HONE - HarborOne Bancorp: Well-Positioned To Withstand A Credit Crunch

2023-04-27 16:30:12 ET

Summary

• While major multinational banks are performing well, as indicated by the current earnings season, there is a lot of risk in the regional bank space.
• HarborOne Bancorp, Inc. loans and deposits are growing here per its Q1 earnings release.
• Margins have been hit hard and the return metrics have withered.
• The safest dividend is one that has just been raised, and HarborOne Bancorp, Inc. just raised the dividend.

While major multinational banks are performing well as indicated by the current earnings season, there is a lot of risk in the regional bank space. While the higher interest rate environment had been boosting net interest margins, we think that those margins have largely hit their peak, because the cost of funds are increasing. What do we mean? Well banks are seeing strong competition for deposit dollars from other banks as well as U.S. Treasuries and money market funds which offer strong yields. To secure deposits banks have had to pay strong interest on their deposits.

Given the competition for deposits as well as a very publicized failing of major banks weeks ago, there has been a concern regarding "runs on the banks" by depositors rushing to get their money out. We have been covering regional banks in a concerted effort to see if smaller regional banks have been punished by this, or if the contagion is contained.

We continue our regional bank coverage with HarborOne Bancorp, Inc. ( HONE ), a community-oriented bank serving eastern Massachusetts and Rhode Island. The company just reported earnings , and the results were mixed , with the bank beating expectations on the top line and missing on the bottom lines. Let us discuss the key metrics we look for in regional banks.

HarborOne headline results in context

In Q1 , there was robust loan activity, but HarborOne Bancorp, Inc. saw a big drop in returns on assets. That said, we were surprised by the bottom line miss given recent company-wide cost savings measures and organizational efficiencies being made that should save approximately $4.1 million annually. Revenues were down 17.7% from last year, to $43.08 million, but beat expectations by $4.3 million. The return on average assets and return on average equity came in at 0.54% and 4.72%, respectively. This is a massive decline or 20 basis points and 150 basis points, respectively, from Q4. This comes in part because margins have peaked. Q1 earnings per share of $0.16 was a $0.04 miss against expectations.

In terms of valuation , HarborOne Bancorp, Inc. is attractive here considering it is trading below tangible book value. However, the discount is slim, and there is a lot of risk to consider when we see the declines in returns, but that all said, there was solid loan growth, and deposits were up.

Loans grow and deposits remain strong

HarborOne Bancorp, Inc. loans increased $73.0 million, or 1.6%, to $4.62 billion to end Q1 up from $4.55 billion to start the quarter. That said, a chunk of the increase was due to an increase in commercial real estate loans of $36.4 million, commercial construction loans of $13.4 million, but also there was an increase in residential real estate loans of $33.6 million. There are risks with commercial real estate circulating and this may weigh further as time moves on, but growing loans are key for any bank so long as they are quality.

The bank also needs deposits. Total average deposits increased from Q4. This quells fear of a run on deposits at HarborOne This was a key results. Deposits have been tough for banks, as there is a lot of competition for customer deposits. Deposits were up to $4.24 billion in the quarter vs. $4.19 billion to start the quarter.

Asset quality improved

What is interesting here is that there is strong asset quality. HarborOne's asset quality and loan loss reserve measures have remained strong. Non-performing assets as a percentage of total assets keep improving. Non-performing assets improved $2.5 million compared to the sequential quarter. The ratio of non-performing assets to total assets improved to 0.22% from 0.28% in the sequential quarter, while the allowance for credit losses ticked up slightly to 1.02% of total loans versus 0.99% of total loans coming into the quarter.

The dividend was raised

One big positive here is that HarborOne Bancorp, Inc. just raised its dividend payment. The safest dividend is one that was just raised. The payment was hiked 7% to $0.075 quarterly. The downside is that despite the hike and the selloff in shares recently, the dividend yield is 2.75%. The company is growing loans and deposits, and is trading below book, so the hike also is a big positive.

Final thoughts

HarborOne Bancorp, Inc. loans are growing, as are deposits. The return metrics got hit hard because margins narrowed, as the bank is paying much more to secure deposits. However, this is another bank showing there has not been a run on deposits. Further, the asset quality has improved, while HarborOne Bancorp, Inc. is trading at a discount-to-tangible book. We also love that the bank increased its dividend. All told, we think you can buy this stock.

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