HarborOne Bancorp, Inc. Announces Second Quarter 2016 Earnings

HarborOne Bancorp, Inc. (the “Company”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), reported a net loss of $681,000 for the quarter ended June 30, 2016 compared to net income of $124,000 for the first quarter of 2016 and net income of $1.1 million for the second quarter of 2015. The Company reported a net loss of $557,000 for the six months ended June 30, 2016 compared to net income of $2.0 million for the same period in 2015. The Company’s results for the quarter ended June 30, 2016 include a one-time pre-tax contribution of $4.8 million in connection with the funding of The HarborOne Foundation (the “Foundation”), a new charitable organization dedicated to providing financial support to charitable organizations in the communities in which we operate now and in the future. Excluding this non-recurring expense, net income would have been $2.2 million for the second quarter of 2016 and $2.3 million for the first six months of 2016. Merrimack Mortgage Company, LLC (“Merrimack”), the Bank’s mortgage company subsidiary, was acquired on July 1, 2015.

James Blake, President and CEO, stated, “We are pleased with the affirmation of our business strategy demonstrated by our deposit customers through their oversubscription of our initial stock offering. Ensuring compliance with the FDIC’s 8% de novo bank capital requirement during the second quarter of 2016 required that we actively manage our balance sheet, prepaying borrowings and reducing our participation in institutional fund deposits. However, our initial public offering, which was completed in late June 2016, and the termination of the de novo bank capital requirements as of July 1, 2016, have provided relief from these immediate capital constraints and allowed us to refocus on executing our growth strategy, including prudent commercial loan growth and expansion opportunities. In addition we were able to make a significant contribution to the Foundation to continue our commitment to strengthening and empowering the communities we serve.”

Net Interest Income

The Company’s net interest income was $14.7 million for the quarter ended June 30, 2016, up $766,000 or 5.5% from $13.9 million for the quarter ended March 31, 2016 and up $2.2 million, or 17.9%, from $12.4 million for the quarter ended June 30, 2015. The interest rate spread and net interest margin on a tax-equivalent basis were 2.68 % and 2.81%, respectively for the quarter ended June 30, 2016 compared to 2.60% and 2.72%, respectively, for the quarter ended March 31, 2016 and 2.42% and 2.53%, respectively, for the quarter ended June 30, 2015. The increases in spread and margin were due primarily to commercial real estate loan growth funded with growth in core deposits.

Total interest and dividend income was $18.1 million for the quarter ended June 30, 2016, up $667,000, or 3.8%, from the quarter ended March 31, 2016 and up $2.1 million, or 12.9%, from the quarter ended June 30, 2015, primarily due to growth in the Company’s average loan balances to $1.881 billion and increases in the yield on loans to 3.61%. Total interest expense decreased to $3.5 million for the quarter ended June 30, 2016, down $99,000, or 2.8%, from the quarter ended March 31, 2016 and down $153,000, or 4.2%, from the quarter ended June 30, 2015, primarily due to a decrease in average Federal Home Loan Bank (“FHLB”) borrowings to $239.2 million from $265.4 million for the first quarter of 2016 and $295.1 million from the second quarter of 2015. The Company’s yield on interest-earning assets on a tax-equivalent basis increased to 3.47% for the quarter ended June 30, 2016 from 3.41% for the quarter ended March 31, 2016 and 3.26% for the quarter ended June 30, 2015, while the cost of funds was 0.79% for the quarter ended June 30, 2016 compared to 0.81% for the quarter ended March 31, 2016 and 0.84% for the quarter ended June 30, 2015.

Noninterest Income

Noninterest income increased to $15.9 million for the quarter ended June 30, 2016, up $4.8 million, or 43.6%, from the quarter ended March 31, 2016 and up $11.7 million, or 279.4% from the quarter ended June 30, 2015, primarily due to the Company’s acquisition of Merrimack. During the three months ended June 30, 2016 and March 31, 2016 the fair value of mortgage servicing rights decreased $2.2 million and $2.3 million, respectively. Despite the negative impact of fair value adjustments on mortgage servicing rights, mortgage banking income increased $4.6 million as a result of increased mortgage loan origination and sales volume and the associated gain on the loan sales and origination fees. Mortgage servicing rights values continued to suffer in the second quarter of 2016 due to the continued low rate environment which drives up prepayment speed assumptions on the underlying mortgages and drives down the fair value of the servicing rights.

Noninterest Expense

Noninterest expenses were $31.2 million for the quarter ended June 30, 2016 an increase of $6.6 million or 26.9% from the quarter ended March 31, 2016, primarily due to the one-time expense incurred in connection with the establishment of the Foundation of $4.8 million. Other elements of the increase in noninterest expense included increased compensation and benefits costs of $889,000 primarily due to increased commission expense of $1.7 million related to the increased mortgage origination volume, offset by a decrease of $900,000 in supplemental executive retirement plan expense as accelerated vesting on a plan amendment was expensed in the first quarter of 2016. Loan expenses increased $536,000 on increased mortgage loan origination volume. Additionally the Company incurred a prepayment penalty of $400,000 on the early repayment of a FHLB borrowing in the second quarter of 2016 that was not incurred in the first quarter. Occupancy and equipment expenses decreased $321,000 due to lower expenses related to landscaping and snow removal in the second quarter of 2016. Noninterest expenses increased $16.6 million, or 113.4% from the quarter ended June 30, 2015 primarily as a result of the acquisition of Merrimack.

