HarborOne Bancorp, Inc. Announces 2018 Third Quarter Earnings

HarborOne Bancorp, Inc. (the “Company” or “HarborOne”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), announced net income of $5.9 million, or $0.19 per basic and diluted share, for the third quarter of 2018, compared to $3.1 million, or $0.10 per basic and diluted share, for the prior quarter and net income of $2.8 million, or $0.09 per basic and diluted share, for the same quarter last year. For the nine months ended September 30, 2018 net income was $11.3 million, or $0.36 per basic and diluted share, as compared to $8.8 million, or $0.28 per basic and diluted share, for the same period last year.

Selected highlights:

• Successful closing of the acquisition of Coastway Bancorp, Inc. (“Coastway”) and Coastway Community Bank into HarborOne on October 5, 2018
• Subordinated debt issuance of $35.0 million to support growth
• Continued shift in balance sheet mix
  • Sustained commercial loan growth
  • $105.4 million portfolio residential mortgage loans transferred to held for sale recognizing a $472,000 gain
• Recognition of a tax refund of $826,000 for the tax year 2014
• Opening of our Boston commercial loan office

“Our commercial loan growth strategy, and the investments we’ve made to enable that growth, continue to provide solid results,” said James W. Blake, CEO. “We’re pleased with the performance of our Boston loan office, and our recent expansion in Rhode Island, with the completed Coastway acquisition, provides tremendous new opportunities for our residential real estate, small business, and commercial lines of business.”

Net Income
The increase in net income from the prior quarter reflects a $226,000 increase in net interest and dividend income, a $254,000 decrease in provision for loan losses, a $1.1 million increase in noninterest income, a $1.1 million decrease in noninterest expense and a $127,000 decrease in income tax provision.

Net Interest Income
The Company’s net interest and dividend income was $21.1 million for the quarter ended September 30, 2018, up $226,000, or 1.1%, from $20.9 million for the quarter ended June 30, 2018 and up $1.8 million, or 9.6%, from $19.3 million for the quarter ended September 30, 2017. The tax-equivalent interest rate spread and net interest margin were 2.87% and 3.12%, respectively, for the quarter ended September 30, 2018 compared to 3.04% and 3.26%, respectively, for the quarter ended June 30, 2018 and 2.91% and 3.07%, respectively, for the quarter ended September 30, 2017.

The increase in net interest income from the previous quarter reflects a $1.6 million, or 6.1%, increase in total interest and dividend income offset by an increase of $1.4 million, or 25.6% in total interest expense. The increase in interest and dividend income is primarily due to commercial loan growth that provided an increase in average outstanding loans of $85.2 million partially offset by decreases in the average balances of residential real estate and consumer loans. The yield on loans was 4.30% for the quarter ended September 30, 2018 compared to 4.25% for the quarter ended June 30, 2018. The increase in interest expense is due to an increase in average interest-bearing deposits of $47.0 million with a 17 basis point increase in the cost of those funds and an increase in average FHLB advances of $38.7 million and an 8 basis point increase in total cost of those funds. Additionally, $35.0 million of subordinated debentures were issued on August 30, 2018 with a rate of 5.625%.

The increase in net interest income from the prior year quarter reflects a $4.4 million, or 18.9%, increase in total interest and dividend income and an increase of $2.6 million, or 62.3%, in total interest expense. The increase in interest and dividend income is primarily due to growth in the Company’s average loan balances to $2.38 billion from $2.19 billion and an increase in the yield on loans to 4.30% from 3.95%, again primarily driven by commercial loan growth as well as higher rates on commercial loans. This is partially offset by the increase in total interest expense primarily due to an increase in average interest-bearing deposits of $158.8 million and a 49 basis point increase in the cost of those funds.

Noninterest Income
Noninterest income increased to $13.6 million for the quarter ended September 30, 2018, up $1.1 million, or 8.6%, from the quarter ended June 30, 2018. The increase is primarily due to an increase in mortgage banking income of $412,000 and other income of $612,000. The increase in other income is primarily due to an increase of $744,000 in swap fee income for new interest rate swap deals. There was no swap fee income in the second quarter of 2018. Other mortgage banking income increased $484,000 primarily reflecting the gain on pending sale of the portfolio residential real estate mortgage loans. This was partially offset by a decrease in the mortgage servicing rights fair value of $378,000. Results of HarborOne Mortgage, LLC (“HarborOne Mortgage”) were flat as compared to the June 2018 quarter.

