No Rising Tide for HarborOne
On July 1, the former HarborOne Credit Union in Brockton, Mass., will celebrate its first anniversary as HarborOne Bank.
While the institution's financial seas have been relatively calm this past year, the post-conversion tides of profitability have not risen to the levels expected. In some areas, in fact, the nearly $2 billion financial institution seems adrift and in search of firmer anchorage.
The 2013 conversion of what was then Massachusetts’ second-largest credit union to a mutual bank created a stir in the changing credit union regulatory landscape. HarborOne, founded as Brockton Credit Union in 1917, was also one of the largest credit unions ever to seek a bank charter. Based on NCUA's slow response to HarborOne's conversion request, the regulator was likely not happy to see this one sail away, some have speculated.
Reports at the time cited comments from President/CEO Jim Blake, a former chair of the Massachusetts Credit Union League, who said the conversion would allow the institution to expand services beyond its four-county boundary as a primary conversion rationale. The move to a mutual bank also would allow HarborOne to increase its lending portfolio and seek secondary capital, if needed, to support growth.
However, based on information found in the balance sheets for both the bank and credit union from the first quarters of 2014 and 2013, respectively, HarborOne has done little to take advantage of its new status, according to Denny Graham, president/CEO of FI Strategies LLC, a St. Louis-based bank and credit union consulting firm.
“If you think of why credit unions say they want to convert, none of those reasons appear on HarborOne's balance sheet,” Graham said. “They didn't raise secondary capital and they don't have a big commercial portfolio.”
HarborOne's balance sheet as a bank, one of 30 in Massachusetts with more than $1 billion in assets, also shows a small amount of derivatives, which the NCUA as credit union regulator may have opposed, according to Graham. It's also a balance sheet with a relatively long asset structure that's short on liabilities, putting them in a precarious position in the face of rising rates.
“This is a classic thrift balance sheet,” Graham explained. “They will be hurt like nearly everyone else if rates go up, but you know they have to have accounted and planned for that in their ALCO.”
Repeated calls from CU Times to Blake and Dave Tryder, HarborOne's senior vice president and chief marketing officer, seeking verification of Graham's assertions and growth strategies were not returned. Officials at the Massachusetts League also were unresponsive to multiple contacts with questions about the former member institution and league chair.
So how well did HarborOne perform during its first year as a bank? Brian Turner, director and chief economist for Catalyst Strategic Solutions, a subsidiary of Catalyst Corporate Federal Credit Union in Plano, Texas, analyzed those same HarborOne balance sheets, obtained for first quarter of 2014 from the Federal Financial Institutions Examination Council and measured them against the institution's NCUA financial performance report from first quarter 2013.
In many areas, according to Turner's analysis, HarborOne may have been better off remaining a credit union provided its performance standards were up to those of its peer group institutions.
Over the past 12 months, HarborOne's total assets increased 6.5% to $1.98 billion. This compares to the prevailing NCUA peer growth rate of 6.6% for the same period, Turner said. But while the NCUA peer group experienced a four-year average asset growth of 6.2%, HarborOne's four-year average growth rate was just 2%, meaning the institution experienced a greater growth as a bank when compared to its credit union history.
However, the situation is a little different when it comes to measuring the institution's net worth, Turner said.
“HarborOne's net worth increased 2.6% over the past 12 months, well below its NCUA peer average of 7.5% for the same period,” Turner noted. “The institution's 8.2% four-year average growth is less than its NCUA peer average of 12.2%.”
Over the past year, the mismatch between its asset and equity growth dropped its equity ratio from 9.7% to 9.1%, meaning, HarborOne's asset growth did not create sufficient earnings to avoid diluting its capital profile, he added.
One of HarborOne's reasons for changing charters was loan growth, and the loans did increase 4.6% over the past year, according to Turner. But the growth rate was well below NCUA's 11.2% peer growth rate for the same period.
“Before conversion, HarborOne's 2.9% four-year growth rate had been more comparable to peer,” Turner said. “This suggests that it might be too early to realize the expected positive impact on loan growth.”
In some areas, however, loan performance took a fairly dramatic turn. Although its NCUA peer's growth in vehicle loans was 16.5% over the past 12 months, HarborOne's vehicle loans outstanding fell 3.6%. Previously, its 3.2% average growth in vehicle loans was comparable to the peer average of 3.8%, according to Turner. HarborOne's real estate loans increased 4.8%, but that compares unfavorably with its NCUA peer average of 8.4% growth.
“In terms of share growth, the institution's total deposits increased 6.3% over the past year, comparable to its NCUA peer average of 6.4%,” Turner said. “Given that its 4.2% four-year average growth rate prior to conversion had been below its peer average of 10.8%, this could suggest that HarborOne saw improvement in its deposit growth since the conversion.”
For the first three months of 2014, HarborOne posted a net income $224,000, compared with $1.3 million for the first quarter of 2013, Turner said. For 2013, Harbor One's return on assets was 0.31%, compared with 0.47% in 2012 and 0.38% in 2011. By contrast, its NCUA peer return on assets was 0.93% in 2013, 1.02% in 2012 and 0.82% in 2011.
“So earnings, in terms of return on assets and equity capital, was not as strong over the past 12 months as in the previous two years,” Turner said. “This should be expected for newly converted institutions and most likely will improve as HarborOne finds improvements in efficiencies.”
One financial indicator Turner couldn't find on the bank's balance sheet was a line item related to director compensation, something HarborOne would not have had on its balance sheet as a credit union.
“I’d be interested in information on director compensation and stockholdings, but it isn't included here,” Turner said. “However, I do see a $3.5 million officer/shareholder loan.”