HarborOne Bancorp, Inc. Announces 2023 Fourth Quarter Results

HarborOne Bancorp, Inc. (the "Company" or "HarborOne") (NASDAQ:HONE), the holding company for HarborOne Bank (the "Bank"), announced net income of $16.1 million, or $0.37 per diluted share, for the year ended December 31, 2023, a decrease of $29.5 million, or 64.7%, compared to net income of $45.6 million, or $0.97 per diluted share, for the year ended December 31, 2022. For the fourth quarter of 2023, the Company reported a net loss of $7.1 million, or $0.17 per diluted share, compared to net income of $8.4 million, or $0.20 per diluted share, for the preceding quarter and net income of $9.6 million, or $0.21 per diluted share, for the same period last year.

The results for the quarter and year ended December 31, 2023 were significantly impacted by the full impairment of goodwill at Harbor One Mortgage, LLC ("HarborOne Mortgage") in the amount of $10.8 million. Throughout 2023 HarborOne Mortgage, and the mortgage banking industry in general, faced significant headwinds. The combination of the average residential mortgage rate reaching twenty-year highs during 2023 and a housing market with low inventory and higher prices, generated the lowest annual residential mortgage loan origination volume in two decades. As a result of these conditions, the impairment analysis of goodwill completed in the fourth quarter resulted in a determination that the goodwill at HarborOne Mortgage was fully impaired.

Excluding the HarborOne Mortgage goodwill impairment charge of $10.8 million, included in noninterest expense, net income and diluted earnings per share for the quarter and year ended December 31, 2023 were $3.7 million, or $0.09⁽¹⁾ per diluted share and $26.9 million, or $0.62⁽¹⁾ per diluted share, respectively. Goodwill impairment is a non-cash charge that has no impact on our liquidity, or regulatory capital ratios.

Selected Financial Highlights:

• Deposit growth, excluding brokered deposits, of $172.7 million, or 4.4%, year over year.
• Strong asset quality; nonperforming loans as a percentage of total loans were 0.37% compared to 0.39% last quarter
• Excluding the goodwill impairment, reduced noninterest expense 8.2% year over year.
• Loan growth of $200.6 million, or 4.4%, year over year.
• Continued share repurchase program, repurchasing 570,527 shares at an average cost of $10.15 per share, totaling $5.8 million.
• Redeemed $35 million subordinated debt with an 8.45% interest rate.

"I am very proud of the progress our team is making in building our relationship bank model," said Joseph F. Casey, President and CEO. "We have customer deposit growth of over 4% in 2023, as well as growth in deposit market share in about 80% of our markets. This growth will position us well for the future."

Net Interest Income

The Company's net interest and dividend income was $29.7 million for the quarter ended December 31, 2023, compared to $31.1 million for the quarter ended September 30, 2023, and $39.2 million for the quarter ended December 31, 2022. The tax equivalent interest rate spread and net interest margin were 1.56% and 2.23%, respectively, for the quarter ended December 31, 2023, compared to 1.70% and 2.34%, respectively, for the quarter ended September 30, 2023, and 2.88% and 3.23%, respectively, for the quarter ended December 31, 2022.

On December 1, 2023, the Company elected to redeem its subordinated notes in the amount of $35 million. This early redemption resulted in interest expense of $620,000 for the remaining unamortized issuance costs during the quarter. Issuance cost amortization recorded in the quarter ended September 30, 2023 was $32,000. For the quarter ended December 31, 2023, the tax equivalent interest rate spread and net interest margin excluding the additional amortization were 1.62% and 2.27%, respectively.

On a linked-quarter basis, the decreases in net interest and dividend income, tax equivalent interest rate spread, and net interest margin primarily reflect a higher cost of funding, partially offset by increased loan balances and yields, with liability repricing outpacing assets. While the yield on interest-earning assets increased 7 basis points from the preceding quarter, the cost of interest-bearing liabilities increased 21 basis points, in a competitive deposit pricing market.

The $9.5 million decrease in net interest and dividend income from the prior year quarter reflects an increase of $22.0 million, or 172.6%, in total interest expense, partially offset by an increase of $12.5 million, or 24.0%, in total interest and dividend income. The changes reflect rate and volume changes in both interest-bearing assets and liabilities. The cost of interest-bearing liabilities increased 186 basis points, while the average balance increased $597.7 million, and the yield on interest-earning assets increased 54 basis points, while the average balance increased $496.8 million.

The quarter and year-to-date results reflect the continuing impact of the successive federal funds rate increases that occurred from March 2022 to July 2023 totaling 525 basis points. The current market expectations for 2024 suggest falling rates throughout the year, although pressure may remain on deposit pricing in competitive markets as financial institutions continue to prioritize customer deposit funding.

