HarborOne Bancorp, Inc. Announces 2020 Second Quarter Earnings

HarborOne Bancorp, Inc. (the “Company” or “HarborOne”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), announced net income of $10.6 million, or $0.19 per basic and diluted share, for the second quarter of 2020, compared to $4.7 million, or $0.09 per basic and diluted share, for the preceding quarter and $4.8 million, or $0.08 per basic and diluted share, for the same period last year. For the six months ended June 30, 2020 net income was $15.3 million, or $0.28 per basic and diluted share, compared to $6.8 million, or $0.12 per basic and diluted share, for the same period last year. The three and six months ended June 30, 2020 reflect charges of $5.7 million and $7.2 million, respectively, to the provision for loan losses and $1.4 million and $1.7 million, respectively to non-interest expense related to the COVID-19 pandemic. Additionally, in the second quarter, we waived $1.0 million in deposit account fees in response to customer needs related to the COVID-19 pandemic.

Selected Second Quarter Financial Highlights:

• Net interest income increased $2.7 million, or 10.3%, quarter over quarter and the net interest margin increased 9 basis points.
• The annualized quarterly return on average assets was 0.99% and the annualized quarterly return on average equity was 6.22%.
• Provision for loan losses of $10.0 million, including $5.7 million in additional reserves for the impact of the COVID-19 pandemic.
• Record residential real estate mortgage closings for the quarter of $856.5 million, resulting in an increase in mortgage banking income of $23.4 million to $33.9 million.
• Commercial loan growth excluding Paycheck Protection Program loans amounted to $129.7 million.
• Total deposits amounted to $3.3 billion, up $287.5 million, or 10.0%, with marked improvement in mix and cost of funds.
• Announced the initiation of a $0.03 per share cash dividend.

“The strength of our second quarter performance is a testament to our ability to execute in the face of extreme change. We’ve kept our focus on customers and how we support them, while keeping staff safe and healthy. Our customers are telling us how they want to bank moving forward, and we will continue to listen, learn, and transform how we operate to meet those needs.” said James Blake, CEO. “Our digital banking enrollment grew 8% and mobile deposit volume grew 33% as compared to the first quarter, as we continue to focus on helping customers get the most out of our digital banking tools. That said, as a community bank we remain committed to providing the in-person service that some situations demand, and we will continue to invest in the infrastructure that will enhance alternative channels,” added Joseph F. Casey, President and COO.

Net Interest Income
The Company’s net interest and dividend income was $29.4 million for the quarter ended June 30, 2020, up $2.7 million, or 10.3%, from $26.7 million for the quarter ended March 31, 2020 and up $2.7 million, or 10.2%, from $26.7 million for the quarter ended June 30, 2019. The tax-equivalent interest rate spread and net interest margin were 2.75% and 3.00%, respectively, for the quarter ended June 30, 2020 compared to 2.58% and 2.91%, respectively, for the quarter ended March 31, 2020, and 2.91% and 3.19%, respectively, for the quarter ended June 30, 2019. Margin pressure continues to be a concern as the economic impact of the COVID-19 pandemic is realized. It is expected that the interest rate and economic environments will continue to be volatile.

The components of the quarter over quarter increase in net interest and dividend income reflected a decrease of $3.3 million, or 31.5%, in total interest expense, partially offset by a $548,000, or 1.5%, decrease in interest and dividend income. Interest on loans in the second quarter included $1.3 million in accretion income from the fair value discount on loans acquired from Coastway Bancorp, Inc. (“Coastway”) and $18,000 in prepayment penalties on commercial loans. Accretion income and prepayment penalties in the previous quarter were $614,000 and $69,000, respectively. The yield on loans was 4.06% for the quarter ended June 30, 2020, down from 4.33% for the quarter ended March 31, 2020. The increase in accretion income reflects increased loan payoffs due to low mortgage loan rates. The decrease in interest and dividend income primarily reflected a decrease in interest rates, as adjustable rate loans repriced, resulting in a 51 basis point decrease in the yield on commercial loans. The yield on residential real estate loans was flat, supported by the recognition of fair value marks on loan payoffs. The decrease in interest expense primarily reflected a decrease in interest rates, resulting in a 48 basis point decrease in the cost of interest-bearing deposits and a shift in the deposit mix. The average balance of certificates of deposit accounts decreased quarter over quarter by $64.1 million, while the savings account average balance increased $156.5 million from the preceding quarter. Average FHLB advances increased $17.4 million and the cost of those funds decreased 78 basis points, resulting in a decrease of $408,000 in interest expense on FHLB borrowings. During the second quarter an interest rate swap agreement with a notional amount of $100.0 million, designated as a cash flow hedge of certain LIBOR-based debt, provided a $149,000 gain that was offset against FHLB interest expense.

