NJ |
|
13.21 |
% |
8.38 |
% |
0.95 |
% |
46.77 |
% |
15.28 |
% |
1.58 |
% |
1.86 |
% |
83.88 |
% |
$ |
122 |
|
ORIT |
Oritani Financial Corp. |
|
NJ |
|
8.40 |
% |
6.42 |
% |
0.08 |
% |
44.20 |
% |
34.50 |
% |
0.48 |
% |
0.21 |
% |
88.91 |
% |
$ |
0 |
|
TRST |
TrustCo Bank Corp NY |
|
NY |
|
5.99 |
% |
66.58 |
% |
0.58 |
% |
0.62 |
% |
2.02 |
% |
0.50 |
% |
8.01 |
% |
54.18 |
% |
$ |
0 |
|
WSBF |
Waterstone Financial, Inc. |
|
WI |
|
5.64 |
% |
35.40 |
% |
0.47 |
% |
30.56 |
% |
11.60 |
% |
1.73 |
% |
1.08 |
% |
76.12 |
% |
$ |
1,212 |
|
WNEB |
Western New England Bancorp, Inc. |
|
MA |
|
8.31 |
% |
32.63 |
% |
4.68 |
% |
3.76 |
% |
24.20 |
% |
11.30 |
% |
0.19 |
% |
77.07 |
% |
$ |
302 |
|
(1) Ratios are based on the date of the most recent financial statements disclosed in the offering prospectus.
Source: S&P Global Market Intelligence and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2019 by RP ® Financial, LC.
Peer Group). In total, construction/land, commercial real estate, multi-family, commercial business and consumer loans comprised 51.45% and 55.69% of the Companys and the Peer Groups assets, respectively. Overall, the Companys asset composition provided for a slightly higher risk weighted assets-to-assets ratio of 78.55% compared to 77.42% for the Peer Group.
Interest Rate Risk
Table 3.5 reflects various key ratios highlighting the relative interest rate risk exposure of the Company versus the Peer Group. In terms of balance sheet composition, HarborOne Bancorps interest rate risk characteristics implied greater interest rate risk exposure relative to the comparable measures for the Peer Group. Most notably, the Companys tangible equity-to-assets ratio and IEA/IBL ratio were below the respective Peer Group ratios. Likewise, a greater degree of balance sheet interest rate risk exposure was implied by the Companys higher ratio of non-interest earning assets as a percent of assets. On a pro forma basis, the infusion of stock proceeds should serve to strengthen the Companys balance sheet interest rate risk characteristics, given the increases that will be realized in Companys tangible equity-to-assets and IEA/IBL ratios.
To analyze interest rate risk associated with the net interest margin, we reviewed quarterly changes in net interest income as a percent of average assets for HarborOne Bancorp and the Peer Group. In general, the comparative fluctuations in the Companys and the Peer Groups net interest income ratios implied that the interest rate risk associated with Companys net interest margin was slightly greater in comparison to the interest rate risk associated with the Peer Groups net interest margin, based on the interest rate environment that prevailed during the period covered in Table 3.5. The stability of the Companys net interest margin should be enhanced by the infusion of stock proceeds, as interest rate sensitive liabilities will be funding a lower portion of HarborOne Bancorps assets and the proceeds will be substantially deployed into interest-earning assets.
Credit Risk
Overall, based on a comparison of credit risk measures, the Companys implied credit risk exposure was viewed to be slightly greater than the Peer Groups credit risk exposure. As shown in Table 3.6, the Companys ratios for non-performing/assets and non-performing loans/loans equaled 1.00% and 1.19%, respectively, versus comparable measures of 0.56%
Table 3.5
Interest Rate Risk Measures and Net Interest Income Volatility
Comparable Institution Analysis
As of September 30, 2018
|
|
|
|
Balance Sheet Measures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
Tangible |
|
|
|
Non-Earn. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity/ |
|
IEA/ |
|
Assets/ |
|
Quarterly Change in Net Interest Income |
|
|||||||||||
|
|
|
|
Assets |
|
IBL |
|
Assets |
|
9/30/2018 |
|
6/30/2018 |
|
3/31/2018 |
|
12/31/2017 |
|
9/30/2017 |
|
6/30/2017 |
|
|
|
|
|
|
(%) |
|
(%) |
|
(%) |
|
(change in net interest income is annualized in basis points) |
|
|||||||||||
HarborOne Bancorp, Inc. |
|
MA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
|
7.6 |
% |
104.7 |
% |
7.2 |
% |
-14 |
|
0 |
|
19 |
|
0 |
|
4 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Public Companies |
|
|
|
12.0 |
% |
110.4 |
% |
5.1 |
% |
2 |
|
1 |
|
0 |
|
-2 |
|
3 |
|
7 |
|
|
State of MA |
|
|
|
10.5 |
% |
109.4 |
% |
3.5 |
% |
-5 |
|
-1 |
|
-4 |
|
-3 |
|
0 |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
12.3 |
% |
111.1 |
% |
5.5 |
% |
-7 |
|
6 |
|
-4 |
|
1 |
|
4 |
|
1 |
|
|
Median |
|
|
|
10.9 |
% |
110.3 |
% |
5.8 |
% |
-5 |
|
5 |
|
-2 |
|
0 |
|
4 |
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DCOM |
Dime Community Bancshares, Inc. |
|
NY |
|
8.7 |
% |
109.3 |
% |
3.8 |
% |
-6 |
|
-8 |
|
-3 |
|
-2 |
|
-4 |
|
0 |
|
ESSA |
ESSA Bancorp, Inc. |
|
PA |
|
8.9 |
% |
106.0 |
% |
5.5 |
% |
-15 |
|
15 |
|
1 |
|
3 |
|
3 |
|
-2 |
|
FDEF |
First Defiance Financial Corp. |
|
OH |
|
9.4 |
% |
106.6 |
% |
8.3 |
% |
8 |
|
7 |
|
0 |
|
-2 |
|
5 |
|
8 |
|
KRNY |
Kearny Financial Corp. |
|
NJ |
|
15.3 |
% |
112.6 |
% |
9.1 |
% |
-3 |
|
25 |
|
0 |
|
0 |
|
0 |
|
-6 |
|
EBSB |
Meridian Bancorp, Inc. |
|
MA |
|
11.4 |
% |
111.1 |
% |
2.6 |
% |
-5 |
|
-5 |
|
-11 |
|
-9 |
|
9 |
|
7 |
|
NFBK |
Northfield Bancorp, Inc. |
|
NJ |
|
14.3 |
% |
112.3 |
% |
6.1 |
% |
-6 |
|
-3 |
|
-8 |
|
1 |
|
4 |
|
-2 |
|
ORIT |
Oritani Financial Corp. |
|
NJ |
|
13.7 |
% |
113.8 |
% |
4.5 |
% |
-13 |
|
6 |
|
-5 |
|
-2 |
|
14 |
|
-7 |
|
TRST |
TrustCo Bank Corp NY |
|
NY |
|
9.8 |
% |
109.4 |
% |
2.0 |
% |
3 |
|
4 |
|
-1 |
|
2 |
|
6 |
|
7 |
|
WSBF |
Waterstone Financial, Inc. |
|
WI |
|
21.0 |
% |
123.3 |
% |
6.5 |
% |
-3 |
|
-1 |
|
2 |
|
12 |
|
-2 |
|
4 |
|
WNEB |
Western New England Bancorp, Inc. |
|
MA |
|
10.5 |
% |
106.8 |
% |
6.2 |
% |
-26 |
|
18 |
|
-13 |
|
10 |
|
1 |
|
5 |
|
(1) Ratios are based on the date of the most recent financial statements disclosed in the offering prospectus.
Source: S&P Global Market Intelligence and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2019 by RP ® Financial, LC.
Table 3.6
Credit Risk Measures and Related Information
Comparable Institution Analysis
As of September 30, 2018
|
|
|
|
|
|
NPAs & |
|
Adj NPAs & |
|
|
|
|
|
|
|
Rsrves/ |
|
|
|
|
|
||
|
|
|
|
REO/ |
|
90+Del/ |
|
90+Del/ |
|
NPLs/ |
|
Rsrves/ |
|
Rsrves/ |
|
NPAs & |
|
Net Loan |
|
NLCs/ |
|
||
|
|
|
|
Assets |
|
Assets (1) |
|
Assets (3) |
|
Loans (1) |
|
Loans HFI |
|
NPLs (1) |
|
90+Del (1) |
|
Chargeoffs (2) |
|
Loans |
|
||
|
|
|
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
($000) |
|
(%) |
|
||
HarborOne Bancorp, Inc. |
|
MA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
December 31, 2018 |
|
|
|
0.02 |
% |
1.00 |
% |
0.51 |
% |
1.19 |
% |
0.69 |
% |
58.00 |
% |
56.81 |
% |
$ |
1,662 |
|
0.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
All Public Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Averages |
|
|
|
0.09 |
% |
0.80 |
% |
0.53 |
% |
0.89 |
% |
0.87 |
% |
152.84 |
% |
135.11 |
% |
$ |
3,039 |
|
0.08 |
% |
|
Medians |
|
|
|
0.03 |
% |
0.67 |
% |
0.48 |
% |
0.74 |
% |
0.85 |
% |
123.24 |
% |
99.27 |
% |
$ |
103 |
|
0.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
State of MA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Averages |
|
|
|
0.00 |
% |
0.52 |
% |
0.18 |
% |
0.62 |
% |
0.76 |
% |
279.37 |
% |
279.12 |
% |
$ |
7 |
|
0.00 |
% |
|
Medians |
|
|
|
0.00 |
% |
0.52 |
% |
0.14 |
% |
0.63 |
% |
0.77 |
% |
163.96 |
% |
163.96 |
% |
$ |
2 |
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Averages |
|
|
|
0.03 |
% |
0.56 |
% |
0.41 |
% |
0.67 |
% |
0.86 |
% |
162.65 |
% |
148.59 |
% |
$ |
422 |
|
0.02 |
% |
|
Medians |
|
|
|
0.02 |
% |
0.62 |
% |
0.40 |
% |
0.71 |
% |
0.88 |
% |
128.20 |
% |
116.14 |
% |
$ |
427 |
|
0.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Comparable Group |
|
|
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DCOM |
Dime Community Bancshares, Inc. |
|
NY |
|
0.00 |
% |
0.13 |
% |
0.07 |
% |
0.13 |
% |
0.39 |
% |
301.95 |
% |
256.80 |
% |
$ |
1,319 |
|
0.02 |
% |
ESSA |
ESSA Bancorp, Inc. |
|
PA |
|
0.06 |
% |
0.64 |
% |
0.64 |
% |
0.81 |
% |
0.89 |
% |
110.09 |
% |
99.27 |
% |
$ |
1,677 |
|
0.13 |
% |
FDEF |
First Defiance Financial Corp. |
|
OH |
|
0.05 |
% |
1.14 |
% |
0.74 |
% |
1.36 |
% |
1.13 |
% |
82.41 |
% |
78.48 |
% |
$ |
(280 |
) |
-0.01 |
% |
KRNY |
Kearny Financial Corp. |
|
NJ |
|
0.01 |
% |
0.39 |
% |
0.32 |
% |
0.54 |
% |
0.70 |
% |
128.92 |
% |
125.49 |
% |
$ |
890 |
|
0.02 |
% |
EBSB |
Meridian Bancorp, Inc. |
|
MA |
|
0.00 |
% |
0.35 |
% |
0.14 |
% |
0.38 |
% |
0.94 |
% |
245.10 |
% |
245.10 |
% |
$ |
(396 |
) |
-0.01 |
% |
NFBK |
Northfield Bancorp, Inc. |
|
NJ |
|
0.00 |
% |
0.62 |
% |
0.35 |
% |
0.83 |
% |
0.86 |
% |
104.24 |
% |
104.11 |
% |
$ |
460 |
|
0.01 |
% |
ORIT |
Oritani Financial Corp. |
|
NJ |
|
0.04 |
% |
0.27 |
% |
0.26 |
% |
0.27 |
% |
0.81 |
% |
305.25 |
% |
261.54 |
% |
$ |
(163 |
) |
0.00 |
% |
TRST |
TrustCo Bank Corp NY |
|
NY |
|
0.05 |
% |
0.77 |
% |
0.53 |
% |
0.92 |
% |
1.17 |
% |
127.48 |
% |
119.62 |
% |
$ |
545 |
|
0.01 |
% |
WSBF |
Waterstone Financial, Inc. |
|
WI |
|
0.11 |
% |
0.61 |
% |
0.45 |
% |
0.62 |
% |
0.97 |
% |
138.22 |
% |
112.67 |
% |
$ |
(223 |
) |
-0.02 |
% |
WNEB |
Western New England Bancorp, Inc. |
|
MA |
|
0.00 |
% |
0.69 |
% |
0.59 |
% |
0.87 |
% |
0.72 |
% |
82.82 |
% |
82.82 |
% |
$ |
393 |
|
0.02 |
% |
(1) Includes performing TDRs for the Company and the Peer Group.
