UNITED STATESSECURITIES 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, 2017

or

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

Commission File Number 001-37778

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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  ☒ (Do not check if a smaller reporting company)	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 7, 2017 there were 32,662,295 shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding.

Index

		PAGE
PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited)	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	61
ITEM 4.	Controls and Procedures	61
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings	62
ITEM 1A.	Risk Factors	62
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
ITEM 3.	Defaults Upon Senior Securities	62
ITEM 4.	Mine Safety Disclosures	62
ITEM 5.	Other Information	62
ITEM 6.	Exhibits	62
EXHIBIT INDEX		63
SIGNATURE		64

HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

	September 30,		December 31,
(in thousands, except share data)	2017		2016
Assets
Cash and due from banks	$	15,393	$	16,464
Short-term investments		79,412		33,751
Total cash and cash equivalents		94,805		50,215
Securities available for sale, at fair value		166,122		136,469
Securities held to maturity, at amortized cost		47,752		47,877
Federal Home Loan Bank stock, at cost		16,356		15,749
Loans held for sale, at fair value		96,201		86,443
Loans		2,122,509		1,998,715
Less: Allowance for loan losses		(17,933)		(16,968)
Net loans		2,104,576		1,981,747
Accrued interest receivable		5,959		5,603
Other real estate owned and repossessed assets		1,021		1,767
Mortgage servicing rights, at fair value		20,376		20,333
Property and equipment, net		24,338		24,193
Retirement plan annuities		12,381		12,044
Bank-owned life insurance		40,199		39,421
Deferred income taxes, net		278		610
Goodwill and other intangible assets		13,519		13,585
Other assets		15,576		12,254
Total assets	$	2,659,459	$	2,448,310
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits	$	266,299	$	239,210
Interest-bearing deposits		1,664,119		1,511,498
Brokered deposits		73,127		54,045
Total deposits		2,003,545		1,804,753
Short-term borrowed funds		10,000		80,000
Long-term borrowed funds		266,366		195,119
Mortgagors' escrow accounts		5,530		5,034
Accrued interest payable		554		545
Other liabilities and accrued expenses		32,863		33,475
Total liabilities		2,318,858		2,118,926
Commitments and contingencies (Notes 8 and 9)
Common stock, $0.01 par value; 90,000,000 shares authorized; 32,662,295 and 32,120,880  shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		327		321
Additional paid-in capital		145,525		144,420
Retained earnings		205,997		197,211
Accumulated other comprehensive loss		(415)		(1,290)
Unearned compensation - ESOP		(10,833)		(11,278)
Total stockholders' equity		340,601		329,384
Total liabilities and stockholders' equity	$	2,659,459	$	2,448,310

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

1

HarborOne Bancorp, Inc.

Consolidated Statements of Operations (unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except share data)	2017		2016		2017		2016
Interest and dividend income:
Interest and fees on loans	$	20,990	$	17,144	$	59,765	$	49,080
Interest on loans held for sale		796		866		1,962		1,907
Interest on taxable securities		1,118		768		3,232		2,441
Interest on non-taxable securities		216		220		650		669
Other interest and dividend income		294		164		866		610
Total interest and dividend income		23,414		19,162		66,475		54,707
Interest expense:
Interest on deposits		2,812		2,092		7,811		6,427
Interest on borrowed funds		1,333		1,168		3,748		3,840
Total interest expense		4,145		3,260		11,559		10,267
Net interest and dividend income		19,269		15,902		54,916		44,440
Provision for loan losses		921		1,710		1,656		2,716
Net interest income, after provision for loan losses		18,348		14,192		53,260		41,724
Noninterest income:
Mortgage banking income:
Changes in mortgage servicing rights fair value		(488)		351		(1,982)		(4,100)
Other		11,071		16,513		30,117		39,725
Total mortgage banking income		10,583		16,864		28,135		35,625
Deposit account fees		3,172		3,010		9,088		8,685
Income on retirement plan annuities		114		111		337		325
Gain on sale of consumer loans		—		—		78		79
Gain on sale and call of securities, net		—		—		—		283
Bank-owned life insurance income		260		275		778		825
Other income		498		609		1,964		1,997
Total noninterest income		14,627		20,869		40,380		47,819
Noninterest expense:
Compensation and benefits		17,325		18,812		48,568		50,552
Occupancy and equipment		2,951		2,458		8,661		7,705
Data processing		1,547		1,450		4,597		4,310
Loan expenses		1,884		3,316		5,129		7,036
Marketing		1,136		592		2,659		1,764
Deposit expenses		311		325		1,019		1,054
Postage and printing		380		313		1,017		959
Professional fees		1,126		709		3,136		1,888
Prepayment penalties on Federal Home Loan Bank advances		—		—		—		400
Foreclosed and repossessed assets		8		31		60		102
Deposit insurance		397		437		1,305		1,258
Charitable foundation contributions		—		—		—		4,820
Other expenses		1,373		1,166		3,570		3,487
Total noninterest expense		28,438		29,609		79,721		85,335
Income before income taxes		4,537		5,452		13,919		4,208
Income tax provision		1,699		1,900		5,133		1,213
Net income	$	2,838	$	3,552	$	8,786	$	2,995
Earnings per common share:
Basic	$	0.09	$	0.11	$	0.28		N/A
Diluted	$	0.09	$	0.11	$	0.28		N/A
Weighted average shares outstanding:
Basic		31,303,281		30,943,808		31,109,104		N/A
Diluted		31,303,281		30,943,808		31,109,104		N/A

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

2

HarborOne Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016
Net income	$	2,838	$	3,552	$	8,786	$	2,995
Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses)		180		(504)		1,155		2,131
Reclassification adjustment for net realized gains		—		—		—		(283)
Net unrealized gains (losses)		180		(504)		1,155		1,848
Related tax effect		(63)		175		(403)		(645)
Net-of-tax amount		117		(329)		752		1,203
Supplemental director retirement plan:
Reclassification adjustment for amortization of prior service cost		60		59		181		176
Related tax effect		(24)		(23)		(58)		(69)
Net-of-tax amount		36		36		123		107
Total other comprehensive income (loss)		153		(293)		875		1,310
Comprehensive income	$	2,991	$	3,259	$	9,661	$	4,305

Amortization of prior service cost is included in compensation and benefits in the unaudited interim Consolidated Statements of Operations.  Realized gains on securities available for sale are included in gain on sale and call of securities, net, in the unaudited interim Consolidated Statements of Operations.  There was no related income tax expense on reclassifications for securities available for sale for the three months ended September 30, 2017 and 2016 or the nine months ended September 30, 2017.  The related income tax expense on reclassification for securities available for sale was $94,000 for the nine months ended September 30, 2016.  

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

3

HarborOne Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

								Accumulated
					Additional			Other		Unearned		Total
	Common Stock				Paid-in	Retained		Comprehensive		Compensation		Stockholders'
(in thousands, except share data)	Shares		Amount		Capital	Earnings		Income (Loss)		ESOP		Equity
Balance at December 31, 2015	—	$	—	$	—	$	191,280	$	(592)	$	—	$	190,688
Comprehensive income (loss)	—		—		—		2,995		1,310		—		4,305
Issuance of common stock to the mutual holding company	17,281,034		172		—		—		—		—		172
Issuance of common stock for initial public offering, net of costs of $3,870	14,454,396		145		140,212		—		—		—		140,357
Issuance of common stock to the HarborOne Foundation	385,450		4		3,851		—		—		—		3,855
Purchase of 1,187,188 shares by the ESOP	—		—		—		—		—		(11,872)		(11,872)
ESOP shares committed to be released (29,680 shares)	—		—		112		—		—		297		409
Balance at September 30, 2016	32,120,880	$	321	$	144,175	$	194,275	$	718	$	(11,575)	$	327,914
Balance at December 31, 2016	32,120,880	$	321	$	144,420	$	197,211	$	(1,290)	$	(11,278)	$	329,384
Comprehensive income	—		—		—		8,786		875		—		9,661
ESOP shares committed to be released (44,520 shares)	—		—		412		—		—		445		857
Restricted stock awards granted	541,415		6		(6)		—		—		—		—
Share-based compensation expense	—		—		699		—		—		—		699
Balance at September 30, 2017	32,662,295	$	327	$	145,525	$	205,997	$	(415)	$	(10,833)	$	340,601

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

4

HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended September 30,
(in thousands)	2017		2016
Cash flows from operating activities:
Net income	$	8,786	$	2,995
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses		1,656		2,716
Net amortization of securities premiums/discounts		523		584
Net amortization of net deferred loan costs/fees and premiums		3,672		4,684
Depreciation and amortization of premises and equipment		2,122		1,914
Change in mortgage servicing rights fair value		1,982		4,100
Mortgage and consumer servicing rights capitalized		(2,054)		(6,732)
Amortization of consumer servicing rights		42		54
Accretion of fair value adjustment on loans and deposits, net		(260)		(248)
Amortization of intangible assets		66		67
Gain on sale and call of securities, net		—		(283)
Bank-owned life insurance income		(778)		(825)
Income on retirement plan annuities		(337)		(325)
Gain on sale of portfolio loans		(36)		(365)
Net loss (gain) on sale and write-down of other real estate owned and repossessed assets		57		(141)
Deferred income tax benefit		(128)		(831)
Issuance of common stock to The HarborOne Foundation		—		3,855
ESOP expenses		857		409
Stock-based compensation expense		699		—
Net change in:
Loans held for sale		(9,758)		(50,257)
Other assets and liabilities, net		(4,114)		(888)
Net cash provided (used) by operating activities		2,997		(39,517)
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		16,697		20,354
Purchases		(45,461)		(14,164)
Sales		—		8,735
Activity in securities held to maturity:
Maturities, prepayment and calls		2,920		14,131
Purchases		(3,052)		—
Net (purchase) redemption of FHLB stock		(607)		3,480
Proceeds from sale of portfolio loans		5,007		39,831
Loan originations, net of principal payments		(133,837)		(223,615)
Proceeds from sale of other real estate owned and repossessed assets		1,658		2,003
Additions to property and equipment		(2,267)		(1,370)
Net cash used by investing activities		(158,942)		(150,615)

(continued)

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

5

HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended September 30,
(in thousands)	2017		2016
Cash flows from financing activities:
Net increase in deposits		198,792		43,699
Net change in borrowed funds with maturities less than ninety days		(70,000)		50,000
Proceeds from other borrowed funds		86,250		20,025
Repayment of other borrowed funds		(15,003)		(74,503)
Net change in mortgagors' escrow accounts		496		857
Issuance of common stock		—		140,529
Purchase of shares by the ESOP		—		(11,872)
Net cash provided by financing activities		200,535		168,735
Net change in cash and cash equivalents		44,590		(21,397)
Cash and cash equivalents at beginning of period		50,215		40,652
Cash and cash equivalents at end of period	$	94,805	$	19,255
Supplemental cash flow information:
Interest paid on deposits	$	7,807	$	6,421
Interest paid on borrowed funds		3,734		3,916
Income taxes paid		5,247		3,052
Transfer of loans to other real estate owned and repossessed assets		969		1,502
Transfer of loans to loans held for sale		5,088		—

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

6

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The unaudited interim Consolidated Financial Statements of HarborOne Bancorp, Inc. (the “Company”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by the U.S. generally accepted accounting principles (“GAAP”).  In the opinion of management, all adjustments and disclosures considered necessary for the fair presentation of the accompanying Consolidated Financial Statements have been included.  Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2016 and 2015 and notes thereto included in the Company’s Annual Report on Form 10-K.

The unaudited interim Consolidated Financial Statements include the accounts of the Company, the Company’s subsidiaries Legion Parkway Company LLC, a security corporation formed on July 13, 2016 and HarborOne Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries.  The Bank’s subsidiaries consist of a mortgage company and two security corporations.  Merrimack Mortgage Company, LLC (“Merrimack Mortgage”) was acquired and became a wholly-owned subsidiary of the Bank on July 1, 2015.  The security corporations were established for the purpose of buying, holding and selling securities on their own behalf.  All significant intercompany balances and transactions have been eliminated in consolidation.

Stock Conversion

On June 29, 2016, the Bank reorganized into a two-tier mutual holding company structure with a mid-tier stock holding company. The Company sold 14,454,396 shares of common stock at $10.00 per share, including 1,187,188 shares purchased by the Company’s Employee Stock Ownership Plan (“ESOP”). In addition, the Company issued 17,281,034 shares to HarborOne Mutual Bancshares, a mutual holding company (the “MHC”) and 385,450 shares to The HarborOne Foundation,a charitable foundation formed in connection with the stock offering and dedicated to supporting charitable organizations operating in the Bank’s local community. A total of 32,120,880 shares of common stock were outstanding following the completion of the stock offering. The direct costs of the Company’s stock offering of $3.9 million were deferred and deducted from the proceeds of the offering. 

Upon the completion of the stock offering, a special “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to the percentage ownership interest in the equity of the Company held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus. The Company is not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the liquidation account. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in an eligible account holder’s qualifying deposits will not restore such holder’s interest in the liquidation account.

Nature of Operations

The Company provides a variety of financial services to individuals and businesses through its fourteen full-service and two limited-service bank offices in eastern Massachusetts, a commercial lending office in Providence, Rhode Island, and a loan office in Westford, Massachusetts.  Merrimack Mortgage maintains 33 offices in Massachusetts, New Hampshire, and Maine, and is also licensed to lend in seven 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 and consumer loans, including indirect automobile lending. The Company also originates, sells and services residential mortgage loans primarily through Merrimack Mortgage.

