HarborOne Bancorp 10Q 2020 Q3 Quarterly report

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-38955

HarborOne Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Massachusetts		81-1607465
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

770 Oak Street, Brockton, Massachusetts	02301
(Address of principal executive offices)	(Zip Code)

(508) 895-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act


Title of each Class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value	HONE	The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of October 28, 2020, there were 58,342,464 shares of the Registrant’s common stock, par value $0.01 per share, outstanding

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Index

		PAGE
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (unaudited)	1
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	70
ITEM 4.	Controls and Procedures	70

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	71
ITEM 1A.	Risk Factors	71
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
ITEM 3.	Defaults Upon Senior Securities	72
ITEM 4.	Mine Safety Disclosures	72
ITEM 5.	Other Information	72
ITEM 6.	Exhibits	73

EXHIBIT INDEX		74

SIGNATURE		75

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HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)


	September 30,		December 31,
(in thousands, except share data)	2020		2019

Assets
Cash and due from banks	$	29,180	$	24,464
Short-term investments		108,338		187,152
Total cash and cash equivalents		137,518		211,616

Securities available for sale, at fair value		280,308		239,473
Securities held to maturity, at amortized cost		—		26,372
Federal Home Loan Bank stock, at cost		11,631		17,121
Assets held for sale		—		8,536
Loans held for sale, at fair value		190,373		110,552
Loans		3,515,831		3,171,558
Less: Allowance for loan losses		(49,223)		(24,060)
Net loans		3,466,608		3,147,498
Accrued interest receivable		12,504		9,807
Other real estate owned and repossessed assets		898		719
Mortgage servicing rights, at fair value		20,159		17,150
Property and equipment, net		49,399		47,951
Retirement plan annuities		13,641		13,333
Bank-owned life insurance		87,400		85,735
Goodwill		69,802		69,802
Intangible assets		4,694		6,035
Other assets		83,384		47,221
Total assets	$	4,428,319	$	4,058,921

Liabilities and Stockholders' Equity
Deposits:
Demand deposit accounts	$	650,336	$	406,403
NOW accounts		202,020		165,877
Regular savings and club accounts		912,017		626,685
Money market deposit accounts		815,644		856,830
Term certificate accounts		785,871		887,078
Total deposits		3,365,888		2,942,873
Short-term borrowed funds		95,000		183,000
Long-term borrowed funds		141,106		171,132
Subordinated debt		34,002		33,907
Mortgagors' escrow accounts		7,979		6,053
Accrued interest payable		1,001		1,669
Other liabilities and accrued expenses		89,240		54,493
Total liabilities		3,734,216		3,393,127

Commitments and contingencies (Notes 9 and 10)

Common stock, $0.01 par value; 150,000,000 shares authorized; 58,480,543 shares issued; 58,342,464 and 58,418,021 shares outstanding at September 30, 2020 and December 31, 2019, respectively		584		584
Additional paid-in capital		463,531		460,232
Retained earnings		261,304		237,356
Treasury stock, at cost, 138,079 and 71,201 shares at September 30, 2020 and December 31, 2019, respectively		(1,333)		(721)
Accumulated other comprehensive income		1,776		1,480
Unearned compensation - ESOP		(31,759)		(33,137)
Total stockholders' equity		694,103		665,794
Total liabilities and stockholders' equity	$	4,428,319	$	4,058,921

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Consolidated Statements of Income (unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except share data)	2020		2019		2020		2019


Interest and dividend income:
Interest and fees on loans	$	34,496	$	36,230	$	102,491	$	106,033
Interest on loans held for sale		1,060		747		2,625		1,647
Interest on taxable securities		1,312		1,450		4,446		4,816
Interest on non-taxable securities		5		92		103		423
Other interest and dividend income		175		1,211		1,173		2,142
Total interest and dividend income		37,048		39,730		110,838		115,061

Interest expense:
Interest on deposits		4,520		9,972		19,018		27,577
Interest on FHLB borrowings		835		1,249		2,933		5,203
Interest on subordinated debentures		524		524		1,571		1,553
Total interest expense		5,879		11,745		23,522		34,333

Net interest and dividend income		31,169		27,985		87,316		80,728
Provision for loan losses		13,454		889		27,207		3,496

Net interest and dividend income, after provision for loan losses		17,715		27,096		60,109		77,232

Noninterest income:
Mortgage banking income:
Gain on sale of mortgage loans		34,055		11,015		77,195		24,086
Changes in mortgage servicing rights fair value		(193)		(2,474)		(5,691)		(6,866)
Other		4,281		2,964		10,962		7,442
Total mortgage banking income		38,143		11,505		82,466		24,662
Deposit account fees		3,451		4,186		10,351		12,020
Income on retirement plan annuities		104		104		308		300
Gain on sale and call of securities, net		—		77		2,533		1,344
Bank-owned life insurance income		560		256		1,665		762
Other income		2,203		1,145		4,642		3,745
Total noninterest income		44,461		17,273		101,965		42,833

Noninterest expense:
Compensation and benefits		29,839		23,238		78,493		63,068
Occupancy and equipment		4,581		4,171		13,296		13,030
Data processing		2,119		2,196		6,576		6,441
Loan expenses		3,189		1,704		7,433		4,309
Marketing		817		799		2,750		2,934
Deposit expenses		475		405		1,435		1,189
Postage and printing		455		435		1,386		1,345
Professional fees		1,458		889		4,204		3,219
Foreclosed and repossessed assets		27		42		165		(34)
Deposit insurance		310		(225)		860		1,030
Other expenses		2,452		2,549		8,350		7,345
Total noninterest expense		45,722		36,203		124,948		103,876

Income before income taxes		16,454		8,166		37,126		16,189

Income tax provision		4,561		1,053		9,934		2,228

Net income	$	11,893	$	7,113	$	27,192	$	13,961

Earnings per common share ⁽¹⁾:
Basic	$	0.22	$	0.13	$	0.50	$	0.25
Diluted	$	0.22	$	0.13	$	0.50	$	0.25
Weighted average shares outstanding⁽¹⁾:
Basic		54,465,339		55,638,734		54,436,090		56,855,930
Diluted		54,465,339		55,638,734		54,436,090		56,855,930

⁽¹⁾ Share amounts related to periods prior to the August 14, 2019 closing of the conversion offering have been restated to give retroactive recognition to the 1.795431 exchange ratio applied in the conversion offering (see Note 1).

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019


Net income	$	11,893	$	7,113	$	27,192	$	13,961
Other comprehensive income:

Unrealized gain/loss on cash flow hedge:
Unrealized holding gains (losses)		32		—		(1,581)		—
Reclassification adjustment for net losses (gains) included in net income		82		—		(67)		—
Net change in unrealized gains (losses) on derivatives in cash flow hedging instruments		114		—		(1,648)		—
Related tax effect		(32)		—		461		—
Net-of-tax amount		82		—		(1,187)		—

Unrealized gain/loss on securities available for sale:
Unrealized holding gains (losses)		(1,335)		609		4,212		6,780
Reclassification of unrealized gain on securities transferred to available for sale		—		—		522		—
Reclassification adjustment for net realized gains		—		(77)		(2,533)		(1,344)
Net unrealized gains (losses)		(1,335)		532		2,201		5,436
Related tax effect		132		(117)		(718)		(1,197)
Net-of-tax amount		(1,203)		415		1,483		4,239

Total other comprehensive income (loss)		(1,121)		415		296		4,239

Comprehensive income	$	10,772	$	7,528	$	27,488	$	18,200

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)


										Accumulated
	Common Stock			Additional				Treasury		Other		Unearned		Total
	Outstanding			Paid-in		Retained		Stock,		Comprehensive		Compensation		Stockholders'
(in thousands, except share data)	Shares ⁽¹⁾	Amount		Capital		Earnings		at Cost		Income (Loss)		- ESOP		Equity

Balance at June 30, 2019	58,483,025	$	327	$	154,730	$	225,936	$	(1,548)	$	1,466	$	(9,793)	$	371,118

Corporate Reorganization:
Conversion of HarborOne Bancorp, Inc. (net of costs of $6.3 million)	8,760		257		303,854		—		—		—		—		304,111
Purchase of 2,482,945 shares by the ESOP	—		—		—		—		—		—		(24,830)		(24,830)
Treasury stock retired	—		—		(1,548)		—		1,548		—		—		—
Contribution of HarborOne Bancorp Mutual Bancshares	—		—		99		—		—		—		—		99
Comprehensive income	—		—		—		7,113		—		415		—		7,528
ESOP shares committed to be released (78,588 shares)	—		—		158		—		—		—		785		943
Restricted stock awards granted, net of awards forfeited	9,000		—		—		—		—		—		—		—
Share-based compensation expense	—		—		1,306		—		—		—		—		1,306
Treasury stock purchased	(71,201)		—		—		—		(721)		—		—		(721)

Balance at September 30, 2019	58,429,584	$	584	$	458,599	$	233,049	$	(721)	$	1,881	$	(33,838)	$	659,554


Balance at June 30, 2020	58,418,021	$	584	$	462,881	$	251,032	$	(721)	$	2,897	$	(32,218)	$	684,455

Comprehensive income	—		—		—		11,893		—		(1,121)		—		10,772
Dividends declared of $0.03 per share	—		—		—		(1,621)		—		—		—		(1,621)
ESOP shares committed to be released (57,680 shares)	—		—		33		—		—		—		459		492
Restricted stock awards forfeited	(8,679)		—		—		—		—		—		—		—
Share-based compensation expense	—		—		617		—		—		—		—		617
Treasury stock purchased	(66,878)		—		—		—		(612)		—		—		(612)

Balance at September 30, 2020	58,342,464	$	584	$	463,531	$	261,304	$	(1,333)	$	1,776	$	(31,759)	$	694,103

⁽¹⁾ Share amounts related to periods prior to the August 14, 2019 closing of the conversion offering have been restated to give retroactive recognition to the 1.795431 exchange ratio applied in the conversion offering (see Note 1).

(continued)

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements

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HarborOne Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)


										Accumulated
	Common Stock			Additional				Treasury		Other		Unearned		Total
	Outstanding			Paid-in		Retained		Stock,		Comprehensive		Compensation		Stockholders'
(in thousands, except share data)	Shares ⁽¹⁾	Amount		Capital		Earnings		at Cost		Income (Loss)		- ESOP		Equity

Balance at December 31, 2018	58,465,505	$	327	$	152,156	$	219,088	$	(1,548)	$	(2,358)	$	(10,091)	$	357,574

Corporate Reorganization:
Conversion of HarborOne Bancorp, Inc. (net of costs of $6.3 million)	8,760		257		303,854		—		—		—		—		304,111
Purchase of 2,482,945 shares by the ESOP	—		—		—		—		—		—		(24,830)		(24,830)
Treasury stock retired	—		—		(1,548)		—		1,548		—		—		—
Contributions of HarborOne Bancorp Mutual Bancshares	—		—		99		—		—		—		—		99
Comprehensive income	—		—		—		13,961		—		4,239		—		18,200
ESOP shares committed to be released (108,268 shares)	—		—		370		—		—		—		1,083		1,453
Restricted stock awards granted, net of awards forfeited	26,520		—		—		—		—		—		—		—
Share-based compensation expense	—		—		3,668		—		—		—		—		3,668
Treasury stock purchased	(71,201)		—		—		—		(721)		—		—		(721)

Balance at September 30, 2019	58,429,584	$	584	$	458,599	$	233,049	$	(721)	$	1,881	$	(33,838)	$	659,554


Balance at December 31, 2019	58,418,021	$	584	$	460,232	$	237,356	$	(721)	$	1,480	$	(33,137)	$	665,794

Comprehensive income	—		—		—		27,192		—		296		—		27,488
Dividends declared of $0.06 per share	—		—		—		(3,244)		—		—		—		(3,244)
ESOP shares committed to be released (173,042 shares)	—		—		156		—		—		—		1,378		1,534
Restricted stock awards forfeited	(8,679)		—		—		—		—		—		—		—
Share-based compensation expense	—		—		3,143		—		—		—		—		3,143
Treasury stock purchased	(66,878)		—		—		—		(612)		—		—		(612)

Balance at September 30, 2020	58,342,464	$	584	$	463,531	$	261,304	$	(1,333)	$	1,776	$	(31,759)	$	694,103

⁽¹⁾ Share amounts related to periods prior to the August 14, 2019 closing of the conversion offering have been restated to give retroactive recognition to the 1.795431 exchange ratio applied in the conversion offering (see Note 1).

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)


	Nine Months Ended September 30,
(in thousands)	2020		2019


Cash flows from operating activities:
Net income	$	27,192	$	13,961
Adjustments to reconcile net income to net cash used by operating activities:
Provision for loan losses		27,207		3,496
Net amortization of securities premiums/discounts		1,371		196
Proceeds from sale of loans		1,715,878		716,894
Loans originated for sale		(1,712,957)		(751,540)
Net amortization of net deferred loan costs/fees and premiums		984		2,152
Depreciation and amortization of premises and equipment		2,997		3,296
Change in mortgage servicing rights fair value		5,691		6,866
Mortgage servicing rights capitalized		(8,700)		(716)
Accretion of fair value adjustment on loans and deposits, net		(2,848)		(1,800)
Amortization of other intangible assets		1,341		1,897
Amortization of subordinated debt issuance costs		95		76
Gain on sale and call of securities, net		(2,533)		(1,344)
Net gains on mortgage loan sales, including fair value adjustments		(82,741)		(25,368)
Bank-owned life insurance income		(1,665)		(762)
Income on retirement plan annuities		(308)		(300)
Disposal of asset held for sale		8,536		—
Net loss on disposal of premises and equipment		101		—
Net (gain) loss on sale and write-down of other real estate owned and repossessed assets		57		(94)
ESOP expense		1,534		1,453
Share-based compensation expense		3,143		3,668
Change in other assets		(39,116)		(21,260)
Change in other liabilities		29,187		1,492
Net cash used by operating activities		(25,554)		(47,737)

Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		69,870		38,786
Purchases		(153,747)		(55,369)
Sales		67,586		28,391
Activity in securities held to maturity:
Maturities, prepayment and calls		432		17,525
Sales		4,759		—
Net redemption of FHLB stock		5,490		11,503
Participation-in loan purchases		(21,994)		(28,931)
Loan originations, net of principal payments		(322,973)		(100,226)
Proceeds from sale of other real estate owned and repossessed assets		855		2,145
Additions to property and equipment		(4,546)		(3,248)
Cash received in MHC merger		—		99
Net cash used by investing activities		(354,268)		(89,325)

(continued)

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)


	Nine Months Ended September 30,
(in thousands)	2020		2019

Cash flows from financing activities:
Net increase in deposits		422,436		238,708
Net change in short-term borrowed funds		(88,000)		(230,000)
Proceeds from other borrowed funds and subordinated debt		40,000		21,220
Repayment of other borrowed funds		(70,026)		(40,016)
Net change in mortgagors' escrow accounts		1,926		1,700
Purchase of shares by the ESOP		—		(24,830)
Treasury stock purchased		(612)		(721)
Net proceeds from sale of common stock		—		304,111
Net cash provided by financing activities		305,724		270,172

Net change in cash and cash equivalents		(74,098)		133,110

Cash and cash equivalents at beginning of period		211,616		105,521

Cash and cash equivalents at end of period	$	137,518	$	238,631

Supplemental cash flow information:
Interest paid on deposits	$	19,282	$	27,654
Interest paid on borrowed funds		5,146		7,531
Income taxes paid, net		13,040		2,341
Transfer of loans to other real estate owned and repossessed assets		1,093		1,680
Transfer of securities held to maturity to available for sale, fair value		22,051		—
Dividends declared		3,244		—

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The unaudited interim Consolidated Financial Statements of HarborOne Bancorp, Inc. (the “Company”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by the U.S. generally accepted accounting principles (“GAAP”). In the opinion of management, all adjustments and disclosures considered necessary for the fair presentation of the accompanying Consolidated Financial Statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2019 and 2018 and notes thereto included in the Company’s Annual Report on Form 10-K.

The unaudited interim Consolidated Financial Statements include the accounts of the Company; the Company’s subsidiaries, Legion Parkway Company LLC, a security corporation, HarborOne Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries, which consist of HarborOne Mortgage, LLC (“HarborOne Mortgage”), a passive investment corporation, and 2 security corporations. The passive investment corporation maintains and manages certain assets of the Bank. The security corporations were established for the purpose of buying, holding and selling securities on their own behalf. All significant intercompany balances and transactions have been eliminated in consolidation.

Recent Events

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, and almost all public commerce and related business activities have been, to varying degrees, curtailed. The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree, and the outbreak has caused significant disruptions in the U.S. economy and adversely impacted a broad range of industries in which the Company’s customers operate and may impair their ability to fulfill their financial obligations to the Company. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.

Congress, the President, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The Federal Reserve also took actions to mitigate the economic impact of COVID-19, including cutting the federal funds rate 150 basis points, targeting a 0 to 25 basis points rate. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The fiscal stimulus and relief programs have been an effective mitigant to credit losses in the near term; however, once these programs are discontinued the severity of potential losses is uncertain and depends on numerous factors and future developments. The Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. Effects may include:

●

Net interest income could be reduced. In accordance with regulatory guidance, the Company is actively working with borrowers impacted by the COVID-19 pandemic to defer payments. While interest will continue to be recognized in accordance with GAAP, should eventual credit losses on these deferments emerge, interest income would be negatively impacted. As of September 30, 2020, the Bank had 99 active payment deferrals on loans with a total principal balance of $100.0 million, primarily commercial real estate loans. Loans with a total principal balance of $253.3 million were out of the deferral period and paying the loan as agreed and

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

loans with a total principal balance of $5.8 million were out of the deferral period and delinquent more than 30 days.

●

The provision for loan losses could increase. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for loan losses. It also is possible that asset quality could worsen, and loan charge-offs increase. The Company participated in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government.

●

Noninterest income could be reduced. Uncertainty regarding the severity and duration of the COVID-19 pandemic could cause further volatility in the financial markets. The COVID-19 pandemic and the measures taken to control its spread may disrupt the mortgage loan origination process. Mortgage banking revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.

●

Valuation and fair value measurement challenges may occur. Management performed an interim impairment assessment on goodwill as a result of changes in the macroeconomic environment resulting from the COVID-19 pandemic. The results of the interim impairment assessment indicated that the remaining fair value exceeded the carrying value for both reporting units. The COVID-19 pandemic could cause further and sustained decline in the Company’s stock price or the occurrence of additional valuation triggering events that could result in an impairment charge to earnings.

