HarborOne Bancorp, Inc. - Quarter Report: 2020 June (Form 10-Q)

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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 June 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 August 1, 2020 there were 58,409,342 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 June 30, 2020 and December 31, 2019 (unaudited)	1
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 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	72

EXHIBIT INDEX		73

SIGNATURE		74

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HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)


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

Assets
Cash and due from banks	$	30,355	$	24,464
Short-term investments		218,617		187,152
Total cash and cash equivalents		248,972		211,616

Securities available for sale, at fair value		262,710		239,473
Securities held to maturity, at amortized cost		—		26,372
Federal Home Loan Bank stock, at cost		15,786		17,121
Assets held for sale		8,536		8,536
Loans held for sale, at fair value		158,898		110,552
Loans		3,474,022		3,171,558
Less: Allowance for loan losses		(36,107)		(24,060)
Net loans		3,437,915		3,147,498
Accrued interest receivable		11,979		9,807
Other real estate owned and repossessed assets		537		719
Mortgage servicing rights, at fair value		16,127		17,150
Property and equipment, net		47,797		47,951
Retirement plan annuities		13,537		13,333
Bank-owned life insurance		86,840		85,735
Goodwill		69,802		69,802
Intangible assets		5,141		6,035
Other assets		80,329		47,221
Total assets	$	4,464,906	$	4,058,921

Liabilities and Stockholders' Equity
Deposits:
Demand deposit accounts	$	642,971	$	406,403
NOW accounts		199,400		165,877
Regular savings and club accounts		876,753		626,685
Money market deposit accounts		831,653		856,830
Term certificate accounts		757,897		887,078
Total deposits		3,308,674		2,942,873
Short-term borrowed funds		200,000		183,000
Long-term borrowed funds		141,114		171,132
Subordinated debt		33,970		33,907
Mortgagors' escrow accounts		8,299		6,053
Accrued interest payable		1,451		1,669
Other liabilities and accrued expenses		86,943		54,493
Total liabilities		3,780,451		3,393,127

Commitments and contingencies (Notes 9 and 10)

Common stock, $0.01 par value; 150,000,000 shares authorized; 58,489,222 shares issued; 58,418,021 shares outstanding at June 30, 2020 and December 31, 2019, respectively		584		584
Additional paid-in capital		462,881		460,232
Retained earnings		251,032		237,356
Treasury stock, at cost, 71,201 shares at June 30, 2020 and December 31, 2019, respectively		(721)		(721)
Accumulated other comprehensive income		2,897		1,480
Unearned compensation - ESOP		(32,218)		(33,137)
Total stockholders' equity		684,455		665,794
Total liabilities and stockholders' equity	$	4,464,906	$	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 June 30,				Six Months Ended June 30,
(in thousands, except share data)	2020		2019		2020		2019


Interest and dividend income:
Interest and fees on loans	$	33,970	$	35,438	$	67,995	$	69,803
Interest on loans held for sale		988		542		1,565		900
Interest on taxable securities		1,392		1,703		3,134		3,366
Interest on non-taxable securities		32		147		98		331
Other interest and dividend income		239		448		998		931
Total interest and dividend income		36,621		38,278		73,790		75,331

Interest expense:
Interest on deposits		5,805		9,362		14,498		17,605
Interest on FHLB borrowings		845		1,679		2,098		3,954
Interest on subordinated debentures		524		524		1,047		1,029
Total interest expense		7,174		11,565		17,643		22,588

Net interest and dividend income		29,447		26,713		56,147		52,743
Provision for loan losses		10,004		1,750		13,753		2,607

Net interest and dividend income, after provision for loan losses		19,443		24,963		42,394		50,136

Noninterest income:
Mortgage banking income:
Gain on sale of mortgage loans		30,862		8,429		43,140		13,072
Changes in mortgage servicing rights fair value		(1,111)		(2,241)		(5,498)		(4,392)
Other		4,110		2,467		6,681		4,477
Total mortgage banking income		33,861		8,655		44,323		13,157
Deposit account fees		2,969		4,056		6,900		7,834
Income on retirement plan annuities		103		100		204		196
Gain on sale and call of securities, net		8		1,267		2,533		1,267
Bank-owned life insurance income		554		253		1,105		506
Other income		1,143		1,387		2,439		2,600
Total noninterest income		38,638		15,718		57,504		25,560

Noninterest expense:
Compensation and benefits		27,469		20,585		48,654		39,830
Occupancy and equipment		4,152		4,411		8,715		8,859
Data processing		2,277		2,199		4,457		4,245
Loan expenses		2,763		1,334		4,244		2,605
Marketing		1,057		1,177		1,933		2,135
Deposit expenses		461		434		960		784
Postage and printing		435		422		931		910
Professional fees		1,518		1,384		2,746		2,330
Foreclosed and repossessed assets		13		(5)		138		(76)
Deposit insurance		279		589		550		1,255
Other expenses		3,414		2,551		5,898		4,796
Total noninterest expense		43,838		35,081		79,226		67,673

Income before income taxes		14,243		5,600		20,672		8,023

Income tax provision		3,668		819		5,373		1,175

Net income	$	10,575	$	4,781	$	15,299	$	6,848

Earnings per common share ⁽¹⁾:
Basic	$	0.19	$	0.08	$	0.28	$	0.12
Diluted	$	0.19	$	0.08	$	0.28	$	0.12
Weighted average shares outstanding⁽¹⁾:
Basic		54,450,146		56,704,297		54,421,306		56,685,741
Diluted		54,450,146		56,704,297		54,421,306		56,685,741

⁽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 June 30,				Six Months Ended June 30,
(in thousands)	2020		2019		2020		2019


Net income	$	10,575	$	4,781	$	15,299	$	6,848
Other comprehensive income:

Unrealized gain/loss on cash flow hedge:
Unrealized holding losses		(1,613)		—		(1,613)		—
Reclassification adjustment for net losses included in net income		(149)		—		(149)		—
Net change in unrealized gains (losses) on derivatives in cash flow hedging instruments		(1,762)		—		(1,762)		—
Related tax effect		493		—		493		—
Net-of-tax amount		(1,269)		—		(1,269)		—

Unrealized gain/loss on securities available for sale:
Unrealized holding gains (losses)		(471)		2,980		5,547		6,171
Reclassification of unrealized gain on securities transferred to available for sale		—		—		522		—
Reclassification adjustment for net realized gains		(8)		(1,267)		(2,533)		(1,267)
Net unrealized gains (losses)		(479)		1,713		3,536		4,904
Related tax effect		387		(377)		(850)		(1,080)
Net-of-tax amount		(92)		1,336		2,686		3,824

Total other comprehensive income (loss)		(1,361)		1,336		1,417		3,824

Comprehensive income	$	9,214	$	6,117	$	16,716	$	10,672

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 March 31, 2019	58,459,493	$	327	$	153,326	$	221,155	$	(1,548)	$	130	$	(9,942)	$	363,448

Comprehensive income	—		—		—		4,781		—		1,336		—		6,117

ESOP shares committed to be released (14,840 shares)	—		—		122		—		—		—		149		271

Restricted stock awards forfeited, net of awards issued	23,532		—		—		—		—		—		—		—

Share-based compensation expense	—		—		1,282		—		—		—		—		1,282

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


Balance at March 31, 2020	58,418,021	$	584	$	461,616	$	242,080	$	(721)	$	4,258	$	(32,678)	$	675,139

Comprehensive income	—		—		—		10,575		—		(1,361)		—		9,214

Dividends declared of $0.03 per share	—		—		—		(1,623)		—		—		—		(1,623)

ESOP shares committed to be released (57,681 shares)	—		—		2		—		—		—		460		462

Share-based compensation expense	—		—		1,263		—		—		—		—		1,263

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

⁽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 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

Comprehensive income	—		—		—		6,848		—		3,824		—		10,672

ESOP shares committed to be released (29,680 shares)	—		—		212		—		—		—		298		510

Restricted stock awards forfeited, net of awards issued	17,520		—		—		—		—		—		—		—

Share-based compensation expense	—		—		2,362		—		—		—		—		2,362

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


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

Comprehensive income	—		—		—		15,299		—		1,417		—		16,716

Dividends declared of $0.03 per share	—		—		—		(1,623)		—		—		—		(1,623)

ESOP shares committed to be released (115,362 shares)	—		—		123		—		—		—		919		1,042

Share-based compensation expense	—		—		2,526		—		—		—		—		2,526

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

⁽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).

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)


	Six Months Ended June 30,
(in thousands)	2020		2019


Cash flows from operating activities:
Net income	$	15,299	$	6,848
Adjustments to reconcile net income to net cash used by operating activities:
Provision for loan losses		13,753		2,607
Net amortization of securities premiums/discounts		668		156
Proceeds from sale of loans		982,423		357,370
Loans originated for sale		(987,631)		(386,843)
Net amortization of net deferred loan costs/fees and premiums		811		1,491
Depreciation and amortization of premises and equipment		1,985		2,204
Change in mortgage servicing rights fair value		5,498		4,392
Mortgage servicing rights capitalized		(4,475)		(331)
Accretion of fair value adjustment on loans and deposits, net		(1,466)		(864)
Amortization of other intangible assets		894		1,279
Amortization of subordinated debt issuance costs		63		44
Gain on sale and call of securities, net		(2,533)		(1,267)
Net gains on mortgage loan sales, including fair value adjustments		(43,140)		(13,072)
Bank-owned life insurance income		(1,105)		(506)
Income on retirement plan annuities		(204)		(196)
Net loss on disposal of premises and equipment		110		—
Net (gain) loss on sale and write-down of other real estate owned and repossessed assets		56		(67)
ESOP expense		1,042		510
Share-based compensation expense		2,526		2,362
Change in other assets		(35,637)		(22,074)
Change in other liabilities		28,847		(3,705)
Net cash used by operating activities		(22,216)		(49,662)

Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		36,453		14,514
Purchases		(100,682)		(29,930)
Sales		67,574		28,391
Activity in securities held to maturity:
Maturities, prepayment and calls		432		9,812
Sales		4,759		—
Net redemption of FHLB stock		1,335		10,093
Participation-in loan purchases		(8,162)		(16,561)
Loan originations, net of principal payments		(295,427)		(66,045)
Proceeds from sale of other real estate owned and repossessed assets		595		1,355
Additions to property and equipment		(1,939)		(2,702)
Net cash used by investing activities		(295,062)		(51,073)

(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)


	Six Months Ended June 30,
(in thousands)	2020		2019

Cash flows from financing activities:
Net increase in deposits		365,406		284,045
Net change in short-term borrowed funds		17,000		(192,000)
Proceeds from other borrowed funds and subordinated debt		40,000		11,220
Repayment of other borrowed funds		(70,018)		(30,007)
Net change in mortgagors' escrow accounts		2,246		663
Net cash provided by financing activities		354,634		73,921

Net change in cash and cash equivalents		37,356		(26,814)

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

Cash and cash equivalents at end of period	$	248,972	$	78,707

Supplemental cash flow information:
Interest paid on deposits	$	14,808	$	15,578
Interest paid on borrowed funds		3,276		5,225
Income taxes paid, net		5,625		859
Transfer of loans to other real estate owned and repossessed assets		469		1,044
Transfer of securities held to maturity to available for sale, fair value		22,051		—
Dividends declared		1,623		—

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 formed on July 13, 2016, HarborOne Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries which consist of HarborOne Mortgage, LLC (“HarborOne Mortgage”), a passive investment corporation and two 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 recent 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 June 30, 2020, the Bank had 157 payment deferrals on commercial loans with a total principal balance of $262.4 million, 172 payment deferrals on residential mortgage loans with a total principal balance of $52.7 million and 664 payment deferrals on consumer loans with a total principal balance of $15.9 million. We also have 108 payment deferrals on

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

sold and bank-serviced residential mortgage loans with a total principal balance of $20.8 million and provided forbearance to 331 borrowers with a total principal balance of $81.7 million that were sold and serviced by a third party on our behalf.

