BROCKTON, Mass.--(BUSINESS WIRE)--HarborOne Bancorp, Inc. (NASDAQ: HONE), the holding company for HarborOne Bank, announced net income of $11.9 million, or $0.22 per basic and diluted share, for the third quarter of 2020, compared to $10.6 million, or $0.19 per basic and diluted share, for the preceding quarter and $7.1 million, or $0.13 per basic and diluted share, for the same period last year. For the nine months ended September 30, 2020, net income was $27.2 million, or $0.50 per basic and diluted share, compared to $14.0 million, or $0.25 per basic and diluted share, for the same period last year. The three and nine months ended September 30, 2020 reflect charges of $10.7 million and $17.9 million, respectively, to the provision for loan losses and $71,000 and $1.8 million, respectively, to non-interest expense related to the COVID-19 pandemic.

Selected Third Quarter Financial Highlights:

• Net income tops $11.8 million, while building the allowance for loan loss to 1.40% of loans
• Return on average assets was 1.09% and return on average equity was 6.90%
• Net interest margin expands 9 basis points to 3.09%
• Historic levels of residential real estate mortgage originations resulting in mortgage banking income of $38.1 million
• Commercial loan growth of $104.3 million, or 5.3%
• Cost of funds continue to decline with marked improvement in deposit mix
• Adopted and received regulatory approval for a share repurchase program

“We’re extremely proud to announce the best quarterly financial performance in our history,” said James Blake, CEO. “The responsiveness and extraordinary commitment of the entire team to remain ‘open for business’ despite the extreme challenges is something we’re particularly proud of. The outstanding performance of HarborOne Mortgage, continued commercial loan growth, and expanded margins are a result of that commitment.” Added Joe Casey, President and COO: “We remain focused on keeping customers and staff safe and healthy, which has quickly become a fundamental aspect of running the business. Through it all, we’re really excited about our newest branch opening in Quincy, Massachusetts on October 19, and we’re full steam ahead to open our new South Boston location in Q1’21.”

Net Interest IncomeThe Company’s net interest and dividend income was $31.2 million for the quarter ended September 30, 2020, up $1.7 million, or 5.8%, from $29.4 million for the quarter ended June 30, 2020 and up $3.2 million, or 11.4%, from $28.0 million for the quarter ended September 30, 2019. The tax equivalent interest rate spread and net interest margin were 2.87% and 3.09%, respectively, for the quarter ended September 30, 2020, compared to 2.75% and 3.00%, respectively, for the quarter ended June 30, 2020, and 2.73% and 3.11%, respectively, for the quarter ended September 30, 2019. Margin improvement has largely been driven by the decrease in deposit rates. It is expected that interest rates will remain low and that the economic environment will continue to be volatile as the impact of the COVID-19 pandemic is realized.

The components of the quarter over quarter increase in net interest and dividend income reflected a decrease of $1.3 million, or 18.1%, in total interest expense and an increase of $427,000, or 1.2%, in total interest and dividend income. The decrease in total interest expense primarily reflected a decrease in interest rates, resulting in a 23 basis point decrease in the cost of interest-bearing deposits. The mix of deposits continues to shift as customers move to more liquid options. The average balance of certificates of deposit accounts decreased quarter over quarter by $46.8 million, while the savings account average balance increased $55.2 million from the preceding quarter. Average FHLB advances decreased $108.9 million as the need for short-term borrowed funds diminished, and the cost of borrowed funds increased 90 basis points, resulting in a decrease of $10,000 in interest expense on FHLB borrowings. An interest rate swap agreement with a notional amount of $100.0 million, designated as a cash flow hedge of certain LIBOR-based liabilities, provided a $94,000 gain that was offset against brokered deposits for the quarter ended September 30, 2020 and a $149,000 gain that was offset against FHLB interest expense for the preceding quarter. The increase in total interest and dividend income primarily reflected an increase of $66.3 million in average earning assets offset by a decrease in rates. The yield on loans was 3.94% for the quarter ended September 30, 2020, down from 4.06% for the quarter ended June 30, 2020. As adjustable rate loans repriced and new loans came on at lower rates, the yield on commercial loans decreased 15 basis points and the yield on residential real estate loans decreased 8 basis points. Interest on loans in the third quarter included $1.6 million in accretion income from the fair value discount on loans acquired from Coastway Bancorp, Inc. (“Coastway”) and $140,000 in prepayment penalties on commercial loans. Accretion income and prepayment penalties in the previous quarter were $1.3 million and $18,000, respectively. The increase in accretion income reflects increased loan payoffs due to low mortgage loan rates.

