HarborOne Bancorp, Inc. Announces 2019 Third Quarter Earnings

HarborOne Bancorp, Inc. (the “Company” or “HarborOne”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), announced net income of $7.1 million, or $0.13 per basic and diluted share for the third quarter of 2019, compared to $4.8 million, or $0.08 per basic and diluted share, for the prior quarter and $5.9 million, or $0.10 per basic and diluted share, for the same period last year. For the nine months ended September 30, 2019 net income was $14.0 million, or $0.25 per basic and diluted share, compared to $11.3 million, or $0.20 per basic and diluted share, for the same period last year. On August 14, 2019, the Company completed its second step conversion from the mutual holding company to the stock holding company form of organization and related common stock offering. All historical share and per share information has been restated to reflect the 1.795431 exchange ratio.

Selected third quarter highlights:

• Successful second-step conversion raising net proceeds of $304.1 million
• Maintained strong commercial loan growth, increasing total commercial loans 4%
• Sustained residential real estate mortgage origination activity, increasing 39% on a linked quarter basis and year over year

“Solid performance in our core operating businesses is a reflection of our continued focus on growth and expense management,” said James Blake, CEO, HarborOne. “We expect the continued strength in commercial lending and the rebound of the mortgage business to serve us well through year end.” Added Joseph Casey, President, HarborOne, “The successful completion of our second step conversion has provided both the capital and flexibility necessary to pursue our growth strategy.”

Net Interest Income
The Company’s net interest and dividend income was $28.0 million for the quarter ended September 30, 2019, up $1.3 million, or 4.8%, from $26.7 million for the quarter ended June 30, 2019 and up $6.9 million, or 32.5%, from $21.1 million for the quarter ended September 30, 2018. The tax-equivalent interest rate spread and net interest margin were 2.73% and 3.11%, respectively, for the quarter ended September 30, 2019 compared to 2.91% and 3.19%, respectively, for the quarter ended June 30, 2019 and 2.87% and 3.12%, respectively, for the quarter ended September 30, 2018.

The increase in net interest and dividend income from the previous quarter reflected a $1.5 million, or 3.8%, increase in total interest and dividend income offset in part by an increase of $180,000, or 1.6%, in total interest expense. The increase in interest and dividend income primarily reflected an increase in interest income on loans due to volume increases and an increase in interest income on other interest-earning assets as proceeds from the second step conversion were invested in liquid investments. Additionally, interest on loans in the third quarter of 2019 included $1.1 million in accretion income of the fair value discount on loans acquired from Coastway Bancorp, Inc. (“Coastway”) and $5,000 in prepayment penalties on commercial loans. Accretion income and prepayment penalties in the previous quarter were $614,000 and $421,000, respectively. The yield on loans was 4.64% for the quarter ended September 30, 2019 compared to 4.70% for the quarter ended June 30, 2019. The increase in interest expense was primarily due to an increase in higher cost certificates of deposit accounts and an increase in the average balance and cost of savings accounts as a result of savings and CD promotions in the third quarter, which drove a 4 basis point increase in the cost of interest-bearing deposits. Average FHLB advances in the same period decreased by $78.3 million, reducing interest expense on FHLB advances by $430,000.

The increase in net interest and dividend income from the prior year quarter reflected an $11.9 million, or 42.7%, increase in total interest and dividend income offset by an increase of $5.0 million, or 74.6%, in total interest expense. The increases in total interest and dividend income which reflected an increase in the yield on loans to 4.64% from 4.30%, primarily driven by commercial loan growth due to the Coastway acquisition as well as organic commercial loan growth. This is partially offset by the increase in total interest expense primarily due to an increase in average interest-bearing deposits of $633.2 million with a 43 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 CDs. Average FHLB borrowings decreased $42.8 million; however, a 57 basis point increase in the cost of those funds offset any savings. Additionally, the Company issued $35.0 million in subordinated notes in the third quarter of 2018.

Noninterest Income
Noninterest income increased $1.6 million, or 9.9%, to $17.3 million for the quarter ended September 30, 2019 from $15.7 million for the quarter ended June 30, 2019. The increase was primarily due to an increase in mortgage banking income of $2.9 million, partially offset by a $1.2 million decrease in gain on sale of securities and a net decrease of $105,000 in the other noninterest income categories. Seasonal mortgage origination activity and mortgage rate decreases resulted in a 39% increase in mortgage production by HarborOne Mortgage, LLC (“HarborOne Mortgage”) compared to the second quarter of 2019. Continued downward pressure on the 10-year Treasury Constant Maturity rate negatively impacted the fair value of the mortgage servicing rights resulting in a $2.5 million decrease in their fair value in the third quarter as compared to a $2.2 million decrease in their fair value in the second quarter of 2019.

Noninterest income increased $3.6 million, or 26.6%, as compared to the quarter ended September 30, 2018. Mortgage banking income increased $2.6 million, or 29.7%, and the other noninterest income categories increased $922,000, excluding the gain on sale of securities. Mortgage banking income increased compared to the same period last year, despite the decrease in the fair value of mortgage servicing rights of $2.5 million in 2019 as compared to a $378,000 decrease in 2018. Mortgage originations increased primarily as a result of lower residential mortgage interest rates and increased refinancing volume. The net increase in other noninterest income categories compared to prior year quarter is primarily due to an $884,000 increase in deposit account fee income reflecting the addition of Coastway accounts and an increase of $114,000 in swap fee income.