●

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 is actively participating 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; if that should change, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings.

●

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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 25 full-service branches in Massachusetts and Rhode Island, one limited-service bank branch, and a commercial lending office in each of Boston, Massachusetts and 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 four 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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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 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.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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.

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 June 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 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.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

In August 2017, the 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 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.

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)

June 30, 2020:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	10,004	$	205	$	—	$	10,209
U.S. government agency and government-sponsored residential mortgage-backed securities		204,155		3,894		106		207,943
U.S. government-sponsored collateralized mortgage obligations		22,934		571		—		23,505
SBA asset-backed securities		18,181		865		—		19,046
Municipal bonds		2,002		5		—		2,007
Total securities available for sale	$	257,276	$	5,540	$	106	$	262,710

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 five 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.

Twenty-three mortgage-backed securities with a combined fair value of $49.4 million are pledged as collateral for interest rate swap agreements as of June 30, 2020 (see Note 10). Seven 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 June 30, 2020 is as follows:



	Available for Sale
	Amortized		Fair
	Cost		Value

	(in thousands)

After 1 year through 5 years	$	5,000	$	5,049
After 5 years through 10 years		5,004		5,160
Over 10 years		2,002		2,007
		12,006		12,216

U.S. government agency and government-sponsored residential mortgage-backed securities		204,155		207,943
U.S. government-sponsored collateralized mortgage obligations		22,934		23,505
SBA asset-backed securities		18,181		19,046

Total	$	257,276	$	262,710

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 U.S. Small Business Administration (“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. Municipal bonds and U.S. government and government-sponsored enterprise obligations are callable at the discretion of the issuer. Municipal bonds with a total fair value of $2.0 million have final maturities ranging from 12 years to 14 years and call features of 2 month. U.S. government and government-sponsored enterprise obligations with a total fair value of $10.2 million have final maturities ranging from 3 years to 8 years and call features ranging from less than 4 months 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 June 30,				Six Months Ended June 30,
		2020		2019		2020		2019

		(in thousands)

Sales
Proceeds	$	1,604	$	28,391	$	72,333	$	28,391
Gross gains		—		1,267		2,521		1,267
Gross losses		—		—		—		—

Calls
Proceeds	$	4,968	$	5,740	$	6,635	$	8,370
Gross gains		8		—		12		—
Gross losses		—		—		—		—

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Information pertaining to securities with gross unrealized losses at June 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)

June 30, 2020:
Securities available for sale

U.S. government agency and government-sponsored residential mortgage-backed securities	$	89	$	27,881	$	17	$	4,224


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 June 30, 2020, ten securities with an amortized cost of $32.2 million have unrealized losses with aggregate depreciation of 0.33% 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 June 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:


	June 30,		December 31,
	2020		2019

	(in thousands)

Loans held for sale, fair value	$	158,898	$	110,552
Loans held for sale, contractual principal outstanding		151,859		107,472
Fair value less unpaid principal balance	$	7,039	$	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 $4.0 million in the six months ended June 30, 2020 to $7.0 million, compared to an increase of $1.5 million in the six months ended June 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 June 30, 2020 and December 31, 2019, there were no loans held for sale that were greater than 90 days past due.

LOANS

A summary of the balances of loans follows:


	June 30,		December 31,
	2020		2019

	(in thousands)

Residential real estate:
One- to four-family	$	977,336	$	935,794
Second mortgages and equity lines of credit		152,709		155,716
Residential real estate construction		20,655		14,055
		1,150,700		1,105,565

Commercial:
Commercial real estate		1,318,051		1,169,923
Commercial construction		194,549		153,907
Commercial and industrial		456,192		306,282
Total commercial loans		1,968,792		1,630,112

Consumer loans:
Auto		345,212		424,592
Personal		9,318		11,289
Total consumer loans		354,530		435,881

Total loans		3,474,022		3,171,558
Allowance for loan losses		(36,107)		(24,060)
Loans, net	$	3,437,915	$	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 June 30, 2020 and December 31, 2019, the Company was servicing loans for participants aggregating $220.4 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 loans (“PCI”). The PCI loans were primarily residential real estate loans. The following table provides certain information pertaining to PCI loans:


	June 30,			December 31,
	2020		2019

	(in thousands)

Outstanding balance	$	4,394	$	4,609
Carrying amount	$	4,169	$	4,378

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

	(in thousands)

Balance at beginning of period	$	147	$	184	$	149	$	185
Additions		—		—		—		—
Accretion		(2)		(1)		(4)		(2)
Reclassification from nonaccretable difference		—		(14)		—		(14)
Balance at end of period	$	145	$	169	$	145	$	169

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


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

	(in thousands)

Balance at March 31, 2019	$	3,120	$	10,351	$	2,670	$	2,819	$	1,109	$	1,213	$	21,282

Provision (credit) for loan losses		(115)		749		257		442		71		346		1,750
Charge-offs		(116)		—		—		(750)		(178)		—		(1,044)
Recoveries		211		—		—		1		61		—		273
Balance at June 30, 2019	$	3,100	$	11,100	$	2,927	$	2,512	$	1,063	$	1,559	$	22,261

Balance at March 31, 2020	$	3,177	$	14,642	$	2,522	$	2,740	$	1,484	$	1,824	$	26,389

Provision (credit) for loan losses		2,598		3,747		693		1,102		808		1,056		10,004
Charge-offs		(52)		—		—		(280)		(126)		—		(458)
Recoveries		134		—		—		—		38		—		172
Balance at June 30, 2020	$	5,857	$	18,389	$	3,215	$	3,562	$	2,204	$	2,880	$	36,107

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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		(227)		1,036		220		1,001		228		349		2,607
Charge-offs		(136)		—		—		(790)		(444)		—		(1,370)
Recoveries		224		5		—		15		125		—		369
Balance at June 30, 2019	$	3,100	$	11,100	$	2,927	$	2,512	$	1,063	$	1,559	$	22,261

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

Provision (credit) for loan losses		2,549		6,687		689		943		1,499		1,386		13,753
Charge-offs		(52)		(1,174)		—		(577)		(379)		—		(2,182)
Recoveries		182		1		—		219		74		—		476
Balance at June 30, 2020	$	5,857	$	18,389	$	3,215	$	3,562	$	2,204	$	2,880	$	36,107

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


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

	(in thousands)

June 30, 2020:
Loans:
Impaired loans	$	25,022	$	3,631	$	10,971	$	10,578	$	—			$	50,202
Non-impaired loans		1,125,678		1,314,420		183,578		445,614		354,530				3,423,820
Total loans	$	1,150,700	$	1,318,051	$	194,549	$	456,192	$	354,530			$	3,474,022
Allowance for loan losses:
Impaired loans	$	1,066	$	—	$	—	$	457	$	—	$	—	$	1,523
Non-impaired loans		4,791		18,389		3,215		3,105		2,204		2,880		34,584
Total allowance for loan losses	$	5,857	$	18,389	$	3,215	$	3,562	$	2,204	$	2,880	$	36,107


December 31, 2019:
Loans:
Impaired loans	$	27,275	$	530	$	11,244	$	5,831	$	—			$	44,880
Non-impaired loans		1,078,290		1,169,393		142,663		300,451		435,881				3,126,678
Total loans	$	1,105,565	$	1,169,923	$	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 June 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)

June 30, 2020
Residential real estate:
One- to four-family	$	1,279	$	3,276	$	5,396	$	9,951	$	10,595
Second mortgages and equity lines of credit		183		319		556		1,058		1,095
Commercial real estate		—		2,667		3,631		6,298		3,631
Commercial construction		—		—		10,939		10,939		10,939
Commercial and industrial		1,278		799		1,879		3,956		10,572
Consumer:
Auto		1,175		671		942		2,788		1,179
Personal		5		42		13		60		53
Total	$	3,920	$	7,774	$	23,356	$	35,050	$	38,064

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 June 30, 2020 and December 31, 2019, there were no 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:


	June 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	$	10,725	$	11,706	$	—	$	11,610	$	12,140	$	—
Commercial real estate		3,631		4,770		—		530		530		—
Commercial construction		10,971		11,244		—		11,244		11,244		—
Commercial and industrial		4,809		6,678		—		5,505		6,901		—
Total		30,136		34,398		—		28,889		30,815		—

Impaired loans with a specific reserve:
Residential real estate		14,297		14,634		1,066		15,665		16,218		985
Commercial and industrial		5,769		5,769		457		326		326		176
Total		20,066		20,403		1,523		15,991		16,544		1,161

Total impaired loans	$	50,202	$	54,801	$	1,523	$	44,880	$	47,359	$	1,161


	Three Months Ended June 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	$	25,241	$	253	$	196	$	30,868	$	408	$	314
Commercial real estate		3,668		1		1		92		—		—
Commercial construction		10,971		—		—		—		—		—
Commercial and industrial		7,765		—		—		6,466		10		10
Total	$	47,645	$	254	$	197	$	37,426	$	418	$	324


	Six Months Ended June 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	$	25,919	$	575	$	518	$	30,818	$	948	$	759
Commercial real estate		2,622		1		1		895		—		—
Commercial construction		11,062		—		—		—		—		—
Commercial and industrial		7,120		7		7		5,586		23		23
Total	$	46,723	$	583	$	526	$	37,299	$	971	$	782

Interest income recognized and interest income recognized on a cash basis in the tables above represent interest income for the three and six months ended June 30, 2020 and 2019, not for the time period designated as impaired. No additional funds are committed to be advanced in connection with impaired loans.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

There were no material TDR loan modifications for the three months ended June 30, 2020 and 2019.