The increase in net interest and dividend income from the prior year quarter reflected a decrease of $5.9 million, or 49.9%, in total interest expense, partially offset by a $2.7 million, or 6.8%, 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 89 basis points while the average balance increased $170.6 million. The yield on interest-earning assets decreased 75 basis points while the average balance increased $447.5 million

Noninterest IncomeTotal noninterest income increased $5.9 million, or 15.1%, to $44.5 million for the quarter ended September 30, 2020, from $38.6 million for the quarter ended June 30, 2020. Record breaking mortgage demand spurred by low mortgage rates continued to provide higher than usual mortgage origination activity and other mortgage banking income for HarborOne Mortgage, LLC. The $789.1 million in mortgage loan closings resulted in a gain on loan sales of $34.1 million for the quarter ended September 30, 2020 as compared to $30.9 million for the preceding quarter. Other mortgage banking income increased $171,000. Residential mortgage loan payoffs resulted in accelerated amortization of mortgage servicing rights in the amount of $1.1 million for the three months ended September 30, 2020 unchanged from June 30, 2020. The 10-year Treasury Constant Maturity rate increased 3 basis points in the third quarter of 2020, resulting in an $890,000 increase in fair value of mortgage servicing rights, and has remained fairly flat since its first quarter 122 basis point drop from year-end 2019. The fair value of the mortgage servicing rights decreased $2.9 million for the nine months ended September 30, 2020. The low mortgage interest rate environment spurred increased purchase and refinance activity in the first nine months of the year, continuing into the fourth quarter of 2020 with a locked residential mortgage pipeline at September 30, 2020 of $623.6 million; however, seasonality, economic uncertainty and increased unemployment rates may have a negative impact on mortgage loan originations in the future. Other income for the quarter ended September 30, 2020 includes $1.6 million in income from the sale of VISA B shares held in the investment portfolio and was partially offset by a $612,000 decrease in swap fee income as compared to the preceding quarter.

Total noninterest income increased $27.2 million, or 157.4%, as compared to the quarter ended September 30, 2019, primarily due to a $26.6 million, or 231.5%, 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. The income from the sale of the VISA B shares noted above was offset by a $739,000 decrease in swap fee income as compared to the quarter ended September 30, 2019. Bank-owned life insurance income increased $304,000 due to a $41.4 million increase in bank-owned life insurance from September 30, 2019 to September 30, 2020.

Noninterest ExpenseTotal noninterest expenses were $45.7 million for the quarter ended September 30, 2020, an increase of $1.9 million, or 4.3%, from the quarter ended June 30, 2020, primarily driven by a $2.4 million increase in compensation and benefits, a $426,000 increase in loan expense, and a $429,000 increase in occupancy and equipment expenses. The increases were partially offset by a decrease of $914,000 in other expenses. The increase in compensation and benefits reflects timing of accruals for incentive programs and severance payments as a result of the staff realignment. The decrease in other expenses reflects a $1.3 million decrease in COVID-19 pandemic-related expenses. For the three months ended September 30, 2020, the expenses amounted to $71,000 compared to $1.4 million in the preceding quarter. Due to the uncertain nature of the COVID-19 pandemic, we may have elevated expenses in the future for personnel, cleaning and other initiatives to support our employees and customers.

Total noninterest expenses increased $9.5 million, or 26.3%, from the quarter ended September 30, 2019. Compensation and benefits increased $6.6 million, loan expenses increased $1.5 million professional fees increased $569,000, and deposit insurance expense increased $535,000. The increase in compensation and benefits and loan expense primarily reflected the increased volume of residential real estate mortgage originations. The increase in professional fees reflects fluctuations in services. The increase in deposit insurance as compared to the prior year reflects FDIC assessment credit awards that were recorded in the quarter ended September 30, 2019. No such awards have been recorded in 2020.