7

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Use of Estimates

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

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed and generally do not exceed the time frame provided in the FDIC’s Uniform Retail Credit Classification and Account Management Policy.  Subsequent recoveries, if any, are credited to the allowance.

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

General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the Company’s loan segments.  Management uses arolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment except commercial real estate and commercial loans.  Due to the lack of historical loss experience for our commercial real estate and commercial loan portfolio, we utilize peer loss data.  Adjustments to this historical loss factor are considered for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.  There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during 2016 or the nine months ended September 30, 2017.  The qualitative factors are determined based on the various risk characteristics of each loan segment.  Risk characteristics relevant to each portfolio segment are as follows:

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

Commercial real estate – Loans in this segment are primarily secured by income-producing properties in southeastern New England.  The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, could have an effect on the credit quality in this segment.  Management obtains rent rolls annually and continually monitors the cash flows of these loans.

Construction – Loans in this segment include both residential and commercial construction loans.  Residential construction loans include loans to build one- to four-family owner-occupied properties, which are subject to the same credit quality factors as residential real estate loans.  Commercial construction loans may include speculative real estate development loans for which payment is derived from lease or sale of the property.  Credit risk is affected by cost overruns, time to lease or sell at an adequate price, and market conditions.

8

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

Consumer – Loans in this segment are generally secured by automobiles or unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component

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

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

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

Unallocated component

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

Stock-based Compensation Plans

The Company’s stock-based compensation plans provide for awards of stock options, restricted stock and other stock-based compensation to directors, officers and employees.  The cost of employee services received in exchange for awards of equity instruments is based on the grant-date fair value of those awards.  Compensation cost is recognized over the requisite service period as a component of compensation expense.  The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options granted, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. The Company has elected to early adopt Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.Under this Update, the Company has elected to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur (e.g., when an award does not vest because the employee leaves the Company or does not meet specific performance measures).

9

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Earnings Per Share

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

Recent Accounting Pronouncements

As an “emerging growth company” as defined in Title 1 of the Jumpstart Our Business Startups (JOBS) Act, the Company has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.  As of September 30, 2017, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. This guidance changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line as the hedged item. This guidance also provides new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged item in fair value hedges of interest rate risk, reducing the complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method, and reducing the risk of material error corrections if a company applies the shortcut method inappropriately.  This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not have any derivatives within the scope of the ASU.

In March 2017, the FASB issued ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Company elected to early adopt this new accounting guidance effective January 1, 2017 and the adoption did not have a material impact on the Consolidated Financial Statements.

In January 2017, FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  This update changes the quantitative impairment test to require an entity to perform a one-step test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the amount of goodwill allocated to the reporting unit.  This new guidance does not amend the optional qualitative assessment of goodwill impairment.  For SEC filers, the ASU is effective for impairment tests in fiscal years beginning after December 15, 2019.  For non-public business entities, the ASU is effective for impairment tests in fiscal years beginning after December 15, 2021.  Early adoption is permitted for impairment tests performed on testing dates after January 1, 2017.  The Company elected to early adopt this new accounting guidance effective October 1, 2017 and the adoption did not have an impact on the Consolidated Financial Statements.

In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Entities will now use forward-looking information to better form their credit loss estimates.  The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.  For public entities that are SEC filers, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  For non-public entities, this ASU is

10

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

effective for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021.  Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Management has identified an implementation team that is in the process of developing an understanding of this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.

In February 2016, FASB issued ASU 2016-02,  Leases (Topic 842).  This update requires a lessee to record a right-to-use asset and a liability representing the obligation to make lease payments for long-term leases.  For public business entities, this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  For non-public business entities, this update is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020.  While we are currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities but no material impact to the Consolidated Statement of Operations, for arrangements previously accounted for as operating leases.

In January 2016, FASB issued ASU 2016-01, Financial Instruments – Overall, (Subtopic 825-10).  The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Targeted improvements to generally accepted accounting principles include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, the elimination of the requirement for non-public business entities to disclose the fair value of financial instruments measured at amortized cost and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost.  For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  For non-public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.  Management currently does not expect this to have a material impact on the Company's Consolidated Financial Statements as the Company does not currently hold any equity securities.

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, a company should apply a five step approach to revenue recognition. For public business entities, this ASU is effective for annual reporting periods, including interim periods, beginning after December 15, 2017. For non-public business entities, this ASU is effective for annual reporting periods beginning after December 31, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early application is permitted, but only for annual reporting periods beginning after December 15, 2016. The Bank's primary source of revenue is interest income on financial assets and income from mortgage banking activities, which are explicitly excluded from the scope of the new guidance.  As a result, adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements. However, the Company will continue to monitor developments and additional guidance up to the effective date of these amendments. 

11

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

2.SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(in thousands)
September 30, 2017:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	9,984	$	—	$	100	$	9,884
U.S. government-sponsored residential mortgage-backed securities		74,553		326		426		74,453
U.S. government-sponsored collateralized mortgage obligations		38,346		327		50		38,623
SBA asset-backed securities		43,106		136		80		43,162
Total securities available for sale	$	165,989	$	789	$	656	$	166,122
Securities held to maturity
U.S. government-sponsored residential mortgage-backed securities	$	18,157	$	109	$	139	$	18,127
U.S. government-sponsored collateralized mortgage obligations		2,155		86		—		2,241
SBA asset-backed securities		2,992		—		8		2,984
Municipal bonds		24,448		1,147		—		25,595
Total securities held to maturity	$	47,752	$	1,342	$	147	$	48,947
December 31, 2016:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	9,983	$	—	$	236	$	9,747
U.S. government-sponsored residential mortgage-backed securities		55,730		—		883		54,847
U.S. government-sponsored collateralized mortgage obligations		38,926		339		82		39,183
SBA asset-backed securities		32,852		40		200		32,692
Total securities available for sale	$	137,491	$	379	$	1,401	$	136,469
Securities held to maturity
U.S. government-sponsored residential mortgage-backed securities	$	20,306	$	115	$	283	$	20,138
U.S. government-sponsored collateralized mortgage obligations		2,528		117		—		2,645
Municipal bonds		25,043		1,146		—		26,189
Total securities held to maturity	$	47,877	$	1,378	$	283	$	48,972

Two mortgage-backed securities with a combined fair value of $5.9 million are pledged as collateral for interest rate swap agreements as of September 30, 2017 (see Note 9).  All of the U.S. government-sponsored enterprise obligations, collateralized mortgage obligations and residential mortgage-backed securities are pledged to secure advances with the Federal Home Loan Bank (“FHLB”) of Boston as of September 30, 2017 (see Note 6).

12

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2017 is as follows:

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(in thousands)
After 5 years through 10 years	$	5,000	$	4,967	$	4,451	$	4,603
Over 10 years		4,984		4,917		19,997		20,992
		9,984		9,884		24,448		25,595
U.S. government-sponsored residential mortgage-backed securities		74,553		74,453		18,157		18,127
U.S. government-sponsored collateralized mortgage obligations		38,346		38,623		2,155		2,241
SBA asset-backed securities		43,106		43,162		2,992		2,984
Total	$	165,989	$	166,122	$	47,752	$	48,947

U.S. government-sponsored residential mortgage-backed securities, collateralized mortgage obligations and securities whose underlying assets are loans from the U.S. Small Business Administration (“SBA asset-backed securities”) have stated maturities of five to thirty years; however, it is expected that such securities will have shorter actual lives due to prepayments.

The following table shows proceeds and gross realized gains and losses related to the sales and calls of securities for the periods indicated.  There were no sales or calls of securities during the three months September 30, 2017 or 2016.

		Nine Months Ended September 30,
		2017		2016
		(in thousands)
Sales
Proceeds	$	—	$	8,735
Gross gains		—		242
Gross losses		—		—
Calls
Proceeds (1)	$	400	$	15,725
Gross gains		—		41
Gross losses		—		—
(1) September 30, 2017 proceeds from calls consists of one held to maturity security.

13

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Information pertaining to securities with gross unrealized losses at September30, 2017 and December 31, 2016 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, 2017:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	100	$	9,884	$	—	$	—
U.S. government-sponsored residential mortgage-backed securities		286		20,278		140		10,922
U.S. government-sponsored collateralized mortgage obligations		50		6,808		—		—
SBA asset-backed securities		80		22,084		—		—
	$	516	$	59,054	$	140	$	10,922
Securities held to maturity
U.S. government-sponsored residential mortgage-backed securities	$	139	$	15,830	$	—	$	—
SBA asset-backed securities		8		2,984		—		—
	$	147	$	18,814	$	—	$	—
December 31, 2016:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	236	$	9,747	$	—	$	—
U.S. government-sponsored residential mortgage-backed securities		712		43,684		171		11,163
U.S. government-sponsored collateralized mortgage obligations		82		7,779		—		—
SBA asset-backed securities		200		26,153		—		—
	$	1,230	$	87,363	$	171	$	11,163
Securities held to maturity
U.S. government-sponsored residential mortgage-backed securities	$	283	$	17,526	$	—	$	—

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

At September 30, 2017, twenty-eight debt securities with an amortized cost of $89.6 million have unrealized losses with aggregate depreciation of 0.90% from the Company’s amortized cost basis. 

The unrealized losses on the Company’s securities were primarily caused by changes in interest rates.  All of these investments are guaranteed by government and government-sponsored enterprises.  Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment.  Because the decline in fair value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be OTTI at September 30, 2017.

14

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

3.LOANS

A summary of the balances of loans follows:

	September 30,		December 31,
	2017		2016
	(in thousands)
Residential real estate:
One- to four-family	$	678,684	$	677,946
Second mortgages and equity lines of credit		90,734		92,989
Commercial real estate		623,054		495,801
Construction		76,668		58,443
Total mortgage loans on real estate		1,469,140		1,325,179
Commercial		111,627		100,501
Consumer loans:
Auto		518,759		547,400
Personal		14,948		15,704
Total consumer loans		533,707		563,104
Total loans		2,114,474		1,988,784
Allowance for loan losses		(17,933)		(16,968)
Net deferred loan costs		8,035		9,931
Loans, net	$	2,104,576	$	1,981,747

During the nine months ended September 30, 2017, the Company sold indirect auto loans of $5.0 million. The loans were classified as loans held for sale at March 31, 2017 and a gain of $78,000 was recorded in the first quarter.  During the nine months ended September 30, 2016, the Company sold $10.0 million of indirect loans and recognized gains of $79,000.  No indirect auto loans were sold during the three months ended September 30, 2017 and 2016.  The unpaid principal balance of indirect auto loans serviced for others was $25.5 million and $31.4 million at September 30, 2017 and December 31, 2016, respectively. 

The Company did not sell residential portfolio loans during the three or nine months ended September 30, 2017. The Company sold residential portfolio loans of $29.5 million during the nine months ended September 30, 2016.  Included in mortgage banking income for the nine months ended September 30, 2016is the related gain on sale of $501,000.  No residential loans were sold from the portfolio during the three months ended September 30, 2016.

The Company has transferred a portion of its originated commercial real estate loans to participating lenders.  The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying unaudited interim Consolidated Balance Sheets.  The Company and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan.  The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties.  At September 30, 2017 and December 31, 2016, the Company was servicing loans for participants aggregating $62.1 million and $45.3 million, respectively.

15

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following is the activity in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016:

	Mortgage Loans
			Commercial
	Residential		Real Estate		Construction		Commercial		Consumer		Unallocated		Total
	(in thousands)
Balance at June 30, 2017	$	4,434	$	7,075	$	936	$	2,114	$	1,033	$	1,589	$	17,181
Provision (credit) for loan losses		(27)		372		162		346		160		(92)		921
Charge-offs		—		—		—		—		(230)		—		(230)
Recoveries		10		—		—		—		51		—		61
Balance at September 30, 2017	$	4,417	$	7,447	$	1,098	$	2,460	$	1,014	$	1,497	$	17,933
Balance at June 30, 2016	$	5,619	$	5,359	$	587	$	1,164	$	794	$	916	$	14,439
Provision (credit) for loan losses		(253)		1,156		49		458		237		63		1,710
Charge-offs		(123)		—		—		(22)		(272)		—		(417)
Recoveries		61		—		—		5		34		—		100
Balance at September 30, 2016	$	5,304	$	6,515	$	636	$	1,605	$	793	$	979	$	15,832

	Mortgage Loans
			Commercial
	Residential		Real Estate		Construction		Commercial		Consumer		Unallocated		Total
	(in thousands)
Balance at December 31, 2016	$	4,963	$	7,150	$	924	$	1,920	$	780	$	1,231	$	16,968
Provision (credit) for loan losses		(559)		297		174		658		820		266		1,656
Charge-offs		(144)		—		—		(134)		(790)		—		(1,068)
Recoveries		157		—		—		16		204		—		377
Balance at September 30, 2017	$	4,417	$	7,447	$	1,098	$	2,460	$	1,014	$	1,497	$	17,933
Balance at December 31, 2015	$	5,816	$	4,365	$	581	$	1,454	$	830	$	654	$	13,700
Provision (credit) for loan losses		(521)		2,150		55		170		537		325		2,716
Charge-offs		(250)		—		—		(27)		(729)		—		(1,006)
Recoveries		259		—		—		8		155		—		422
Balance at September 30, 2016	$	5,304	$	6,515	$	636	$	1,605	$	793	$	979	$	15,832

16

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Allocation of the allowance to loan segments at September 30, 2017 and December 31, 2016 follows:

	Mortgage Loans
			Commercial
	Residential		Real Estate		Construction		Commercial		Consumer		Unallocated		Total
	(in thousands)
September 30, 2017:
Loans:
Impaired loans	$	36,885	$	—	$	131	$	3,885	$	—	$	—	$	40,901
Non-impaired loans		732,533		623,054		76,537		107,742		533,707		—		2,073,573
Total loans	$	769,418	$	623,054	$	76,668	$	111,627	$	533,707	$	—	$	2,114,474
Allowance for loan losses:
Impaired loans	$	1,286	$	—	$	—	$	906	$	—	$	—	$	2,192
Non-impaired loans		3,131		7,447		1,098		1,554		1,014		1,497		15,741
Total allowance for loan losses	$	4,417	$	7,447	$	1,098	$	2,460	$	1,014	$	1,497	$	17,933
December 31, 2016:
Loans:
Impaired loans	$	43,012	$	—	$	134	$	2,936	$	—	$	—	$	46,082
Non-impaired loans		727,923		495,801		58,309		97,565		563,104		—		1,942,702
Total loans	$	770,935	$	495,801	$	58,443	$	100,501	$	563,104	$	—	$	1,988,784
Allowance for loan losses:
Impaired loans	$	1,624	$	—	$	—	$	499	$	—	$	—	$	2,123
Non-impaired loans		3,339		7,150		924		1,421		780		1,231		14,845
Total allowance for loan losses	$	4,963	$	7,150	$	924	$	1,920	$	780	$	1,231	$	16,968

17

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following is a summary of past due and non-accrual loans at September 30, 2017 and December 31, 2016:

					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, 2017
Residential real estate:
One- to four-family	$	407	$	4,351	$	5,404	$	10,162	$	14,326
Second mortgages and equity lines of credit		347		122		375		844		1,200
Construction		—		—		—		—		131
Commercial		208		—		15		223		3,631
Consumer:
Auto		1,374		318		286		1,978		286
Personal		44		28		29		101		32
Total	$	2,380	$	4,819	$	6,109	$	13,308	$	19,606
December 31, 2016
Residential real estate:
One- to four-family	$	4,955	$	1,873	$	7,964	$	14,792	$	16,456
Second mortgages and equity lines of credit		588		190		724		1,502		1,686
Construction		—		—		134		134		134
Commercial		55		—		387		442		2,674
Consumer:
Auto		1,978		297		150		2,425		205
Personal		103		41		23		167		25
Total	$	7,679	$	2,401	$	9,382	$	19,462	$	21,180

At September 30, 2017 and December 31, 2016, there were no loans past due 90 days or more and still accruing.

The following information pertains to impaired loans:

	September 30, 2017						December 31, 2016
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(in thousands)
Impaired loans without a valuation allowance:
Residential	$	14,316	$	15,047	$	—	$	17,000	$	18,031	$	—
Construction		131		131		—		134		134		—
Commercial		—		—		—		173		301		—
Total	$	14,447	$	15,178	$	—	$	17,307	$	18,466	$	—
Impaired loans with a valuation allowance:
Residential	$	22,569	$	27,016	$	1,286	$	26,012	$	27,204	$	1,624
Commercial		3,885		3,983		906		2,763		2,763		499
Total	$	26,454	$	30,999	$	2,192	$	28,775	$	29,967	$	2,123

18

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

	Three Months Ended September 30,
	2017						2016
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(in thousands)
Residential	$	38,114	$	494	$	384	$	47,480	$	616	$	284
Commercial real estate		—		—		—		—		—		—
Construction		131		2		2		134		—		—
Commercial		3,896		5		4		3,033		10		10
Total	$	42,141	$	501	$	390	$	50,647	$	626	$	294

	Nine Months Ended September 30,
	2017						2016
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(in thousands)
Residential	$	40,087	$	1,721	$	1,382	$	49,517	$	2,021	$	1,029
Commercial real estate		—		—		—		242		—		—
Construction		132		10		10		135		7		7
Commercial		3,770		62		61		1,779		54		54
Total	$	43,989	$	1,793	$	1,453	$	51,673	$	2,082	$	1,090

Interest income recognized and interest income recognized on a cash basis in the table above represents interest income for the three and nine months ended September 30, 2017 and 2016, not for the time period designated as impaired.  As part of a workout agreement, the Company is committed to advance $165,000 in additional funds on one commercial impaired loan.

The following table sets forth TDRs during the three and nine months ended September 30, 2017 and 2016:

		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Numberof	Recorded		Recorded
	Contracts	Investment		Investment
	(dollars in thousands)
Three Months Ended September 30, 2017
Residential	1	$	54	$	54
Nine Months Ended September 30, 2017
Residential	2	$	363	$	363
Commercial	2		1,578		1,578
	4	$	1,941	$	1,941
Nine Months Ended September 30, 2016
Residential	2	$	196	$	232

There were no TDR loan modifications for the three months ended September 30, 2016.

19

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The recorded investment in TDRs was $29.7 million and $31.8 million at September 30, 2017 and 2016, respectively.  Of these loans, $8.1 million and $6.8 million were on non-accrual at September 30, 2017 and 2016, respectively.

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

During the three and nine months ended September 30, 2017, there were no payment defaults on TDRs.  During the nine months ended September 30, 2016, one troubled debt restructuring with a recorded investment of $107,000 defaulted.  During the three months ended September 30, 2016, there were no payment defaults on TDRs.

Credit Quality Information

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

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

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

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

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

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

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

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

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

20

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents the Company’s loans by risk rating at September 30, 2017 and December 31, 2016:

	September 30, 2017						December 31, 2016
	Commercial						Commercial
	Real Estate		Commercial		Construction		Real Estate		Commercial		Construction
	(in thousands)
Loans rated 1 - 6	$	619,989	$	107,196	$	63,914	$	492,473	$	97,566	$	43,518
Loans rated 7		—		800		—		—		261		—
Loans rated 8		—		3,591		—		—		2,287		—
Loans rated 9		—		40		—		—		387		—
Loans rated 10		—		—		—		—		—		—
Loans not rated		3,065		—		12,754		3,328		—		14,925
	$	623,054	$	111,627	$	76,668	$	495,801	$	100,501	$	58,443

4.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 balances of mortgage loans serviced for others were $1.92 billion and $1.85 billion as of September 30, 2017 and December 31, 2016, respectively. 

The Company accounts for MSRs at fair value.  The Company obtains valuations from independent third parties to determine the fair value of MSRs.  Key assumptions used in the estimation of fair value include prepayment speeds, discount rates, default rates, cost to service, and contractual servicing fees.  At September 30, 2017 and December 31, 2016, the following weighted average assumptions were used in the calculation of fair value of MSRs:

	September 30,		December 31,
	2017		2016
Prepayment speed	10.29	%	9.49	%
Discount rate	9.26		9.25
Default rate	2.02		1.71

The following summarizes changes to mortgage servicing rights for the nine months ended September 30, 2017 and 2016:

	Nine Months Ended September 30,
	2017		2016
	(in thousands)
Balance, beginning of period	$	20,333	$	12,958
Additions from loans sold with servicing retained		2,025		6,676
Changes in fair value due to :
Reductions from loans paid off during the period		(1,138)		(1,229)
Changes in valuation inputs or assumptions		(844)		(2,871)
Balance, end of period	$	20,376	$	15,534

For the three months ended September 30, 2017 and 2016, contractually specified servicing fees included in other mortgage banking income amounted to $1.3 million and $1.1 million, respectively.  For the nine months ended September 30, 2017 and 2016, contractually specified servicing fees included in other mortgage banking income amounted to $3.9 million and $2.9 million, respectively.

.

21

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

5.DEPOSITS

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

	September 30,		December 31,
	2017		2016
	(in thousands)
NOW and demand deposit accounts	$	395,728	$	365,869
Regular savings and club accounts		404,465		316,947
Money market deposit accounts		666,613		595,211
Total non-certificate accounts		1,466,806		1,278,027
Term certificate accounts greater than $250,000		91,862		81,064
Term certificate accounts less than or equal to $250,000		371,750		391,617
Brokered deposits		73,127		54,045
Total certificate accounts		536,739		526,726
Total deposits	$	2,003,545	$	1,804,753

The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions.  At September 30, 2017, total reciprocal deposits were $192.6 million.  There were no reciprocal deposits at December 31, 2016.

A summary of certificate accounts by maturity at September 30, 2017 is as follows:

			Weighted
			Average
	Amount		Rate
	(dollars in thousands)
Within 1 year	$	369,107	1.10	%
Over 1 year to 2 years		108,905	1.44
Over 2 years to 3 years		28,920	1.50
Over 3 years to 4 years		21,736	1.57
Over 4 years to 5 years		8,071	1.41
	$	536,739	1.21	%

22

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

6.BORROWED FUNDS

Borrowed funds at September 30, 2017 and December 31, 2016 consist of FHLB advances.  Short-term advances were $10.0 million and $80.0 million with weighted average rates of 1.33% and 0.77% at September 30, 2017 and December 31, 2016, respectively. Long-term advances are summarized by maturity date below.  There were no callable advances at September 30, 2017 or December 31, 2016.

	September 30, 2017				December 31, 2016
			Weighted				Weighted
	Scheduled		Average		Scheduled		Average
	Maturity		Rate		Maturity		Rate
	(dollars in thousands)
Year ending December 31:
2017	$	25,000	4.17	%	$	40,000	4.22	%
2018		111,250	1.47			50,000	1.65
2019		60,000	1.66			35,000	1.68
2020		50,000	1.84			50,000	1.84
2021		20,000	1.79			20,000	1.79
2022 and thereafter*		116	2.94			119	2.96
	$	266,366	1.86	%	$	195,119	2.24	%
* Includes an amortizing advance requiring monthly principal and interest payments of $1,000.

The FHLB advances are secured by a blanket security agreement on qualified collateral defined primarily as 75% of the carrying value of first mortgage loans on residential property and 94% of the fair value of government-sponsored enterprise and mortgage-backed securities obligations. 

The Company also has an available line of credit with the Federal Reserve Bank of Boston secured by 74% of the carrying value of indirect auto loans with principal balance amounting to $156.0 million and $207.9 million, respectively, of which no amount was outstanding at September 30, 2017 and December 31, 2016, respectively.

7.INCOME TAXES

For the three and nine months ended September 30, 2017, the Company recorded an expense of $1.7 million and $5.1 million, respectively, representing an effective tax rate of 37.4% and 36.9%, respectively.  For the three and nine months ended September 30, 2016, the Company recorded an expense of $1.9 million and $1.2 million, respectively, representing an effective tax rate of 34.8% and 28.8%, respectively.  The increase in the effective tax rate in 2017 is due primarily to the increase in nondeductible expense related to the ESOP and decreased tax-advantaged income.

8.OTHER COMMITMENTS AND CONTINGENCIES

Loan Commitments

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

23

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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, 2017 and December 31, 2016.  The contract amounts represent credit risk.

	September 30,		December 31,
	2017		2016
	(in thousands)
Commitments to grant loans	$	99,062	$	75,914
Unadvanced funds on home equity lines of credit		79,410		82,797
Unadvanced funds on revolving lines of credit		65,676		58,238
Unadvanced funds on construction loans		116,766		49,999

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

Other Commitments

On May 31, 2017, the Bank entered into a ground lease for property located in Stoughton, Massachusetts, to develop as a prospective branch site.  Until January 31, 2018, the Bank has the right to terminate the lease without any future obligations.

9.DERIVATIVES

The Company is party to a variety of derivative transactions, including derivative loan commitments, forward loan sale commitments and interest rate swap contracts. The Company enters into derivative contracts in order to meet the financing needs of its customers. The Company also enters into derivative contracts as a means of reducing its interest rate risk and market risk. 

All derivatives are recognized in the unaudited interim Consolidated Balance Sheets at fair value.  Changes in the fair value of derivatives are recognized in earnings.  The Company did not have any fair value hedges or cash flow hedges at September 30, 2017 and December 31, 2016. 

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. 

24

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Forward Loan Sale Commitments

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

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

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

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

Interest Rate Swaps

The Company enters into interest rate swap agreements that are transacted to meet the financing needs of its commercial customers. Offsetting interest rate swap agreements are simultaneously transacted with a third-party financial institution to effectively eliminate the Company’s interest rate risk associated with the customer swaps. The primary risks associated with these transactions arise from exposure to the ability of the counterparties to meet the terms of the contract.  Mortgage-backed securities with a fair value of $5.9 million are pledged to secure the Company’s liability for the offsetting interest rate swaps (see Note 2).  The interest rate swap notional amount below is the aggregate notional amount of the customer swap and the offsetting third-party swap.

Risk Participation Agreements

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

25

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following tables present the fair values of derivative instruments in the Consolidated Balance Sheets:

			Assets			Liabilities
			Balance			Balance
	Notional		Sheet	Fair		Sheet	Fair
	Amount		Location	Value		Location	Value
		(in thousands)
September 30, 2017:
Derivative loan commitments	$	122,200	Other assets	$	1,583	Other liabilities	$	16
Forward loan sale commitments		162,360	Other assets		344	Other liabilities		205
Interest rate swaps		248,887	Other assets		2,483	Other liabilities		2,483
Risk participation agreements		43,037	Other assets		—	Other liabilities		—
Total				$	4,410		$	2,704
December 31, 2016:
Derivative loan commitments	$	87,728	Other assets	$	2,231	Other liabilities	$	—
Forward loan sale commitments		167,289	Other assets		491	Other liabilities		576
Interest rate swaps		173,477	Other assets		248	Other liabilities		248
Total				$	2,970		$	824

The following table presents information pertaining to the Company’s derivative instruments in the Consolidated Statements of Operations:

		Amount of Gain (Loss)
		Three Months Ended September 30,				Nine Months Ended September 30,
	Location of Gain (Loss)		2017		2016		2017		2016
		(in thousands)
Derivative loan commitments	Mortgage banking income	$	30	$	(649)	$	430	$	2,442
Forward loan sale commitments	Mortgage banking income		(80)		1,205		(870)		(1,218)
Total		$	(50)	$	556	$	(440)	$	1,224

10.COMPENSATION AND BENEFIT PLANS

Directors’ Retirement Plan

The Company has elected to freeze the Directors’ Retirement Plan effective December 31, 2017.  The balance of the liability at September 30, 2017 was $1.6 million.

