HarborOne Bancorp, Inc. (the “Company” or “HarborOne”) (NASDAQ: HONE), the holding company for HarborOne Bank (the “Bank”), announced net income of $10.0 million, or $0.21 per basic and diluted share, for the second quarter of 2022, compared to net income of $12.3 million, or $0.25 per diluted share, for the preceding quarter and $14.3 million, or $0.27 per diluted share, for the same period last year.

Selected Second Quarter Financial Highlights:

• Return on average assets was 0.87%, and return on average equity was 6.22%.
• Loan growth of $174.6 million, or 4.7%.
• Core deposit growth of $96.3 million, or 3.0%.
• Net interest margin increased 27 basis points to 3.48%.
• Continued share repurchase program.

“HarborOne had a solid quarter of growth in loans, deposits, and margin, with a continued focus on strong credit quality in the first half of the year,” said Joseph Casey, President and CEO. He added: “While mortgage banking saw a significant decline in origination volume and gain on sale margin, our mortgage banking team has identified over $1.0 million in expense savings to commence during the third quarter.”

Net Interest Income

The Company’s net interest and dividend income was $37.2 million for the quarter ended June 30, 2022, up $3.9 million, or 11.8%, from $33.3 million for the quarter ended March 31, 2022, and up $4.7 million, or 14.3%, from $32.5 million for the quarter ended June 30, 2021. The tax equivalent interest rate spread and net interest margin were 3.38% and 3.48%, respectively, for the quarter ended June 30, 2022, compared to 3.12% and 3.21%, respectively, for the quarter ended March 31, 2022, and 2.93% and 3.06%, respectively, for the quarter ended June 30, 2021. On a linked-quarter basis, the increase in net interest and dividend income primarily reflects increased yields on loans and investments primarily due to rate increases and prepayment penalties on commercial loan payoffs, partially offset by decreases in fees recognized in connection with U.S. Small Business Administration Paycheck Protection Program (“PPP”) loans and higher rates on deposits. The cost of funds was 27 basis points for the quarter ended June 30, 2022, compared to 25 basis points in the preceding quarter.

The $4.3 million increase in total interest and dividend income on a linked-quarter basis reflected a 30 basis-point increase in the yield on interest-earning assets. The yield on loans increased 21 basis points, from 3.75% to 3.96%. Interest on loans in the second quarter included $1.1 million in prepayment penalties on commercial loans and $353,000 in accretion income from the fair value discount on loans acquired in connection with the merger with Coastway Bancorp, Inc. Prepayment penalties and accretion income in the preceding quarter were $305,000 and $284,000, respectively. The three months ended June 30, 2022 and March 31, 2022 include the recognition of deferred fees on PPP loans in the amount of $368,000 and $487,000, respectively. The yield on investments increased 17 basis points, from, 1.75% to 1.92%.

The increase in net interest and dividend income from the prior year quarter reflects an increase of $4.0 million, or 11.1%, in total interest and dividend income and a decrease of $695,000, or 20.7%, in total interest expense. The changes reflect rate and volume changes in both interest-bearing assets and liabilities. The yield on interest-earning assets increased 35 basis points, while the average balance increased $29.1 million, and the cost of interest-bearing liabilities decreased 11 basis points, while the average balance increased $92.9 million.

Noninterest Income

Total noninterest income decreased $5.0 million, or 26.0%, to $14.1 million for the quarter ended June 30, 2022, from $19.1 million for the quarter ended March 31, 2022. Mortgage loan closings for the quarter ended June 30, 2022 were $297.5 million with a gain on loan sales of $4.5 million, compared to $253.8 million in mortgage closings and $5.3 million in gain on sales for the preceding quarter. The locked residential mortgage pipeline continues to be negatively impacted by decreased mortgage volumes due to rising rates and low for-sale inventory.