(2) Net loan chargeoffs are shown on a last twelve month basis.
(3) Excludes performing TDRs for the Company and the Peer Group.
(4) Ratios are based on the date of the most recent financial statements disclosed in the offering prospectus.
Source: S&P Global Market Intelligence and RP ® Financial, LC. calculations. The information provided in this table has been obrained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2019 by RP ® Financial, LC.
and 0.67% for the Peer Group. It should be noted that the measures for non-performing assets/assets and non-performing loans/loans include accruing loans that are classified as troubled debt restructurings, which accounted for approximately 49% of the Companys non-performing assets at December 31, 2018. After excluding performing troubled debt restructurings from non-performing assets, the Companys and the Peer Groups non-performing assets as a percent of assets equaled 0.51% and 0.41%, respectively. The Companys and Peer Groups loss reserves as a percent of non-performing loans equaled 58.00% and 162.65%, respectively. Loss reserves maintained as percent of loans receivable equaled 0.69% for the Company, versus 0.86% for the Peer Group. Net loan charge-offs were a slightly larger factor for the Company, as net loan charge-offs for the Company and the Peer Group equaled 0.06% of loans and 0.02% of loans, respectively.
Summary
Based on the above analysis, RP Financial concluded that the Peer Group forms a reasonable basis for determining the pro forma market value of the Company. Such general characteristics as asset size, capital position, interest-earning asset composition, funding composition, core earnings measures, loan composition, credit quality and exposure to interest rate risk all tend to support the reasonability of the Peer Group from a financial standpoint. Those areas where differences exist will be addressed in the form of valuation adjustments to the extent necessary.
IV. VALUATION ANALYSIS
Introduction
This chapter presents the valuation analysis and methodology, prepared pursuant to the regulatory valuation guidelines, and valuation adjustments and assumptions used to determine the estimated pro forma market value of the common stock to be issued in conjunction with the Companys conversion transaction.
Appraisal Guidelines
The regulatory written appraisal guidelines re quired by the FRB, the FDIC and state banking agencies specify the market value methodology for estimating the pro forma market value of an institution pursuant to a mutual-to-stock conversion. Pursuant to this methodology: (1) a peer group of comparable publicly-traded institutions is selected; (2) a financial and operational comparison of the subject company to the peer group is conducted to discern key differences; and (3) a valuation analysis in which the pro forma market value of the subject company is determined based on the market pricing of the peer group as of the date of valuation, incorporating valuation adjustments for key differences. In addition, the pricing characteristics of recent conversions, both at conversion and in the aftermarket, must be considered.
RP Financial Approach to the Valuation
The valuation analysis herein complies with such regulatory approval guidelines. Accordingly, the valuation incorporates a detailed analysis based on the Peer Group, discussed in Chapter III, which constitutes fundamental analysis techniques. Additionally, the valuation incorporates a technical analysis of recently completed stock conversions, particularly second-step conversions, including closing pricing and aftermarket trading of such offerings. It should be noted that these valuation analyses cannot possibly fully account for all the market forces which impact trading activity and pricing characteristics of a particular stock on a given day.
The pro forma market value determined herein is a preliminary value for the Companys to-be-issued stock. Throughout the conversion process, RP Financial will: (1) review changes in HarborOne Bancorps operations and financial condition; (2) monitor HarborOne Bancorps
operations and financial condition relative to the Peer Group to identify any fundamental changes; (3) monitor the external factors affecting value including, but not limited to, local and national economic conditions, interest rates, and the stock market environment, including the market for thrift stocks and HarborOne Bancorps stock specifically; and (4) monitor pending conversion offerings, particularly second-step conversions, (including those in the offering phase), both regionally and nationally. If, during the conversion process, material changes occur, RP Financial will determine if updated valuation reports should be prepared to reflect such changes and their related impact on value, if any. RP Financial will also prepare a final valuation update at the closing of the offering to determine if the prepared valuation analysis and resulting range of value continues to be appropriate.
The appraised value determined herein is based on the current market and operating environment for the Company and for all thrifts. Subsequent changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or major world events), which may occur from time to time (often with great unpredictability) may materially impact the market value of all thrift stocks, including HarborOne Bancorps value, or HarborOne Bancorps value alone. To the extent a change in factors impacting the Companys value can be reasonably anticipated and/or quantified, RP Financial has incorporated the estimated impact into the analysis.
Valuation Analysis
A fundamental analysis discussing similarities and differences relative to the Peer Group was presented in Chapter III. The following sections summarize the key differences between the Company and the Peer Group and how those differences affect the pro forma valuation. Emphasis is placed on the specific strengths and weaknesses of the Company relative to the Peer Group in such key areas as financial condition, profitability, growth and viability of earnings, asset growth, primary market area, dividends, liquidity of the shares, marketing of the issue, management, and the effect of government regulations and/or regulatory reform. We have also considered the market for thrift stocks, in particular new issues, to assess the impact on value of the Company coming to market at this time.
1. Financial Condition
The financial condition of an institution is an important determinant in pro forma market value because investors typically look to such factors as liquidity, capital, asset composition and quality, and funding sources in assessing investment attractiveness. The similarities and differences in the Companys and the Peer Groups financial strengths are noted as follows:
· Overall A/L Composition . In comparison to the Peer Group, the Companys interest-earning asset composition showed a lower concentration of cash and investments and a higher concentration of loans. Diversification into higher risk and higher yielding types of loans was slightly more significant for the Peer Group, while the Company Group maintained a higher concentration of 1-4 family loans. Overall, in comparison to the Peer Group, the Companys interest-earning asset composition provided for a higher yield earned on interest-earning assets and a similar risk weighted assets-to-assets ratio. HarborOne Bancorps funding composition reflected slightly higher levels of deposits and borrowings funding assets, which translated into a slightly higher cost of funds for the Company. Overall, as a percent of assets, the Company maintained a lower level of interest-earning assets and a higher level of interest-bearing liabilities compared to the Peer Groups ratios, which resulted in a lower IEA/IBL ratio for the Company. After factoring in the impact of the net stock proceeds, the Companys IEA/IBL ratio should be more comparable to the Peer Groups IEA/IBL ratio. On balance, RP Financial concluded that asset/liability composition was a neutral factor in our adjustment for financial condition.
· Credit Quality. The Companys ratios for non-performing assets as a percent of assets and non-performing loans as a percent of loans were slightly higher than the comparable ratios for the Peer Group. Loss reserves as a percent of non-performing loans and as a percent of loans were lower for the Company. Net loan charge-offs as a percent of loans were slightly higher for the Company. The Companys risk weighted assets-to-assets ratio was similar to the Peer Groups ratio. Overall, RP Financial concluded that credit quality was a slightly negative factor in our adjustment for financial condition.
· Balance Sheet Liquidity . The Company operated with a lower level of cash and investment securities relative to the Peer Group (10.64% of assets versus 15.47% for the Peer Group). Following the infusion of stock proceeds, the Companys cash and investments ratio is expected to increase as the proceeds retained at the holding company level will be initially deployed into cash and investments. The Company was viewed as having similar future borrowing capacity relative to the Peer Group, based on the comparable level of borrowings currently funding the Companys and the Peer Groups assets. Overall, RP Financial concluded that balance sheet liquidity was a neutral factor in our adjustment for financial condition.
· Funding Liabilities . The Companys interest-bearing funding composition reflected slightly higher concentrations of deposits and borrowings relative to the comparable Peer Group ratios, which translated into a slightly higher cost of funds for the Company. Total interest-bearing liabilities as a percent of assets were higher for the Company. Following the stock offering, the increase in the Companys capital position will reduce the level of interest-bearing liabilities funding the Companys
assets. Overall, RP Financial concluded that funding liabilities were a slightly negative factor in our adjustment for financial condition.
· Capital . The Company currently operates with a lower tangible equity-to-assets ratio than the Peer Group. Following the stock offering, HarborOne Bancorps pro forma tangible capital position will likely exceed the Peer Groups tangible equity-to-assets ratio. The Companys higher pro forma capital position implies greater leverage capacity, lower dependence on interest-bearing liabilities to fund assets and a greater capacity to absorb unanticipated losses. At the same time, the Companys more significant capital surplus will make it more difficult to achieve a competitive ROE. On balance, RP Financial concluded that capital strength was a slightly positive factor in our adjustment for financial condition.