Supplemental Retirement Plans

On March 1, 2016, in anticipation of the reorganization, the Company amended a supplemental executive retirement Plan with an executive to accelerate vesting.  This amendment increased the net present value of the benefit obligation in the amount of $891,000 and this increase was expensed in the first quarter of 2016. 

Employee Stock Ownership Plan

On June 29, 2016, the Company established an ESOP to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified retirement plan for the benefit of the Company employees.  The ESOP shares were purchased through a loan from the Company and as the debt is repaid, shares are released.  Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits.  The unreleased shares are deducted from stockholders’ equity as unearned ESOP shares in the accompanying balance sheets.  The number of shares committed to be released per year is 59,359 through 2035. 

26

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents share information held by the ESOP:

	September 30, 2017		December 31, 2016
Allocated shares		59,359		—
Shares committed to be allocated		44,520		59,359
Unallocated shares		1,083,309		1,127,829
Total shares		1,187,188		1,187,188
Fair value of unallocated shares	$	20,377,000	$	21,812,000

Total compensation expense recognized in connection with the ESOP was $275,000 and $857,000 for the three and nine months ended September 30, 2017.  Total compensation expense recognized in connection with the ESOP was $409,000 for the three and nine months ended September 30, 2016.

11.STOCK-BASED COMPENSATION

Under the HarborOne Bancorp, Inc. 2017 Stock Option and Incentive Plan (the “Equity Plan”), adopted on August 9, 2017, the Company may grant options, stock appreciation rights, restricted stock, restricted units, unrestricted stock awards, cash based awards, performance share awards, and dividend equivalent rights to its directors, officers and employees. Total shares reserved for issuance under the plan are 2,077,577. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan, with the total shares reserved for options equaling 1,483,984. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The total number of shares reserved for restricted stock or restricted units is 593,593. Options and awards vest ratably over three years. The fair value of shares awarded is based on the market price at the date of grant.

Expense related to options and restricted stock granted to directors is recognized as directors' fees within noninterest expense.

The Company has standard form agreements used for stock option and restricted stock awards. The standard form agreements used for the Chief Executive Officer and all other executive officers have previously been disclosed in Securities and Exchange Commission filings and generally provide that: (1) any unvested options or unvested restricted stock vest upon a Change in Control; and, that (2) any stock options which vest pursuant to a Change in Control, which is an event described in Section 280G of the Internal Revenue Code of 1986, will be cashed out at the difference between the acquisition price and the exercise price of the stock option.

Stock Options

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

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

27

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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

· Recognize forfeitures as they occur.

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

The Company made the following awards of options to purchase shares of common stock in 2017:

Date of grant	August 16, 2017
Options granted	1,326,063
Vesting period (years)	3
Expiration date	August 16, 2027
Expected volatility	24	%
Expected life (years)	6
Expected dividend yield	—	%
Risk free interest rate	1.88	%
Fair value per option	$ 5.07

A summary of the status of the Company’s stock option grants for the quarter ended September 30, 2017, is presented in the table below:

					Weighted
					Average
				Weighted	Remaining		Aggregate
		Stock Option		Average	Contractual		Intrinsic
Options		Awards		Exercise Price	Term (years)		Value
Balance at January 1, 2017		—	$	—	—	$	—
Granted		1,326,063		18.35	9.88		609,989
Balance at September 30, 2017		1,326,063	$	18.35	9.88	$	609,989
Exercisable at September 30, 2017		—	$	—	—	$	—
Unrecognized compensation cost	$	6,437,000
Weighted average remaining recognition period (years)		2.88

For the quarter ended September 30, 2017, stock-based compensation expense applicable to the stock options was $282,000 and the recognized tax benefit related to this expense was $99,000.  There was no stock-based compensation expense in 2016.

Restricted Stock

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

28

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents the activity in non-vested stock awards under the Equity Plan for the quarter ended September 30, 2017:

	Outstanding Restricted		Weighted Average
	Stock Awards		Grant Price
Non-vested stock awards at January 1, 2017		—	$	—
Granted		541,415		18.35
Non-vested stock awards at September 30, 2017		541,415	$	18.35
Unrecognized compensation cost inclusive of directors' fees	$	9,518,000
Weighted average remaining recognition period (years)		2.88

Total expense for the restricted stock awards was $417,000 for the quarter ended September 30, 2017, and the recognized tax benefits related to this expense was $146,000.  There was no expense related to restricted stock awards in 2016.

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 Federal Deposit Insurance Corporation (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 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%, a total capital ratio of 8.0% and a leverage ratio of 4.0%.  Additionally, subject to a transition schedule, the capital rules require a bank holding company to establish 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, which became effective January 1, 2015, 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, 2017, 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, 2017 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 1.25%.

29

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The Company’s and the Bank’s actual regulatory capital ratios as of September 30, 2017 and December 31, 2016 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, 2017
Common equity Tier 1 capital to risk-weighted assets	$	327,523	15.5	%	$	94,890	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		327,523	15.5			126,520	6.0			N/A	N/A
Total capital to risk-weighted assets		345,456	16.4			168,693	8.0			N/A	N/A
Tier 1 capital to average assets		327,523	12.5			104,711	4.0			N/A	N/A
December 31, 2016
Common equity Tier 1 capital to risk-weighted assets	$	317,185	16.2	%	$	88,320	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		317,185	16.2			117,760	6.0			N/A	N/A
Total capital to risk-weighted assets		334,153	17.0			157,014	8.0			N/A	N/A
Tier 1 capital to average assets		317,185	13.2			95,796	4.0			N/A	N/A
HarborOne Bank
September 30, 2017
Common equity Tier 1 capital to risk-weighted assets	$	244,104	11.6	%	$	94,884	4.5	%	$	137,055	6.5	%
Tier 1 capital to risk-weighted assets		244,104	11.6			126,512	6.0			168,683	8.0
Total capital to risk-weighted assets		262,037	12.4			168,683	8.0			210,853	10.0
Tier 1 capital to average assets		244,104	9.5			102,042	4.0			127,552	5.0
December 31, 2016
Common equity Tier 1 capital to risk-weighted assets	$	234,655	12.0	%	$	88,201	4.5	%	$	127,402	6.5	%
Tier 1 capital to risk-weighted assets		234,655	12.0			117,602	6.0			156,802	8.0
Total capital to risk-weighted assets		251,623	12.8			156,802	8.0			196,003	10.0
Tier 1 capital to average assets		234,655	9.9			95,178	4.0			118,973	5.0

30

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

13.COMPREHENSIVE INCOME (LOSS)

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

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

	September 30,		December 31,
	2017		2016
	(in thousands)
Securities available for sale:
Net unrealized gain (loss)	$	133	$	(1,022)
Related tax effect		(46)		357
Net-of-tax amount		87		(665)
Directors' retirement plan:
Prior service cost		(835)		(1,016)
Related tax effect		333		391
Net-of-tax amount		(502)		(625)
Total accumulated other comprehensive loss	$	(415)	$	(1,290)

31

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following tables present changes in accumulated other comprehensive loss by component for the three and nine months ended September 30, 2017 and 2016:

	Three Months Ended September 30,
	2017						2016
	Unrealized Gains						Unrealized Gains
	and Losses on		Director's				and Losses on		Director's
	Available-for-Sale		Retirement				Available-for-Sale		Retirement
	Securities		Plan		Total		Securities		Plan		Total
	(in thousands)
Balance at beginning of period	$	(30)	$	(538)	$	(568)	$	1,671	$	(660)	$	1,011
Other comprehensive income before reclassifications		180		—		180		(504)		—		(504)
Amounts reclassified from accumulated other comprehensive income		—		60		60		—		59		59
Net current period other comprehensive income		180		60		240		(504)		59		(445)
Related tax effect		(63)		(24)		(87)		175		(23)		152
Balance at end of period	$	87	$	(502)	$	(415)	$	1,342	$	(624)	$	718
	Nine Months Ended September 30,
	2017						2016
	Unrealized Gains						Unrealized Gains
	and Losses on		Directors'				and Losses on		Directors'
	Available-for-Sale		Retirement				Available-for-Sale		Retirement
	Securities		Plan		Total		Securities		Plan		Total
	(in thousands)
Balance at beginning of period	$	(665)	$	(625)	$	(1,290)	$	139	$	(731)	$	(592)
Other comprehensive income before reclassifications		1,155		—		1,155		2,131		—		2,131
Amounts reclassified from accumulated other comprehensive income		—		181		181		(283)		176		(107)
Net current period other comprehensive income		1,155		181		1,336		1,848		176		2,024
Related tax effect		(403)		(58)		(461)		(645)		(69)		(714)
Balance at end of period	$	87	$	(502)	$	(415)	$	1,342	$	(624)	$	718

14.FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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

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

FHLB stock - The fair value of Federal Home Loan Bank stock is equal to cost based on redemption provisions.

Loans held for sale - Fair values are based on prevailing market prices for similar commitments.  At September 30, 2017 and December 31, 2016, there were no loans held for sale that were greater than ninety days past due. 

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,
	2017		2016
	(in thousands)
Loans held for sale, fair value	$	96,201	$	86,443
Loans held for sale, contractual principal outstanding		92,981		85,024
Fair value less unpaid principal	$	3,220	$	1,419

Loans - Fair values for mortgage loans and other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

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

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

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

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

loan based on the Company’s internal cost analysis that is not observable.   At September 30, 2017 and December 31, 2016, the weighted average pull-through rate for derivative loan commitments was 87% and 86%, 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.  The Company incorporates credit valuation analysis for counterparty nonperformance risk in the fair value measurement, including the impact of netting applicable credit enhancements such as available collateral.

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

Fair Value Hierarchy

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

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

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

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

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

34

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

							Total
	Level 1		Level 2		Level 3		Fair Value
	(in thousands)
September 30, 2017
Assets
Securities available for sale	$	—	$	166,122	$	—	$	166,122
Loans held for sale		—		96,201		—		96,201
Mortgage servicing rights		—		20,376		—		20,376
Derivative loan commitments		—		—		1,583		1,583
Forward loan sale commitments		—		—		344		344
Interest rate swaps		—		2,483		—		2,483
	$	—	$	285,182	$	1,927	$	287,109
Liabilities
Derivative loan commitments	$	—	$	—	$	16	$	16
Forward loan sale commitments		—		—		205		205
Interest rate swaps		—		2,483		—		2,483
	$	—	$	2,483	$	221	$	2,704
December 31, 2016
Assets
Securities available for sale	$	—	$	136,469	$	—	$	136,469
Loans held for sale		—		86,443		—		86,443
Mortgage servicing rights		—		20,333		—		20,333
Derivative loan commitments		—		—		2,231		2,231
Forward loan sale commitments		—		—		491		491
Interest rate swaps		—		248		—		248
	$	—	$	243,493	$	2,722	$	246,215
Liabilities
Forward loan sale commitments	$	—	$	—	$	576	$	576
Interest rate swaps		—		248		—		248
	$	—	$	248	$	576	$	824

35

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The table below presents, for the three and nine months ended September 30, 2017 and 2016, 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,
	2017		2016		2017		2016
	(in thousands)
Assets:  Derivative and Forward Loan Sale Commitments:
Balance at beginning of period	$	1,994	$	4,381	$	2,722	$	1,661
Total gains (losses) included in net income (1)		(67)		(622)		(795)		2,098
Balance at end of period	$	1,927	$	3,759	$	1,927	$	3,759
Changes in unrealized gains relating to instruments at period end	$	1,927	$	3,759	$	1,927	$	3,759
Liabilities:  Derivative and Forward Loan Sale Commitments:
Balance at beginning of period	$	(238)	$	(2,141)	$	(576)	$	(89)
Total gains (losses) included in net income (1)		17		1,178		355		(874)
Balance at end of period	$	(221)	$	(963)	$	(221)	$	(963)
Changes in unrealized losses relating to instruments at period end	$	(221)	$	(963)	$	(221)	$	(963)
(1)  Included in mortgage banking income on the Consolidated Statements of Net Income.

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles.  These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.  There were no liabilities measured at fair value on a non-recurring basis at September 30, 2017 and December 31, 2016.  The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets. 

