HarborOne Bancorp, Inc. Announces 2018 Second Quarter Earnings

HarborOne Bancorp, Inc. (the “Company”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), announced net income of $3.1 million, or $0.10 per basic and diluted share, for the second quarter of 2018, compared to $2.3 million, or $0.07 per basic and diluted share, for the prior quarter and net income of $3.2 million, or $0.10 per basic and diluted share, for the same quarter last year. For the six months ended June 30, 2018 net income was $5.4 million, or $0.17 per basic and dilute share as compared to $5.9 million, or $0.19 per basic and diluted share, for the same period last year.

Selected highlights for the second quarter of 2018:

• Total outstanding commercial, commercial real estate and construction loans surpassed $1 billion during the second quarter.
• Launched a commercial loan office in Boston.
• Total deposits grew by 4% in the second quarter.

The increase in net income from the prior quarter reflects a $771,000 increase in net interest and dividend income and a $1.2 million increase in noninterest income, partially offset by a $919,000 increase in noninterest expense, a $78,000 increase in provision for loan losses and a $131,000 increase in income tax provision.

The previously announced acquisition of Coastway Bancorp, Inc.(“Coastway”) is anticipated to close in the second half of 2018 subject to customary closing conditions and required regulatory approvals.

James W. Blake, CEO stated, “Despite the contraction in residential mortgage demand, our earnings have been consistently strong. Our investment in the commercial loan growth strategy has provided margin improvement and positions us as a significant commercial lender in New England. ”

Net Interest Income
The Company’s net interest and dividend income was $20.9 million for the quarter ended June 30, 2018, up $771,000, or 3.8%, from $20.1 million for the quarter ended March 31, 2018 and up $2.7 million, or 14.7%, from $18.2 million for the quarter ended June 30, 2017. The tax-equivalent interest rate spread and net interest margin were 3.04% and 3.26%, respectively, for the quarter ended June 30, 2018 compared to 3.07% and 3.26%, respectively, for the quarter ended March 31, 2018 and 2.87% and 3.03%, respectively, for the quarter ended June 30, 2017.

The increase in net interest income from the previous quarter reflects a $1.6 million, or 6.3%, increase in total interest and dividend income offset by an increase of $795,000, or 17.4% 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 $60.0 million partially offset by decreases in the average balances of residential real estate and consumer loans. The yield on loans was 4.25% for the quarter ended June 30, 2018 and 4.13% for the quarter ended March 31, 2018. The increase in interest expense is due to an increase in average interest-bearing deposits of $82.7 million with a 15 basis point increase in the cost of those funds, partially offset by a decrease in average FHLB advances of $35.6 million and a 1 basis point increase in total cost of borrowed funds.

The increase in net interest income from the prior year quarter reflects a $4.3 million, or 19.8%, increase in total interest and dividend income and an increase of $1.7 million, or 44.9%, in total interest expense. The increase in interest and dividend income is primarily due to growth in the Company’s average loan balances to $2.30 billion from $2.13 billion and an increase in the yield on loans to 4.25% from 3.82%, again primarily driven by commercial loan growth as well as higher rates on commercial loans. The increase in total interest expense reflects increased average balances and rising interest rates.

Noninterest Income
Noninterest income increased to $12.6 million for the quarter ended June 30, 2018, up $1.2 million, or 10.6%, from the quarter ended March 31, 2018. The increase is primarily due to an increase in mortgage banking income of $1.2 million. Other mortgage banking income increased $2.5 million as mortgage originations increased 55.2% from the prior quarter. This was partially offset by a negative change in the mortgage servicing rights fair value of $306,000, as compared to a positive change in mortgage servicing rights fair market value of $1.0 million in the first quarter of 2018 due to flat rates as compared to the prior quarter. Other income was flat at $4.1 million for both quarters.

Noninterest income decreased $1.7 million, or 12.2%, as compared to the quarter ended June 30, 2017. Mortgage banking income decreased $1.7 million, or 16.6% despite an improvement in mortgage servicing rights fair value of $746,000. Other mortgage banking income decreased $2.4 million, or 21.7% compared to the prior year quarter due to lower mortgage originations in 2018. Compared to the same quarter prior year, mortgage originations decreased 13.5% in 2018 primarily as a result of higher residential mortgage interest rates, low housing inventories and reduced refinancing volume.

Noninterest Expense
Noninterest expenses were $28.5 million for the quarter ended June 30, 2018, an increase of $919,000, or 3.3%, from the quarter ended March 31, 2018 due to increases in compensation and benefits of $993,000, partially offset by a decrease of $314,000, or 9.6% in occupancy and equipment expenses. The decrease in occupancy and equipment expenses primarily reflects the seasonality of grounds’ maintenance costs.

The increase in compensation and benefits primarily reflects the increase in loan production volumes as compared to the first quarter. The results for the second quarter of 2018 include $80,000 in severance expense related to a workforce reduction at HarborOne Mortgage which is expected to result in annual cost reductions of approximately $1.0 million. The right sizing of HarborOne Mortgage was in response to efficiencies created by the consolidation of HarborOne Mortgage and the Bank’s residential mortgage group, as well as economic pressures within the mortgage industry.