The recorded investment in TDRs was $17.3 million and $20.0 million at June 30, 2020 and December 31, 2019, respectively. Commercial TDRs totaled $2.7 million and $3.0 million at June 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 $4.3 million and $5.0 million at June 30, 2020 and December 31, 2019, respectively. Of these loans, $2.7 million and $3.0 million were non-accrual commercial TDRs.

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 six months ended June 30, 2020 and 2019, there were no 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 June 30, 2020 and December 31, 2019:


	June 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	$	1,313,255	$	168,974	$	444,708	$	1,163,342	$	127,962	$	294,507
Loans rated 7		258		14,636		1,073		4,539		14,701		6,117
Loans rated 8		524		10,939		8,397		530		11,244		3,223
Loans rated 9		3,107		—		2,014		—		—		2,435
Loans rated 10		—		—		—		—		—		—
Loans not rated		907		—		—		1,512		—		—
	$	1,318,051	$	194,549	$	456,192	$	1,169,923	$	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 $2.27 billion and $1.83 billion as of June 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 June 30, 2020 and December 31, 2019, the following weighted average assumptions were used in the calculation of fair value of MSRs:


	June 30,		December 31,
	2020		2019
Prepayment speed	17.00	%	12.43	%
Discount rate	9.31		9.34
Default rate	1.98		2.61

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

	(in thousands)

Balance, beginning of period	$	13,207	$	20,231	$	17,150	$	22,217
Additions		4,031		166		4,475		331
Changes in fair value due to:
Reductions from loans paid off during the period		(1,114)		(459)		(1,690)		(778)
Changes in valuation inputs or assumptions		3		(1,782)		(3,808)		(3,614)
Balance, end of period	$	16,127	$	18,156	$	16,127	$	18,156

Contractually specified servicing fees included in other mortgage banking income amounted to $1.3 million and $2.6 million for the three and six months ended June 30, 2020, respectively, and $1.4 million and $2.7 million for the three and six months ended June 30, 2019, respectively.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

6.	GOODWILL

As of June 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 no 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 no indication of impairment related to other intangible assets as of June 30, 2020.

7.	DEPOSITS

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


	June 30,		December 31,
	2020		2019

	(in thousands)

NOW and demand deposit accounts	$	842,371	$	572,280
Regular savings and club accounts		876,753		626,685
Money market deposit accounts		831,653		856,830
Total non-certificate accounts		2,550,777		2,055,795

Term certificate accounts greater than $250,000		151,915		169,595
Term certificate accounts less than or equal to $250,000		546,111		636,343
Brokered deposits		59,871		81,140
Total certificate accounts		757,897		887,078
Total deposits	$	3,308,674	$	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 June 30, 2020 and December 31, 2019, total reciprocal deposits were $125.5 million and $277.9 million, respectively, consisting primarily of money market accounts.

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


			Weighted
			Average
	Amount		Rate

	(dollars in thousands)

Within 1 year	$	679,991	1.55	%
Over 1 year to 2 years		56,589	1.83
Over 2 years to 3 years		17,794	1.97
Over 3 years to 4 years		3,212	1.52
Over 4 years to 5 years		1,295	1.34
Total certificate deposits		758,881	1.58	%
Less unaccreted acquisition discount		(984)
Total certificate deposits, net	$	757,897

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

8.BORROWED FUNDS

Borrowed funds at June 30, 2020 and December 31, 2019 consist of Federal Home Loan Bank (“FHLB”) advances. Short-term advances were $200.0 million with a weighted average rate of 0.46% at June 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.


	June 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		20,192		192	3.48			20,195		195	2.43
2024		10,000		10,000	1.68			10,000		10,000	1.68
2025 and thereafter		42,172		2,172	1.34			2,187		2,187	1.10
	$	141,114	$	141,114	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 $981.4 million at June 30, 2020 and $1.06 billion at December 31, 2019. As of June 30, 2020, the Company had $369.2 million of available borrowing capacity with the FHLB.

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 65% of the carrying value of indirect auto and commercial loans with principal balances amounting to $117.2 million and $46.9 million at June 30, 2020 and December 31, 2019, respectively. No amounts were outstanding under either line at June 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.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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 June 30, 2020 and December 31, 2019. The contract amounts represent credit risk.


	June 30,		December 31,
	2020		2019

	(in thousands)

Commitments to grant loans	$	581,524	$	98,866
Unadvanced funds on home equity lines of credit		170,671		157,867
Unadvanced funds on revolving lines of credit		150,958		147,047
Unadvanced funds on construction loans		129,745		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 June 30, 2020, the Company had one 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 4.8 years, the current weighted average rate paid is 0.67%, the weighted average fixed swap receive rate is 1.31%, and the fair value is $1.8 million. The Company expects approximately $396,000 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 amount 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 $49.4 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 June 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)

June 30, 2020:
Derivatives designated as Hedging Instruments
Interest rate swaps	$	100,000	—	$	—	Other liabilities	$	1,762
Derivatives not designated as Hedging Instruments
Derivative loan commitments	$	497,723	Other assets	$	10,822	Other liabilities	$	83
Forward loan sale commitments		412,750	Other assets		22	Other liabilities		1,984
Interest rate swaps		871,816	Other assets		46,855	Other liabilities		46,855
Risk participation agreements		128,510	Other assets		—	Other liabilities		—
Total				$	57,699		$	50,684

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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

	(in thousands)
Derivatives designated as hedging instruments
Loss in OCI on derivatives (effective portion), net of tax	$	(1,269)	$	—	$	(1,269)	$	—
Gain reclassified from OCI into interest income or interest expense (effective portion)	$	149	$	—	$	149	$	—

Derivatives not designated as hedging instruments
Changes in fair value of derivative loan commitments
Mortgage banking income	$	4,337	$	470	$	9,528	$	1,014
Changes in fair value of forward loan sale commitments
Mortgage banking income		1,842		(351)		(1,830)		(333)
Changes in fair value of interest rate swaps
Other income		—		—		—		—
Total	$	6,179	$	119	$	7,698	$	681

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.

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 $1.3 million and $2.5 million for the three and six months ended June 30, 2020, respectively, and $1.3 million and $2.4 million for the three and six 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 six months ended June 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 six months ended June 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		—		—						(176,161)		2.47
Forfeited		—		—						—		—
Expired		—		—						—		—
Balance at June 30, 2020		2,169,243	$	9.87		7.71	$	—		1,020,384	$	2.70
Exercisable at June 30, 2020		1,148,859	$	10.01		7.47	$	—
Unrecognized cost inclusive of directors' awards	$	1,829,000
Weighted average remaining recognition period (years)		1.44

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 six months ended June 30, 2020:


	Restricted		Weighted Average
	Stock Awards		Grant Price

Non-vested stock awards at January 1, 2020		333,766	$	10.20
Vested		(9,528)		9.80
Granted		—		—
Forfeited		—		—
Non-vested stock awards at June 30, 2020		324,238	$	10.21
Unrecognized cost inclusive of directors' awards	$	674,000
Weighted average remaining recognition period (years)		0.89

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 June 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 June 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 June 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.
June 30, 2020
Common equity Tier 1 capital to risk-weighted assets	$	608,001	17.8	%	$	153,465	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		608,001	17.8			204,620	6.0			N/A	N/A
Total capital to risk-weighted assets		679,108	19.9			272,827	8.0			N/A	N/A
Tier 1 capital to average assets		608,001	14.4			168,629	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
June 30, 2020
Common equity Tier 1 capital to risk-weighted assets	$	473,288	13.9	%	$	153,476	4.5	%	$	221,687	6.5	%
Tier 1 capital to risk-weighted assets		473,288	13.9			204,634	6.0			272,846	8.0
Total capital to risk-weighted assets		509,395	14.9			272,846	8.0			341,057	10.0
Tier 1 capital to average assets		473,288	11.3			167,423	4.0			209,278	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:


	June 30,		December 31,
	2020		2019

	(in thousands)

Cash flow hedge:
Net unrealized gain	$	(1,762)	$	—
Related tax effect		493		—
Total accumulated other comprehensive income	$	(1,269)	$	—

Securities available for sale:
Net unrealized gain	$	5,435	$	1,899
Related tax effect		(1,269)		(419)
Total accumulated other comprehensive income	$	4,166	$	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 months ended June 30, 2020 and 2019:


	Three Months Ended June 30,
	2020						2019

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

	(in thousands)

Balance at beginning of period	$	4,258	$	—	$	4,258	$	130

Other comprehensive income (loss) before reclassifications		(471)		(1,613)		(2,084)		2,980
Amounts reclassified from accumulated other comprehensive income (loss)		(8)		(149)		(157)		(1,267)
Net current period other comprehensive income (loss)		(479)		(1,762)		(2,241)		1,713
Related tax effect		387		493		880		(377)
Balance at end of period	$	4,166	$	(1,269)	$	2,897	$	1,466


	Six Months Ended June 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		5,547		(1,613)		3,934		6,171
Amounts reclassified to accumulated other comprehensive income for transfer of securities to available for sale		522		—		522		(1,267)
Amounts reclassified from accumulated other comprehensive income (loss)		(2,533)		(149)		(2,682)		—
Net current period other comprehensive income (loss)		3,536		(1,762)		1,774		4,904
Related tax effect		(850)		493		(357)		(1,080)
Balance at end of period	$	4,166	$	(1,269)	$	2,897	$	1,466

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 76% and 85% at June 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 are 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 no 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)

June 30, 2020
Assets

Securities available for sale	$	—	$	262,710	$	—	$	262,710
Loans held for sale		—		158,898		—		158,898
Mortgage servicing rights		—		16,127		—		16,127
Derivative loan commitments		—		—		10,822		10,822
Forward loan sale commitments		—		—		22		22
Interest rate swaps		—		46,855		—		46,855
	$	—	$	484,590	$	10,844	$	495,434
Liabilities

Derivative loan commitments	$	—	$	—	$	83	$	83
Forward loan sale commitments		—		—		1,984		1,984
Interest rate management agreements		—		1,762		—		1,762
Interest rate swaps		—		46,855		—		46,855
	$	—	$	48,617	$	2,067	$	50,684

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 six months ended June 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

	(in thousands)

Assets: Derivative and Forward Loan Sale Commitments:

Balance at beginning of period	$	8,078	$	1,732	$	1,411	$	1,261

Total gains included in net income ⁽¹⁾		2,766		762		9,433		1,233
Balance at end of period	$	10,844	$	2,494	$	10,844	$	2,494

Changes in unrealized gains relating to instruments at period end	$	10,844	$	2,494	$	10,844	$	2,494


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

	(in thousands)

Liabilities: Derivative and Forward Loan Sale Commitments:

Balance at beginning of period	$	(5,480)	$	(539)	$	(332)	$	(630)

Total gains (losses) included in net income ⁽¹⁾		3,413		(643)		(1,735)		(552)
Balance at end of period	$	(2,067)	$	(1,182)	$	(2,067)	$	(1,182)

Changes in unrealized losses relating to instruments at period end	$	(2,067)	$	(1,182)	$	(2,067)	$	(1,182)

⁽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 no liabilities measured at fair value on a non-recurring basis at June 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.


