HarborOne Bancorp, Inc. Announces 2020 Fourth Quarter Earnings

HarborOne Bancorp, Inc. (the “Company” or “HarborOne”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), announced net income of $17.6 million, or $0.33 per basic and diluted share, for the fourth quarter of 2020, compared to $11.9 million, or $0.22 per basic and diluted share, for the preceding quarter and $4.3 million, or $0.08 per basic and diluted share, for the same period last year. For the year ended December 31, 2020, net income was $44.8 million, or $0.82 per basic and diluted share, compared to $18.3 million, or $0.33 per basic and diluted share, for the year ended December 31, 2019. The quarter and year ended December 31, 2020 reflect charges of $1.7 million and $19.6 million, respectively, to the provision for loan losses and $47,000 and $1.8 million, respectively, to non-interest expense related to the COVID-19 pandemic.

Selected Fourth Quarter Financial Highlights:

• Record EPS with net income of $17.6 million
• Allowance for loan loss at 1.59% of loans and 1.64% of loans, excluding Paycheck Protection Program loans
• Mortgage banking income grew to $31.9 million, or 145.6% as compared to the fourth quarter 2019
• Net interest margin expanded 13 basis points to 3.22%
• Return on average assets was 1.61% and return on average equity was 10.13%
• Continued commercial loan growth providing expanded commercial deposit growth
• Deposit growth of $140.3 million, or 4.2%, with improved cost of funds and favorable mix

“We’re pleased that the momentum we had in Q3 continued into Q4. It’s a testament to the tremendous teamwork and commitment to our customers during a very challenging time,” said James Blake, CEO. “While the pandemic presented both personal and professional challenges for most of us, it forced us to rethink many aspects of our business. As a result we will be a better company moving forward,” added Joseph Casey, President and COO. “We’re very focused on continuing to deliver a tremendous customer experience.”

Net Interest Income

The Company’s net interest and dividend income was $32.8 million for the quarter ended December 31, 2020, up $1.6 million, or 5.1%, from $31.2 million for the quarter ended September 30, 2020 and up $4.5 million, or 15.6%, from $28.3 million for the quarter ended December 31, 2019. The tax equivalent interest rate spread and net interest margin were 3.03% and 3.22%, respectively, for the quarter ended December 31, 2020, compared to 2.87% and 3.09%, respectively, for the quarter ended September 30, 2020, and 2.70% and 3.08%, respectively, for the quarter ended December 31, 2019. The improvement in net interest margin was largely driven by the decrease in deposit rates. The recognition of origination fees on U.S. Small Business Administration Paycheck Protection Program loans contributed to improved margins in the fourth quarter of 2020. It is expected that interest rates will remain low and that the economic environment will continue to be volatile as the impact of the COVID-19 pandemic is realized.

The components of the quarter over quarter increase in net interest and dividend income reflected an increase of $673,000, or 1.8%, in total interest and dividend income and a decrease of $909,000, or 15.5%, in total interest expense. The increase in total interest and dividend income primarily reflected an increase of $29.4 million in average earning assets and a 4 basis point increase in the yield. The yield on loans was 4.00% for the quarter ended December 31, 2020, up from 3.94% for the quarter ended September 30, 2020. The three months ended December 31, 2020 and September 30, 2020 include the recognition of deferred fees on Paycheck Protection Program loans in the amount of $1.3 million and $653,000, respectively. Interest on loans in the fourth quarter included $1.4 million in accretion income from the fair value discount on loans acquired from Coastway Bancorp, Inc. (“Coastway”) and $244,000 in prepayment penalties on commercial loans. Accretion income and prepayment penalties in the preceding quarter were $1.6 million and $140,000, respectively.

The decrease in total interest expense primarily reflected a decrease in interest rates, resulting in an 11 basis point decrease in the cost of interest-bearing deposits. The mix of deposits continues to shift as customers move to more liquid options. The average balance of certificates of deposit accounts decreased quarter over quarter by $34.1 million, while the savings account average balance increased $71.0 million from the preceding quarter. Average FHLB advances decreased $30.0 million as the need for short-term borrowed funds diminished, and the cost of borrowed funds remained flat, resulting in a decrease of $164,000 in interest expense on FHLB borrowings.