Noninterest Income

Total noninterest income decreased $2.7 million, or 23.2%, to $8.9 million for the quarter ended December 31, 2023, from $11.6 million for the quarter ended September 30, 2023. The decrease was primarily driven by a decrease in the mortgage servicing rights ("MSR") valuation for the three months ended December 31, 2023 of $3.1 million, compared to an increase of $770,000 for the three months ended September 30, 2023. The MSR valuation was negatively impacted by key benchmark rates used in the valuation model, which decreased from the prior quarter. The impact on the MSR of principal payments on the underlying mortgages was $487,000 and $645,000 for the quarters ended, December 31, 2023 and September 30, 2023, respectively.

Persistent low inventory of for-sale residential real estate and elevated mortgage interest rates continued to impact the results of HarborOne Mortgage with gain on loan sales of $2.2 million from mortgage loan closings of $124.2 million for the quarter ended December 31, 2023, compared to $2.7 million in gain on loan sales from mortgage loan closings of $157.6 million in the preceding quarter.

Total noninterest income for the quarter and year ended December 31, 2023 included a $305,000 gain on sale of a former bank branch, and $582,000 recognized on a revenue enhancing Bank-owned life insurance ("BOLI") surrender and exchange strategy. The BOLI income was offset by a $464,000 corresponding tax impact included in the provision for income taxes and a modified endowment contract charge included in noninterest expense.

Total noninterest income decreased $996,000, or 10.1%, compared to the quarter ended December 31, 2022, primarily due to a $1.1 million, or 53.7%, decrease in mortgage banking income. The prior year quarter reflected a $2.1 million decrease in the fair value of the MSR.

Noninterest Expense

Total noninterest expense increased $11.3 million, or 35.6% to $43.2 million for the quarter ended December 31, 2023, from $31.9 million for the quarter ended September 30, 2023. Excluding the one-time $10.8 million goodwill impairment charge, noninterest expenses for the quarter ended December 31, 2023 were $32.4 million. The linked-quarter increase, excluding the goodwill impairment charge, was $582,000. Loan expense for the quarter ended December 31, 2023 includes a $629,000 reversal of repurchase reserve at HarborOne Mortgage based on updated assumptions used to determine the estimate.

Total noninterest expense increased $8.6 million, or 24.7% compared to the prior year quarter of $34.6 million. Excluding the goodwill impairment charge, noninterest expenses decreased $2.2 million from the prior year quarter. Full-time equivalent employees decreased 80 for the year ended December 31, 2023, as HarborOne Mortgage and the Bank proactively enacted cost saving measures, including reductions in force. The reduction in force resulted in a decrease in compensation and benefits expense of $905,000, primarily reflecting decreased salary, mortgage origination commission and incentive accruals, and an occupancy and equipment expense decrease of $265,000. These decreases were partially offset by a $409,000 increase in deposit insurance expense.

Asset Quality and Allowance for Credit Losses

Total nonperforming assets were $17.6 million at December 31, 2023, compared to $18.8 million at September 30, 2023 and $14.8 million at December 31, 2022. Nonperforming assets as a percentage of total assets were 0.31% at December 31, 2023, 0.33% at September 30, 2023, and 0.28% at December 31, 2022.

The Company recorded a provision for loan credit losses of $970,000 and $6.7 million for the quarter and year ended December 31, 2023. The provision for loan credit losses for the quarter and year ended December 31, 2022 was $2.1 million and $5.7 million, respectively, and the Company recorded a provision for loan credit losses of $474,000 for the quarter ended September 30, 2023. Net charge-offs totaled $1.3 million, or 0.11%, and $4.0 million, or 0.08%, of average loans outstanding on an annualized basis, for the quarter and year ended December 31, 2023, respectively. Net charge-offs totaled $2.1 million, or 0.19%, of average loans outstanding on an annualized basis, for the quarter ended December 31, 2022 and net recoveries totaled $18,000 for the quarter ended September 30, 2023. Loan credit loss provisioning for the fourth quarter and the years ended December 31, 2023 and 2022, primarily reflect replenishment of the allowance for credit losses ("ACL") on loans due to charge-offs and loan growth.

The ACL on loans was $48.0 million, or 1.01% of total loans, at December 31, 2023, compared to $48.3 million, or 1.02% of total loans, at September 30, 2023 and $45.2 million, or 0.99% of total loans, at December 31, 2022. The ACL on unfunded commitments, included in other liabilities on the unaudited Consolidated Balance Sheets, amounted to $3.9 million at December 31, 2023, compared to $4.2 million at September 30, 2023 and $4.9 million at December 31, 2022.

Management continues to closely monitor the loan portfolio for signs of deterioration in light of speculation that commercial real estate values may deteriorate as the market adjusts to higher vacancies and interest rates. The commercial real estate portfolio is centered in New England, with approximately 75% of the portfolio secured by property located in Massachusetts and Rhode Island. Approximately 60% of the commercial real estate loans are fixed-rate loans with, in the opinion of management, limited near-term maturity risk.

