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HarborOne Bancorp, Inc. - Quarter Report: 2022 September (Form 10-Q)

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2022

or

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 November 3, 2022, there were 49,188,495 shares of the Registrant’s common stock, par value $0.01 per share, outstanding

Table of Contents

Index

PAGE

PART I.

FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)

1

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

2

Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

3

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)

6

Notes to Consolidated Financial Statements (unaudited)

Note 1. Summary of Significant Accounting Policies

8

Note 2. Debt Securities

10

Note 3. Loans Held for Sale

14

Note 4. Loans and Allowance for Credit Losses

15

Note 5. Mortgage Loan Servicing

24

Note 6. Goodwill and Other Intangible Assets

25

Note 7. Deposits

25

Note 8. Borrowings

26

Note 9. Other Commitments and Contingencies

27

Note 10. Derivatives

29

Note 11. Operating Lease Right-of-Use Assets and Liabilities

31

Note 12. Minimum Regulatory Capital Requirements

32

Note 13. Comprehensive (Loss) Income

34

Note 14. Fair Value of Assets and Liabilities

35

Note 15. Earnings Per Share (“EPS”)

42

Note 16. Revenue Recognition

43

Note 17. Segment Reporting

43

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

46

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

68

ITEM 4.

Controls and Procedures

68

PART II.

OTHER INFORMATION

ITEM 1.

Legal Proceedings

69

ITEM 1A.

Risk Factors

69

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

ITEM 3.

Defaults Upon Senior Securities

69

ITEM 4.

Mine Safety Disclosures

69

ITEM 5.

Other Information

69

ITEM 6.

Exhibits

70

EXHIBIT INDEX

70

SIGNATURE

71

Table of Contents

HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

September 30, 

December 31, 

(in thousands, except share data)

    

2022

2021

 

Assets

    

 

Cash and due from banks

$

39,910

$

35,549

Short-term investments

46,044

159,170

Total cash and cash equivalents

85,954

194,719

Securities available for sale, at fair value

304,852

394,036

Securities held to maturity, at amortized cost

15,000

Federal Home Loan Bank stock, at cost

15,973

5,931

Asset held for sale

881

Loans held for sale, at fair value

18,805

45,642

Loans

4,197,354

3,607,733

Less: Allowance for credit losses on loans

(44,621)

(45,377)

Net loans

4,152,733

3,562,356

Accrued interest receivable

12,746

10,624

Other real estate owned and repossessed assets

74

53

Mortgage servicing rights, at fair value

49,861

38,268

Property and equipment, net

49,115

50,745

Retirement plan annuities

14,511

14,174

Bank-owned life insurance

91,452

89,972

Goodwill

69,802

69,802

Intangible assets

2,461

3,164

Other assets

104,304

73,038

Total assets

$

4,987,643

$

4,553,405

Liabilities and Stockholders' Equity

Deposits:

Demand deposit accounts

$

795,945

$

743,051

NOW accounts

308,191

313,733

Regular savings and club accounts

1,289,825

1,138,979

Money market deposit accounts

889,517

858,970

Term certificate accounts

599,632

627,916

Total deposits

3,883,110

3,682,649

Short-term borrowed funds

330,000

Long-term borrowed funds

15,684

55,711

Subordinated debt

34,254

34,159

Mortgagors' escrow accounts

9,842

8,459

Accrued interest payable

950

1,083

Other liabilities and accrued expenses

102,433

92,083

Total liabilities

4,376,273

3,874,144

Commitments and contingencies (Notes 9 and 10)

Common stock, $0.01 par value; 150,000,000 shares authorized; 59,919,254 and 59,087,487 shares issued; 49,202,660 and 52,390,478 shares outstanding at September 30, 2022 and December 31, 2021, respectively

593

585

Additional paid-in capital

480,617

469,934

Retained earnings

350,049

325,699

Treasury stock, at cost, 10,716,594 and 6,693,504 shares at September 30, 2022 and December 31, 2021, respectively

(143,125)

(85,859)

Accumulated other comprehensive loss

(48,681)

(1,637)

Unearned compensation - ESOP

(28,083)

(29,461)

Total stockholders' equity

611,370

679,261

Total liabilities and stockholders' equity

$

4,987,643

$

4,553,405

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

1

Table of Contents

HarborOne Bancorp, Inc.

Consolidated Statements of Income (unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

(in thousands, except share data)

  

2022

  

2021

  

2022

  

2021

Interest and dividend income:

Interest and fees on loans

$

42,065

$

33,680

$

113,163

$

101,646

Interest on loans held for sale

377

665

972

2,841

Interest on taxable securities

1,971

1,293

5,545

2,671

Other interest and dividend income

143

170

335

384

Total interest and dividend income

44,556

35,808

120,015

107,542

Interest expense:

Interest on deposits

3,491

2,050

7,131

7,072

Interest on FHLB borrowings

1,209

431

1,516

1,514

Interest on subordinated debentures

524

524

1,571

1,571

Total interest expense

5,224

3,005

10,218

10,157

Net interest and dividend income

39,332

32,803

109,797

97,385

Provision (benefit) for credit losses

668

(1,627)

3,552

(5,822)

Net interest and dividend income, after provision (benefit) for credit losses

38,664

34,430

106,245

103,207

Noninterest income:

Mortgage banking income:

Gain on sale of mortgage loans

3,809

12,756

13,669

51,820

Changes in mortgage servicing rights fair value

1,816

(992)

7,963

(135)

Other

2,453

3,882

7,623

12,472

Total mortgage banking income

8,078

15,646

29,255

64,157

Deposit account fees

4,870

4,658

14,234

13,056

Income on retirement plan annuities

119

108

338

318

Gain on sale and call of securities, net

241

241

Bank-owned life insurance income

503

515

1,480

1,516

Other income

675

842

2,102

2,234

Total noninterest income

14,245

22,010

47,409

81,522

Noninterest expense:

Compensation and benefits

20,991

24,760

63,169

77,360

Occupancy and equipment

4,829

4,765

14,832

14,723

Data processing

2,311

2,205

6,811

6,910

Loan expenses

355

1,323

1,218

5,008

Marketing

850

880

3,054

2,524

Deposit expenses

587

431

1,646

1,209

Postage and printing

373

396

1,204

1,215

Professional fees

1,457

1,362

4,676

4,432

Prepayment penalties on Federal Home Loan Bank advances

1,095

1,095

Foreclosed and repossessed assets

(308)

18

(332)

Deposit insurance

357

341

1,060

993

Other expenses

2,363

2,024

6,574

5,537

Total noninterest expense

34,473

39,274

104,262

120,674

Income before income taxes

18,436

17,166

49,392

64,055

Income tax provision

4,678

4,907

13,380

18,128

Net income

$

13,758

$

12,259

$

36,012

$

45,927

Earnings per common share:

Basic

$

0.30

$

0.25

$

0.77

$

0.89

Diluted

$

0.30

$

0.24

$

0.76

$

0.88

Weighted average shares outstanding:

Basic

45,830,737

49,801,123

46,875,312

51,362,252

Diluted

46,420,527

50,663,415

47,541,647

52,094,749

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

2

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HarborOne Bancorp, Inc.

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

(in thousands)

    

2022

2021

2022

2021

     

Net income

$

13,758

$

12,259

$

36,012

$

45,927

Other comprehensive income:

Unrealized gain/loss on cash flow hedge:

Unrealized holding gains (losses)

2,658

22

7,386

1,392

Reclassification adjustment for net losses (gains) included in net income

(420)

140

(380)

373

Net change in unrealized gains (losses) on derivatives in cash flow hedging instruments

2,238

162

7,006

1,765

Related tax effect

(628)

(46)

(1,968)

(494)

Net-of-tax amount

1,610

116

5,038

1,271

Unrealized gain/loss on securities available for sale:

Unrealized holding (losses) gains

(20,554)

(2,406)

(66,806)

(5,626)

Reclassification adjustment for net realized gains

(241)

(241)

Net unrealized (losses) gains

(20,554)

(2,647)

(66,806)

(5,867)

Related tax effect

4,530

584

14,724

1,293

Net-of-tax amount

(16,024)

(2,063)

(52,082)

(4,574)

Total other comprehensive (loss) income

(14,414)

(1,947)

(47,044)

(3,303)

Comprehensive (loss) income

$

(656)

$

10,312

$

(11,032)

$

42,624

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

Amount

Capital

Earnings

at Cost

Income (Loss)

- ESOP

Equity

Balance at June 30, 2021

55,735,623

$

585

$

467,194

$

305,831

$

(38,588)

$

829

$

(30,380)

$

705,471

Comprehensive income

12,259

(1,947)

10,312

Dividends declared of $0.05 per share

(2,407)

(2,407)

ESOP shares committed to be released (57,680 shares)

340

459

799

Restricted stock awards forfeited

(3,000)

Share-based compensation expense

992

992

Treasury stock purchased

(2,500,513)

(35,135)

(35,135)

Balance at September 30, 2021

53,232,110

$

585

$

468,526

$

315,683

$

(73,723)

$

(1,118)

$

(29,921)

$

680,032

Balance at June 30, 2022

49,989,007

$

593

$

479,519

$

339,471

$

(132,296)

$

(34,267)

$

(28,542)

$

624,478

Comprehensive income (loss)

13,758

(14,414)

(656)

Dividends declared of $0.07 per share

(3,180)

(3,180)

ESOP shares committed to be released (57,680 shares)

354

459

813

Restricted stock awards forfeited, net of awards

(2,845)

Share-based compensation expense

744

744

Treasury stock purchased

(783,502)

(10,829)

(10,829)

Balance at September 30, 2022

49,202,660

$

593

$

480,617

$

350,049

$

(143,125)

$

(48,681)

$

(28,083)

$

611,370

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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

Amount

Capital

Earnings

at Cost

Income (Loss)

- ESOP

Equity

Balance at December 31, 2020

57,205,458

$

584

$

464,176

$

277,312

$

(16,644)

$

2,185

$

(31,299)

$

696,314

Comprehensive income (loss)

45,927

(3,303)

42,624

Dividends declared of $0.15 per share

(7,556)

(7,556)

ESOP shares committed to be released (173,042 shares)

955

1,378

2,333

Restricted stock awards granted, net of forfeitures

185,377

Share-based compensation expense

2,753

2,753

Stock options exercised

62,840

1

642

643

Treasury stock purchased

(4,221,565)

(57,079)

(57,079)

Balance at September 30, 2021

53,232,110

$

585

$

468,526

$

315,683

$

(73,723)

$

(1,118)

$

(29,921)

$

680,032

Balance at December 31, 2021

52,390,478

$

585

$

469,934

$

325,699

$

(85,859)

$

(1,637)

$

(29,461)

$

679,261

Cumulative effect of change in accounting principle - ASC 326

(1,884)

(1,884)

Comprehensive income (loss)

36,012

(47,044)

(11,032)

Dividends declared of $0.21 per share

(9,778)

(9,778)

ESOP shares committed to be released (173,042 shares)

1,078

1,378

2,456

Restricted stock awards granted, net of forfeitures

97,971

Performance stock units vested

14,596

Share-based compensation expense

2,744

2,744

Stock options exercised

722,705

8

6,861

6,869

Treasury stock purchased

(4,023,090)

(57,266)

(57,266)

Balance at September 30, 2022

49,202,660

$

593

$

480,617

$

350,049

$

(143,125)

$

(48,681)

$

(28,083)

$

611,370

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

    

Nine Months Ended September 30, 

(in thousands)

    

2022

    

2021

Cash flows from operating activities:

Net income

$

36,012

$

45,927

Adjustments to reconcile net income to net cash used by operating activities:

Provision (benefit) for credit losses

3,552

(5,822)

Net amortization of securities premiums/discounts

821

3,098

Proceeds from sale of loans

510,260

1,826,818

Loans originated for sale

(471,314)

(1,625,647)

Net accretion of net deferred loan costs/fees and premiums

(315)

(1,881)

Depreciation and amortization of premises and equipment

2,924

3,406

Change in mortgage servicing rights fair value

(7,963)

135

Mortgage servicing rights capitalized

(3,630)

(11,842)

Accretion of fair value adjustment on loans and deposits, net

(1,043)

(2,817)

Amortization of other intangible assets

703

971

Amortization of subordinated debt issuance costs

95

95

Gain on sale and call of securities, net

(241)

Net gains on mortgage loan sales, including fair value adjustments

(12,109)

(69,611)

Bank-owned life insurance income

(1,480)

(1,516)

Income on retirement plan annuities

(338)

(318)

Write-down of asset held for sale

196

Net loss on disposal of premises and equipment

41

Net gain on sale and write-down of other real estate owned and repossessed assets

(30)

(215)

ESOP expense

2,456

2,333

Share-based compensation expense

2,744

2,753

Decrease (increase) in operating lease right-of-use assets

1,019

(2,053)

(Decrease) increase in operating lease liabilities

(976)

2,436

Change in other assets

(13,909)

21,567

Change in other liabilities

5,570

(20,360)

Net cash provided by operating activities

53,286

167,216

Cash flows from investing activities:

Activity in securities available for sale:

Maturities, prepayments and calls

37,659

124,307

Purchases

(16,102)

(286,406)

Sales

39,321

Activity in securities held to maturity:

Purchases

(15,000)

Net (purchase) redemption of FHLB stock

(10,042)

1,910

Proceeds on asset held for sale

685

Loan pool purchase

(58,311)

Participation-in loan purchases

(116,144)

(30,742)

Net loan (originations) payments

(415,391)

70,452

Proceeds from sale of other real estate owned and repossessed assets

247

1,455

Additions to property and equipment

(1,335)

(5,187)

Net cash used by investing activities

(593,734)

(84,890)

(continued)

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended September 30, 

(in thousands)

    

2022

    

2021

          

Cash flows from financing activities:

Net increase in deposits

200,379

187,799

Net change in short-term borrowed funds

330,000

(35,000)

Proceeds from other borrowed funds and subordinated debt

3,400

Repayment of other borrowed funds

(40,027)

(61,777)

Net change in mortgagors' escrow accounts

1,383

676

Proceeds from exercise of stock options

6,869

643

Treasury stock purchased

(57,266)

(57,079)

Dividends paid

(9,655)

(7,219)

Net cash provided by financing activities

431,683

31,443

Net change in cash and cash equivalents

(108,765)

113,769

Cash and cash equivalents at beginning of period

194,719

205,870

Cash and cash equivalents at end of period

$

85,954

$

319,639

Supplemental cash flow information:

Interest paid on deposits

$

6,667

$

7,079

Interest paid on borrowed funds

3,248

3,728

Income taxes paid, net

8,020

18,715

Transfer of loans to other real estate owned and repossessed assets

238

673

Transfer of asset to assets held for sale

881

Dividends declared

9,778

7,556

Supplemental disclosure related to adoption of ASU 2016-02, detailed in Note 1:

ROU asset

$

$

23,189

Operating lease liabilities

24,370

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 years ended December 31, 2021 and 2020 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) and HarborOne Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries, which consist of HarborOne Mortgage, LLC (“HarborOne Mortgage”), a passive investment corporation, and one security corporation. The passive investment corporation maintains and manages certain assets of the Bank. The security corporation was established for the purpose of buying, holding and selling securities on its own behalf. All significant intercompany balances and transactions have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These changes and reclassifications did not impact previously reported net income or comprehensive income.

