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HarborOne deploying excess capital for scarce New England M&A

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HarborOne deploying excess capital for scarce New England M&A

HarborOne Bancorp Inc (MHC) is deploying excess capital to bolster its presence in New England — an area with "limited" remaining M&A opportunities, executives said.

After markets closed March 14, the Brockton, Mass.-based company announced plans to acquire Warwick, R.I.-based Coastway Bancorp Inc. for about $125.6 million in cash. The combined company expects to have $3.4 billion in assets.

According to investor presentation materials, HarborOne is poised to become the No. 1 mortgage lender in Rhode Island and the No. 12 New England community bank in terms of total assets.

Coastway is HarborOne's first bank deal. HarborOne Bank (MHC) recently announced that it is acquiring South Portland, Maine-based Cumberland County Mortgage. In 2015, it acquired Manchester, N.H.-based Merrimack Mortgage Co. LLC. Including bank, mortgage and loan production offices, HarborOne expects to have 65 locations across New England. The Coastway transaction will tack on nine bank branches and three mortgage production offices in Rhode Island.

HarborOne has a commercial loan production office in Providence. Joseph Casey, HarborOne's executive vice president, COO and CFO, said the office has generated more than $300 million in commercial loans since its inception in June 2015.

"It's a market that we know a whole lot and we've been successful in, and it is really the only public franchise available in Rhode Island," Casey said in an interview. He added that the deal "very significantly enhances" HarborOne's Northeast mortgage franchise, and is a "perfect complement" to its business lending franchise, given Coastway's focus on small-business lending.

Casey said HarborOne is open to additional M&A opportunities. Across New England, he said acquisition targets are "limited" but available. He anticipates that the company will focus on organic growth over the next year.

Initially, investors appeared to react poorly to the news, with shares dropping 12.40% to $17.38 on March 15. HarborOne anticipates tangible book value dilution of about $2.00 a share to be earned back in about 4.1 years, including 30% cost savings of the estimated noninterest expense base. According to the company, this dilution is in line with comparable all-cash transactions. Casey said cost savings will stem from back-office consolidation. The bank is projecting greater than 70% earnings per share accretion in 2019 and 2020.

Compass Point's Laurie Havener Hunsicker lowered HarborOne's stocking rating to "neutral" from "buy." In a research note, she wrote that there is a "scarcity of New England franchises" and that Coastway "appears to be a solid bank."

But, she added, "the financial metrics don't make sense," because the deal appears overly dilutive to HarborOne's tangible book and fully converted tangible book values. She anticipates both to decline about 19%, resulting in a revised tangible book value of $8.14 and fully converted tangible book value of $15.78. She expects tangible book dilution to break even in 6.6 years.

Sandler O'Neill & Partners analyst Mark Fitzgibbon also acknowledged "sizable TBV dilution" and anticipates a tangible book earn back period of 6.5 years, using the simple method. He called the deal a "bold and strategic move."

In 2016, HarborOne completed its reorganization into a mutual holding company via a stock offering. Both banks converted from credit unions.