Conversion and Reorganization

On August 14, 2019, the Company completed a second step conversion offering (the “Offering”). Prior to the completion of the Offering, approximately 53% of the shares of common stock of the Company were owned by HarborOne Mutual Bancshares, a mutual holding company (the “MHC”). The Company sold 31,036,812 shares of common stock at $10.00 per share in the Offering, resulting in net cash proceeds of $304.1 million. In addition, each share of the Company common stock owned by shareholders other than the MHC prior to the Offering was exchanged for 1.795431 shares of Company common stock, for a total of 12,162,763 shares of Company common stock.

As a result of the Offering, all shares and per share information has been revised to reflect the 1.795431 exchange ratio. The revised financial information presented in this Quarterly Report on Form 10-Q is derived from the consolidated financial statements of the Company.

Depositors Insurance Fund and Share Insurance Fund.

The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (the “FDIC”), and deposits in excess of the FDIC insurance limits are insured by the Depositors Insurance Fund, a private, industry-sponsored insurance fund that insures all deposits above FDIC limits for Massachusetts-chartered savings banks. Until March 17, 2020, the Bank’s deposits in excess of the FDIC insurance limits were insured by the Share Insurance Fund of the Co-operative Central Bank, which insured the excess deposits of Massachusetts-chartered co-operative banks. On March 17, 2020, the Share Insurance Fund merged into the Depositors Insurance Fund. In connection with the closing of the merger, and by operation of law, the Bank converted from a Massachusetts-chartered co-operative bank to a Massachusetts-chartered savings bank. None of the Bank’s products or services were discontinued or changed as a result of the Bank’s charter conversion.

Nature of Operations

The Company provides a variety of financial services to individuals and businesses through its 26 full-service branches in Massachusetts and Rhode Island, and a commercial lending office in each of Boston, Massachusetts and

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Providence, Rhode Island. HarborOne Mortgage maintains more than 30 offices in Massachusetts, Rhode Island, New Hampshire, Maine, New Jersey and Florida and originates loans in 4 additional states.

The Company’s primary deposit products are checking, money market, savings and term certificate of deposit accounts, while its primary lending products are commercial real estate, commercial, residential mortgages, home equity, and consumer loans. The Company also originates, sells and services residential mortgage loans through HarborOne Mortgage.

Use of Estimates

In preparing unaudited interim Consolidated Financial Statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuations of mortgage servicing rights, derivatives, goodwill and deferred tax assets.

Allowance for Loan Losses

The allowance for loan losses is established based upon the level of estimated probable losses in the current loan portfolio. Loan losses are charged against the allowance when management believes the collectability of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, specific and unallocated components, as further described below.

General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the Company’s loan segments. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment except commercial real estate, commercial construction and commercial and industrial loans. Due to the lack of historical loss experience for our commercial real estate, commercial construction and commercial and industrial loan portfolio, we utilize peer loss data. Adjustments to this historical loss factor are considered for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate – The Company generally does not originate portfolio loans with a loan-to-value ratio greater than 80 percent without obtaining private mortgage insurance and does not generally grant loans that would be classified as subprime upon origination. The Company generally has first or second liens on the property securing equity lines of credit. Loans in this segment are generally collateralized by residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, can have an effect on the credit quality in this segment.

Residential construction – Residential construction loans include loans to build one- to four-family owner-occupied properties, which are subject to the same credit quality factors as residential real estate loans.

Commercial real estate – Commercial real estate loans are primarily secured by income-producing properties in southeastern New England. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, could have an effect on the

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

credit quality in this segment. Management obtains rent rolls annually and continually monitors the cash flows of these loans.

Commercial construction – Commercial construction loans may include speculative real estate development loans for which payment is derived from lease or sale of the property. Credit risk is affected by cost overruns, time to lease or sell at an adequate price, and market conditions.

Commercial and industrial – Commercial and industrial loans are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer or business spending, could have an effect on the credit quality in this segment.

Consumer – Consumer loans are generally secured by automobiles or unsecured, and repayment is dependent on the credit quality of the individual borrower.

Specific Reserves

The specific reserves relate to loans that are classified as impaired. Residential real estate and commercial loans are evaluated for impairment on a loan-by-loan basis. Impairment is determined by nonaccrual status, whether a loan is subject to a troubled debt restructuring agreement or in the case of certain loans, based on the internal credit rating. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, except for troubled debt restructurings (“TDRs”), the Company does not separately identify individual consumer loans for impairment evaluation.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan.

Unallocated component

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general reserves in the portfolio. The unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. Additionally, the Company's unseasoned commercial portfolio and use of peer group data to establish general reserves for the commercial portfolio adds another element of risk to management's estimates.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Earnings Per Share

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. The restricted stock awards are participating securities; therefore, unvested awards are included as common shares outstanding in the computation of basic earnings per share. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock option awards and are determined using the treasury stock method.

Recent Accounting Pronouncements

As an “emerging growth company”, as defined in Title 1 of the Jumpstart Our Business Startups (“JOBS”) Act, the Company has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As of September 30, 2020, there is no significant difference in the comparability of the financial statements as a result of this extended transition period. The Company’s emerging growth company status is scheduled to end December 31, 2021 unless a triggering event occurs sooner.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered “minor” so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting.

ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company is currently evaluating the effect that this ASU will have on the Company’s consolidated financial statements.

ASU No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), was issued in December 2019 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The adoption of ASU 2019-12 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2017, FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. This guidance changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line as the hedged item. This guidance also provides new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged item in fair value hedges of interest rate risk, reducing the complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method, and reducing the risk of material error

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

corrections if a company applies the shortcut method inappropriately. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this standard is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), commonly referred to as “CECL,” which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. For public entities that are SEC filers, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For non-public entities, this ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. With the passage of the CARES Act, the option to delay CECL was provided until the earlier of the national health emergency being declared over or December 31, 2020. The Company continues to evaluate the impact of this ASU on the consolidated financial statements and disclosures. The Company has formed a cross functional working group and selected a third-party vendor to assist with the application of this ASU. The working group has an implementation plan which includes assessment and documentation of processes, internal controls, data sources and model development and documentation. The Company will adopt the ASU December 31, 2021 effective January 1, 2021, upon the termination of its emerging growth company status.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to record a right-to-use asset and a liability representing the obligation to make lease payments for long-term leases. For public business entities, this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For non-public business entities, this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years beginning after December 15, 2021. While we are currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities but no material impact to the Consolidated Statement of Income, for arrangements previously accounted for as operating leases.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

2.	SECURITIES

The amortized cost and fair value of securities with gross unrealized gains and losses is as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(in thousands)

September 30, 2020:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	10,003	$	134	$	—	$	10,137
U.S. government agency and government-sponsored residential mortgage-backed securities		230,072		3,067		512		232,627
U.S. government-sponsored collateralized mortgage obligations		19,675		465		—		20,140
SBA asset-backed securities		16,458		946		—		17,404
Total securities available for sale	$	276,208	$	4,612	$	512	$	280,308

December 31, 2019:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	14,994	$	210	$	—	$	15,204
U.S. government agency and government-sponsored residential mortgage-backed securities		163,982		1,456		265		165,173
U.S. government-sponsored collateralized mortgage obligations		26,137		243		7		26,373
SBA asset-backed securities		32,461		286		24		32,723
Total securities available for sale	$	237,574	$	2,195	$	296	$	239,473

Securities held to maturity
U.S. government agency and government-sponsored residential mortgage-backed securities	$	12,682	$	86	$	6	$	12,762
U.S. government-sponsored collateralized mortgage obligations		1,433		69		—		1,502
SBA asset-backed securities		5,308		124		—		5,432
Municipal bonds		6,949		282		—		7,231
Total securities held to maturity	$	26,372	$	561	$	6	$	26,927

In February 2020, with the intention to reduce credit risk in the investment portfolio and to support the Bank’s credit risk policy, the Bank executed the sale of 5 held-to-maturity investments. The securities had a total amortized cost of $4.5 million and a $1.3 million gain on sale was recorded during the three months ended March 31, 2020. As a result, the remaining held to maturity securities, with an amortized cost of $21.5 million and an unrealized gain of approximately $522,000, were transferred to the available for sale category at a fair value of $22.1 million.

NaN mortgage-backed securities with a combined fair value of $48.9 million are pledged as collateral for interest rate swap agreements as of September 30, 2020 (see Note 10). NaN mortgage-backed securities with a combined fair value of $15.7 million were pledged as collateral for interest rate swap agreements as of December 31, 2019.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2020 is as follows:



	Available for Sale
	Amortized		Fair
	Cost		Value

	(in thousands)

After 1 year through 5 years	$	5,000	$	5,012
After 5 years through 10 years		5,003		5,125
Over 10 years		—		—
		10,003		10,137

U.S. government agency and government-sponsored residential mortgage-backed securities		230,072		232,627
U.S. government-sponsored collateralized mortgage obligations		19,675		20,140
SBA asset-backed securities		16,458		17,404

Total	$	276,208	$	280,308

SBA asset-backed securities are U.S. government-sponsored residential mortgage-backed securities, collateralized mortgage obligations and securities whose underlying assets are loans from the SBA and have stated maturities of 2 to 30 years; however, it is expected that such securities will have shorter actual lives due to prepayments. U.S. government and government-sponsored enterprise obligations are callable at the discretion of the issuer. U.S. government and government-sponsored enterprise obligations with a total fair value of $10.1 million have final maturities ranging from 3 years to 8 years and call features ranging from 1 month to 1 year.

The following table shows proceeds and gross realized gains and losses related to the sales and calls of securities for the periods indicated:


		Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019

		(in thousands)

Sales
Proceeds	$	—	$	—	$	72,333	$	28,391
Gross gains		—		—		2,521		1,267
Gross losses		—		—		—		—

Calls
Proceeds	$	2,000	$	11,775	$	8,635	$	20,145
Gross gains		—		77		12		77
Gross losses		—		—		—		—

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Information pertaining to securities with gross unrealized losses at September 30, 2020 and December 31, 2019 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:


	Less Than Twelve Months				Twelve Months and Over
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value

	(in thousands)

September 30, 2020:
Securities available for sale

U.S. government agency and government-sponsored residential mortgage-backed securities	$	493	$	81,377	$	19	$	3,721


December 31, 2019:
Securities available for sale

U.S. government agency and government-sponsored residential mortgage-backed securities	$	147	$	47,343	$	118	$	7,986
U.S. government-sponsored collateralized mortgage obligations		1		884		6		795
SBA asset-backed securities		24		3,964		—		—
	$	172	$	52,191	$	124	$	8,781

Securities held to maturity

U.S. government agency and government-sponsored residential mortgage-backed securities	$	—	$	—	$	6	$	2,538

Management evaluates securities for other-than-temporary impairment (“OTTI”) at each reporting period, and more frequently when economic or market concerns warrant such evaluation.

At September 30, 2020, 20 securities with an amortized cost of $85.6 million have unrealized losses with aggregate depreciation of 0.60% from the Company’s amortized cost basis.

The unrealized losses on the Company’s securities were primarily caused by changes in interest rates. All of these investments are guaranteed by government and government-sponsored enterprises. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be OTTI at September 30, 2020.

3.	LOANS HELD FOR SALE

The following table provides the fair value and contractual principal balance outstanding of loans held for sale accounted for under the fair value option:


	September 30,		December 31,
	2020		2019

	(in thousands)

Loans held for sale, fair value	$	190,373	$	110,552
Loans held for sale, contractual principal outstanding		181,746		107,472
Fair value less unpaid principal balance	$	8,627	$	3,080

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The Company has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them. Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to an increase of $5.5 million in the nine months ended September 30, 2020 to $8.6 million, compared to an increase of $1.3 million in the nine months ended September 30, 2019. These amounts are offset in earnings by the changes in fair value of forward sale commitments. The changes in fair value are reported as a component of gain on sale of mortgage loans in the Unaudited Consolidated Statements of Income.

At September 30, 2020 and December 31, 2019, there were 0 loans held for sale that were greater than 90 days past due.

LOANS

A summary of the balances of loans follows:


	September 30,		December 31,
	2020		2019

	(in thousands)

Residential real estate:
One- to four-family	$	954,198	$	937,305
Second mortgages and equity lines of credit		150,315		155,716
Residential real estate construction		26,422		14,055
		1,130,935		1,107,076

Commercial:
Commercial real estate		1,380,071		1,168,412
Commercial construction		211,953		153,907
Commercial and industrial		480,129		306,282
Total commercial loans		2,072,153		1,628,601

Consumer loans:
Auto		303,598		424,592
Personal		9,145		11,289
Total consumer loans		312,743		435,881

Total loans		3,515,831		3,171,558
Allowance for loan losses		(49,223)		(24,060)
Loans, net	$	3,466,608	$	3,147,498

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying unaudited interim Consolidated Balance Sheets. The Company and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At September 30, 2020 and December 31, 2019, the Company was servicing loans for participants aggregating $260.5 million and $195.2 million, respectively.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Acquired Loans

The loans purchased from Coastway Bancorp, Inc. included $5.4 million in purchased credit impaired (“PCI”) loans. PCI loans were primarily residential real estate loans. The following table provides certain information pertaining to PCI loans:


	September 30,			December 31,
	2020		2019

	(in thousands)

Outstanding balance	$	4,354	$	4,609
Carrying amount	$	4,133	$	4,378

The following table summarizes activity in the accretable yield for PCI loans:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(in thousands)

Balance at beginning of period	$	145	$	169	$	149	$	185
Additions		—		—		—		—
Accretion		(3)		(5)		(7)		(7)
Reclassification from nonaccretable difference		—		—		—		(14)
Balance at end of period	$	142	$	164	$	142	$	164

The following is the activity in the allowance for loan losses for the three and nine months ended September 30, 2020 and 2019:


	Residential		Commercial		Commercial		Commercial
	Real Estate		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total

	(in thousands)

Balance at June 30, 2019	$	3,100	$	11,100	$	2,927	$	2,512	$	1,063	$	1,559	$	22,261

Provision (credit) for loan losses		1		739		(366)		34		113		368		889
Charge-offs		—		—		—		(43)		(216)		—		(259)
Recoveries		74		1		—		—		78		—		153
Balance at September 30, 2019	$	3,175	$	11,840	$	2,561	$	2,503	$	1,038	$	1,927	$	23,044

Balance at June 30, 2020	$	5,857	$	18,389	$	3,215	$	3,562	$	2,204	$	2,880	$	36,107

Provision (credit) for loan losses		1,721		7,771		962		1,617		643		740		13,454
Charge-offs		—		(62)		—		(213)		(140)		—		(415)
Recoveries		22		—		—		—		55		—		77
Balance at September 30, 2020	$	7,600	$	26,098	$	4,177	$	4,966	$	2,762	$	3,620	$	49,223

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)


	Residential		Commercial		Commercial		Commercial
	Real Estate		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total

	(in thousands)

Balance at December 31, 2018	$	3,239	$	10,059	$	2,707	$	2,286	$	1,154	$	1,210	$	20,655

Provision (credit) for loan losses		(226)		1,775		(146)		1,035		341		717		3,496
Charge-offs		(136)		—		—		(833)		(660)		—		(1,629)
Recoveries		298		6		—		15		203		—		522
Balance at September 30, 2019	$	3,175	$	11,840	$	2,561	$	2,503	$	1,038	$	1,927	$	23,044

Balance at December 31, 2019	$	3,178	$	12,875	$	2,526	$	2,977	$	1,010	$	1,494	$	24,060

Provision (credit) for loan losses		4,270		14,458		1,651		2,560		2,142		2,126		27,207
Charge-offs		(52)		(1,236)		—		(790)		(519)		—		(2,597)
Recoveries		204		1		—		219		129		—		553
Balance at September 30, 2020	$	7,600	$	26,098	$	4,177	$	4,966	$	2,762	$	3,620	$	49,223

Allocation of the allowance to loan segments at September 30, 2020 and December 31, 2019 follows:


	Residential		Commercial		Commercial		Commercial
	Real Estate		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total

	(in thousands)

September 30, 2020:
Loans:
Impaired loans	$	28,061	$	4,943	$	10,971	$	10,089	$	—			$	54,064
Non-impaired loans		1,102,874		1,375,128		200,982		470,040		312,743				3,461,767
Total loans	$	1,130,935	$	1,380,071	$	211,953	$	480,129	$	312,743			$	3,515,831
Allowance for loan losses:
Impaired loans	$	950	$	—	$	251	$	611	$	—	$	—	$	1,812
Non-impaired loans		6,650		26,098		3,926		4,355		2,762		3,620		47,411
Total allowance for loan losses	$	7,600	$	26,098	$	4,177	$	4,966	$	2,762	$	3,620	$	49,223


December 31, 2019:
Loans:
Impaired loans	$	27,275	$	530	$	11,244	$	5,831	$	—			$	44,880
Non-impaired loans		1,079,801		1,167,882		142,663		300,451		435,881				3,126,678
Total loans	$	1,107,076	$	1,168,412	$	153,907	$	306,282	$	435,881			$	3,171,558
Allowance for loan losses:
Impaired loans	$	985	$	—	$	—	$	176	$	—	$	—	$	1,161
Non-impaired loans		2,193		12,875		2,526		2,801		1,010		1,494		22,899
Total allowance for loan losses	$	3,178	$	12,875	$	2,526	$	2,977	$	1,010	$	1,494	$	24,060

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following is a summary of past due and non-accrual loans at September 30, 2020 and December 31, 2019:


					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans on
	Past Due		Past Due		Past Due		Past Due		Non-accrual

	(in thousands)

September 30, 2020
Residential real estate:
One- to four-family	$	595	$	2,114	$	4,697	$	7,406	$	11,925
Second mortgages and equity lines of credit		660		24		297		981		951
Commercial real estate		—		3,183		4,943		8,126		4,943
Commercial construction		—		—		10,939		10,939		10,939
Commercial and industrial		1,725		4,643		1,564		7,932		10,078
Consumer:
Auto		819		380		923		2,122		1,150
Personal		31		49		2		82		41
Total	$	3,830	$	10,393	$	23,365	$	37,588	$	40,027

December 31, 2019
Residential real estate:
One- to four-family	$	9,364	$	5,622	$	5,668	$	20,654	$	10,610
Second mortgages and equity lines of credit		418		77		760		1,255		1,561
Commercial real estate		261		4,730		191		5,182		530
Commercial construction		—		—		1,960		1,960		11,244
Commercial and industrial		2,000		722		3,133		5,855		5,831
Consumer:
Auto		3,180		456		457		4,093		529
Personal		69		16		13		98		16
Total	$	15,292	$	11,623	$	12,182	$	39,097	$	30,321

At September 30, 2020 and December 31, 2019, there were 0 loans past due 90 days or more and still accruing.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following information pertains to impaired loans:


	September 30, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance

	(in thousands)

Impaired loans without a specific reserve:
Residential real estate	$	14,101	$	15,322	$	—	$	11,610	$	12,140	$	—
Commercial real estate		4,943		6,194		—		530		530		—
Commercial construction		—		—		—		11,244		11,244		—
Commercial and industrial		4,019		5,999		—		5,505		6,901		—
Total		23,063		27,515		—		28,889		30,815		—

Impaired loans with a specific reserve:
Residential real estate		13,960		14,308		950		15,665		16,218		985
Commercial construction		10,971		11,244		251		—		—		—
Commercial and industrial		6,070		6,287		611		326		326		176
Total		31,001		31,839		1,812		15,991		16,544		1,161

Total impaired loans	$	54,064	$	59,354	$	1,812	$	44,880	$	47,359	$	1,161


	Three Months Ended September 30,
	2020						2019
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis

	(in thousands)

Residential real estate	$	26,542	$	272	$	270	$	29,375	$	451	$	367
Commercial real estate		4,287		—		—		—		—		—
Commercial construction		10,971		—		—		5,622		—		—
Commercial and industrial		10,334		9		9		5,467		21		21
Total	$	52,134	$	281	$	279	$	40,464	$	472	$	388


	Nine Months Ended September 30,
	2020						2019
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis

	(in thousands)

Residential real estate	$	26,454	$	847	$	788	$	30,316	$	1,399	$	1,125
Commercial real estate		3,202		1		1		671		—		—
Commercial construction		11,039		—		—		3,748		—		—
Commercial and industrial		7,863		16		16		5,497		44		44
Total	$	48,558	$	864	$	805	$	40,232	$	1,443	$	1,169

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Interest income recognized and interest income recognized on a cash basis in the tables above represent interest income for the three and nine months ended September 30, 2020 and 2019, not for the time period designated as impaired. NaN additional funds are committed to be advanced in connection with impaired loans.