The increase in net interest and dividend income from the prior year quarter reflected a decrease of $4.4 million, or 38.0%, in total interest expense, partially offset by a $1.7 million, or 4.3%, 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 69 basis points while the average balance increased $167.5 million. The yield on interest earning assets decreased 85 basis points while the average balance increased $592.8 million

Noninterest Income
Noninterest income increased $19.8 million, or 104.8%, to $38.6 million for the quarter ended June 30, 2020 from $18.9 million for the quarter ended March 31, 2020. Record breaking mortgage demand spurred by low mortgage rates continued to provide higher than normal mortgage origination activity and other mortgage banking income for HarborOne Mortgage, LLC (“HarborOne Mortgage”). The $856.5 million in mortgage loan closings resulted in a gain on loan sales of $30.8 million for the quarter ended June 30, 2020 as compared to 12.3 million for the preceding quarter. Other mortgage banking income increased $1.5 million, primarily due to increased origination fees. Residential mortgage loan payoffs resulted in accelerated amortization of mortgage servicing rights in the amount of $1.1 million for the three months ended June 30, 2020 and $576,000 for the three months ended March 31, 2020. The 10-year Treasury Constant Maturity rate decreased 4 basis points in the second quarter of 2020 and 126 basis points from year end 2019 and negatively impacted the fair value of the mortgage servicing rights, resulting in a decrease in fair value of $3.8 million in the first quarter of 2020. The 2020 results for HarborOne Mortgage are uncertain in light of the COVID-19 pandemic. The low mortgage interest rate environment spurred increased purchase and refinance activity in the first half of the year, continuing into the third quarter of 2020 with a locked residential mortgage pipeline at June 30, 2020 of $497.7 million; however, economic uncertainty and increased unemployment rates may have a negative impact on mortgage loan originations in the second half of 2020.

Noninterest income increased $22.9 million, or 145.8%, as compared to the quarter ended June 30, 2019, primarily due to a $25.2 million, or 291.2%, increase in mortgage banking income. Mortgage banking income increased compared to the same period last year, due to the increase in mortgage origination volume. Mortgage originations increased primarily as a result of lower residential mortgage interest rates and increased refinancing volume. Bank-owned life insurance income increased $301,000 due to a $41.4 million increase in bank-owned life insurance from June 30, 2019 to June 30, 2020.

Noninterest Expense
Noninterest expenses were $43.8 million for the quarter ended June 30, 2020, an increase of $8.5 million, or 23.9%, from the quarter ended March 31, 2020, primarily driven by a $6.3 million increase in compensation and benefits, a $1.3 million increase in loan expense, and a $719,000 increase in other expenses. The increases were partially offset by a decrease of $411,000 in occupancy and equipment expenses. The increase in compensation and benefits and loan expenses primarily reflect increases consistent with the volume increase in residential mortgage originations. The increase in other expenses reflects an increase in COVID-19 pandemic-related expenses, primarily for compensation to branch personnel and sick time. For the three months ended June 30, 2020, the expenses amounted to $1.4 million and compared to $329,000 in the preceding quarter. We anticipate additional COVID-19 pandemic expenses throughout 2020 for personnel, cleaning and other initiatives to support our employees and customers.

Total noninterest expenses increased $8.8 million, or 25.0%, from the quarter ended June 30, 2019. Compensation and benefits increased $6.9 million, loan expenses increased $1.4 million and other expenses increased $921,000. The increases were partially offset by a $310,000 decrease in deposit insurance. The increase in compensation and benefits and loan expenses primarily reflected the increased volume of residential real estate mortgage originations. The increase in other expenses reflects the COVID-19 pandemic-related expenses noted above. The decrease in deposit insurance expense reflects the reduction in assessment rate due to improved capital ratios as a result of the second step conversion.

Income Tax Provision
The effective tax rate was 25.8% for the quarter ended June 30, 2020, compared to 26.5% for the quarter ended March 31, 2020 and 14.6% for the quarter ended June 30, 2019. The effective tax rate for the quarter ended June 30, 2019 included a 2013 federal tax refund of $603,000 and a 2013 Massachusetts state tax refund of $211,000 recognized in the quarter.