The increase in net interest and dividend income from the prior year quarter reflected a decrease of $6.4 million, or 56.4%, in total interest expense, partially offset by a $2.0 million, or 5.0%, decrease in total interest and dividend income. The decreases reflect offsetting rate and volume changes in both interest-bearing assets and liabilities. The cost of interest-bearing liabilities decreased 94 basis points while the average balance increased $140.0 million. The yield on interest-earning assets decreased 61 basis points while the average balance increased $396.1 million.

Noninterest Income

Total noninterest income decreased $7.3 million, or 16.4%, to $37.2 million for the quarter ended December 31, 2020, from $44.5 million for the quarter ended September 30, 2020. Record-breaking mortgage demand spurred by low mortgage rates continued to provide higher than usual mortgage origination activity and other mortgage banking income for HarborOne Mortgage, LLC. The $813.2 million in mortgage loan closings resulted in a gain on loan sales of $28.3 million for the quarter ended December 31, 2020, as compared to $34.1 million for the preceding quarter. Other mortgage banking income increased $395,000. Residential mortgage loan payoffs resulted in accelerated amortization of mortgage servicing rights in the amount of $1.4 million and $1.1 million for the three months ended December 31, 2020 and September 30, 2020, respectively. The 10-year Treasury Constant Maturity rate increased 24 basis points in the fourth quarter of 2020, resulting in a $366,000 increase in fair value of mortgage servicing rights. The fair value of the mortgage servicing rights decreased $2.6 million for the year ended December 31, 2020. The low interest rate environment spurred increased purchase and refinance activity during the year, continuing into the first quarter of 2021 with a locked residential mortgage pipeline at December 31, 2020 of $485.4 million; however, seasonality, economic uncertainty and increased unemployment rates may have a negative impact on mortgage loan originations in the future.

Total noninterest income increased $19.0 million, or 105.0%, as compared to the quarter ended December 31, 2019, primarily due to an $18.9 million, or 145.6%, increase in mortgage banking income primarily driven by volume. The 2019 quarterly results also include a write down to fair value of the former Coastway corporate office in Warwick, Rhode Island, which was sold during 2020.

Noninterest Expense

Total noninterest expenses were $41.4 million for the quarter ended December 31, 2020, a decrease of $4.3 million, or 9.4%, from the quarter ended September 30, 2020, primarily driven by a $2.7 million decrease in compensation and benefits, a $926,000 decrease in other expenses, a $346,000 decrease in loan expense, and a $206,000 decrease in professional fees. The decrease in compensation and benefits reflects timing of accruals for incentive programs and severance payments paid in the third quarter of 2020 as a result of the staff realignment. The decrease in other expenses reflects a $196,000 decrease in foreclosed asset expense and a $123,000 decrease in amortization of core deposit intangibles. Other expenses for the three months ended September 30, 2020 also included a write off of $217,000 for fixed assets. For the three months ended December 31, 2020, pandemic expenses, which are also included in other expenses, amounted to $47,000 compared to $71,000 in the preceding quarter. Due to the uncertain nature of the COVID-19 pandemic, we may continue to have additional expenses for personnel, cleaning, and other initiatives to support our employees and customers.

Total noninterest expenses increased $2.7 million, or 7.0%, from the quarter ended December 31, 2019. Compensation and benefits increased $3.4 million and loan expenses increased $950,000, partially offset by a $1.2 million decrease in professional fees and a $777,000 decrease in other expenses. The increase in compensation and benefits and loan expenses primarily reflected the increased volume of residential real estate mortgage originations. The decrease in professional fees reflects $712,000 in consulting fees recorded in the fourth quarter of 2019 for the review of filings effected by the Home Mortgage Disclosure Act and no such expense in 2020. The decrease in other expenses reflects a decrease in the Board of Director’s equity award expense of $361,000, as original grants were fully vested in the third quarter of 2020.