	September 30, 2017						December 31, 2016
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(in thousands)
Impaired loans	$	—	$	—	$	3,490	$	—	$	—	$	2,548
Other real estate owned and repossessed assets		—		—		1,021		—		—		1,767
	$	—	$	—	$	4,511	$	—	$	—	$	4,315

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, 2017 and December 31, 2016, respectively.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(in thousands)
Impaired loans	$	444	$	492	$	525	$	821
Other real estate owned and repossessed assets		11		78		58		238
	$	455	$	570	$	583	$	1,059

36

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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, 2017
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash and cash equivalents	$	94,805	$	94,805	$	—	$	—	$	94,805
Securities available for sale		166,122		—		166,122		—		166,122
Securities held to maturity		47,752		—		48,947		—		48,947
Federal Home Loan Bank stock		16,356		—		—		16,356		16,356
Loans held for sale		96,201		—		96,201		—		96,201
Loans, net		2,104,576		—		—		2,123,695		2,123,695
Retirement plan annuities		12,381		—		—		12,381		12,381
Mortgage servicing rights		20,376		—		20,376		—		20,376
Accrued interest receivable		5,959		—		5,959		—		5,959
Financial liabilities:
Deposits		2,003,545		—		—		2,002,218		2,002,218
Borrowed funds		276,366		—		276,531		—		276,531
Mortgagors' escrow accounts		5,530		—		—		5,530		5,530
Accrued interest payable		554		—		554		—		554
Derivative loan commitments:
Assets		1,583		—		—		1,583		1,583
Liabilities		16		—		—		16		16
Interest rate swap agreements:
Assets		2,483		—		2,483		—		2,483
Liabilities		2,483		—		2,483		—		2,483
Forward loan sale commitments:
Assets		344		—		—		344		344
Liabilities		205		—		—		205		205

37

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

	December 31, 2016
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash and cash equivalents	$	50,215	$	50,215	$	—	$	—	$	50,215
Securities available for sale		136,469		—		136,469		—		136,469
Securities held to maturity		47,877		—		48,972		—		48,972
Federal Home Loan Bank stock		15,749		—		—		15,749		15,749
Mortgage loans held for sale		86,443		—		86,443		—		86,443
Loans, net		1,981,747		—		—		2,007,394		2,007,394
Retirement plan annuities		12,044		—		—		12,044		12,044
Mortgage servicing rights		20,333		—		20,333		—		20,333
Accrued interest receivable		5,603		—		5,603		—		5,603
Financial liabilities:
Deposits		1,804,753		—		—		1,806,926		1,806,926
Borrowed funds		275,119		—		276,741		—		276,741
Mortgagors' escrow accounts		5,034		—		—		5,034		5,034
Accrued interest payable		545		—		545		—		545
Derivative loan commitments:
Assets		2,231		—		—		2,231		2,231
Interest rate swap agreements:
Assets		248		—		248		—		248
Liabilities		248		—		248		—		248
Forward loan sale commitments:
Assets		491		—		—		491		491
Liabilities		576		—		—		576		576

15.EARNINGS PER SHARE (“EPS”)

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

38

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

	Three Months Ended September 30,
	2017		2016
Net income applicable to common stock (in thousands)	$	2,838	$	3,552
Average number of common shares outstanding		32,391,588		32,120,880
Less: Average unallocated ESOP shares		(1,088,307)		(1,177,072)
Average number of common shares outstanding used to calculate basic earnings per common share		31,303,281		30,943,808
Common stock equivalents		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		31,303,281		30,943,808
Earnings per common share:
Basic	$	0.09	$	0.11
Diluted	$	0.09	$	0.11

	Nine Months Ended
	September 30, 2017
Net income applicable to common stock (in thousands)	$	8,786
Average number of common shares outstanding		32,212,107
Less: Average unallocated ESOP shares		(1,103,003)
Average number of common shares outstanding used to calculate basic earnings per common share		31,109,104
Common stock equivalents		—
Average number of common shares outstanding used to calculate diluted earnings per common share		31,109,104
Earnings per common share:
Basic	$	0.28
Diluted	$	0.28

Stock options for 1,326,063 shares of common stock for the three and nine month periods ended September 30, 2017 were not considered in computing diluted earnings per share because they were antidilutive.

39

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

16.SEGMENT REPORTING

The Company has two reportable segments: HarborOne Bank and Merrimack Mortgage.  Revenue from HarborOne Bank consists primarily of interest earned on loans and investment securities and service charges on deposit accounts.  Revenue from Merrimack 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.

Information about the reportable segments and reconciliation to the unaudited interim Consolidated Financial Statements at September 30, 2017 and 2016 and for the three and nine months then ended is presented in the tables below.  Merrimack Mortgage was acquired in July 2015. 

	Three Months Ended September 30, 2017
	HarborOne		Merrimack		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated
	(In thousands)
Net interest and dividend income	$	18,731	$	487	$	51	$	—	$	19,269
Provision for loan losses		921		—		—		—		921
Net interest income, after provision for loan losses		17,810		487		51		—		18,348
Mortgage banking income:
Changes in mortgage servicing rights fair value		(170)		(318)		—		—		(488)
Other		834		10,237		—		—		11,071
Total mortgage banking income		664		9,919		—		—		10,583
Other noninterest income		4,034		10		—		—		4,044
Total noninterest income		4,698		9,929		—		—		14,627
Noninterest expense		18,716		9,457		265		—		28,438
Income (loss) before income taxes		3,792		959		(214)		—		4,537
Provision (benefit) for income taxes		1,393		392		(86)		—		1,699
Net income (loss)	$	2,399	$	567	$	(128)	$	—	$	2,838
	Nine Months Ended September 30, 2017
	HarborOne		Merrimack		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated
	(in thousands)
Net interest and dividend income	$	53,573	$	1,251	$	92	$	—	$	54,916
Provision for loan losses		1,656		—		—		—		1,656
Net interest income, after provision for loan losses		51,917		1,251		92		—		53,260
Mortgage banking income:
Changes in mortgage servicing rights fair value		(723)		(1,259)		—		—		(1,982)
Other		2,476		27,641		—		—		30,117
Total mortgage banking income		1,753		26,382		—		—		28,135
Other noninterest income		12,226		19		—		—		12,245
Total noninterest income		13,979		26,401		—		—		40,380
Noninterest expense		53,931		25,420		370		—		79,721
Income (loss) before income taxes		11,965		2,232		(278)		—		13,919
Provision (benefit) for income taxes		4,342		902		(111)		—		5,133
Net income (loss)	$	7,623	$	1,330	$	(167)	$	—	$	8,786
Total assets at period end	$	2,591,620	$	133,534	$	340,930	$	(406,625)	$	2,659,459
Goodwill at period end	$	3,186	$	10,179	$	—	$	—	$	13,365

40

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

	Three Months Ended September 30, 2016
	HarborOne		Merrimack		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated
	(In thousands)
Net interest and dividend income	$	15,302	$	600	$	—	$	—	$	15,902
Provision for loan losses		1,710		—		—		—		1,710
Net interest income, after provision for loan losses		13,592		600		—		—		14,192
Mortgage banking income:
Changes in mortgage servicing rights fair value		155		196		—		—		351
Other		1,336		15,177		—		—		16,513
Total mortgage banking income		1,491		15,373		—		—		16,864
Other noninterest income		3,996		9		—		—		4,005
Total noninterest income		5,487		15,382		—		—		20,869
Noninterest expense		16,594		12,937		78		—		29,609
Income (loss) before income taxes		2,485		3,045		(78)		—		5,452
Provision (benefit) for income taxes		739		1,219		(58)		—		1,900
Net income (loss)	$	1,746	$	1,826	$	(20)	$	—	$	3,552
	Nine Months Ended September 30, 2016
	HarborOne		Merrimack		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated
	(in thousands)
Net interest and dividend income	$	43,078	$	1,362	$	—	$	—	$	44,440
Provision for loan losses		2,716		—		—		—		2,716
Net interest income, after provision for loan losses		40,362		1,362		—		—		41,724
Mortgage banking income:
Changes in mortgage servicing rights fair value		(1,227)		(2,873)		—		—		(4,100)
Other		3,607		36,118		—		—		39,725
Total mortgage banking income		2,380		33,245		—		—		35,625
Other noninterest income		12,189		5		—		—		12,194
Total noninterest income		14,569		33,250		—		—		47,819
Noninterest expense		50,173		30,264		4,898		—		85,335
Income (loss) before income taxes		4,758		4,348		(4,898)		—		4,208
Provision (benefit) for income taxes		1,456		1,740		(1,983)		—		1,213
Net income (loss)	$	3,302	$	2,608	$	(2,915)	$	—	$	2,995
Total assets at period end	$	2,340,199	$	140,152	$	325,915	$	(459,133)	$	2,347,133
Goodwill at period end	$	3,186	$	10,179	$	—	$	—	$	13,365

17.SUBSEQUENT EVENTS

On October 27, 2017, the Company announced that its Board of Directors has adopted a share repurchase program.  Under the share repurchase program, the Company may repurchase up to 1,633,115 shares of its common stock, or approximately 5% of its current issued and outstanding shares.  On October 12, 2017, the earn-out agreement with Merrimack Mortgage was negotiated and settled in full.  The excess of the recorded contingent consideration liability in the amount of $1.2 million was reversed through earnings.

41

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, 2017, and our results of operations for the three and nine months ended September  30, 2017 and 2016. 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 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 under the section captioned “Risk Factors” at Part II, Item 1A of this Form 10-Q, and in our Annual Report on Form 10-K for the year ended December 31, 2016, as updated by the Company’s quarterly reports on Form 10-Q, including this report, and other filings with the Securities and Exchange Commission, adverse conditions in the capital and debt markets and the impact of such conditions on our business activities; changes in interest rates; competitive pressures from other financial institutions; the effects of general economic conditions on a national basis or in the local markets in which we operate, including changes that adversely affect borrowers’ ability to service and repay our loans; changes in the value of securities in our investment portfolio; changes in loan default and charge-off rates; fluctuations in real estate values; the adequacy of loan loss reserves; decreases in deposit levels necessitating increased borrowing to fund loans and investments;operational risks including, but not limited to, cybersecurity, fraud and natural disasters; changes in government regulation; changes in accounting standards and practices; the risk that goodwill and intangibles recorded in our financial statements will become impaired; demand for loans in our market area; our ability to attract and maintain deposits; risks related to the implementation of acquisitions, dispositions, and restructurings; the risk that we may not be successful in the implementation of our business strategy; and changes in assumptions used in making such forward-looking statements. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

Critical Accounting Policies

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

42

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

Comparison of Financial Condition at September 30, 2017 and December 31, 2016

Total Assets.    Total assets increased $211.1 million, or 8.62%, to $2.66 billion at September 30, 2017 from $2.45 billion at December 31, 2016 primarily due to the continued execution of our commercial loan growth strategy. 

Cash and Cash Equivalents.    Cash and cash equivalents increased $44.6 million to $94.8 million at September 30, 2017 from $50.2 million at December 31, 2016. The increase was primarily due to HarborOne Bancorp, Inc.’s participation in the Bank’s reciprocal deposit program that was established in June of 2017. Through the program, the Company’s $68.5 million deposit at the Bank was converted to multiple deposits at other financial institutions which are not eliminated in consolidation.

Loans Held for Sale.    Loans held for sale at September 30, 2017 were $96.2 million, an increase of $9.8 million from $86.4 million at December 31, 2016 due to the seasonal increase in residential mortgage originations. Of the loans held for sale at September 30, 2017, $92.3 million were originated by Merrimack Mortgage and $3.9 million were originated by the Bank.

Loans, net.    At September 30, 2017, net loans were $2.1 billion, an increase of $122.8 million, or 6.20%, from $1.98 billion at December 31, 2016, primarily due to an increase in the Bank’s commercial real estate, construction and commercial loan originations, partially offset by a decrease in consumer loans. Total commercial real estate and commercial loans at September 30, 2017 were $734.7 million, an increase of $138.4 million, or 23.21%, from $596.3 million at December 31, 2016, reflecting the execution of our business strategy to increase commercial lending. Construction loans increased $18.2 million, or 31.18%, in the same period, primarily due to commercial construction loan advances and originations. Consumer loans decreased $29.4 million, or 5.22%, partially the result of a $5.0 million indirect auto loan sale. Our residential portfolio decreased by $1.5 million, or 0.20%. The allowance for loan losses was $17.9 million at September 30, 2017 and $17.0 million December 31, 2016.

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

	September 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Residential real estate:
One- to four-family	$	678,684	32.1	%	$	677,946	34.1	%
Second mortgages and equity lines of credit		90,734	4.3			92,989	4.7
Commercial real estate		623,054	29.5			495,801	24.9
Construction		76,668	3.6			58,443	2.9
Total real estate		1,469,140	69.5			1,325,179	66.6
Commercial		111,627	5.3			100,501	5.1
Consumer:
Auto		518,759	24.5			547,400	27.5
Personal		14,948	0.7			15,704	0.8
Total consumer		533,707	25.2			563,104	28.3
Total loans		2,114,474	100.0	%		1,988,784	100.0	%
Allowance for loan losses		(17,933)				(16,968)
Net deferred loan origination costs		8,035				9,931
Loans, net	$	2,104,576			$	1,981,747

43

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Securities.    Total investment securities at September 30, 2017 were $213.9 million, an increase of $29.5 million, or 16.02%, from December 31, 2016. There were no sales of securities in the third quarter of 2017.  Proceeds from calls of securities amounted to $400,000 in the nine months ended September 30, 2017.  The following table provides the composition of our securities available for sale and held to maturity at the dates indicated:

	September 30, 2017				December 31, 2016
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(in thousands)
Securities available for sale:
Debt securities:
U.S. government and government-sponsored enterprise obligations	$	9,984	$	9,884	$	9,983	$	9,747
U.S. government-sponsored mortgage-backed and collateralized mortgage obligations		112,899		113,076		94,656		94,030
SBA asset-backed securities		43,106		43,162		32,852		32,692
Total securities available for sale	$	165,989	$	166,122	$	137,491	$	136,469
Securities held to maturity:
Debt securities:
U.S. government-sponsored mortgage-backed and collateralized mortgage obligations	$	20,312	$	20,368	$	22,834	$	22,783
SBA asset-backed securities		2,992		2,984		—		—
Other bonds and obligations:
State and political subdivisions		24,448		25,595		25,043		26,189
Total securities held to maturity	$	47,752	$	48,947	$	47,877	$	48,972

Mortgage servicing rights.    Mortgage servicing rights are created as a result of our mortgage banking origination activities and accounted for at fair value. At September 30, 2017, we serviced mortgage loans for others with an aggregate outstanding principal balance of $1.92 billion. Total mortgage servicing rights were $20.4 million at September 30, 2017 and December 31, 2016. 