There were 0 material TDR loan modifications for the three months ended September 30, 2020 and 2019.

The recorded investment in TDRs was $17.0 million and $20.0 million at September 30, 2020 and December 31, 2019, respectively. Commercial TDRs totaled $2.5 million and $3.0 million at September 30, 2020 and December 31, 2019, respectively. The remainder of the TDRs outstanding at the end of these periods were residential loans. Non-accrual TDRs totaled $3.9 million and $5.0 million at September 30, 2020 and December 31, 2019, respectively. Of these loans, $2.5 million and $3.0 million were non-accrual commercial TDRs at September 30, 2020 and December 31, 2019, respectively.

All TDR loans are considered impaired and management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each loan. TDR loans which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In either case, any reserve required is recorded as part of the allowance for loan losses.

During the three and nine months ended September 30, 2020 and 2019, there were 0 payment defaults on TDRs.

Credit Quality Information

The Company uses a ten-grade internal loan rating system for commercial real estate, commercial construction and commercial loans, as follows:

Loans rated 1 – 6 are considered “pass” rated loans with low to average risk.

Loans rated 7 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 8 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 9 are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 10 are considered “uncollectible” (loss), and of such little value that their continuance as loans is not warranted.

Loans not rated consist primarily of certain smaller balance commercial real estate and commercial loans that are managed by exception.

On an annual basis, or more often if needed, the Company formally reviews on a risk adjusted basis, the ratings on all commercial real estate, construction and commercial loans. Semi-annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

On a monthly basis, the Company reviews the residential construction, residential real estate and consumer installment portfolios for credit quality primarily through the use of delinquency reports.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents the Company’s loans by risk rating at September 30, 2020 and December 31, 2019:


	September 30, 2020						December 31, 2019
	Commercial		Commercial		Commercial		Commercial		Commercial		Commercial
	Real Estate		Construction		and Industrial		Real Estate		Construction		and Industrial

	(in thousands)

Loans rated 1 - 6	$	1,352,794	$	201,014	$	466,254	$	1,163,343	$	127,962	$	294,507
Loans rated 7		23,646		—		3,519		4,539		14,701		6,117
Loans rated 8		524		10,939		8,342		530		11,244		3,223
Loans rated 9		3,107		—		2,014		—		—		2,435
Loans rated 10		—		—		—		—		—		—
	$	1,380,071	$	211,953	$	480,129	$	1,168,412	$	153,907	$	306,282

5.	MORTGAGE LOAN SERVICING

The Company sells residential mortgages to government-sponsored entities and other parties. The Company retains no beneficial interests in these loans, but may retain the servicing rights of the loans sold. Mortgage loans serviced for others are not included in the accompanying unaudited interim Consolidated Balance Sheets. The risks inherent in mortgage servicing rights (“MSRs”) relate primarily to changes in prepayments that primarily result from shifts in mortgage interest rates. The unpaid principal balance of mortgage loans serviced for others was $2.65 billion and $1.83 billion as of September 30, 2020 and December 31, 2019, respectively.

The Company accounts for MSRs at fair value. The Company obtains valuations from independent third parties to determine the fair value of MSRs. Key assumptions used in the estimation of fair value include prepayment speeds, discount rates, default rates, cost to service, and contractual servicing fees. At September 30, 2020 and December 31, 2019, the following weighted average assumptions were used in the calculation of fair value of MSRs:


	September 30,		December 31,
	2020		2019
Prepayment speed	15.90	%	12.43	%
Discount rate	9.26		9.34
Default rate	2.51		2.61

The following summarizes changes to MSRs for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(in thousands)

Balance, beginning of period	$	16,127	$	18,156	$	17,150	$	22,217
Additions		4,225		385		8,700		716
Changes in fair value due to:
Reductions from loans paid off during the period		(1,083)		(585)		(2,773)		(1,363)
Changes in valuation inputs or assumptions		890		(1,889)		(2,918)		(5,503)
Balance, end of period	$	20,159	$	16,067	$	20,159	$	16,067

Contractually specified servicing fees included in other mortgage banking income amounted to $1.6 million and $4.2 million for the three and nine months ended September 30, 2020, respectively, and $1.3 million and $4.1 million for the three and nine months ended September 30, 2019, respectively.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

6.	GOODWILL

As of September 30, 2020, the Company had $69.8 million in goodwill, of which $59.0 million was allocated to the Bank reporting unit and $10.8 million was allocated to the HarborOne Mortgage reporting unit. The Company typically performs its goodwill impairment test during the fourth quarter of the year, unless certain indicators suggest earlier testing to be warranted. The Company determined that an interim impairment test was warranted due to the operational disruption and uncertainty associated with the COVID-19 pandemic. Accordingly, the Company performed impairment tests as of June 30, 2020 and determined that there was 0 impairment to the goodwill of either reporting unit, as the fair value of each reporting unit was in excess of its carrying value. Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company also considered the impact of the COVID-19 pandemic as it pertains to these intangible assets, and determined that there was 0 indication of impairment related to other intangible assets as of June 30, 2020. The Company determined that there was no triggering event that warranted an interim impairment test at September 30, 2020.

7.	DEPOSITS

A summary of deposit balances, by type, is as follows:


	September 30,		December 31,
	2020		2019

	(in thousands)

NOW and demand deposit accounts	$	852,356	$	572,280
Regular savings and club accounts		912,017		626,685
Money market deposit accounts		815,644		856,830
Total non-certificate accounts		2,580,017		2,055,795

Term certificate accounts greater than $250,000		142,266		169,595
Term certificate accounts less than or equal to $250,000		526,614		636,343
Brokered deposits		116,991		81,140
Total certificate accounts		785,871		887,078
Total deposits	$	3,365,888	$	2,942,873

The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions. The reciprocal deposit program provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. At September 30, 2020 and December 31, 2019, total reciprocal deposits were $107.8 million and $277.9 million, respectively, consisting primarily of money market accounts.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

A summary of certificate accounts by maturity at September 30, 2020 is as follows:


			Weighted
			Average
	Amount		Rate

	(dollars in thousands)

Within 1 year	$	720,786	1.25	%
Over 1 year to 2 years		45,648	1.78
Over 2 years to 3 years		13,174	1.96
Over 3 years to 4 years		5,737	1.16
Over 4 years to 5 years		1,326	0.97
Total certificate deposits		786,671	1.29	%
Less unaccreted acquisition discount		(800)
Total certificate deposits, net	$	785,871

8.BORROWED FUNDS

Borrowed funds at September 30, 2020 and December 31, 2019 consist of Federal Home Loan Bank (“FHLB”) advances. Short-term advances were $95.0 million with a weighted average rate of 0.43% at September 30, 2020. Short-term advances were $183.0 million with a weighted average rate of 1.80% at December 31, 2019. Long-term advances are summarized by maturity date below.


	September 30, 2020						December 31, 2019
	Amount by				Weighted		Amount by				Weighted
	Scheduled		Amount by		Average		Scheduled		Amount by		Average
	Maturity*		Call Date ⁽¹⁾		Rate ⁽²⁾		Maturity*		Call Date ⁽¹⁾		Rate ⁽²⁾

	(dollars in thousands)

Year ending December 31:
2020	$	27,000	$	107,000	3.01	%	$	87,000		137,000	2.25	%
2021		41,750		21,750	2.47			41,750		21,750	2.47
2022		—		—	—			10,000		—	1.73
2023		20,191		191	3.48			20,195		195	2.43
2024		10,000		10,000	1.68			10,000		10,000	1.68
2025 and thereafter		42,165		2,165	1.34			2,187		2,187	1.10
	$	141,106	$	141,106	2.32	%	$	171,132	$	171,132	2.16	%

* Includes an amortizing advance requiring monthly principal and interest payments.

⁽¹⁾ Callable FHLB advances are shown in the respective periods assuming that the callable debt is redeemed at the call date, while all other advances are shown in the periods corresponding to their scheduled maturity date.

⁽²⁾Weighted average rates are based on scheduled maturity dates.

The FHLB advances are secured by a blanket security agreement which requires the Bank to maintain certain qualifying assets as collateral, principally residential mortgage loans and certain multi-family and commercial real estate loans held in the Bank’s portfolio. The carrying value of the loans pledged as collateral for these borrowings totaled $1.3 billion at September 30, 2020 and $1.06 billion at December 31, 2019. As of September 30, 2020, the Company had $660.7 million of available borrowing capacity with the FHLB.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The Company also has additional borrowing capacity under a $25.0 million unsecured federal funds line with a correspondent bank and a secured line of credit with the Federal Reserve Bank of Boston secured by 59% of the carrying value of indirect auto and commercial loans with principal balances amounting to $74.9 million and $46.9 million at September 30, 2020 and December 31, 2019, respectively. NaN amounts were outstanding under either line at September 30, 2020 or December 31, 2019.

As a participating lender in the PPP, the Company also has access to additional borrowing capacity through the Federal Reserve’s Paycheck Protection Program Liquidity Facility. Only loans issued under the PPP may be pledged as collateral.

9.	OTHER COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and advance funds on various lines of credit. Those commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying unaudited interim Consolidated Financial Statements.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

The following off-balance sheet financial instruments were outstanding at September 30, 2020 and December 31, 2019. The contract amounts represent credit risk.


	September 30,		December 31,
	2020		2019

	(in thousands)

Commitments to grant residential real estate loans-HarborOne Mortgage	$	623,593	$	24,752
Commitments to grant other loans		103,213		74,114
Unadvanced funds on home equity lines of credit		173,775		157,867
Unadvanced funds on revolving lines of credit		167,971		147,047
Unadvanced funds on construction loans		131,797		112,158

Commitments to extend credit and unadvanced portion of construction loans are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments to grant loans generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for unadvanced funds on construction loans, home equity and revolving lines of credit may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. Commitments to grant loans, and unadvanced construction loans and home equity lines of credit are collateralized by real estate, while revolving lines of credit are unsecured.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

10.

DERIVATIVES

The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally , the Company enters into interest rate derivatives to accommodate the business requirements of its customers. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of a derivative instrument depends upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.

Interest Rate Swaps Designated as a Cashflow Hedge

As part of its interest rate risk management strategy, the Company utilizes interest rate swap agreements to help manage its interest rate risk positions. The notional amount of the interest rate swaps do not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amounts and the other terms of the interest rate swap agreements. The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.

In the second quarter the Company executed an interest swap agreement designated as a cash flow hedge. As of September 30, 2020, the Company had 1 interest rate swap agreement with a notional amount of $100.0 million that was designated as a cash flow hedge of certain short-term debt. The interest rate swap agreement has an average maturity of 4.5 years, the current weighted average fixed rate paid is 0.67%, the weighted average 3-month LIBOR swap receive rate is 0.35%, and the fair value is $1.6 million. The Company expects approximately $462,000 related to the cash flow hedge to be reclassified to interest expense, from other comprehensive income, in the next twelve months.

Derivative Loan Commitments

Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of a rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.

Forward Loan Sale Commitments

The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the number of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).

The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Interest Rate Swaps

The Company enters into interest rate swap agreements that are transacted to meet the financing needs of its commercial customers. Offsetting interest rate swap agreements are simultaneously transacted with a third-party financial institution to effectively eliminate the Company’s interest rate risk associated with the customer swaps. The primary risks associated with these transactions arise from exposure to the ability of the counterparties to meet the terms of the contract. Mortgage-backed securities with a fair value of $48.9 million are pledged to secure the Company’s liability for the offsetting interest rate swaps (see Note 2). The interest rate swap notional amount is the aggregate notional amount of the customer swap and the offsetting third-party swap.

Risk Participation Agreements

The Company has entered into risk participation agreements with the correspondent institutions and shares in any interest rate swap losses incurred as a result of the commercial loan customers’ termination of a loan level interest rate swap agreement prior to maturity. The Company records these risk participation agreements at fair value. The Company’s maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivables from the customer.

Although the Company has determined that the majority of the inputs used to value its interest rate swaps and risk participation agreements fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2020 and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has classified its derivative valuations in their entirety as Level 2.

The following tables presents the outstanding notional balances and fair values of outstanding derivative instruments:


			Assets			Liabilities
			Balance			Balance
	Notional		Sheet	Fair		Sheet	Fair
	Amount		Location	Value		Location	Value

		(in thousands)

September 30, 2020:
Derivatives designated as Hedging Instruments
Interest rate swaps	$	100,000	—	$	—	Other liabilities	$	1,648
Derivatives not designated as Hedging Instruments
Derivative loan commitments	$	623,593	Other assets	$	15,554	Other liabilities	$	77
Forward loan sale commitments		457,500	Other assets		193	Other liabilities		1,400
Interest rate swaps		869,700	Other assets		44,636	Other liabilities		44,636
Risk participation agreements		132,684	Other assets		—	Other liabilities		—
Total				$	60,383		$	47,761

December 31, 2019:
Derivatives designated as Hedging Instruments
Interest rate swaps	$	—	—	$	—	—	$	—
Derivatives not designated as Hedging Instruments
Derivative loan commitments	$	100,938	Other assets	$	1,385	Other liabilities	$	174
Forward loan sale commitments		88,000	Other assets		26	Other liabilities		158
Interest rate swaps		725,332	Other assets		15,092	Other liabilities		15,092
Risk participation agreements		134,346	Other assets		—	Other liabilities		—
Total				$	16,503		$	15,424

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents the recorded net gains and losses pertaining to the Company’s derivative instruments:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(in thousands)
Derivatives designated as hedging instruments
Gain (loss) in OCI on derivatives (effective portion), net of tax	$	82	$	—	$	(1,187)	$	—
(Loss) gain reclassified from OCI into interest income or interest expense (effective portion)	$	(82)	$	—	$	67	$	—

Derivatives not designated as hedging instruments
Changes in fair value of derivative loan commitments
Mortgage banking income	$	4,738	$	421	$	14,266	$	1,435
Changes in fair value of forward loan sale commitments
Mortgage banking income		755		782		(1,075)		449
Changes in fair value of interest rate swaps
Other income		—		—		—		—
Total	$	5,493	$	1,203	$	13,191	$	1,884

11.

STOCK-BASED COMPENSATION

Under the HarborOne Bancorp, Inc. 2017 Stock Option and Incentive Plan (the “Equity Plan”), adopted on August 9, 2017, the Company may grant options, stock appreciation rights, restricted stock, restricted units, unrestricted stock awards, cash-based awards, performance share awards, and dividend equivalent rights to its directors, officers and employees. Shareholders’ approved the HarborOne Bancorp, Inc. 2020 Equity Incentive Plan on September 29, 2020. No awards had been granted under the new plan as of September 30, 2020.

Expense related to awards granted to employees is recognized as compensation expense, and expense related to awards granted to directors is recognized as directors’ fees within noninterest expense. Total expense for the Equity Plan was $617,000 and $3.1 million for the three and nine months ended September 30, 2020, respectively, and $1.3 million and $3.7 million for the three and nine months ended 2019, respectively.

Share amounts related to periods prior to the date of the closing of the Offering on August 14, 2019 have been restated to give retroactive recognition to the 1.795431 exchange ratio applied in the Offering.

Stock Options

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

●

Volatility is based on peer group volatility due to lack of sufficient trading history for the Company.

●

Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term and the vesting period.

●

Expected dividend yield is based on the Company’s history and expectation of dividend payouts.

●

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

During the nine months ended September 30, 2020, the Company made no awards of nonqualified options to purchase shares of common stock.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

A summary of the status of the Company’s stock option grants for the nine months ended September 30, 2020, is presented in the table below:


	Outstanding								Nonvested
					Weighted
					Average						Weighted
			Weighted		Remaining		Aggregate				Average
	Stock Option		Average		Contractual		Intrinsic		Stock Option		Grant Date
	Awards		Exercise Price		Term (years)		Value		Awards		Fair Value

Balance at January 1, 2020		2,169,243	$	9.87						1,196,545	$	2.66
Granted		—		—						—		—
Vested		—		—						(609,968)		2.72
Forfeited		(20,948)		10.23						(20,948)		2.82
Expired		—		—						—		—
Balance at September 30, 2020		2,148,295	$	9.87		7.33	$	—		565,629	$	2.59
Exercisable at September 30, 2020		1,582,663	$	10.07		6.96	$	—
Unrecognized cost inclusive of directors' awards	$	991,000
Weighted average remaining recognition period (years)		1.37

Restricted Stock

Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the plan. The fair market value of shares awarded, based on the market price at the date of grant, is unearned compensation to be amortized over the applicable vesting period.