On balance, HarborOne Bancorps balance sheet strength was considered to be comparable to the Peer Groups balance sheet strength and, thus, no adjustment was applied for the Companys financial condition.
2. Profitability, Growth and Viability of Earnings
Earnings are a key factor in determining pro forma market value, as the level and risk characteristics of an institutions earnings stream and the prospects and ability to generate future earnings heavily influence the multiple that the investment community will pay for earnings. The major factors considered in the valuation are described below.
· Reported Earnings . The Companys reported earnings were lower than the Peer Groups on a ROAA basis (0.39% of average assets versus 0.90% for the Peer Group), as the Peer Group maintained earnings advantages with respect to net loan loss provisions, operating expenses and non-operating items. Reinvestment of stock proceeds into interest-earning assets will serve to increase the Companys earnings, with the benefit of reinvesting proceeds expected to be somewhat offset by implementation of additional stock benefit plans in connection with the second-step offering. Overall, the Companys pro forma reported earnings were considered to be less favorable than the Peer Groups earnings and, thus, RP Financial concluded that this was a moderately negative factor in our adjustment for profitability, growth and viability of earnings.
· Core Earnings . Net interest income, operating expenses, non-interest operating income and loan loss provisions were reviewed in assessing the relative strengths and weaknesses of the Companys and the Peer Groups core earnings. The Company operated with a higher net interest income ratio, a higher operating expense ratio and a higher level of non-interest operating income. The Companys higher ratios for net interest income and operating expenses translated into a lower expense coverage ratio in comparison to the Peer Groups ratio (equal to 0.77x versus 1.18X for the Peer Group). Similarly, the Companys efficiency ratio of 83.04% was less favorable than the Peer Groups efficiency ratio of 62.83%. Loan loans provisions had a slightly larger impact on the Companys earnings. Overall, these measures, as well as the expected earnings benefits the Company should realize from the redeployment of stock proceeds into interest-earning assets and
leveraging of post-conversion capital, which will be somewhat negated by expenses associated with the stock benefit plans, indicate that the Companys pro forma core earnings will remain less favorable than the Peer Groups earnings on a ROAA basis. Therefore, RP Financial concluded that this was a moderately negative factor in our adjustment for profitability, growth and viability of earnings.
· Interest Rate Risk . Quarterly changes in the Companys and the Peer Groups net interest income to average assets ratios indicated that a slightly greater degree of volatility was associated with the Companys net interest margin. Measures of balance sheet interest rate risk, such as capital, IEA/IBL and non-interest earning asset ratios implied a greater degree of interest rate risk exposure was associated with the Companys balance sheet. On a pro forma basis, the infusion of stock proceeds can be expected to provide the Company with equity-to-assets and IEA/ILB ratios that will be more comparable to or exceed the Peer Group ratios, as well as enhance the stability of the Companys net interest margin through the reinvestment of stock proceeds into interest-earning assets. On balance, RP Financial concluded that interest rate risk was a neutral factor in our adjustment for profitability, growth and viability of earnings.
· Credit Risk . Loan loss provisions were a slightly larger factor in the Companys earnings (0.13% of average assets versus 0.05% of average assets for the Peer Group). In terms of future exposure to credit quality related losses, lending diversification into higher risk types of loans was similar for the Company and the Peer Group. The Companys credit quality measures generally implied a slightly greater degree of credit risk exposure relative to the comparable credit quality measures indicated for the Peer Group. Overall, RP Financial concluded that credit risk was a slightly negative factor in our adjustment for profitability, growth and viability of earnings.
· Earnings Growth Potential . Several factors were considered in assessing earnings growth potential. First, the Company maintained a higher interest rate spread than the Peer Group, which would tend to continue to provide for a higher net interest income ratio for the Company going forward based on the current prevailing interest rate environment. Second, the infusion of stock proceeds will provide the Company with more significant growth potential through leverage than currently maintained by the Peer Group. Third, the Companys higher ratio of non-interest operating income and the Peer Groups lower operating expense ratio were viewed as respective advantages for the Company and the Peer Group to sustain earnings growth during periods when net interest margins come under pressure as the result of adverse changes in interest rates. Overall, earnings growth potential was considered to be a neutral factor in our adjustment for profitability, growth and viability of earnings.
· Return on Equity . Currently, the Companys core ROE is lower than the Peer Groups core ROE. As the result of the significant increase in capital that will be realized from the infusion of net stock proceeds into the Companys equity, the Companys pro forma return equity on a core earnings basis will remain lower than the Peer Groups core ROE. Accordingly, this was a moderately negative factor in the adjustment for profitability, growth and viability of earnings.
On balance, HarborOne Bancorps pro forma earnings strength was considered to be
less favorable than the Peer Groups and, thus, a moderate downward adjustment was applied for profitability, growth and viability of earnings.
3. Asset Growth
Comparative twelve-month asset growth rates for the Company and the Peer Group showed a 36.06% increase in the Companys assets, versus a 7.16% increase in the Peer Groups assets. The Companys significantly higher asset growth rate was largely attributable to the acquisition of Coastway Bancorp, which closed in October 2018. Asset growth for the Company primarily consisted of loans growth and was supplemented with less significant growth of cash and investments. Similarly, asset growth for the Peer Group consisted primarily of loan growth, while cash and investments for the Peer Group increased as well. Overall, the Companys recent asset growth trends would be viewed more favorably than the Peer Groups asset growth trends in terms of supporting future earnings growth. However, net of acquisition related growth, the Companys asset growth would be more consistent with the Peer Groups asset growth. On a pro forma basis, the Companys tangible equity-to-assets ratio will exceed the Peer Groups tangible equity-to-assets ratio, indicating greater leverage capacity for the Company. On balance, a slight upward adjustment was applied for asset growth.
4. Primary Market Area
The general condition of an institutions market area has an impact on value, as future success is in part dependent upon opportunities for profitable activities in the local market served. HarborOne Bancorp serves the Boston and Providence metropolitan areas through 23 full service branch offices. Operating in densely populated market areas provides the Company with growth opportunities, but such growth must be achieved in a highly competitive market environment. The Company competes against significantly larger institutions that provide a larger array of services and have significantly larger branch networks than maintained by HarborOne Bancorp.
The Peer Group companies generally operate in markets with larger populations compared to Plymouth County. Population growth for the primary market area counties served by the Peer Group companies reflected a range of growth rates, but, overall, population growth rates in the markets served by the Peer Group companies were less than Plymouth Countys recent historical and projected population growth rates. Plymouth County has a higher per
capita income compared to the Peer Groups average per capita income and, on average, the Peer Groups primary market area counties were slightly less affluent markets within their respective states compared to Plymouth Countys per capita income as a percent of Massachusetts per capita income (90.0% for the Peer Group versus 96.8% for Plymouth County). The average and median deposit market shares maintained by the Peer Group companies were higher and lower than the Companys market share of deposits in Plymouth County. Overall, the degree of competition faced by the Peer Group companies was viewed as similar to the Companys competitive environment in Plymouth County, while the growth potential in the markets served by the Peer Group companies was for the most part viewed to be slightly less favorable than provided by the Companys primary market area. Summary demographic and deposit market share data for the Company and the Peer Group companies is provided in Exhibit III-5. As shown in Table 4.1, the average unemployment rate for the primary market area counties served by the Peer Group companies was above the unemployment rate reflected for Plymouth County. On balance, we concluded that a slight upward adjustment was appropriate for the Companys market area.
Table 4.1
Market Area Unemployment Rates
HarborOne Bancorp and the Peer Group Companies (1)
|
|
County |
|
December 2018 Unemployment |
|
HarborOne Bancorp, Inc. - MA |
|
Plymouth |
|
2.8 |
% |
|
|
|
|
|
|
Peer Group Average |
|
|
|
3.7 |
% |
|
|
|
|
|
|
Dime Community Bancshares - NY |
|
Kings |
|
4.0 |
% |
ESSA Bancorp, Inc. - PA |
|
Monroe |
|
5.0 |
% |
First Defiance Fin. Corp. - OH |
|
Defiance |
|
4.7 |
% |
Kearny Fin. Corp. - NJ |
|
Essex |
|
4.5 |
% |
Meridian Bancorp - MA |
|
Essex |
|
2.8 |
% |
Northfield Bancorp - NJ |
|
Middlesex |
|
3.1 |
% |
Oritani Financial Corp. - NJ |
|
Bergen |
|
2.9 |
% |
TrustCo Bank Corp. - NY |
|
Schenectady |
|
3.4 |
% |
Waterstone Financial - WI |
|
Milwaukee |
|
3.0 |
% |
Western New England Bancorp - MA |
|
Hampden |
|
3.8 |
% |
(1) Unemployment rates are not seasonally adjusted Source: S&P Global Market Intelligence |
5. Dividends
The Company currently does not pay a dividend. After the second-step conversion, future declarations of dividends by the Board of Directors will depend upon a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions.
All ten of the Peer Group companies pay regular cash dividends, with implied dividend yields ranging from 1.54% to 5.92%. The average dividend yield on the stocks of the Peer Group institutions was 2.80% as of February 8, 2019. Comparatively, as of February 8, 2019, the average dividend yield on the stocks of all fully-converted publicly-traded thrifts equaled 2.01%. The dividend paying thrifts generally maintain higher than average profitability ratios, facilitating their ability to pay cash dividends.
While the Company has not established a definitive dividend policy prior to its second-step conversion, the Company will have the capacity to pay a dividend comparable to the Peer Groups average dividend yield based on pro forma earnings and capitalization. On balance, we concluded that no adjustment was warranted for this factor.
6. Liquidity of the Shares
The Peer Group is by definition composed of companies that are traded in the public markets. All ten of the Peer Group companies trade on the NASDAQ Global Select Market. Typically, the number of shares outstanding and market capitalization provides an indication of how much liquidity there will be in a particular stock. The market capitalization of the Peer Group companies ranged from $168 million to $1.2 billion as of February 8, 2019, with average and median market values of $640 million and $716 million, respectively. The shares issued and outstanding of the Peer Group companies ranged from 11.0 million to 96.7 million, with average and median shares outstanding of 46.0 million and 40.8 million, respectively. The Companys second-step stock offering is expected to provide for a pro forma market value and shares outstanding that will be in the middle of the Peer Groups ranges for market values and shares outstanding. Consistent with all of the Peer Group companies, the Companys stock will also be quoted on the NASDAQ Global Select Market following the stock offering. Overall, we anticipate that the Companys stock will have a comparable trading market as the Peer Group companies on average and, therefore, concluded no adjustment was necessary for this factor.