The change in the fair value of mortgage servicing rights positively impacted mortgage banking income, however the increase in the fair value of mortgage servicing rights for the three months ended June 30, 2022 was $1.6 million, as compared to an increase of $6.1 million in the fair value of mortgage servicing rights for the three months ended March 31, 2022. The 10-year Treasury Constant Maturity rate increased 66 basis points versus the first quarter of 2022, and prepayments were consistent with the first quarter of 2022. The change in the fair value of the mortgage servicing rights is generally consistent with the change in the 10-year Treasury Constant Maturity rate. As interest rates rise and prepayment speeds slow, mortgage servicing rights values tend to increase; conversely, as interest rates fall and prepayment speeds quicken, mortgage servicing rights values tend to decrease.

Deposit account fees increased $420,000, or 9.4%, to $4.9 million for the quarter ended June 30, 2022, from $4.5 million for the quarter ended March 31, 2022, primarily due to an increase in interchange fees. Other income for the quarter ended June 30, 2022 decreased $241,000. The first quarter of 2022 included a positive credit valuation adjustment of $239,000 on the termination of an interest rate swap and a $189,000 corporate capital distribution from the National Credit Union Association partially offset by a write-down on the final disposition of a branch real estate asset held for sale. No similar transactions were recorded in other income during the second quarter of 2022.

Total noninterest income decreased $7.6 million, or 35.0%, as compared to the quarter ended June 30, 2021, primarily due to a $7.8 million, or 49.2%, decrease in mortgage banking income, driven by the decrease in loan closings and narrowing gain-on-sale margins. The decrease in mortgage banking income was offset by a $346,000 increase in deposit account fees.

Noninterest Expense

Total noninterest expenses were $35.0 million for the quarter ended June 30, 2022, an increase of $119,000, or 0.3%, from the quarter ended March 31, 2022. Compensation and benefits increased $732,000, or 3.5%, and other expenses increased $401,000, or 14.0%, partially offset by an $853,000 decrease in occupancy and equipment expenses. The increase in compensation expense reflects a $924,000 increase in salary expense due to annual salary increases effective at the end of the first quarter and $439,000 in expense related to the benefit accruals and equity award acceleration in connection with the retirement of the Company’s former CEO James W. Blake, partially offset by a decrease in payroll tax expenses. The increase in other expenses reflects increases in cloud computing and employment agency fees. The decrease in occupancy and equipment expense reflects decreases in expenses for utilities, seasonal landscaping, and service maintenance contracts.

Total noninterest expenses decreased $3.6 million, or 9.4%, from the quarter ended June 30, 2021. Compensation and benefits decreased $3.7 million and loan expenses decreased $865,000, consistent with the decrease in residential mortgage loan closings and corresponding decrease in mortgage origination commissions.

Income Tax Provision

The effective tax rate was 27.6% for the quarter ended June 30, 2022, compared to 28.5% for the quarter ended March 31, 2022 and 28.3% for the quarter ended June 30, 2021.

Asset Quality and Allowance for Credit Losses

Effective January 1, 2022, the Company adopted Accounting Standards Update No. 2016-13, commonly referred to as CECL, which requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures. CECL requires that the allowance for credit losses (“ACL”) be calculated based on current expected credit losses over the full remaining expected life of the financial assets and also consider expected future changes in macroeconomic conditions. Upon adoption of CECL on January 1, 2022, the Company’s ACL on loans decreased by $1.3 million, and the ACL on unfunded commitments increased by $3.9 million, for a net increase of $2.6 million. The after-tax impact of $1.9 million was recognized as a one-time, cumulative-effect adjustment that decreased retained earnings.

Credit quality performance has remained strong with total nonperforming assets of $24.4 million at June 30, 2022, compared to $26.1 million at March 31, 2022 and $32.7 million at June 30, 2021. Nonperforming assets as a percentage of total assets were 0.52% at June 30, 2022, 0.57% at March 31, 2022, and 0.71% at June 30, 2021.

The funded loan provision for credit losses for the three and six months ended June 30, 2022 was $1.3 million and $1.7 million, respectively. Net recoveries totaled $504,000, or 0.05% of average loans outstanding on an annualized basis, for the quarter ended June 30, 2022. Net charge-offs totaled $2.7 million, or 0.30% of average loans outstanding on an annualized basis, for the quarter ended March 31, 2022, and net recoveries totaled $175,000, or 0.02% of average loans outstanding on an annualized basis, for the quarter ended June 30, 2021.