The following table presents the activity in non-vested stock awards under the Equity Plan for the nine months ended September 30, 2020:


	Restricted		Weighted Average
	Stock Awards		Grant Price

Non-vested stock awards at January 1, 2020		333,765	$	10.20
Vested		(293,688)		10.22
Granted		—		—
Forfeited		(8,679)		10.23
Non-vested stock awards at September 30, 2020		31,398	$	10.00
Unrecognized cost inclusive of directors' awards	$	256,000
Weighted average remaining recognition period (years)		1.62

12.MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Company and Bank are subject to various regulatory capital requirements administered by the Federal Reserve and the FDIC. Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements.

Under the capital rules, risk-based capital ratios are calculated by dividing Tier 1, common equity Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several risk-weight categories, based primarily on relative risk. The rules require banks and bank holding companies to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0%

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

and a total capital ratio of 8.0%. In addition, a Tier 1 leverage ratio of 4.0% is required. Additionally, the capital rules require a bank holding company to maintain a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements equal to 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.

Under the FDIC’s prompt corrective action rules, an insured state nonmember bank is considered “well capitalized” if its capital ratios meet or exceed the ratios as set forth in the following table and is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. The Bank must meet well capitalized requirements under prompt corrective action provisions. Prompt corrective action provisions are not applicable to bank holding companies.

A bank holding company is considered “well capitalized” if the bank holding company (i) has a total risk-based capital ratio of at least 10.0%, (ii) has a Tier 1 risk-based capital ratio of at least 6.0%, and (iii) is not subject to any written agreement order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.

At September 30, 2020, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at September 30, 2020 also exceeded the minimum capital requirements, including the currently applicable capital conservation buffer of 2.5%.

The Company’s and the Bank’s actual regulatory capital ratios as of September 30, 2020 and December 31, 2019 are presented in the table below.


									Minimum Required to be
									Considered "Well Capitalized"
					Minimum Required for				Under Prompt Corrective
	Actual				Capital Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)

HarborOne Bancorp, Inc.
September 30, 2020
Common equity Tier 1 capital to risk-weighted assets	$	619,098	17.6	%	$	157,971	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		619,098	17.6			210,627	6.0			N/A	N/A
Total capital to risk-weighted assets		698,045	19.9			280,837	8.0			N/A	N/A
Tier 1 capital to average assets		619,098	14.5			171,035	4.0			N/A	N/A

December 31, 2019
Common equity Tier 1 capital to risk-weighted assets	$	590,122	18.7	%	$	142,048	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		590,122	18.7			189,397	6.0			N/A	N/A
Total capital to risk-weighted assets		649,182	20.6			252,529	8.0			N/A	N/A
Tier 1 capital to average assets		590,122	15.3			154,659	4.0			N/A	N/A

HarborOne Bank
September 30, 2020
Common equity Tier 1 capital to risk-weighted assets	$	486,565	13.9	%	$	157,958	4.5	%	$	228,162	6.5	%
Tier 1 capital to risk-weighted assets		486,565	13.9			210,611	6.0			280,815	8.0
Total capital to risk-weighted assets		530,508	15.1			280,815	8.0			351,018	10.0
Tier 1 capital to average assets		486,565	11.4			170,933	4.0			213,666	5.0

December 31, 2019
Common equity Tier 1 capital to risk-weighted assets	$	453,707	14.4	%	$	142,053	4.5	%	$	205,188	6.5	%
Tier 1 capital to risk-weighted assets		453,707	14.4			189,404	6.0			252,539	8.0
Total capital to risk-weighted assets		477,767	15.1			252,539	8.0			315,674	10.0
Tier 1 capital to average assets		453,707	12.2			149,272	4.0			186,591	5.0

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

13.COMPREHENSIVE INCOME (LOSS)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the stockholders’ equity section of the Consolidated Balance Sheets, such items, along with net income, are components of comprehensive income (loss).

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:


	September 30,		December 31,
	2020		2019

	(in thousands)

Cash flow hedge:
Net unrealized loss	$	(1,648)	$	—
Related tax effect		461		—
Total accumulated other comprehensive loss	$	(1,187)	$	—

Securities available for sale:
Net unrealized gain	$	4,100	$	1,899
Related tax effect		(1,137)		(419)
Total accumulated other comprehensive income	$	2,963	$	1,480

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following tables present changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,
	2020						2019

	Available		Cash				Available
	for Sale		Flow				for Sale
	Securities		Hedge		Total		Securities

	(in thousands)

Balance at beginning of period	$	4,166	$	(1,269)	$	2,897	$	1,466

Other comprehensive income (loss) before reclassifications		(1,335)		32		(1,303)		609
Amounts reclassified from accumulated other comprehensive income (loss)		—		82		82		(77)
Net current period other comprehensive income (loss)		(1,335)		114		(1,221)		532
Related tax effect		132		(32)		100		(117)
Balance at end of period	$	2,963	$	(1,187)	$	1,776	$	1,881


	Nine Months Ended September 30,
	2020						2019

	Available		Cash				Available
	for Sale		Flow				for Sale
	Securities		Hedge		Total		Securities

	(in thousands)

Balance at beginning of period	$	1,480	$	—	$	1,480	$	(2,358)

Other comprehensive income (loss) before reclassifications		4,212		(1,581)		2,631		6,780
Amounts reclassified to accumulated other comprehensive income for transfer of securities to available for sale		522		—		522		(1,344)
Amounts reclassified from accumulated other comprehensive income (loss)		(2,533)		(67)		(2,600)		—
Net current period other comprehensive income (loss)		2,201		(1,648)		553		5,436
Related tax effect		(718)		461		(257)		(1,197)
Balance at end of period	$	2,963	$	(1,187)	$	1,776	$	1,881

14.

FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and cash equivalents - The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

Securities - All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. Securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

FHLB stock - FHLB stock has restrictions placed on its transferability. As a result, the fair value of FHLB stock was not practicable to determine.

Loans held for sale - Fair values are based on prevailing market prices for similar commitments.

Loans - Fair values for mortgage loans and other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using comparable sales or recent appraisals, adjusted for selling costs and other expenses.

Retirement plan annuities - The carrying value of the annuities are based on their contract values which approximate fair value.

MSRs - Fair value is based on a third-party valuation model that calculates the present value of estimated future net servicing income and includes observable market data such as prepayment speeds and default and loss rates.

Deposits and mortgagors’ escrow accounts - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) and mortgagors’ escrow accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowed funds - The fair values of borrowed funds are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Accrued interest - The carrying amounts of accrued interest approximate fair value.

Interest Rate Swap designated as a cashflow hedge- The Company works directly with a third party vendor to provide periodic valuations for its interest rate risk management agreements to determine fair value of its interest rate swaps executed for interest rate risk management. The vendor utilizes standard valuation methodologies applicable to interest rate derivatives based on readily observable market data and are therefore considered Level 2 valuations.

Forward loan sale commitments and derivative loan commitments - Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. The assumptions for pull-through rates are derived from internal data and adjusted using management judgment. Derivative loan commitments include the value of servicing rights and non-refundable costs of originating the loan based on the Company’s internal cost analysis that is not observable. The weighted average pull-through rate for derivative loan commitments was approximately 73% and 85% at September 30, 2020 and December 31, 2019, respectively.

Interest rate swaps and risk participation agreements - The Company’s interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined by a third party utilizing models that use primarily market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instrument’s fixed and variable cash flows, which are then discounted using an appropriate yield curve to arrive at the fair value of each swap. The pricing models do

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

not contain a high level of subjectivity as the methodologies used do not require significant judgment. The Company incorporates credit valuation analysis for counterparty nonperformance risk in the fair value measurement, including the impact of netting applicable credit enhancements such as available collateral.

Off-balance sheet credit-related instruments - Fair values for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of off-balance sheet instruments is immaterial.

Fair Value Hierarchy

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation.

Transfers between levels are recognized at the end of the reporting period, if applicable. There were 0 transfers during the periods presented.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:


							Total
	Level 1		Level 2		Level 3		Fair Value

	(in thousands)

September 30, 2020
Assets

Securities available for sale	$	—	$	280,308	$	—	$	280,308
Loans held for sale		—		190,373		—		190,373
Mortgage servicing rights		—		20,159		—		20,159
Derivative loan commitments		—		—		15,554		15,554
Forward loan sale commitments		—		—		193		193
Interest rate swaps		—		44,636		—		44,636
	$	—	$	535,476	$	15,747	$	551,223
Liabilities

Derivative loan commitments	$	—	$	—	$	77	$	77
Forward loan sale commitments		—		—		1,400		1,400
Interest rate management agreements		—		1,648		—		1,648
Interest rate swaps		—		44,636		—		44,636
	$	—	$	46,284	$	1,477	$	47,761

December 31, 2019
Assets

Securities available for sale	$	—	$	239,473	$	—	$	239,473
Loans held for sale		—		110,552		—		110,552
Mortgage servicing rights		—		17,150		—		17,150
Derivative loan commitments		—		—		1,385		1,385
Forward loan sale commitments		—		—		26		26
Interest rate swaps		—		15,092		—		15,092
	$	—	$	382,267	$	1,411	$	383,678
Liabilities

Derivative loan commitments	$	—	$	—	$	174	$	174
Forward loan sale commitments		—		—		158		158
Interest rate swaps		—		15,092		—		15,092
	$	—	$	15,092	$	332	$	15,424

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The table below presents, for the three and nine months ended September 30, 2020 and 2019, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(in thousands)

Assets: Derivative and Forward Loan Sale Commitments:

Balance at beginning of period	$	10,844	$	2,494	$	1,411	$	1,261

Total gains included in net income ⁽¹⁾		4,903		468		14,336		1,701
Balance at end of period	$	15,747	$	2,962	$	15,747	$	2,962

Changes in unrealized gains relating to instruments at period end	$	15,747	$	2,962	$	15,747	$	2,962


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(in thousands)

Liabilities: Derivative and Forward Loan Sale Commitments:

Balance at beginning of period	$	(2,067)	$	(1,182)	$	(332)	$	(630)

Total gains (losses) included in net income ⁽¹⁾		590		736		(1,145)		184
Balance at end of period	$	(1,477)	$	(446)	$	(1,477)	$	(446)

Changes in unrealized losses relating to instruments at period end	$	(1,477)	$	(446)	$	(1,477)	$	(446)

⁽¹⁾ Included in mortgage banking income on the Consolidated Statements of Net Income.

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were 0 liabilities measured at fair value on a non-recurring basis at September 30, 2020 and December 31, 2019. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets.


	September 30, 2020						December 31, 2019
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

	(in thousands)

Asset held for sale	$	—	$	—	$	—	$	—	$	—	$	8,536
Impaired loans:
Residential		—		—		4,246		—		—		2,272
Commercial		—		—		20,476		—		—		1,606
Other real estate owned and repossessed assets		—		—		898		—		—		719
	$	—	$	—	$	25,620	$	—	$	—	$	13,133

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Losses in the following table represent the amount of the fair value adjustments recorded during the period on the carrying value of the assets held at September 30, 2020 and December 31, 2019, respectively. Losses on fully charged off loans are not included in the table.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(in thousands)

Impaired loans
Residential	$	103	$	26	$	369	$	58
Commercial		644		181		2,654		193
Other real estate owned and repossessed assets		2		21		58		88
	$	749	$	228	$	3,081	$	339

Losses applicable to write-downs of impaired loans and other real estate owned and repossessed assets are based on the appraised value of the underlying collateral less estimated costs to sell. The losses on impaired loans are not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. The losses on other real estate owned and repossessed assets represent adjustments in valuation recorded during the time period indicated and not for losses incurred on sales. Appraised values are typically based on a blend of (a) an income approach using observable cash flows to measure fair value, and (b) a market approach using observable market comparables. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from time of valuation.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Summary of Fair Values of Financial Instruments

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.


	September 30, 2020
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total

	(in thousands)

Financial assets:
Cash and cash equivalents	$	137,518	$	137,518	$	—	$	—	$	137,518
Securities available for sale		280,308		—		280,308		—		280,308
Federal Home Loan Bank stock		11,631		N/A		N/A		N/A		N/A
Loans held for sale		190,373		—		190,373		—		190,373
Loans, net		3,466,608		—		—		3,509,251		3,509,251
Retirement plan annuities		13,641		—		—		13,641		13,641
Accrued interest receivable		12,504		—		12,504		—		12,504

Financial liabilities:
Deposits		3,365,888		—		—		3,369,131		3,369,131
Borrowed funds		236,106		—		239,842		—		239,842
Subordinated debt		34,002		—		—		35,291		35,291
Mortgagors' escrow accounts		7,979		—		—		7,979		7,979
Accrued interest payable		1,001		—		1,001		—		1,001

Derivative loan commitments:
Assets		15,554		—		—		15,554		15,554
Liabilities		77		—		—		77		77

Interest rate management agreements:
Liabilities		1,648		—		—		—		—

Interest rate swap agreements:
Assets		44,636		—		44,636		—		44,636
Liabilities		44,636		—		44,636		—		44,636

Forward loan sale commitments:
Assets		193		—		—		193		193
Liabilities		1,400		—		—		1,400		1,400

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)


	December 31, 2019
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total

	(in thousands)

Financial assets:
Cash and cash equivalents	$	211,616	$	211,616	$	—	$	—	$	211,616
Securities available for sale		239,473		—		239,473		—		239,473
Securities held to maturity		26,372		—		26,927		—		26,927
Federal Home Loan Bank stock		17,121		N/A		N/A		N/A		N/A
Loans held for sale		110,552		—		110,552		—		110,552
Loans, net		3,147,498		—		—		3,176,442		3,176,442
Retirement plan annuities		13,333		—		—		13,333		13,333
Accrued interest receivable		9,807		—		9,807		—		9,807

Financial liabilities:
Deposits		2,942,873		—		—		2,943,899		2,943,899
Borrowed funds		354,132		—		354,881		—		354,881
Subordinated debt		33,907		—		—		34,619		34,619
Mortgagors' escrow accounts		6,053		—		—		6,053		6,053
Accrued interest payable		1,669		—		1,669		—		1,669

Derivative loan commitments:
Assets		1,385		—		—		1,385		1,385
Liabilities		174		—		—		174		174

Interest rate swap agreements:
Assets		15,092		—		15,092		—		15,092
Liabilities		15,092		—		15,092		—		15,092

Forward loan sale commitments:
Assets		26		—		—		26		26
Liabilities		158		—		—		158		158

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

15.

EARNINGS PER SHARE (“EPS”)

Basic EPS represents net income attributable to common shareholders divided by the weighted-average number of common shares outstanding during the period. Unvested restricted shares are participating securities and included in the computation of basic earnings per share. Diluted EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding, plus the effect of potential dilutive common stock equivalents outstanding during the period. Unallocated ESOP shares are not deemed outstanding for EPS calculations.


	Three Months Ended September 30,
	2020		2019

Net income applicable to common stock (in thousands)	$	11,893	$	7,113

Average number of common shares outstanding		58,375,742		58,453,259
Less: Average unallocated ESOP shares		(3,910,403)		(2,814,525)
Average number of common shares outstanding used to calculate basic earnings per common share		54,465,339		55,638,734
Common stock equivalents		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		54,465,339		55,638,734

Earnings per common share:
Basic	$	0.22	$	0.13
Diluted	$	0.22	$	0.13


	Nine Months Ended September 30,
	2020		2019

Net income available to common stockholders (in thousands)	$	27,192	$	13,961

Average number of common shares outstanding		58,403,825		58,461,953
Less: Average unallocated ESOP shares		(3,967,735)		(1,606,023)
Weighted average number of common shares outstanding used to calculate basic earnings per common share		54,436,090		56,855,930
Weighted average number of common shares outstanding used to calculate diluted earnings per common share		54,436,090		56,855,930

Earnings per common share:
Basic	$	0.50	$	0.25
Diluted	$	0.50	$	0.25

Share amounts related to periods prior to the August 14, 2019 closing of the conversion offering have been restated to give retroactive recognition to the 1.795431 exchange ratio applied in the conversion offering.

Stock options for 2,148,295 and 2,240,307 shares of common stock for the three and nine months ended September 30, 2020 and 2019, respectively, were not considered in computing diluted earnings per share because they were antidilutive.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

16.

REVENUE RECOGNITION

Revenue from contracts with customers in the scope of Accounting Standards Codification (“ASC”) (“Topic 606”) is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.

The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.

In certain cases, other parties are involved with providing services to our customers. If the Company is a principal in the transaction (providing services itself or through a third party on its behalf), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (referring to another party to provide services), the Company reports its net fee or commission retained as revenue.

The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction.

17.

SEGMENT REPORTING

The Company has 2 reportable segments: HarborOne Bank and HarborOne Mortgage. Revenue from HarborOne Bank consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from HarborOne Mortgage comprises interest earned on loans and fees received as a result of the residential mortgage origination, sale and servicing process.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Segment profit and loss is measured by net income on a legal entity basis. Intercompany transactions are eliminated in consolidation.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Information about the reportable segments and reconciliation to the unaudited interim Consolidated Financial Statements at September 30, 2020 and 2019 and for the three and nine months then ended is presented in the tables below.