7. Marketing of the Issue
We believe that four separate markets exist for thrift stocks, including those coming to market such as HarborOne Bancorps stock: (A) the after-market for public companies, in which trading activity is regular and investment decisions are made based upon financial condition, earnings, capital, ROE, dividends and future prospects; (B) the new issue market in which converting thrifts are evaluated on the basis of the same factors, but on a pro forma basis without the benefit of prior operations as a fully-converted company; (C) the acquisition market for thrift franchises based in Massachusetts; and (D) the market for the public stock of HarborOne Bancorp. All of these markets were considered in the valuation of the Companys to-be-issued stock.
A. The Public Market
The value of publicly-traded thrift stocks is easily measurable, and is tracked by most investment houses and related organizations. Exhibit IV-1 provides pricing and financial data on all publicly-traded thrifts. In general, thrift stock values react to market stimuli such as interest rates, inflation, perceived industry health, projected rates of economic growth, regulatory issues and stock market conditions in general. Exhibit IV-2 displays historical stock market trends for various indices and includes historical stock price index values for thrifts and commercial banks. Exhibit IV-3 displays various stock price indices as of February 8, 2019.
In terms of assessing general stock market conditions, the performance of the overall stock market has been mixed in recent quarters. Strong job growth reflected in June employment report and signs that U.S. trade tensions with Europe may be easing propelled the stock market higher at the start of the third quarter of 2018. Technology stocks led a broader stock market rally in mid-July, with the NASDAQ closing at a new record high. Some favorable second quarter earnings reports continued the upward trend in the broader stock market heading into the second half of July. Comparatively, technology stocks led the stock market lower at the end of July, as some technology companies posted disappointing second quarter earnings. Strong earnings growth by some of Americas biggest companies contributed to a rebound in the stock market in early-August. Energy shares led the broader stock market lower going into mid-August 2018, which was attributed to a decline in oil prices. Upbeat data for the U.S. economy, deal activity and signs of cooperation between the U.S. and China contributed to stocks rallying higher during the second half of August, as the NASDAQ soared past 8000 to a new record high. Comparatively, stocks retreated at the end of August through the first part of
September, in which technology shares led the market lower on worries about trade and regulation. Manufacturer and financial shares helped stocks to rebound going into the second half of September, as new tariffs announced by the U.S. and China were less than expected. After the Dow Jones Industrial Average (DJIA) and S&P 500 closed at record highs, shares of industrial companies led the market lower in late-September. Heightened trade tensions and the Federal Reserves rate hike, along with signaling a continued path of rate hikes, were noted factors that stoked caution among investors.
Stocks rebounded at the end of September and the beginning of October 2018, as manufacturer shares led the DJIA to a new record high following completion of a new North American trade pact. A sell-off in Treasury bonds prompted a broader stock market downturn at the end of the first week of October, as investors reacted to the September employment report which showed the national unemployment rate hitting a 50-year low. The sell-off in stocks deepened in the second week of October, with the DJIA recording a two-day decline of 5.2% before rebounding at the end of the week. Volatility continued to prevail in the broader stock market during the second half of October, as investors reacted to mixed third quarter earnings reports and signs of softer global economic growth. Following a sell-off heading into late-October 2018, stocks rebounded sharply higher at the end of October and at the start of November. The rebound in the stock market was led by technology shares, based on some favorable third quarter earnings reports. Stocks continued to surge higher following the mid-term elections, as a congressional power divide eased worries about swift policy changes. Following the mid-term election rally, stocks trended sharply lower through late-November. Factors contributing to the sell-off included U.S.-China trade tensions, concerns about the health of the technology sector, worries about slowing global growth and oil prices dropping to a three-year low. Stocks rebounded in the last week of November, with the DJIA and the S&P 500 erasing their November declines after the Federal Reserve Chairman eased investor worries about aggressively increasing interest rates. A strong retail sales report for the Thanksgiving weekend and a trade truce between the U.S. and China also contributed to the stock market rally at the end of November. Energy shares led the stock market higher at the start of December, as oil prices rounded after an easing of geopolitical concerns. Stocks tumbled lower to close out the first trading week of December, as investors doubts about the U.S.-China trade truce and a flattening yield curve raised fears of an economic slowdown. A rally in technology shares helped the broader stock market to edge higher going into mid-December, which was followed by a mid-December sell-off prompted by signs that Chinas
economy may be slowing. The stock market route deepened going into the second half of December, as investors reacted to the Federal Reserves rate hike and possible government shutdown. After four days of sharp declines, the DJIA logged its biggest daily point gain which was led by a rebound in energy shares. The positive trend in the broader stock market continued in the final trading days of 2018, although 2018 was the worst yearly decline for stocks since 2008.
Volatility continued to prevail in the broader stock market at the start of 2019. Soft economic data for U.S. December manufacturing activity prompted a sharp sell-off, which was followed a robust rally on strong job growth reported for December. The rally in the broader stock market gained momentum through mid-January, which was supported signs of progress in the U.S.- China trade talks and the Federal Reserve signaling its willingness to slow its pace of interest rate increases. The broad-based stock market rally paused in late-January, as stocks retreated on signs that a slow down in Chinas economy was hurting corporate profits in the U.S. Stocks soared higher after the Federal Reserve concluded its end of January policy meeting, in which it elected to hold interest rates steady and stated that is was done raising interest rates for a while. Overall, stocks posted their best January in three years, which was led by the biggest laggards during the fourth quarter sell-off. Strong job growth reflected in the January employment report helped to sustain stock market gains at the start of February, which was followed by a pullback related to China trade tensions. On February 8, 2019, the DJIA closed at 25106.33, an increase of 3.8% from one year ago and an increase of 7.6% year-to-date, and the NASDAQ closed at 7,298.20, an increase of 6.2% from one year ago and an increase of 19.4% year-to-date. The S&P 500 Index closed at 2707.88 on February 8, 2019, an increase of 3.4% from one year ago and an increase of 8.0% year-to-date.
The performance of thrift stocks has also been uneven in recent quarters. The strong jobs report for June boosted thrift stocks at the start of the third quarter of 2018, which was followed by a slight decline in thrift shares ahead of third quarter earnings reports. After trading in a narrow range through the release of second earnings reports, concerns of rising inflation pressured thrift shares lower in late-July and into early-August. After drifting lower during the first half of August, signs of a strong labor market and a pick-up in consumer spending contributed to gains in the thrift sector going into the second half of August. Following the upturn, thrift shares trended lower through the end of August as thrift stocks were negatively impacted by July housing data showing a decline in new and existing home sales. Thrift stocks
traded in a narrow range during the first half of September, which was followed by a pullback in thrift stocks through the end of September.
The decline in thrift shares became more pronounced in the first week of October 2018, as the shares of mortgage-based lenders were negatively impacted by the rise in long-term Treasury yields and concerns that higher mortgage rates could further deter home buyers in a slumping housing market. Financial shares were among the worst performers in the market sell-off that occurred during second week of October, as investors dumped bank stocks heading into third quarter earnings season. The downturn in thrift stocks continued into the second half of October, as third quarter earnings reports showed a trend of net interest margin compression among mortgage-based lenders. After easing lower through mid-November 2018, comments by the Federal Reserve Chairman signaling a less aggressive approach to raising interest rates spurred a rally in thrift shares at the end of November. Thrift shares reversed course during the first half of December, as financial shares experienced a broad-based sell-off on concerns about the flattening yield curve and slower economic growth translating into weaker demand for bank loans. The sell-off in thrift shares accelerated in the closing weeks of 2018, as financial shares were among the hardest hit in the stock market route that occurred in the second half of December.
The favorable jobs report for December 2018 helped thrift stocks to start 2019 out trending higher. Thrift shares continued to rally through mid-January, as some favorable fourth quarter earnings posted by some large banks served to lift financial shares in general. Expectations that the Federal Reserve would slow down its pace of rate increases helped to sustain the positive trend in thrift shares through the second half of January. The favorable jobs report for January, the Federal Reserves indication that it was taking a pause in raising interest rates and consolidation in the banking sector contributed to sustaining the rebound in thrift shares through the first week of February. On February 8, 2019, the SNL Index for all publicly-traded thrifts closed at 864.5, a decrease of 7.1% from one year ago and an increase of 12.0% year-to-date.
B. The New Issue Market
In addition to thrift stock market conditions in general, the new issue market for converting thrifts is also an important consideration in determining the Companys pro forma market value. The new issue market is separate and distinct from the market for seasoned thrift stocks in that the pricing ratios for converting issues are computed on a pro forma basis,
specifically: (1) the numerator and denominator are both impacted by the conversion offering amount, unlike existing stock issues in which price change affects only the numerator; and (2) the pro forma pricing ratio incorporates assumptions regarding source and use of proceeds, effective tax rates, stock plan purchases, etc. which impact pro forma financials, whereas pricing for existing issues are based on reported financials. The distinction between pricing of converting and existing issues is perhaps no clearer than in the case of the price/book (P/B) ratio in that the P/B ratio of a converting thrift will typically result in a discount to book value whereas in the current market for existing thrifts the P/B ratio may reflect a premium to book value. Therefore, it is appropriate to also consider the market for new issues, both at the time of the conversion and in the aftermarket.
As shown in Table 4.2, two first-step mutual holding company offerings have been completed during the past three months and no standard conversions or second-step conversions have been completed during the past three months. The most recent second-step conversion offering was completed by Mid-Southern Bancorp of Indiana, which was completed in July 2018. Mid-Southern Bancorps offering was significantly smaller in comparison to HarborOne Bancorps proposed second-step offering. Mid-Southern Bancorps second-step offering was closed at the top of its offerings range at a closing pro forma price/tangible book ratio of 77.5% and the stock was up 25.7% after the first week of trading. As of February 8, 2019, Mid-Southern Bancorps stock price was up 28.9% from its IPO price.