Nature of Operations

The Company provides a variety of financial services to individuals and businesses through its 31 full-service branches in Massachusetts and Rhode Island, and commercial lending offices in each of Boston, Massachusetts and Providence, Rhode Island. HarborOne Mortgage maintains 26 offices in Maine, Massachusetts, Rhode Island, and New Hampshire and is licensed to lend in six 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.

Risks and Uncertainties

Macroeconomic trends are mixed as uncertainty remains about the timing and strength of the economy’s recovery from the response to the COVID-19 pandemic. The Company could experience adverse effects on its business, financial condition, results of operations and cash flows if there is severe or prolonged inflation, a recession, further escalation of the current geopolitical situation, sustained supply chain disruptions, or if there is a resurgence in the virus. While asset quality continues to point to economic recovery, the Company’s customers could experience similar adverse effects from these uncertainties that would impair their ability to fulfill their financial obligations to the Company resulting in deteriorating credit quality and loan charge-offs.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Summary of Significant Accounting Policies and Recently Adopted Accounting Standards Updates (“ASU”)

Significant accounting policies in effect and disclosed within the Company’s most recent audited consolidated financial statements as of December 31, 2021 remain substantially unchanged with the exception of the accounting policy for credit losses, commonly referred to as “CECL,” as a result of adopting ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) and subsequent related updates (collectively ASU 2016-13) as described below.

ASU 2016-13 was issued in June 2016. ASU 2016-13 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For available-for-sale debt securities with unrealized losses, Topic 326 requires credit losses to be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses are recognized immediately in earnings rather than as interest income over time. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective. The Company adopted ASU 2016-13, including the subsequent ASUs issued to clarify Topic 326 (“Topic 326”), on January 1, 2022.

The Company assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation and to identify new internal controls over accounting processes for estimating the allowance for credit losses (“ACL”). This included assessing the adequacy of existing loan and loss data, assessing models for default and loss estimates, conducting limited “trial” runs and analytical reviews through December 31, 2021, and completing independent model validation and documentation of ACL processes and controls in the first quarter of 2022.

In accordance with Topic 326, the Company has updated its ACL accounting policies. Required policy disclosures are provided in Notes 2, 4, and 9.

Upon adoption of Topic 326 on January 1, 2022, the ACL for loans decreased by $1.3 million and the ACL for unfunded commitments increased by $3.9 million, as compared to December 31, 2021. The increases in the ACL on loans and unfunded commitments upon adoption resulted in a one-time cumulative-effect adjustment that decreased retained earnings by $1.9 million, net of deferred tax balances of $737,000.

The Company has not elected to use the CECL transition provision provided by regulatory guidance issued by the Federal Deposit Insurance Corporation (“FDIC”) in March 2020, and as such the full impact of the adoption is reflected in Tier 2 capital ratios. See Note 12 for additional disclosure on regulatory capital.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

ASUs not yet Adopted

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in Accounting Standards Codification (“ASC”) 310-40, “Receivables – Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments — Credit Losses — Measured at Amortized Cost.” ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022-02 will have on its consolidated financial statements and related disclosures.

2.

DEBT SECURITIES

Adoption of Topic 326

Effective January 1, 2022, the Company adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. There was no ACL on available-for-sale debt securities recognized upon the adoption of Topic 326.

Accounting Policy Updates

Effective January 1, 2022, the Company has modified its accounting policy for the assessment of debt securities for impairment. The updated policy is detailed below.

The Company has made an accounting policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Company also excludes accrued interest from the estimate of credit losses.

A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on non-accrual is reversed against interest income. There were no debt securities on non-accrual status, and therefore there was no accrued interest related to debt securities reversed against interest income, for the three months ended September 30, 2022 and 2021.

The Company measures expected credit losses on held to maturity securities on a collective basis by major security type in accordance with the CECL methodology. As of September 30, 2022, the held to maturity securities were U.S. government-sponsored agency obligations. These securities are guaranteed by the government sponsored agency with a long history of no credit losses. As a result, management has determined these securities to have a zero loss expectation and therefore does not estimate an allowance for credit losses on these securities.

For available-for-sale debt securities in an unrealized loss position, management first assesses whether the Company intends to sell, or if it is likely that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charge to earnings. For debt securities available for sale that do not meet either these criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers both quantitative and qualitative factors.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

A substantial portion of available-for-sale debt securities held by the Company are obligations issued by U.S. government agency and U.S. government-sponsored enterprises, including mortgage-backed securities. These securities are either explicitly or implicitly guaranteed by the U.S. government, which are highly rated by major credit rating agencies and have a long history of no credit losses. For these securities, management takes into consideration the long history of no credit losses and other factors to assess the risk of nonpayment even if the U.S. government were to default. As such, the Company has utilized a zero loss estimate due to credit for these securities. For available-for-sale debt securities that are not guaranteed by U.S. government agencies and U.S. government-sponsored enterprises, such as corporate bonds, management utilizes a third-party credit modeling tool based on observable market data, which assists management in identifying any potential credit risk associated with its available-for-sale debt securities. In addition, qualitative factors are also considered, including the extent to which fair value is less than amortized cost, changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If a credit loss exists based on the results of this assessment, an ACL (contra asset) is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is considered market-related and is recognized in other comprehensive income, net of taxes.

Changes in the ACL on available-for-sale debt securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectability of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Debt Securities

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

Gross

Gross

Allowance

Amortized

Unrealized

Unrealized

for Credit

Fair

Cost

    

Gains

    

Losses

    

Losses

    

Value

(in thousands)

September 30, 2022:

Securities available for sale

U.S. government and government-sponsored enterprise obligations

$

47,142

$

$

8,600

$

$

38,542

U.S. government agency and government-sponsored residential mortgage-backed securities

321,628

1

61,402

260,227

U.S. government-sponsored collateralized mortgage obligations

2,838

105

2,733

SBA asset-backed securities

2,685

195

2,490

Corporate bonds

1,000

140

860

Total securities available for sale

$

375,293

$

1

$

70,442

$

$

304,852

Securities held to maturity

U.S. government and government-sponsored enterprise obligations

$

15,000

$

$

549

$

$

14,451

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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)

December 31, 2021:

Securities available for sale

U.S. government and government-sponsored enterprise obligations

$

42,148

$

$

883

$

41,265

U.S. government agency and government-sponsored residential mortgage-backed securities

347,716

914

3,870

344,760

U.S. government-sponsored collateralized mortgage obligations

3,927

100

4,027

SBA asset-backed securities

3,880

104

3,984

Total securities available for sale

$

397,671

$

1,118

$

4,753

$

394,036

Seventeen mortgage-backed securities with a combined fair value of $13.9 million were pledged as collateral for interest rate swap agreements as of December 31, 2021. There were no securities pledged as collateral for interest rate swap agreements as of September 30, 2022 (see Note 10).

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2022 is as follows:

Available for Sale

Held to Maturity

Amortized

Fair

Amortized

Fair

    

Cost

    

Value

 

Cost

    

Value

(in thousands)

After 1 year through 5 years

$

$

$

$

After 5 years through 10 years

48,142

39,402

15,000

14,451

Over 10 years

48,142

39,402

15,000

14,451

U.S. government agency and government-sponsored residential mortgage-backed securities

321,628

260,227

U.S. government-sponsored collateralized mortgage obligations

2,838

2,733

SBA asset-backed securities

2,685

2,490

Total

$

375,293

$

304,852

$

15,000

$

14,451

U.S. government-sponsored residential mortgage-backed securities, collateralized mortgage obligations and securities whose underlying assets are loans from the SBA have stated maturities of one to 29 years; however, it is expected that such securities will have shorter actual lives due to prepayments. U.S. government and government-sponsored enterprise obligations and corporate bonds are callable at the discretion of the issuer. U.S. government and government-sponsored enterprise obligations and corporate bonds with a total fair value of $53.9 million have a final maturity of five to ten years and a call feature of one month to five years. At September 30, 2022 there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholder equity.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

2022

2021

2022

2021

(in thousands)

Sales

Proceeds

$

$

39,321

$

$

39,321

Gross gains

241

241

Gross losses

Calls

Proceeds

$

$

5,000

$

$

5,000

Gross gains

Gross losses

Information pertaining to securities with gross unrealized losses at September 30, 2022 and December 31, 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

Less Than Twelve Months

Twelve Months and Over

Gross

Gross

Unrealized

Fair

Unrealized

Fair

    

Losses

    

Value

    

Losses

    

Value

(in thousands)

September 30, 2022:

Securities available for sale

U.S. government and government-sponsored enterprise obligations

$

229

$

4,771

$

8,371

$

33,771

U.S. government agency and government-sponsored residential mortgage-backed securities

10,653

66,455

50,749

193,735

U.S. government-sponsored collateralized mortgage obligations

105

2,733

SBA asset-backed securities

195

2,490

Corporate bonds

140

860

$

11,322

$

77,309

$

59,120

$

227,506

Securities held to maturity

U.S. government and government-sponsored enterprise obligations

$

549

$

14,451

December 31, 2021:

Securities available for sale

U.S. government and government-sponsored enterprise obligations

$

883

$

41,265

$

$

U.S. government agency and government-sponsored residential mortgage-backed securities

2,835

262,889

1,035

35,552

$

3,718

$

304,154

$

1,035

$

35,552

Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. For the accounting policy on the assessment of available-for-sale debt securities for impairment that was in effect prior to the adoption of Topic 326, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

As of September 30, 2022, the Company’s security portfolio consisted of 131 debt securities, 130 of which were in an unrealized loss position. The unrealized losses are primarily related to the Company’s debt securities that were issued by U.S. government-sponsored entities and agencies. The Company does not believe that the debt securities that were in an unrealized loss position as of September 30, 2022 represent a credit loss impairment. As of September 30, 2022 and December 31, 2021, the gross unrealized loss positions were primarily related to mortgage-backed securities and other obligations issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Total gross unrealized losses were primarily attributable to changes in interest rates relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.

Management reviewed the collectability of the corporate bonds taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. Management believes the unrealized losses on the corporate bonds are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the corporate bonds.

Management expects to recover the entire amortized cost basis of the debt securities with an unrealized loss. Furthermore, the Company does not intend to sell these securities, and it is likely that the Company will not be required to sell these securities, before recovery of their cost basis, which may be at maturity. Therefore, no allowance for credit losses was recorded at September 30, 2022.

3.

LOANS HELD FOR SALE

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

September 30, 

December 31, 

    

2022

    

2021

(in thousands)

Loans held for sale, fair value

$

18,805

$

45,642

Loans held for sale, contractual principal outstanding

18,967

44,245

Fair value less unpaid principal balance

$

(162)

$

1,397

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 a decrease of $1.6 million in the nine months ended September 30, 2022 to negative $162,000, compared to a decrease of $7.6 million in the nine months ended September 30, 2021. These amounts are offset in earnings by the changes in fair value of forward sale commitments. The changes in fair value are reported as a component of gain on sale of mortgage loans in the Unaudited Consolidated Statements of Income.

At September 30, 2022 and December 31, 2021, there were no loans held for sale that were greater than 90 days past due.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

4.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

A summary of the balances of loans follows:

September 30, 

December 31, 

    

2022

    

2021

 

(in thousands)

Residential real estate:

One- to four-family

$

1,326,645

$

1,047,819

Second mortgages and equity lines of credit

157,518

136,853

Residential real estate construction

36,646

33,308

Total residential real estate loans

1,520,809

1,217,980

Commercial:

Commercial real estate

2,041,905

1,699,877

Commercial construction

185,062

136,563

Commercial and industrial

397,112

421,608

Total commercial loans

2,624,079

2,258,048

Consumer loans:

Auto

44,685

124,354

Personal

7,781

7,351

Total consumer loans

52,466

131,705

Total loans

4,197,354

3,607,733

Allowance for loan losses

(44,621)

(45,377)

Loans, net

$

4,152,733

$

3,562,356

The net unamortized deferred loan origination costs included in total loans and leases were $7.0 million and $5.4 million as of September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, the commercial and industrial loans included $2.1 million and $27.0 million, respectively, of U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans and $69,000 and $949,000, respectively, of deferred fees on the PPP loans. PPP loans are fully guaranteed by the U.S. government.

The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying unaudited interim Consolidated Balance Sheets. The Company and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At September 30, 2022 and December 31, 2021, the Company was servicing commercial loans for participants in the aggregate amount of $338.7 million and $288.9 million, respectively.

Adoption of Topic 326

Effective January 1, 2022, the Company adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Company decreased the ACL on loans by $1.3 million on January 1, 2022.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Accounting Policy Updates

Effective January 1, 2022, the Company has modified its accounting policy for the ACL on loans as described below.

The Company has made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Company also excludes accrued interest from the estimate of credit losses. Accrued interest receivable on loans totaled $11.5 million and $9.6 million, respectively, as of September 30, 2022 and December 31, 2021.

The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date. The ACL on loans is increased through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income and by recoveries of amounts previously charged off. The ACL on loans is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral-dependent individually analyzed loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates.

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. Pooled loan portfolio segments include commercial real estate, commercial and industrial, commercial construction, residential real estate (including homeowner construction), home equity and consumer loans. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. Individually analyzed loans include non-accrual loans, commercial loans risk-rated 8 or greater, loans classified as a TDR and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

For loans that are individually analyzed, the ACL is measured using a discounted cash flow (“DCF”) methodology based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral-dependent, at the fair value of the collateral. Factors management considers when measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. For collateral-dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral-dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral.

For pooled loans, the Company utilizes a DCF methodology to estimate credit losses over the expected life of the loan. The life of the loan excludes expected extensions, renewal and modifications, unless: (1) the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Company; or (2) management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. The methodology incorporates the probability of default and loss given default, which are identified by default triggers such as past due by 90 or more days, whether a charge-off has occurred, the loan is non-accrual, the loan has been modified in

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

a TDR or the loan is risk-rated as special mention, substandard, or doubtful. The probability of default for the life of the loan is determined by the use of an econometric factor. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to the historical mean of its macroeconomic assumption in order to estimate the probability of default for each loan portfolio segment. Utilizing a third-party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived.

Quantitative loss factors are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. These qualitative risk factors include: (1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; (2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; (3) changes in the nature of the portfolio and in the volume of past due loans; (4) changes in the experience, ability, and depth of lending management and other relevant staff; (5) changes in the quality of the loan review system; (6) changes in the value of underlying collateral for collateral-dependent loans; (7) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (8) the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. Qualitative loss factors are applied to each portfolio segment and determined based on the risk characteristics of each segment.

Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate.