Provision for Loan Losses and Asset Quality
The Company recorded a provision for loan losses of $10.0 million for the quarter ended June 30, 2020, compared to $3.7 million for the quarter ended March 31, 2020 and $1.8 million for the quarter ended June 30, 2019. Allowance for loan losses was $36.1 million, or 1.04%, of total loans at June 30, 2020, compared to $26.4 million, or 0.83%, of total loans at March 31, 2020 and $22.3 million, or 0.73%, of total loans at June 30, 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 June 30, 2020 included adjustments for our quarterly analysis of our historical and peer loss experience rates, commercial real estate loan growth, and a $5.7 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 March 31, 2020 included adjustments for our quarterly analysis of our historical and peer loss experience rates, commercial real estate loan growth, an additional provision to cover a $1.2 million commercial real estate loan charge-off unrelated to the COVID-19 pandemic, and a $1.5 million provision directly related to the initial estimate of inherent losses resulting from the impact of the COVID-19 pandemic. The provision for loan losses for the quarter ended June 30, 2019 primarily reflected commercial real estate loan growth.

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 if the loans were purchased. The additional provisions provided to each category for the three months ended June 30, 2020 ranged from 14 to 26 basis points and amounted to allocations of $1.6 million to the residential real estate portfolio, $3.2 million to the commercial portfolio and $935,000 to the consumer portfolio.

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 impact 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 66.9% 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 commercial sectors identified as at risk is $930.2 million, which represents 47.2% of the commercial loan portfolio. The at-risk sectors include $682.3 million in commercial real estate loans, $191.0 million in commercial and industrial loans, and $56.9 million in commercial construction loans.

As of June 30, 2020, the retail sector was $250.6 million, or 12.7% of total commercial loans and incudes $207.2 million in commercial real estate loans, $33.4 million in commercial and industrial loans and $10.0 million in commercial construction loans. Paycheck Protection Program loans included in the sector totaled $7.1 million, and we have provided deferrals for loans in this sector with outstanding principal balances of $33.4 million. Excluding the Paycheck Protection Program loans, we originated $22.2 million loans during the second quarter that are within the retail sector. The commercial real estate loans includes $114.6 million in loans secured by retail space anchored by a diverse mix of national chains and grocery stores.

In the second quarter, we identified the office space sector as an additional at-risk sector, as the pandemic dampened demand for office space and may further impact it as work-from-home arrangements become more common-place. As of June 30, 2020, the office sector was $220.6 million, or 11.2% of total commercial loans, and included $198.0 million in commercial real estate loans, $15.9 million in commercial and industrial loans and $6.7 million in commercial construction loans. We provided deferrals for loans in the sector with outstanding principal balances of $14.2 million; however, no Paycheck Protection Program loans were originated in this sector. We originated $14.9 million loans during the second quarter that are within the office sector.

As of June 30, 2020, the hotel sector was $191.4 million, or 9.7% of total commercial loans, and included $167.2 million in commercial real estate loans, $2.7 million in commercial and industrial loans and $21.4 million in commercial construction loans. Paycheck Protection Program loans included in the sector totaled $569,000, and we have provided deferrals for loans in this sector with outstanding principal balances of $118.4 million. In the first quarter of 2020, we charged off $1.2 million on a loan acquired from Coastway, secured by a hotel property whose credit deterioration was unrelated to the COVID-19 pandemic. That credit is on nonaccrual and amounted to $3.1 million at June 30, 2020.

The health and social services sector amounted to $178.1 million, or 9.0% of total commercial loans, as of June 30, 2020 and included $84.5 million in commercial real estate loans and $93.7 million in commercial and industrial loans. Paycheck Protection Program loans included in the sector totaled $42.5 million, and we have provided deferrals for loans in this sector with outstanding principal balances of $12.8 million. Excluding the Paycheck Protection Program loans, we originated $50.6 million loans during the second quarter that are within this sector.

As of June 30, 2020, the restaurant sector amounted to $57.1 million, or 2.9% of total commercial loans, including $9.4 million in Paycheck Protection Program loans. We provided deferrals for loans in this sector with outstanding principal balances of $8.7 million. The recreation sector amounted to $32.4 million, or 1.6% of total commercial loans, including $2.8 million in Paycheck Protection Program loans. We provided deferrals for loans in this sector with outstanding principal balances of $13.8 million. Included in the recreation sector is a $9.0 million nonaccrual loan secured by an ice-skating rink for which credit deterioration began prior to the COVID-19 pandemic.