C. The Acquisition Market
Also considered in the valuation was the potential impact on HarborOne Bancorps stock price of recently completed and pending acquisitions of thrift institutions operating in Massachusetts. As shown in Exhibit IV-4, there were eleven acquisitions of thrifts headquartered in Massachusetts completed from the beginning of 2015 through February 8, 2019 and there are currently two acquisitions pending for thrifts based in Massachusetts. The recent acquisition activity involving regional financial institutions may imply a certain degree of acquisition speculation for the Companys stock. To the extent that acquisition speculation may impact the Companys offering, we have largely taken this into account in selecting companies for the Peer Group which operate in markets that have experienced some degree of acquisition activity as well and, thus, are subject to the same type of acquisition speculation that may influence HarborOne Bancorps stock. However, since converting thrifts are subject to a three-
Table 4.2
Pricing Characteristics and After-Market Trends
Conversions Completed in the Last Three Months
Institutional Information
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Contribution to |
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Pre-Conversion Data |
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Offering Information |
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Char. Found. |
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Financial Info. |
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Asset Quality |
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Excluding Foundation |
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% of |
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Conversion |
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Equity/ |
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NPAs/ |
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Res. |
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Gross |
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% |
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% of |
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Exp./ |
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Public Off. |
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Institution |
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Date |
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Ticker |
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Assets |
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Assets |
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Assets |
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Cov. |
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Proc. |
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Offer |
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Mid. |
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Proc. |
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Form |
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Inc. Fdn. |
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($Mil) |
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(%) |
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(%) |
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(%) |
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($Mil.) |
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(%) |
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(%) |
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(%) |
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(%) |
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Standard Conversions |
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Second Step Conversions |
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Mutual Holding Companies |
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Rhinebeck Bancorp, Inc. |
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1/17/19 |
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RBKB-NASDAQ |
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$ |
820 |
|
6.96 |
% |
1.25 |
% |
74 |
% |
$ |
47.9 |
|
43 |
% |
132 |
% |
3.7 |
% |
N.A. |
|
N.A. |
|
1895 Bancorp of Wisconsin, Inc. (PyraMax Bank) |
|
1/9/19 |
|
BCOW-NASDAQ |
|
$ |
483 |
|
7.82 |
% |
0.34 |
% |
199 |
% |
$ |
21.5 |
|
44 |
% |
89 |
% |
7.0 |
% |
C/S |
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2.2 |
% |
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Averages - MHC Conversions: |
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$ |
651 |
|
7.39 |
% |
0.80 |
% |
136 |
% |
$ |
34.7 |
|
44 |
% |
110 |
% |
5.3 |
% |
N.A. |
|
N.A. |
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Medians - MHC Conversions: |
|
$ |
651 |
|
7.39 |
% |
0.80 |
% |
136 |
% |
$ |
34.7 |
|
44 |
% |
110 |
% |
5.3 |
% |
N.A. |
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N.A. |
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Averages - All Conversions: |
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$ |
651 |
|
7.39 |
% |
0.80 |
% |
136 |
% |
$ |
34.7 |
|
44 |
% |
110 |
% |
5.3 |
% |
N.A. |
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N.A. |
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Medians - All Conversions: |
|
$ |
651 |
|
7.39 |
% |
0.80 |
% |
136 |
% |
$ |
34.7 |
|
44 |
% |
110 |
% |
5.3 |
% |
N.A. |
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N.A. |
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Insider Purchases |
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Pro Forma Data |
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Post-IPO Pricing Trends |
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% Off Incl. Fdn.+Merger Shares |
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Pricing Ratios(2)(5) |
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Financial Charac. |
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Closing Price: |
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Benefit Plans |
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Initial |
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First |
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After |
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After |
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Recog. |
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Stk |
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Mgmt.& |
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Div. |
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Core |
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Core |
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Core |
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IPO |
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Trading |
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% |
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First |
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% |
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First |
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% |
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Thru |
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% |
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Institution |
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ESOP |
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Plans |
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Option |
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Dirs. |
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Yield |
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P/TB |
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P/E |
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P/A |
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ROA |
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TE/A |
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ROE |
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Price |
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Day |
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Chg |
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Week(3) |
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Chg |
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Month(4) |
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Chg |
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2/8/2019 |
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Chg |
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|||||
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(%) |
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(%) |
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(%) |
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(%)(1) |
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(%) |
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(%) |
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(x) |
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(%) |
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(%) |
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(%) |
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(%) |
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($) |
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($) |
|
(%) |
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($) |
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(%) |
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($) |
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(%) |
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($) |
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(%) |
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Standard Conversions |
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Second Step Conversions |
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Mutual Holding Companies |
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Rhinebeck Bancorp, Inc. |
|
9.1 |
% |
4.6 |
% |
11.4 |
% |
3.8 |
% |
0.00 |
% |
74.0 |
% |
40.3x |
|
12.2 |
% |
0.3 |
% |
16.5 |
% |
1.8 |
% |
$ |
10.00 |
|
$ |
11.75 |
|
17.50 |
% |
$ |
11.58 |
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15.8 |
% |
$ |
11.44 |
|
14.4 |
% |
$ |
11.44 |
|
14.4 |
% |
1895 Bancorp of Wisconsin, Inc. (PyraMax Bank) |
|
8.7 |
% |
4.4 |
% |
10.9 |
% |
2.1 |
% |
0.00 |
% |
62.0 |
% |
NM |
|
9.3 |
% |
-0.4 |
% |
15.0 |
% |
-2.5 |
% |
$ |
10.00 |
|
$ |
9.60 |
|
-4.0 |
% |
$ |
10.00 |
|
0.0 |
% |
$ |
9.48 |
|
-5.2 |
% |
$ |
9.48 |
|
-5.2 |
% |
|
|
8.9 |
% |
4.5 |
% |
11.1 |
% |
3.0 |
% |
0.00 |
% |
68.0 |
% |
40.3x |
|
10.7 |
% |
0.0 |
% |
15.8 |
% |
-0.4 |
% |
$ |
10.00 |
|
$ |
10.68 |
|
6.8 |
% |
$ |
10.79 |
|
7.9 |
% |
$ |
10.46 |
|
4.6 |
% |
$ |
10.46 |
|
4.6 |
% |
|
|
8.9 |
% |
4.5 |
% |
11.1 |
% |
3.0 |
% |
0.00 |
% |
68.0 |
% |
40.3x |
|
10.7 |
% |
0.0 |
% |
15.8 |
% |
-0.4 |
% |
$ |
10.00 |
|
$ |
10.68 |
|
6.8 |
% |
$ |
10.79 |
|
7.9 |
% |
$ |
10.46 |
|
4.6 |
% |
$ |
10.46 |
|
4.6 |
% |
|
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|
8.9 |
% |
4.5 |
% |
11.1 |
% |
3.0 |
% |
0.00 |
% |
68.0 |
% |
40.3x |
|
10.7 |
% |
0.0 |
% |
15.8 |
% |
-0.4 |
% |
$ |
10.00 |
|
$ |
10.68 |
|
6.8 |
% |
$ |
10.79 |
|
7.9 |
% |
$ |
10.46 |
|
4.6 |
% |
$ |
10.46 |
|
4.6 |
% |
|
|
8.9 |
% |
4.5 |
% |
11.1 |
% |
3.0 |
% |
0.00 |
% |
68.0 |
% |
40.3x |
|
10.7 |
% |
0.0 |
% |
15.8 |
% |
-0.4 |
% |
$ |
10.00 |
|
$ |
10.68 |
|
6.8 |
% |
$ |
10.79 |
|
7.9 |
% |
$ |
10.46 |
|
4.6 |
% |
$ |
10.46 |
|
4.6 |
% |
Note: * - Appraisal performed by RP Financial; BOLD = RP Financial assisted in the business plan preparation, NT - Not Traded; NA - Not Applicable, Not Available; C/S-Cash/Stock.
(1) As a percent of MHC offering for MHC transactions.
(2) Does not take into account the adoption of SOP 93-6.
(3) Latest price if offering is less than one week old.
(4) Latest price if offering is more than one week but less than one month old.
(5) Mutual holding company pro forma data on full conversion basis.(5) Mutual holding company pro forma data on full conversion basis.
(6) Simultaneously completed acquisition of another financial institution.
(7) Simultaneously converted to a commercial bank charter.
(8) Former credit union.
2/8/2019
year regulatory moratorium from being acquired, acquisition speculation in HarborOne Bancorps stock would tend to be less compared to the stocks of the Peer Group companies.
D. Trading in HarborOne Bancorps Stock
Since HarborOne Bancorps minority stock currently trades under the symbol HONE on the NASDAQ, RP Financial also considered the recent trading activity in the valuation analysis. HarborOne Bancorp had a total of 32,563,485 shares issued and outstanding at December 31, 2018, of which 15,282,451 shares were held by public shareholders and traded as public securities. As of February 8, 2019, the 52 week trading range of the Companys stock was $14.90 to $20.01 per share and its closing price on February 8, 2019 was $15.33 per share. There are significant differences between the Companys minority stock (currently being traded) and the conversion stock that will be issued by the Company. Such differences include different liquidity characteristics, a different return on equity for the conversion stock and the stock is currently traded based on speculation of a range of exchange ratios. Since the pro forma impact has not been publicly disseminated to date, it is appropriate to discount the current trading level. As the pro forma impact is made known publicly, the trading level will become more informative.
* * * * * * * * * * *
In determining our valuation adjustment for marketing of the issue, we considered trends in both the overall thrift market, the new issue market including the new issue market for second-step conversions, the acquisition market, and recent trading activity in the Companys minority stock. Taking these factors and trends into account, RP Financial concluded that no adjustment was appropriate in the valuation analysis for purposes of marketing of the issue.
8. Management
The Companys management team appears to have experience and expertise in all of the key areas of the Companys operations. Exhibit IV-5 provides summary resumes of the Companys Board of Directors and senior management. The financial characteristics of the Company suggest that the Board and senior management have been effective in implementing an operating strategy that can be well managed by the Companys present organizational
structure. The Company currently does not have any senior management positions that are vacant. Similarly, the returns, equity positions and other operating measures of the Peer Group companies are indicative of well-managed financial institutions, which have Boards and management teams that have been effective in implementing competitive operating strategies. Therefore, on balance, we concluded no valuation adjustment relative to the Peer Group was appropriate for this factor.
9. Effect of Government Regulation and Regulatory Reform
As a fully-converted regulated institution, HarborOne Bancorp will operate in substantially the same regulatory environment as the Peer Group members all of whom are adequately capitalized institutions and are operating with no apparent restrictions. Exhibit IV-6 provides HarborOne Banks pro forma regulatory capital ratios. On balance, no adjustment has been applied for the effect of government regulation and regulatory reform.
Summary of Adjustments
Overall, based on the factors discussed above, we concluded that the Companys pro forma market value should reflect the following valuation adjustments relative to the Peer Group:
Key Valuation Parameters: |
|
Valuation Adjustment |
|
|
|
Financial Condition |
|
No Adjustment |
Profitability, Growth and Viability of Earnings |
|
Moderate Downward |
Asset Growth |
|
Slight Upward |
Primary Market Area |
|
Slight Upward |
Dividends |
|
No Adjustment |
Liquidity of the Shares |
|
No Adjustment |
Marketing of the Issue |
|
No Adjustment |
Management |
|
No Adjustment |
Effect of Govt. Regulations and Regulatory Reform |
|
No Adjustment |
Valuation Approaches
In applying the accepted valuation methodology promulgated by the FRB and the Commissioner, i.e., the pro forma market value approach, we considered the three key pricing ratios in valuing the Companys to-be-issued stock price/earnings (P/E), price/book (P/B), and price/assets (P/A) approaches all performed on a pro forma basis including the effects
of the stock proceeds. In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in the Companys prospectus for reinvestment rate, effective tax rate and stock benefit plan assumptions (summarized in Exhibits IV-7 and IV-8). In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group and recent conversion offerings.