Income Tax Provision

The effective tax rate was 15.7% for the quarter ended December 31, 2020, compared to 27.7% for the quarter ended September 30, 2020 and 33.6% for the quarter ended December 31, 2019. The effective tax rate for the quarter ended December 31, 2020 was impacted by a 2016 federal tax refund of $1.9 million recognized on the expiration of the statute of limitations.

Provision for Loan Losses and Asset Quality

The Company recorded a provision for loan losses of $7.6 million for the quarter ended December 31, 2020, compared to $13.5 million for the quarter ended September 30, 2020 and $1.3 million for the quarter ended December 31, 2019. The allowance for loan losses was $55.4 million, or 1.59%, of total loans at December 31, 2020, compared to $49.2 million, or 1.40%, of total loans at September 30, 2020 and $24.1 million, or 0.76%, of total loans at December 31, 2019. 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 provision for loan losses for the quarter ended December 31, 2020 included adjustments for our quarterly analysis of our historical and peer loss experience rates, commercial real estate loan growth, and a $1.7 million provision directly related to the estimate of inherent losses resulting from the impact of the COVID-19 pandemic. The current period allowance for loan losses reflects an additional provision expense and charge-off in the amount of $937,000 related to two non-performing commercial loans that were transferred out of portfolio and subsequently sold during the quarter ended December 31, 2020. The provision for loan losses for the quarter ended September 30, 2020 included adjustments for our quarterly analysis of our historical and peer loss experience rates, commercial real estate loan growth, and a $10.7 million provision directly related to the estimate of inherent losses resulting from the impact of the COVID-19 pandemic. The provision for loan losses for the quarter ended December 31, 2019 primarily reflected commercial real estate loan growth and overall credit quality indicators.

In estimating the provision for the COVID-19 pandemic, management considered economic factors, including unemployment rates and the interest rate environment, the volume and dollar amount of requests for payment deferrals, the loan risk profile of each loan type, and whether the loans were purchased. An additional 10 basis points of provisions were provided to the commercial loan categories for the three months ended December 31, 2020, amounting to $1.7 million. No additional provisions specific to COVID-19 were provided for the residential real estate or consumer loan portfolios in the fourth quarter.

Management continues to evaluate our loan portfolio, particularly the commercial loan portfolio, in light of the expected decrease in economic activity, the mitigating effects of government stimulus, and loan modification efforts designed to limit the long term impacts of the COVID-19 pandemic. Our commercial loan portfolio is diversified across many sectors and is largely secured by commercial real estate loans, which make up 73.3% of the total commercial loan portfolio. Initial assessments of the impact of the COVID-19 pandemic on the commercial loan portfolio have been focused on sectors that have experienced a direct impact. Management has identified six sectors as the most susceptible to immediate increased credit risk: retail, office space, hotels, health and social services, restaurants, and recreation. The total loan portfolio of the six commercial sectors identified as at risk totaled $948.5 million, which represents 44.8% of the commercial loan portfolio. The at-risk sectors include $735.7 million in commercial real estate loans, $184.7 million in commercial and industrial loans, and $28.2 million in commercial construction loans.

As of December 31, 2020, the retail sector was $261.8 million, or 12.4% of total commercial loans, and included $219.8 million in commercial real estate loans, $28.6 million in commercial and industrial loans, and $13.4 million in commercial construction loans. U.S. Small Business Administration Paycheck Protection Program loans included in this sector totaled $4.5 million. We have provided deferrals for loans in this sector with outstanding principal balances of $46.7 million. We originated $4.5 million loans during the fourth quarter that are within the retail sector. The new loans are supported by leases to credit-related tenants such as pharmacy and grocery stores, which have been essential businesses during the pandemic.

As of December 31, 2020, the office space sector was $210.3 million, or 9.9% of total commercial loans, and included $193.1 million in commercial real estate loans, $16.3 million in commercial and industrial loans, and $854,000 in commercial construction loans. We provided deferrals for loans in the sector with outstanding principal balances of $13.4 million. No Paycheck Protection Program loans were originated in this sector. We originated $2.0 million loans during the fourth quarter that are within the office space sector.