The following table presents the activity in the ACL on loans for the three and nine months ended September 30, 2022:

Second Mortgages

Residential

One- to Four-

and Equity

Real Estate

Commercial

Commercial

Commercial

Family

  

Lines of Credit

  

Construction

  

Real Estate

  

Construction

  

and Industrial

  

Consumer

  

Unallocated

  

Total

(in thousands)

Balance at June 30, 2022

$

10,082

$

849

$

327

$

20,431

$

4,370

$

7,174

$

327

$

$

43,560

Charge-offs

(24)

(205)

(24)

(253)

Recoveries

2

15

7

1,021

7

1,052

Provision

834

(16)

(33)

741

99

(1,300)

(63)

262

Balance at September 30, 2022

$

10,918

$

848

$

294

$

21,155

$

4,469

$

6,690

$

247

$

$

44,621

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Second Mortgages

Residential

One- to Four-

and Equity

Real Estate

Commercial

Commercial

Commercial

  

Family

  

Lines of Credit

  

Construction

  

Real Estate

  

Construction

  

and Industrial

  

Consumer

  

Unallocated

  

Total

(in thousands)

Balance at December 31, 2021

$

3,631

$

420

$

69

$

33,242

$

2,010

$

4,638

$

367

$

1,000

$

45,377

Adoption of Topic 326

5,198

391

185

(10,194)

1,698

2,288

123

(1,000)

(1,311)

Charge-offs

(2,810)

(246)

(55)

(3,111)

Recoveries

2

108

13

1,495

67

1,685

Provision

2,087

(71)

40

904

761

(1,485)

(255)

1,981

Balance at September 30, 2022

$

10,918

$

848

$

294

$

21,155

$

4,469

$

6,690

$

247

$

$

44,621

For the accounting policy on the allowance for loan losses that was in effect prior to the adoption of Topic 326, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

The following is the activity in the allowance for loan losses for the three and nine months ended September 30, 2021:

Second Mortgages

Residential

One- to Four-

and Equity

Real Estate

Commercial

Commercial

Commercial

  

Family

  

Lines of Credit

  

Construction

  

Real Estate

  

Construction

  

and Industrial

  

Consumer

  

Unallocated

  

Total

 

(in thousands)

Balance at June 30, 2021

$

4,708

$

603

$

123

$

32,991

$

1,937

$

8,059

$

853

$

1,999

$

51,273

Provision for loan losses

(1,667)

(270)

(72)

2,059

615

(815)

(478)

(999)

(1,627)

Charge-offs

(381)

(1,277)

(61)

(1,719)

Recoveries

1

7

1

18

34

61

Balance at September 30, 2021

$

3,042

$

340

$

51

$

34,670

$

2,552

$

5,985

$

348

$

1,000

$

47,988

Second Mortgages

Residential

One- to Four-

and Equity

Real Estate

Commercial

Commercial

Commercial

  

Family

  

Lines of Credit

  

Construction

  

Real Estate

  

Construction

  

and Industrial

  

Consumer

  

Unallocated

  

Total

(in thousands)

Balance at December 31, 2020

$

6,168

$

1,054

$

197

$

34,765

$

1,955

$

5,311

$

2,475

$

3,470

$

55,395

Provision for loan losses

(3,270)

(797)

(146)

293

597

2,101

(2,129)

(2,470)

(5,821)

Charge-offs

(393)

(1,463)

(147)

(2,003)

Recoveries

144

83

5

36

149

417

Balance at September 30, 2021

$

3,042

$

340

$

51

$

34,670

$

2,552

$

5,985

$

348

$

1,000

$

47,988

18

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Effective January 1, 2022, individually analyzed loans include non-accrual loans, loans classified as TDRs, and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. As of September 30, 2022, the carrying value of individually analyzed loans amounted to $32.2 million, with a related allowance of $3.7 million, and $23.1 million were considered collateral-dependent.

For collateral-dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

The following table presents the carrying value of collateral-dependent individually analyzed loans as of September 30, 2022:

Related

    

Carrying Value

    

Allowance

(in thousands)

Commercial:

Commercial real estate

$

10,576

$

3,034

Commercial and industrial

3,384

63

Commercial construction

Total Commercial

13,960

3,097

Residential real estate

9,135

356

Total

$

23,095

$

3,453

Prior to January 1, 2022, a loan was considered impaired when, based on current information and events, it was probable that Company would not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans included non-accrual loans and loans restructured in a TDR. The Company identified loss allocations for impaired loans on an individual-loan basis. The following is a summary of impaired loans.

Residential

Commercial

Commercial

Commercial

    

Real Estate

Real Estate

    

Construction

    

and Industrial

    

Consumer

    

Unallocated

    

Total

(in thousands)

December 31, 2021:

Loans:

Impaired loans

$

23,110

$

20,203

$

$

4,182

$

$

47,495

Non-impaired loans

1,194,870

1,679,674

136,563

417,426

131,705

3,560,238

Total loans

$

1,217,980

$

1,699,877

$

136,563

$

421,608

$

131,705

$

3,607,733

Allowance for loan losses:

Impaired loans

$

650

$

7,275

$

$

21

$

$

$

7,946

Non-impaired loans

3,470

25,967

2,010

4,617

367

1,000

37,431

Total allowance for loan losses

$

4,120

$

33,242

$

2,010

$

4,638

$

367

$

1,000

$

45,377

19

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following information pertains to impaired loans:

December 31, 2021

Unpaid

Recorded

Principal

Related

    

Investment

    

Balance

    

Allowance

(in thousands)

Impaired loans without a specific reserve:

Residential real estate

$

14,115

$

15,335

$

Commercial real estate

2,641

2,692

Commercial construction

Commercial and industrial

1,389

3,396

Total

18,145

21,423

Impaired loans with a specific reserve:

Residential real estate

8,995

9,791

650

Commercial real estate

17,562

24,847

7,275

Commercial construction

Commercial and industrial

2,793

3,596

21

Total

29,350

38,234

7,946

Total impaired loans

$

47,495

$

59,657

$

7,946

Three Months Ended September 30, 2021

Interest

Average

Interest

Income

Recorded

Income

Recognized

Investment

    

Recognized

    

on Cash Basis

(in thousands)

Residential real estate

$

22,268

$

279

$

121

Commercial real estate

12,455

60

60

Commercial construction

Commercial and industrial

7,834

13

13

Total

$

42,557

$

352

$

194

Nine Months Ended September 30, 2021

Interest

Average

Interest

Income

Recorded

Income

Recognized

    

Investment

    

Recognized

    

on Cash Basis

    

(in thousands)

Residential real estate

$

23,973

$

822

$

280

Commercial real estate

13,894

125

125

Commercial construction

Commercial and industrial

7,802

149

149

Total

$

45,669

$

1,096

$

554

Interest income recognized and interest income recognized on a cash basis in the tables above represent interest income for the three and nine months ended September 30, 2021, not for the time period designated as impaired. No additional funds are committed to be advanced in connection with impaired loans.

20

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following is a summary of past due and non-accrual loans at September 30, 2022 and December 31, 2021:

90 Days

30-59 Days

60-89 Days

or More

Total

Loans on

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Non-accrual

 

(in thousands)

September 30, 2022

Residential real estate:

One- to four-family

$

$

2,163

$

5,990

$

8,153

$

8,921

Second mortgages and equity lines of credit

98

222

320

415

Commercial real estate

288

288

10,576

Commercial construction

Commercial and industrial

275

434

2,841

3,550

3,287

Consumer:

Auto

345

51

53

449

82

Personal

18

42

12

72

12

Total

$

736

$

2,690

$

9,406

$

12,832

$

23,293

December 31, 2021

Residential real estate:

One- to four-family

$

5,578

$

2,901

$

3,777

$

12,256

$

11,210

Second mortgages and equity lines of credit

202

336

538

600

Commercial real estate

149

11,334

11,483

20,053

Commercial construction

Commercial and industrial

616

1

3,277

3,894

4,114

Consumer:

Auto

747

162

140

1,049

144

Personal

67

12

79

12

Total

$

7,359

$

3,064

$

18,876

$

29,299

$

36,133

At September 30, 2022 and December 31, 2021, there were no loans past due 90 days or more and still accruing.

There was one TDR loan modification during the three and nine months ended September 30, 2022 and no material modifications during the same periods in 2021. The TDR loan modification in 2022 provided a deferral of principal.

The recorded investment in TDRs was $11.7 million and $11.0 million at September 30, 2022 and December 31, 2021, respectively. Commercial TDRs totaled $2.3 million and $408,000 at September 30, 2022 and December 31, 2021, respectively. The remainder of the TDRs outstanding at the end of these periods were residential loans. Non-accrual TDRs totaled $2.9 million at September 30, 2022 and $1.0 million at December 31, 2021. Of these loans, $2.1 million and $190,000 were non-accrual commercial TDRs at September 30, 2022 and December 31, 2021, respectively.

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

During the three and nine months ended September 30, 2022 and 2021, there were no payment defaults on TDRs.

21

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Credit Quality Indicators

Commercial

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.

Residential and Consumer

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.

22

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table summarizes the Company’s loan portfolio by credit quality indicator and loan portfolio segment as of September 30, 2022:

Revolving

Revolving Loans

Term Loans at Amortized Cost by Origination Year

Loans

Converted to

2022

2021

2020

2019

2018

Prior

Amortized Cost

Term Loans

Total

(in thousands)

As of September 30, 2022

Commercial real estate

Pass

$

575,951

$

422,759

$

244,248

$

268,148

$

143,176

$

354,200

$

$

$

2,008,482

Special mention

22,516

331

22,847

Substandard

10,576

10,576

Doubtful

Total commercial real estate

575,951

422,759

244,248

268,148

165,692

365,107

2,041,905

Commercial and industrial

Pass

33,935

93,811

82,504

27,521

38,314

54,254

64,726

395,065

Special mention

2

53

14

5

74

Substandard

47

365

50

462

Doubtful

1,461

50

1,511

Total commercial and industrial

33,982

93,811

82,506

27,521

38,367

56,094

64,831

397,112

Commercial construction

Pass

53,088

98,047

11,761

10,073

195

1,497

868

175,529

Special mention

9,533

9,533

Substandard

Doubtful

Total commercial construction

53,088

98,047

11,761

19,606

195

1,497

868

185,062

Residential real estate

Accrual

320,255

512,357

216,914

42,236

25,831

247,332

145,042

1,506

1,511,473

Non-accrual

203

140

206

1,067

7,591

91

38

9,336

Total residential real estate

320,255

512,560

217,054

42,442

26,898

254,923

145,133

1,544

1,520,809

Consumer

Accrual

7,917

3,920

2,324

25,916

8,222

2,994

1,079

52,372

Non-accrual

4

7

55

27

1

94

Total Consumer

7,917

3,924

2,331

25,971

8,222

3,021

1,080

52,466

Total Loans

$

991,193

$

1,131,101

$

557,900

$

383,688

$

239,374

$

680,642

$

211,912

$

1,544

$

4,197,354

The following table presents the Company’s loans by risk rating at December 31, 2021:

December 31, 2021

Commercial

Commercial

Commercial

    

Real Estate

    

Construction

    

and Industrial

 

(in thousands)

Loans rated 1 - 6

$

1,645,871

$

136,563

$

417,408

Loans rated 7

33,953

85

Loans rated 8

20,053

694

Loans rated 9

3,421

Loans rated 10

$

1,699,877

$

136,563

$

421,608

23

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The Company adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired and accounted for under ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). In accordance with the standard, the Company did not reassess whether previously recognized purchased credit impaired (“PCI”) loans accounted for under prior accounting guidance met the criteria of a PCD loan as of the date of adoption. PCD loans are initially recorded at fair value along with an ACL determined using the same methodology as originated loans. The sum of the loan’s purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through provision for credit losses. The amortized cost basis as of September 30, 2022 of the PCD loans was $2.4 million.

Prior to January 1, 2022, ASC 310-30 required the following table that summarizes activity in the accretable yield for PCI loans:

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2021

(in thousands)

Balance at beginning of period

$

136

$

141

Additions

Accretion

(1)

(6)

Reclassification from nonaccretable difference

Balance at end of period

$

135

$

135

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 $3.63 billion and $3.65 billion as of September 30, 2022 and December 31, 2021.

The Company accounts for MSRs at fair value. The Company obtains and reviews 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, and default rates. At September 30, 2022 and December 31, 2021, the following weighted average assumptions were used in the calculation of fair value of MSRs:

September 30, 

December 31, 

    

2022

    

2021

  

Prepayment speed

7.00

9.40

%

Discount rate

9.45

9.20

Default rate

1.65

1.64

24

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following summarizes changes to MSRs for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2022

2021

     

2022

    

2021

(in thousands)

Balance, beginning of period

$

47,130

$

35,955

$

38,268

$

24,833

Additions

915

1,577

3,630

11,842

Changes in fair value due to:

Reductions from loans paid off during the period

(747)

(1,613)

(2,351)

(4,713)

Changes in valuation inputs or assumptions

2,563

621

10,314

4,578

Balance, end of period

$

49,861

$

36,540

$

49,861

$

36,540

Contractually specified servicing fees, net of subservicing expense, included in other mortgage banking income amounted to $2.0 million and $6.1 million for the three and nine months ended September 30, 2022 and $2.0 million and $5.5 million for the three and nine months ended September 30, 2021.

6.

GOODWILL AND OTHER INTANGIBLE ASSETS

As of September 30, 2022, the Company had $69.8 million in goodwill, of which $59.0 million was allocated to the HarborOne 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. Other intangible assets were $2.5 million and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company determined that there was no triggering event that warranted an interim impairment test at September 30, 2022.

7.

DEPOSITS

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

September 30, 

December 31, 

    

2022

    

2021

 

(in thousands)

NOW and demand deposit accounts

    

$

1,104,136

$

1,056,784

Regular savings and club accounts

1,289,825

1,138,979

Money market deposit accounts

889,517

858,970

Total non-certificate accounts

3,283,478

3,054,733

Term certificate accounts greater than $250,000

103,323

108,426

Term certificate accounts less than or equal to $250,000

381,613

419,490

Brokered deposits

114,696

100,000

Total certificate accounts

599,632

627,916

Total deposits

$

3,883,110

$

3,682,649

The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions. The reciprocal deposit program provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. At September 30, 2022 and December 31, 2021, total reciprocal deposits were $27.7 million and $43.8 million, respectively, consisting primarily of demand deposit accounts.

25

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

A summary of certificate accounts by maturity at September 30, 2022 is as follows:

Weighted

Average

    

Amount

    

Rate

 

(dollars in thousands)

Within 1 year

$

406,623

0.83

%

Over 1 year to 2 years

159,658

1.51

Over 2 years to 3 years

23,587

0.93

Over 3 years to 4 years

7,359

0.65

Over 4 years to 5 years

2,552

0.74

Total certificate deposits

599,779

1.01

%

Less unaccreted acquisition discount

(147)

Total certificate deposits, net

$

599,632

8.BORROWINGS

Borrowed funds at September 30, 2022 and December 31, 2021 consist of Federal Home Loan Bank (“FHLB”) advances. Short-term advances were $330.0 million at September 30, 2022, with a weighted average rate of 2.99%. There were no short-term advances at December 31, 2021. Long-term advances are summarized by maturity date below.

September 30, 2022

December 31, 2021

Amount by

Weighted

Amount by

Weighted

Scheduled

Average

Scheduled

Amount by

Average

    

Maturity*

    

Rate (2)

    

Maturity*

    

Call Date (1)

    

Rate (2)

 

(dollars in thousands)

Year ending December 31:

             

2022

$

%      

$

40,000

%

2023

182

1.42

185

185

1.46

2024

13,400

1.39

13,400

13,400

1.39

2025

987

40,987

987

1.32

2026

2027 and thereafter

1,115

2.00

1,139

1,139

2.00

$

15,684

1.35

%  

$

55,711

$

55,711

1.35

%

* 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. There were no callable advances at September 30, 2022.

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

The FHLB advances are secured by a blanket security agreement which requires the Bank to maintain certain qualifying assets as collateral, principally residential mortgage loans and certain multi-family and commercial real estate loans held in the Bank’s portfolio. The carrying value of the loans pledged as collateral for these borrowings totaled $1.61 billion at September 30, 2022 and $1.22 billion at December 31, 2021. As of September 30, 2022, the Company had $772.6 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 (“FRBB”), secured by 67% of the carrying value of indirect auto and commercial loans with principal balances amounting to $100.0 million and $101.4 million at September 30, 2022 and December 31, 2021, respectively. No amounts were outstanding under either line at September 30, 2022 or December 31, 2021.