RP Financials valuation placed an emphasis on the following:
· P/E Approach . The P/E approach is generally the best indicator of long-term value for a stock and we have given it significant weight among the valuation approaches. Given certain similarities between the Companys and the Peer Groups earnings composition and overall financial condition, the P/E approach was carefully considered in this valuation. At the same time, recognizing that (1) the earnings multiples will be evaluated on a pro forma basis for the Company; and (2) the Peer Group on average has had the opportunity to realize the benefit of reinvesting and leveraging their offering proceeds, we also gave weight to the other valuation approaches.
· P/B Approach . P/B ratios have generally served as a useful benchmark in the valuation of thrift stocks, particularly in the context of a public offering, as the earnings approach involves assumptions regarding the use of proceeds. RP Financial considered the P/B approach to be a valuable indicator of pro forma value, taking into account the pricing ratios under the P/E and P/A approaches. We have also modified the P/B approach to exclude the impact of intangible assets (i.e., price/tangible book value or P/TB), in that the investment community frequently makes this adjustment in its evaluation of this pricing approach.
· P/A Approach . P/A ratios are generally a less reliable indicator of market value, as investors typically assign less weight to assets and attribute greater weight to book value and earnings. Furthermore, this approach as set forth in the regulatory valuation guidelines does not take into account the amount of stock purchases funded by deposit withdrawals, thus understating the pro forma P/A ratio. At the same time, the P/A ratio is an indicator of franchise value, and, in the case of highly capitalized institutions, high P/A ratios may limit the investment communitys willingness to pay market multiples for earnings or book value when ROE is expected to be low.
· Trading of HONE stock . Converting institutions generally do not have stock outstanding. HarborOne Bancorp, however, has public shares outstanding due to the mutual holding company form of ownership and first-step minority stock offering. Since HarborOne Bancorp is currently traded on the NASDAQ, it is an indicator of investor interest in the Companys conversion stock and therefore received some weight in our valuation. Based on the February 8, 2019, stock price of $15.33 per share and the 32,282,451 shares of HarborOne Bancorp stock outstanding, the Companys implied market value of $499.5 million was considered in the valuation process. However, since the conversion stock will have different characteristics than the minority shares, and since pro forma information has not been publicly
disseminated to date, the current trading price of Harbor Bancorps stock was somewhat discounted herein but will become more important towards the closing of the offering.
The Company has adopted Employers Accounting for Employee Stock Ownership Plans (ASC 718-40), which causes earnings per share computations to be based on shares issued and outstanding excluding unreleased ESOP shares. For purposes of preparing the pro forma pricing analyses, we have reflected all shares issued in the offering, including all ESOP shares, to capture the full dilutive impact, particularly since the ESOP shares are economically dilutive, receive dividends and can be voted. However, we did consider the impact of ASC 718-40 in the valuation.
In preparing the pro forma pricing analysis we have taken into account the pro forma impact of the MHC s net assets (i.e., unconsolidated equity) that will be consolidated with the Company and thus will slightly increase equity. At December 31, 2019, the MHC had net assets of $99,000, which has been added to the Companys December 31, 2019 equity to reflect the consolidation of the MHC into the Companys operations. Exhibit IV-9 shows that after accounting for the impact of the MHCs net assets, the public shareholders ownership interest was reduced by approximately 0.01%. Accordingly, for purposes of the Companys pro forma valuation, the public shareholders ownership interest was reduced from 46.93% to 46.92% and the MHCs ownership interest was increased from 53.07% to 53.08%.
Based on the application of the three valuation approaches, taking into consideration the valuation adjustments discussed above, RP Financial concluded that as of February 8, 2019, the aggregate pro forma market value of HarborOne Bancorps conversion stock equaled $508,686,450 at the midpoint, equal to 50,868,645 shares at $10.00 per share. The $10.00 per share price was determined by the HarborOne Bancorp Board. The midpoint and resulting valuation range is based on the sale of a 53.08% ownership interest to the public, which provides for a $270,000,000 public offering at the midpoint value.
1. Price-to-Earnings (P/E) . The application of the P/E valuation method requires calculating the Companys pro forma market value by applying a valuation P/E multiple to the pro forma earnings base. In applying this technique, we considered both reported earnings and a recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of the net proceeds. The Companys reported earnings equaled $11.394 million for the twelve months ended
December 31, 2018. In deriving HarborOne Bancorps core earnings, the adjustments made to reported earnings were to eliminate net gains on the sale of investment securities available for sale equal to $5,000 and merger expenses related to the acquisition of Coastway Bancorp equal to $5.092 million. As shown below, assuming an effective marginal tax rate of 27.0% for the earnings adjustments, the Companys core earnings were estimated to equal $15.107 million for the twelve months ended December 31, 2018.
|
|
Amount |
|
|
|
|
($000) |
|
|
|
|
|
|
|
Net income |
|
$ |
11,394 |
|
Deduct: Net gain in sale of investment securities available for sale(1) |
|
(4 |
) |
|
Add: Merger expenses(1) |
|
3,717 |
|
|
Core earnings estimate |
|
$ |
15,107 |
|
(1) Tax effected at 27.0%
Based on the Companys reported and estimated core earnings, and incorporating the impact of the pro forma assumptions discussed previously, the Companys pro forma reported and core P/E multiples at the $ 508.7 million midpoint value equaled 42.21x and 32.27x, respectively, indicating premiums of 154.43% and 96.41% relative to the Peer Groups average reported and core earnings multiples of 16.59x and 16.43x, respectively (see Table 4.3). In comparison to the Peer Groups median reported and core earnings multiples of 14.75x and 14.62x, respectively, the Companys pro forma reported and core P/E multiples at the midpoint value indicated premiums of 186.17% and 120.73%, respectively. The Companys pro forma P/E ratios based on reported earnings at the minimum and the maximum equaled 35.83x and 48.60x, respectively, and based on core earnings at the minimum and the maximum equaled 27.40x and 37.15x, respectively.
2. Price-to-Book (P/B) . The application of the P/B valuation method requires calculating the Companys pro forma market value by applying a valuation P/B ratio, as derived from the Peer Groups P/B ratio, to the Companys pro forma book value. Based on the $508.7 million midpoint valuation, the Companys pro forma P/B and P/TB ratios equaled 86.06% and 99.21%, respectively. In comparison to the average P/B and P/TB ratios for the Peer Group of 123.57% and 134.98%, respectively, the Companys ratios reflected discounts of 30.36% on a P/B basis and 26.50% on a P/TB basis. In comparison to the Peer Groups median P/B and
Table 4.3
Public Market Pricing Versus Peer Group
HarborOne Bancorp, Inc. and the Comparables
As of February 8, 2019
|
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|
Market |
|
Per Share Data |
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||||||||||||
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Capitalization |
|
Core |
|
Book |
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|
Dividends(3) |
|
Financial Characteristics(5) |
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2nd Step |
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||||||||||||||||||||||||||||
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Price/ |
|
Market |
|
12 Month |
|
Value/ |
|
Pricing Ratios(2) |
|
Amount/ |
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|
|
Payout |
|
Total |
|
Equity/ |
|
Tang. Eq./ |
|
NPAs/ |
|
Reported |
|
Core |
|
Exchange |
|
Offering |
|
||||||||||||||||||||
|
|
|
|
Share |
|
Value |
|
EPS(1) |
|
Share |
|
P/E |
|
P/B |
|
P/A |
|
P/TB |
|
P/Core |
|
Share |
|
Yield |
|
Ratio(4) |
|
Assets |
|
Assets |
|
T. Assets |
|
Assets |
|
ROAA |
|
ROAE |
|
ROAA |
|
ROAE |
|