Income Tax ProvisionThe effective tax rate was 27.7% for the quarter ended September 30, 2020, compared to 25.8% for the quarter ended June 30, 2020 and 12.9% for the quarter ended September 30, 2019. The effective tax rate for the quarter ended September 30, 2019 included a 2015 federal tax refund of $1.3 million and a 2015 Massachusetts state tax refund of $39,700.

Provision for Loan Losses and Asset QualityThe Company recorded a provision for loan losses of $13.5 million for the quarter ended September 30, 2020, compared to $10.0 million for the quarter ended June 30, 2020 and $889,000 for the quarter ended September 30, 2019. The allowance for loan losses was $49.2 million, or 1.40%, of total loans at September 30, 2020, compared to $36.1 million, or 1.04%, of total loans at June 30, 2020 and $23.0 million, or 0.74%, of total loans at September 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 September 30, 2020 included adjustments for our quarterly analysis of our historical and peer loss experience rates, commercial real estate loan growth, and a $10.7 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 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 September 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 whether the loans were purchased. The additional provisions provided to each category for the three months ended September 30, 2020 ranged from 26 to 55 basis points and amounted to allocations of $2.5 million to the residential real estate portfolio, $7.0 million to the commercial portfolio, and $1.2 million 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 impacts 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 66.6% 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 six commercial sectors identified as at risk totaled $945.2 million, which represents 45.6% of the commercial loan portfolio. The at risk sectors include $707.6 million in commercial real estate loans, $185.9 million in commercial and industrial loans, and $51.7 million in commercial construction loans.

As of September 30, 2020, the retail sector was $261.7 million, or 12.6% of total commercial loans and included $217.8 million in commercial real estate loans, $31.8 million in commercial and industrial loans, and $12.1 million in commercial construction loans. U.S. Small Business Administration’s Paycheck Protection Program loans included in the sector totaled $6.9 million. We have provided deferrals for loans in this sector with outstanding principal balances of $46.1 million. We originated $16.3 million loans during the third quarter that are within the retail sector. The new loans are supported by leases to retail space largely insulated from the pandemic, such as drug stores and grocery stores.

As of September 30, 2020, the office sector was $214.0 million, or 10.3% of total commercial loans, and included $197.1 million in commercial real estate loans, $16.2 million in commercial and industrial loans, and $768,000 in commercial construction loans. We provided deferrals for loans in the sector with outstanding principal balances of $13.3 million. No Paycheck Protection Program loans were originated in this sector. We originated $619,000 loans during the third quarter that are within the office sector.

As of September 30, 2020, the hotel sector was $193.8 million, or 9.4% of total commercial loans, and included $171.0 million in commercial real estate loans, $2.7 million in commercial and industrial loans, and $20.1 million in commercial construction loans. Paycheck Protection Program loans included in the sector totaled $548,000. We have provided deferrals for loans in this sector with outstanding principal balances of $112.2 million, $61.3 million that have expired deferral periods and are paying as agreed, and $4.9 million that have expired deferral periods and are greater than 30 days delinquent. In addition, we have provided other short-term relief for loans in this sector with outstanding principal balances of $7.7 million. At September 30, 2020, nonperforming loans included in the hotel sector amount to $4.8 million. The increase from the second quarter reflects one loan that amounted to $1.4 million that is on nonaccrual and subsequently executed a deferral agreement.

The health and social services sector amounted to $188.0 million, or 9.1% of total commercial loans, as of September 30, 2020 and included $96.6 million in commercial real estate loans, $91.3 million in commercial and industrial loans, and $107,000 in commercial construction loans. Paycheck Protection Program loans included in the sector totaled $41.5 million, and we have provided deferrals for loans in this sector with outstanding principal balances of $13.8 million. We originated $12.7 million loans during the third quarter that are within this sector.

As of September 30, 2020, the restaurant sector amounted to $56.1 million, or 2.7% of total commercial loans, including $9.0 million in Paycheck Protection Program loans. We provided deferrals for loans in this sector with outstanding principal balances of $13.4 million. The recreation sector amounted to $31.6 million, or 1.5% of total commercial loans, including $2.7 million in Paycheck Protection Program loans. We provided deferrals for loans in this sector with outstanding principal balances of $15.6 million. Included in the recreation sector is a $9.2 million nonaccrual loan with an allocated reserve of $254,000 secured by a recreational facility 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 September 30, 2020, Paycheck Protection Program loans amounted to $153.0 million. As of September 30, 2020, there was $4.0 million in deferred processing fee income that will be recognized over the life of the loans.