	Three Months Ended September 30, 2020
	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated

	(in thousands)


Net interest and dividend income (expense)	$	30,599	$	1,000	$	(430)	$	—	$	31,169
Provision for loan losses		13,454		—		—		—		13,454
Net interest and dividend income (loss), after provision for loan losses		17,145		1,000		(430)		—		17,715
Mortgage banking income:
Gain on sale of mortgage loans		—		34,055		—		—		34,055
Intersegment gain (loss)		(645)		645		—		—		—
Changes in mortgage servicing rights fair value		(354)		161		—		—		(193)
Other		334		3,947		—		—		4,281
Total mortgage banking income (loss)		(665)		38,808		—		—		38,143
Other noninterest income (loss)		6,326		(8)		—		—		6,318
Total noninterest income		5,661		38,800		—		—		44,461
Noninterest expense		26,300		19,156		266		—		45,722
Income (loss) before income taxes		(3,494)		20,644		(696)		—		16,454
Provision (benefit) for income taxes		571		4,550		(560)		—		4,561
Net income (loss)	$	(4,065)	$	16,094	$	(136)	$	—	$	11,893


	Nine Months Ended September 30, 2020
	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated

	(in thousands)


Net interest and dividend income (expense)	$	86,248	$	2,020	$	(952)	$	—	$	87,316
Provision for loan losses		27,207		—		—		—		27,207
Net interest and dividend income (loss), after provision for loan losses		59,041		2,020		(952)		—		60,109
Mortgage banking income:
Gain on sale of mortgage loans		—		77,195		—		—		77,195
Intersegment gain (loss)		(2,444)		2,444		—		—		—
Changes in mortgage servicing rights fair value		(2,014)		(3,677)		—		—		(5,691)
Other		1,031		9,931		—		—		10,962
Total mortgage banking income (loss)		(3,427)		85,893		—		—		82,466
Other noninterest income (loss)		19,640		(141)		—		—		19,499
Total noninterest income		16,213		85,752		—		—		101,965
Noninterest expense		75,806		48,235		907		—		124,948
Income (loss) before income taxes		(552)		39,537		(1,859)		—		37,126
Provision (benefit) for income taxes		2,199		8,667		(932)		—		9,934
Net income (loss)	$	(2,751)	$	30,870	$	(927)	$	—	$	27,192

Total assets at period end	$	4,404,842	$	280,983	$	729,838	$	(987,344)	$	4,428,319
Goodwill at period end	$	59,042	$	10,760	$	—	$	—	$	69,802

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)


	Three Months Ended September 30, 2019

	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated

	(in thousands)


Net interest and dividend income	$	27,855	$	285	$	(155)	$	—	$	27,985
Provision for loan losses		889		—		—		—		889
Net interest and dividend income, after provision for loan losses		26,966		285		(155)		—		27,096
Mortgage banking income:
Gain on sale of mortgage loans		—		11,015		—		—		11,015
Intersegment gain (loss)		(393)		393		—		—		—
Changes in mortgage servicing rights fair value		(591)		(1,883)		—		—		(2,474)
Other		369		2,595		—		—		2,964
Total mortgage banking income		(615)		12,120		—		—		11,505
Other noninterest income		5,772		(4)		—		—		5,768
Total noninterest income		5,157		12,116		—		—		17,273
Noninterest expense		24,405		11,227		571		—		36,203
Income (loss) before income taxes		7,718		1,174		(726)		—		8,166
Provision (benefit) for income taxes		1,019		171		(137)		—		1,053
Net income (loss)	$	6,699	$	1,003	$	(589)	$	—	$	7,113


	Nine Months Ended September 30, 2019

	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp Inc.		Eliminations		Consolidated

	(in thousands)

Net interest and dividend income (expense)	$	81,296	$	604	$	(1,172)	$	—	$	80,728
Provision for loan losses		3,496		—		—		—		3,496
Net interest and dividend income (loss), after provision for loan losses		77,800		604		(1,172)		—		77,232
Mortgage banking income:
Gain on sale of mortgage loans		1		24,085		—		—		24,086
Intersegment gain (loss)		(866)		866		—		—		—
Changes in mortgage servicing rights fair value		(1,599)		(5,267)		—		—		(6,866)
Other		1,127		6,315		—		—		7,442
Total mortgage banking income (loss)		(1,337)		25,999		—		—		24,662
Other noninterest income (loss)		18,191		(20)		—		—		18,171
Total noninterest income		16,854		25,979		—		—		42,833
Noninterest expense		74,527		27,496		1,853		—		103,876
Income (loss) before income taxes		20,127		(913)		(3,025)		—		16,189
Provision (benefit) for income taxes		3,267		(256)		(783)		—		2,228
Net income (loss)	$	16,860	$	(657)	$	(2,242)	$	—	$	13,961

Total assets at period end	$	3,821,671	$	152,800	$	693,851	$	(719,302)	$	3,949,020
Goodwill at period end	$	58,875	$	10,760	$	—	$	—	$	69,635

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at September 30, 2020, and our results of operations for the nine months ended September 30, 2020 and 2019. This section should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes thereto of the Company appearing in Part I, Item 1 of this Form 10-Q.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These statements include, among others, statements regarding the impact of the COVID-19 pandemic; our strategy, goals and expectations; evaluations of future interest rate trends and liquidity; expectations as to growth in assets, deposits and results of operations, future operations, market position and financial position; and prospects, plans and objectives of management. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond our control.

Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned “Risk Factors”; the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in employment levels and other general business and economic conditions on a national basis and in the local markets in which the Company operates; changes in customer behavior; the possibility that future credit losses, loan defaults and charge-off rates are higher than expected due to changes in economic assumptions or adverse economic developments; turbulence in the capital and debt markets; changes in interest rates; decreases in the value of securities and other assets; decreases in deposit levels necessitating increased borrowing to fund loans and investments; competitive pressures from other financial institutions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; changes in regulation; reputational risks relating to the Company’s participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; changes in accounting standards and practices; the risk that goodwill and intangibles recorded in our financial statements will become impaired; risks related to the implementation of acquisitions, dispositions, and restructurings, including the risk that acquisitions may not produce results at levels or within time frames originally anticipated; the risk that we may not be successful in the implementation of our business strategy; changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K and updated in this Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

Critical Accounting Policies

Certain of our accounting policies, which are important to the portrayal of our financial condition, require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the Company’s Annual Report on Form 10-K.

COVID-19

The COVID-19 pandemic is a highly unusual, unprecedented and evolving public health and economic crisis that may have a significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to address the economic effects of the COVID-19 pandemic.

Paycheck Protection Program. The CARES Act appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. As of September 30, 2020, the Bank had originated 1,071 PPP loans totaling approximately $153.0 million. PPP loans are fully guaranteed by the U.S. government, have an initial term of up to five years and earn interest at rate of 1%. We currently expect a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2020, there was $4.0 million in deferred processing fee income that will be recognized over the life of the loan. The average authorized loan size is $150,000 and the aggregate number of jobs positively impacted is approximately 15,000. In conjunction with the PPP, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has created a lending facility for qualified financial institutions. The Paycheck Protection Program Liquidity Facility will extend credit to depository institutions with a term equal to the term of the pledged collateral at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility.

Troubled Debt Restructuring Relief. From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the national emergency declared by the President on March 13, 2020 concerning the COVID–19 outbreak, a financial institution may elect to suspend the requirements under accounting principles generally accepted in the U.S. for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a troubled debt restructured (“TDR”), including impairment accounting. This TDR relief is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable.

In connection with the COVID-19 pandemic, the Company instituted a payment deferral program for certain commercial, mortgage and consumer loans. Most initial deferrals were for a 90-day period and none were greater than 180 days. Deferrals under this program began to expire in the third quarter of 2020. The following table provides the principal balance of loans with payment deferrals and the current status of the deferral agreement as of September 30, 2020.


														% Active
														deferrals to
												Total		Total
	Deferrals expired and			Deferrals expired &						Total		outstanding		outstanding
(dollars in thousands)	paying			delinquent			Active deferrals			deferrals		loans		loans
	#		$	#		$	#		$
Commercial real estate	50	$	146,926	4	$	4,679	14	$	80,153	$	231,758	$	1,380,071	5.8	%
Commercial and industrial	80		39,123	1		254	12		5,341		44,718		480,129	1.1
Commercial construction	1		12,711	—		—	—		—		12,711		211,953	—
One- to Four family	129		41,389	1		452	36		13,567		55,408		954,198	1.4
Second mortgages and equity lines of credit	16		1,038	1		50	3		156		1,244		150,315	0.1
Residential construction	—		—	—		—	—		—		—		26,422	—
Consumer	504		12,127	23		361	34		772		13,260		312,743	0.2
	780	$	253,314	30	$	5,796	99	$	99,989	$	359,099	$	3,515,831	2.8	%

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Company Impact and Response

Our commercial and consumer banking products and services are offered primarily in Southeastern New England, where individual and governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity beginning in March 2020. We have been able to continue serving our customers through online banking, drive-up teller windows and in our branch offices by appointment only. We implemented work from home protocols for non-branch staff without any degradation to customer service or operations. The Company’s COVID-19 response team continues to monitor the local impact of COVID-19 in order to anticipate and respond to developments quickly and decisively. As of September 30, 2020, we do not anticipate significant challenges to our ability to maintain our systems and controls and do not currently face any material resource constraints. The Company maintains access to multiple sources of liquidity. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company may become more reliant on volatile or more expensive sources of funding.

Management continues to evaluate our loan portfolio, particularly the commercial loan portfolio, in light of the expected decrease in economic activity, the mitigating effects of government stimulus, and loan modification efforts designed to limit the long-term impacts of the COVID-19 pandemic. Our commercial loan portfolio is diversified across many sectors and is largely secured by commercial real estate loans, which make up 66.6% of the total commercial loan portfolio. Initial assessments of the impact of the COVID-19 pandemic on the commercial loan portfolio have been focused on sectors that have experienced a direct impact. Management has identified six sectors as the most susceptible to immediate increased credit risk: retail, office space, hotels, health and social services, restaurants, and recreation. The total loan portfolio of the six commercial sectors identified as at risk totaled $945.2 million, which represents 45.6% of the commercial loan portfolio. The at risk sectors include $707.6 million in commercial real estate loans, $185.9 million in commercial and industrial loans, and $51.7 million in commercial construction loans.


	At Risk Sectors
																								Percent
										Health									Total					at risk
										and Social									at risk			Total		sector
	Retail			Office			Hotel			Services			Restaurants			Recreation			sectors			loans		to total

	(dollars in thousands)
Commercial real estate	$	217,768		$	197,087		$	171,009		$	96,586		$	10,161		$	15,015		$	707,626		$	1,380,071	51.3	%
Commercial and industrial		31,806			16,162			2,683			91,277			36,414			7,521			185,863			480,129	38.7
Commercial construction		12,116			768			20,106			107			9,566			9,044			51,707			211,953	24.4
Total	$	261,690		$	214,017		$	193,798		$	187,970		$	56,141		$	31,580		$	945,196		$	2,072,153	45.6	%
Percent to total commercial loans		12.6	%		10.3	%		9.4	%		9.1	%		2.7	%		1.5	%		45.6	%

Outstanding principal balance of:
Original commercial deferrals	$	46,121		$	13,320		$	112,242		$	13,761		$	13,424		$	15,623		$	214,491		$	289,187	74.2	%
Active deferrals	$	20,899		$	77		$	46,044		$	882		$	1,253		$	—		$	69,155		$	99,990	69.2	%
PPP loans	$	6,891		$	—		$	548		$	41,475		$	8,983		$	2,715		$	60,612		$	148,979	40.7	%
Nonaccrual loans	$	520		$	—		$	4,815		$	395		$	16		$	9,162		$	14,908		$	25,960	57.4	%

As of September 30, 2020, the retail sector was $261.7 million, or 12.6% of total commercial loans and included $217.8 million in commercial real estate loans, $31.8 million in commercial and industrial loans, and $12.1 million in commercial construction loans. PPP loans included in the sector totaled $6.9 million. We have provided deferrals for loans in this sector with outstanding principal balances of $46.1 million. We originated $16.3 million loans during the third

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

quarter that are within the retail sector. The new loans are supported by leases to retail space largely insulated from the pandemic, such as drug stores and grocery stores.

As of September 30, 2020, the office sector was $214.0 million, or 10.3% of total commercial loans, and included $197.1 million in commercial real estate loans, $16.2 million in commercial and industrial loans, and $768,000 in commercial construction loans. We provided deferrals for loans in the sector with outstanding principal balances of $13.3 million. No PPP loans were originated in this sector. We originated $619,000 in loans during the third quarter that are within the office sector.

As of September 30, 2020, the hotel sector was $193.8 million, or 9.4% of total commercial loans, and included $171.0 million in commercial real estate loans, $2.7 million in commercial and industrial loans, and $20.1 million in commercial construction loans. PPP loans included in the sector totaled $548,000. We have provided deferrals for loans in this sector with outstanding principal balances of $112.2 million, $61.3 million that have expired deferral periods and are paying as agreed, and $4.9 million that have expired deferral periods and are greater than 30 days delinquent. In addition, we have provided other short-term relief through our payment deferral program for certain commercial, mortgage, and consumer loans as described above for loans in this sector with outstanding principal balances of $7.7 million. At September 30, 2020, nonperforming loans included in the hotel sector amounted to $4.8 million. The increase from the second quarter reflects one loan totaling $1.4 million that is on nonaccrual and for which we subsequently entered into a deferral agreement.

The health and social services sector amounted to $188.0 million, or 9.1% of total commercial loans, as of September 30, 2020 and included $96.6 million in commercial real estate loans, $91.3 million in commercial and industrial loans, and $107,000 in commercial construction loans. PPP loans included in the sector totaled $41.5 million, and we have provided deferrals for loans in this sector with outstanding principal balances of $13.8 million. We originated $12.7 million loans during the third quarter that are within this sector.

As of September 30, 2020, the restaurant sector amounted to $56.1 million, or 2.7% of total commercial loans, including $9.0 million in PPP loans. We provided deferrals for loans in this sector with outstanding principal balances of $13.4 million. The recreation sector amounted to $31.6 million, or 1.5% of total commercial loans, including $2.7 million in PPP loans. We provided deferrals for loans in this sector with outstanding principal balances of $15.6 million. Included in the recreation sector is a $9.2 million nonaccrual loan with an allocated reserve of $254,000 secured by a recreational facility for which credit deterioration began prior to the COVID-19 pandemic.

The loan portfolio has not experienced significant credit quality deterioration as of September 30, 2020, however, the continuing impact and uncertain nature of the COVID-19 pandemic may result in increases in delinquencies, charge-offs and loan modifications in these portfolios through the remainder of the year. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to impact the magnitude of loan loss provisions and allowance for loan losses.

While interest and fees will continue to accrue on short term deferrals, the breadth of the economic impact may affect our borrowers’ ability to repay in future periods. Should eventual credit losses on these deferred payments emerge, interest income and fees in future periods could be negatively impacted.

Management performed an interim impairment assessment on goodwill as a result of changes in the macroeconomic environment resulting from the COVID-19 pandemic during the second quarter. The results of the interim impairment assessment indicated that the remaining fair value exceeded the carrying value for both reporting units. The COVID-19 pandemic could cause further and sustained decline in the Company’s stock price or the occurrence of additional valuation triggering events that could result in an impairment charge to earnings.

Conversion and Reorganization

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Mutual Bancshares, a mutual holding company (the “MHC”). The Company sold 31,036,812 shares of common stock at $10.00 per share in the Offering, resulting in net cash proceeds of $304.1 million. In addition, each share of the Company common stock owned by shareholders other than the MHC prior to the Offering was exchanged for 1.795431 shares of Company common stock, for a total of 12,162,763 shares of Company common stock.

As a result of the Offering, all shares and per share information has been revised to reflect the 1.795431 exchange ratio. The revised financial information presented in this Form 10-Q is derived from the consolidated financial statements of the Company.

Business Combination

On October 5, 2018, the Company completed the acquisition of Coastway Bancorp, Inc. (“Coastway”), the holding company of Coastway Community Bank, in an all cash transaction valued at approximately $125.6 million.

Comparison of Financial Condition at September 30, 2020 and December 31, 2019

Total Assets. Total assets increased $369.4 million, or 9.1%, to $4.43 billion at September 30, 2020 from $4.06 billion at December 31, 2019. The increase primarily reflects an increase of $319.1 million in net loans, a $79.8 million increase in loans held for sale, and a $36.2 million increase in other assets partially offset by a $74.1 million decrease in cash and cash equivalents. The increase in other assets reflects a $29.5 million increase unrealized gain in back-to-back commercial loan swap contracts with a corresponding increase in other liabilities and a $14.3 million increase in derivative loan commitments as a result of the increase in residential real estate mortgage originations.

Cash and Cash Equivalents. Cash and cash equivalents decreased $74.1 million to $137.5 million at September 30, 2020 from $211.6 million at December 31, 2019 as excess cash was used to pay down short-term FHLB borrowings.

Loans Held for Sale. Loans held for sale at September 30, 2020 were $190.4 million, an increase of $79.8 million from $110.6 million at December 31, 2019, reflecting strong residential mortgage loan demand continuing into the third quarter of 2020.