	June 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	$	—	$	—	$	8,536
Impaired loans:
Residential		—		—		13,244		—		—		2,272
Commercial		—		—		5,300		—		—		1,606
Other real estate owned and repossessed assets		—		—		537		—		—		719
	$	—	$	—	$	27,617	$	—	$	—	$	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 June 30, 2020 and December 31, 2019, respectively. Losses on fully charged off loans are not included in the table.


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

	(in thousands)

Impaired loans
Residential	$	584	$	—	$	581	$	—
Commercial		449		395		449		749
Other real estate owned and repossessed assets		—		67		55		67
	$	1,033	$	462	$	1,085	$	816

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.


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

	(in thousands)

Financial assets:
Cash and cash equivalents	$	248,972	$	248,972	$	—	$	—	$	248,972
Securities available for sale		262,710		—		262,710		—		262,710
Federal Home Loan Bank stock		15,786		N/A		N/A		N/A		N/A
Loans held for sale		158,898		—		158,898		—		158,898
Loans, net		3,437,915		—		—		3,479,805		3,479,805
Retirement plan annuities		13,537		—		—		13,537		13,537
Accrued interest receivable		11,979		—		11,979		—		11,979

Financial liabilities:
Deposits		3,308,674		—		—		3,316,033		3,316,033
Borrowed funds		341,114		—		344,825		—		344,825
Subordinated debt		33,970		—		—		35,481		35,481
Mortgagors' escrow accounts		8,299		—		—		8,299		8,299
Accrued interest payable		1,451		—		1,451		—		1,451

Derivative loan commitments:
Assets		10,822		—		—		10,822		10,822
Liabilities		83		—		—		83		83

Interest rate management agreements:
Liabilities		1,762		—		1,762		—		1,762

Interest rate swap agreements:
Assets		46,855		—		46,855		—		46,855
Liabilities		46,855		—		46,855		—		46,855

Forward loan sale commitments:
Assets		22		—		—		22		22
Liabilities		1,984		—		—		1,984		1,984

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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 June 30,
	2020		2019

Net income applicable to common stock (in thousands)	$	10,575	$	4,781

Average number of common shares outstanding		58,418,021		58,471,680
Less: Average unallocated ESOP shares		(3,967,875)		(1,767,383)
Average number of common shares outstanding used to calculate basic earnings per common share		54,450,146		56,704,297
Common stock equivalents		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		54,450,146		56,704,297

Earnings per common share:
Basic	$	0.19	$	0.08
Diluted	$	0.19	$	0.08


	Six Months Ended June 30,
	2020		2019

Net income available to common stockholders (in thousands)	$	15,299	$	6,848

Average number of common shares outstanding		58,418,021		58,466,373
Less: Average unallocated ESOP shares		(3,996,715)		(1,780,632)
Weighted average number of common shares outstanding used to calculate basic earnings per common share		54,421,306		56,685,741
Weighted average number of common shares outstanding used to calculate diluted earnings per common share		54,421,306		56,685,741

Earnings per common share:
Basic	$	0.28	$	0.12
Diluted	$	0.28	$	0.12

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 2,169,243 and 2,240,307 shares of common stock for the three and six months ended June 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 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 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 June 30, 2020 and 2019 and for the three and six months then ended is presented in the tables below.


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

	(in thousands)


Net interest and dividend income (expense)	$	29,139	$	739	$	(431)	$	—	$	29,447
Provision for loan losses		10,004		—		—		—		10,004
Net interest and dividend income (loss), after provision for loan losses		19,135		739		(431)		—		19,443
Mortgage banking income:
Gain on sale of mortgage loans		—		30,862		—		—		30,862
Intersegment gain (loss)		(1,399)		1,399		—		—		—
Changes in mortgage servicing rights fair value		(490)		(621)		—		—		(1,111)
Other		346		3,764		—		—		4,110
Total mortgage banking income (loss)		(1,543)		35,404		—		—		33,861
Other noninterest income (loss)		4,788		(11)		—		—		4,777
Total noninterest income		3,245		35,393		—		—		38,638
Noninterest expense		25,218		18,273		347		—		43,838
Income (loss) before income taxes		(2,838)		17,859		(778)		—		14,243
Provision (benefit) for income taxes		27		3,878		(237)		—		3,668
Net income (loss)	$	(2,865)	$	13,981	$	(541)	$	—	$	10,575


	Six Months Ended June 30, 2020
	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated

	(in thousands)


Net interest and dividend income (expense)	$	55,649	$	1,020	$	(522)	$	—	$	56,147
Provision for loan losses		13,753		—		—		—		13,753
Net interest and dividend income (loss), after provision for loan losses		41,896		1,020		(522)		—		42,394
Mortgage banking income:
Gain on sale of mortgage loans		—		43,140		—		—		43,140
Intersegment gain (loss)		(1,799)		1,799		—		—		—
Changes in mortgage servicing rights fair value		(1,660)		(3,838)		—		—		(5,498)
Other		697		5,984		—		—		6,681
Total mortgage banking income (loss)		(2,762)		47,085		—		—		44,323
Other noninterest income (loss)		13,314		(133)		—		—		13,181
Total noninterest income		10,552		46,952		—		—		57,504
Noninterest expense		49,506		29,079		641		—		79,226
Income (loss) before income taxes		2,942		18,893		(1,163)		—		20,672
Provision (benefit) for income taxes		1,628		4,117		(372)		—		5,373
Net income (loss)	$	1,314	$	14,776	$	(791)	$	—	$	15,299

Total assets at period end	$	4,451,114	$	233,138	$	721,153	$	(940,499)	$	4,464,906
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 June 30, 2019

	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated

	(in thousands)


Net interest and dividend income	$	27,022	$	210	$	(519)	$	—	$	26,713
Provision for loan losses		1,750		—		—		—		1,750
Net interest and dividend income, after provision for loan losses		25,272		210		(519)		—		24,963
Mortgage banking income:
Gain on sale of mortgage loans		1		8,428		—		—		8,429
Intersegment gain (loss)		(314)		314		—		—		—
Changes in mortgage servicing rights fair value		(438)		(1,803)		—		—		(2,241)
Other		377		2,090		—		—		2,467
Total mortgage banking income		(374)		9,029		—		—		8,655
Other noninterest income		7,067		(4)		—		—		7,063
Total noninterest income		6,693		9,025		—		—		15,718
Noninterest expense		25,257		8,917		907		—		35,081
Income (loss) before income taxes		6,708		318		(1,426)		—		5,600
Provision (benefit) for income taxes		802		418		(401)		—		819
Net income (loss)	$	5,906	$	(100)	$	(1,025)	$	—	$	4,781


	Six Months Ended June 30, 2019

	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp Inc.		Eliminations		Consolidated

	(in thousands)

Net interest and dividend income (expense)	$	53,441	$	319	$	(1,017)	$	—	$	52,743
Provision for loan losses		2,607		—		—		—		2,607
Net interest and dividend income (loss), after provision for loan losses		50,834		319		(1,017)		—		50,136
Mortgage banking income:
Gain on sale of mortgage loans		1		13,071		—		—		13,072
Intersegment gain (loss)		(473)		473		—		—		—
Changes in mortgage servicing rights fair value		(1,008)		(3,384)		—		—		(4,392)
Other		758		3,719		—		—		4,477
Total mortgage banking income (loss)		(722)		13,879		—		—		13,157
Other noninterest income (loss)		12,419		(16)		—		—		12,403
Total noninterest income		11,697		13,863		—		—		25,560
Noninterest expense		50,122		16,269		1,282		—		67,673
Income (loss) before income taxes		12,409		(2,087)		(2,299)		—		8,023
Provision (benefit) for income taxes		2,248		(427)		(646)		—		1,175
Net income (loss)	$	10,161	$	(1,660)	$	(1,653)	$	—	$	6,848

Total assets at period end	$	3,736,515	$	144,935	$	405,776	$	(549,802)	$	3,737,424
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 June 30, 2020, and our results of operations for the six months ended June 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 (“PPP”). 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 U.S. Small Business Administration (“SBA”) requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. As of June 30, 2020, the Bank had originated 1,071 PPP loans totaling approximately $152.6 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 June 30, 2020 there was $4.6 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. As of June 30, 2020 the Bank had 157 payment deferrals on commercial loans with a total principal balance of $262.4 million, 172 payment deferrals on residential mortgage loans with a total principal balance of $52.7 million and 664 payment deferrals on consumer loans with a total principal balance of $15.9 million. We also have 108 payment deferrals on sold and bank-serviced residential mortgage loans with a total principal balance of $20.8 million and provided forbearance to 331 borrowers with a total principal balance of $81.7 million that were sold and are serviced by a third party on our behalf. Most initial deferrals were for a 90-day period and none were greater than 180 days. The deferrals will begin to expire in the third quarter of 2020 unless an additional 90-day deferral is requested and approved.

Company Impact and Response

Our commercial and consumer banking products and services are offered primarily in South Eastern 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 June 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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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.


	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	$	207,183		$	198,021		$	167,178		$	84,465		$	10,253		$	15,206		$	682,306	$	1,318,051	51.8	%
Commercial and industrial		33,442			15,878			2,735			93,518			37,357			7,910			190,840		456,192	41.9
Commercial construction		10,010			6,749			21,444			—			9,503			9,044			56,750		194,549	29.2
Total	$	250,635		$	220,648		$	191,357		$	177,983		$	57,113		$	32,160		$	929,896	$	1,968,792	47.2	%
Percent to total commercial loans		13	%		11	%		10	%		9	%		3	%		2	%

Outstanding principal balance of:
Commercial deferrals	$	33,421		$	14,194		$	118,389		$	12,769		$	8,695		$	13,792		$	201,260	$	262,419	77	%
PPP loans	$	7,118		$	—		$	569		$	42,509		$	9,353		$	2,772		$	62,321	$	152,634	40.8	%
Nonaccrual loans	$	545		$	155		$	3,325		$	448		$	17		$	9,200		$	13,690	$	38,064	36	%

New commercial originations for the three months ended June 30, 2020, excluding PPP loans	$	22,179		$	14,914		$	—		$	50,624		$	—		$	—		$	87,717

Our commercial loan portfolio is diverse across many sectors and is largely secured by commercial real estate loans, which make up 66.9% 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 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 commercial sectors identified as at risk is $930.2 million, which represents 47.2% of the commercial loan portfolio. The at-risk sectors include $682.3 million in commercial real estate loans, $191.0 million in commercial and industrial loans, and $56.9 million in commercial construction loans.

