HarborOne Bancorp, Inc. Announces 2019 Second Quarter Earnings

HarborOne Bancorp, Inc. (the "Company" or "HarborOne") (NASDAQ:HONE), the holding company for HarborOne Bank (the "Bank"), announced net income of $4.8 million, or $0.15 per basic and diluted share for the second quarter of 2019, compared to $2.1 million, or $0.07 per basic and diluted share, for the prior quarter and $3.1 million, or $0.10 per basic and diluted share, for the same quarter prior year. For the six months ended June 30, 2019 net income was $6.8 million, or $0.22 per basic and diluted share, compared to $5.4 million, or $0.17 per basic and diluted share, for the same period last year.

Selected second quarter highlights:

• Commercial loan growth of $75.5 million, or 5% to $1.5 billion
• Deposits up 5% quarter over quarter to $3.0 billion, solid growth in core accounts
• $1.3 million gain on $27.1 million of investment sales
• Residential mortgage production increase of 94%
• Received depositor approval and commenced second-step conversion

"The first half of the year provided strong commercial loan and deposit growth. We were pleased with the increased production at HarborOne Mortgage this quarter, spurred by falling interest rates and the spring real estate market. Early indicators are that the mortgage application volume will remain strong through the summer," said James W. Blake, CEO.

Net Interest Income
The Company's net interest and dividend income was $26.7 million for the quarter ended June 30, 2019, up $683,000, or 2.6%, from $26.0 million for the quarter ended March 31, 2019 and up $5.8 million, or 27.8%, from $20.9 million for the quarter ended June 30, 2018. The tax-equivalent interest rate spread and net interest margin were 2.91% and 3.19%, respectively, for the quarter ended June 30, 2019 compared to 2.92% and 3.19%, respectively, for the quarter ended March 31, 2019 and 3.04% and 3.26%, respectively, for the quarter ended June 30, 2018.

The increase in net interest and dividend income from the previous quarter reflects a $1.2 million, or 3.3%, increase in total interest and dividend income offset in part by an increase of $542,000, or 4.9% in total interest expense. The increase in interest and dividend income primarily reflects an increase in interest income on commercial loans due to both rate and volume increases. Additionally, interest on loans in the second quarter of 2019 includes $614,000 in accretion income of the fair value discount on loans acquired from Coastway Bancorp, Inc. ("Coastway") in October 2018, and $421,000 in prepayment penalties on commercial loans. Accretion income and prepayment penalties in the previous quarter were $670,000 and $106,000, respectively. The yield on loans was 4.70% for the quarter ended June 30, 2019 compared to 4.67% for the quarter ended March 31, 2019. The increase in interest expense is primarily due to an increase in higher cost money market accounts driving a 9 basis point increase in the cost of interest-bearing deposits. The increase was partially offset by a decrease in average FHLB advances of $100.6 million reducing interest expense on FHLB advances by $596,000.

The increase in net interest and dividend income from the prior year quarter reflects a $12.0 million, or 45.8%, increase in total interest and dividend income offset by an increase of $6.2 million, or 115.9%, in total interest expense. The increases in total interest and dividend income reflect an increase in the yield on loans to 4.70% from 4.25%, primarily driven by growth due to the Coastway acquisition as well as organic commercial loan growth and higher rates on commercial loans. This is partially offset by the increase in total interest expense primarily due to an increase in average interest-bearing deposits of $621.1 million with a 56 basis point increase in the cost of those funds, due to deposits acquired from Coastway as well as organic deposit growth in money market and term certificate of deposits, as well as a $74.1 million increase in average FHLB borrowings with a 64 basis point increase in the cost of those funds. Additionally the Company issued $35.0 million in subordinated notes in the third quarter of 2018.

Noninterest Income
Noninterest income increased $5.9 million, or 59.7%, to $15.7 million for the quarter ended June 30, 2019 from the quarter ended March 31, 2019. The increase is primarily due to a increase in mortgage banking income of $4.2 million, $1.3 million in gain on sale of securities and a net increase of $456,000 in the other noninterest income categories. HarborOne Mortgage, LLC ("HarborOne Mortgage") results improved compared to the first quarter primarily driven by seasonal mortgage origination activity resulting in a 94% increase in mortgage production compared to the first quarter. Continued downward pressure on the 10-year Treasury Constant Maturity rate negatively impacted the fair value of the mortgage servicing rights resulting in a $2.2 million decrease in their fair value in both the first and second quarter of 2019. The net increase in the other noninterest income categories compared to the prior quarter is primarily due to an increase of $278,000 in deposit account fees and an increase of $174,000 in other income primarily due to an increase in swap fee income.

Noninterest income increased $3.2 million or 25.2%, as compared to the quarter ended June 30, 2018. Mortgage banking income increased $196,000, or 2.3%, and the other noninterest income categories increased $1.7 million, excluding the gain on sale of securities noted above. Mortgage banking income increased compared to the prior year quarter, despite the decrease in the fair value of mortgage servicing rights of $2.2 million in 2019 as compared to a $306,000 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 $832,000 increase in deposit account fee income reflecting the addition of Coastway accounts and the addition of $748,000 in swap fee income in the second quarter of 2019.