The following table represents the activity for mortgage servicing rights and the related fair value changes during the periods noted:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(in thousands)
Balance, beginning of period	$	20,313	$	12,688	$	20,333	$	12,958
Additions from loans sold with servicing retained		551		2,495		2,025		6,676
Changes in fair value due to :
Reductions from loans paid off during the period		(415)		(563)		(1,138)		(1,229)
Changes in valuation inputs or assumptions		(73)		914		(844)		(2,871)
Balance, end of period	$	20,376	$	15,534	$	20,376	$	15,534

The fair value of our mortgage servicing rights is determined by a third party provider that determines the appropriate prepayment speed, discount and default rate assumptions based on our portfolio. Any measurement of fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. The following table presents weighted average assumptions utilized in determining the fair value of mortgage servicing rights at September 30, 2017 and December 31, 2016:

	September 30,		December 31,
	2017		2016
Prepayment speed	10.29	%	9.49	%
Discount rate	9.26		9.25
Default rate	2.02		1.71

44

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Prepayment speeds are significantly impacted by mortgage rates. Decreasing mortgage rates normally encourage increased mortgage refinancing activity, which reduces the life of the loans underlying the mortgage servicing rights, thereby reducing the value of mortgage servicing rights.

Management has made the strategic decision not to hedge mortgage servicing assets at this point. Therefore, any future declines in interest rates would likely cause further decreases in the fair value of the mortgage servicing rights, and a corresponding detriment to earnings, whereas increases in interest rates would result in increases in fair value, and a corresponding benefit to earnings. Management may choose to hedge the mortgage servicing assets in the future or limit the balance of mortgage servicing rights by selling them or selling loans with the servicing released.

Deposits.    Deposits increased $198.8 million, or 11.01%, to $2.00 billion at September 30, 2017 from $1.80 billion at December 31, 2016. The growth in deposits was driven by an increase of $29.9 million in checking account deposits, $87.5 million in savings account deposits, $71.4 million in money market deposits and $19.1 million in brokered deposits partially offset by a decline in certificates of deposit of $9.1 million.  Included in deposits are $192.6 million in reciprocal deposit relationships, $102.3 million in money markets, $80.3 million in savings deposits, including the Company’s $68.5 million deposit, and $10.0 million in certificates of deposit. The reciprocal deposit program was established in June 2017 and provides access to FDIC insured deposit products in aggregate amounts exceeding the current insurance limits for depositors. Retail growth provided the checking account increase, $41.5 million of the money market increase and $7.1 million of the savings account increase. The decrease in certificates of deposits was due to a $19.6 million decrease in institutional deposits partially offset by the $10.0 million increase in reciprocal accounts. The overall municipal balances increased $42.9 million from December 31, 2016, $29.9 million in money market accounts, $11.9 million in savings accounts and $1.1 million in certificates of deposits. 

Borrowings.   Total borrowings from the FHLB decreased $1.3 million, or 0.45%, to $276.4 million at September 30, 2017 from $275.1 million at December 31, 2016.

Stockholders’ equity.Total stockholders’ equity was $340.6 million at September30, 2017 compared to $329.4 million at December 31, 2016, an increase of 3.41%. The increase from December 31, 2016 is primarily due to net income, share-based compensation and allocated ESOP shares.

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

Overview.   Consolidated net income for the three and nine months ended September 30, 2017 was $2.8 million and $8.8 million, respectively, compared to net income of $3.6 million and $3.0 million for the three and nine months ended September 30, 2016. The 2016 results include a one-time, pre-tax contribution of $4.8 million to establish the Foundation. Excluding the contribution expense, net income would have been $5.9 million for the nine months ended September 30, 2016. 

45

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

HarborOne Bancorp, Inc. Consolidated

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 and loans has been adjusted to a fully taxable-equivalent (FTE) basis using a federal tax rate of 35%.  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.

	Three Months Ended September 30,
	2017							2016
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost (6)		Balance			Interest		Cost (6)
		(dollars in thousands)
Interest-earning assets:
Loans (1)	$	2,190,303		$	21,786	3.95	%	$	1,983,249		$	18,010	3.61	%
Investment securities (2)		206,761			1,409	2.70			166,816			1,065	2.54
Other interest-earning assets		102,589			294	1.14			18,030			164	3.62
Total interest-earning assets		2,499,653			23,489	3.73			2,168,095			19,239	3.53
Noninterest-earning assets		128,966							130,498
Total assets	$	2,628,619						$	2,298,593
Interest-bearing liabilities:
Savings accounts	$	402,470			195	0.19		$	319,202			139	0.17
NOW accounts		125,636			20	0.06			120,704			19	0.06
Money market accounts		646,873			970	0.59			612,761			685	0.44
Certificates of deposit		463,077			1,382	1.18			434,519			1,246	1.14
Brokered deposits		82,976			245	1.17			549			3	2.17
Total interest-bearing deposits		1,721,032			2,812	0.65			1,487,735			2,092	0.56
FHLB advances		287,858			1,333	1.84			232,587			1,168	2.00
Total interest-bearing liabilities		2,008,890			4,145	0.82			1,720,322			3,260	0.75
Noninterest-bearing liabilities:
Noninterest-bearing deposits		251,579							217,930
Other noninterest-bearing liabilities		30,815							32,888
Total liabilities		2,291,284							1,971,140
Total equity		337,335							327,453
Total liabilities and equity	$	2,628,619						$	2,298,593
Tax equivalent net interest income					19,344							15,979
Tax equivalent interest rate spread (3)						2.91	%						2.78	%
Less: tax equivalent adjustment					75							77
Net interest income as reported				$	19,269						$	15,902
Net interest-earning assets (4)	$	490,763						$	447,773
Net interest margin (5)						3.06	%						2.92	%
Tax equivalent effect						0.01							0.01
Net interest margin on a fully tax equivalent basis						3.07	%						2.93	%
Ratio of interest-earning assets to interest-bearing liabilities		124.43	%						126.03	%
(1) Includes loans held for sale, nonaccruing loan balances and interest received on such loans.
(2) Includes securities available for sale and securities held to maturity.  Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented.  The yield on investments before tax equivalent adjustments for the quarters presented were 2.56% and 2.36%, respectively.
(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.
(6) Annualized.

46

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

	Nine Months Ended September 30,
	2017							2016
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost (6)		Balance			Interest		Cost (6)
	(dollars in thousands)
Interest-earning assets:
Loans (1)	$	2,144,071		$	61,727	3.85	%	$	1,889,578		$	50,987	3.60	%
Investment securities (2)		204,693			4,109	2.68			174,692			3,344	2.56
Other interest-earning assets		79,354			866	1.46			48,977			610	1.65
Total interest-earning assets		2,428,118			66,702	3.67			2,113,247			54,941	3.47
Noninterest-earning assets		132,054							127,996
Total assets	$	2,560,172						$	2,241,243
Interest-bearing liabilities:
Savings accounts	$	360,660			497	0.18		$	312,672			407	0.17
NOW accounts		125,902			59	0.06			119,495			56	0.06
Money market accounts		642,764			2,544	0.53			628,669			2,112	0.45
Certificates of deposit		467,342			4,101	1.17			446,624			3,849	1.15
Brokered deposits		75,140			610	1.08			184			3	2.18
Total interest-bearing deposits		1,671,808			7,811	0.62			1,507,644			6,427	0.57
FHLB advances		278,181			3,748	1.80			245,693			3,840	2.09
Total interest-bearing liabilities		1,949,989			11,559	0.79			1,753,337			10,267	0.78
Noninterest-bearing liabilities:
Noninterest-bearing deposits		246,512							218,960
Other noninterest-bearing liabilities		29,750							29,451
Total liabilities		2,226,251							2,001,748
Total equity		333,921							239,495
Total liabilities and equity	$	2,560,172						$	2,241,243
Tax equivalent net interest income					55,143							44,674
Tax equivalent interest rate spread (3)						2.88	%						2.69	%
Less: tax equivalent adjustment					227							234
Net interest income as reported				$	54,916						$	44,440
Net interest-earning assets (4)	$	478,129						$	359,910
Net interest margin (5)						3.02	%						2.81	%
Tax equivalent effect						0.02							0.01
Net interest margin on a fully tax equivalent basis						3.04	%						2.82	%
Ratio of interest-earning assets to  interest-bearing liabilities		124.52	%						120.53	%
(1) Includes loans held for sale, nonaccruing loan balances and interest received on such loans.
(2) Includes securities available for sale, securities held to maturity and FHLB stock.  Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented.  The yield on investments before tax equivalent adjustments was 2.54% and 2.38% for the six months ended September 30, 2017 and 2016, respectively.
(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.
(6) Annualized.

47

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017 v. 2016						2017 v. 2016
	Increase (Decrease) Due to Changes in				Total		Increase (Decrease) Due to Changes in				Total
	Volume		Rate		Increase (Decrease)		Volume		Rate		Increase (Decrease)
	(in thousands)
Interest-earning assets:
Loans	$	1,736	$	2,040	$	3,776	$	6,621	$	4,119	$	10,740
Investment securities		237		107		344		556		209		765
Other interest-earning assets		309		(179)		130		339		(83)		256
Total interest-earning assets		2,282		1,968		4,250		7,516		4,245		11,761
Interest-bearing liabilities:
Savings accounts		32		24		56		61		29		90
NOW accounts		1		—		1		3		—		3
Money market accounts		36		249		285		46		386		432
Certificates of deposit		76		60		136		178		74		252
Brokered deposit		243		(1)		242		610		(3)		607
Total interest-bearing deposits		388		332		720		898		486		1,384
FHLB advances		263		(98)		165		473		(565)		(92)
Total interest-bearing liabilities		651		234		885		1,371		(79)		1,292
Change in net interest income	$	1,631	$	1,734	$	3,365	$	6,145	$	4,324	$	10,469

Interest and Dividend Income.    Interest and dividend income increased $4.3 million, or 22.19%, to $23.4 million for the three months ended September 30, 2017, compared to $19.2 million for the three months ended September 30, 2016. The increase was primarily due to a $3.8 million, or 20.97%, increase in interest on loans and loans held for sale to $21.8 million for the three months ended September 30, 2017 from $18.0 million for the three months ended September 30, 2016. Included in interest on loans and loans held for sale was a $680,000 commercial loan prepayment penalty, while there were no such penalties collected in the prior year quarter. Additionally, the increase in loan interest income was attributable to a 10.44% increase in average loans outstanding as well as the shift in mix to higher

48

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

yielding commercial loans. The average yield on loans and loans held for sale increased 34 basis points, excluding the prepayment penalty there would have been a 17 basis point increase in the average quarterly yield. Interest and dividend income on securities increased by $346,000, or 35.02%, from $988,000 for the three months ended September 30, 2016 to $1.3 million for the three months ended September 30, 2017.

Compared to the first nine months of 2016, interest and dividend income increased $11.8 million, or 21.51% reflecting similar trends in the quarter over quarter results. Average loans and loans held for sale increased $254.5 million, or 13.47% coupled with a 25 basis point increase in yield resulting in a $10.7 million increase in interest on loans and loans held for sale. Excluding the prepayment penalty there would have been a 20 basis point increase in the average yield.

Interest Expense.    Interest expense increased $885,000, or 27.15%, to $4.1 million for the three months ended September 30, 2017 from $3.3 million for the three months ended September 30, 2016. The increase resulted from a $720,000 increase in interest expense on deposits and a $165,000 increase in interest expense on borrowings. The increase in interest expense on deposits resulted from a 15.68% increase in average balances and a 9 basis point increase in the cost of deposits. Components of the increase included $83.0 million in average brokered deposits at a cost of 1.17% in the third quarter of 2017 whereas average brokered deposit were $549,000 at a cost of 2.17% in the third quarter of 2016. Average money market deposits increased by $34.1 million, or 5.57% and the cost of money market deposits was 0.59% for the for the third quarter of 2017 compared to 0.44% for the 2016 quarterly period.  The cost of certificates of deposit increased 4 basis point to 1.18% for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 and the average balance increased 6.57%. The cost of savings accounts increased 2 basis points to 0.19% and the average balance increased 26.09% for the three months ended September 30, 2017 as compared to the 2016 quarter. The cost of NOW accounts was 0.06% for both periods and the average balance increased 4.09% in the three months ended September 30, 2017 compared to the same period in 2016.  The increase in interest expense on borrowings reflects the 23.73% increase in average balance partially offset by the decrease in cost to 1.84% from 2.00% when comparing the three months ended September 30, 2017 and 2016.

Compared to the first nine months of 2016, interest expense increased $1.3 million, or 12.58% to $11.6 million from $10.3 million reflecting the quarter over quarter trend of increasing deposit average balances. Average interest bearing deposits increased $164.2 million, or 10.89% and the cost of funds increased 5 basis points year over year. The increase in interest expense on borrowings is due to the average balance increase of $32.5 million, or 13.22% partially offset by a  29 basis point decrease in the cost of borrowed funds.