As of June 30, 2020, the retail sector was $250.6 million, or 12.7% of total commercial loans and incudes $207.2 million in commercial real estate loans, $33.4 million in commercial and industrial loans and $10.0 million in commercial construction loans. PPP loans included in the sector totaled $7.1 million, and we have provided deferrals for loans in this sector with outstanding principal balances of $33.4 million. Excluding PPP loans, we originated $22.2 million loans during the second quarter that are within the retail sector. The commercial real estate loans includes $114.6 million in loans secured by retail space anchored by a diverse mix of national chains and grocery stores.

In the second quarter, we identified the office space sector as an additional at-risk sector, as the COVID-19 pandemic has dampened demand for office space and may further impact such demand as work-from-home arrangements become more common. As of June 30, 2020, the office space sector was $220.6 million, or 11.2% of total commercial loans, and included $198.0 million in commercial real estate loans, $15.9 million in commercial and industrial loans and $6.7 million in commercial construction loans. We provided deferrals for loans in the office space sector with outstanding principal balances of $14.2 million; however, no PPP loans were originated in this sector. We originated $14.9 million loans during the second quarter that are within the office sector.

As of June 30, 2020, the hotel sector was $191.4 million, or 9.7% of total commercial loans, and included $167.2 million in commercial real estate loans, $2.7 million in commercial and industrial loans and $21.4 million in commercial

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

construction loans. PPP loans included in the sector totaled $569,000, and we have provided deferrals for loans in this sector with outstanding principal balances of $118.4 million. In the first quarter of 2020, we charged off $1.2 million on a loan acquired from Coastway, secured by a hotel property whose credit deterioration was unrelated to the COVID-19 pandemic. That credit is on nonaccrual and amounted to $3.1 million at June 30, 2020.

The health and social services sector amounted to $178.1 million, or 9.0% of total commercial loans, as of June 30, 2020 and included $84.5 million in commercial real estate loans and $93.7 million in commercial and industrial loans. PPP loans included in the sector totaled $42.5 million, and we have provided deferrals for loans in this sector with outstanding principal balances of $12.8 million. Excluding PPP loans, we originated $50.6 million loans during the second quarter that are within this sector.

As of June 30, 2020, the restaurant sector amounted to $57.1 million, or 2.9% of total commercial loans, including $9.4 million in PPP loans. We provided deferrals for loans in this sector with outstanding principal balances of $8.7 million. The recreation sector amounted to $32.4 million, or 1.6% of total commercial loans, including $2.8 million in PPP loans. We provided deferrals for loans in this sector with outstanding principal balances of $13.8 million. Included in the recreation sector is a $9.0 million nonaccrual loan secured by an ice-skating rink for which credit deterioration began prior to the COVID-19 pandemic.

The loan portfolio has not experienced significant credit quality deterioration as of June 30, 2020, but we anticipate that the impact of the COVID-19 pandemic will result in increases in payment deferrals, delinquencies, charge-offs and loan modifications in the loan portfolio 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. 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 Form 10-Q is derived from the consolidated financial statements of the Company.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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 June 30, 2020 and December 31, 2019

Total Assets. Total assets increased $406.0 million, or 10.0%, to $4.64 billion at June 30, 2020 from $4.06 billion at December 31, 2019. The increase primarily reflects an increase of $290.4 million in net loans, a $48.3 million increase in loans held for sale, a $37.4 million increase in cash and cash equivalents and a $33.5 million increase in other assets. The increase in other assets reflects a $31.8 million increase unrealized gain in back-to-back commercial loan swap contracts with a corresponding increase in other liabilities.

Cash and Cash Equivalents. Cash and cash equivalents increased $37.4 million to $249.0 million at June 30, 2020 from $211.6 million at December 31, 2019.

Loans Held for Sale. Loans held for sale at June 30, 2020 were $158.9 million, an increase of $48.3 million from $110.6 million at December 31, 2019, reflecting strong residential mortgage loan demand continuing into the second quarter of 2020.

Loans, net. At June 30, 2020, net loans were $3.44 billion, an increase of $290.4 million, or 9.2%, 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 partially offset by a decrease in consumer loans and home equity lines of credit and second mortgage loans. Total commercial loans at June 30, 2020 were $1.97 billion, an increase of $338.7 million, or 20.8%, 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 $45.1 million, or 4.1%, and consumer loans decreased $81.4 million, or 18.7%. The Bank purchased $224.3 million in loans from HarborOne Mortgage in the first half of 2020. The allowance for loan losses was $36.1 million at June 30, 2020 and $24.1 million at December 31, 2019.

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


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

	(dollars in thousands)

Residential real estate:
One- to four-family	$	977,336	28.1	%	$	935,794	29.5	%
Second mortgages and equity lines of credit		152,709	4.4			155,716	4.9
Residential construction		20,655	0.6			14,055	0.4
Total residential real estate		1,150,700	33.1			1,105,565	34.8
Commercial:
Commercial real estate		1,318,051	37.9			1,169,923	36.8
Commercial construction		194,549	5.6			153,907	4.9
Commercial and industrial		456,192	13.1			306,282	9.7
Total commercial loans		1,968,792	56.7			1,630,112	51.4
Consumer:
Auto		35,150	1.0			49,686	1.6
Auto lease loans		310,062	8.9			374,906	11.8
Personal		9,318	0.3			11,289	0.4
Total consumer		354,530	10.2			435,881	13.8
Total loans		3,474,022	100.0	%		3,171,558	100.0	%
Allowance for loan losses		(36,107)				(24,060)
Loans, net	$	3,437,915			$	3,147,498

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Securities. Total investment securities at June 30, 2020 were $262.7 million, a decrease of $3.1 million, or 1.2%, 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 June 30, 2020 there were $72.3 million in sales of investment securities with a gain of $2.5 million and purchases of $100.7 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:


	June 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	$	10,004	$	10,209	$	14,994	$	15,204
U.S. government agency and government-sponsored mortgage-backed and collateralized mortgage obligations		227,089		231,448		190,119		191,546
SBA asset-backed securities		18,181		19,046		32,461		32,723
Municipal bonds		2,002		2,007		—		—
Total securities available for sale	$	257,276	$	262,710	$	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 June 30, 2020, we serviced mortgage loans for others with an aggregate outstanding principal balance of $2.37 billion. Total MSRs were $16.1 million at June 30, 2020 and $17.2 million at December 31, 2019.

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 quarter 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 $365.8 million, or 12.4%, to $3.31 billion at June 30, 2020 from $2.94 billion at December 31, 2019. The following table sets forth information concerning the composition of deposits:


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

	(dollars in thousands)

Noninterest-bearing deposits	$	642,971	$	406,403	$	236,568		58.2	%
NOW accounts		199,336		165,790		33,546		20.2
Regular savings		876,753		620,705		256,048		41.3
Money market accounts		562,718		575,881		(13,163)		(2.3)
Term certificate accounts		679,046		785,005		(105,959)		(13.5)
Consumer and business deposits		2,960,824		2,553,784		407,040		15.9
Municipal deposits		274,933		286,932		(11,999)		(4.2)
Wholesale deposits		72,917		102,157		(29,240)		(28.6)
Total deposits	$	3,308,674	$	2,942,873	$	365,801		12.4	%

Reciprocal deposits	$	125,464	$	277,874	$	(152,410)		(54.8)	%

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The growth in deposits was driven by an increase of $407.0 million in consumer and business deposits, partially offset by a $12.0 million decrease in municipal deposits and a $29.2 million decrease in wholesale 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 June 30, 2020, wholesale deposits included brokered deposits of $59.9 million and $13.0 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 $125.5 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 $13.0 million, or 3.7%, to $341.1 million at June 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 $684.5 million at June 30, 2020 compared to $665.8 million at December 31, 2019.

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2020 and 2019

HarborOne Bancorp, Inc. Consolidated

Overview. Consolidated net income for the three and six months ended June 30, 2020 was $10.6 million and $15.3 million, respectively, compared to net income of $4.8 million and $6.8 million for the three and six months ended June 30, 2019, respectively.

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.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis


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

	(dollars in thousands)

Interest-earning assets:
Investment securities ⁽¹⁾	$	240,025		$	1,430	2.40	%	$	259,151		$	1,880	2.91	%
Other interest-earning assets		222,840			239	0.43			26,758			448	6.71
Loans held for sale		119,047			988	3.34			48,158			542	4.52
Loans
Commercial loans ⁽²⁾		1,872,349			18,196	3.91			1,445,652			18,580	5.16
Residential real estate loans⁽²⁾		1,123,896			11,811	4.23			1,118,761			12,265	4.40
Consumer loans ⁽²⁾		372,929			3,963	4.27			459,774			4,593	4.01
Total loans		3,369,174			33,970	4.06			3,024,187			35,438	4.70
Total interest-earning assets		3,951,086			36,627	3.73			3,358,254			38,308	4.58
Noninterest-earning assets		334,452							260,864
Total assets	$	4,285,538						$	3,619,118
Interest-bearing liabilities:
Savings accounts	$	842,560			834	0.40		$	528,360			564	0.43
NOW accounts		187,560			33	0.07			140,115			25	0.07
Money market accounts		826,939			1,207	0.59			872,653			3,384	1.56
Certificates of deposit		730,756			3,472	1.91			788,701			4,627	2.35
Brokered deposits		66,701			259	1.56			124,122			762	2.46
Total interest-bearing deposits		2,654,516			5,805	0.88			2,453,951			9,362	1.53
FHLB advances		258,679			845	1.31			291,835			1,679	2.31
Subordinated debentures		33,951			524	6.21			33,826			524	6.21
Total borrowings		292,630			1,369	1.88			325,661			2,203	2.71
Total interest-bearing liabilities		2,947,146			7,174	0.98			2,779,612			11,565	1.67
Noninterest-bearing liabilities:
Noninterest-bearing deposits		585,715							423,462
Other noninterest-bearing liabilities		72,808							49,163
Total liabilities		3,605,669							3,252,237
Total equity		679,869							366,881
Total liabilities and equity	$	4,285,538						$	3,619,118
Tax equivalent net interest income					29,453							26,743
Tax equivalent interest rate spread ⁽³⁾						2.75	%						2.91	%
Less: tax equivalent adjustment					6							30
Net interest income as reported				$	29,447						$	26,713
Net interest-earning assets ⁽⁴⁾	$	1,003,940						$	578,642
Net interest margin ⁽⁵⁾						3.00	%						3.19	%
Tax equivalent effect						—							—
Net interest margin on a fully tax equivalent basis						3.00	%						3.19	%
Ratio of interest-earning assets to interest-bearing liabilities		134.06	%						120.82	%

