Description

Overview:

HarborOne Bancorp ("HONE" or "Company") is a bank holding company that operates primarily through HarborOne Bank ("Bank").  On August 14, 2019, HONE completed its second step conversion from a mutual holding company structure to a stock holding company structure.  Pro forma for the equity offering, HONE's shares trade at ~1.1x tangible book value. Relative to other opportunities today, that is an attractive price for an overcapitalized $4 billion bank in New England.

Loans:

Over the past few years, HONE has nearly doubled its loan portfolio.  All of the growth has come from the commercial lending segment, which has transformed the portfolio mix from 53% residential real estate / 12% commercial / 35% consumer to 36% residential real estate / 50% commercial / 14% consumer.

Within commercial, HONE is primarily focused on commercial real estate loans, which are generally secured by properties used for business purposes such as office buildings, retail development, manufacturing facilities, warehouse distribution, hospitality and apartment buildings.  HONE currently focus on small- and mid-size owner occupants and investors seeking loans between $350,000 and $25.0 million.

The Bank originates fixed- and adjustable-rate commercial real estate loans typically with terms of five to ten years, though loans may be for terms of up to 20 years.  Loan amounts generally do not exceed 80% of the property's appraised value at the time the loan is originated.

At March 31, 2019, the average originated loan balance of outstanding commercial real estate loans was $3.4 million, and the four largest credits ranged from $14.0 million to $16.0 million. These loans were performing in accordance with their original terms at March 31, 2019.  The Bank’s largest commercial real estate relationship totaled $36.5 million and is comprised of five loans to finance commercial real estate assets comprising light industrial, office, and retail space.

Overall, it appears the commercial loan portfolio is fairly well diversified:

Deposits:

Founded in 1917 as Brockton Credit Union, HONE is headquartered in Brockton, MA and has 24 full service branches (and 1 commercial lending office in each of Boston and Providence). 

While HONE has <1% deposit market share in the Boston MSA, it has 58% share in Brockton, >20% in Easton, Abington, Middleboro, Canton, and >10% in Bridgewater, Randolph, Plymouth, Raynham, and Mansfield. 

Similarly, while HONE has 2% deposit market share in the Providence MSA, it has 18% share in Lincoln and >3.5% in Warwick/West Warwick, East Providence, Cranston and East/West Greenwich.

Returns:

HONE’s balance sheet generates a 3.2% NIM.  However, the Bank’s elevated expense ratio (80-90%) and overcapitalized position (15% TCE/TA ratio) have generated returns on equity in the low- to mid-single digits. 

In the past, the Company has paid up for acquisitions.  Now, management has committed only to consider M&A with minimal (<5%) tangible book value dilution going forward.  At the current trading price, they are effectively locked out from buying anyone. Instead, management can focus on deploying their newly raised capital and cutting costs in order to increase returns on equity to a level more in line with peers.  If that doesn’t happen and/or the book value multiple doesn’t increase, then HONE will be an attractive take-out candidate in 3 years.  

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This is not investing advice.

Catalyst

time, M&A