Net Interest and Dividend Income.    Net interest and dividend income on a tax equivalent basis increased $3.4 million, or 21.06%, to $19.3 million for the three months ended September 30, 2017 from $16.0 million for the three months ended September 30, 2016. Growth in higher yielding commercial loans was primarily funded with deposit growth. The tax equivalent net interest spread increased 13 basis points to 2.91% for the three months ended September 30, 2017 from 2.78% for the three months ended September 30, 2016, and net interest margin on a tax equivalent basis rose by 14 basis points to 3.07% for the three months ended September 30, 2017 from 2.93% for the three months ended September 30, 2016. Excluding the commercial prepayment penalty, the net interest spread and yield for the three months ended September 30, 2017 would have been 2.80% and 2.96%, respectively.

Compared to the first nine months of 2016, net interest and dividend income increased $10.2 million, or 22.92% to $54.9 million from $44.4 million.  The tax equivalent net interest spread increased 19 basis points to 2.88% for the nine months ended September 30, 2017 from 2.69% for the nine months ended September 30, 2016, and net interest margin on a tax equivalent basis also rose by 22 basis points to 3.04% for the nine months ended September 30, 2017 from 2.82% for the nine months ended September 30, 2016. Excluding the commercial prepayment penalty the net interest spread and yield for the nine months ended September 30, 2017 would have been 2.85% and 3.00%, respectively.

49

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The tables below show the results of operations for HarborOne Bank (excluding Merrimack Mortgage) for the three and nine months ended September 30, 2017 and 2016, the increase or decrease in those results, and the results of operations for Merrimack Mortgage for the three and nine months ended September 30, 2017 and 2016. Revenue and expenses for the holding company are minor and not reflected in the below tables. 

	HarborOne Bank								Merrimack Mortgage
	Three Months Ended								Three Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
	2017		2016		Dollars		Percent		2017		2016		Dollars		Percent
	(dollars in thousands)
Net interest and dividend income	$	18,731	$	15,302	$	3,429	22.4	%	$	487	$	600	$	(113)	(18.8)	%
Provision for loan losses		921		1,710		(789)	(46.1)			—		—		—	—
Net interest income, after provision for loan losses		17,810		13,592		4,218	31.0			487		600		(113)	(18.8)
Mortgage banking income:
Changes in mortgage servicing rights fair value		(170)		155		(325)	(209.7)			(318)		196		(514)	(262.2)
Other		834		1,336		(502)	(37.6)			10,237		15,177		(4,940)	(32.5)
Total mortgage banking income		664		1,491		(827)	(55.5)			9,919		15,373		(5,454)	(35.5)
Other noninterest income		4,034		3,996		38	1.0			10		9		1	11.1
Total noninterest income		4,698		5,487		(789)	(14.4)			9,929		15,382		(5,453)	(35.5)
Noninterest expense		18,716		16,594		2,122	12.8			9,457		12,937		(3,480)	(26.9)
Income before income taxes		3,792		2,485		1,307	52.6			959		3,045		(2,086)	(68.5)
Provision for income taxes		1,393		739		654	88.5			392		1,219		(827)	(67.8)
Net income	$	2,399	$	1,746	$	653	37.4	%	$	567	$	1,826	$	(1,259)	(68.9)	%
	HarborOne Bank								Merrimack Mortgage
	Nine Months Ended								Nine Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
	2017		2016		Dollars		Percent		2017		2016		Dollars		Percent
	(dollars in thousands)
Net interest and dividend income	$	53,573	$	43,078	$	10,495	24.4	%	$	1,251	$	1,362	$	(111)	(8.1)	%
Provision for loan losses		1,656		2,716		(1,060)	(39.0)			—		—		—	—
Net interest income, after provision for loan losses		51,917		40,362		11,555	28.6			1,251		1,362		(111)	(8.1)
Mortgage banking income:
Changes in mortgage servicing rights fair value		(723)		(1,227)		504	41.1			(1,259)		(2,873)		1,614	56.2
Other		2,476		3,607		(1,131)	(31.4)			27,641		36,118		(8,477)	(23.5)
Total mortgage banking income		1,753		2,380		(627)	(26.3)			26,382		33,245		(6,863)	(20.6)
Other noninterest income		12,226		12,189		37	0.3			19		5		14	280.0
Total noninterest income		13,979		14,569		(590)	(4.0)			26,401		33,250		(6,849)	(20.6)
Noninterest expense		53,931		50,173		3,758	7.5			25,420		30,264		(4,844)	(16.0)
Income before income taxes		11,965		4,758		7,207	151.5			2,232		4,348		(2,116)	(48.7)
Provision for income taxes		4,342		1,456		2,886	198.2			902		1,740		(838)	(48.2)
Net income	$	7,623	$	3,302	$	4,321	130.9	%	$	1,330	$	2,608	$	(1,278)	(49.0)	%

HarborOne Bank Segment

Results of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

Net Income.    The Bank’s net income increased by $653,000 to $2.4 million for the three months ended September 30, 2017 from $1.8 million for the three months ended September 30, 2016 and, pre-tax income was $3.8 

50

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

million for the three months ended September 30, 2017, a $1.3 million increase from the three months ended September 30, 2016. The increases in pre-tax income reflects a $2.8 million increase in net interest income and a $789,000 decrease in the provision for loan losses, partially offset by a $109,000 decrease in noninterest income and a $2.1 million increase in noninterest expense.  The provision for income taxes increased $654,000 offsetting the pre-tax income increase for the quarter.

Compared to the first nine months of 2016, the Bank’s net income for the nine months ended September 30, 2017 increased $4.3 million to $7.6 million from $3.3 million. The increase in net income reflects an increase of $9.8 million of net interest and dividend income, a decrease of $1.1 million in provision for loan losses and an increase of $90,000 in noninterest income, partially offset by increases of $3.8 million in noninterest expense and $2.9 million in provision for income taxes.

Provision for Loan Losses.    The Bank recorded a provision for loan losses of $921,000 and $1.7 million for the three and nine months ended September 30, 2017, respectively, and $1.7 million and $2.7 million for the three and nine months ended September 30, 2016. The provision reflects the continued growth in commercial loans and general reserve adjustments based on peer data utilized for commercial real estate and commercial loans. Annually, in the first quarter, the Bank adjusts general reserve allocations for commercial real estate and commercial loans based on updated peer data. The 2017 updated peer data resulted in lower general reserve rates and reserves on these loan types and therefore, despite loan growth, the allowance for loan losses attributable to commercial real estate and commercial loans decreased in the first quarter of 2017. Similarly, in 2016 improved peer data resulted in lower general reserve rates and reserves on commercial real estate and commercial loans.  Net charge-offs were $169,000 and $691,000 for the three and nine months ended September 30, 2017, respectively,  compared to $317,000 and $584,000 for the same periods in 2016 and  credit quality improved as nonaccrual loans declined to $19.6 million at September 30, 2017 from $24.0 million at September 30, 2016.

Noninterest Income.    Total noninterest income decreased to $4.7 million for the three months ended September 30, 2017 compared to $5.5 million for the prior year period. Income from mortgage banking operations decreased $827,000, or 55.47%, to $664,000 for the three months ended September 30, 2017 compared to $1.5 million for the three months ended September 30, 2016. Other mortgage banking income decreased $502,000 compared to the three months ended September 30, 2016 primarily a result of lower residential real estate loan sale volume in 2017 as compared to 2016. The fair value adjustment of mortgage servicing rights was a $170,000 loss in 2017 compared to a gain of $155,000 during the three months ended September 30, 2016, driven by the market rate changes during the periods. Other noninterest income was flat at $4.0 million for the three months ended September 30, 2017 and September 30, 2016. 

Compared to the first nine months of 2016, total noninterest income for the nine months ended September 30, 2017 decreased $590,000, or 4.05%, to $14.0 million from $14.6 million. Total mortgage banking income decreased $627,000 as other mortgage banking income decreased of $1.1 million partially offset by the $504,000 decrease in the fair value loss on the mortgage servicing rights. The low rate environment of 2016 negatively impacted servicing rights values and positively impacted mortgage loan origination volumes. Other noninterest income was flat at $12.2 million for the nine months ended September 30, 2017 and 2016. 

Noninterest Expense.    Noninterest expense increased $2.1 million, or 12.79%, to $18.7 million for the three months ended September 30, 2017 from $16.6 million for the three months ended September 30, 2016. The increase in noninterest expense included increased compensation and benefit expense of $973,000, marketing expenses increase of $578,000, professional fee increase of $359,000 and occupancy and equipment expense increase of $268,000. The increase in compensation and benefits expense is due to annual salary increases, staff additions to the commercial loan area, and equity awards expense of $498,000.  The equity awards were granted in the third quarter of 2017. The increase in professional fees primarily reflects expenses related to tax and other consulting.

Compared to the first nine months of 2016, noninterest expense for the nine months ended September 30, 2017 increased $3.8 million, or 7.49% to $53.9 million from $50.2 million. The components of the year-to-date increase include increased salaries and benefit costs of $1.6 million, primarily due to ESOP expense of $716,000 and equity awards expense

51

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

of $498,000, increased professional fees of $968,000 primarily related to tax and other consulting, increased occupancy and equipment expense of $576,000 and increased marketing expense of $912,000.

Income Tax Provision.    Provision for income taxes for the three and nine months ended September 30, 2017 was $1.4 million and $4.3 million, respectively, compared to $739,000 and $1.5 million for the three and nine months ended September 30, 2016, respectively. The increased provision for income taxes was mainly due to increase in pre-tax earnings of $1.3 million and $7.2 million for the three and nine months ended September 30, 2017 and an increase in the effective rate. The increase in the effective tax rate in 2017 is due primarily to the increase in nondeductible expense related to the ESOP and decreased tax-advantaged income. 

Merrimack Mortgage Segment

Results of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

Net Income.   Merrimack Mortgage recorded net income of $567,000 and $1.3 million for the three and nine months ended September 30, 2017, respectively, as compared to the three and nine months ended September 30, 2016, net income was $1.8 million and $2.6 million, respectively. The Merrimack Mortgage segment’s results are heavily impacted by prevailing rates, refinancing activity and home sales.

Noninterest Income.    During the three and nine months ended September 30, 2017, noninterest income totaled $9.9 million and $26.4 million, respectively. Noninterest income is primarily from mortgage banking income for which the following table provides further detail:

	September 30,
	Three Months Ended				Nine Months Ended
	2017		2016		2017		2016
	(in thousands)
Gain on sale of mortgage loans	$	8,311	$	13,050	$	22,349	$	31,403
Processing, underwriting and closing fees		1,019		1,429		2,618		3,349
Secondary market loan servicing fees, net of guarantee fees		907		698		2,674		1,366
Changes in mortgage servicing rights, fair value		(318)		196		(1,259)		(2,873)
Total mortgage banking income	$	9,919	$	15,373	$	26,382	$	33,245
Originated mortgage servicing rights included in gain on sale of mortgage loans	$	396	$	1,580	$	2,292	$	5,887

52

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

For the three and nine months ended September 30, 2017, Merrimack Mortgage originated $296.8 million and $764.7 million, respectively, of residential mortgages.  For the three and nine months ended September 30, 2016, Merrimack Mortgage originated $422.4 and $992.7 million, respectively, of residential mortgages. The decrease is due primarily to higher mortgage rates in 2017.  The following tables provide additional loan production detail:

	Three Months Ended September 30,
	2017				2016
	Loan					Loan
	Amount		% of Total			Amount		% of Total
	(dollars in thousands)
Source
Retail Offices	$	236,644	79.7	%		$	339,136	80.3	%
Third Party		60,188	20.3				83,249	19.7
Total	$	296,832	100.0	%		$	422,385	100.0	%
Product Type
Conventional	$	176,369	59.4	%		$	281,108	66.6	%
Government		96,437	32.5				120,991	28.6
State Housing Agency		685	0.2				17,754	4.2
Jumbo		22,976	7.8				2,532	0.6
Seconds		365	0.1				—	—
Total	$	296,832	100.0	%		$	422,385	100.0	%
Purpose
Purchase	$	241,689	81.4	%		$	279,641	66.2	%
Refinance		55,143	18.6				142,744	33.8
Total	$	296,832	100.0	%		$	422,385	100.0	%
	Nine Months Ended September 30,
	2017				2016
	Loan					Loan
	Amount		% of Total			Amount		% of Total
	(dollars in thousands)
Source
Retail Offices	$	606,473	79.3	%		$	779,768	78.5	%
Third Party		158,191	20.7				212,965	21.5
Total	$	764,664	100.0	%		$	992,733	100.0	%
Product Type
Conventional	$	443,012	57.9	%		$	634,299	63.9	%
Government		250,628	32.8				305,728	30.8
State Housing Agency		20,240	2.7				43,369	4.3
Jumbo		50,038	6.5				8,618	0.9
Seconds		746	0.1				719	0.1
Total	$	764,664	100.0	%		$	992,733	100.0	%
Purpose
Purchase	$	610,898	79.9	%		$	664,172	66.9	%
Refinance		153,766	20.1				328,561	33.1
Total	$	764,664	100.0	%		$	992,733	100.0	%

During the three and nine months ended September 30, 2017, Merrimack Mortgage sold loans to Freddie Mac, Fannie Mae and Ginnie Mae in the amounts of $43.1 million and $169.9 million, respectively, and recorded an average originated mortgage servicing right gain of 0.92% and 0.93%, respectively, of the underlying mortgage amount.  For the

53

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

three and nine months ended September 30, 2016, there were $239.0 million and $581.4 million, respectively, of agency loan sales at an average originated mortgage servicing right gain of 1.01%. The decrease in pricing of the mortgage servicing rights resulted in the decrease agency sales.