Supplemental information:
Total deposits, including demand deposits	$	3,240,231		$	5,805			$	2,877,413		$	9,362
Cost of total deposits						0.72	%						1.31	%
Total funding liabilities, including demand deposits	$	3,532,861		$	7,174			$	3,203,074		$	11,565
Cost of total funding liabilities						0.82	%						1.45	%


⁽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 2.40% and 2.86% for the quarters ended June 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.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis


	Six Months Ended June 30,
	2020							2019
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost		Balance			Interest		Cost

	(dollars in thousands)

Interest-earning assets:
Investment securities ⁽¹⁾		257,828			3,252	2.54			259,678			3,766	2.92
Other interest-earning assets		204,730			998	0.98			32,334			931	5.81
Loans held for sale		90,297			1,565	3.48			38,797			900	4.68
Loans
Commercial loans ⁽²⁾		1,760,008			36,319	4.15			1,414,415			36,058	5.14
Residential real estate loans⁽²⁾		1,112,036			23,355	4.22			1,118,901			24,472	4.41
Consumer loans ⁽²⁾		394,123			8,321	4.25			472,683			9,273	3.96
Total loans		3,266,167			67,995	4.19			3,005,999			69,803	4.68
Total interest-earning assets		3,819,022			73,810	3.89			3,336,808			75,400	4.56
Noninterest-earning assets		324,323							256,895
Total assets	$	4,143,345						$	3,593,703
Interest-bearing liabilities:
Savings accounts	$	764,295			2,132	0.56		$	506,782			928	0.37
NOW accounts		173,130			64	0.07			138,543			50	0.07
Money market accounts		831,048			3,790	0.92			833,781			6,144	1.49
Certificates of deposit		762,819			7,829	2.06			800,780			9,139	2.30
Brokered deposits		79,445			683	1.73			111,800			1,344	2.42
Total interest-bearing deposits		2,610,737			14,498	1.12			2,391,686			17,605	1.48
FHLB advances		249,990			2,098	1.69			341,880			3,954	2.33
Subordinated debentures		33,935			1,047	6.20			33,824			1,029	6.13
Total borrowings		283,925			3,145	2.23			375,704			4,983	2.67
Total interest-bearing liabilities		2,894,662			17,643	1.23			2,767,390			22,588	1.65
Noninterest-bearing liabilities:
Noninterest-bearing deposits		502,668							412,081
Other noninterest-bearing liabilities		70,261							50,682
Total liabilities		3,467,591							3,230,153
Total equity		675,754							363,550
Total liabilities and equity	$	4,143,345						$	3,593,703
Tax equivalent net interest income					56,167							52,812
Tax equivalent interest rate spread ⁽³⁾						2.66	%						2.91	%
Less: tax equivalent adjustment					20							69
Net interest income as reported				$	56,147						$	52,743
Net interest-earning assets ⁽⁴⁾	$	924,360						$	569,418
Net interest margin ⁽⁵⁾						2.96	%						3.19	%
Tax equivalent effect						—							—
Net interest margin on a fully tax equivalent basis						2.96	%						3.19	%
Ratio of interest-earning assets to interest-bearing liabilities		131.93	%						120.58	%

Supplemental information:
Total deposits, including demand deposits	$	3,113,405		$	14,498			$	2,803,767		$	17,605
Cost of total deposits						0.94	%						1.27	%
Total funding liabilities, including demand deposits	$	3,397,330		$	17,643			$	3,179,471		$	22,588
Cost of total funding liabilities						1.04	%						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 2.52% and 2.87% for the six months ended June 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.

Table of Contents

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 June 30,						Six Months Ended June 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	$	(133)	$	(317)	$	(450)	$	(26)	$	(488)	$	(514)
Other interest-earning assets		560		(769)		(209)		1,408		(1,341)		67
Loans held for sale		620		(174)		446		947		(282)		665
Loans
Commercial loans		4,748		(5,132)		(384)		8,021		(7,760)		261
Residential real estate loans		151		(605)		(454)		(18)		(1,099)		(1,117)
Consumer loans		(760)		130		(630)		(1,356)		404		(952)
Total loans		4,139		(5,607)		(1,468)		6,647		(8,455)		(1,808)
Total interest-earning assets		5,186		(6,867)		(1,681)		8,976		(10,566)		(1,590)
Interest-bearing liabilities:
Savings accounts		317		(47)		270		334		870		1,204
NOW accounts		8		—		8		14		—		14
Money market accounts		(22)		(2,155)		(2,177)		343		(2,697)		(2,354)
Certificates of deposit		(309)		(846)		(1,155)		(364)		(946)		(1,310)
Brokered deposit		(280)		(223)		(503)		(332)		(329)		(661)
Total interest-bearing deposits		(286)		(3,271)		(3,557)		(5)		(3,102)		(3,107)
FHLB advances		(174)		(660)		(834)		(915)		(941)		(1,856)
Subordinated debentures		—		—		—		2		16		18
Total borrowings		(174)		(660)		(834)		(913)		(925)		(1,838)
Total interest-bearing liabilities		(460)		(3,931)		(4,391)		(918)		(4,027)		(4,945)
Change in net interest income	$	5,646	$	(2,936)	$	2,710	$	9,894	$	(6,539)	$	3,355

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Interest and Dividend Income. Interest and dividend income on a tax equivalent basis decreased $1.7 million, or 4.4%, to $36.6 million for the three months ended June 30, 2020, compared to $38.3 million for the three months ended June 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 June 30, 2020, the primary components of the decrease were a $1.5 million decrease in interest on total loans, a $450,000 decrease investment income and a $209,000 decrease in interest on other interest earning assets, partially offset by a $446,000 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 85 basis points decrease in the average yield on loans, partially offset by the $592.8 million, or 17.7% 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 six months of 2019, interest and dividend income decreased $1.6 million, or 2.1%, reflecting similar trends as discussed in the quarter over quarter results. Average loans and loans held for sale increased $311.7 million, or 10.2%. As a result of a 39 basis point decrease in yield, there was a $1.1 million decrease in interest income on loans and loans held for sale.

Interest Expense. Interest expense decreased $4.4 million, or 61.2%, to $7.2 million for the three months ended June 30, 2020 from $11.6 million for the three months ended June 30, 2019. The decrease resulted from a $3.6 million decrease in interest expense on deposits and a $834,000 decrease in interest expense on FHLB borrowings. The decrease in interest expense on deposits reflected a 65 basis point decrease in the cost of interest bearing deposits, partially offset by $200.6 million, or 8.2%, 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 $314.2 million, or 59.5%, and the average cost of savings accounts decreased 3 basis points. The cost of money market deposits decreased 97 basis points to 0.59% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 and the average balance decreased 5.2%. Average certificates of deposit decreased by $57.9 million, or 7.3%, and the cost of certificates of deposits was 1.91% for the second quarter of 2020 compared to 2.35% for the second quarter of 2019. The decrease in interest expense on FHLB advances resulted from a 100 basis point decrease in the cost of FHLB advances and a $33.2 million, or 11.4%, decrease in average balances.

Compared to the first six months of 2019, interest expense decreased $4.9 million, or 21.9% to $17.6 million from $22.6 million reflecting similar trends discussed in the quarter over quarter results. Average interest bearing deposits increased $219.1 million, or 9.2% and the cost of interest-bearing deposits decreased 36 basis points year over year. The decrease in interest expense on FHLB borrowings is due to a 64 basis point decrease in the cost of borrowed funds and the average balance decrease of $91.9 million, or 26.9%.

Net Interest and Dividend Income. Net interest and dividend income on a tax equivalent basis increased $2.7 million, or 10.1%, to $29.5 million for the three months ended June 30, 2020 from $26.7 million for the three months ended June 30, 2019, primarily as a result of deposit account repricing and commercial loan growth. The tax equivalent net interest spread decreased 16 basis points to 2.75% for the three months ended June 30, 2020 from 2.91% for the three months ended June 30, 2019, and net interest margin on a tax equivalent basis decreased 19 basis points to 3.00% for the three months ended June 30, 2020 from 3.19% for three months ended June 30, 2019.

Compared to the first six months of 2019, net interest and dividend income increased $3.4 million, or 6.4%, to $56.2 million from $52.8 million. The tax equivalent net interest spread decreased 25 basis points to 2.66% for the six months ended June 30, 2020 from 2.91% for the six months ended June 30, 2019, and net interest margin on a tax equivalent basis also decreased by 23 basis points to 2.96% for the six months ended June 30, 2020 from 3.19% for the six months ended June 30, 2019.

Income Tax Provision. The provision for income taxes and effective tax rate for the three months ended June 30, 2020 was $3.7 million and 25.8%, respectively, compared to $819,000 and 14.6%, respectively, for the three months ended June 30, 2019. Income tax expense for the quarter ended June 30, 2019 was impacted by the 2013 federal tax refund of $603,000 and the 2013 Massachusetts state tax refund of $211,000 recognized in the quarter.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The provision for income taxes and effective tax rate for the six months ended June 30, 2020 was $5.4 million and 26.0%, respectively, compared to $1.2 million and 14.6%, respectively, for the six months ended June 30, 2019. Income tax expense for the six months ended June 30, 2019 was impacted by 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.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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


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

	(dollars in thousands)

Net interest and dividend income	$	29,139	$	27,022	$	2,117	7.8	%	$	739	$	210	$	529	251.9	%
Provision for loan losses		10,004		1,750		8,254	471.7			—		—		—	—
Net interest and dividend income, after provision for loan losses		19,135		25,272		(6,137)	(24.3)			739		210		529	251.9
Mortgage banking income:
Gain on sale of mortgage loans		—		1		(1)	(100.0)			30,862		8,428		22,434	266.2
Intersegment gain (loss)		(1,399)		(314)		(1,085)	(345.5)			1,399		314		1,085	345.5
Changes in mortgage servicing rights fair value		(490)		(438)		(52)	(11.9)			(621)		(1,803)		1,182	65.6
Other		346		377		(31)	8.2			3,764		2,090		1,674	80.1
Total mortgage banking income (loss)		(1,543)		(374)		(1,169)	(312.6)			35,404		9,029		26,375	292.1
Other noninterest income (loss)		4,788		7,067		(2,279)	(32.2)			(11)		(4)		(7)	(175.0)
Total noninterest income		3,245		6,693		(3,448)	(51.5)			35,393		9,025		26,368	292.2
Noninterest expense		25,218		25,257		(39)	(0.2)			18,273		8,917		9,356	104.9
Income (loss) before income taxes		(2,838)		6,708		(9,546)	(142.3)			17,859		318		17,541	NM
Provision (benefit) for income taxes		27		802		(775)	(96.6)			3,878		418		3,460	827.8
Net income (loss)	$	(2,865)	$	5,906	$	(8,771)	(148.5)	%	$	13,981	$	(100)	$	14,081	NM	%