26

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

On August 30, 2018, the Company issued $35.0 million in fixed-to-floating rate subordinated notes due 2028 (the “Notes”) in a private placement to institutional accredited investors. The Notes bear interest at annual fixed rate of 5.625% until September 1, 2023, at which time the interest rate resets quarterly to an interest rate per annum equal to the three–month LIBOR plus 278 basis points. Interest is payable semi-annually on March 1 and September 1 each year through September 1, 2023 and quarterly thereafter. The Notes can be redeemed partially or in whole, prior to the maturity date beginning September 1, 2023 and on any scheduled interest payment date thereafter, at par. The Notes are carried on the Consolidated Balance Sheets net of unamortized issuance costs of $746,000 and $841,000 at September 30, 2022 and December 31, 2021, respectively.

9.

OTHER COMMITMENTS AND CONTINGENCIES

Adoption of Topic 326

As disclosed in Note 2, Topic 326 requires the measurement of expected lifetime credit losses for unfunded commitments that are considered off-balance sheet credit exposures. The Company adopted the provisions of Topic 326 effective January 1, 2022 using the modified retrospective method. Therefore, the prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Company recognized an increase in the ACL on unfunded commitments of $3.9 million on January 1, 2022.

Effective January 1, 2022, the Company has modified its accounting policy for the ACL on unfunded commitments. The updated policy is detailed below.

The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Company’s average historical utilization rate for each portfolio.

The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income.

The ACL on unfunded commitments amounted to $5.5 million at September 30, 2022. The activity in the ACL on unfunded commitments for the three months ended September 30, 2022 is presented below:

Residential

Commercial

Commercial

Commercial

Real Estate

Real Estate

Construction

and Industrial

Consumer

Total

(in thousands)

Balance at June 30, 2022

$

337

$

482

$

3,638

$

624

$

15

$

5,096

Provision

(7)

29

135

253

(4)

406

$

330

$

511

$

3,773

$

877

$

11

$

5,502

27

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The activity in the ACL on the unfunded commitments for the nine months ended September 30, 2022 is presented below:

Residential

Commercial

Commercial

Commercial

Real Estate

Real Estate

Construction

and Industrial

Consumer

Total

(in thousands)

Balance at December 31, 2021

$

$

$

$

$

$

Adoption of Topic 326

318

380

2,561

658

14

3,931

Provision

12

131

1,212

219

(3)

1,571

$

330

$

511

$

3,773

$

877

$

11

$

5,502

Loan Commitments

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

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

The following off-balance sheet financial instruments were outstanding at September 30, 2022 and December 31, 2021. The contract amounts represent credit risk.

September 30, 

December 31, 

    

2022

    

2021

 

(in thousands)

Commitments to grant residential real estate loans-HarborOne Mortgage

$

122,378

$

142,781

Commitments to grant other loans

174,272

27,029

Unadvanced funds on home equity lines of credit

242,496

211,120

Unadvanced funds on revolving lines of credit

329,153

223,110

Unadvanced funds on construction loans

338,792

194,101

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 and 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.

28

Table of Contents

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 cashflow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.

As of September 30, 2022, the Company had one interest rate swap agreement with a notional amount of $100.0 million that was designated as a cashflow hedge of certificates of deposits. The interest rate swap agreement has an average maturity of 2.52 years, the current weighted average fixed rate paid is 0.67%, the weighted average 3-month LIBOR swap receive rate is 2.32%, and the fair value is $8.7 million. The Company expects approximately $3.7 million related to the cashflow hedge to be reclassified to interest expense, from other comprehensive income, in the next twelve months.

Derivative Loan Commitments

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

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

Forward Loan Sale Commitments

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

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

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

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

29

Table of Contents

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. At September 30, 2022, there were no securities 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. The Company also assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determines whether the credit valuation adjustments are significant to the overall valuation of its derivatives. During 2021, a credit valuation adjustment related to an interest rate swap was determined to be significant and required a negative fair value adjustment of $430,000, which was included in other income. During the first quarter of 2022, the interest rate swap was terminated, which resulted in a reversal of $329,000 to the negative fair value adjustment recorded in 2021 to a negative fair value adjustment of $101,000 at March 31, 2022.

Risk Participation Agreements

The Company has entered into risk participation agreements with 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.

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

Assets

Liabilities

Balance

Balance

Notional

Sheet

Fair

Sheet

Fair

    

Amount

    

Location

    

Value

    

Location

    

Value

 

(in thousands)

September 30, 2022:

       

Derivatives designated as Hedging Instruments

Interest rate swaps

$

100,000

Other assets

$

8,669

Other liabilities

$

Derivatives not designated as Hedging Instruments

Derivative loan commitments

$

47,154

Other assets

$

901

Other liabilities

$

343

Forward loan sale commitments

42,606

Other assets

1,334

Other liabilities

16

Interest rate swaps

657,517

Other assets

29,243

Other liabilities

29,243

Risk participation agreements

130,875

Other assets

Other liabilities

Total

$

40,147

$

29,602

December 31, 2021:

Derivatives designated as Hedging Instruments

Interest rate swaps

$

100,000

Other assets

$

1,663

Other liabilities

$

Derivatives not designated as Hedging Instruments

Derivative loan commitments

$

86,134

Other assets

$

1,527

Other liabilities

$

95

Forward loan sale commitments

96,000

Other assets

56

Other liabilities

94

Interest rate swaps

740,235

Other assets

18,874

Other liabilities

19,214

Risk participation agreements

139,109

Other assets

Other liabilities

Total

$

22,120

$

19,403

30

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

2022

2021

2022

2021

(in thousands)

Derivatives designated as hedging instruments

      

(Loss) gain in OCI on derivatives (effective portion), net of tax

$

1,610

$

116

$

5,038

$

1,271

(Loss) gain reclassified from OCI into interest income or interest expense (effective portion)

$

420

$

(140)

$

380

$

(373)

Derivatives not designated as hedging instruments

Changes in fair value of derivative loan commitments

Mortgage banking income

$

(606)

$

(1,897)

$

(874)

$

(9,178)

Changes in fair value of forward loan sale commitments

Mortgage banking income

1,377

1,064

1,356

3,059

Changes in fair value of interest rate swaps

Other income

330

Total

$

771

$

(833)

$

812

$

(6,119)

11.

OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES

Operating lease right-of-use (“ROU”) assets, included in other assets, were $25.8 million and $26.8 million at September 30, 2022 and December 31, 2021, respectively.

Operating lease liabilities, included in other liabilities and accrued expenses, were $27.4 million and $28.4 million at September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 and December 31, 2021, there were no leases that had not yet commenced. At September 30, 2022, lease expiration dates ranged from two months to 35.9 years and have a weighted average remaining lease term of 16.4 years. At December 31, 2021, lease expiration dates ranged from 3 months to 36.1 years and had a weighted average remaining lease term of 16.7 years.

Future minimum lease payments under non-cancellable leases and a reconciliation to the amount recorded as operating lease liabilities as of September 30, 2022 were as follows:

September 30, 2022

(in thousands)

2022

$

815

2023

3,162

2024

2,817

2025

2,509

2026

2,461

Thereafter

21,515

Total lease payments

33,279

Imputed interest

(5,885)

Total present value of operating lease liabilities

$

27,394

The weighted-average discount rate and remaining lease term for operating leases were as follows:

September 30, 2022

December 31, 2021

Weighted-average discount rate

1.97

%

1.94

%

Weighted-average remaining lease term (years)

16.42

16.77

31

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Rental expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease components, such as fair-market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents the components of total lease expense:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2022

2021

2022

2021

(in thousands)

Lease Expense:

Operating lease expense

$

836

$

742

$

2,472

$

2,032

Short-term lease expense

37

52

105

122

Variable lease expense

2

21

Sublease income

(4)

(9)

Total lease expense

$

869

$

796

$

2,568

$

2,175

Other Information

Cash paid for amounts included in the measurement of lease liabilities-

operating cash flows for operating leases

845

751

2,446

2,108

Operating Lease - Operating cash flows (Liability reduction)

701

624

2,041

1,745

Right-of-use assets obtained in exchange for new operating lease liabilities

77

276

1,160

27,267

12.MINIMUM REGULATORY CAPITAL REQUIREMENTS

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

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

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

At September 30, 2022, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at September 30, 2022 also exceeded the minimum capital requirements, including the currently applicable capital conservation buffer of 2.5%.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The Company’s and the Bank’s actual regulatory capital ratios as of September 30, 2022 and December 31, 2021 are presented in the table below.

Minimum Required to be

Considered "Well Capitalized"

Minimum Required for

Under Prompt Corrective

Actual

Capital Adequacy Purposes

Action Provisions

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

(dollars in thousands)

HarborOne Bancorp, Inc.

September 30, 2022

Common equity Tier 1 capital to risk-weighted assets

$

588,467

13.4

%  

$

197,880

4.5

%  

N/A

N/A

Tier 1 capital to risk-weighted assets

588,467

13.4

263,839

6.0

N/A

N/A

Total capital to risk-weighted assets

673,590

15.3

351,786

8.0

N/A

N/A

Tier 1 capital to average assets

588,467

12.3

191,473

4.0

N/A

N/A

December 31, 2021

Common equity Tier 1 capital to risk-weighted assets

$

608,804

16.4

%  

$

167,475

4.5

%  

N/A

N/A

Tier 1 capital to risk-weighted assets

608,804

16.4

223,300

6.0

N/A

N/A

Total capital to risk-weighted assets

689,181

18.5

297,733

8.0

N/A

N/A

Tier 1 capital to average assets

608,804

13.6

179,710

4.0

N/A

N/A

HarborOne Bank

September 30, 2022

Common equity Tier 1 capital to risk-weighted assets

$

517,127

11.8

%  

$

197,813

4.5

%  

$

285,731

6.5

%

Tier 1 capital to risk-weighted assets

517,127

11.8

263,751

6.0

351,668

8.0

Total capital to risk-weighted assets

567,251

12.9

351,668

8.0

439,585

10.0

Tier 1 capital to average assets

517,127

10.8

191,434

4.0

239,293

5.0

December 31, 2021

Common equity Tier 1 capital to risk-weighted assets

$

485,239

13.1

%  

$

166,660

4.5

%  

$

240,731

6.5

%

Tier 1 capital to risk-weighted assets

485,239

13.1

222,214

6.0

296,285

8.0

Total capital to risk-weighted assets

530,616

14.3

296,285

8.0

370,356

10.0

Tier 1 capital to average assets

485,239

10.9

178,279

4.0

222,849

5.0

33

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

13.COMPREHENSIVE (LOSS) INCOME

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 (loss) income, included in stockholders’ equity, are as follows:

September 30, 

December 31, 

    

2022

    

2021

 

(in thousands)

Cash flow hedge:

Net unrealized gain

$

8,669

$

1,663

Related tax effect

(2,434)

(466)

Total accumulated other comprehensive income

$

6,235

$

1,197

Securities available for sale:

Net unrealized loss

$

(70,441)

$

(3,635)

Related tax effect

15,525

801

Total accumulated other comprehensive loss

$

(54,916)

$

(2,834)

The following tables present changes in accumulated other comprehensive (loss) income by component for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, 

2022

2021

Available

Cash

Available

Cash

for Sale

Flow

for Sale

Flow

Securities

Hedge

Total

Securities

Hedge

Total

(in thousands)

Balance at beginning of period

   

$

(38,892)

$

4,625

$

(34,267)

   

$

687

$

142

$

829

Other comprehensive (loss) income before reclassifications

(20,554)

2,658

(17,896)

(2,406)

22

(2,384)

Amounts reclassified from accumulated other comprehensive income (loss)

(420)

(420)

(241)

140

(101)

Net current period other comprehensive (loss) income

(20,554)

2,238

(18,316)

(2,647)

162

(2,485)

Related tax effect

4,530

(628)

3,902

584

(46)

538

Balance at end of period

$

(54,916)

$

6,235

$

(48,681)

$

(1,376)

$

258

$

(1,118)

34

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 

2022

2021

Available

Cash

Available

Cash

for Sale

Flow

for Sale

Flow

Securities

Hedge

Total

Securities

Hedge

Total

(in thousands)

Balance at beginning of period

$

(2,834)

$

1,197

$

(1,637)

$

3,198

$

(1,013)

$

2,185

Other comprehensive (loss) income before reclassifications

(66,806)

7,386

(59,420)

(5,626)

1,392

(4,234)

Amounts reclassified from accumulated other comprehensive income (loss)

(380)

(380)

(241)

373

132

Net current period other comprehensive (loss) income

(66,806)

7,006

(59,800)

(5,867)

1,765

(4,102)

Related tax effect

14,724

(1,968)

12,756

1,293

(494)

799

Balance at end of period

$

(54,916)

$

6,235

$

(48,681)

$

(1,376)

$

258

$

(1,118)

14.

FAIR VALUE OF ASSETS AND LIABILITIES

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2 – Significant other 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.

•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Debt Securities – Available-for-sale debt securities are recorded at fair value on a recurring basis. When available, the Company uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 securities held at September 30, 2022 and December 31, 2021.

Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds.

Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 securities held at September 30, 2022 and December 31, 2021.

Loans held for sale - The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets. There were no mortgage loans held for sale 90 days or more past due as of September 30, 2022 and December 31, 2021.

35

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Collateral-Dependent Impaired Loans - The fair value of collateral-dependent loans that are deemed to be impaired is determined based upon the fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral-dependent loans for which repayment is dependent on the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral-dependent loans for which repayment is dependent on the operation of the collateral, such as accruing TDR loans, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral-dependent impaired loans are categorized as Level 3.

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

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 DCF 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 DCF 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 93% and 88% at September 30, 2022 and December 31, 2021, 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 not contain a high level of subjectivity as the methodologies used do not require significant judgment.

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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. As of September 30, 2022 and December 31, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company classified its derivative valuations in their entirety as Level 2.

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

Transfers between levels are recognized at the end of the reporting period, if applicable. There were no transfers during the periods presented.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Total

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

 

(in thousands)

September 30, 2022

Assets

Securities available for sale

$

$

304,852

$

$

304,852

Loans held for sale

18,805

18,805

Mortgage servicing rights

49,861

49,861

Derivative loan commitments

901

901

Forward loan sale commitments

1,334

1,334

Interest rate management agreements

8,669

8,669

Interest rate swaps

29,243

29,243

$

$

411,430

$

2,235

$

413,665

Liabilities

Derivative loan commitments

$

$

$

343

$

343

Forward loan sale commitments

16

16

Interest rate swaps

29,243

29,243

$

$

29,243

$

359

$

29,602

December 31, 2021

Assets

Securities available for sale

$

$

394,036

$

$

394,036

Loans held for sale

45,642

45,642

Mortgage servicing rights

38,268

38,268

Derivative loan commitments

1,527

1,527

Forward loan sale commitments

56

56

Interest rate management agreements

1,663

1,663

Interest rate swaps

18,874

18,874

$

$

498,483

$

1,583

$

500,066

Liabilities

Derivative loan commitments

$

$

$

95

$

95

Forward loan sale commitments

94

94

Interest rate swaps

19,214

19,214

$

$

19,214

$

189

$

19,403

37

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The table below presents, for the three and nine months ended September 30, 2022 and 2021, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis.