For the three and nine months ended September 30, 2017 processing, underwriting, and closing fees amounted to  $1.0 million and $2.6 million, respectively, as compared to $2.2 million and $5.1 million for the three and nine months ended September 30, 2016, reflecting the lower production volumes of 2017. Secondary market loan servicing fees, net of loan guarantee fees were $907,000 and $2.7 million, respectively for the three and nine months ended September 30, 2017 as compared to $698,000 and $1.4 million, respectively for the three and nine months ended September 30, 2016. At September 30, 2017, the unpaid balance of the servicing portfolio totaled $1.4 billion as compared to $1.09 billion at September 30, 2016, resulting in the higher secondary market servicing fees in 2017.  

During the three months ended September 30, 2017 the fair value of mortgage servicing rights decreased $318,000 and the 10 year Treasury Constant Maturity rate increased 2 basis points. For the same quarter in 2016 the fair value of mortgage servicing rights increased $196,000 and the 10 year Treasury Constant Maturity rate increased 11 basis points.  During the nine months ended September 30, 2017 and 2016, the fair value of mortgage servicing rights decreased $1.3 million and $2.9 million, respectively, reflecting decreases in the 10 year Treasury Constant Maturity rate of 12 basis points and 67 points, respectively. Decreasing interest rates generally result in a decrease in mortgage servicing rights fair value as the assumed prepayment speeds of the underlying mortgage loans tend to increase.  Conversely, as interest rates rise and prepayment speeds slow, mortgage servicing rights fair value tend to increase. In the current quarter, prepayment speeds on the serviced portfolio were slightly higher, impacted by low mortgage demand on rising housing prices and rates, resulting in the decrease in value.

Noninterest Expense.    Noninterest expense for the three months ended September 30, 2017 and 2016 was $9.5 million and $12.9 million, respectively, generally reflecting the decreased loan volume. Compensation and benefits expenses totaled $6.8 million and $9.1 million, respectively, for the three months ended September 30, 2017 and 2016. Salary expense was $2.2 million and $2.3 million, commission-related expenses were $4.0 million and $5.5 million, and incentive plan expense was $89,000 and $678,000, respectively, for the three months ended September 30, 2017 and 2016. Loan expenses totaled $1.6 million and $2.9 million for the three months ended September 30, 2017 and 2016, and included direct loan origination expenses of $1.3 million and $2.5 million, respectively, associated with the origination of $296.8 million and $422.4 million of mortgage loans.  Sub-servicing related expenses for the same three month periods were $246,000 and $189,000, respectively. Occupancy expense totaled $628,000 and $407,000 for the three months ended September 30, 2017 and 2016, and primarily consisted of rent and other expenses associated with the retail branch network and corporate office. Other expenses totaled $472,000 and $578,000 for the three months ended September 30, 2017 and 2016 and primarily consisted of professional fees and other expenses. The quarter over quarter decrease reflects decreased professional fees and marketing expense.

Noninterest expense for the nine months ended September 30, 2017 and 2016 was $25.4 million and $30.3 million, respectively. Salary and benefits was $18.4 million including $6.4 million in salary expense and $10.1 million in commission related expenses for the nine months ended September 30, 2017 as compared to $21.7 million including $6.4 million in salary expense and $12.7 million in commission related expenses for the nine months ended September 30, 2016.  Loan expenses totaled $4.1 million and $5.9 million for the nine months ended September 30, 2017 and 2016, respectively.  Included in loan expense was direct loan origination expense of $3.2 million and $5.3 million, respectively, associated with the origination of mortgage loans of $764.7 million and $992.7 million, respectively. Sub-servicing related expenses were $641,000 and $487,000, respectively.  Occupancy expense was $1.6 million and $1.3 million, respectively for the nine months ended September 30, 2017 and 2016. Other expenses totaled $1.3 million and $1.4 million for the nine months ended September 30, 2017 and 2016 and primarily consisted of professional fees and other expenses.

54

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Asset Quality

The following table provides information with respect to our nonperforming assets, including troubled debt restructurings, 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,
	2017			2016
	(dollars in thousands)
Nonaccrual loans:
Residential real estate:
One- to four-family	$	14,326		$	16,456
Second mortgages and equity lines of credit		1,200			1,686
Construction		131			134
Commercial		3,631			2,674
Consumer		318			230
Total nonaccrual loans (1)		19,606			21,180
Other real estate owned:
One- to four-family residential		929			1,767
Other repossessed assets		92			—
Total nonperforming assets		20,627			22,947
Performing troubled debt restructurings		21,613			25,134
Total nonperforming assets and performing troubled debt restructurings	$	42,240		$	48,081
Total nonperforming loans to total loans (2)		0.92	%		1.06	%
Total nonperforming assets and performing troubled debt restructurings to total assets		1.59	%		1.96	%
Total nonperforming assets to total assets		0.78	%		0.94	%
(1)$8.1 million and $7.5 million of troubled debt restructurings are included in total nonaccrual loans at September 30, 2017 and December 31, 2016, respectively.
(2) Total loans are presented before allowance for loan losses, but include deferred loan origination costs (fees), net.

Income related to impaired loans included in interest income for the three months ended September 30, 2017 and 2016, amounted to $501,000 and $626,000, respectively.  Income related to impaired loans included in interest income for the nine months ended September 30, 2017 and 2016, amounted to $1.8 million and $2.1 million, respectively. 

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

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

	September 30,		December 31,
	2017		2016
	(in thousands)
Classified loans:
Substandard	$	3,591	$	2,287
Doubtful		40		387
Loss		—		—
Total classified loans		3,631		2,674
Special mention		800		261
Total criticized loans	$	4,431	$	2,935

None of the special mention assets at September 30, 2017 and December 31, 2016 were on nonaccrual.

55

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

At September 30, 2017, our allowance for loan losses was $17.9 million, or 0.84% of total loans and 91.47% of nonperforming loans. At December 31, 2016, our allowance for loan losses was $17.0 million, or 0.85% of total loans and 80.12% of nonperforming loans. Nonperforming loans at September 30, 2017 were $19.6 million, or 0.92% of total loans, compared to $21.2 million, or 1.06% of total loans, at December 31, 2016. The allowance for loan losses is maintained at a level that represents management’s best estimate of losses in the loan portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan losses will be adequate to cover losses which may be realized in the future or that additional provisions for loan losses will not be required.

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

	September 30, 2017						December 31, 2016
			% 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	$	3,795	21.16	%	32.10	%	$	4,193	24.70	%	34.09	%
Second mortgages and equity lines of credit		622	3.47		4.30			770	4.54		4.68
Commercial real estate		7,447	41.53		29.46			7,150	42.14		24.93
Construction		1,098	6.12		3.62			924	5.45		2.94
Commercial		2,460	13.72		5.28			1,920	11.32		5.05
Consumer		1,014	5.65		25.24			780	4.60		28.31
Total general and allocated allowance		16,436	91.65		100.00	%		15,737	92.75		100.00	%
Unallocated		1,497	8.35					1,231	7.25
Total	$	17,933	100.00	%			$	16,968	100.00	%

56

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(dollars in thousands)
Allowance at beginning of period	$	17,181		$	14,439		$	16,968		$	13,700
Provision for loan losses		921			1,710			1,656			2,716
Charge offs:
Residential real estate:
One- to four-family		—			(123)			(126)			(194)
Second mortgages and equity lines of credit		—			—			(18)			(56)
Commercial real estate		—			—			—			—
Construction		—			—			—			—
Commercial		—			(22)			(134)			(27)
Consumer		(230)			(272)			(790)			(729)
Total charge-offs		(230)			(417)			(1,068)			(1,006)
Recoveries:
Residential real estate:
One- to four-family		8			21			89			197
Second mortgages and equity lines of credit		2			40			68			62
Commercial real estate		—			—			—			—
Construction		—			—			—			—
Commercial		—			5			16			8
Consumer		51			34			204			155
Total recoveries		61			100			377			422
Net charge-offs		(169)			(317)			(691)			(584)
Allowance at end of period	$	17,933		$	15,832		$	17,933		$	15,832
Total loans outstanding (1)	$	2,114,474		$	1,920,715		$	2,114,474		$	1,920,715
Average loans outstanding	$	2,109,130		$	1,886,159		$	2,070,364		$	1,817,571
Allowance for loan losses as a percent of total loans outstanding (1)		0.84	%		0.82	%		0.84	%		0.82	%
Annualized net loans charged off as a percent of average loans outstanding		0.03	%		0.07	%		0.04	%		0.04	%
Allowance for loan losses to nonperforming loans		91.47	%		65.95	%		91.47	%		65.95	%
(1) Loans are presented before allowance for loan losses, but include deferred loan origination costs (fees), net.

We recorded a provision for loan losses of $921,000 and $1.7 million for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, we recorded a provision for loan losses of $1.7 million and $2.7 million, respectively. The provisions primarily reflect loan loss allocations commensurate with commercial loan growth and other changes in the loan portfolio. Annually, in the first quarter, the Company adjusts general reserve allocations for commercial real estate and commercial loans based on updated peer data. The updated peer data resulted in lower general reserve rates and reserves on these loan types however, the decrease was partially offset by commercial loan growth. Changes in the provision for loan losses are also based on management’s assessment of loan portfolio growth and composition changes, historical charge-off trends, and ongoing evaluation of credit quality and current economic conditions. Net charge-offs totaled $169,000 for the quarter ended September 30, 2017, or 0.03%, of average loans outstanding on an annualized basis, compared to $317,000 and 0.07% for the quarter ended September 30, 2016. Nonperforming assets were $20.6 million at September 30, 2017 compared to $22.9 million at December 31, 2016 and $26.0 million at September 30, 2016. Nonperforming assets as a percentage of total assets were 0.78% at September 30, 2017, 0.94% at December 31, 2016 and 1.11% at September 30, 2016. The continued improvement in assets quality reflects the Company’s continued efforts to minimize nonperforming assets through diligent collection efforts and prudent workout arrangements.

57

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Management of Market Risk

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

As of September 30, 2017, net interest income simulation results for the Company indicated that our exposure over one year to changing interest rates was within our guidelines. The following table presents the estimated impact of interest rate changes on our estimated net interest income over one year:

September 30, 2017
	Change in Net Interest Income
Changes in Interest Rates	Year One
(basis points) (1)	(% change from year one base)
+300	3.62	%
(100)	(4.46)	%
(1) The calculated change in net interest income assumes an instantaneous parallel shift of the yield curve.

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

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

The table below sets forth, as of September 30, 2017, the estimated changes in the net economic value of equity that would result from the designated changes in the United States Treasury yield curve under an instantaneous parallel shift for the Bank. Computations of prospective effects of hypothetical interest rate changes are based on numerous

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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, 2017
							EVE as a Percentage of Economic
			Estimated Increase (Decrease)				Value of Assets
Changes in Interest Rates		Estimated	in EVE						Changes in
(basis points) (1)		EVE	Amount		Percent		EVE Ratio (2)		Basis Points
(dollars in thousands)
+ 300	$	388,455	$	(44,692)	(10.3)	%	15.7	%	(0.50)
0		433,147		—	—		16.2		—
- 100		419,200		(13,947)	(3.2)		15.3		(0.90)
(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.

Management regularly adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our interest rate risk and investment policies.

Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities and financing activities. Net cash provided by operating activities was $3.0 million for the nine months ended September 30, 2017 as compared to net cash used by operating activities of $39.5 million for the nine months ended September 30, 2016. Net cash used in investing activities, which consists primarily of disbursements for loan originations and loan purchases, the purchase of securities and the purchase of time deposits with other banks, offset by principal collections on loans, proceeds from the sale of securities, proceeds from redemption of time deposits and proceeds from maturing securities and sales of other real estate owned, and pay downs on mortgage-backed securities, was $158.9 million and $150.6 million for the nine months ended September 30, 2017 and 2016, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, FHLB advances and the issuance of common stock was $200.5 million and $168.7 million for the nine months ended September 30, 2017 and 2016, respectively, resulting from our strategy of managing growth and cash flows to preserve capital ratios and reduce expenses.

The Bank is subject to various regulatory capital requirements. At September 30, 2017, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. See Note 11 to our unaudited interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

At September 30, 2017, we had outstanding commitments to originate loans of $99.1 million and unadvanced funds on loans of $261.9 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, 2017 totaled $369.1 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.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.  For additional information on financial instruments with off-balance sheet risk see Note 8 to the unaudited Consolidated Financial Statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of September  30, 2017. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well-designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.  Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

During the quarter ended September  30, 2017, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

As of September  30, 2017, the risk factors of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.  

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

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EXHIBIT INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (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, 2017 and December 31, 2016, (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (iii) the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2017 and 2016, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (vi) the Notes to the unaudited Consolidated Financial Statements.

*Filed herewith

**Furnished herewith

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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 13, 2017	By:	/s/ James W. Blake
		James W. Blake
		President, Chief Executive Officer and Director (Principal Executive Officer)
Date: November 13, 2017	By:	/s/ Joseph F. Casey
		Joseph F. Casey
		Executive Vice President, Chief Operating Officer,  Chief Financial Officer, Treasurer and Director (Principal Accounting and Financial Officer)

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