The ACL was $43.6 million, or 1.11% of total loans, at June 30, 2022, compared to $41.8 million, or 1.12% of total loans, at March 31, 2022 and an allowance for loss under the incurred loss model of $51.3 million, or 1.50% of total loans, at June 30, 2021. The ACL on unfunded commitments, included in other liabilities on the unaudited Consolidated Balance Sheets, amounted to $5.1 million at June 30, 2022 as compared to $3.8 million at March 31, 2022 and the associated provision was $1.3 million and $1.2 million for the three and six months ended June 30, 2022. There was no ACL on unfunded commitments at December 31, 2021 or June 30, 2021. The increase from the prior quarter reflects $125.2 million in new construction originations in the second quarter, with $98.1 million in unfunded balances as of June 30, 2022.

We have not experienced any significant negative trends in the at-risk sectors identified in response to conditions that developed during the COVID-19 pandemic; however management continues to monitor certain credit types within those sectors that may be susceptible to increased credit risk as a result of trends that were precipitated by the COVID-19 pandemic and may be exacerbated by current economic conditions. Management is focused on business-oriented hotels, non-anchored retail space and metro office space. As of June 30, 2022, business-oriented hotels included 14 loans with a total outstanding balance of $123.3 million, non-anchored retail space included 35 loans with a total outstanding balance of $58.8 million and metro office space included 2 loans with a total outstanding balance of $14.9 million. As of June 30, 2022 there were two business-oriented hotel credits with a carrying value of $10.6 million that were on nonaccrual. The other loans in these groups were performing in accordance with their terms.

Balance Sheet

Total assets increased $112.7 million, or 2.5%, to $4.70 billion at June 30, 2022, from $4.59 billion at March 31, 2022. The increase primarily reflects an increase of $174.6 million in loans, partially offset by decreases of $55.4 million in cash and cash equivalents and $27.1 million in securities available for sale. Securities available for sale were negatively impacted by unrealized losses of $49.9 million as of June 30, 2022 and $30.0 million as March 31, 2022, as compared to $3.6 million of unrealized losses as of December 31, 2021.

Loans increased $174.6 million, or 4.7%, to $3.91 billion at June 30, 2022, from $3.74 billion at March 31, 2022. The increase in loans for the three months ended June 30, 2022 was primarily due to an increase in residential real estate loans of $170.2 million and an increase in commercial real estate loans of $31.1 million, partially offset by a decrease in consumer loans of $27.8 million. As of June 30, 2022, outstanding PPP loans amounted to $2.5 million, and there was $93,000 in deferred processing fee income. We expect to complete the forgiveness process for the remaining PPP loans by the end of the third quarter of 2022.

Total deposits were $3.85 billion at June 30, 2022 and $3.76 billion at March 31, 2022. Compared to the prior quarter, non-certificate accounts increased $96.3 million, and term certificate accounts decreased $10.4 million. FHLB borrowings increased $50.0 million to $105.7 million at June 30, 2022 from $55.7 million at March 31, 2022. At June 30, 2022, FHLB borrowings are were primarily short-term borrowings.

Total stockholders’ equity was $624.5 million at June 30, 2022, compared to $649.1 million at March 31, 2022 and $705.5 million at June 30, 2021. Stockholders’ equity decreased 3.8% when compared to the prior quarter, as earnings were offset by share repurchases and elevated levels of unrealized losses on available-for-sale investment securities included in other comprehensive income. The Company announced a fourth share repurchase program on April 12, 2022, and repurchased 1,337,602 shares at an average price of $13.83 during the three months ended June 30, 2022. The tangible-common-equity-to-tangible-assets ratio was 11.92% at June 30, 2022, 12.75% at March 31, 2022, and 13.91% at June 30, 2021. At June 30, 2022, 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 30 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 27 offices in Massachusetts, Rhode Island, and New Hampshire, and is licensed to lend 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. We may also make forward-looking statements in other documents we file with the Securities and Exchange Commission (“SEC”), in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. 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, ongoing disruptions due to 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; changes in general business and economic conditions (including inflation) 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; ongoing 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; changes related to the discontinuation and replacement of LIBOR; 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, war, terrorism, civil unrest and future pandemics; changes in 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 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’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.