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2022

2021

      

2022

    

2021

(in thousands)

Assets: Derivative and Forward Loan Sale Commitments:

Balance at beginning of period

$

1,344

$

5,134

$

1,583

$

12,623

Total gains (losses) included in net income (1)

891

(1,103)

652

(8,592)

Balance at end of period

$

2,235

$

4,031

$

2,235

$

4,031

Changes in unrealized gains relating to instruments at period end

$

2,235

$

4,031

$

2,235

$

4,031

Three Months Ended September 30, 

Nine Months Ended September 30, 

2022

2021

      

2022

    

2021

(in thousands)

Liabilities: Derivative and Forward Loan Sale Commitments:

Balance at beginning of period

$

(239)

$

(342)

$

(189)

$

(2,545)

Total gains (losses) included in net income (1)

(120)

270

(170)

2,473

Balance at end of period

$

(359)

$

(72)

$

(359)

$

(72)

Changes in unrealized losses relating to instruments at period end

$

(359)

$

(72)

$

(359)

$

(72)

(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 is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There are no liabilities measured at fair value on a non-recurring basis.

September 30, 2022

December 31, 2021

    

Level 1

    

Level 2

    

Level 3

Level 1

    

Level 2

    

Level 3

(in thousands)

Collateral-dependent impaired loans

$

$

$

8,996

$

$

$

21,615

Other real estate owned and repossessed assets

74

53

$

$

$

9,070

$

$

$

21,668

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Losses in the following table represent the amount of the fair value adjustments recorded during the period on the carrying value of the assets held at September 30, 2022 and December 31, 2021, respectively. Losses on fully charged off loans are not included in the table.

Three Months Ended September 30, 

Nine Months Ended September 30, 

2022

2021

2022

    

2021

(in thousands)

Collateral-dependent impaired loans

$

92

$

5,132

$

840

$

7,948

Other real estate owned and repossessed assets

24

$

92

$

5,132

$

840

$

7,972

The table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on a nonrecurring basis at the dates indicated.

Fair Value

September 30, 

December 31,

Valuation Technique

2022

2021

(in thousands)

Collateral-dependent impaired loans

$

5,862

$

21,615

Sales Comparison Approach (1)

Real estate owned and repossessed assets

$

$

(1) Fair value is generally determined through independent appraisals of the underlying collateral. The Company may also use another source of collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by management for qualitative factors and estimated liquidation expenses. Unobservable inputs are adjustments for differences between the comparable sales. Residential real estate appraisals are generally discounted 0% - 20%. Commercial real estate loan appraisals are discounted 0% - 50%. Commercial and industrial appraisals are discounted 0-90%.

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Summary of Fair Values of Financial Instruments

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

September 30, 2022

Carrying

Fair Value

    

Amount

    

Level 1

    

Level 2

    

Level 3

    

Total

 

(in thousands)

Financial assets:

Cash and cash equivalents

$

85,954

$

85,954

$

$

$

85,954

Securities available for sale

304,852

304,852

304,852

Securities held to maturity

15,000

14,451

14,451

Federal Home Loan Bank stock

15,973

N/A

N/A

N/A

N/A

Loans held for sale

18,805

18,805

18,805

Loans, net

4,152,733

4,067,780

4,067,780

Retirement plan annuities

14,511

14,511

14,511

Accrued interest receivable

12,746

12,746

12,746

Financial liabilities:

Deposits

3,883,110

3,861,090

3,861,090

Borrowed funds

345,684

344,611

344,611

Subordinated debt

34,254

31,054

31,054

Mortgagors' escrow accounts

9,842

9,842

9,842

Accrued interest payable

950

950

950

Derivative loan commitments:

Assets

901

901

901

Liabilities

343

343

343

Interest rate management agreements:

Assets

8,669

8,669

8,669

Liabilities

Interest rate swap agreements:

Assets

29,243

29,243

29,243

Liabilities

29,243

29,243

29,243

Forward loan sale commitments:

Assets

1,334

1,334

1,334

Liabilities

16

16

16

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

December 31, 2021

Carrying

Fair Value

    

Amount

    

Level 1

    

Level 2

    

Level 3

    

Total

 

(in thousands)

Financial assets:

Cash and cash equivalents

$

194,719

$

194,719

$

$

$

194,719

Securities available for sale

394,036

394,036

394,036

Federal Home Loan Bank stock

5,931

N/A

N/A

N/A

N/A

Loans held for sale

45,642

45,642

45,642

Loans, net

3,562,356

3,558,934

3,558,934

Retirement plan annuities

14,174

14,174

14,174

Accrued interest receivable

10,624

10,624

10,624

Financial liabilities:

Deposits

3,682,649

3,683,465

3,683,465

Borrowed funds

55,711

55,765

55,765

Subordinated debt

34,159

35,790

35,790

Mortgagors' escrow accounts

8,459

8,459

8,459

Accrued interest payable

1,083

1,083

1,083

Derivative loan commitments:

Assets

1,527

1,527

1,527

Liabilities

95

95

95

Interest rate management agreements:

Assets

1,663

1,663

1,663

Liabilities

Interest rate swap agreements:

Assets

18,874

18,874

18,874

Liabilities

19,214

19,214

19,214

Forward loan sale commitments:

Assets

56

56

56

Liabilities

94

94

94

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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. Non-vested restricted shares that are participating securities are included in the computation of basic EPS. 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.

The following table presents earnings per common share.

Three Months Ended September 30, 

2022

2021

Net income available to common stockholders (in thousands)

$

13,758

$

12,259

Average number of common shares outstanding

49,626,152

54,021,542

Less: Average unallocated ESOP shares and non-vested restricted shares

(3,795,415)

(4,220,419)

Weighted average number of common shares outstanding used to calculate basic earnings per common share

45,830,737

49,801,123

Dilutive effect of share-based compensation

589,790

862,292

Weighted average number of common shares outstanding used to calculate diluted earnings per common share

46,420,527

50,663,415

Earnings per common share:

Basic

$

0.30

$

0.25

Diluted

$

0.30

$

0.24

Nine Months Ended September 30, 

2022

2021

Net income available to common stockholders (in thousands)

$

36,012

$

45,927

Average number of common shares outstanding

50,738,918

55,599,758

Less: Average unallocated ESOP shares and non-vested restricted shares

(3,863,606)

(4,237,506)

Weighted average number of common shares outstanding used to calculate basic earnings per common share

46,875,312

51,362,252

Dilutive effect of share-based compensation

666,335

732,497

Weighted average number of common shares outstanding used to calculate diluted earnings per common share

47,541,647

52,094,749

Earnings per common share:

Basic

$

0.77

$

0.89

Diluted

$

0.76

$

0.88

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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 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 September 30, 2022 and 2021 and for the three and nine months then ended is presented in the tables below.

Three Months Ended September 30, 2022

HarborOne

HarborOne

Bank

    

Mortgage

    

Consolidated

(in thousands)

Net interest and dividend income

$

39,373

$

437

$

39,332

Provision for credit losses

668

668

Net interest and dividend income, after provision for credit losses

38,705

437

38,664

Mortgage banking income:

Gain on sale of mortgage loans

3,809

3,809

Intersegment gain (loss)

(904)

698

Changes in mortgage servicing rights fair value

164

1,652

1,816

Other

218

2,235

2,453

Total mortgage banking income (loss)

(522)

8,394

8,078

Other noninterest income (loss)

6,180

(13)

6,167

Total noninterest income

5,658

8,381

14,245

Noninterest expense

27,707

6,610

34,473

Income before income taxes

16,656

2,208

18,436

Provision for income taxes

4,166

687

4,678

Net income

$

12,490

$

1,521

$

13,758

Nine Months Ended September 30, 2022

HarborOne

HarborOne

    

Bank

    

Mortgage

    

Consolidated

(in thousands)

Net interest and dividend income

$

110,043

$

1,198

$

109,797

Provision for credit losses

3,552

3,552

Net interest and dividend income, after provision for credit losses

106,491

1,198

106,245

Mortgage banking income:

Gain on sale of mortgage loans

13,669

13,669

Intersegment gain (loss)

(2,607)

2,632

Changes in mortgage servicing rights fair value

881

7,082

7,963

Other

670

6,953

7,623

Total mortgage banking income (loss)

(1,056)

30,336

29,255

Other noninterest income

18,151

3

18,154

Total noninterest income

17,095

30,339

47,409

Noninterest expense

81,663

21,613

104,262

Income before income taxes

41,923

9,924

49,392

Provision for income taxes

11,273

2,777

13,380

Net income

$

30,650

$

7,147

$

36,012

Total assets at period end

$

5,000,963

$

132,431

$

4,987,643

Goodwill at period end

$

59,042

$

10,760

$

69,802

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three Months Ended September 30, 2021

HarborOne

HarborOne

    

Bank

    

Mortgage

Consolidated

(in thousands)

Net interest and dividend income

$

32,494

$

792

$

32,803

Provision (benefit) for credit losses

(1,627)

(1,627)

Net interest and dividend income, after provision (benefit) for credit losses

34,121

792

34,430

Mortgage banking income:

Gain on sale of mortgage loans

12,756

12,756

Intersegment gain (loss)

(1,373)

2,366

Changes in mortgage servicing rights fair value

(74)

(918)

(992)

Other

263

3,619

3,882

Total mortgage banking income (loss)

(1,184)

17,823

15,646

Other noninterest income

6,339

25

6,364

Total noninterest income

5,155

17,848

22,010

Noninterest expense

26,570

12,387

39,274

Income before income taxes

12,706

6,253

17,166

Provision for income taxes

3,575

1,559

4,907

Net income

$

9,131

$

4,694

$

12,259

Nine Months Ended September 30, 2021

HarborOne

HarborOne

Bank

Mortgage

Consolidated

(in thousands)

Net interest and dividend income

$

95,876

$

2,897

$

97,385

Provision (benefit) for credit losses

(5,822)

(5,822)

Net interest and dividend income, after provision (benefit) for credit losses

101,698

2,897

103,207

Mortgage banking income:

Gain on sale of mortgage loans

51,820

51,820

Intersegment gain (loss)

(2,945)

3,938

Changes in mortgage servicing rights fair value

(207)

72

(135)

Other

839

11,633

12,472

Total mortgage banking income (loss)

(2,313)

67,463

64,157

Other noninterest income

17,328

37

17,365

Total noninterest income

15,015

67,500

81,522

Noninterest expense

75,161

44,545

120,674

Income before income taxes

41,552

25,852

64,055

Provision for income taxes

11,873

6,905

18,128

Net income

$

29,679

$

18,947

$

45,927

Total assets at period end

$

4,575,798

$

208,888

$

4,567,094

Goodwill at period end

$

59,042

$

10,760

$

69,802

45

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at September 30, 2022, and our results of operations for the nine months ended September 30, 2022 and 2021. 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;”  changes in general business and economic conditions (including inflation) on a national basis and in the local markets in which the Company operates; changes in customer behavior due to changing political, business and economic conditions including concerns about inflation; 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; ongoing 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, war, terrorism, civil unrest, the ongoing COVID-19 pandemic, and future pandemics; 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 and Estimates

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its most recent Annual Report on Form 10-K. Modifications to significant accounting policies made during the year are described in Note 1 to the Consolidated Financial Statements included in Item 1 of this report. The preparation of the consolidated financial statements in accordance with GAAP and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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.

Management has identified the Company’s most critical accounting policies as related to:

•Allowance for Credit Losses

•Income Taxes

•Goodwill and Identifiable Intangible Assets

The accounting policies and estimates, including the nature of the estimates and types of assumptions used, are described in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s most recent Form 10-K and pertain to discussion in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.

COVID-19 Update

While asset quality continues to improve, the continued uncertainty regarding the COVID-19 pandemic, inflation and the related economic effects on credit quality could continue to affect the accounting for credit losses. Management continues to evaluate our loan portfolio, particularly the commercial loan portfolio. Management identified five sectors as the most susceptible to increased credit risk at the outset of the COVID-19 pandemic: retail, office space, hotels, restaurants, and recreation. Management continues to monitor certain credit types within those sectors that may be susceptible to increased credit risk as a result of trends that were precipitated by the COVID-19 pandemic and may be exacerbated by current economic conditions. Management is focused on business-oriented hotels, non-anchored retail space, and metro office space. As of September 30, 2022, business-oriented hotels included 13 loans with a total outstanding balance of $93.9 million, non-anchored retail space included 31 loans with a total outstanding balance of $56.3 million, and metro office space included 2 loans with a total outstanding balance of $14.9 million. As of September 30, 2022, there were two business-oriented hotel credits with a carrying value of $10.3 million that were on non-accrual. One of those credits in the amount of $2.0 million was provided a principal deferral that resulted in a TDR designation in the third quarter. One business-oriented hotel credit in the amount of $9.5 million was downgraded to a watch risk rating during the third quarter of 2022; however, it is performing in accordance with its terms. The other loans in these groups were performing in accordance with their terms.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total Assets.  Total assets increased $434.2 million, or 9.5%, to $4.99 billion at September 30, 2022 from $4.55 billion at December 31, 2021. The increase primarily reflects increases of $589.6 million in loans and $23.1 million in other assets, partially offset by decreases of $108.8 million in cash and cash equivalents and $89.2 million in securities available for sale. The increase in other assets is partially attributable to an increase in the deferred tax asset for the unrealized losses in the available securities discussed below in the “Securities” section.

Cash and Cash Equivalents.  Cash and cash equivalents decreased $108.8 million to $85.9 million at September 30, 2022 from $194.7 million at December 31, 2021 and was primarily used to fund loan growth.

Loans Held for Sale.  Loans held for sale at September 30, 2022 were $18.8 million, a decrease of $26.8 million from $45.6 million at December 31, 2021, as rising interest rates on residential mortgage loans dampened loan demand.

Loans, net.  Net loans increased $590.4 million, or 16.6%, to $4.15 billion at September 30, 2022 from $3.56 billion at December 31, 2021. The following table sets forth information concerning the composition of loans:

September 30, 

December 31, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Residential real estate:

One- to four-family

$

1,326,645

$

1,047,819

$

278,826

26.6

%

Second mortgage and equity lines of credit

157,518

136,853

20,665

15.1

Residential construction

36,646

33,308

3,338

10.0

Total residential real estate loans

1,520,809

1,217,980

302,829

24.9

Commercial:

Commercial real estate

2,041,905

1,699,877

342,028

20.1

Commercial construction

185,062

136,563

48,499

35.5

Commercial and industrial

397,112

421,608

(24,496)

(5.8)

Total commercial loans

2,624,079

2,258,048

366,031

16.2

Consumer loans

52,466

131,705

(79,239)

(60.2)

Total loans

4,197,354

3,607,733

589,621

16.3

`

Allowance for loan losses

(44,621)

(45,377)

756

1.7

Loans, net

$

4,152,733

$

3,562,356

$

590,377

16.6

%

The increase in net loans is primarily due to commercial real estate and residential real estate loan growth. The increase in one- to four-family loans includes a purchased pool of $58.1 million. The allowance for loan losses was $44.6 million at September 30, 2022 and $45.4 million at December 31, 2021. The Company adopted Accounting Standards Update No. 2016-13, commonly referred to as CECL, on January 1, 2022. The decrease reflects the adoption of the CECL accounting methodology, as well as the impact of net charge-offs in the first quarter of 2022, partially offset by net recoveries in the second and third quarters of 2022. See additional disclosure in the Asset Quality section.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Securities.  Investment securities available for sale at September 30, 2022 were $304.9 million, a decrease of $89.1 million, or 22.6%, from $394.0 million at December 31, 2021. Securities available for sale were negatively impacted by unrealized losses of $70.4 million as September 30, 2022, as compared to $3.6 million of unrealized losses as of December 31, 2021. As of September 30, 2022 and December 31, 2021, the gross unrealized loss positions were primarily related to mortgage-backed securities and other obligations issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Total gross unrealized losses were primarily attributable to changes in interest rates relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.