As of December 31, 2020, the hotel sector was $201.0 million, or 9.5% of total commercial loans, and included $190.3 million in commercial real estate loans, $2.6 million in commercial and industrial loans, and $8.0 million in commercial construction loans. Paycheck Protection Program loans included in the sector totaled $444,000. We have provided deferrals for loans in this sector with outstanding principal balances of $120.4 million, $93.8 million that have expired deferral periods and are paying as agreed, and $254,000 that have expired deferral periods and are greater than 30 days delinquent. In addition, we have provided other relief for loans in this sector with outstanding principal balances of $81,000. At December 31, 2020, nonperforming loans included in the hotel sector amount to $12.2 million. The increase from the third quarter reflects one loan that amounted to $9.0 million that is on nonaccrual and is considered impaired. This loan’s deferral period expires in the second quarter of 2021, however it was determined in the fourth quarter that weaknesses in the credit warranted a downgrade to substandard and nonaccrual status. A specific reserve of $1.8 million has been allocated to this loan. We originated $6.1 million loans during the fourth quarter that are within the hotel sector.

The health and social services sector amounted to $199.3 million, or 9.4% of total commercial loans, as of December 31, 2020 and included $107.5 million in commercial real estate loans, $90.7 million in commercial and industrial loans, and $1.0 million in commercial construction loans. Paycheck Protection Program loans included in the sector totaled $36.2 million, and we have provided deferrals for loans in this sector with outstanding principal balances of $12.6 million. We originated $14.3 million loans during the fourth quarter that are within this sector. The loans originated in the fourth quarter were generally owner occupied commercial real estate supported by stable and diverse medical practices.

As of December 31, 2020, the restaurant sector amounted to $55.0 million, or 2.6% of total commercial loans, including $7.3 million in Paycheck Protection Program loans. We provided deferrals for loans in this sector with outstanding principal balances of $13.5 million. The recreation sector amounted to $21.3 million, or 1.0% of total commercial loans, including $1.8 million in Paycheck Protection Program loans. We provided deferrals for loans in this sector with outstanding principal balances of $15.7 million. During the fourth quarter two non-performing loans that were included in the recreation sector in previous quarters, with a recorded investment of $10.9 million, were sold and a charge off of $937,000 was recorded.

We provided access to the Paycheck Protection Program to both our existing customers and new customers, to ensure small businesses in our communities have access to this important lifeline for their businesses. As of December 31, 2020, Paycheck Protection Program loans amounted to $126.5 million. As of December 31, 2020, there was $2.7 million in deferred processing fee income that will be recognized over the life of the loans.

We are also working with commercial loan customers that may need payment deferrals or other accommodations to keep their loans out of default through the COVID-19 pandemic. As of December 31, 2020, we have provided 171 payment deferrals on commercial loans with a total principal balance of $295.3 million, or 14.0%, of total commercial loans, of which $222.2 million are loans included in an at risk sector. As of December 31, 2020, 90.8% of the commercial deferrals have expired and the borrower is making payments as agreed, 0.09% of the commercial deferrals have expired and the borrower is delinquent, and 9.1% are in active deferral period. The active commercial deferrals expire during 2021. We have also provided $4.6 million loans with other accommodations. We continue to consider requests for additional deferrals or new deferrals at December 31, 2020 for commercial credits.

The residential loan and consumer loan portfolios have not experienced significant credit quality deterioration as of December 31, 2020; however, the continuing impact and uncertain nature of the COVID-19 pandemic may result in increases in delinquencies, charge offs and loan modifications in these portfolios through the remainder of 2021. As of December 31, 2020, we had provided 172 payment deferrals on residential mortgage loans with a total principal balance of $51.9 million, or 4.7% of total residential loans, of which 86.1% of the deferrals have expired and are paying as agreed and 5.4% are in active deferral periods. We had 495 payment deferrals on consumer loans with a total principal balance of $11.6 million, or 4.2%, of total consumer loans, of which 93.5% of the deferrals have expired and are paying as agreed. Requests for additional extensions on residential mortgage loans and consumer loans were not significant as of December 31, 2020.