Loans, net. At September 30, 2020, net loans were $3.47 billion, an increase of $319.1 million, or 10.1%, from $3.15 billion at December 31, 2019, primarily due to an increase in commercial real estate loans, commercial and industrial loans, commercial construction loans, one- to four-family residential real estate loans, and residential construction loans partially offset by a decrease in consumer loans and home equity lines of credit and second mortgage loans. Total commercial loans at September 30, 2020 were $2.07 billion, an increase of $443.6 million, or 27.2%, from $1.63 billion at December 31, 2019. The increase is due to the origination of $152.6 million in PPP loans and also reflects our business strategy to increase commercial lending. Residential real estate loans increased $23.9 million, or 2.2%, and consumer loans decreased $123.1 million, or 28.3%. The Bank has purchased $292.7 million in loans from HarborOne Mortgage in 2020. The allowance for loan losses was $49.2 million at September 30, 2020 and $24.1 million at December 31, 2019, reflecting provision for loan losses recorded for the impact of the COVID-19 pandemic.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The following table provides the composition of our loan portfolio at the dates indicated:


	September 30, 2020				December 31, 2019
	Amount		Percent		Amount		Percent

	(dollars in thousands)

Residential real estate:
One- to four-family	$	954,198	27.1	%	$	937,305	29.5	%
Second mortgages and equity lines of credit		150,315	4.3			155,716	4.9
Residential construction		26,422	0.8			14,055	0.4
Total residential real estate		1,130,935	32.2			1,107,076	34.8
Commercial:
Commercial real estate		1,380,071	39.3			1,168,412	36.8
Commercial construction		211,953	6.0			153,907	4.9
Commercial and industrial		480,129	13.7			306,282	9.7
Total commercial loans		2,072,153	58.9			1,628,601	51.4
Consumer:
Auto		29,870	0.8			49,686	1.6
Auto lease loans		273,728	7.8			374,906	11.8
Personal		9,145	0.3			11,289	0.4
Total consumer		312,743	8.9			435,881	13.8
Total loans		3,515,831	100.0	%		3,171,558	100.0	%
Allowance for loan losses		(49,223)				(24,060)
Loans, net	$	3,466,608			$	3,147,498

Securities. Total investment securities at September 30, 2020 were $280.3 million, an increase of $14.5 million, or 5.4%, from $265.8 million at December 31, 2019. In the first quarter of 2020, with intention to reduce credit risk in the investment portfolio, held to maturity securities were sold and as a result the remaining held to maturity securities were transferred to the available for sale category. As of September 30, 2020, there were $72.3 million in sales of investment securities with a gain of $2.5 million and purchases of $153.7 million in U.S. government agency mortgage-backed securities. The following table provides the composition of our securities available for sale and held to maturity at the dates indicated:


	September 30, 2020				December 31, 2019
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

	(in thousands)

Securities available for sale:
Debt securities:
U.S. government and government-sponsored enterprise obligations	$	10,003	$	10,137	$	14,994	$	15,204
U.S. government agency and government-sponsored mortgage-backed and collateralized mortgage obligations		249,747		252,767		190,119		191,546
SBA asset-backed securities		16,458		17,404		32,461		32,723
Municipal bonds		—		—		—		—
Total securities available for sale	$	276,208	$	280,308	$	237,574	$	239,473

Securities held to maturity:
Debt securities:
U.S. government agency and government-sponsored mortgage-backed and collateralized mortgage obligations	$	—	$	—	$	14,115	$	14,264
SBA asset-backed securities		—		—		5,308		5,432
Other bonds and obligations:
State and political subdivisions		—		—		6,949		7,231
Total securities held to maturity	$	—	$	—	$	26,372	$	26,927

Mortgage servicing rights. Mortgage servicing rights (“MSRs”) are created as a result of our mortgage banking origination activities and accounted for at fair value. At September 30, 2020, we serviced mortgage loans for others with an aggregate outstanding principal balance of $2.65 billion. Total MSRs were $20.2 million at September 30, 2020 and $17.2 million at December 31, 2019.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Management has made the strategic decision not to hedge mortgage servicing assets at present. Therefore, any future declines in interest rates would likely cause decreases in the fair value of the MSRs, and a corresponding decrease in earnings, whereas increases in interest rates would result in increases in fair value, and a corresponding increase in earnings. MSRs recorded in the second half of 2020 may be less sensitive to falling rates in the future as they were originated in a low mortgage rate environment. Management may choose to hedge the mortgage servicing assets in the future or limit the balance of MSRs by selling them or selling loans with the servicing released.

Deposits. Deposits increased $423.0 million, or 14.4%, to $3.37 billion at September 30, 2020 from $2.94 billion at December 31, 2019. The following table sets forth information concerning the composition of deposits:


	September 30,		December 31,		Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Noninterest-bearing deposits	$	650,336	$	406,403	$	243,933		60.0	%
NOW accounts		201,707		165,790		35,917		21.7
Regular savings		912,017		620,705		291,312		46.9
Money market accounts		567,561		575,881		(8,320)		(1.4)
Term certificate accounts		650,728		785,005		(134,277)		(17.1)
Consumer and business deposits		2,982,349		2,553,784		428,565		16.8
Municipal deposits		254,441		286,932		(32,491)		(11.3)
Wholesale deposits		129,098		102,157		26,941		26.4
Total deposits	$	3,365,888	$	2,942,873	$	423,015		14.4	%

Reciprocal deposits	$	107,793	$	277,874	$	(170,081)		(61.2)	%

The growth in deposits was driven by an increase of $428.6 million in consumer and business deposits and a $26.9 million increase in wholesale deposits, partially offset by a $32.5 million decrease in municipal deposits. Consumer and business deposit growth was primarily a response to marketing and promotions of retail products and customers maintaining liquidity due to market uncertainty as a result of the COVID-19 pandemic. At September 30, 2020, wholesale deposits included brokered deposits of $117.0 million and $12.1 million in certificates of deposits from institutional investors. We participate in a reciprocal deposit program that provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. Total deposits included $107.8 million in reciprocal deposits, including $4.9 million in municipal deposits. The wholesale deposits provide a channel for the Company to seek additional funding outside the Company’s core market.

Borrowings. Total borrowings from the FHLB decreased $118.0 million, or 33.3%, to $236.1 million at September 30, 2020 from $354.1 million at December 31, 2019 as excess funds were utilized to pay down FHLB borrowings.

Stockholders’ equity. Total stockholders’ equity was $694.1 million at September 30, 2020 compared to $665.8 million at December 31, 2019.

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

HarborOne Bancorp, Inc. Consolidated

Overview. Consolidated net income for the three and nine months ended September 30, 2020 was $11.9 million and $27.2 million, respectively, compared to net income of $7.1 million and $14.0 million for the three and nine months ended September 30, 2019, respectively.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Average Balances and Yields. The following table sets forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated, on a consolidated basis. Interest income on tax-exempt securities has been adjusted to a fully taxable-equivalent basis using a federal tax rate of 21%. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis


	Three Months Ended September 30,
	2020							2019
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost		Balance			Interest		Cost

	(dollars in thousands)

Interest-earning assets:
Investment securities ⁽¹⁾	$	269,477		$	1,319	1.95	%	$	224,379		$	1,562	2.76	%
Other interest-earning assets		121,384			175	0.57			185,063			1,211	2.59
Loans held for sale		139,418			1,060	3.02			74,327			747	3.99
Loans
Commercial loans ⁽²⁾		2,017,492			19,066	3.76			1,511,487			18,797	4.93
Residential real estate loans⁽²⁾		1,135,947			11,833	4.14			1,119,742			12,704	4.50
Consumer loans ⁽²⁾		333,623			3,597	4.29			454,837			4,729	4.13
Total loans		3,487,062			34,496	3.94			3,086,066			36,230	4.66
Total interest-earning assets		4,017,341			37,050	3.67			3,569,835			39,750	4.42
Noninterest-earning assets		333,444							278,976
Total assets	$	4,350,785						$	3,848,811
Interest-bearing liabilities:
Savings accounts	$	897,751			589	0.26		$	564,040			902	0.63
NOW accounts		199,982			39	0.08			139,773			26	0.07
Money market accounts		825,732			745	0.36			879,694			3,417	1.54
Certificates of deposit		684,002			2,895	1.68			831,262			5,016	2.39
Brokered deposits		139,887			252	0.72			98,278			611	2.47
Total interest-bearing deposits		2,747,354			4,520	0.65			2,513,047			9,972	1.57
FHLB advances		149,750			835	2.22			213,578			1,249	2.32
Subordinated debentures		33,983			524	6.13			33,858			524	6.14
Total borrowings		183,733			1,359	2.94			247,436			1,773	2.84
Total interest-bearing liabilities		2,931,087			5,879	0.80			2,760,483			11,745	1.69
Noninterest-bearing liabilities:
Noninterest-bearing deposits		641,353							515,612
Other noninterest-bearing liabilities		89,319							52,357
Total liabilities		3,661,759							3,328,452
Total equity		689,026							520,359
Total liabilities and equity	$	4,350,785						$	3,848,811
Tax equivalent net interest income					31,171							28,005
Tax equivalent interest rate spread ⁽³⁾						2.87	%						2.73	%
Less: tax equivalent adjustment					2							20
Net interest income as reported				$	31,169						$	27,985
Net interest-earning assets ⁽⁴⁾	$	1,086,254						$	809,352
Net interest margin ⁽⁵⁾						3.09	%						3.11	%
Tax equivalent effect						—							—
Net interest margin on a fully tax equivalent basis						3.09	%						3.11	%
Ratio of interest-earning assets to interest-bearing liabilities		137.06	%						129.32	%

Supplemental information:
Total deposits, including demand deposits	$	3,388,707		$	4,520			$	3,028,659		$	9,972
Cost of total deposits						0.53	%						1.31	%
Total funding liabilities, including demand deposits	$	3,572,440		$	5,879			$	3,276,095		$	11,745
Cost of total funding liabilities						0.65	%						1.42	%


⁽¹⁾ Includes securities available for sale and securities held to maturity. Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21%. The yield on investments before tax equivalent adjustments was 1.95% and 2.73% for the quarters ended September 30, 2020 and 2019, respectively.
⁽²⁾ Includes nonaccruing loan balances and interest received on such loans.
⁽³⁾ Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
⁽⁴⁾ Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
⁽⁵⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis


	Nine Months Ended September 30,
	2020							2019
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost		Balance			Interest		Cost

	(dollars in thousands)

Interest-earning assets:
Investment securities ⁽¹⁾		261,740			4,571	2.33			247,782			5,328	2.87
Other interest-earning assets		176,745			1,173	0.89			83,803			2,142	3.42
Loans held for sale		106,790			2,625	3.28			50,771			1,647	4.34
Loans
Commercial loans ⁽²⁾		1,846,462			55,385	4.01			1,447,128			54,855	5.07
Residential real estate loans⁽²⁾		1,120,065			35,188	4.20			1,119,185			37,175	4.44
Consumer loans ⁽²⁾		373,809			11,918	4.26			466,669			14,003	4.01
Total loans		3,340,336			102,491	4.10			3,032,982			106,033	4.67
Total interest-earning assets		3,885,611			110,860	3.81			3,415,338			115,150	4.51
Noninterest-earning assets		327,385							264,336
Total assets	$	4,212,996						$	3,679,674
Interest-bearing liabilities:
Savings accounts	$	809,106			2,721	0.45		$	526,078			1,830	0.47
NOW accounts		182,146			103	0.08			138,957			76	0.07
Money market accounts		829,263			4,535	0.73			849,254			9,561	1.51
Certificates of deposit		736,355			10,724	1.95			811,052			14,155	2.33
Brokered deposits		99,739			935	1.25			107,243			1,955	2.44
Total interest-bearing deposits		2,656,609			19,018	0.96			2,432,584			27,577	1.52
FHLB advances		216,333			2,933	1.81			298,643			5,203	2.33
Subordinated debentures		33,951			1,571	6.18			33,835			1,553	6.14
Total borrowings		250,284			4,504	2.40			332,478			6,756	2.72
Total interest-bearing liabilities		2,906,893			23,522	1.08			2,765,062			34,333	1.66
Noninterest-bearing liabilities:
Noninterest-bearing deposits		549,233							446,970
Other noninterest-bearing liabilities		76,660							51,252
Total liabilities		3,532,786							3,263,284
Total equity		680,210							416,390
Total liabilities and equity	$	4,212,996						$	3,679,674
Tax equivalent net interest income					87,338							80,817
Tax equivalent interest rate spread ⁽³⁾						2.73	%						2.85	%
Less: tax equivalent adjustment					22							89
Net interest income as reported				$	87,316						$	80,728
Net interest-earning assets ⁽⁴⁾	$	978,718						$	650,276
Net interest margin ⁽⁵⁾						3.00	%						3.16	%
Tax equivalent effect						—							—
Net interest margin on a fully tax equivalent basis						3.00	%						3.16	%
Ratio of interest-earning assets to interest-bearing liabilities		133.67	%						123.52	%

Supplemental information:
Total deposits, including demand deposits	$	3,205,842		$	19,018			$	2,879,554		$	27,577
Cost of total deposits						0.79	%						1.28	%
Total funding liabilities, including demand deposits	$	3,456,126		$	23,522			$	3,212,032		$	34,333
Cost of total funding liabilities						0.91	%						1.43	%


⁽¹⁾ Includes securities available for sale and securities held to maturity. Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21%. The yield on investments before tax equivalent adjustments was 2.32% and 2.83% for the nine months ended September 30, 2020 and 2019, respectively.
⁽²⁾ Includes nonaccruing loan balances and interest received on such loans.
⁽³⁾ Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
⁽⁴⁾ Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
⁽⁵⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Rate/Volume Analysis. The following table presents, on a tax equivalent basis, the effects of changing rates and volumes on our net interest income for the periods indicated, on a consolidated basis. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020 v. 2019						2020 v. 2019
	Increase (Decrease) Due to Changes in				Total		Increase (Decrease) Due to Changes in				Total
	Volume		Rate		Increase (Decrease)		Volume		Rate		Increase (Decrease)

	(in thousands)

Interest-earning assets:
Investment securities	$	272	$	(515)	$	(243)	$	289	$	(1,046)	$	(757)
Other interest-earning assets		(317)		(719)		(1,036)		1,327		(2,296)		(969)
Loans held for sale		527		(214)		313		1,460		(482)		978
Loans
Commercial loans		5,373		(5,104)		269		13,477		(12,947)		530
Residential real estate loans		238		(1,109)		(871)		283		(2,270)		(1,987)
Consumer loans		(1,145)		13		(1,132)		(2,492)		407		(2,085)
Total loans		4,466		(6,200)		(1,734)		11,268		(14,810)		(3,542)
Total interest-earning assets		4,948		(7,648)		(2,700)		14,344		(18,634)		(4,290)
Interest-bearing liabilities:
Savings accounts		373		(686)		(313)		969		(78)		891
NOW accounts		20		(7)		13		42		(15)		27
Money market accounts		(166)		(2,506)		(2,672)		(220)		(4,806)		(5,026)
Certificates of deposit		(789)		(1,332)		(2,121)		(1,172)		(2,259)		(3,431)
Brokered deposit		187		(546)		(359)		(128)		(892)		(1,020)
Total interest-bearing deposits		(375)		(5,077)		(5,452)		(509)		(8,050)		(8,559)
FHLB advances		(361)		(53)		(414)		(1,256)		(1,014)		(2,270)
Subordinated debentures		—		—		—		5		13		18
Total borrowings		(361)		(53)		(414)		(1,251)		(1,001)		(2,252)
Total interest-bearing liabilities		(736)		(5,130)		(5,866)		(1,760)		(9,051)		(10,811)
Change in net interest income	$	5,684	$	(2,518)	$	3,166	$	16,104	$	(9,583)	$	6,521

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Interest and Dividend Income. Interest and dividend income on a tax equivalent basis decreased $2.7 million, or 6.8%, to $37.1 million for the three months ended September 30, 2020, compared to $39.8 million for the three months ended September 30, 2019. All adjustable rate products were negatively impacted by the Federal Reserve cuts to the federal funds rate, and although loan origination volume was strong, lower rates on loan originations also negatively impacted interest and dividend income. For the three months ended September 30, 2020, the primary components of the decrease were a $1.7 million decrease in interest on total loans, a $243,000 decrease investment income and a $1.0 million decrease in interest on other interest earning assets, partially offset by a $313,000 increase in interest on loans held for sale. The increase in interest on loans held for sale reflected a higher average balance due to residential real estate mortgage loan demand. The decrease in interest income on loans reflected the 72 basis points decrease in the average yield on loans, partially offset by the $401.0 million, or 13.0% increase in the average total loan balance. Commercial loans were the primary driver of the average balance growth and yield decrease.

Compared to the first nine months of 2019, interest and dividend income decreased $4.3 million, or 3.7%, reflecting similar trends as discussed in the quarter over quarter results. Average loans increased $307.4 million, or 10.1% offset by a 57 basis point decrease in the yield resulting in a $3.5 million decrease in interest income on loans. Average loans held for sale increased $56.0 million, or 110.3% partially offset by a 106 basis point decrease in yield resulting in a $978,000 increase in interest income loans held for sale.

Interest Expense. Interest expense decreased $5.9 million, or 49.9%, to $5.9 million for the three months ended September 30, 2020 from $11.7 million for the three months ended September 30, 2019. The decrease resulted from a $5.5 million decrease in interest expense on deposits and a $414,000 decrease in interest expense on FHLB borrowings. The decrease in interest expense on deposits reflected a 92 basis point decrease in the cost of interest bearing deposits, partially offset by $234.3 million, or 9.3%, increase in the average balance of interest-bearing deposits. Increases in the average balances were driven by organic growth. The decrease in cost of interest-bearing deposits was driven by rate decreases primarily in money market and certificate of deposit products and the resulting shift in balances to the savings product. The average balance of savings accounts increased $333.7 million, or 59.2%, and the average cost of savings accounts decreased 37 basis points. The cost of money market deposits decreased 118 basis points to 0.36% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and the average balance decreased 6.1%. Average certificates of deposit decreased by $147.3 million, or 17.7%, and the cost of certificates of deposits was 1.68% for the third quarter of 2020 compared to 2.39% for the third quarter of 2019. The decrease in interest expense on FHLB advances resulted from a 10 basis point decrease in the cost of FHLB advances and a $63.8 million, or 29.9%, decrease in average balances.

Compared to the first nine months of 2019, interest expense decreased $10.8 million, or 31.5% to $23.5 million from $34.3 million reflecting similar trends discussed in the quarter over quarter results. Average interest bearing deposits increased $224.0 million, or 9.2% and the cost of interest-bearing deposits decreased 56 basis points year over year. The decrease in interest expense on FHLB borrowings is due to a 52 basis point decrease in the cost of borrowed funds and the average balance decrease of $82.3 million, or 27.6%.

Net Interest and Dividend Income. Net interest and dividend income on a tax equivalent basis increased $3.2 million, or 11.3%, to $31.2 million for the three months ended September 30, 2020 from $28.0 million for the three months ended September 30, 2019, primarily as a result of deposit account repricing and commercial loan growth. The tax equivalent net interest spread increased 14 basis points to 2.87% for the three months ended September 30, 2020 from 2.73% for the three months ended September 30, 2019, and net interest margin on a tax equivalent basis decreased 2 basis points to 3.09% for the three months ended September 30, 2020 from 3.11% for three months ended September 30, 2019.

Compared to the first nine months of 2019, net interest and dividend income on a tax equivalent basis increased $6.5 million, or 8.1%, to $87.3 million from $80.8 million. The tax equivalent net interest spread decreased 12 basis points to 2.73% for the nine months ended September 30, 2020 from 2.85% for the nine months ended September 30, 2019, and net interest margin on a tax equivalent basis decreased by 16 basis points to 3.00% for the nine months ended September 30, 2020 from 3.16% for the nine months ended September 30, 2019.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Income Tax Provision. The provision for income taxes and effective tax rate for the three months ended September 30, 2020 was $4.6 million and 27.7%, respectively, compared to $1.1 million and 12.9%, respectively, for the three months ended September 30, 2019. Income tax expense for the quarter ended September 30, 2019 was impacted by the 2015 federal tax refund of $1.3 million and the 2015 Massachusetts state tax refund of $39,700 recognized in the quarter.