Securities held to maturity amounted to $15.0 million at September 30, 2022 and reflects the purchase of three $5.0 million U.S. government agency notes during 2022. During the nine months ended September 30, 2022, purchases of available-for-sale securities included $10.0 million of mortgage-backed securities, $5.0 million of U.S. government agency notes, and $1.0 million of corporate bonds.

Mortgage servicing rights.  MSRs are created as a result of our mortgage banking origination activities and accounted for at fair value. At September 30, 2022, we serviced mortgage loans for others with an aggregate outstanding principal balance of $3.63 billion. Total MSRs were $49.9 million at September 30, 2022 and $38.3 million at December 31, 2021. The change in total MSRs for the nine months ended September 30, 2022 primarily reflects a fair value mark of $10.3 million.  

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 during the period of July 2021 through December 2021 may be less sensitive to falling rates in the future as they were originated in a low mortgage rate environment.

Deposits.  Deposits increased $200.5 million, or 5.4%, to $3.88 billion at September 30, 2022 from $3.68 billion at December 31, 2021. The following table sets forth information concerning the composition of deposits:

September 30, 

December 31, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Noninterest-bearing deposits

$

795,945

$

743,051

$

52,894

7.1

%

NOW accounts

308,128

313,684

(5,556)

(1.8)

Regular savings

1,289,825

1,138,980

150,845

13.2

Money market accounts

506,894

548,830

(41,936)

(7.6)

Term certificate accounts

484,567

527,548

(42,981)

(8.1)

Consumer and business deposits

3,385,359

3,272,093

113,266

3.5

Municipal deposits

383,055

310,556

72,499

23.3

Wholesale deposits

114,696

100,000

14,696

14.7

Total deposits

$

3,883,110

$

3,682,649

$

200,461

5.4

%

Reciprocal deposits

$

27,736

$

43,757

$

(16,021)

(36.6)

%

The growth in deposits was driven by an increase of $113.3 million in consumer and business 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. At September 30, 2022, wholesale deposits were brokered deposits of $114.7 million. 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 $27.7 million in reciprocal deposits. The wholesale deposits provide a channel for the Company to seek additional funding outside the Company’s core market.

Stockholders’ equity.  Total stockholders’ equity was $611.4 million at September 30, 2022, compared to $679.3 million at December 31, 2021 and $680.0 million at September 30, 2021. Stockholders’ equity decreased 10.0% when compared to the year ended December 31, 2021 as earnings were offset by share repurchases and elevated levels of unrealized losses on available-for-sale investment securities included in other comprehensive income. The Company commenced its fourth share repurchase program on April 12, 2022 and purchased 2,121,104 shares at an average price of

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Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

$13.82 through September 30, 2022. The Company completed its third share repurchase program of 2,668,159 shares on March 25, 2022 at an average price of $14.64. A fifth share repurchase program of 2,450,208 shares was announced on September 21, 2022 and will begin when the fourth program is completed. The tangible-common-equity-to-tangible-assets ratio was 10.97% at September 30, 2022, 13.53% at December 31, 2021, and 13.50% at September 30, 2021.

At September 30, 2022, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at September 30, 2022 also exceeded the minimum capital requirements, including the currently applicable capital conservation buffer of 2.5%. Regulatory capital ratios are not impacted by the decline in other comprehensive income as a result of the unrealized losses on available-for-sale investment securities.

Comparison of Results of Operations for the Three Months and Nine Months Ended September 30, 2022 and 2021

HarborOne Bancorp, Inc. Consolidated

Overview.  Consolidated net income for the three and nine months ended September 30, 2022 was $13.8 million and $36.0 million, respectively, compared to net income of $12.3 million and $45.9 million for the three and nine months ended September 30, 2021.

Average Balances and Yields.  The following tables set 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.

50

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Three Months Ended September 30, 

2022

2021

Average

Average

Outstanding

Yield/

Outstanding

Yield/

    

Balance

      

Interest

      

Cost

      

Balance

      

Interest

      

Cost

      

(dollars in thousands)

Interest-earning assets:

Investment securities (1)

$

390,577

$

1,971

2.00

%  

$

358,927

$

1,293

1.43

%

Other interest-earning assets

27,723

143

2.05

372,892

170

0.18

Loans held for sale

28,046

377

5.33

84,399

665

3.13

Loans

Commercial loans (2)

2,522,359

28,298

4.45

2,121,432

22,394

4.19

Residential real estate loans (2)

1,470,305

12,972

3.50

1,121,898

9,352

3.31

Consumer loans (2)

63,220

795

4.99

170,366

1,934

4.50

Total loans

4,055,884

42,065

4.11

3,413,696

33,680

3.91

Total interest-earning assets

4,502,230

44,556

3.93

4,229,914

35,808

3.36

Noninterest-earning assets

308,734

347,060

Total assets

$

4,810,964

$

4,576,974

Interest-bearing liabilities:

Savings accounts

$

1,293,598

1,211

0.37

$

1,136,131

365

0.13

NOW accounts

305,777

42

0.05

283,725

45

0.06

Money market accounts

893,452

1,382

0.61

832,340

392

0.19

Certificates of deposit

486,923

787

0.64

570,570

1,087

0.76

Brokered deposits

102,875

69

0.27

100,000

161

0.64

Total interest-bearing deposits

3,082,625

3,491

0.45

2,922,766

2,050

0.28

FHLB advances

196,036

1,209

2.45

84,438

431

2.03

Subordinated debentures

34,237

524

6.07

34,111

524

6.09

Total borrowings

230,273

1,733

2.99

118,549

955

3.20

Total interest-bearing liabilities

3,312,898

5,224

0.63

3,041,315

3,005

0.39

Noninterest-bearing liabilities:

Noninterest-bearing deposits

789,214

756,927

Other noninterest-bearing liabilities

80,304

90,366

Total liabilities

4,182,416

3,888,608

Total equity

628,548

688,366

Total liabilities and equity

$

4,810,964

$

4,576,974

Net interest income as reported

39,332

32,803

Interest rate spread (3)

3.30

%  

2.97

%

Net interest-earning assets (4)

$

1,189,332

$

1,188,599

Net interest margin (5)

3.47

%  

3.08

%

Ratio of interest-earning assets to interest-bearing liabilities

135.90

%  

139.08

%

Supplemental information:

Total deposits, including demand deposits

$

3,871,839

$

3,491

$

3,679,693

$

2,050

Cost of total deposits

0.36

%

0.22

%

Total funding liabilities, including demand deposits

$

4,102,112

$

5,224

$

3,798,242

$

3,005

Cost of total funding liabilities

0.51

%

0.31

%

(1) Includes securities available for sale and securities held to maturity.

(2) Includes nonaccruing loan balances and interest received on such loans.

(3) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average total interest-earning assets.

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Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Nine Months Ended September 30, 

2022

2021

Average

Average

Outstanding

Yield/

Outstanding

Yield/

    

Balance

      

Interest

      

Cost

      

Balance

      

Interest

      

Cost

      

(dollars in thousands)

Interest-earning assets:

Investment securities (1)

391,786

5,545

1.89

318,817

2,671

1.12

Other interest-earning assets

80,540

335

0.56

317,837

384

0.16

Loans held for sale

29,114

972

4.46

130,622

2,841

2.91

Loans

Commercial loans (2)

2,400,290

75,688

4.22

2,144,726

65,253

4.07

Residential real estate loans (2)

1,341,508

34,296

3.42

1,090,361

29,439

3.61

Consumer loans (2)

89,934

3,179

4.73

209,443

6,954

4.44

Total loans

3,831,732

113,163

3.95

3,444,530

101,646

3.95

Total interest-earning assets

4,333,172

120,015

3.70

4,211,806

107,542

3.41

Noninterest-earning assets

315,781

338,980

Total assets

$

4,648,953

$

4,550,786

Interest-bearing liabilities:

Savings accounts

$

1,242,533

2,203

0.24

$

1,104,765

1,363

0.16

NOW accounts

306,115

116

0.05

242,623

123

0.07

Money market accounts

879,310

2,320

0.35

849,041

1,369

0.22

Certificates of deposit

497,744

2,186

0.59

589,404

3,760

0.85

Brokered deposits

100,969

306

0.41

100,000

457

0.61

Total interest-bearing deposits

3,026,671

7,131

0.32

2,885,833

7,072

0.33

FHLB advances

96,015

1,516

2.11

94,482

1,514

2.14

Subordinated debentures

34,206

1,571

6.14

34,080

1,571

6.16

Total borrowings

130,221

3,087

3.17

128,562

3,085

3.21

Total interest-bearing liabilities

3,156,892

10,218

0.43

3,014,395

10,157

0.45

Noninterest-bearing liabilities:

Noninterest-bearing deposits

765,479

749,426

Other noninterest-bearing liabilities

80,727

90,763

Total liabilities

4,003,098

3,854,584

Total equity

645,855

696,202

Total liabilities and equity

$

4,648,953

$

4,550,786

Net interest income as reported

109,797

97,385

Interest rate spread (3)

3.27

%  

2.96

%

Net interest-earning assets (4)

$

1,176,280

$

1,197,411

Net interest margin (5)

3.39

%  

3.09

%

Ratio of interest-earning assets to interest-bearing liabilities

137.26

%  

139.72

%

Supplemental information:

Total deposits, including demand deposits

$

3,792,150

$

7,131

$

3,635,259

$

7,072

Cost of total deposits

0.25

%

0.26

%

Total funding liabilities, including demand deposits

$

3,922,371

$

10,218

$

3,763,821

$

10,157

Cost of total funding liabilities

0.35

%

0.36

%

(1) Includes securities available for sale and securities held to maturity.

(2) Includes nonaccruing loan balances and interest received on such loans.

(3) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average total interest-earning assets.

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Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

2022 v. 2021

2022 v. 2021

Increase (Decrease)

Total

Increase (Decrease)

Total

Due to Changes in

Increase

Due to Changes in

Increase

    Volume

    

    Rate

    

(Decrease)

    

    Volume

    

    Rate

    

(Decrease)

(in thousands)

Interest-earning assets:

Investment securities

$

104

$

574

$

678

$

510

$

2,364

$

2,874

Other interest-earning assets

(27)

(27)

(124)

75

(49)

Loans held for sale

(288)

(288)

(1,516)

(353)

(1,869)

Loans

Commercial loans

2,289

3,615

5,904

6,547

3,888

10,435

Residential real estate loans

2,772

848

3,620

6,417

(1,560)

4,857

Consumer loans

(1,083)

(56)

(1,139)

(3,724)

(51)

(3,775)

Total loans

3,978

4,407

8,385

9,240

2,277

11,517

Total interest-earning assets

3,767

4,981

8,748

8,110

4,363

12,473

Interest-bearing liabilities:

Savings accounts

43

803

846

154

686

840

NOW accounts

3

(6)

(3)

28

(35)

(7)

Money market accounts

27

963

990

47

904

951

Certificates of deposit

(148)

(152)

(300)

(524)

(1,050)

(1,574)

Brokered deposit

5

(97)

(92)

4

(155)

(151)

Total interest-bearing deposits

(70)

1,511

1,441

(291)

350

59

FHLB advances

881

(103)

778

2

2

Subordinated debentures

Total borrowings

881

(103)

778

2

2

Total interest-bearing liabilities

811

1,408

2,219

(289)

350

61

Change in net interest income

$

2,956

$

3,573

$

6,529

$

8,399

$

4,013

$

12,412

Interest and Dividend Income.  Interest and dividend income increased $8.7 million, or 24.4%, to $44.6 million for the three months ended September 30, 2022, compared to $35.8 million for the three months ended September 30, 2021. The significant components of the increase were:

Interest and fees on loans increased $8.4 million, or 24.9%, reflecting loan growth, and a 20 basis point increase in the yield. Interest on loans for three months ended September 30, 2022, included $454,000 in prepayment penalties on commercial loans, $188,000 in accretion income from fair value discounts on acquired loans, and $24,000 from the recognition of deferred fees on PPP loans. The same period in 2021 included $436,000 in prepayment penalties, $675,000 in accretion income and $1.9 million in recognition of PPP loan fees.

Interest income on securities increased $678,000, or  52.4%, reflecting the increase in average balance and rate.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Interest on loans held for sale decreased $288,000, or 43.3%, partially offsetting the increases, reflecting the decrease in mortgage originations, partially offset by the increase in rates.

Compared to the first nine months of 2021, interest and dividend income increased $12.5 million, or 11.6%, reflecting an $11.5 million, or 11.3% increase in loan income, and a $2.9 million increase in securities income, partially offset by a $1.9 million decrease in income from loans held for sale. The increases in loans and securities reflect increases in average balances coupled with increases in yields.

Interest Expense.  Interest expense increased $2.2 million, or 73.8%, to $5.2 million for the three months ended September 30, 2022 from $3.0 million for the three months ended September 30, 2021. The increase resulted from a $1.4 million increase in interest expense on deposits and a $778,000 increase in interest expense on FHLB borrowings. The increase in interest expense on FHLB borrowings reflects an increase in the average balance and a 42 basis-point increase in the cost of FHLB borrowings. The increase in deposit expense reflects a 17 basis-point increase in cost of interest-bearing deposits and an increase in the average balance.

For the first nine months of 2022 and 2021, interest expense was $10.2 million. The increase in the average interest-bearing deposits and the increase in the total borrowings balance was offset by slight decreases in the cost of those funds.

Net Interest and Dividend Income.  Net interest and dividend income increased $6.5 million, or 19.9%, to $39.3 million for the three months ended September 30, 2022 from $32.8 million for the three months ended September 30, 2021, primarily as a result of increases in the average balance of loans and investments. The net interest spread increased 33 basis points to 3.30% for the three months ended September 30, 2022 from 2.97% for the three months ended September 30, 2021 and net interest margin increased 39 basis points to 3.47% for the three months ended September 30, 2022 from 3.08% for three months ended September 30, 2021.

Compared to the first nine months of 2021, net interest and dividend income increased $12.4 million, or 12.8%, to $109.8 million from $97.4 million. The net interest spread increased 31 basis points to 3.27% for the nine months ended September 30, 2022 from 2.96% for the nine months ended September 30, 2021, and net interest margin increased by 30 basis points to 3.39% for the nine months ended September 30, 2022 from 3.09% for the nine months ended September 30, 2021.

Income Tax Provision.  The provision for income taxes and effective tax rate for the three months ended September 30, 2022 was $4.7 million and 25.4%, respectively, compared to $4.9 million and 28.6%, respectively, for the three months ended September 30, 2021.

The provision for income taxes and effective tax rate for the nine months ended September 30, 2022 was $13.4 million and 27.1%, respectively, compared to $18.1 million and 28.3%, respectively, for the nine months ended September 30, 2021.

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.