The Company recorded an income tax benefit of $749,000 for the quarter ended June 30, 2016 compared to $62,000 income tax expense or a 33.3% effective tax rate, for the quarter ended March 31, 2016 and $290,000 or a 21.5% effective tax rate, for the quarter ended June 30, 2015. The second quarter 2016 benefit reflects the $1.9 million tax benefit for the Foundation expense offset by the taxable income at an effective rate of 34.6%. The increase in the effective tax rate in 2016 is due primarily to the effect of higher projected pre-tax income while maintaining the same level of tax-advantaged income such as BOLI and tax-exempt municipal bonds.

Asset Quality

The Company’s provision for loan losses increased to $801,000 for the quarter ended June 30, 2016 from $205,000 for the quarter ended March 31, 2016 and $667,000 for the quarter ended June 30, 2015, primarily due to commercial loan growth. The increases in the provision for loan losses were also based on management’s assessment of loan portfolio growth and composition changes, improving historical charge-off trends, and ongoing evaluation of credit quality and current economic conditions. The allowance for loan losses was $14.4 million or 0.79% of total loans at June 30, 2016, compared to $13.7 million or 0.78% of total loans at March 31, 2016 and $14.1 million or 0.81% of total loans at June 30, 2015. Net charge-offs totaled $59,000 for the quarter ended June 30, 2016, or 0.01% of average loans outstanding on an annualized basis compared to $209,000 for the quarter ended March 31, 2016, or 0.05% of average loans outstanding on an annualized basis and $329,000 for the quarter ended June 30, 2015, or 0.08% of average loans outstanding on an annualized basis.

Nonperforming assets were $27.8 million at June 30, 2016 compared to $29.7 million at March 31, 2016 and $34.2 million at June 30, 2015. Nonperforming assets as a percentage of total assets were 1.23% at June 30, 2016, 1.32% at March 31, 2016 and 1.58% at June 30, 2015. The reductions reflect the Company’s continued efforts to minimize nonperforming assets through diligent collection efforts and prudent workout arrangements.

Balance Sheet

Total assets increased $22.0 million, or 1.0%, to $2.267 billion at June 30, 2016 from $2.245 billion at March 31, 2016. Net loans increased $81.4 million, or 4.7%, to $1.821 billion at June 30, 2016 from $1.740 billion at March 31, 2016. The net increase in loans for the three months ended June 30, 2016 was primarily due to increases of $76.5 million in commercial real estate loans, $3.7 million in commercial and industrial loans and $16.0 million in auto loans, partially offset by decreases of $9.8 million in construction loans and $3.9 million in residential real estate loans. Mortgage loans held for sale increased $32.1 million, or 47.5%, to $99.7 million at June 30, 2016 from $67.6 million at March 31, 2016 spurred by the continued low interest rate environment and seasonal home purchase activity. Cash and cash equivalents decreased $84.1 million, or 73.6%, to $30.1 million at June 30, 2016 from $114.3 million at March 31, 2016 with the funds primarily deployed to commercial real estate loan growth and FHLB borrowing prepayments.

Total deposits decreased $41.5 million, or 2.4%, to $1.710 billion at June 30, 2016 from $1.752 billion at March 31, 2016 reflecting a $30.5 million decrease in non-certificate accounts, primarily municipal money market deposits and a $22.5 million decrease in term certificate accounts, primarily institutional certificates. Proceeds from the Company’s stock offering were used to pay down debt during the second quarter of 2016. As a result borrowings decreased $74.5 million, or 27.6%, to $195.1 million at June 30, 2016 from $270.0 million at March 31, 2016.

Total stockholders’ equity was $324.2 million at June 30, 2016 compared to $191.9 million at March 31, 2016 and $187.2 million at June 30, 2015. The increases from both prior periods reflect the Company’s mutual to stock conversion that was completed on June 29, 2016. As part of the conversion, the Company established an employee stock ownership plan (“ESOP”) which acquired 8% of the shares issued in the conversion, including shares contributed to the Foundation. The $11.9 million related to the ESOP is shown as a reduction to stockholders’ equity on the consolidated balance sheet. The tangible common equity to tangible assets ratio increased to 13.79% at June 30, 2016 from 7.99% at March 31, 2016 as a result of the additional capital received from the Company’s conversion. At June 30, 2016, 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 Southeastern Massachusetts through a network of 14 full-service branches, two limited service branches, a commercial loan office in 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. Merrimack Mortgage Company, LLC, a subsidiary of HarborOne Bank, is a full-service mortgage lender with 34 offices in Massachusetts, New Hampshire, Connecticut and Maine, and also does business in five 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, 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; 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 Company’s Registration Statement on Form S-1 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.

Earnings (loss) per share is not presented herein as common stock has not been outstanding during the entire three months ended June 30, 2016.

Earnings (loss) per share is not presented herein as common stock has not been outstanding during the entire three months ended June 30, 2016.

(1)Includes loans held for sale, nonaccruing loan balances and interest received on such loans.
(2)Includes securities available for sale, securities held to maturity and FHLB stock. Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented. The yield on investments before tax equivalent adjustments for the quarters presented were 2.50%, 2.51%, and 2.21%, 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.

(1)Includes loans held for sale, nonaccruing loan balances and interest received on such loans.
(2)Includes securities available for sale, securities held to maturity and FHLB stock. Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented. The yield on investments before tax equivalent adjustments were 2.50% and 2.18% for the six months ended June 30, 2016 and 2015, 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.

(1)Includes loans held for sale, nonaccruing loan balances and interest received on such loans.
(2)Includes securities available for sale, securities held to maturity and FHLB stock.

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