Ratio |
|
Range |
|
||||||||
|
|
|
|
($) |
|
($Mil) |
|
($) |
|
($) |
|
(x) |
|
(%) |
|
(%) |
|
(%) |
|
(x) |
|
($) |
|
(%) |
|
(%) |
|
($Mil) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(%) |
|
(X) |
|
($Mil) |
|
||||||||
HarborOne Bancorp, Inc. |
|
MA |
|
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||||||||
Maximum |
|
|
|
$ |
10.00 |
|
$ |
584.99 |
|
$ |
0.27 |
|
$ |
10.71 |
|
48.60x |
|
93.37 |
% |
14.91 |
% |
106.72 |
% |
37.15x |
|
$ |
0.00 |
|
0.00 |
% |
0.00 |
% |
$ |
3,922 |
|
15.98 |
% |
14.26 |
% |
0.93 |
% |
0.31 |
% |
1.92 |
% |
0.40 |
% |
2.51 |
% |
1.7961x |
|
$ |
310.50 |
|
|
Midpoint |
|
|
|
$ |
10.00 |
|
$ |
508.69 |
|
$ |
0.31 |
|
$ |
11.62 |
|
42.21x |
|
86.06 |
% |
13.09 |
% |
99.21 |
% |
32.27x |
|
$ |
0.00 |
|
0.00 |
% |
0.00 |
% |
$ |
3,887 |
|
15.21 |
% |
13.47 |
% |
0.94 |
% |
0.31 |
% |
2.04 |
% |
0.41 |
% |
2.67 |
% |
1.5618x |
|
$ |
270.00 |
|
|
Minimum |
|
|
|
$ |
10.00 |
|
$ |
432.38 |
|
$ |
0.36 |
|
$ |
12.86 |
|
35.83x |
|
77.76 |
% |
11.23 |
% |
90.58 |
% |
27.40x |
|
$ |
0.00 |
|
0.00 |
% |
0.00 |
% |
$ |
3,851 |
|
14.41 |
% |
12.65 |
% |
0.94 |
% |
0.31 |
% |
2.17 |
% |
0.41 |
% |
2.84 |
% |
1.3276x |
|
$ |
229.50 |
|
|
|
|
|
|
|
|
|
|
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|
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|
||||||||
All Non-MHC Public Companies(6) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Averages |
|
|
|
$ |
21.89 |
|
$ |
615.99 |
|
$ |
1.57 |
|
$ |
17.51 |
|
15.73x |
|
125.81 |
% |
15.07 |
% |
140.26 |
% |
16.89x |
|
$ |
0.40 |
|
2.01 |
% |
45.64 |
% |
$ |
4,355 |
|
12.84 |
% |
11.86 |
% |
1.10 |
% |
0.91 |
% |
7.67 |
% |
0.87 |
% |
6.91 |
% |
|
|
|
|
||
Median |
|
|
|
$ |
16.80 |
|
$ |
212.93 |
|
$ |
0.98 |
|
$ |
15.56 |
|
14.85x |
|
117.77 |
% |
14.84 |
% |
128.91 |
% |
14.67x |
|
$ |
0.34 |
|
1.79 |
% |
38.43 |
% |
$ |
1,468 |
|
11.72 |
% |
10.59 |
% |
0.92 |
% |
0.86 |
% |
7.33 |
% |
0.80 |
% |
7.11 |
% |
|
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||
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|
|
|
|
|
|
||||||||
All Non-MHC State of MA(6) |
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Averages |
|
|
|
$ |
45.72 |
|
$ |
278.58 |
|
$ |
3.75 |
|
$ |
29.51 |
|
16.60x |
|
127.79 |
% |
13.61 |
% |
133.35 |
% |
14.27x |
|
$ |
0.50 |
|
1.36 |
% |
22.10 |
% |
$ |
2,082 |
|
10.94 |
% |
10.27 |
% |
0.95 |
% |
0.62 |
% |
6.58 |
% |
0.73 |
% |
7.88 |
% |
|
|
|
|
||
Medians |
|
|
|
$ |
16.90 |
|
$ |
176.52 |
|
$ |
1.10 |
|
$ |
15.31 |
|
14.88x |
|
120.74 |
% |
13.99 |
% |
125.99 |
% |
13.84x |
|
$ |
0.28 |
|
1.63 |
% |
20.75 |
% |
$ |
1,495 |
|
11.05 |
% |
10.50 |
% |
0.95 |
% |
0.75 |
% |
7.59 |
% |
0.79 |
% |
8.67 |
% |
|
|
|
|
||
|
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|
|
|
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|
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|
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|
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|
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|
|
|
|
|
|
||||||||
State of MA |
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
|
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|
|
|
|
||||||||
HIFS |
Hingham Institution for Savings |
|
MA |
|
$ |
183.95 |
|
$ |
392.32 |
|
$ |
14.99 |
|
$ |
99.67 |
|
13.23x |
|
184.55 |
% |
16.29 |
% |
184.55 |
% |
12.27x |
|
$ |
1.48 |
|
0.80 |
% |
13.81 |
% |
$ |
2,409 |
|
8.83 |
% |
8.83 |
% |
NA |
|
1.32 |
% |
14.97 |
% |
1.42 |
% |
16.15 |
% |
|
|
|
|
|
MELR |
Melrose Bancorp, Inc. |
|
MA |
|
$ |
18.02 |
|
$ |
42.79 |
|
NA |
|
$ |
17.57 |
|
24.35x |
|
102.55 |
% |
14.32 |
% |
102.55 |
% |
NM |
|
$ |
0.34 |
|
1.89 |
% |
45.95 |
% |
$ |
324 |
|
13.96 |
% |
13.96 |
% |
NA |
|
0.56 |
% |
3.94 |
% |
NA |
|
NA |
|
|
|
|
|
||
EBSB |
Meridian Bancorp, Inc. |
|
MA |
|
$ |
15.77 |
|
$ |
805.94 |
|
$ |
1.10 |
|
$ |
12.60 |
|
14.88x |
|
125.15 |
% |
13.67 |
% |
129.58 |
% |
14.34x |
|
$ |
0.28 |
|
1.78 |
% |
20.75 |
% |
$ |
6,179 |
|
10.92 |
% |
10.59 |
% |
NA |
|
0.99 |
% |
8.36 |
% |
1.03 |
% |
8.67 |
% |
|
|
|
|
|
RNDB |
Randolph Bancorp, Inc. |
|
MA |
|
$ |
14.75 |
|
$ |
81.64 |
|
$ |
(0.31 |
) |
$ |
13.05 |
|
NM |
|
113.04 |
% |
14.98 |
% |
NA |
|
NM |
|
NA |
|
NA |
|
NA |
|
$ |
590 |
|
13.25 |
% |
NA |
|
0.95 |
% |
-0.63 |
% |
-4.26 |
% |
-0.29 |
% |
-1.94 |
% |
|
|
|
|
||
WEBK |
Wellesley Bancorp, Inc. |
|
MA |
|
$ |
32.00 |
|
$ |
77.42 |
|
$ |
2.40 |
|
$ |
25.79 |
|
13.33x |
|
124.08 |
% |
9.27 |
% |
124.08 |
% |
13.33x |
|
$ |
0.22 |
|
0.69 |
% |
8.96 |
% |
$ |
871 |
|
7.47 |
% |
7.47 |
% |
NA |
|
0.72 |
% |
9.66 |
% |
0.72 |
% |
9.66 |
% |
|
|
|
|
|
WNEB |
Western New England Bancorp, Inc. |
|
MA |
|
$ |
9.80 |
|
$ |
271.39 |
|
$ |
0.57 |
|
$ |
8.35 |
|
17.19x |
|
117.39 |
% |
13.13 |
% |
125.99 |
% |
17.12x |
|
$ |
0.16 |
|
1.63 |
% |
21.05 |
% |
$ |
2,119 |
|
11.19 |
% |
10.50 |
% |
NA |
|
0.78 |
% |
6.82 |
% |
0.79 |
% |
6.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Averages |
|
|
|
$ |
15.87 |
|
$ |
640.23 |
|
$ |
1.11 |
|
$ |
13.00 |
|
16.59x |
|
123.57 |
% |
15.92 |
% |
134.98 |
% |
16.43x |
|
$ |
0.45 |
|
2.80 |
% |
50.33 |
% |
$ |
4,174 |
|
13.05 |
% |
11.84 |
% |
0.79 |
% |
1.04 |
% |
8.13 |
% |
1.04 |
% |
7.74 |
% |
|
|
|
|
||
Medians |
|
|
|
$ |
15.51 |
|
$ |
716.43 |
|
$ |
1.10 |
|
$ |
13.02 |
|
14.75x |
|
118.16 |
% |
16.02 |
% |
127.78 |
% |
14.62x |
|
$ |
0.40 |
|
2.68 |
% |
41.32 |
% |
$ |
4,249 |
|
11.87 |
% |
10.50 |
% |
0.79 |
% |
0.97 |
% |
7.97 |
% |
0.96 |
% |
7.58 |
% |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Comparable Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
DCOM |
Dime Community Bancshares, Inc. |
|
NY |
|
$ |
19.84 |
|
$ |
716.08 |
|
$ |
1.36 |
|
$ |
16.68 |
|
14.38x |
|
118.93 |
% |
11.33 |
% |
131.04 |
% |
14.62x |
|
$ |
0.56 |
|
2.82 |
% |
40.58 |
% |
$ |
6,321 |
|
9.53 |
% |
8.72 |
% |
NA |
|
0.82 |
% |
8.44 |
% |
0.80 |
% |
8.31 |
% |
|
|
|
|
|
ESSA |
ESSA Bancorp, Inc. |
|
PA |
|
$ |
15.25 |
|
$ |
167.65 |
|
$ |
1.05 |
|
$ |
15.63 |
|
14.95x |
|
97.55 |
% |
9.68 |
% |
106.23 |
% |
14.52x |
|
$ |
0.40 |
|
2.62 |
% |
36.27 |
% |
$ |
1,863 |
|
9.92 |
% |
9.18 |
% |
NA |
|
0.61 |
% |
6.21 |
% |
0.63 |
% |
6.39 |
% |
|
|
|
|
|
FDEF |
First Defiance Financial Corp. |
|
OH |
|
$ |
29.39 |
|
$ |
593.56 |
|
$ |
2.27 |
|
$ |
19.81 |
|
13.00x |
|
148.36 |
% |
18.63 |
% |
199.85 |
% |
12.97x |
|
$ |
0.76 |
|
2.59 |
% |
30.09 |
% |
$ |
3,182 |
|
12.56 |
% |
9.63 |
% |
1.00 |
% |
1.52 |
% |
12.03 |
% |
1.52 |
% |
12.07 |
% |
|
|
|
|
|
KRNY |
Kearny Financial Corp. |
|
NJ |
|
$ |
12.95 |
|
$ |
1,163.43 |
|
$ |
0.44 |
|
$ |
12.62 |
|
33.21x |
|
102.63 |
% |
18.12 |
% |
124.25 |
% |
29.40x |
|
$ |
0.20 |
|
1.54 |
% |
82.05 |
% |
$ |
6,702 |
|
17.65 |
% |
NA |
|
NA |
|
0.57 |
% |
2.95 |
% |
0.64 |
% |
3.35 |
% |
|
|
|
|
|
EBSB |
Meridian Bancorp, Inc. |
|
MA |
|
$ |
15.77 |
|
$ |
805.94 |
|
$ |
1.10 |
|
$ |
12.60 |
|
14.88x |
|
125.15 |
% |
13.67 |
% |
129.58 |
% |
14.34x |
|
$ |
0.28 |
|
1.78 |
% |
20.75 |
% |
$ |
6,179 |
|
10.92 |
% |
10.59 |
% |
NA |
|
0.99 |
% |
8.36 |
% |
1.03 |
% |
8.67 |
% |
|
|
|
|
|
NFBK |
Northfield Bancorp, Inc. |
|
NJ |
|
$ |
14.59 |
|
$ |
716.77 |
|
$ |
0.86 |
|
$ |
13.43 |
|
17.16x |
|
108.66 |
% |
16.43 |
% |
115.50 |
% |
17.04x |
|
$ |
0.40 |
|
2.74 |
% |
47.06 |
% |
$ |
4,408 |
|
15.12 |
% |
14.35 |
% |
0.58 |
% |
0.95 |
% |
6.17 |
% |
0.96 |
% |
6.21 |
% |
|
|
|
|
|
ORIT |
Oritani Financial Corp. |
|
NJ |
|
$ |
16.88 |
|
$ |
767.92 |
|
$ |
1.27 |
|
$ |
11.78 |
|
13.95x |
|
143.33 |
% |
18.47 |
% |
143.33 |
% |
13.27x |
|
$ |
1.00 |
|
5.92 |
% |
95.04 |
% |
$ |
4,090 |
|
12.89 |
% |
12.89 |
% |
NA |
|
1.30 |
% |
9.70 |
% |
1.37 |
% |
10.20 |
% |
|
|
|
|
|
TRST |
TrustCo Bank Corp NY |
|
NY |
|
$ |
8.01 |
|
$ |
774.24 |
|
NA |
|
$ |
5.07 |
|
12.59x |
|
158.05 |
% |
15.61 |
% |
158.23 |
% |
NM |
|
$ |
0.27 |
|
3.40 |
% |
42.06 |
% |
$ |
4,959 |
|
9.88 |
% |
9.87 |
% |
NA |
|
1.25 |
% |
13.05 |
% |
NA |
|
NA |
|
|
|
|
|
||
WSBF |
Waterstone Financial, Inc. |
|
WI |
|
$ |
16.24 |
|
$ |
425.31 |
|
$ |
1.11 |
|
$ |
14.04 |
|
14.63x |
|
115.65 |
% |
24.13 |
% |
115.83 |
% |
14.63x |
|
$ |
0.48 |
|
2.96 |
% |
88.29 |
% |
$ |
1,915 |
|
20.87 |
% |
20.84 |
% |
NA |
|
1.64 |
% |
7.58 |
% |
1.64 |
% |
7.58 |
% |
|
|
|
|
|
WNEB |
Western New England Bancorp, Inc. |
|
MA |
|
$ |
9.80 |
|
$ |
271.39 |
|
$ |
0.57 |
|
$ |
8.35 |
|
17.19x |
|
117.39 |
% |
13.13 |
% |
125.99 |
% |
17.12x |
|
$ |
0.16 |
|
1.63 |
% |
21.05 |
% |
$ |
2,119 |
|
11.19 |
% |
10.50 |
% |
NA |
|
0.78 |
% |
6.82 |
% |
0.79 |
% |
6.84 |
% |
|
|
|
|
(1) Core income, on a diluted per-share basis. Core income is net income after taxes and before extraordinary items, less net income attributable to noncontrolling interest, gain on the sale of securities, amortization of intangibles, goodwill and nonrecurring items. Assumed tax rate is 40%.