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 September 30, 2020, we have provided 162 payment deferrals on commercial loans with a total principal balance of $289.2 million, or 14.0%, of total commercial loans, of which $214.4 million are loans included in an at risk sector. As of September 30, 2020, 68.7% of the commercial deferrals have expired and the borrower is making payments as agreed, 1.7% of the commercial deferrals have expired and the borrower is delinquent, and 29.6% are in active deferral period. The majority of active commercial deferrals expire during the fourth quarter. Requests for additional deferrals or new deferrals are immaterial at September 30, 2020.

The residential loan and consumer loan portfolios have not experienced significant credit quality deterioration as of September 30, 2020; however, the continuing impact and uncertain nature of the COVID-19 pandemic may result in increases in delinquencies, charge-offs and loan modifications in these portfolios through the remainder of the year. As of September 30, 2020, we had provided 186 payment deferrals on residential mortgage loans with a total principal balance of $56.7 million, or 5.0% of total residential loans, of which 74.9% of the deferrals have expired and are paying as agreed and 24.2% are in active deferral periods. We had 561 payment deferrals on consumer loans with a total principal balance of $13.3 million, or 4.2%, of total consumer loans, of which 91.4% of the deferrals have expired and are paying as agreed. Requests for additional extensions on residential mortgage loans and consumer loans were not significant as of September 30, 2020.

Net charge offs totaled $338,000 for the quarter ended September 30, 2020, or 0.04% of average loans outstanding on an annualized basis, compared to $286,000, or 0.03% of average loans outstanding on an annualized basis, for the quarter ended June 30, 2020 and $106,000, or 0.01% of average loans outstanding on an annualized basis, for the quarter ended September 30, 2019.

Total nonperforming assets were $41.0 million at September 30, 2020, compared to $38.6 million at June 30, 2020 and $27.9 million at September 30, 2019. Nonperforming assets as a percentage of total assets were 0.93% at September 30, 2020, 0.86% at June 30, 2020, and 0.71% at September 30, 2019. The increase from the preceding quarter is primarily due to a commercial loan that amounted to $1.4 million and a net increase in nonperforming residential real estate loans of $1.4 million. The increase in nonperforming assets from the prior year quarter was primarily in the commercial loan portfolio.

Balance SheetTotal assets decreased $36.6 million, or 0.8%, to $4.43 billion at September 30, 2020 from $4.46 billion at June 30, 2020. The decrease primarily reflects a decrease of $110.3 million in short-term investments partially offset by a $28.7 million increase in net loans and $31.5 million increase in loans held for sale. Additionally, an asset held for sale at June 30, 2020 of $8.5 million closed in the third quarter.

Net loans increased $28.7 million, or 0.8%, to $3.47 billion at September 30, 2020 from $3.44 billion at June 30, 2020. The net increase in loans for the three months ended September 30, 2020 was primarily due to increases in commercial real estate loans of $62.9 million, commercial and industrial loans of $23.9 million, and commercial construction loans of $17.4 million, partially offset by a decrease in consumer loans of $41.8 million and a $20.7 million decrease in residential real estate loans. Loans held for sale increased $31.5 million, or 19.8%, to $190.4 million at September 30, 2020, from $158.9 million at June 30, 2020.

Total deposits increased $57.2 million, or 1.7%, to $3.37 billion at September 30, 2020 from $3.31 billion at June 30, 2020. Compared to the prior quarter, non-certificate accounts increased $29.2 million and term certificate accounts increased $28.0 million. FHLB borrowings decreased $105.0 million, or 52.5%, to $236.1 million at September 30, 2020 from $341.1 million at June 30, 2020.

Total stockholders’ equity was $694.1 million at September 30, 2020 compared to $684.4 million at June 30, 2020 and $659.6 million at September 30, 2019. The tangible common equity to tangible assets ratio was 14.23% at September 30, 2020, 13.88% at June 30, 2020, and 15.06% at September 30, 2019. At September 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 26 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.