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 June 30, 2020, we originated 1,071 Paycheck Protection Program loans totaling $152.6 million. As of June 30, 2020, there was $4.6 million in deferred processing fee income that will be recognized over the life of the loans. The average authorized loan size is $150,000 and the aggregate number of jobs positively impacted is approximately 15,000.

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 June 30, 2020, we have 157 payment deferrals on commercial loans with a total principal balance of $262.4 million, or 13.3%, of total commercial loans, of which $201.3 million are loans included in an at-risk sector. As of June 30, 2020, there were four borrowers requesting an additional three-month deferral. Two borrowers with three loans are included in the hotel sector with an outstanding principal balance of $15.7 million, one borrower with two loans is included in the recreation sector with an outstanding principal balance of $7.0 million and one borrower with one loan is included in the retail sector with an outstanding principal balance of $542,000. The majority of commercial loan deferrals are scheduled to end in the third quarter unless additional requests are received and granted.

The residential loan and consumer loan portfolios have not experienced significant credit quality deterioration as of June 30, 2020; however, we anticipate that the COVID-19 pandemic will result in increases in delinquencies, charge-offs and loan modifications in these portfolios through the remainder of the year. As of June 30, 2020, we had 172 payment deferrals on residential mortgage loans with a total principal balance of $52.7 million, or 4.6% of total residential loans, and 664 payment deferrals on consumer loans with a total principal balance of $15.9 million, or 4.5%, of total consumer loans. As of June 30, 2020, we had processed a second three-month extension for 7 residential real estate loans with principal balances of $2.7 million and received extension requests for an additional 12 loans with a principal balance of $4.7 million. Requests for additional extensions on consumer loans were not significant as of June 30, 2020.

Net charge-offs totaled $286,000 for the quarter ended June 30, 2020, or 0.03% of average loans outstanding on an annualized basis, compared to $1.4 million, or 0.18% of average loans outstanding on an annualized basis, for the quarter ended March 31, 2020 and $771,000, or 0.10% of average loans outstanding on an annualized basis, for the quarter ended June 30, 2019.

Total nonperforming assets were $38.6 million at June 30, 2020 compared to $32.1 million at March 31, 2020 and $17.2 million at June 30, 2019. Nonperforming assets as a percentage of total assets were 0.86% at June 30, 2020, 0.78% at March 31, 2020 and 0.46% at June 30, 2019. The increase from the preceding quarter is primarily due to 3 loans to one commercial loan borrower that amounted to $5.8 million. The increase in nonperforming assets from the prior year quarter was primarily in the commercial loan portfolio.

Balance Sheet
Total assets increased $363.7 million, or 8.9%, to $4.46 billion at June 30, 2020 from $4.10 billion at March 31, 2020. The increase primarily reflects an increase of $280.4 million in net loans and $40.6 million in loans held for sale.

Net loans increased $280.4 million, or 8.9%, to $3.44 billion at June 30, 2020 from $3.16 billion at March 31, 2020. The net increase in loans for the three months ended June 30, 2020 was primarily due to increases in commercial real estate loans of $105.5 million, commercial and industrial loans of $138.6 million, $33.6 million of commercial construction loans and $49.2 million in residential real estate loans, partially offset by a decrease in consumer loans of $36.7 million. The increase in commercial and industrial loans primarily reflects loans originated as part of the Paycheck Protection Program. Loans held for sale increased $40.6 million, or 34.3%, to $158.9 million at June 30, 2020 from $118.3 million at March 31, 2020.

Total deposits increased $287.5 million, or 9.5%, to $3.31 billion at June 30, 2020 from $3.02 billion at March 31, 2020. Compared to the prior quarter, non-certificate accounts increased $381.8 million and term CDs decreased $94.4 million. FHLB borrowings increased $56.0 million, or 19.6%, to $341.1 million at June 30, 2020 from $285.1 million at March 31, 2020.

Total stockholders’ equity was $684.4 million at June 30, 2020 compared to $675.1 million at March 31, 2020 and $371.1 million at June 30, 2019. The tangible common equity to tangible assets ratio was 13.88% at June 30, 2020, 14.90% at March 31, 2020 and 8.04% at June 30, 2019. The increase in stockholders’ equity and ratios from June 30, 2019 to June 30, 2020 primarily reflects the results of the Company’s second step offering, net of the additional ESOP funding. At June 30, 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 25 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, 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.

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