(2) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/Core = Price to core earnings. P/E and P/Core =NM if the ratio is negative or above 35x.
(3) Indicated 12 month dividend, based on last quarterly dividend declared.
(4) Indicated 12 month dividend as a percent of trailing 12 month earnings.
(5) ROAA (return on average assets) and ROAE (return on average equity) are indicated ratios based on trailing 12 month earnings and average equity and assets balances.
(6) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating characteristics.
Source: S&P Global Market Intelligence and RP Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
P/TB ratios of 118.16% and 127.78%, respectively, the Companys pro forma P/B and P/TB ratios at the midpoint value reflected discounts of 27.17% and 22.36%, respectively. At the maximum of the range, the Companys P/B and P/TB ratios equaled 93.57% and 106.72%, respectively. In comparison to the Peer Groups average P/B and P/TB ratios, the Companys P/B and P/TB ratios at the maximum of the range reflected discounts of 24.44% and 20.94%, respectively. In comparison to the Peer Groups median P/B and P/TB ratios, the Companys P/B and P/TB ratios at the maximum of the range reflected discounts of 20.98% and 16.48%, respectively. RP Financial considered the discounts under the P/B approach to be reasonable, given the nature of the calculation of the P/B ratio which tends to mathematically result in a ratio discounted to book value. The discounts reflected under the P/B approach were also supported by the significant premiums reflected in the Companys P/E multiples.
3. Price-to-Assets (P/A) . The P/A valuation methodology determines market value by applying a valuation P/A ratio to the Companys pro forma asset base, conservatively assuming no deposit withdrawals are made to fund stock purchases. In all likelihood there will be deposit withdrawals, which results in understating the pro forma P/A ratio which is computed herein. At the $508.7 million midpoint of the valuation range, the Companys value equaled 13.09% of pro forma assets. Comparatively, the Peer Group companies exhibited an average P/A ratio of 15.92%, which implies a discount of 17.78% has been applied to the Companys pro forma P/A ratio. In comparison to the Peer Groups median P/A ratio of 16.02%, the Companys pro forma P/A ratio at the midpoint value reflects a discount of 18.29%.
Comparison to Recent Offerings
As indicated at the beginning of this chapter, RP Financials analysis of recent conversion offering pricing characteristics at closing and in the aftermarket has been limited to a technical analysis and, thus, the pricing characteristics of recent conversion offerings cannot be a primary determinate of value. Particular focus was placed on the P/TB approach in this analysis, since the P/E multiples do not reflect the actual impact of reinvestment and the source of the stock proceeds (i.e., external funds vs. deposit withdrawals). As discussed previously, the most recently completed second-step offering was Mid-Southern Bancorp, Inc. of Indiana, which was completed in July 2018. Mid-Southern Bancorps forma price/tangible book ratio at closing equaled 77.50%. In comparison, the Companys pro forma price/tangible book ratio at the midpoint value reflects an implied premium of 28.01%. It should be noted that Mid-Southern
Bancorps second-step offering of $25.6 million was significantly smaller than HarborOne Bancorps midpoint second-step offering of $270.0 million.
Valuation Conclusion
Based on the foregoing, it is our opinion that, as of February 8, 2019, the estimated aggregate pro forma valuation of the shares of the Company to be issued and outstanding at the end of the conversion offering including (1) newly-issued shares representing the MHCs current ownership interest in the Company and (2) exchange shares issued to existing public shareholders of the Company - was $508,686,450 at the midpoint, equal to 50,868,645 shares at a per share value of $10.00. The resulting range of value and pro forma shares, all based on $10.00 per share, are as follows:
|
|
Total Shares |
|
Offering
|
|
Exchange Shares
|
|
Exchange
|
|
|||
Shares |
|
|
|
|
|
|
|
|
|
|||
Maximum |
|
58,498,942 |
|
31,050,000 |
|
27,448,942 |
|
1.7961 |
|
|||
Midpoint |
|
50,868,645 |
|
27,000,000 |
|
23,868,645 |
|
1.5618 |
|
|||
Minimum |
|
43,238,349 |
|
22,950,000 |
|
20,288,349 |
|
1.3276 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Distribution of Shares |
|
|
|
|
|
|
|
|
|
|||
Maximum |
|
100.00 |
% |
53.08 |
% |
46.92 |
% |
|
|
|||
Midpoint |
|
100.00 |
% |
53.08 |
% |
46.92 |
% |
|
|
|||
Minimum |
|
100.00 |
% |
53.08 |
% |
46.92 |
% |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Aggregate Market Value at $10 per share |
|
|
|
|
|
|
|
|
|
|||
Maximum |
|
$ |
584,989,420 |
|
$ |
310,500,000 |
|
$ |
274,489,420 |
|
|
|
Midpoint |
|
$ |
508,686,450 |
|
$ |
270,000,000 |
|
$ |
238,686,450 |
|
|
|
Minimum |
|
$ |
432,383,490 |
|
$ |
229,500,000 |
|
$ |
202,883,490 |
|
|
|
The pro forma valuation calculations relative to the Peer Group are shown in Table 4.4 and are detailed in Exhibit IV-7 and Exhibit IV-8.
Establishment of the Exchange Ratio
Conversion regulations provide that in a conversion of a mutual holding company, the minority shareholders are entitled to exchange the public shares for newly issued shares in the fully converted company. The Boards of Trustees of the MHC and the Board of Directors of HONE and the Bank have independently determined the exchange ratio, which has been designed to preserve the current aggregate percentage ownership in the Company (adjusted for the dilution resulting from the consolidation of the MHCs unconsolidated equity into the Company). The exchange ratio to be received by the existing minority shareholders of the Company will be determined at the end of the offering, based on the total number of shares sold in the second-step conversion offering and the final appraisal. Based on the valuation conclusion herein, the resulting offering value and the $10.00 per share offering price, the indicated exchange ratio at the midpoint is 1.5618 shares of the Companys stock for every one public share held by public shareholders. Furthermore, based on the offering range of value, the indicated exchange ratio is 1.3276 at the minimum and 1.7961 at the maximum. RP Financial expresses no opinion on the proposed exchange of newly issued Company shares for the shares held by the public shareholders or on the proposed exchange ratio.
RP
®
FINANCIAL, LC.
Advisory | Planning | Valuation
March 11, 2019
Board of Trustees
HarborOne Mutual Bancshares
Boards of Directors
HarborOne Bancorp, Inc.
HarborOne Bank
770 Oak Street
Brockton, Massachusetts 02301
Re: |
|
Plan of Conversion |
|
|
HarborOne Mutual Bancshares |
|
|
HarborOne Bancorp, Inc. |
|
|
HarborOne Bank |
Members of the Board of Trustees and Directors:
All capitalized terms not otherwise defined in this letter have the meanings given such terms in the Plan of Conversion (the Plan) adopted by the Board of Trustees of HarborOne Mutual Bancshares (the MHC) and the Board of Directors of Old HarborOne and HarborOne Bank. The Plan provides for the conversion of the MHC into the capital stock form of organization. Pursuant to the Plan, a new Massachusetts stock holding company named HarborOne Bancorp, Inc. (the Company) will be organized and will sell shares of common stock in a public offering. When the conversion is completed, all of the capital stock of HarborOne Bank will be owned by the Company and all of the common stock of the Company will be owned by public stockholders.
We understand that in accordance with the Plan, subscription rights to purchase shares of common stock in the Company are to be issued to: (1) Eligible Account Holders; (2) Tax-Qualified Plans including HarborOne Banks employee stock ownership plan (the ESOP); and (3) Employees, Officers, Directors, Trustees and Corporators. Based solely upon our observation that the subscription rights will be available to such parties without cost, will be legally non-transferable and of short duration, and will afford such parties the right only to purchase shares of common stock at the same price as will be paid by members of the general public in the community, syndicated or firm commitment underwritten offerings but without undertaking any independent investigation of state or federal law or the position of the Internal Revenue Service with respect to this issue, we are of the belief that, as a factual matter:
(1) the subscription rights will have no ascertainable market value; and,
(2) the price at which the subscription rights are exercisable will not be more or less than the pro forma market value of the shares upon issuance.
Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the Companys value alone. Accordingly, no assurance can be given that persons who subscribe to shares of common stock in the subscription offering will thereafter be able to buy or sell such shares at the same price paid in the subscription offering.
|
Sincerely, |
|
RP Financial, LC. |
|
|
|
|
Washington Headquarters |
|
|
4250 North Fairfax Drive |
|
Telephone: (703) 528-1700 |
Suite 600 |
|
Fax No.: (703) 528-1788 |
Arlington, VA 22203 |
|
Toll-Free No.: (866) 723-0594 |
www.rpfinancial.com |
|
E-Mail: mail@rpfinancial.com |