Noninterest income decreased $987,000, or 6.7%, as compared to the quarter ended September 30, 2017. Mortgage banking income decreased $1.7 million, or 16.2%, partially offset by an increase of $626,000 in other income. Other mortgage banking income decreased $1.8 million, or 16.5% compared to the prior year quarter due to lower mortgage originations in 2018, primarily as a result of higher residential mortgage interest rates, low housing inventories and reduced refinancing volume. The increase in other income compared to prior year quarter is primarily due to an increase of $544,000 in commercial loan interest rate swap fee income.

Noninterest Expense
Noninterest expenses were $27.4 million for the quarter ended September 30, 2018, a decrease of $1.1 million, or 4.0%, from the quarter ended June 30, 2018 due to a decrease in compensation and benefits of $536,000 and a decrease in marketing expense of $445,000.

The decrease in compensation and benefits primarily reflects a decrease in equity compensation expense. During the quarter a clerical error in the 2017 stock option award amounts was corrected resulting in a one-time $652,000 expense reversal. Additionally, HarborOne Mortgage’s compensation and benefits expense decreased by $289,000. Partially offsetting these decreases were increased accruals related to incentive plans. The decrease in marketing expense reflects seasonality of marketing campaigns.

Noninterest expenses decreased $1.1 million, or 3.7%, from the quarter ended September 30, 2017. The decrease was primarily due to decreases in compensation and benefits of $516,000, loan expense of $381,000, marketing expenses of $497,000 and professional fees of $414,000 partially offset by an increase in other expenses of $382,000. The compensation and benefits decrease reflects the correction noted above. Loan expense decreased as compared to the prior year consistent with the decrease in loan originations. The decrease in marketing and professional fees primarily reflects timing. The increase in other expenses reflects $274,000 in expenses related to the Coastway acquisition and $189,000 in employment agency fees that were not incurred in the third quarter of 2017.

Income Tax Provision
The effective tax rate was 12.1% for the quarter ended September 30, 2018, 23.3% for the quarter ended June 30, 2018 and 37.4% for the quarter ended September 30, 2017. The effective tax rate for the nine months ended September 30, 2018 and 2017 was 18.6% and 36.9%, respectively. The effective tax rate for the quarter and year to date ended September 30, 2018 is primarily being impacted by the $826,000 tax refund for the tax year 2014 that was recognized this quarter. In 2017 the Company filed amended returns that reflected a change in tax basis of certain assets. Additionally, the enactment of the Tax Cuts and Jobs 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.

Asset Quality
The Company recorded a provision for loan losses of $632,000 for the quarter ended September 30, 2018, $886,000 for the quarter ended June 30, 2018 and $921,000 for the quarter ended September 30, 2017. The decrease in the provision for the quarter ended September 30, 2018 reflects a $262,000 negative provision in conjunction with the sale of $105.4 million residential real estate mortgage loans from portfolio. There were also charge offs of $255,000 and $390,000 for the quarters ended September 30, 2018 and June 30, 2018, respectively, related to one commercial credit. Generally loan loss provisions each quarter are due to growth in the commercial loan portfolio. Changes in the provision for loan losses are based on management’s assessment of loan portfolio growth and composition changes, historical charge-off trends, and ongoing evaluation of credit quality and current economic conditions. The allowance for loan losses was $19.4 million, or 0.87%, of total loans at September 30, 2018, compared to $19.2 million, or 0.84%, of total loans at June 30, 2018 and $17.9 million, or 0.84%, of total loans at September 30, 2017. Net charge-offs totaled $436,000 for the quarter ended September 30, 2018, or 0.08%, of average loans outstanding on an annualized basis, compared to $505,000, or 0.09% of average loans outstanding on an annualized basis, for the quarter ended June 30, 2018 and $169,000, or 0.03% of average loans outstanding on an annualized basis , for the quarter ended September 30, 2017.

Nonperforming assets were $17.4 million at September 30, 2018 compared to $17.4 million at June 30, 2018 and $20.6 million at September 30, 2017. Nonperforming assets as a percentage of total assets were 0.61% at September 30, 2018, 0.60% at June 30, 2018 and 0.78% at September 30, 2017. The Company’s continues to minimize nonperforming assets through diligent collection efforts, prudent workout arrangements and strong underwriting.