	HarborOne Bank								HarborOne Mortgage
	Six Months Ended								Six Months Ended
	June 30,				Increase (Decrease)				June 30,				Increase (Decrease)
	2020		2019		Dollars		Percent		2020		2019		Dollars		Percent

	(dollars in thousands)


Net interest and dividend income	$	55,649	$	53,441	$	2,208	4.1	%	$	1,020	$	319	$	701	219.7	%
Provision for loan losses		13,753		2,607		11,146	427.5			—		—		—	—
Net interest and dividend income, after provision for loan losses		41,896		50,834		(8,938)	(17.6)			1,020		319		701	219.7
Mortgage banking income:
Gain on sale of mortgage loans		—		1		(1)	(100.0)			43,140		13,071		30,069	230.0
Intersegment gain (loss)		(1,799)		(473)		(1,326)	(280.3)			1,799		473		1,326	280.3
Changes in mortgage servicing rights fair value		(1,660)		(1,008)		(652)	(64.7)			(3,838)		(3,384)		(454)	(13.4)
Other		697		758		(61)	(8.0)			5,984		3,719		2,265	60.9
Total mortgage banking income (loss)		(2,762)		(722)		(2,040)	282.5			47,085		13,879		33,206	239.3
Other noninterest income (loss)		13,314		12,419		895	7.2			(133)		(16)		(117)	(731.3)
Total noninterest income		10,552		11,697		(1,145)	(9.8)			46,952		13,863		33,089	238.7
Noninterest expense		49,506		50,122		(616)	(1.2)			29,079		16,269		12,810	78.7
Income (loss) before income taxes		2,942		12,409		(9,467)	(76.3)			18,893		(2,087)		20,980	NM
Provision (benefit) for income taxes		1,628		2,248		(620)	(27.6)			4,117		(427)		4,544	NM
Net income (loss)	$	1,314	$	10,161	$	(8,847)	(87.1)	%	$	14,776	$	(1,660)	$	16,436	990.1	%

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

HarborOne Bank Segment

Results of Operations for the Three and Six Months Ended June 30, 2020 and 2019

Net Income. The Bank’s net income decreased by $8.8 million to a net loss of $2.9 million for the three months ended June 30, 2020 compared to net income of $5.9 million for the three months ended June 30, 2019. Pre-tax loss was $2.8 million for the three months ended June 30, 2020, a $9.5 million decrease from the three months ended June 30, 2019. The decrease in pre-tax income reflects an increase of $8.3 million in the provision for loan losses, and a $3.4 million decrease in noninterest income partially offset by a $2.1 million increase in net interest income and a $39,000 decrease in noninterest expense. The provision for income taxes decreased $775,000.

Compared to the first six months of 2019, the Bank’s net income for the six months ended June 30, 2020 decreased $8.8 million to $1.3 million from $10.2 million. Pre-tax income decreased $9.5 million, or 76.3%, due to a $11.1 million increase in provision for loan losses and a $1.1 million decrease in noninterest income partially offset by a $2.2 million increase in net interest and dividend income and a $616,000 decrease in noninterest expenses. The provision for income taxes decreased $620,000.

Provision for Loan Losses. The provision for loan losses for the three and six months ended June 30, 2020 was $10.0 million and $13.8 million, respectively, compared to provision for loan losses of $1.8 million and $2.6 million, respectively, for the three and six months ended June 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 six months ended June 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 six months ended June 30, 2020 also include $5.7 million and $7.2 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 six months ended June 30, 2019 primarily reflected commercial real estate loan growth.

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 ranged from 14 to 26 basis points and amounted to allocations of $1.6 million to the residential real estate portfolio, $3.2 million to the commercial portfolio and $935,000 to the consumer portfolio.

Net charge-offs were $286,000 and $1.7 million for the three and six months ended June 30, 2020 compared to $771,000 and $1.0 million for the three and six months ended June 30, 2019. Net charge-offs to average loans outstanding on an annualized basis for the three and six months ended June 30, 2020 were 0.03% and 0.10%, respectively, compared to 0.10% and 0.07% for the three and six months ended June 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 and whose credit deterioration was unrelated to the COVID-19 pandemic. At June 30, 2020, nonperforming assets were $38.6 million and nonperforming assets to total assets were 0.86% at as compared to $17.2 million and 0.46%, respectively, at June 30, 2019. The increase in nonperforming assets was primarily due to four commercial loan relationships. As of June 30, 2020, the increase in nonperforming loans was not a result of the COVID-19 pandemic.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Income. Total noninterest income was $3.2 million and $10.6 million for the three and six months ended June 30, 2020, respectively, compared to $6.7 million and $11.7 million for the respective prior year periods. The following table sets forth the components of noninterest income:


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

	(dollars in thousands)

Gain on sale of mortgage loans	$	—	$	1	$	(1)		100.0	%
Intersegment loss		(1,399)		(314)		(1,085)		(345.5)
Secondary market loan servicing fees, net of guarantee fees		346		377		(31)		(8.2)
Changes in mortgage servicing rights fair value		(490)		(438)		(52)		(11.9)
Total mortgage banking income		(1,543)		(374)		(1,169)		(312.6)	%
Interchange fees		2,183		2,123		60		2.8
Other deposit account fees		786		1,933		(1,147)		(59.3)
Income on retirement plan annuities		103		100		3		3.0
Gain on sale and call of securities		8		1,267		(1,259)		100.0
Bank-owned life insurance income		554		253		301		119.0
Swap fee income		731		748		(17)		(2.3)
Other		423		643		(220)		(34.2)
Total noninterest income	$	3,245	$	6,693	$	(3,448)		(51.5)	%


	Six Months Ended June 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Gain on sale of mortgage loans	$	—	$	1	$	(1)		(100.0)	%
Intersegment loss		(1,799)		(473)		(1,326)		(280.3)
Secondary market loan servicing fees, net of guarantee fees		697		758		(61)		(8.0)
Changes in mortgage servicing rights fair value		(1,660)		(1,008)		(652)		64.7
Total mortgage banking income		(2,762)		(722)		(2,040)		282.5	%
Interchange fees		4,176		4,094		82		2.0
Other deposit account fees		2,724		3,740		(1,016)		(27.2)
Income on retirement plan annuities		204		196		8		4.1
Gain on sale and call of securities		2,533		1,267		1,266		100.0
Bank-owned life insurance income		1,105		506		599		118.4
Swap fee income		1,142		1,360		(218)		(16.0)
Other		1,430		1,256		174		13.9
Total noninterest income	$	10,552	$	11,697	$	(1,145)		(9.8)	%

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

●	Mortgage banking income reflects the consolidation of the Bank’s residential lending division into HarborOne Mortgage in April 2018. The Bank records an intersegment loss on loans purchased from HarborOne Mortgage that is offset in consolidation.

●	The change in the MSR fair value is consistent with the 122 basis point decrease in the 10-year Treasury Constant Maturity rate over the six months ended June 30, 2020. As interest rates fall, prepayment speeds tend to increase and MSR fair value decreases.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

●	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.

Noninterest Expense. Total noninterest expense was $25.2 million and $49.5 million for the three and six months ended June 30, 2020, respectively, compared to $25.3 million and $50.1 million for the respective prior year periods. The following table sets forth the components of noninterest expense:


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

	(dollars in thousands)

Compensation and benefits	$	13,254	$	13,879	$	(625)		(4.5)	%
Occupancy and equipment		3,298		3,685		(387)		(10.5)
Data processing expenses		2,189		2,110		79		3.7
Loan expenses		317		341		(24)		(7.0)
Marketing		1,010		1,078		(68)		(6.3)
Deposit expenses		461		434		27		6.2
Postage and printing		404		379		25		6.6
Professional fees		1,207		914		293		32.1
Foreclosed and repossessed assets		13		(5)		18		360.0
Deposit insurance		279		589		(310)		(52.6)
Other expenses		2,786		1,853		933		50.4
Total noninterest expense	$	25,218	$	25,257	$	(39)		(0.2)	%


	Six Months Ended June 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	26,550	$	27,833	$	(1,283)		(4.6)	%
Occupancy and equipment		7,069		7,381		(312)		(4.2)
Data processing expenses		4,306		4,120		186		4.5
Loan expenses		499		859		(360)		(41.9)
Marketing		1,805		1,955		(150)		(7.7)
Deposit expenses		960		784		176		22.4
Postage and printing		857		825		32		3.9
Professional fees		2,111		1,619		492		30.4
Foreclosed and repossessed assets		138		(76)		214		(281.6)
Deposit insurance		550		1,255		(705)		(56.2)
Other expenses		4,661		3,567		1,094		30.7
Total noninterest expense	$	49,506	$	50,122	$	(616)		(1.2)	%

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

●	The decrease in compensation and benefits for the three and six months ended June 30, 2020 primarily reflects the prior periods including the accrual of compensation for the employment agreement of a former Coastway executive.

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

●	The 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 six months ended June 30, 2020 include $1.3 million and $1.6 million, respectively, in COVID-19 pandemic expenses partially offset by a decrease in core deposit intangible amortization of $170,000 and $341,000 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 Six Months Ended June 30, 2020 and 2019

Net Income. HarborOne Mortgage recorded a net income of $14.0 million and $14.8 million for the three and six months ended June 30, 2020, respectively, as compared to a net loss of $100,000 and $1.7 million for the respective prior year periods. HarborOne Mortgage segment’s results are heavily impacted by prevailing rates, refinancing activity and home sales.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Income. Total noninterest income was $35.4 million and $47.1 million for the three and six months ended June 30, 2020, respectively, as compared to $9.0 million and $13.9 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 June 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Gain on sale of mortgage loans	$	30,607	$	8,302	$	22,305		268.7	%
Intersegment gain		1,399		314		1,085		345.5
Processing, underwriting and closing fees		3,094		1,243		1,851		148.9
Secondary market loan servicing fees net of guarantee fees		925		973		(48)		(4.9)
Changes in mortgage servicing rights fair value		(621)		(1,803)		1,182		65.6
Total mortgage banking income	$	35,404	$	9,029	$	26,375		292.1	%

Originated mortgage servicing rights included in gain on sale of mortgage loans	$	3,813	$	131	$	3,682		2,810.7	%
Change in 10-year Treasury Constant Maturity rate in basis points		(4)		(41)


	Six Months Ended June 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Gain on sale of mortgage loans	$	42,789	$	12,914	$	29,875		231.3	%
Intersegment gain		1,799		473		1,326		280.3
Processing, underwriting and closing fees		4,526		1,972		2,554		129.5
Secondary market loan servicing fees net of guarantee fees		1,809		1,904		(95)		(5.0)
Changes in mortgage servicing rights fair value		(3,838)		(3,384)		(454)		NM
Total mortgage banking income	$	47,085	$	13,879	$	33,206		239.3	%

Originated mortgage servicing rights included in gain on sale of mortgage loans	$	4,091	$	296	$	3,795		1,282.1	%
Change in 10-year Treasury Constant Maturity rate in basis points		(126)		(69)

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 126 basis points for the six months ended June 30, 2020 and negatively impacted the fair value of the mortgage servicing rights. Residential mortgage loan payoffs also resulted in accelerated amortization of MSRs of $859,000 in the second quarter of 2020.