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Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The tables below show the results of operations for the Company’s segments, HarborOne Bank and HarborOne Mortgage, for the three and nine months ended September 30, 2022 and 2021, and the increase or decrease in those results:

HarborOne Bank

HarborOne Mortgage

Three Months Ended

Three Months Ended

September 30, 

Increase (Decrease)

September 30, 

Increase (Decrease)

    

2022

    

2021

    

Dollars

    

Percent

    

2022

    

2021

    

Dollars

    

Percent

    

(dollars in thousands)

Net interest and dividend income

$

39,373

$

32,494

$

6,879

21.2

%  

$

437

$

792

$

(355)

(44.8)

%  

Provision (benefit) for credit losses

668

(1,627)

2,295

141.1

Net interest and dividend income, after provision (benefit) for credit losses

38,705

34,121

4,584

13.4

437

792

(355)

(44.8)

Mortgage banking income:

Gain on sale of mortgage loans

3,809

12,756

(8,947)

(70.1)

Intersegment gain (loss)

(904)

(1,373)

469

34.2

698

2,366

(1,668)

(70.5)

Changes in mortgage servicing rights fair value

164

(74)

238

321.6

1,652

(918)

2,570

280.0

Other

218

263

(45)

(17.1)

2,235

3,619

(1,384)

(38.2)

Total mortgage banking income (loss)

(522)

(1,184)

662

55.9

8,394

17,823

(9,429)

(52.9)

Other noninterest income (loss)

6,180

6,339

(159)

(2.5)

(13)

25

(38)

(152.0)

Total noninterest income

5,658

5,155

503

9.8

8,381

17,848

(9,467)

(53.0)

Noninterest expense

27,707

26,570

1,137

4.3

6,610

12,387

(5,777)

(46.6)

Income before income taxes

16,656

12,706

3,950

31.1

2,208

6,253

(4,045)

(64.7)

Provision for income taxes

4,166

3,575

591

16.5

687

1,559

(872)

(55.9)

Net income

$

12,490

$

9,131

$

3,359

36.8

%  

$

1,521

$

4,694

$

(3,173)

(67.6)

%  

HarborOne Bank

HarborOne Mortgage

Nine Months Ended

Nine Months Ended

September 30, 

Increase (Decrease)

September 30, 

Increase (Decrease)

    

2022

    

2021

    

Dollars

    

Percent

    

2022

2021

Dollars

Percent

(dollars in thousands)

Net interest and dividend income

$

110,043

$

95,876

$

14,167

14.8

%  

$

1,198

$

2,897

$

(1,699)

(58.6)

%

Provision (benefit) for credit losses

3,552

(5,822)

9,374

161.0

Net interest and dividend income, after provision (benefit) for credit losses

106,491

101,698

4,793

4.7

1,198

2,897

(1,699)

(58.6)

Mortgage banking income:

Gain on sale of mortgage loans

13,669

51,820

(38,151)

(73.6)

Intersegment gain (loss)

(2,607)

(2,945)

338

11.5

2,632

3,938

(1,306)

(33.2)

Changes in mortgage servicing rights fair value

881

(207)

1,088

525.6

7,082

72

7,010

NM

Other

670

839

(169)

(20.1)

6,953

11,633

(4,680)

(40.2)

Total mortgage banking income (loss)

(1,056)

(2,313)

1,257

54.3

30,336

67,463

(37,127)

(55.0)

Other noninterest income

18,151

17,328

823

4.7

3

37

(34)

(91.9)

Total noninterest income

17,095

15,015

2,080

13.9

30,339

67,500

(37,161)

(55.1)

Noninterest expense

81,663

75,161

6,502

8.7

21,613

44,545

(22,932)

(51.5)

Income before income taxes

41,923

41,552

371

0.9

9,924

25,852

(15,928)

(61.6)

Provision for income taxes

11,273

11,873

(600)

(5.1)

2,777

6,905

(4,128)

(59.8)

Net income

$

30,650

$

29,679

$

971

3.3

%  

$

7,147

$

18,947

$

(11,800)

(62.3)

%

55

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

HarborOne Bank Segment

Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

Net Income.  The Bank’s net income increased by $3.4 million to $12.5 million for the three months ended September 30, 2022, compared to $9.1 million for the three months ended September 30, 2021. Pre-tax income was $16.7 million for the three months ended September 30, 2022, a $4.0 million increase from the three months ended September 30, 2021. The increase in pre-tax income reflects an increase of $6.9 million in net interest and dividend income, partially offset by a $2.3 million increase in provision for credit losses and a $1.1 million increase in noninterest expense.

Compared to the first nine months of 2021, the Bank’s net income for the nine months ended September 30, 2022 increased $971,000 to $30.7 million from $29.7 million. Pre-tax income increased $371,000, or 0.89%, due to a $14.2 million increase in net interest and dividend income and a $2.1 million increase in noninterest income, partially offset by $9.4 million increase in the provision for credit losses and a $6.5 million increase in noninterest expense. The provision for income taxes decreased $600,000.

Allowance for Credit Losses.  Effective January 1, 2022, the Company adopted Accounting Standards Update No. 2016-13, commonly referred to as CECL, which requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures. CECL requires that the ACL be calculated based on current expected credit losses over the full remaining expected life of the financial assets and also consider expected future changes in macroeconomic conditions. Upon adoption of CECL on January 1, 2022, the Company’s ACL on loans decreased by $1.3 million, and the ACL on unfunded commitments increased by $3.9 million for a net increase of $2.6 million. The after-tax impact of $1.9 million was recognized as a one-time, cumulative-effect adjustment that decreased retained earnings.

The Bank recorded provision for credit losses of $668,000 and $3.6 million for the three and nine months ended September 30, 2022. For the three months ended September 30, 2022, the provision for credit losses included a $262,000 ACL on loans and a $406,000 ACL on unfunded commitments and reflects provisioning for loan growth partially offset by a reduction in pandemic related uncertainty. The Bank recorded a reversal of provision for credit losses of $1.6 million and $5.8 million for the three and nine months ended September 30, 2021. The reversal of provision in 2021 primarily reflected positive economic and pandemic trends. There was no ACL on unfunded commitments prior to the adoption of CECL.

Net recoveries totaled $799,000, or 0.08% of average loans outstanding on an annualized basis, for the quarter ended September 30, 2022, compared to net charge-offs of $1.7 million, or 0.19% of average loans outstanding on an annualized basis, for the quarter ended September 30, 2021. Net charge-offs totaled $1.4 million, or 0.05% of average loans outstanding on an annualized basis for the nine months ended September 30, 2022, as compared to net charge-offs of $1.6 million for the same period in 2021. The 2022 nine-month period included a $2.8 million charge-off upon the resolution of one credit, previously included in the office space at-risk sector, in the amount of $8.8 million. At September 30, 2022, nonperforming assets were $23.4 million, and nonperforming assets to total assets were 0.47% as compared to $36.5 million and 0.80%, respectively, at September 30, 2021.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Income.  Total noninterest income was $5.7 million and $17.1 million for the three and nine months ended September 30, 2022, compared to $5.2 million and $15.0 million for the respective prior year periods. The following tables set forth the components of noninterest income:

Three Months Ended September 30, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Intersegment loss

$

(904)

$

(1,373)

$

469

34.2

%

Secondary market loan servicing fees, net of guarantee fees

218

263

(45)

(17.1)

Changes in mortgage servicing rights fair value

164

(74)

238

321.6

Total mortgage banking loss

(522)

(1,184)

662

55.9

%

Interchange fees

2,574

2,674

(100)

(3.7)

Other deposit account fees

2,296

1,984

312

15.7

Income on retirement plan annuities

119

108

11

10.2

Gain on sale and call of securities

241

(241)

(100.0)

Bank-owned life insurance income

503

515

(12)

(2.3)

Swap fee income

70

20

50

100.0

Other

618

797

(179)

(22.5)

Total noninterest income

$

5,658

$

5,155

$

503

9.8

%

Nine Months Ended September 30, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Intersegment loss

$

(2,607)

$

(2,945)

$

338

11.5

%

Secondary market loan servicing fees, net of guarantee fees

670

839

(169)

(20.1)

Changes in mortgage servicing rights fair value

881

(207)

1,088

525.6

Total mortgage banking loss

(1,056)

(2,313)

1,257

54.3

%

Interchange fees

7,754

7,825

(71)

(0.9)

Other deposit account fees

6,480

5,231

1,249

23.9

Income on retirement plan annuities

338

318

20

6.3

Gain on sale and call of securities

241

(241)

(100.0)

Bank-owned life insurance income

1,480

1,516

(36)

(2.4)

Swap fee income

112

315

(203)

(64.4)

Other

1,987

1,882

105

5.6

Total noninterest income

$

17,095

$

15,015

$

2,080

13.9

%

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

The Bank records an intersegment loss on loans purchased from HarborOne Mortgage that is offset in consolidation. The Bank purchased $335.0 million of residential mortgage loans from HarborOne Mortgage during the nine months ended September 30, 2022, as compared to $372.0 million for the prior year period.
The change in the MSR fair value is generally consistent with the change in the 10-year Treasury Constant Maturity rate. As interest rates rise and prepayment speeds decrease, MSR fair value tends to increase. Conversely, when interest rates fall and prepayment speeds increase, MSR fair value tends to decrease. The 10-year Treasury Constant Maturity rate increased 85 basis points and 231 basis points for the three and nine months ended September 30, 2022, respectively, positively impacting the fair value of the MSRs, partially offset by amortization related to principal payments.
The increase in other deposit account fees reflects an increase in overdraft protection fees of $249,000 and $1.1 million for the three and nine months ended September 30, 2022, respectively.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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 year-to-date 2022 other income included a positive credit valuation adjustment of $239,000 on the termination of an interest rate swap and a $189,000 corporate capital distribution from the National Credit Union Association, partially offset by a write-down on the final disposition of a branch real estate asset held for sale, all recorded in the first quarter of 2022. The year-to-date 2021 included a corporate capital distribution from the National Credit Union Association of $256,000.

Noninterest Expense.  Total noninterest expense was $27.7 million and $81.7 million for the three and nine months ended September 30, 2022, compared to $26.6 million and $75.2 million for the respective prior year periods. The following tables set forth the components of noninterest expense:

Three Months Ended September 30, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Compensation and benefits

$

16,455

$

14,736

$

1,719

11.7

%

Occupancy and equipment

4,096

4,013

83

2.1

Data processing expenses

2,219

2,028

191

9.4

Loan expenses

68

320

(252)

(78.8)

Marketing

728

795

(67)

(8.4)

Deposit expenses

587

431

156

36.2

Postage and printing

358

374

(16)

(4.3)

Professional fees

1,258

1,075

183

17.0

Prepayment penalties on Federal Home Loan Bank advances

1,095

(1,095)

(100.0)

Foreclosed and repossessed assets

(308)

308

100.0

Deposit insurance

357

341

16

4.7

Other expenses

1,581

1,670

(89)

(5.3)

Total noninterest expense

$

27,707

$

26,570

$

1,137

4.3

%

Nine Months Ended September 30, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Compensation and benefits

$

47,942

$

41,664

$

6,278

15.1

%

Occupancy and equipment

12,598

12,239

359

2.9

Data processing expenses

6,552

6,479

73

1.1

Loan expenses

298

925

(627)

(67.8)

Marketing

2,776

2,334

442

18.9

Deposit expenses

1,646

1,209

437

36.1

Postage and printing

1,128

1,098

30

2.7

Professional fees

3,419

2,960

459

15.5

Prepayment penalties on Federal Home Loan Bank advances

1,095

(1,095)

(100.0)

Foreclosed and repossessed assets

18

(332)

350

105.4

Deposit insurance

1,060

993

67

6.7

Other expenses

4,226

4,497

(271)

(6.0)

Total noninterest expense

$

81,663

$

75,161

$

6,502

8.7

%

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

The quarter-over-quarter increase in compensation expense reflects increased expense related to benefit accruals. The year-over-year increase in compensation and benefits reflects increased staffing levels at the Bank, the impact of annual salary increases and expenses related to the benefit accruals, and equity award acceleration in connection with the retirement of the Company’s former CEO, James W. Blake.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The increase in occupancy expense reflects an increase in utilities and software licenses.

The decrease in loan expenses is consistent with the decrease in the consumer loan portfolio.

Marketing expense increased due to an increase in the utilization of radio media for advertising the HarborOne brand.

The increase in deposit expense reflects check losses.

HarborOne Mortgage Segment

Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

Net Income.  HarborOne Mortgage recorded net income of $1.5 million and $7.1 million for the three and nine months ended September 30, 2022, respectively, as compared to net income of $4.7 million and $18.9 million for the prior year respective periods. The HarborOne Mortgage segment’s results are heavily impacted by prevailing rates, refinancing activity and home sales.

Noninterest Income.  Total noninterest income was $8.4 million and $30.3 million for the three and nine months ended September 30, 2022, respectively, as compared to $17.8 million and $67.5 million for the respective prior year periods. Noninterest income is primarily from mortgage banking income, for which the following tables provide further detail:

Three Months Ended September 30, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Gain on sale of mortgage loans

$

3,809

$

12,756

$

(8,947)

(70.1)

%

Intersegment gain

698

2,366

(1,668)

(70.5)

Processing, underwriting and closing fees

466

1,974

(1,508)

(76.4)

Secondary market loan servicing fees net of guarantee fees

1,769

1,645

124

7.5

Changes in mortgage servicing rights fair value

1,652

(918)

2,570

280.0

Total mortgage banking income

$

8,394

$

17,823

$

(9,429)

(52.9)

%

Originated mortgage servicing rights included in gain on sale of mortgage loans

$

915

$

1,577

$

(662)

(42.0)

%

Change in 10-year Treasury Constant Maturity rate in basis points

85

7

Nine Months Ended September 30, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Gain on sale of mortgage loans

$

13,669

$

51,820

$

(38,151)

(73.6)

%

Intersegment gain

2,632

3,938

(1,306)

(33.2)

Processing, underwriting and closing fees

1,723

7,147

(5,424)

(75.9)

Secondary market loan servicing fees net of guarantee fees

5,230

4,486

744

16.6

Changes in mortgage servicing rights fair value

7,082

72

7,010

9,736.1

Total mortgage banking income

$

30,336

$

67,463

$

(37,127)

(55.0)

%

Originated mortgage servicing rights included in gain on sale of mortgage loans

$

3,630

$

11,823

$

(8,193)

(69.3)

%

Change in 10-year Treasury Constant Maturity rate in basis points

231

59

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Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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. The 10-year Treasury Constant Maturity rate increased 85 basis points and 231 basis points for the three and nine months ended September 30, 2022, respectively, positively impacting the fair value of the MSRs, partially offset by amortization related to payoffs. Amortization related to payoffs decreased approximately 46% and 55% for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021.

Quarter over quarter, gain on sale of mortgages and processing, underwriting and closing fees decreased as loan closings decreased due to slowing mortgage demand on rising interest rates.
The increase in the secondary market loan servicing fee net of guarantee fees reflects the increase in the average serviced mortgage loans for the three and nine months ended September 30, 2022, as compared to the respective prior year periods.

