HarborOne Bancorp, Inc. Announces 2019 First Quarter Earnings

HarborOne Bancorp, Inc. (the “Company” or “HarborOne”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), announced net income of $2.1 million, or $0.07 basic and diluted earnings per share for the first quarter of 2019, compared to $111,000, or $0.00 per basic and diluted share, for the prior quarter and $2.3 million, or $0.07 per basic and diluted share, for the same quarter prior year.

Selected highlights:

• Commercial loan growth of $37.2 million to $1.4 billion
• Deposits up 6% quarter over quarter to $2.8 billion, solid growth in core accounts
• Asset quality for the quarter remains strong
• Opening of Stoughton, Massachusetts branch in March 2019

“Our continued commitment to commercial assets drove core earnings with an increase of interest and fees on loans, along with other income from fees generated by the commercial business,” said James W. Blake, CEO. “Volatility in the capital markets resulted in a negative mark to market of $2.2 million on mortgage servicing rights and first quarter earnings were also negatively impacted by the operating loss at HarborOne Mortgage. The residential mortgage business as a whole has experienced lower income and spreads and we are actively managing the expense side of the business with $1.2 million in annual savings on a recent additional layoff. Although HarborOne Mortgage got off to a slow start this year, recent mortgage application volume spurred by the spring housing market and lower mortgage rates indicates an improved outlook in the second quarter of 2019.”

Net Interest Income
The Company’s net interest and dividend income was $26.0 million for the quarter ended March 31, 2019, down $760,000, or 2.8%, from $26.8 million for the quarter ended December 31, 2018 and up $5.9 million, or 29.3%, from $20.1 million for the quarter ended March 31, 2018. The tax-equivalent interest rate spread and net interest margin were 2.92% and 3.19%, respectively, for the quarter ended March 31, 2019 compared to 3.00% and 3.26%, respectively, for the quarter ended December 31, 2018 and 3.07% and 3.26%, respectively, for the quarter ended March 31, 2018.

The decrease in net interest income from the previous quarter reflects a $130,000, or 0.4%, increase in total interest and dividend income offset by an increase of $890,000, or 8.8% in total interest expense. Compared to the prior quarter, interest and dividend income was relatively flat. Interest on loans in the first quarter of 2019 includes $670,000 in accretion income of the fair value discount on loans acquired from Coastway Bancorp, Inc. (“Coastway”) in October 2018, and $106,000 in prepayment penalties on commercial loans. Accretion income and prepayment penalties in the previous quarter were $900,000 and $226,000, respectively. The yield on loans was 4.67% for the quarter ended March 31, 2019 compared to 4.63% for the quarter ended December 31, 2018. The increase in interest expense is primarily due to an increase in higher cost money market accounts driving a 16 basis point increase in the cost of interest-bearing deposits. The increase was partially offset by a decrease in average FHLB advances of $45.5 million, tempered by an 18 basis point increase in the cost of those funds.

The increase in net interest income from the prior year quarter reflects a $12.4 million, or 50.1%, increase in total interest and dividend income and an increase of $6.5 million, or 141.7%, in total interest expense. The increases in total interest and dividend income reflect an increase in the yield on loans to 4.67% from 4.13%, primarily driven by growth due to the Coastway acquisition as well as organic commercial loan growth and 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 $578.6 million with a 62 basis point increase in the cost of those funds, due to deposits acquired from Coastway as well as organic deposit growth in money market and term certificate of deposits and a $139.1 million increase in average FHLB borrowings with a 69 basis point increase in the cost of those funds. Additionally the Company issued $35.0 million in subordinated notes in the third quarter of 2018.

Noninterest Income
Noninterest income decreased $1.8 million, or 15.5%, to $9.8 million for the quarter ended March 31, 2019 from the quarter ended December 31, 2018. The decrease is primarily due to a decrease in mortgage banking income of $1.5 million and a net decrease of $316,000 in the other noninterest income categories. Results of HarborOne Mortgage, LLC (“HarborOne Mortgage”) were down compared to the fourth quarter. Lower mortgage banking income reflects industry wide conditions, including lack of inventory and lower refinancing activity due to higher mortgage rates during the quarter. Additionally the decrease in the 10-year Treasury Constant Maturity rate negatively impacted the fair value of the mortgage servicing rights resulting in a $2.2 million decrease in their fair value. The net decrease in the other noninterest income categories compared to the prior quarter is primarily due to a decrease of $750,000 in bank-owned life insurance income and a $229,000 decrease in deposit account fees partially offset by an increase of $673,000 in other income. The increase in other income reflects $613,000 in swap fee income as compared to $124,000 in the previous quarter. The quarter ended December 31, 2018 included a $746,000 death benefit in bank-owned life insurance income with no such benefit in the first quarter of 2019.

Noninterest income decreased $1.5 million or 13.3%, as compared to the quarter ended March 31, 2018. Mortgage banking income decreased $2.8 million, or 38.2%, partially offset by a net increase in the other noninterest income categories of $1.3 million. Mortgage banking income decreased compared to the prior year quarter due to lower mortgage originations, primarily as a result of higher residential mortgage interest rates, low housing inventories and reduced refinancing volume. Additionally, mortgage servicing rights fair value decreased $2.2 million for the quarter ended March 31, 2019 as compared to an increase of $1.0 million in the quarter ended March 31, 2018. The net increase in other noninterest income categories compared to prior year quarter is primarily due to an $811,000 increase in deposit account fee income reflecting the addition of Coastway accounts and an increase of $466,000 in other income primarily from swap fee income and other commercial loan fees.