●	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 six months ended June 30, 2020.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The following table provides additional loan production detail:


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

	(dollars in thousands)

Product Type
Conventional	$	612,763	71.5	%		$	177,359	57.7	%
Government		31,235	3.7				48,240	15.7
State Housing Agency		19,463	2.3				16,769	5.5
Jumbo		192,897	22.5				64,958	21.1
Seconds		157	0.0				42	—
Total	$	856,515	100.0	%		$	307,368	100.0	%

Purpose
Purchase	$	233,041	27.2	%		$	222,349	72.3	%
Refinance		608,777	71.1				81,107	26.4
Construction		14,697	1.7				3,912	1.3
Total	$	856,515	100.0	%		$	307,368	100.0	%


	Six Months Ended June 30,
	2020				2019
	Loan				Loan
	Amount		% of Total		Amount		% of Total

	(dollars in thousands)

Product Type
Conventional	$	871,136	71.9	%	$	269,022	57.8	%
Government		66,964	5.5			76,006	16.3
State Housing Agency		33,226	2.8			34,006	7.3
Jumbo		240,298	19.8			86,497	18.6
Seconds		272	0.0			70	—
Total	$	1,211,896	100.0	%	$	465,601	100.0	%

Purpose
Purchase	$	376,734	31.1	%	$	346,681	74.5	%
Refinance		814,103	67.2			112,118	24.1
Construction		21,059	1.7			6,802	1.4
Total	$	1,211,896	100.0	%	$	465,601	100.0	%

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Expense. Total noninterest expense was $18.3 million and $29.1 million for the three and six months ended June 30, 2020 compared to $8.9 million and $16.3 million for the prior year periods. The following tables set forth the components of noninterest expense:


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

	(dollars in thousands)

Compensation and benefits	$	14,317	$	6,639	$	7,678		115.6	%
Occupancy and equipment		838		705		133		18.9
Data processing expenses		88		89		(1)		(1.1)
Loan expenses		2,446		993		1,453		146.3
Marketing		47		99		(52)		(52.5)
Postage and printing		30		41		(11)		(26.8)
Professional fees		299		208		91		43.8
Other expenses		208		143		65		45.5
Total noninterest expense	$	18,273	$	8,917	$	9,356		104.9	%


	Six Months Ended June 30,				Increase (Decrease)
	2020		2019		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	22,412	$	11,996	$	10,416		86.8	%
Occupancy and equipment		1,614		1,451		163		11.2
Data processing expenses		152		125		27		21.6
Loan expenses		3,745		1,746		1,999		114.5
Marketing		128		180		(52)		(28.9)
Postage and printing		70		77		(7)		(9.1)
Professional fees		561		418		143		34.2
Other expenses		397		276		121		43.8
Total noninterest expense	$	29,079	$	16,269	$	12,810		78.7	%

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 six months ended June 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.

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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.


	June 30,			December 31,
	2020			2019

	(dollars in thousands)

Nonaccrual loans:
Residential real estate:
One- to four-family	$	10,595		$	10,610
Second mortgages and equity lines of credit		1,095			1,561
Commercial real estate		3,631			530
Commercial construction		10,939			11,244
Commercial and industrial		10,572			5,831
Consumer		1,232			545
Total nonaccrual loans ⁽¹⁾		38,064			30,321
Other real estate owned and repossessed assets:
One- to four-family residential real estate owned		298			298
Other repossessed assets		239			421
Total nonperforming assets		38,601			31,040
Performing troubled debt restructurings		13,348			15,104
Total nonperforming assets and performing troubled debt restructurings	$	51,949		$	46,144

Total nonperforming loans to total loans ⁽²⁾		1.10	%		0.96	%
Total nonperforming assets and performing troubled debt restructurings to total assets		1.16	%		1.14	%
Total nonperforming assets to total assets		0.86	%		0.76	%

⁽¹⁾ $4.3 million and $5.0 million of troubled debt restructurings are included in total nonaccrual loans at June 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 six months ended in June 30, 2020 and 2019, amounted to $254,000 and $418,000, respectively. Income related to impaired loans included in interest income for the six months ended June 30, 2020 and 2019, amounted to $583,000 and $971,000, 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:


	June 30, 2020		December 31, 2019

	(in thousands)

Classified loans:
Substandard	$	19,860	$	14,997
Doubtful		5,121		2,435
Loss		—		—
Total classified loans		24,981		17,432
Special mention		15,967		25,357
Total criticized loans	$	40,948	$	42,789

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

At June 30, 2020, our allowance for loan losses was $36.1 million, or 1.04% of total loans and 94.86% 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 $11.1 million fair value discount on loans acquired from Coastway. Nonperforming loans at June 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:


	June 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	$	5,097	14.12	%	28.13	%	$	2,606	10.83	%	29.44	%
Second mortgages and equity lines of credit		685	1.90		4.40			551	2.29		4.88
Residential construction		75	0.21		0.59			21	0.09		0.44
Commercial real estate		18,389	50.93		37.94			12,875	53.51		37.03
Commercial construction		3,215	8.90		5.60			2,526	10.50		4.86
Commercial and industrial		3,562	9.87		13.13			2,977	12.37		9.67
Consumer		2,204	6.10		10.21			1,010	4.20		13.68
Total general and allocated allowance		33,227	92.02		100.00	%		22,566	93.79		100.00	%
Unallocated		2,880	7.98					1,494	6.21
Total	$	36,107	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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019

	(dollars in thousands)

Allowance at beginning of period	$	26,389		$	21,282		$	24,060		$	20,655
Provision for loan losses		10,004			1,750			13,753			2,607
Charge offs:
Residential real estate:
One- to four-family		(52)			—			(52)			(20)
Second mortgages and equity lines of credit		—			(116)			—			(116)
Commercial Real Estate		—			—			(1,174)			—
Commercial and industrial		(280)			(750)			(577)			(790)
Consumer		(126)			(178)			(379)			(444)
Total charge-offs		(458)			(1,044)			(2,182)			(1,370)

Recoveries:
Residential real estate:
One- to four-family		129			180			143			180
Second mortgages and equity lines of credit		5			31			39			44
Commercial real estate		—			—			1			5
Commercial and industrial		—			1			219			15
Consumer		38			61			74			125
Total recoveries		172			273			476			369
Net charge-offs		(286)			(771)			(1,706)			(1,001)
Allowance at end of period	$	36,107		$	22,261		$	36,107		$	22,261
Total loans outstanding at end of period	$	3,474,022		$	3,060,564		$	3,474,022		$	3,060,564
Average loans outstanding	$	3,369,174		$	3,024,187		$	3,266,167		$	3,005,999
Allowance for loan losses as a percent of total loans outstanding at end of period		1.04	%		0.73	%		1.04	%		0.73	%
Annualized net loans charged off as a percent of average loans outstanding		0.03	%		0.10	%		0.10	%		0.07	%
Allowance for loan losses to nonperforming loans at end of period		94.86	%		133.61	%		94.86	%		133.61	%

We recorded a provision for loan losses of $10.0 million and $1.7 million for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019 we recorded a provision for loan losses of $13.8 million and $2.6 million, respectively. Changes in the provision for loan losses are also 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 June 30, 2020 includes adjustments for our quarterly analysis of our historical and peer loss experience rates, commercial real estate loan growth, and a $5.7 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 six months ended June 30, 2019 primarily reflected commercial real estate loan growth.

Net charge-offs totaled $286,000 the quarter ended June 30, 2020, or 0.03%, of average loans outstanding on an annualized basis, compared to $771,000, or 0.10% of average loans outstanding for the quarter ended June 30, 2019. Nonperforming assets were $38.6 million at June 30, 2020 compared to $31.0 million at December 31, 2019 and $17.2 million at June 30, 2019. Nonperforming assets as a percentage of total assets were 0.86% at June 30, 2020, 0.76% at December 31, 2019 and 0.46% at June 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.

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,

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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 June 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:


June 30, 2020
	Change in Net Interest Income
Changes in Interest Rates	Year One
(basis points) ⁽¹⁾	(% change from year one base)
+300	7.40	%
(100)	(6.90)	%

⁽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 June 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 June 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	$	756,704	$	65,078	9.4	%	18.0	%	2.66
0		691,626		—	—		15.4		—
- 100		576,504		(115,122)	(16.6)		12.6		2.72

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

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.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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 $22.2 million and $49.7 million for the six months ended June 30, 2020 and 2019, respectively. Net cash used by investing activities was $295.1 million for the six months ended June 30, 2020 and consists primarily of disbursements for loan originations and the purchase of securities. For the six months ended June 30, 2019, net cash used by investing activities was $51.1 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 $354.6 million and $73.9 million for the six months ended June 30, 2020 and 2019, respectively.

As of June 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 June 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 June 30, 2020, we had outstanding commitments to originate loans of $581.5 million and unadvanced funds on loans of $451.4 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 June 30, 2020 totaled $680.0 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 June 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 June 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 March 31, 2020 (the “First Quarter 10-Q”), based on information currently known to us and recent developments since the date of the First Quarter 10-Q filing. 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 First 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 First 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. While certain of these restrictions have been eased and workplaces in the communities we serve are beginning to reopen, the pace of reopening is measured and these government policies and directives 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. 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 half 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 June 30, 2020, we have originated 1,071 loans aggregating $152.6 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

None.

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 June 30, 2020 (and are numbered in accordance with Item 601 of Regulation S-K):


Exhibit No.		Description

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 June 30, 2020 and December 31, 2019, (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019 (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019, (v) the Consolidated Statements of Cash Flows for the six months ended June 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: August 7, 2020	By:	/s/ James W. Blake
		James W. Blake
		Chief Executive Officer and Director (Principal Executive Officer)

Date: August 7, 2020	By:	/s/ Linda H. Simmons
		Linda H. Simmons
		Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)