The provision for income taxes and effective tax rate for the nine months ended September 30, 2020 was $9.9 million and 26.8%, respectively, compared to $2.2 million and 13.8%, respectively, for the nine months ended September 30, 2019. Income tax expense for the nine months ended September 30, 2019 was impacted by the 2015 tax refunds noted above, the 2013 federal tax refund of $603,000 and the 2013 Massachusetts state tax refund of $211,000 recognized in the second quarter of 2019 and the 2014 Massachusetts state refund of $320,000 recognized in the first quarter of 2019. The refunds were a result of previously amended returns filed for those years.

Segments. The Company has two reportable segments: HarborOne Bank and HarborOne Mortgage. Revenue from HarborOne Bank consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from HarborOne Mortgage is comprised of interest earned on loans and fees received as a result of the residential mortgage origination, sale and servicing process. Residential real estate portfolio loans are originated by HarborOne Mortgage and purchased by the Bank.

The table below shows the results of operations for the Company’s segments, HarborOne Bank and HarborOne Mortgage, for the three and nine months ended September 30, 2020 and 2019, and the increase or decrease in those results:


	HarborOne Bank								HarborOne Mortgage
	Three Months Ended								Three Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent		2020		2019		Dollars		Percent

	(dollars in thousands)

Net interest and dividend income	$	30,599	$	27,855	$	2,744	9.9	%	$	1,000	$	285	$	715	250.9	%
Provision for loan losses		13,454		889		12,565	1,413.4			—		—		—	—
Net interest and dividend income, after provision for loan losses		17,145		26,966		(9,821)	(36.4)			1,000		285		715	250.9
Mortgage banking income:
Gain on sale of mortgage loans		—		—		—	—			34,055		11,015		23,040	209.2
Intersegment gain (loss)		(645)		(393)		(252)	(64.1)			645		393		252	64.1
Changes in mortgage servicing rights fair value		(354)		(591)		237	40.1			161		(1,883)		2,044	108.6
Other		334		369		(35)	(9.5)			3,947		2,595		1,352	52.1
Total mortgage banking income (loss)		(665)		(615)		(50)	(8.1)			38,808		12,120		26,688	220.2
Other noninterest income (loss)		6,326		5,772		554	9.6			(8)		(4)		(4)	(100.0)
Total noninterest income		5,661		5,157		504	9.8			38,800		12,116		26,684	220.2
Noninterest expense		26,300		24,405		1,895	7.8			19,156		11,227		7,929	70.6
Income (loss) before income taxes		(3,494)		7,718		(11,212)	(145.3)			20,644		1,174		19,470	NM
Provision (benefit) for income taxes		571		1,019		(448)	(44.0)			4,550		171		4,379	NM
Net income (loss)	$	(4,065)	$	6,699	$	(10,764)	(160.7)	%	$	16,094	$	1,003	$	15,091	NM	%

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis


	HarborOne Bank								HarborOne Mortgage
	Nine Months Ended								Nine Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent		2020		2019		Dollars		Percent

	(dollars in thousands)


Net interest and dividend income	$	86,248	$	81,296	$	4,952	6.1	%	$	2,020	$	604	$	1,416	234.4	%
Provision for loan losses		27,207		3,496		23,711	678.2			—		—		—	—
Net interest and dividend income, after provision for loan losses		59,041		77,800		(18,759)	(24.1)			2,020		604		1,416	234.4
Mortgage banking income:
Gain on sale of mortgage loans		—		1		(1)	(100.0)			77,195		24,085		53,110	220.5
Intersegment gain (loss)		(2,444)		(866)		(1,578)	(182.2)			2,444		866		1,578	182.2
Changes in mortgage servicing rights fair value		(2,014)		(1,599)		(415)	(26.0)			(3,677)		(5,267)		1,590	30.2
Other		1,031		1,127		(96)	(8.5)			9,931		6,315		3,616	57.3
Total mortgage banking income (loss)		(3,427)		(1,337)		(2,090)	(156.3)			85,893		25,999		59,894	230.4
Other noninterest income (loss)		19,640		18,191		1,449	8.0			(141)		(20)		(121)	(605.0)
Total noninterest income		16,213		16,854		(641)	(3.8)			85,752		25,979		59,773	230.1
Noninterest expense		75,806		74,527		1,279	1.7			48,235		27,496		20,739	75.4
Income (loss) before income taxes		(552)		20,127		(20,679)	(102.7)			39,537		(913)		40,450	NM
Provision (benefit) for income taxes		2,199		3,267		(1,068)	(32.7)			8,667		(256)		8,923	NM
Net income (loss)	$	(2,751)	$	16,860	$	(19,611)	(116.3)	%	$	30,870	$	(657)	$	31,527	NM	%

HarborOne Bank Segment

Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

Net Income. The Bank’s net income decreased by $10.8 million to a net loss of $4.1 million for the three months ended September 30, 2020 compared to net income of $6.7 million for the three months ended September 30, 2019. Pre-tax loss was $3.5 million for the three months ended September 30, 2020, an $11.2 million decrease from the three months ended September 30, 2019. The decrease in pre-tax income reflects an increase of $12.6 million in the provision for loan losses, and a $1.9 million increase in noninterest expense partially offset by a $2.7 million increase in net interest income and a $504,000 increase in noninterest income. The provision for income taxes decreased $448,000.

Compared to the first nine months of 2019, the Bank’s net income for the nine months ended September 30, 2020 decreased $19.6 million to a net loss of $2.8 million from $16.9 million. Pre-tax income decreased $20.7 million, or 102.7%, due to a $23.7 million increase in provision for loan losses, a $1.3 million increase in noninterest expense, and a $641,000 million decrease in noninterest income partially offset by a $5.0 million increase in net interest and dividend income. The provision for income taxes decreased $1.1 million.

Provision for Loan Losses. The provision for loan losses for the three and nine months ended September 30, 2020 was $13.5 million and $27.2 million, respectively, compared to provision for loan losses of $889,000 and $3.5 million, respectively, for the three and nine months ended September 30, 2019. Changes in the provision for loan losses are based on management’s assessment of loan portfolio growth and composition changes, historical charge-off trends, and ongoing evaluation of credit quality and current economic conditions.

The provision for loan losses for the three and nine months ended September 30, 2020 includes adjustments for our quarterly analysis of our historical and peer loss experience rates, commercial real estate loan growth, and replenishment driven by charge off activity. The three and nine months ended September 30, 2020 also include $10.7 million and $17.9 million, respectively of provision directly related to the estimate of inherent losses resulting from the impact of the COVID-19 pandemic. The provision for loan losses for the three and nine months ended September 30, 2019 primarily reflected commercial real estate loan growth.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

In estimating the provision for the COVID-19 pandemic, management considered economic factors, including unemployment rates and the interest rate environment, the volume and dollar amount of requests for payment deferrals, the loan risk profile of each loan type, and if the loans were purchased. The additional provisions provided to each category for the quarter ranged from 26 to 55 basis points and amounted to allocations of $2.5 million to the residential real estate portfolio, $7.0 million to the commercial portfolio and $1.2 million to the consumer portfolio.

Net charge-offs were $338,000 and $2.0 million for the three and nine months ended September 30, 2020 compared to $106,000 and $1.1 million for the three and nine months ended September 30, 2019. Net charge-offs to average loans outstanding on an annualized basis for the three and nine months ended September 30, 2020 were 0.04% and 0.08%, respectively, compared to 0.01% and 0.05% for the three and nine months ended September 30, 2019. The 2020 year-to-date charge-offs includes a $1.2 million commercial real estate charge-off on a loan acquired from Coastway, secured by a hotel property, in the amount of $3.1 million, whose credit deterioration was unrelated to the COVID-19 pandemic. At September 30, 2020, nonperforming assets were $40.9 million and nonperforming assets to total assets were 0.93% as compared to $27.9 million and 0.71%, respectively, at September 30, 2019. The increase in nonperforming assets was primarily due to commercial real estate loans and commercial and industrial loans. As of September 30, 2020, the increase in nonperforming loans was not primarily a result of the COVID-19 pandemic.

Noninterest Income. Total noninterest income was $5.7 million and $16.2 million for the three and nine months ended September 30, 2020, respectively, compared to $5.2 million and $16.9 million for the respective prior year periods. The following table sets forth the components of noninterest income:


	Three Months Ended September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Intersegment loss		(645)		(393)		(252)		(64.1)
Secondary market loan servicing fees, net of guarantee fees		334		369		(35)		(9.5)
Changes in mortgage servicing rights fair value		(354)		(591)		237		40.1
Total mortgage banking income		(665)		(615)		(50)		(8.1)	%
Interchange fees		2,384		2,100		284		13.5
Other deposit account fees		1,067		2,086		(1,019)		(48.8)
Income on retirement plan annuities		105		104		1		1.0
Gain on sale and call of securities		—		77		(77)		(100.0)
Bank-owned life insurance income		560		256		304		118.8
Swap fee income		119		858		(739)		(86.1)
Other		2,091		291		1,800		618.6
Total noninterest income	$	5,661	$	5,157	$	504		9.8	%


	Nine Months Ended September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Gain on sale of mortgage loans	$	—	$	1	$	(1)		(100.0)	%
Intersegment loss		(2,444)		(866)		(1,578)		(182.2)
Secondary market loan servicing fees, net of guarantee fees		1,031		1,127		(96)		(8.5)
Changes in mortgage servicing rights fair value		(2,014)		(1,599)		(415)		(26.0)
Total mortgage banking income		(3,427)		(1,337)		(2,090)		(156.3)	%
Interchange fees		6,560		6,194		366		5.9
Other deposit account fees		3,791		5,826		(2,035)		(34.9)
Income on retirement plan annuities		309		300		9		3.0
Gain on sale and call of securities		2,533		1,344		1,189		88.5
Bank-owned life insurance income		1,665		762		903		118.5
Swap fee income		1,261		2,218		(957)		(43.1)
Other		3,521		1,547		1,974		127.6
Total noninterest income	$	16,213	$	16,854	$	(641)		(3.8)	%

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The primary reasons for the variances within the noninterest income categories shown in the preceding table are noted below:

●	The Bank records an intersegment loss on loans purchased from HarborOne Mortgage that is offset in consolidation. The Bank has purchased $292.7 million residential mortgage loans from HarborOne Mortgage during the nine months ended September 30, 2020.

●

The change in the MSR fair value reflects accelerated amortization due to mortgage loan payoffs and the 123 basis point decrease in the 10-year Treasury Constant Maturity rate over the nine months ended September 30, 2020. As interest rates fall, prepayment speeds tend to increase and MSR fair value decreases.

●	The decrease in other deposit account fees reflects waived fees in response to customer needs related to the COVID-19 pandemic

●	Swap fee income is collected and recorded at the time the swap contract is entered into and therefore income fluctuates as a function of the swap agreements entered into in a period.

●	The gain on sale of securities is the result of the sale of securities with proceeds of $74.0 million.

●	The increase in bank-owned life insurance is due to a $41.4 million increase in the balance of bank-owned life insurance.

●	Other income includes $1.6 million in income from the sale of VISA B shares held in the investment portfolio.

Noninterest Expense. Total noninterest expense was $26.3 million and $75.8 million for the three and nine months ended September 30, 2020, respectively, compared to $24.4 million and $74.5 million for the respective prior year periods. The following table sets forth the components of noninterest expense:


	Three Months Ended September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	15,313	$	14,767	$	546		3.7	%
Occupancy and equipment		3,774		3,421		353		10.3
Data processing expenses		2,071		2,110		(39)		(1.8)
Loan expenses		350		423		(73)		(17.3)
Marketing		747		711		36		5.1
Deposit expenses		476		405		71		17.5
Postage and printing		391		381		10		2.6
Professional fees		1,009		586		423		72.2
Foreclosed and repossessed assets		27		42		(15)		(35.7)
Deposit insurance		309		(225)		534		237.3
Other expenses		1,833		1,784		49		2.7
Total noninterest expense	$	26,300	$	24,405	$	1,895		7.8	%

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis


	Nine Months Ended September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	41,863	$	42,600	$	(737)		(1.7)	%
Occupancy and equipment		10,843		10,802		41		0.4
Data processing expenses		6,377		6,230		147		2.4
Loan expenses		849		1,282		(433)		(33.8)
Marketing		2,552		2,666		(114)		(4.3)
Deposit expenses		1,436		1,189		247		20.8
Postage and printing		1,248		1,206		42		3.5
Professional fees		3,120		2,205		915		41.5
Foreclosed and repossessed assets		165		(34)		199		585.3
Deposit insurance		859		1,030		(171)		(16.6)
Other expenses		6,494		5,351		1,143		21.4
Total noninterest expense	$	75,806	$	74,527	$	1,279		1.7	%

The primary reasons for the significant variances within the noninterest expense categories shown in the preceding table are noted below:

●	The increase in compensation and benefits for the three and nine months ended September 30, 2020 primarily reflects timing of accruals for incentive programs. The 2020 results also include $522,000 in severance payments as a result of the staff realignment that was undertaken in the third quarter.

●	Fluctuations in professional expenses are generally due to timing and can fluctuate due to strategic efforts.

●

The quarter over quarter increase in deposit insurance expense reflects FDIC assessment credit awards recorded in the quarter ended September 30, 2019 and no such awards in 2020. The year over year decrease in deposit insurance reflects the reduction in assessment rate due to improved capital ratios as a result of the Offering.

●

Other expenses for the three and nine months ended September 30, 2020 include $71,000 and $1.8 million, respectively, in COVID-19 pandemic expenses partially offset by a decrease in core deposit intangible amortization of $170,000 and $511,000 during those periods. COVID-19 pandemic expense includes costs for personnel, cleaning and other initiatives to support our employees and customers.

HarborOne Mortgage Segment

Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

Net Income. HarborOne Mortgage recorded net income of $16.1 million and $30.9 million for the three and nine months ended September 30, 2020, respectively, as compared to net income of $1.0 million and a net loss of $657,000 for the respective prior year periods. HarborOne Mortgage segment’s results are heavily impacted by prevailing rates, refinancing activity and home sales.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Income. Total noninterest income was $38.8 million and $85.8 million for the three and nine months ended September 30, 2020, respectively, as compared to $12.1 million and $26.0 million for the respective prior year periods. Noninterest income is primarily from mortgage banking income for which the following table provides further detail:


	Three Months Ended September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Gain on sale of mortgage loans	$	34,055	$	11,015	$	23,040		209.2	%
Intersegment gain		645		393		252		64.1
Processing, underwriting and closing fees		2,964		1,705		1,259		73.8
Secondary market loan servicing fees net of guarantee fees		983		890		93		10.4
Changes in mortgage servicing rights fair value		161		(1,883)		2,044		108.6
Total mortgage banking income	$	38,808	$	12,120	$	26,688		220.2	%

Originated mortgage servicing rights included in gain on sale of mortgage loans	$	4,073	$	268	$	3,805		1,419.8	%
Change in 10-year Treasury Constant Maturity rate in basis points		3		(32)


	Nine Months Ended September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Gain on sale of mortgage loans	$	77,195	$	24,085	$	53,110		220.5	%
Intersegment gain		2,444		866		1,578		182.2
Processing, underwriting and closing fees		7,490		3,677		3,813		103.7
Secondary market loan servicing fees net of guarantee fees		2,441		2,638		(197)		(7.5)
Changes in mortgage servicing rights fair value		(3,677)		(5,267)		1,590		30.2
Total mortgage banking income	$	85,893	$	25,999	$	59,894		230.4	%

Originated mortgage servicing rights included in gain on sale of mortgage loans	$	8,164	$	564	$	7,600		1,347.5	%
Change in 10-year Treasury Constant Maturity rate in basis points		(123)		(101)

The primary reasons for the significant variances in the noninterest income category shown in the preceding table are noted below:

●

The change in the MSR fair value is consistent with the change in the 10-year Treasury Constant Maturity rate. As interest rates fall, prepayment speeds increase and resulting in a decrease in MSR fair value. The Federal Reserve cuts to the federal funds rate resulted in the 10-year Treasury Constant Maturity rate decreasing 123 basis points for the nine months ended September 30, 2020, negatively impacting the fair value of the mortgage servicing rights. Residential mortgage loan payoffs also resulted in accelerated amortization of MSRs of $823,000 and $2.1 million for the three and nine months ended September 30, 2020, respectively.

●	The gain on sale of mortgages and processing, underwriting and closing fees increased as residential mortgage originations increased primarily as a result of falling mortgage rates and a strong real estate market during the three and nine months ended September 30, 2020.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The following table provides additional loan production detail:


	Three Months Ended September 30,
	2020				2019
	Loan					Loan
	Amount		% of Total			Amount		% of Total

	(dollars in thousands)

Product Type
Conventional	$	626,010	79.3	%		$	333,728	78.2	%
Government		49,678	6.3				71,158	16.7
State Housing Agency		23,839	3.0				5,486	1.3
Jumbo		89,360	11.3				15,755	3.7
Seconds		185	0.0				293	0.1
Total	$	789,072	100.0	%		$	426,420	100.0	%

Purpose
Purchase	$	361,821	45.9	%		$	233,988	54.9	%
Refinance		415,738	52.7				187,460	43.9
Construction		11,513	1.5				4,972	1.2
Total	$	789,072	100.0	%		$	426,420	100.0	%


	Nine Months Ended September 30,
	2020				2019
	Loan				Loan
	Amount		% of Total		Amount		% of Total

	(dollars in thousands)

Product Type
Conventional	$	1,497,146	74.8	%	$	602,750	67.6	%
Government		116,642	5.8			147,164	16.5
State Housing Agency		57,065	2.9			39,492	4.4
Jumbo		329,658	16.5			102,252	11.5
Seconds		457	0.0			363	—
Total	$	2,000,968	100.0	%	$	892,021	100.0	%

Purpose
Purchase	$	738,555	36.9	%	$	580,669	65.1	%
Refinance		1,229,841	61.5			299,578	33.6
Construction		32,572	1.6			11,774	1.3
Total	$	2,000,968	100.0	%	$	892,021	100.0	%

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Expense. Total noninterest expense was $19.2 million and $48.2 million for the three and nine months ended September 30, 2020 compared to $11.2 million and $27.5 million for the prior year periods. The following tables set forth the components of noninterest expense:


	Three Months Ended September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	14,680	$	8,561	$	6,119		71.5	%
Occupancy and equipment		792		732		60		8.2
Data processing expenses		48		86		(38)		(44.2)
Loan expenses		2,839		1,281		1,558		121.6
Marketing		70		88		(18)		(20.5)
Postage and printing		31		37		(6)		(16.2)
Professional fees		309		266		43		16.2
Other expenses		387		176		211		119.9
Total noninterest expense	$	19,156	$	11,227	$	7,929		70.6	%


	Nine Months Ended September 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	37,092	$	20,557	$	16,535		80.4	%
Occupancy and equipment		2,406		2,183		223		10.2
Data processing expenses		200		211		(11)		(5.2)
Loan expenses		6,584		3,027		3,557		117.5
Marketing		198		268		(70)		(26.1)
Postage and printing		101		114		(13)		(11.4)
Professional fees		870		684		186		27.2
Other expenses		784		452		332		73.5
Total noninterest expense	$	48,235	$	27,496	$	20,739		75.4	%

The primary reasons for the significant variances within the noninterest expense categories shown in the preceding table are noted below:

●	Compensation and benefits increased for the three and nine months ended September 30, 2020 primarily reflecting commission expense consistent with the mortgage origination volumes.