Noninterest Expense
Noninterest expenses were $36.2 million for the quarter ended September 30, 2019, an increase of $1.1 million, or 3.2%, from the quarter ended June 30, 2019, driven by a $2.7 million increase in compensation and benefits, and a $370,000 increase in loan expense, partially offset by an $814,000 decrease in deposit insurance expense, a $495,000 decrease in professional fees, a $378,000 decrease in marketing expense and a $240,000 decrease in occupancy and equipment expenses. The increase in compensation and benefits is due to an increase in commissions of $1.9 million due to the increase in mortgage loan originations at HarborOne Mortgage and an increase of $674,000 in ESOP expense in connection with the second step conversion. The loan expense increase is due to the increase in mortgage origination volume. The decrease in deposit insurance expense reflects the Bank’s FDIC assessment credit awards recorded in the quarter ended September 30, 2019. The decreases in the other noninterest expense categories primarily reflect timing differences.

Total noninterest expenses increased $8.8 million, or 32.2%, from the quarter ended September 30, 2018. Compensation and benefits increased $6.4 million, other expenses increased $1.3 million and occupancy and equipment expense increased $1.1 million. The increases were partially offset by a $765,000 decrease in deposit insurance expense as a result of the FDIC credit awards noted above. Additionally, the quarter ended September 30, 2018 included $274,000 in merger expenses. The increases primarily reflected the acquisition of Coastway and expenses related to the new Stoughton branch and the Boston commercial lending office.

Income Tax Provision
The effective tax rate was 12.9% for the quarter ended September 30, 2019, compared to 14.6% for the quarter ended June 30, 2019 and 12.1% for the quarter ended September 30, 2018. The effective tax rate for the quarter ended September 30, 2019 was impacted by the 2015 federal tax refund of $1.3 million and the 2015 Massachusetts state tax refund of $39,700 and the quarter ended June 30, 2019 was impacted by the 2013 federal tax refund of $603,000 and the 2013 Massachusetts state tax refund of $211,000 recognized in the quarter. The effective tax rate for the quarter ended September 30, 2018 was primarily impacted by an $826,000 tax refund for the tax year 2014. The refunds were a result of previously amended returns filed for those years.

Asset Quality
The Company recorded a provision for loan losses of $889,000 for the quarter ended September 30, 2019, compared to $1.8 million for the quarter ended June 30, 2019 and $632,000 for the quarter ended September 30, 2018. The provision for the quarter ended September 30, 2019 is primarily due to commercial real estate loan growth. The provision in the quarter ended June 30, 2019 reflected commercial loan growth and a $738,000 commercial loan charge off. 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 $106,000 for the quarter ended September 30, 2019, or 0.01%, of average loans outstanding on an annualized basis, compared to $771,000, or 0.10% of average loans outstanding on an annualized basis, for the quarter ended June 30, 2019 and $436,000, or 0.08% of average loans outstanding on an annualized basis, for the quarter ended September 30, 2018.

The allowance for loan losses was $23.0 million, or 0.74%, of total loans at September 30, 2019, compared to $22.3 million, or 0.73%, of total loans at June 30, 2019 and $19.4 million, or 0.87%, of total loans at September 30, 2018. The decrease in the ratio of allowance for loan losses to total loans from September 30, 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 is no allowance for loan losses associated with the acquired loans.

Total nonperforming assets were $27.9 million at September 30, 2019 compared to $17.2 million at June 30, 2019 and $17.4 million at September 30, 2018. Nonperforming assets as a percentage of total assets were 0.71% at September 30, 2019, 0.46% at June 30, 2019 and 0.61% at September 30, 2018. The increase in nonperforming assets was primarily due to two commercial construction loans to one borrower for $11.2 million for which no specific reserve is required at this time. The Company continues to minimize loan losses through diligent collection efforts, prudent workout arrangements and strong underwriting.

Balance Sheet
Total assets increased $211.6 million, or 5.7%, to $3.95 billion at September 30, 2019 from $3.74 billion at June 30, 2019. The increase primarily reflects approximately $128.0 million of proceeds from the second step offering that are included in short-term investments. Short-term investments increased by $159.4 million, or 309.4%, to $210.9 million at September 30, 2019 from $51.5 million at June 30, 2019. The remainder of the second step offering proceeds were utilized to fund commercial loan growth and pay down FHLB borrowings.

Net loans increased $45.4 million, or 1.5%, to $3.09 billion at September 30, 2019 from $3.04 billion at June 30, 2019. The net increase in loans for the three months ended September 30, 2019 was primarily due to increases in commercial real estate loans of $60.2 million and commercial construction loans of $3.4 million, partially offset by decreases in residential real estate loans of $7.8 million, commercial loans of $2.4 million, and consumer loans of $7.6 million. Loans held for sale increased $17.5 million, or 20.6%, to $102.1 million at September 30, 2019 from $84.7 million at June 30, 2019.

Total deposits decreased $45.1 million, or 1.5%, to $2.92 billion at September 30, 2019 from $2.97 billion at June 30, 2019. Compared to the prior quarter of 2019, non-certificate accounts increased $26.4 million, brokered deposits decreased $65.5 million and term CDs decreased $6.1 million. FHLB borrowings were $271.1 million at September 30, 2019 and $309.1 million at June 30, 2019.

Total stockholders’ equity was $659.6 million at September 30, 2019 compared to $371.1 million at June 30, 2019 and $353.3 million at September 30, 2018. The tangible common equity to tangible assets ratio was 15.06% at September 30, 2019, 8.04% at June 30, 2019 and 11.96% at September 30, 2018. The increase in stockholders’ equity and ratios primarily reflects the results of the Company’s second step offering, net of the additional ESOP funding. At September 30, 2019, the Company and the Bank exceeded 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 more than 30 offices in Massachusetts, Rhode Island, New Hampshire, Maine, and New Jersey and is also licensed to lend in four 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.