Noninterest Expense
Noninterest expenses were $35.1 million for the quarter ended June 30, 2019, an increase of $2.5 million, or 7.6%, from the quarter ended March 31, 2019. The significant changes in noninterest expense included a $1.3 million increase in compensation and benefits, a $438,000 increase in professional fees, a $390,000 increase in other expenses and a $219,000 increase in marketing expense. The increase in compensation and benefits is due to an increase in commission expense of $2.0 million primarily due to the increase in origination volume at HarborOne Mortgage partially offset by a decrease in employee retirement plan expense of $227,000. Also impacting compensation and benefits in the first quarter of 2019 were severance payments $295,000 reflecting continued efforts to right size HarborOne Mortgage in response to economic conditions. There were no such payments in the second quarter of 2019. In the quarter ended June 30, 2019 other expenses included $242,000 in non-capitalized expenses for the second-step conversion.

Total noninterest expenses increased $6.6 million, or 23.0%, from the quarter ended June 30, 2018. Compensation and benefits increased $3.2 million, occupancy and equipment expense increased $1.5 million, other expenses increased $1.2 million, professional fees increased $469,000 and data processing expense increased $630,000. Additionally, the quarter ended June 30, 2018 included $524,000 in merger expenses. The increases primarily reflect the acquisition of Coastway and expenses related to the new Stoughton branch and the Boston commercial loan office.

Income Tax Provision
The effective tax rate was 14.6% for the quarter ended June 30, 2019, compared to 14.7% for the quarter ended March 31, 2019 and 23.3% for the quarter ended June 30, 2018. The effective tax rate for 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 March 31, 2019 was impacted by the 2014 Massachusetts state tax refund of $320,000 recognized in the quarter. The refunds were a result of previously amended returns filed for those years.

Asset Quality
The Company recorded a provision for loan losses of $1.8 million for the quarter ended June 30, 2019, compared to $857,000 for the quarter ended March 31, 2019 and $886,000 for the quarter ended June 30, 2018. The increase in the provision for the quarter ended June 30, 2019 is primarily due to commercial real estate loan growth. Also contributing to the higher provision for the quarter ended June 30, 2019 was 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 $771,000 for the quarter ended June 30, 2019, or 0.10%, of average loans outstanding on an annualized basis, compared to $230,000, or 0.03% of average loans outstanding on an annualized basis, for the quarter ended March 31, 2019 and $505,000, or 0.09% of average loans outstanding on an annualized basis, for the quarter ended June 30, 2018.

The allowance for loan losses was $22.3 million, or 0.73%, of total loans at June 30, 2019, compared to $21.3 million, or 0.71%, of total loans at March 31, 2019 and $19.2 million, or 0.84%, of total loans at June 30, 2018. The decrease in the ratio of allowance for loan losses to total loans from June 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 was no allowance for loan losses associated with the acquired loans.

Total nonperforming assets were $17.2 million at June 30, 2019 compared to $19.3 million at March 31, 2019 and $17.4 million at June 30, 2018. Nonperforming assets as a percentage of total assets were 0.46% at June 30, 2019, 0.53% at March 31, 2019 and 0.60% at June 30, 2018. The Company continues to minimize nonperforming assets through diligent collection efforts, prudent workout arrangements and strong underwriting.

Balance Sheet
Total assets increased $81.4 million, or 2.2%, to $3.74 billion at June 30, 2019 from $3.66 billion at March 31, 2019.

Net loans increased $64.4 million, or 2.2%, to $3.04 billion at June 30, 2019 from $2.98 billion at March 31, 2019. The net increase in loans for the three months ended June 30, 2019 was primarily due to increases in commercial real estate loans of $75.5 million, residential real estate loans of $5.9 million, and commercial loans of $1.4 million, partially offset by decreases in consumer loans of $16.2 million and commercial construction loans of $1.4 million. Loans held for sale increased $52.2 million, or 160.9%, to $84.7 million at June 30, 2019 from $32.4 million at March 31, 2019.

Total deposits increased $133.0 million, or 4.7%, to $2.97 billion at June 30, 2019 from $2.84 billion at March 31, 2019. Compared to the prior quarter, non-certificate accounts increased $109.8 million, brokered deposits increased $14.0 million and term certificate accounts increased $9.2 million. FHLB borrowings were $309.1 million at June 30, 2019 and $355.9 million at March 31, 2019.

Total stockholders' equity was $371.1 million at June 30, 2019 compared to $363.4 million at March 31, 2019 and $348.6 million at June 30, 2018. The tangible common equity to tangible assets ratio was 8.04% at June 30, 2019, 7.99% at March 31, 2019 and 11.68% at June 30, 2018. At June 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.