Noninterest Expense
Noninterest expenses were $32.6 million for the quarter ended March 31, 2019, a decrease of $4.0 million, or 10.9%, from the quarter ended December 31, 2018 which included merger expenses of $3.8 million as compared to none in the first quarter of 2019.

Other significant changes in noninterest expense included an $817,000 decrease in compensation and benefits partially offset by a $499,000 increase in occupancy and equipment expense. The decrease in compensation and benefits is due to a decrease in commission expense of $990,000 primarily due to the decrease in origination volume at HarborOne Mortgage and a $1.0 million decrease in management incentive plan expense partially offset by an increase in supplemental employee retirement plan expense of $535,000. Also impacting compensation and benefits in the first quarter of 2019 were severance payments $295,000 reflecting continued efforts to right size HarborOne Mortgage in response to economic conditions. The occupancy and equipment expense increase was primarily due to property maintenance expense increases due to the additional Coastway properties.

Total noninterest expenses increased $5.0 million, or 18.1%, from the quarter ended March 31, 2018. Compensation and benefits increased $2.9 million, occupancy and equipment expense increased $1.2 million, other expenses increased $802,000 and data processing expense increased $493,000. The increases primarily reflect the acquisition of Coastway and expenses related to the new Stoughton branch and Boston commercial loan office.

Income Tax Provision
The effective tax rate was 14.7% for the quarter ended March 31, 2019, compared to 68.0% for the quarter ended December 31, 2018 and 26.5% for the quarter ended March 31, 2018. The effective tax rate for the quarter ended December 31, 2018 was impacted by nondeductible merger expenses, while the quarter ended March 31, 2019 was impacted by the 2014 Massachusetts state tax refund of $320,000 recognized in the quarter.

Asset Quality
The Company recorded a provision for loan losses of $857,000 for the quarter ended March 31, 2019, compared to $1.5 million for the quarter ended December 31, 2018 and $808,000 for the quarter ended March 31, 2018. 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 higher provision for the quarter ended December 31, 2018 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. 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.

Net charge-offs totaled $230,000 for the quarter ended March 31, 2019, or 0.03%, of average loans outstanding on an annualized basis, compared to $287,000, or 0.04% of average loans outstanding on an annualized basis, for the quarter ended December 31, 2018 and $434,000, or 0.08% of average loans outstanding on an annualized basis, for the quarter ended March 31, 2018.

The allowance for loan losses was $21.3 million, or 0.71%, of total loans at March 31, 2019, compared to $20.7 million, or 0.69%, of total loans at December 31, 2018 and $18.9 million, or 0.84%, of total loans at March 31, 2018. The decrease from March 31, 2018 reflects the loans acquired from Coastway. 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 $19.3 million at March 31, 2019 compared to $18.5 million at December 31, 2018 and $17.2 million at March 31, 2018. Nonperforming assets as a percentage of total assets were 0.53% at March 31, 2019, 0.51% at December 31, 2018 and 0.63% at March 31, 2018. The Company continues to minimize nonperforming assets through diligent collection efforts, prudent workout arrangements and strong underwriting.

Balance Sheet
Total assets increased $2.9 million, or 0.1%, to $3.66 billion at March 31, 2019 from $3.65 billion at December 31, 2018.

Net loans increased $14.4 million, or 0.5%, to $2.98 billion at March 31, 2019 from $2.96 billion at December 31, 2018. The net increase in loans for the three months ended March 31, 2019 was primarily due increases in commercial real estate loans of $18.0 million and commercial loans of $22.4 million, partially offset by decreases in commercial construction loans of $3.2 million and consumer loans of $22.1 million. Loans held for sale decreased $9.7 million, or 22.9%, to $32.4 million at March 31, 2019 from $42.1 million at December 31, 2018.

Total deposits increased $151.6 million, or 5.6%, to $2.84 billion at March 31, 2019 from $2.69 billion at December 31, 2018. Compared to the prior quarter, non-certificate accounts increased $117.4 million, brokered deposits increased $40.4 million and term certificate accounts decreased $6.2 million. FHLB borrowings were $355.9 million at March 31, 2019 and $519.9 million at December 31, 2018.

Total stockholders’ equity was $363.4 million at March 31, 2019 compared to $357.6 million at December 31, 2018 and $344.9 million at March 31, 2018. The tangible common equity to tangible assets ratio was 7.99% at March 31, 2019, 7.81% at December 31, 2018 and 12.17% at March 31, 2018. At March 31, 2019, 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 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. 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 34 offices in Massachusetts, Rhode Island, New Hampshire, Maine, and New Jersey and is also licensed to lend 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, acquisitions may not produce results at levels or within time frames originally anticipated; 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.

(1) Includes loans held for sale, nonaccruing loan balances and interest received on such loans.
(2) Includes securities available for sale and securities held to maturity. Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the quarters presented. The yield on investments before tax equivalent adjustments for the quarters presented were 2.88%, 2.80%, and 2.67%, respectively.
(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.
(6) Annualized.

(1) Includes loans held for sale, nonaccruing loan balances and interest received on such loans.
(2) Includes securities available for sale and securities held to maturity.