Balance Sheet
Total assets decreased $26.9 million, or 0.9%, to $2.85 billion at September 30, 2018 from $2.88 billion at June 30, 2018. Net loans decreased $77.1 million, or 3.4%, to $2.20 billion at September 30, 2018 from $2.28 billion at June 30, 2018. The net decrease in loans for the three months ended September 30, 2018 was primarily due to decreases of $103.1 million in residential real estate, $24.6 million in construction loans and $18.5 million in consumer loans partially offset by increases of $62.3 million in commercial real estate loans and $7.3 million in commercial loans. Loans held for sale increased $84.3 million, or 118.6%, to $155.3 million at September 30, 2018 from $71.0 million at June 30, 2018 due to the transfer of a $105.4 million residential real estate loan portfolio to held for sale. Management proactively assesses the balance sheet mix to enhance margins. The decrease in consumer loans partially reflects the reallocation of funds into commercial lending.

Total deposits decreased $16.9 million, or 0.8%, to $2.19 billion at September 30, 2018 from $2.20 billion at June 30, 2018. Compared to the prior quarter, non-certificate accounts decreased $80.3 million, term certificate accounts increased $76.0 million and brokered deposits decreased $12.6 million. Term certificate growth reflects special promotions offered during the quarter for 11 and 14 month term certificates. Borrowings were $265.0 million at September 30, 2018 and $287.4 million at June 30, 2018. We also issued $35.0 million of fixed-to-floating rate subordinated debentures on August 30, 2018 with a rate of 5.625%. Issuance costs of $1.2 million were deferred and are being amortized over the term of the debentures.

Total stockholders’ equity was $353.3 million at September 30, 2018 compared to $348.6 million at June 30, 2018 and $336.6 million at September 30, 2017. The tangible common equity to tangible assets ratio was 11.96% at September 30, 2018, 11.68% at June 30, 2018 and 12.36% at September 30, 2017. At September 30, 2018, the Company and the Bank exceed all regulatory capital requirements.

About HarborOne Bancorp, Inc.
HarborOne Bancorp, Inc. is the holding company for HarborOne Bank, the largest co-operative bank in New England. HarborOne Bank serves the financial needs of consumers, businesses, and municipalities throughout Eastern Massachusetts through a network of 23 full-service branches, two limited service branches, two commercial loan offices in Boston, Massachusetts and Providence, Rhode Island, and 16 free-standing ATMs. The Bank also provides a range of educational services through “HarborOne U,” with classes on small business, financial literacy and personal enrichment at two campuses located adjacent to our Brockton and Mansfield locations. HarborOne Mortgage, LLC, a subsidiary of HarborOne Bank, is a full-service mortgage lender with 40 offices in Massachusetts, Rhode Island, New Hampshire, Maine, and New Jersey and also does business in five additional states.

Forward Looking Statements
Certain statements herein constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as “believes,” “will,” “would,” “expects,” “project,” “may,” “could,” “developments,” “strategic,” “launching,” “opportunities,” “anticipates,” “estimates,” “intends,” “plans,” “targets” and similar expressions. These statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors. Factors that could cause such differences to exist include, but are not limited to, the Company’s ability to achieve the synergies and value creation contemplated by the Coastway acquisition; adverse conditions in the capital and debt markets and the impact of such conditions on the Company’s 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 the Company operates, including changes that adversely affect borrowers’ ability to service and repay the Company’s loans; changes in the value of securities in the Company’s 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 increased borrowing 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 the Company’s financial statements will become impaired; demand for loans in the Company’s market area; the Company’s ability to attract and maintain deposits; risks related to the implementation of acquisitions, dispositions, and restructurings; the risk that the Company may not be successful in the implementation of its business strategy; changes in assumptions used in making such forward-looking statements and the risk factors described in the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q as filed with the Securities and Exchange Commission (the “SEC”), which are available at the SEC’s website, www.sec.gov. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, HarborOne Bancorp, Inc.’s actual results could differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release. The Company disclaims any obligation to publicly update or revise any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except as required by law.

Use of Non-GAAP Measures
In addition to results presented in accordance with generally accepted accounting principles (“GAAP”), this press release contains certain non-GAAP financial measures. The Company’s management believes that the supplemental non-GAAP information, which consists of the tax equivalent basis for yields, the efficiency ratio, tangible common equity to tangible assets ratio and tangible book value per share is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names.