Noninterest expenses increased $1.6 million, or 6.1%, from the quarter ended June 30, 2017. The increase was primarily due to increases in compensation and benefits of $1.0 million and other expenses of $907,000 partially offset by a decrease in loan expense of $492,000. The compensation and benefits and other expense increase reflects expenses related to the equity plan that was established in August 2017. The second quarter of 2018 includes $985,000 in compensation and benefits and $396,000 in other expenses related to the equity plan. There were no such expenses in the second quarter of 2017. Also contributing to the increase in other expenses was $524,000 in expenses related to the Coastway acquisition. Loan expense decreased as compared to the prior year consistent with the decrease in loan originations.

Income Tax Provision
The effective tax rate was 23.3% for the quarter ended June 30, 2018, 26.5% for the quarter ended March 31, 2018 and 37.8% for the quarter ended June 30, 2017. The effective tax rate for the six months ended June 30, 2018 and 2017 was 24.7% and 36.6%, respectively. 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. As a result of the reduction in tax rate, the Company revalued its net deferred tax asset and recorded a one-time additional $243,000 tax provision in the fourth quarter of 2017 and reduced the effective tax rate in 2018. The decrease in the effective tax rate as compared to the prior quarter is primarily due to higher nondeductible merger expenses in the first quarter of 2018.

Asset Quality
The Company recorded a provision for loan losses of $886,000 for the quarter ended June 30, 2018, $808,000 for the quarter ended March 31, 2018 and $470,000 for the quarter ended June 30, 2017. The provisions in these quarters were primarily due to commercial loan growth. 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 $19.2 million, or 0.84%, of total loans at June 30, 2018, compared to $18.9 million, or 0.84%, of total loans, at March 31, 2018 and $17.2 million, or 0.82%, of total loans at June 30, 2017. Net charge-offs totaled $505,000 for the quarter ended June 30, 2018, or 0.09%, of average loans outstanding on an annualized basis, compared to $434,000, or 0.08% of average loans outstanding on an annualized basis, for the quarter ended March 31, 2018 and $173,000, or 0.03% of average loans outstanding on an annualized basis , for the quarter ended June 30, 2017.

Nonperforming assets were $17.4 million at June 30, 2018 compared to $17.2 million at March 31, 2018 and $22.5 million at June 30, 2017. Nonperforming assets as a percentage of total assets were 0.60% at June 30, 2018, 0.63% at March 31, 2018 and 0.86% at June 30, 2017. The steady decline reflects the Company’s continued efforts to minimize nonperforming assets through diligent collection efforts, prudent workout arrangements and strong underwriting.

Balance Sheet
Total assets increased $144.1 million, or 5.3%, to $2.88 billion at June 30, 2018 from $2.74 billion at March 31, 2018. Net loans increased $67.2 million, or 3.0%, to $2.28 billion at June 30, 2018 from $2.21 billion at March 31, 2018. The net increase in loans for the three months ended June 30, 2018 was primarily due to increases of $39.2 million in commercial real estate loans, $18.3 million in construction loans and $21.3 million in commercial and industrial loans partially offset by a decrease of $6.4 million in residential real estate loans and $4.7 million in consumer loans. Loans held for sale increased $36.9 million, or 108.1%, to $71.0 million at June 30, 2018 from $34.1 million at March 31, 2018 due to the seasonal increase in residential mortgage originations. 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 $75.3 million, or 3.5%, to $2.20 billion at June 30, 2018 from $2.13 billion at March 31, 2018. Compared to the prior quarter, non-certificate accounts increased $14.7 million, term certificate accounts increased $51.4 million and brokered deposits increased $9.2 million. Term certificate growth reflects a limited time offer 17 month term special offered during the quarter. Borrowings were $287.4 million at June 30, 2018 and $226.4 million at March 31, 2018.

Total stockholders’ equity was $348.6 million at June 30, 2018 compared to $344.9 million at March 31, 2018 and $336.6 million at June 30, 2017. The tangible common equity to tangible assets ratio was 11.68% at June 30, 2018, 12.17% at March 31, 2018 and 12.34% at June 30, 2017. At June 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 14 full-service branches, two limited service branches, two commercial loan offices in Boston, Massachusetts and Providence, Rhode Island, a residential lending office in Westford, Massachusetts, and 13 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 34 offices in Massachusetts, New Hampshire and Maine, and also does business in seven 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 and Coastway’s ability to achieve the synergies and value creation contemplated by the proposed acquisition; the Company and Coastway’s ability to successfully integrate operations in the proposed acquisition; the effect of the announcement of the proposed acquisition on the ability of Coastway to maintain relationships with its key partners, customers and employees, and on its operating business generally; 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 periods ended June 30, 2018 and March 31, 2018 and 35% for the period ended June 30, 2017. The yield on investments before tax equivalent adjustments for the quarters presented were 2.69%, 2.67%, and 2.55%, 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. Interest income from tax exempt securities is computed on a tax equivalent basis using a tax rate of 21% for 2018 and 35% for 2017. The yield on investments before tax equivalent adjustments was 2.68% and 2.52% for the years ended June 30, 2018 and 2017, 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