●	Loan expense primarily is for expenses to originate loans and is consistent with mortgage origination volumes.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Asset Quality

The following table provides information with respect to our nonperforming assets, including TDRs, at the dates indicated. We did not have any accruing loans past due 90 days or more at the dates presented.


	September 30,			December 31,
	2020			2019

	(dollars in thousands)

Nonaccrual loans:
Residential real estate:
One- to four-family	$	11,925		$	10,610
Second mortgages and equity lines of credit		951			1,561
Commercial real estate		4,943			530
Commercial construction		10,939			11,244
Commercial and industrial		10,078			5,831
Consumer		1,191			545
Total nonaccrual loans ⁽¹⁾		40,027			30,321
Other real estate owned and repossessed assets:
One- to four-family residential real estate owned		297			298
Other repossessed assets		601			421
Total nonperforming assets		40,925			31,040
Performing troubled debt restructurings		13,280			15,104
Total nonperforming assets and performing troubled debt restructurings	$	54,205		$	46,144

Total nonperforming loans to total loans ⁽²⁾		1.14	%		0.96	%
Total nonperforming assets and performing troubled debt restructurings to total assets		1.22	%		1.14	%
Total nonperforming assets to total assets		0.93	%		0.76	%

⁽¹⁾ $3.7 million and $5.0 million of troubled debt restructurings are included in total nonaccrual loans at September 30, 2020 and December 31, 2019 respectively
⁽²⁾ Total loans are presented before allowance for loan losses, but include deferred loan origination costs (fees), net.

Income related to impaired loans included in interest income for the three and nine months ended in September 30, 2020 and 2019, amounted to $281,000 and $472,000, respectively. Income related to impaired loans included in interest income for the nine months ended September 30, 2020 and 2019, amounted to $864,000 and $1.4 million, respectively

The Company utilizes a ten-grade internal loan rating system for commercial real estate, commercial construction and commercial loans. Loans not rated consist primarily of residential construction loans and certain smaller balance commercial real estate and commercial loans that are managed by exception.

The following table presents our risk rated loans considered classified or special mention in accordance with our internal risk rating system:


	September 30, 2020		December 31, 2019

	(in thousands)

Classified loans:
Substandard	$	19,805	$	14,997
Doubtful		5,121		2,435
Loss		—		—
Total classified loans		24,926		17,432
Special mention		27,165		25,357
Total criticized loans	$	52,091	$	42,789

None of the special mention assets at September 30, 2020 and December 31, 2019 were on nonaccrual.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

At September 30, 2020, our allowance for loan losses was $49.2 million, or 1.40% of total loans and 122.97% of nonperforming loans. At December 31, 2019, our allowance for loan losses was $24.1 million, or 0.76% of total loans and 79.35% of nonperforming loans. Total loans is net of an $9.6 million fair value discount on loans acquired from Coastway. Nonperforming loans at September 30, 2020 were $38.1 million, or 1.10% of total loans, compared to $30.3 million, or 0.96% of total loans, at December 31, 2019. The allowance for loan losses is maintained at a level that represents management’s best estimate of losses in the loan portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan losses will be adequate to cover losses which may be realized in the future or that additional provisions for loan losses will not be required.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:


	September 30, 2020						December 31, 2019
			% of						% of
			Allowance						Allowance
			Amount to		% of Loans				Amount to		% of Loans
			Total		in Category				Total		in Category
	Amount		Allowance		to Total Loans			Amount	Allowance		to Total Loans

	(dollars in thousands)

Residential real estate:
One- to four-family	$	6,414	13.03	%	27.14	%	$	2,606	10.83	%	29.44	%
Second mortgages and equity lines of credit		1,014	2.06		4.28			551	2.29		4.88
Residential construction		172	0.35		0.75			21	0.09		0.44
Commercial real estate		26,098	53.02		39.25			12,875	53.51		37.03
Commercial construction		4,177	8.49		6.03			2,526	10.50		4.86
Commercial and industrial		4,966	10.09		13.66			2,977	12.37		9.67
Consumer		2,762	5.61		8.90			1,010	4.20		13.68
Total general and allocated allowance		45,603	92.65		100.00	%		22,566	93.79		100.00	%
Unallocated		3,620	7.35					1,494	6.21
Total	$	49,223	100.00	%			$	24,060	100.00	%

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019

	(dollars in thousands)

Allowance at beginning of period	$	36,107		$	22,261		$	24,060		$	20,655
Provision for loan losses		13,454			889			27,207			3,496
Charge offs:
Residential real estate:
One- to four-family		—			—			(52)			(20)
Second mortgages and equity lines of credit		—			—			—			(116)
Commercial Real Estate		(62)			—			(1,236)			—
Commercial and industrial		(213)			(43)			(790)			(833)
Consumer		(140)			(216)			(519)			(660)
Total charge-offs		(415)			(259)			(2,597)			(1,629)

Recoveries:
Residential real estate:
One- to four-family		13			15			156			195
Second mortgages and equity lines of credit		9			59			48			103
Commercial real estate		—			1			1			6
Commercial and industrial		—			—			219			15
Consumer		55			78			129			203
Total recoveries		77			153			553			522
Net charge-offs		(338)			(106)			(2,044)			(1,107)
Allowance at end of period	$	49,223		$	23,044		$	49,223		$	23,044
Total loans outstanding at end of period	$	3,515,831		$	3,106,472		$	3,515,831		$	3,106,472
Average loans outstanding	$	3,487,062		$	3,086,066		$	3,340,336		$	3,032,982
Allowance for loan losses as a percent of total loans outstanding at end of period		1.40	%		0.74	%		1.40	%		0.74	%
Annualized net loans charged off as a percent of average loans outstanding		0.04	%		0.01	%		0.08	%		0.05	%
Allowance for loan losses to nonperforming loans at end of period		122.97	%		83.58	%		122.97	%		83.58	%

We recorded a provision for loan losses of $13.5 million and $889,000 for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, we recorded a provision for loan losses of $27.2 million and $3.5 million, respectively. Changes in the provision for loan losses are based on management’s assessment of loan portfolio growth and composition changes, analysis of historical and peer loss rates, and ongoing evaluation of credit quality and current economic conditions. The provision for loan losses for the quarter ended September 30, 2020 includes adjustments for our quarterly analysis of our historical and peer loss experience rates, commercial real estate loan growth, and a $10.7 million provision directly related to the estimate of inherent losses resulting from the impact of the COVID-19 pandemic. The provisions for loan losses for the three and nine months ended September 30, 2019 primarily reflected commercial real estate loan growth.

Net charge-offs totaled $338,000 the quarter ended September 30, 2020, or 0.04%, of average loans outstanding on an annualized basis, compared to $106,000, or 0.01% of average loans outstanding for the quarter ended September 30, 2019. Nonperforming assets were $40.9 million at September 30, 2020 compared to $31.0 million at December 31, 2019 and $27.9 million at September 30, 2019. Nonperforming assets as a percentage of total assets were 0.93% at September 30, 2020, 0.76% at December 31, 2019 and 0.71% at September 30, 2019. The increase in nonperforming assets from the prior year quarter was primarily in the commercial loan portfolio. While it is clear that the COVID-19 pandemic had, and will continue to have, a significant economic impact, the ultimate effect on our loan portfolio is uncertain.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Management of Market Risk

Net Interest Income Analysis. The Company uses income simulation as the primary tool for measuring interest-rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over specified time frames and using different interest rate shocks and ramps. The assumptions include, but are not limited to, management’s best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are inherently changeable, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in the balance sheet composition and market conditions. Assumptions are supported with quarterly back testing of the model to actual market rate shifts.

The table below sets forth, as of September 30, 2020, the net interest income simulation results that estimate the impact of interest rate changes on the Company’s estimated net interest income over one year:


September 30, 2020
	Change in Net Interest Income
Changes in Interest Rates	Year One
(basis points) ⁽¹⁾	(% change from year one base)
+300	6.8	%
(100)	(7.0)	%

⁽¹⁾ The calculated change in net interest income assumes an instantaneous parallel shift of the yield curve.

Economic Value of Equity Analysis. The Company also uses the net present value of equity at risk, or “EVE,” methodology. This methodology calculates the difference between the present value of expected cash flows from assets and liabilities. The comparative scenarios assume an immediate parallel shift in the yield curve up 300 basis points and down 100 basis points.

The board of directors and management review the methodology’s measurements for both net interest income and EVE on a quarterly basis to determine whether the exposure resulting from the changes in interest rates remains within established tolerance levels and develops appropriate strategies to manage this exposure.

The table below sets forth, as of September 30, 2020, the estimated changes in the EVE that would result from an instantaneous parallel shift in interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.


At September 30, 2020
							EVE as a Percentage of Economic
			Estimated Increase (Decrease)				Value of Assets
Changes in Interest Rates		Estimated	in EVE						Changes in
(basis points) ⁽¹⁾		EVE	Amount		Percent		EVE Ratio ⁽²⁾		Basis Points
(dollars in thousands)

+ 300	$	769,112	$	76,710	11.1	%	18.4	%	2.9
0		692,402		—	—		15.5		—
- 100		576,092		(116,310)	(16.8)		12.7		(2.8)

⁽¹⁾ Assumes instantaneous parallel changes in interest rates.
⁽²⁾ EVE Ratio represents EVE divided by the economic value of assets.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Liquidity Management and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions and competition.

Management regularly adjusts our investments in liquid assets based upon an assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of our interest rate risk and investment policies.

Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities and financing activities. Net cash used by operating activities was $25.6 million and $47.7 million for the nine months ended September 30, 2020 and 2019, respectively. Net cash used by investing activities was $354.3 million for the nine months ended September 30, 2020 and consists primarily of disbursements for loan originations and the purchase of securities. For the nine months ended September 30, 2019, net cash used by investing activities was $89.3 million. Net cash as a result of financing activities, consisting primarily of the activity in deposit accounts and FHLB advances and results from our strategy of managing growth and cash flows to preserve capital ratios and reduce expenses. Net cash provided by financing activities was $305.7 million and $270.2 million for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, we have not experienced any signs of stress in our liquidity position as a result of the COVID-19 pandemic or otherwise. Management plans to continually monitor liquidity in future periods for signs of stress resulting from the COVID-19 pandemic.

The Company and the Bank are subject to various regulatory capital requirements. At September 30, 2020, the Company and the Bank exceeded all regulatory capital requirements and were considered “well capitalized” under regulatory guidelines. See Note 13 to our unaudited interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

At September 30, 2020, we had outstanding commitments to originate loans of $726.8 million and unadvanced funds on loans of $473.5 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2020 totaled $720.8 million. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may use FHLB advances, brokered deposits, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. For additional information on financial instruments with off-balance sheet risk see Note 10 to the unaudited Consolidated Financial Statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is included in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Management of Market Risk.”

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of September 30, 2020. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well-designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

During the quarter ended September 30, 2020, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not involved in any material pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. We are not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.

ITEM 1A. RISK FACTORS

This section supplements and updates certain of the information found under Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 13, 2020 (“Annual Report”) and Part II. Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (the “Second Quarter 10-Q”), based on information currently known to us and recent developments since the date of the Second Quarter 10-Q. The matters discussed below should be read in conjunction with the risks described in Part I. Item 1A. “Risk Factors” of our Annual Report and Part II. Item 1A “Risk Factors” or our Second Quarter 10-Q. However, the risks and uncertainties that we face are not limited to those described below and those set forth in the Annual Report and Second Quarter 10-Q. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures and the related impacts to economic and operating conditions.

The COVID-19 pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers, business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.

The COVID-19 pandemic has impacted and is likely to continue to impact the national economy and the regional and local markets in which we operate, lower equity market valuations, create significant volatility and disruption in capital and debt markets, and increase unemployment levels. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. We are subject to heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements that we have put in place for our employees. Federal Reserve actions to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect our net interest income and margins, and our profitability. The continued closures of many businesses and the institution of social distancing, shelter in place and stay home orders in the states and communities we serve, have reduced business activity and financial transactions. Government policies and directives relating to the pandemic response are subject to change as the effects and spread of the COVID-19 pandemic continue to evolve. It is unclear whether any COVID-19 pandemic-related businesses losses that we or our customers may suffer will be recovered by existing insurance policies. Changes in customer behavior due to worsening business and economic conditions or legislative or regulatory initiatives may impact the demand for our products and services, which could adversely affect our revenue. Increases in deposit balances due, among other things, to government stimulus and relief programs could adversely affect our financial performance if we are unable to successfully lend or invest those funds. The measures we have taken to aid our customers, including short-term loan payment deferments, may be insufficient to help our customers who have been negatively impacted by the economic fallout from the COVID-19 pandemic. Loans that are currently in deferral status may become nonperforming loans. Pandemic-related delays in our ability to execute appraisals of collateral securing impaired loans may add uncertainty about the adequacy of our allowance for credit losses. Because of adverse economic and market conditions, we may be required to increase our provision for loan losses expense, or recognize impairments on the securities we hold. While the COVID-19 pandemic negatively impacted our results of operations for the first nine months of 2020, the extent to which the COVID-19 pandemic will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions we may take as may be required by government authorities or that we determine is in the best interests of our employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.

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Our participation in the SBA’s PPP may expose us to reputational harm, increased litigation risk, as well as the risk that the SBA may not fund some or all of the guarantees associated with PPP loans.

As of September 30, 2020, we have originated 1,071 loans aggregating $152.9 million through the PPP. Lenders participating in the PPP have faced increased public scrutiny about their loan application process and procedures, and the nature and type of the borrowers receiving PPP loans. We depend on our reputation as a trusted and responsible financial services company to compete effectively in the communities that we serve, and any negative public or customer response to, or any litigation or claims that might arise out of, our participation in the PPP and any other legislative or regulatory initiatives and programs that may be enacted in response to the COVID-19 pandemic, could adversely impact our business. Other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP, and we may be subject to the same or similar litigation, in addition to litigation in connection with our processing of PPP loan forgiveness applications. In addition, if the SBA determines that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a)	Unregistered Sales of Equity Securities. None

b)	Use of Proceeds. None

c)	Repurchase of Equity Securities. None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On November 4, 2020, the Board of Directors of the Company approved the entry by the Company into indemnification agreements (each, an “Indemnification Agreement” and, collectively, the “Indemnification Agreements”) with each of its directors, as well as Chief Executive Office James W. Blake, President and Chief Operating Officer Joseph F. Casey, Chief Financial Officer Linda H. Simmons, Chief Lending Officer H. Scott Sanborn, and General Counsel Inez H. Friedman-Boyce (each, an “Indemnitee”).

The Indemnification Agreements clarify and supplement the indemnification rights and obligations of each Indemnitee and Company already included in the Company’s articles of organization. Under the terms of the Indemnification Agreements, subject to certain exceptions specified in the Indemnification Agreements, the Company will indemnify each Indemnitee to the fullest extent permitted by Massachusetts law in the event the Indemnitee becomes subject to or a participant in certain claims or proceedings as a result of the Indemnitee’s service as a director or executive officer. The Company will also, subject to certain exceptions and repayment conditions, advance to the Indemnitee specified indemnifiable expenses incurred in connection with such claims or proceedings.

The foregoing description of the Indemnification Agreements is qualified in its entirety by reference to the form of Indemnification Agreement, which is attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q and incorporated herein by reference.

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ITEM 6. EXHIBITS

The exhibits listed in the Exhibit Index are included in, or incorporated by reference into, this Quarterly Report on Form 10-Q.

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EXHIBIT INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (and are numbered in accordance with Item 601 of Regulation S-K):


Exhibit No.		Description

10.1†		HarborOne Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed with the Securities and Exchange Commission on October 1, 2020)
10.2*		Form of Indemnification Agreement
10.3†		Form of Restricted Stock Award Agreement under the HarborOne Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to Form S-8 filed with the Securities and Exchange Commission on October 5, 2020)
10.4†		Form of Non-Qualified Stock Option Award Agreement for Non-Employee Directors under the HarborOne Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to Form S-8 filed with the Securities and Exchange Commission on October 5, 2020)
10.5†		Form of Non-Qualified Stock Option Award Agreement for Employees under the HarborOne Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to Form S-8 filed with the Securities and Exchange Commission on October 5, 2020)
10.6†		Form of Incentive Stock Option Agreement under the HarborOne Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to Form S-8 filed with the Securities and Exchange Commission on October 5, 2020)
10.7†		Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under the HarborOne Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to Form S-8 filed with the Securities and Exchange Commission on October 5, 2020)
10.8†		Form of Restricted Stock Unit Award Agreement for Employees under the HarborOne Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.7 to Form S-8 filed with the Securities and Exchange Commission on October 5, 2020)
31.1*		Certification of Chief Executive Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
31.2*		Certification of Chief Financial Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
32.1**		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, and (vi) the Notes to the unaudited Consolidated Financial Statements.
104		Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)

*Filed herewith

**Furnished herewith

† Management contract or compensation plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	HarborOne Bancorp, Inc.

Date: November 6, 2020	By:	/s/ James W. Blake
		James W. Blake
		Chief Executive Officer and Director (Principal Executive Officer)

Date: November 6, 2020	By:	/s/ Linda H. Simmons
		Linda H. Simmons
		Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

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HarborOne Bancorp (HONE) 10-Q2020 Q3 Quarterly report

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