Management also continues to monitor certain sectors within the commercial real estate segment that may be particularly 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. This includes business-oriented hotels, non-anchored retail space, and metro office space. As of December 31, 2023, business-oriented hotels loans included 14 loans with a total outstanding balance of $122.7 million, non-anchored retail space loans included 28 loans with a total outstanding balance of $44.8 million, and metro office space loans included two loans with a total outstanding balance of $10.8 million. During the fourth quarter of 2023, a charge-off of $1.3 million was recorded on one of the metro office space loans based on a purchase and sale agreement that is expected to close in the second quarter of 2024. As of December 31, 2023, this loan has a carrying value of $5.7 million, was rated doubtful and on nonaccrual. There is also one business-oriented hotel credit with a carrying value of $1.7 million that was rated substandard and on nonaccrual. The other loans in these groups were performing in accordance with their terms.

Balance Sheet

Total assets were $5.67 billion and $5.36 billion as of December 31, 2023 and 2022, respectively, and $5.66 billion at September 30, 2023. The linked-quarter increase and year-over-year increase primarily reflect increases in total loans and cash and cash equivalents.

Available-for-sale securities were $290.2 million and $301.1 million at December 31, 2023 and 2022, respectively and $271.1 million at September 30, 2023. The unrealized loss on securities available for sale was $62.0 million and $68.3 million as of December 31, 2023 and 2022, respectively, as compared to $81.3 million of unrealized losses as of September 30, 2023. Securities held to maturity were flat at $19.8 million, or 0.4% of total assets, during 2023.

Loans increased $27.5 million, or 0.6%, to $4.75 billion at December 31, 2023, from $4.72 billion at September 30, 2023. The increase in loans for the three months ended December 31, 2023 was primarily due to increases in commercial construction loans of $17.2 million, commercial and industrial loans of $15.9 million, and residential mortgage loans of $2.8 million, partially offset by decreases in commercial real estate loans of $6.2 million and consumer loans of $2.2 million.

Total deposits were $4.39 billion at December 31, 2023 and $4.41 billion at September 30, 2023. Compared to the prior quarter, non-certificate accounts decreased $76.4 million and term certificate accounts increased $4.2 million, as competitive rate specials attracted term certificate deposits during the quarter. Brokered deposits increased $49.7 million. As of December 31, 2023, FDIC-insured deposits were approximately 68% of total deposits, including Bank subsidiary deposits. Including Depositors Insurance Fund ("DIF") excess insurance coverage that remains available until February 24, 2024, insured deposits are approximately 84% of total deposits, including Bank subsidiary deposits. Although the Bank exited the DIF as of February 24, 2023, insurance remains in place for funds on deposit as of that date for one year, or until maturity for term certificates.

FHLB borrowings increased $93.0 million to $568.5 million at December 31, 2023 from $475.5 million at September 30, 2023. As of December 31, 2023, the Bank had $1.18 billion in available borrowing capacity across multiple relationships. Additionally, on December 1, 2023, the Company redeemed its $35.0 million in subordinated debt.

Total stockholders' equity was $583.8 million at December 31, 2023, compared to $584.6 million at September 30, 2023 and $617.0 million at December 31, 2022. Stockholders' equity decreased 0.1% when compared to the prior quarter, as net loss and share repurchases were partially offset by a decrease in unrealized loss on available-for-sale securities. As of December 31, 2023, the Company's sixth share repurchase program, commenced in the third quarter of 2023, is ongoing with 1,223,050 shares repurchased, at an average price of $10.05, including $0.10 per share of excise tax, since commencement. The tangible-common-equity-to-tangible-assets ratio⁽²⁾ was 9.33% at December 31, 2023, 9.17% at September 30, 2023, and 10.31% at December 31, 2022. At December 31, 2023, the Company and the Bank had strong capital positions, exceeding all regulatory capital requirements, and are considered well-capitalized.

⁽¹⁾ This non-GAAP ratio is net loss less goodwill impairment to weighted average shares outstanding on a diluted basis.

⁽²⁾ This non-GAAP ratio is total stockholders equity less goodwill and intangible assets to total assets less goodwill and intangible assets.

About HarborOne Bancorp, Inc.

HarborOne Bancorp, Inc. is the holding company for HarborOne Bank, a Massachusetts-chartered trust company. HarborOne Bank serves the financial needs of consumers, businesses, and municipalities throughout Eastern Massachusetts and Rhode Island through a network of 30 full-service banking centers located in Massachusetts and Rhode Island, and commercial lending offices in Boston, Massachusetts and Providence, Rhode Island. HarborOne Bank also provides a range of educational resources through "HarborOne U," with free digital content, webinars, and recordings for small business and personal financial education. HarborOne Mortgage, LLC, a subsidiary of HarborOne Bank, provides mortgage lending services throughout New England and other 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, changes in general business and economic conditions (including inflation and concerns about 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 interest rates; changes in customer behavior; ongoing turbulence in the capital and debt markets and the impact of such conditions on the Company's business activities; 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; cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, and 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 income statement results excluding the goodwill impairment charge, total noninterest expense excluding the goodwill impairment charge, diluted earnings per share excluding the impairment charge, Return on average assets (ROAA), excluding the goodwill impairment charge, Return on average equity (ROAE), excluding goodwill impairment charge, the efficiency ratio, efficiency ratio excluding the goodwill impairment charge, 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.