HarborOne Bancorp, Inc. Announces 2018 Fourth Quarter Earnings

HarborOne Bancorp, Inc. (the “Company” or “HarborOne”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), announced net income of $111,000, or $0.00 basic and diluted earnings per share for the fourth quarter of 2018, compared to $5.9 million, or $0.19 per basic and diluted share, for the prior quarter and net income of $1.6 million, or $0.05 per basic and diluted share, for the same quarter last year. For the year ended December 31, 2018 net income was $11.4 million, or $0.36 per basic and diluted share, as compared to $10.4 million, or $0.33 per basic and diluted share, for the same period last year.

Quarterly and annual earnings for 2018 were significantly impacted by the Coastway Bancorp, Inc. (“Coastway”) acquisition, which closed on October 5, 2018, resulting in merger expenses of $3.8 million and $5.1 million, respectively. Excluding merger expenses, net income for the three months and year ended December 31, 2018 was $3.0 million, or $0.09 per basic and diluted share and $15.3 million, or $0.49 per basic and diluted share, respectively.

Selected highlights:

• Sustained commercial loan growth
• 14 basis point net interest margin improvement quarter over quarter
• Net interest income expands $14.6 million, or 19.6% year over year

“Our organic commercial loan growth and recent acquisition of Coastway has provided year over year net interest income expansion, as we continue to maintain strong credit quality, said James W. Blake, CEO. We look forward to continuing our momentum as we expand our New England franchise through new branches, product development and brand awareness.”

Net Interest Income
The Company’s net interest and dividend income was $26.8 million for the quarter ended December 31, 2018, up $5.7 million, or 26.8%, from $21.1 million for the quarter ended September 30, 2018 and up $7.4 million, or 37.9%, from $19.4 million for the quarter ended December 31, 2017. The tax-equivalent interest rate spread and net interest margin on a fully tax equivalent basis were 3.00% and 3.26%, respectively, for the quarter ended December 31, 2018 compared to 2.87% and 3.12%, respectively, for the quarter ended September 30, 2018 and 2.90% and 3.07%, respectively, for the quarter ended December 31, 2017.

The increase in net interest income from the previous quarter reflects a $9.1 million, or 32.6%, increase in total interest and dividend income partially offset by an increase of $3.4 million, or 50.6% in total interest expense. Compared to the prior quarter, interest and dividend income was positively impacted by the Coastway acquisition and organic commercial loan growth. Interest on loans in the fourth quarter of 2018 includes $900,000 in accretion income of the Coastway loans’ fair value discount and $338,000 in prepayment penalties on commercial loans. Prepayment penalties in the previous quarter were $233,000. The yield on loans was 4.63% for the quarter ended December 31, 2018 compared to 4.30% for the quarter ended September 30, 2018. The increase in interest expense is due to acquisition of Coastway deposits and an increase in higher cost money market balances driving a 14 basis point increase in the cost of interest-bearing deposits, and an increase in average FHLB advances of $181.6 million and a 42 basis point increase in the cost of those funds, primarily reflecting the Coastway borrowings acquired.

The increase in net interest income from the prior year quarter reflects a $13.1 million, or 55.1%, increase in total interest and dividend income and an increase of $5.8 million, or 131.5%, in total interest expense. The increases largely reflect the impact of the Coastway acquisition. Also positively impacting interest and dividend income is the Company’s commercial loan growth and an increase in the yield on loans to 4.63% from 3.94%, 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 $496.8 million with a 56 basis point increase in the cost of those funds and a $191.6 million increase in average borrowings with a 74 basis point increase in the cost of those funds. The increase in deposits reflects the Coastway acquired deposits and organic deposit growth in money market and term certificates of deposits.

Noninterest Income
Noninterest income decreased to $11.7 million for the quarter ended December 31, 2018, down $2.0 million, or 14.6%, from the quarter ended September 30, 2018. The decrease is primarily due to a decrease in mortgage banking income of $2.9 million and other income of $584,000. Results of HarborOne Mortgage, LLC (“HarborOne Mortgage”) were down compared to the third quarter. Lower mortgage banking income reflects industry wide conditions, including lack of inventory and lower refinancing activity due to higher mortgage rates. We expect these headwinds to continue into 2019. Other mortgage banking income decreased $1.5 million primarily reflecting the decrease in mortgage origination volumes. Additionally mortgage servicing rights fair value decreased $1.4 million. The decrease in other income is primarily due to a decrease of $621,000 in swap fee income. The decreases were partially offset by recognition of a $746,000 death benefit through bank-owned life insurance income and a $705,000 increase in deposit account fees reflecting the added Coastway accounts.

Noninterest income decreased $2.5 million or 17.7%, as compared to the quarter ended December 31, 2017. Mortgage banking income decreased $3.1 million, or 33.8%, and other income decreased $967,000, partially offset by an increase of $757,000 in bank owned life insurance income from the above mentioned death benefit and an increase in deposit account fee income of $784,000. Mortgage banking income decreased 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. Additionally, mortgage servicing rights fair value decreased $1.7 million. The decrease in other income compared to prior year quarter is primarily due to a $1.2 million reversal of contingent consideration in 2017 and no such transaction in 2018.

Noninterest Expense
Noninterest expenses were $36.6 million for the quarter ended December 31, 2018, an increase of $9.2 million, or 33.6%, from the quarter ended September 30, 2018 including merger expenses of $3.8 million as compared to $274,000 in the third quarter. The majority of these costs were related to contract terminations and legal and professional fees.