Net charge offs totaled $1.4 million for the quarter ended December 31, 2020, or 0.16% of average loans outstanding on an annualized basis, compared to $338,000, or 0.04% of average loans outstanding on an annualized basis, for the quarter ended September 30, 2020 and $235,000, or 0.03% of average loans outstanding on an annualized basis, for the quarter ended December 31, 2019. Net charge offs for the quarter ended December 31, 2020 include a charge off in the amount of $937,000 recorded on the sale of two nonperforming commercial loans.

Total nonperforming assets were $34.7 million at December 31, 2020, compared to $41.0 million at September 30, 2020 and $31.0 million at December 31, 2019. Nonperforming assets as a percentage of total assets were 0.77% at December 31, 2020, 0.93% at September 30, 2020, and 0.76% at December 31, 2019. The decrease from the preceding quarter is primarily due to the two commercial loans noted above that were sold and amounted to $10.9 million.

Balance Sheet

Total assets increased $55.3 million, or 1.2%, to $4.48 billion at December 31, 2020 from $4.43 billion at September 30, 2020. The increase primarily reflects an increase of $65.8 million in short-term investments and an $18.2 million increase in loans held for sale, partially offset by a $27.4 million decrease in net loans.

Net loans decreased $27.4 million, or 0.08%, to $3.44 billion at December 31, 2020 from $3.47 billion at September 30, 2020. The net decrease in loans for the three months ended December 31, 2020 was primarily due to decreases in commercial construction loans of $112.6 million, commercial and industrial loans of $15.7 million, consumer loans of $38.9 million and residential real estate loans of $25.1 million, partially offset by an increase in commercial real estate loans of $171.2 million. The changes in commercial real estate loans and commercial construction loans reflect $79.2 million of commercial construction loans that converted to commercial real estate loans at the end of the construction phase. Additionally, two non-performing commercial construction loans with a net book value of $10.9 million were sold at a loss of $937,000. The allowance for loan losses increased $6.2 million, or 12.5% to $55.4 million at December 31, 2020 from $49.2 million at September 30, 2020 as provisions continue to be made in response to portfolio risks as a result of COVID-19 pandemic.

Total deposits increased $140.3 million, or 4.2%, to $3.51 billion at December 31, 2020 from $3.37 billion at September 30, 2020. Compared to the prior quarter, non-certificate accounts increased $193.9 million and term certificate accounts decreased $53.6 million. FHLB borrowings decreased $87.0 million, or 36.9%, to $149.1 million at December 31, 2020 from $236.1 million at September 30, 2020.

Total stockholders’ equity was $696.3 million at December 31, 2020, compared to $694.1 million at September 30, 2020 and $665.8 million at December 31, 2019. The Company adopted a share repurchase program on September 3, 2020 to repurchase up to approximately 5% of the Company’s outstanding shares and repurchased 1,533,500 shares in the fourth quarter of 2020 recorded in treasury stock on the balance sheet. The tangible common equity to tangible assets ratio was 14.11% at December 31, 2020, 14.23% at September 30, 2020, and 14.81% at December 31, 2019. At December 31, 2020, the Company and the Bank had strong capital positions and exceeded all regulatory capital requirements.

About HarborOne Bancorp, Inc.

HarborOne Bancorp, Inc. is the holding company for HarborOne Bank, a Massachusetts-chartered savings bank. HarborOne Bank serves the financial needs of consumers, businesses, and municipalities throughout Eastern Massachusetts and Rhode Island through a network of 26 full-service branches located in Massachusetts and Rhode Island, 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, New Jersey and Florida and is 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, the negative impacts and disruptions of the COVID-19 pandemic and the measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of economic contraction as a result of the COVID-19 pandemic; the effects of continued deterioration in employment levels, general business and economic conditions on a national basis and 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 customer behavior; turbulence in the capital and debt markets and the impact of such conditions on the Company’s business activities; changes in interest rates; increases in loan default and charge off rates; decreases in the value of securities in the Company’s investment portfolio; fluctuations in real estate values; the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions, customer behavior or adverse economic developments; the adequacy of loan loss reserves; decreases in deposit levels necessitating increased borrowing to fund loans and investments; competitive pressures from other financial institutions; acquisitions may not produce results at levels or within time frames originally anticipated; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters, and future pandemics; changes in regulation; reputational risk relating to the Company’s participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; 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.