The following tables provide additional loan production detail:

Three Months Ended September 30, 

2022

2021

Loan

Loan

Amount

    

% of Total

Amount

% of Total

(dollars in thousands)

Product Type

Conventional

$

117,536

46.9

%

$

379,934

62.8

%

Government

15,020

6.0

35,021

5.9

State Housing Agency

12,037

4.8

20,739

3.4

Jumbo

105,776

42.2

168,999

27.9

Seconds

95

0.1

193

Total

$

250,464

100.0

%

$

604,886

100.0

%

Purpose

Purchase

$

228,934

91.4

%

$

324,886

53.7

%

Refinance

15,007

6.0

269,011

44.5

Construction

6,523

2.6

10,989

1.8

Total

$

250,464

100.0

%

$

604,886

100.0

%

Nine Months Ended September 30, 

2022

2021

Loan

Loan

Amount

    

% of Total

Amount

    

% of Total

(dollars in thousands)

Product Type

Conventional

$

421,436

52.6

%

$

1,395,093

69.7

%

Government

44,784

5.6

126,724

6.3

State Housing Agency

30,112

3.7

55,792

2.8

Jumbo

305,291

38.1

425,819

21.2

Seconds

195

0.0

457

Total

$

801,818

100.0

%

$

2,003,885

100.0

%

Purpose

Purchase

$

603,289

75.2

%

$

844,973

42.2

%

Refinance

169,362

21.1

1,132,700

56.5

Construction

29,167

3.7

26,212

1.3

Total

$

801,818

100.0

%

$

2,003,885

100.0

%

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Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Expense.  Total noninterest expense was $6.6 million and $21.6 million for the three and nine months ended September 30, 2022, compared to $12.4 million and $44.5 million for the respective prior year periods. The following tables set forth the components of noninterest expense:

Three Months Ended September 30, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Compensation and benefits

$

4,788

$

10,022

$

(5,234)

(52.2)

%

Occupancy and equipment

691

702

(11)

(1.6)

Data processing expenses

92

153

(61)

(39.9)

Loan expenses

287

1,003

(716)

(71.4)

Marketing

122

85

37

43.5

Postage and printing

11

20

(9)

(45.0)

Professional fees

108

242

(134)

(55.4)

Other expenses

511

160

351

219.4

Total noninterest expense

$

6,610

$

12,387

$

(5,777)

(46.6)

%

Nine Months Ended September 30, 

Increase (Decrease)

2022

2021

Dollars

Percent

(dollars in thousands)

Compensation and benefits

$

15,974

$

35,660

$

(19,686)

(55.2)

%

Occupancy and equipment

2,094

2,314

(220)

(9.5)

Data processing expenses

259

375

(116)

(30.9)

Loan expenses

920

4,083

(3,163)

(77.5)

Marketing

278

190

88

46.3

Postage and printing

47

89

(42)

(47.2)

Professional fees

484

1,303

(819)

(62.9)

Other expenses

1,557

531

1,026

193.2

Total noninterest expense

$

21,613

$

44,545

$

(22,932)

(51.5)

%

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

The quarter-to-date and year-to-date changes in compensation and benefits primarily reflects the commission expense decreased consistent with the changes in mortgage origination volumes and decreased staffing levels.

The year-to-date changes in occupancy and equipment primarily reflects the decrease in loan offices.

Loan expense primarily is for expenses to originate loans and is generally consistent with mortgage origination volumes.
The decrease in professional fees primarily reflects expenses for outsourced quality control services and mortgage consulting services that were utilized in 2021.
The quarter-to-date and year-to-date increase in other expenses reflects increased intercompany management fees, cloud-computing expenses, and employment agency fees.

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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.

September 30, 

December 31, 

    

2022

    

2021

(dollars in thousands)

Non-accrual loans:

Residential real estate:

        

One- to four-family

$

8,921

$

11,210

Second mortgages and equity lines of credit

415

600

Commercial real estate

10,576

20,053

Commercial construction

Commercial and industrial

3,287

4,114

Consumer

94

156

Total non-accrual loans (1)

23,293

36,133

Other real estate owned and repossessed assets:

One- to four-family residential real estate owned

Other repossessed assets

74

53

Total nonperforming assets

23,367

36,186

Performing troubled debt restructurings

8,847

10,003

Total nonperforming assets and performing troubled debt restructurings

$

32,214

$

46,189

Period end allowance for credit losses balance

44,621

45,377

Period end total loan balance

4,197,354

3,607,733

Allowance for credit losses to total loans

1.06

%

1.26

%

Allowance for credit losses to non-accrual loans

191.56

%

125.58

%

Total nonperforming loans to total loans (2)

0.55

%  

1.00

%

Total nonperforming assets and performing troubled debt restructurings to total assets

0.65

%  

1.01

%

Total nonperforming assets to total assets

0.47

%  

0.79

%

(1) $2.9 million and $1.0 million of troubled debt restructurings are included in total non-accrual loans at September 30, 2022 and December 31, 2021, respectively.

(2) Total loans are presented before allowance for loan losses, but include deferred loan origination costs (fees), net.

Credit quality performance has remained strong, with total nonperforming assets of $23.4 million at September 30, 2022, compared to $36.2 million at December 31, 2021 and $36.5 million at September 30, 2021. Nonperforming assets as a percentage of total assets were 0.47% at September 30, 2022, 0.79% at December 31, 2021, and 0.80% at September 30, 2021. The decrease in nonperforming assets was primarily due to the resolution of one credit in the amount of $8.8 million, previously included in the office at-risk sector, for which the Company also recorded a $2.8 million charge-off in the first quarter of 2022.

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. A DCF methodology is used to estimate credit losses for each pooled portfolio segment. The methodology incorporates the probability of default and loss given default. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to its historical mean in order to estimate the probability of default for each loan portfolio segment. Utilizing a third-party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. For loans that are individually analyzed, the ACL is measured using a DCF methodology based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral-dependent, at the fair value of the collateral.

The ACL was $44.6 million, or 1.06% of total loans, at September 30, 2022, compared to $45.4 million, or 1.26% of total loans, at December 31, 2021. The ACL on individually analyzed loans amounted to $3.7 million, 11.5% of the carrying value of individually analyzed loans. The ACL on unfunded commitments, included in other liabilities on the unaudited Consolidated Balance Sheets, amounted to $5.5 million at September 30, 2022, and there was no ACL on unfunded commitments at December 31, 2021.

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

September 30, 2022

December 31, 2021

% 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

$

10,918

24.47

%  

31.61

%  

$

3,631

8.00

%  

29.04

%

Second mortgages and equity lines of credit

848

1.90

3.75

420

0.93

3.79

Residential construction

294

0.66

0.87

69

0.15

0.93

Commercial real estate

21,155

47.41

48.65

33,242

73.26

47.12

Commercial construction

4,469

10.02

4.41

2,010

4.43

3.79

Commercial and industrial

6,690

14.99

9.46

4,638

10.22

11.69

Consumer

247

0.55

1.24

367

0.81

3.64

Total general and allocated allowance

44,621

100.00

100.00

%  

44,377

97.80

100.00

%

Unallocated

0.00

1,000

2.20

Total

$

44,621

100.00

%  

$

45,377

100.00

%  

Net recoveries were $799,000 or 0.08% of average loans outstanding on an annualized basis for the quarter ended September 30, 2022. Net charge-offs were $1.7 million or 0.19% of average loans outstanding on an annualized basis for the quarter ended September 30, 2021. Net charge-offs were $1.4 million, or 0.05%, and $1.6 million , or 0.06% of average loans outstanding on an annualized basis, for the nine months ended September 30, 2022 and 2021, respectively.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The following table sets forth net charge-offs (recoveries) and the ratio of annualized net charge-offs (recoveries) to average loans for the periods indicated:

Three Months Ended September 30, 

2022

2021

Net

Net Charge-

Net

Net Charge-

Average

Charge-offs

off (Recovery)

Average

Charge-offs

off (Recovery)

Balance

(Recoveries)

   

Rate

      

Balance

(Recoveries)

   

Rate

(dollars in thousands)

Residential real estate:

One- to four-family

$

1,276,112

$

(2)

(0.00)

%

$

954,917

$

(1)

(0.00)

%

Second mortgages and equity lines of credit

154,601

(15)

(0.04)

%

134,978

(7)

(0.02)

%

Residential real estate construction

39,592

%

32,003

%

Total residential real estate loans

$

1,470,305

$

(17)

(0.00)

%

$

1,121,898

$

(8)

(0.00)

%

Commercial:

Commercial real estate

$

2,042,145

$

17

0.00

%

$

1,551,868

$

380

0.10

%

Commercial construction

177,999

%

127,576

%

Commercial and industrial

302,215

(816)

(1.08)

%

441,988

1,259

1.14

%

Total commercial loans

$

2,522,359

$

(799)

(0.13)

%

$

2,121,432

$

1,639

0.31

%

Total Consumer loans

$

63,220

$

17

0.11

%

$

170,366

$

27

0.06

%

Total loans

$

4,055,884

$

(799)

(0.08)

%

$

3,413,696

$

1,658

0.19

%

Nine Months Ended September 30, 

2022

2021

Net

Net Charge-

Net

Net Charge-

Average

Charge-offs

off (Recovery)

Average

Charge-offs

off (Recovery)

Balance

(Recoveries)

   

Rate

      

Balance

(Recoveries

   

Rate

(dollars in thousands)

Residential real estate:

One- to four-family

$

1,157,063

$

(2)

(0.00)

%

$

921,334

$

(144)

(0.02)

%

Second mortgages and equity lines of credit

145,965

(108)

(0.10)

%

137,371

(84)

(0.08)

%

Residential real estate construction

38,480

%

31,656

%

Total residential real estate loans

$

1,341,508

$

(110)

(0.01)

%

$

1,090,361

$

(228)

(0.03)

%

Commercial:

Commercial real estate

$

1,937,531

$

2,797

0.19

%

$

1,555,887

$

388

0.03

%

Commercial construction

156,709

%

114,362

%

Commercial and industrial

306,050

(1,249)

(0.54)

%

474,477

1,427

0.40

%

Total commercial loans

$

2,400,290

$

1,548

0.09

%

$

2,144,726

$

1,815

0.11

%

Total Consumer loans

$

89,934

$

(12)

(0.02)

%

$

209,443

$

(2)

(0.00)

%

Total loans

$

3,831,732

$

1,426

0.05

%

$

3,444,530

$

1,585

0.06

%

Management of Market Risk

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

of interest rate changes as well as changes in the balance sheet composition and market conditions. Assumptions are supported with quarterly back testing of the model to actual market rate shifts.

The table below sets forth, as of September 30, 2022, the net interest income simulation results that estimate the impact of interest rate changes on the Company’s estimated net interest income over one year:

September 30, 2022

Change in Net Interest Income

Changes in Interest Rates

(% change from year one base)

(basis points) (1)

    

Year One

Year Two

+300

(6.9)

%

(4.4)

%

+200

(4.4)

%

(2.5)

%

+100

(2.2)

%

(1.2)

%

-100

0.8

%

(1.1)

%

(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 100, 200, and 300 basis points and down 100 basis points.

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

The table below sets forth, as of September 30, 2022, the estimated changes in the EVE that would result from an instantaneous parallel shift in interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

At September 30, 2022

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)

    

Percent

 

(dollars in thousands)

+ 300

$

625,554

$

(238,149)

(27.6)

%  

14.8

%  

(3.6)

%  

+ 200

713,882

(149,821)

(17.3)

16.3

(2.1)

+ 100

788,855

(74,848)

(8.7)

17.4

(1.0)

0

863,703

18.4

- 100

893,747

30,044

3.5

18.4

(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.

The objective of our liquidity risk management process is to manage cash flow and liquidity in an effort to provide continuous access to sufficient, reasonably priced funds. Funding requirements are impacted by loan originations and

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

refinancings, deposit balance changes, liability issuances and settlements, and off-balance sheet funding commitments. We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions. 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.

We have access to immediate liquid resources in the form of cash which is primarily on deposit with the FRBB. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio and our ability to sell loans in the secondary market. Our core deposits have historically provided us with a long-term source of stable and relatively lower cost source of funding. Additional funding is available through the issuance of long-term debt or equity.

Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and FRBB. As of September 30, 2022, we had additional borrowing capacity of $772.6 million from the FHLB and $67.3 million from the FRBB based on the amount of collateral pledged. We also have additional borrowing capacity under a $25.0 million unsecured federal funds line with a correspondent bank.

We continue to maintain a strong liquidity position. As of September 30, 2022, cash and cash equivalents were $86.0 million, the carrying value of our available-for-sale investment securities was $304.9 million, and total deposits were $3.88 billion.

The Company and the Bank are subject to various regulatory capital requirements. At September 30, 2022, the Company and the Bank exceeded all regulatory capital requirements and were considered “well capitalized” under regulatory guidelines. See Note 12 to our unaudited interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations

At September 30, 2022, we had outstanding commitments to originate loans of $296.7 million and unadvanced funds on loans of $910.4 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 September 30, 2022 totaled $406.6 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.

There are no other 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 9 of the unaudited interim Consolidated Financial Statements included in Part I, item I of this Form 10-Q.

Non-GAAP Financial Measures and Reconciliation to GAAP

In addition to results presented in accordance with generally accepted accounting principles, this Form 10-Q contains certain non-GAAP financial measures. The Company’s management believes that the supplemental non-GAAP information, which consists of the tangible-common-equity-to-tangible-assets ratio, is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The following table reconciles the Company’s tangible-common-equity-to-tangible-assets ratio for the periods indicated:

Quarters Ended

September 30, 

December 31, 

September 30, 

2022

2021

2021

(dollars on thousands)

Tangible common equity:

Total stockholders' equity

$

611,370

$

679,261

$

680,032

Less: Goodwill

69,802

69,802

69,802

Less: Other intangible assets (1)

2,461

3,164

3,399

Tangible common equity

$

539,107

$

606,295

$

606,831

Tangible assets:

Total assets

$

4,987,643

$

4,553,405

$

4,567,094

Less: Goodwill

69,802

69,802

69,802

Less: Other intangible assets

2,461

3,164

3,399

Tangible assets

$

4,915,380

$

4,480,439

$

4,493,893

Tangible common equity / tangible assets (2)

10.97

%  

13.53

%  

13.50

%

(1) Other intangible assets are core deposit intangibles.

(2) This non-GAAP ratio is total stockholders' equity less goodwill and intangible assets to total assets less goodwill and intangible assets.

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Table of Contents

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

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures as of the period ended September 30, 2022. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures. The Company will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.

Internal Control Over Financial Reporting

Effective January 1, 2022, the Corporation adopted Topic 326 “Financial Instrument - Credit Losses.” The Company implemented changes to its policies, processes, and controls over the ACL methodology to support the adoption of Topic 326. Many controls over this new accounting methodology mirror controls under the prior GAAP methodology. New controls were established, such as model validation done by an independent third party and input review of econometric and other factors utilized in estimating the allowance. Except as related to the adoption of Topic 326, there were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our 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

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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.

Issuer Purchases of Equity Securities

Total Number

of Shares

Average Price

Index

Purchased

Paid Per Share

July 1 to July 31, 2022

303,127

13.98

August 1 to August 31, 2022

80,002

13.79

September 1 to September 30, 2022

400,373

13.71

Total

783,502

$

13.82

On April 12, 2022, the Company announced a fourth share repurchase program to repurchase up to 2,526,134 shares of the Company’s common stock, or approximately 5% of its outstanding shares. The Company repurchased 2,121,104 shares at an average cost of $13.82 per share through September 30, 2022, under the fourth share repurchase program. The Company announced a fifth share repurchase program on September 21, 2022 to commence following the completion of the fourth share repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

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

EXHIBIT INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (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 September 30, 2022 and December 31, 2021, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 (iii) the Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2022 and 2021, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, and (vi) the Notes to the unaudited Consolidated Financial Statements.

104

Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)

*Filed herewith

**Furnished herewith

† Management contract or compensation plan or arrangement.

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SIGNATURES

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

HarborOne Bancorp, Inc.

Date: November 8, 2022

By:

/s/ Joseph F. Casey

Joseph F. Casey

President and Chief Executive Officer

(Principal Executive Officer)

Date: November 8, 2022

By:

/s/ Linda H. Simmons

Linda H. Simmons

Executive Vice President and Chief Financial Officer

(Principal Accounting and Financial Officer)

71