Additionally, compensation and benefits and occupancy and equipment increased $3.3 million and $922,000, respectively. The increase in compensation and benefits primarily reflects an increase in salary expense of $2.6 million primarily due to the addition of Coastway employees and a $642,000 increase in stock option expense. During the third quarter of 2018 a clerical error in the 2017 stock option award amounts was corrected resulting in a one-time $652,000 expense reversal, the 2018 fourth quarter results reflect the normalized quarterly expense for the plan. The occupancy and equipment expense increase is due to depreciation and real estate taxes on the additional Coastway properties. Other expenses increased $985,000 primarily due to amortization of core deposit intangibles of $618,000.

Total noninterest expenses increased $6.9 million, or 23.2%, from the quarter ended December 31, 2017. Compensation and benefits increased $2.4 million, occupancy and equipment expense increased $902,000 and the 2018 quarter included $3.8 million in merger expense whereas there were none in the quarter ended December 31, 2017, due primarily to the Coastway acquisition. Offsetting the increases was a loan expense decrease of $525,000 consistent with the decrease in loan originations. The $325,000 decrease in marketing expenses primarily reflects timing.

Income Tax Provision
The effective tax rate was 68.0% for the quarter ended December 31, 2018, compared to 12.1% for the quarter ended September 30, 2018 and 49.2% for the quarter ended December 31, 2017. The effective tax rate for the years ended December 31, 2018 and 2017 was 19.8% and 39.1%, respectively. The increase in the effective tax rate from the previous quarter primarily resulted from nondeductible merger expenses. Additionally, in the third quarter, an $826,000 tax refund for the tax year 2014 was recognized. In 2017 the Company filed amended returns that reflected a change in tax basis of certain assets. The effective tax rates for 2018 periods also have been impacted by the enactment of the Tax Cuts and Jobs Act of 2017 which 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 $1.5 million for the quarter ended December 31, 2018, compared to $632,000 for the quarter ended September 30, 2018 and $760,000 for the quarter ended December 31, 2017. The increase in the provision for the quarter ended December 31, 2018 is primarily due to commercial and construction loan growth. Also contributing to the increase in the provision was $18.1 million in loans that were downgraded to a watch risk rating and resulted in an increase in the allocated reserves of $439,000.

Net charge-offs totaled $287,000 for the quarter ended December 31, 2018, or 0.04%, of average loans outstanding on an annualized basis, compared to $436,000, or 0.08% of average loans outstanding on an annualized basis, for the quarter ended September 30, 2018 and $204,000, or 0.04% of average loans outstanding on an annualized basis, for the quarter ended December 31, 2017. Generally increases in loan loss provisions each quarter were 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 $20.7 million, or 0.69%, of total loans at December 31, 2018, compared to $19.4 million, or 0.87%, of total loans at September 30, 2018 and $18.5 million, or 0.84%, of total loans at December 31, 2017. In accordance with generally accepted accounting principles for acquisition accounting, the loans acquired through the acquisition of Coastway were recorded at fair value; accordingly, there was no allowance for loan losses associated with the acquired loans.

Total nonperforming assets were $18.5 million at December 31, 2018 compared to $17.4 million at September 30, 2018 and $18.6 million at December 31, 2017. Nonperforming assets as a percentage of total assets were 0.51% at December 31, 2018, 0.61% at September 30, 2018 and 0.69% at December 31, 2017. The Company continues to minimize nonperforming assets through diligent collection efforts, prudent workout arrangements and strong underwriting.

Balance Sheet
Total assets increased $800.3 million, or 28.1%, to $3.65 billion at December 31, 2018 from $2.85 billion at September 30, 2018. On October 5, 2018, the Company completed the acquisition of Coastway, resulting in the addition of nine branch locations in Rhode Island. 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.

Net loans increased $760.5 million, or 34.5%, to $2.96 billion at December 31, 2018 from $2.20 billion at September 30, 2018. The net increase in loans for the three months ended December 31, 2018 was primarily due to the $703.9 million in loans at fair value acquired from Coastway. Gross loans excluding the Coastway loans increased $58.2 million from September 30, 2018, reflecting increases in commercial real estate of $31.5 million, construction loans of $37.7 million and commercial loans of $6.8 million offset by decreases in residential real estate loans of $9.7 million and consumer loans of $8.2 million. Loans held for sale decreased $113.2 million, or 72.9%, to $42.1 million at December 31, 2018 from $155.3 million at September 30, 2018 due to the settlement of a $105.4 million residential real estate loan portfolio 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 increased $499.4 million, or 22.9%, to $2.69 billion at December 31, 2018 from $2.19 billion at September 30, 2018 and primarily reflects the fair value of deposits acquired from Coastway of $476.5 million. Compared to the prior quarter, excluding the Coastway acquired balances, non-certificate accounts increased $50.8 million, brokered deposits increased $10.7 million and term certificate accounts decreased $38.6 million. The decrease in term certificates includes net maturities of $28.6 million in Coastway acquired term certificates. FHLB borrowings were $519.9 million at December 31, 2018 and $231.2 million at September 30, 2018. We acquired $276.8 million from Coastway. Subordinated debt was $33.8 million at December 31, 2018 and September 30, 2018.

Total stockholders’ equity was $357.6 million at December 31, 2018 compared to $353.3 million at September 30, 2018 and $343.5 million at December 31, 2017. The tangible common equity to tangible assets ratio was 7.81% at December 31, 2018, 11.96% at September 30, 2018 and 12.35% at December 31, 2017. At December 31, 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 and Rhode Island 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 net income and earnings per share before merger expenses, 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.