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 June 30, 2018

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 August 1, 2018 there were 32,622,695 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

Index

		PAGE
PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (unaudited)	1
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June  30, 2018 and 2017 (unaudited)	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	65
ITEM 4.	Controls and Procedures	65
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings	66
ITEM 1A.	Risk Factors	66
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
ITEM 3.	Defaults Upon Senior Securities	66
ITEM 4.	Mine Safety Disclosures	66
ITEM 5.	Other Information	66
ITEM 6.	Exhibits	66
EXHIBIT INDEX		67
SIGNATURE		68

HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

	June 30,		December 31,
(in thousands, except share data)	2018		2017
Assets
Cash and due from banks	$	20,232	$	16,348
Short-term investments		112,264		64,443
Total cash and cash equivalents		132,496		80,791
Securities available for sale, at fair value		185,702		170,853
Securities held to maturity, at amortized cost		48,251		46,869
Federal Home Loan Bank stock, at cost		15,310		15,532
Loans held for sale, at fair value		71,017		59,460
Loans		2,300,695		2,194,967
Less: Allowance for loan losses		(19,244)		(18,489)
Net loans		2,281,451		2,176,478
Accrued interest receivable		7,284		6,545
Other real estate owned and repossessed assets		1,029		762
Mortgage servicing rights, at fair value		22,832		21,092
Property and equipment, net		24,226		24,487
Retirement plan annuities		12,730		12,498
Bank-owned life insurance		40,928		40,446
Deferred income taxes, net		1,717		843
Goodwill and other intangible assets		13,717		13,497
Other assets		21,024		14,767
Total assets	$	2,879,714	$	2,684,920
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits	$	294,944	$	264,453
Interest-bearing deposits		1,828,162		1,675,795
Brokered deposits		79,396		73,490
Total deposits		2,202,502		2,013,738
Short-term borrowed funds		70,000		44,000
Long-term borrowed funds		217,438		246,365
Mortgagors' escrow accounts		5,299		5,221
Accrued interest payable		417		518
Other liabilities and accrued expenses		35,482		31,594
Total liabilities		2,531,138		2,341,436
Commitments and contingencies (Notes 2, 9 and 10)
Common stock, $0.01 par value; 90,000,000 shares authorized; 32,662,295 shares issued at June 30, 2018 and December 31, 2017, respectively		327		327
Additional paid-in capital		150,063		147,060
Retained earnings		213,049		207,590
Treasury stock, at cost, 39,600 and 14,900 shares at June 30, 2018 and December 31, 2017, respectively		(742)		(280)
Accumulated other comprehensive loss		(3,733)		(528)
Unearned compensation - ESOP		(10,388)		(10,685)
Total stockholders' equity		348,576		343,484
Total liabilities and stockholders' equity	$	2,879,714	$	2,684,920

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 June 30,				Six Months Ended June 30,
(in thousands, except share data)	2018		2017		2018		2017
Interest and dividend income:
Interest and fees on loans	$	23,866	$	19,640	$	46,370	$	38,775
Interest on loans held for sale		521		620		932		1,166
Interest on taxable securities		1,351		1,116		2,630		2,114
Interest on non-taxable securities		216		216		433		434
Other interest and dividend income		297		320		571		572
Total interest and dividend income		26,251		21,912		50,936		43,061
Interest expense:
Interest on deposits		4,450		2,567		7,973		4,999
Interest on borrowed funds		906		1,130		1,944		2,415
Total interest expense		5,356		3,697		9,917		7,414
Net interest and dividend income		20,895		18,215		41,019		35,647
Provision for loan losses		886		470		1,694		735
Net interest income, after provision for loan losses		20,009		17,745		39,325		34,912
Noninterest income:
Mortgage banking income:
Changes in mortgage servicing rights fair value		(306)		(1,052)		716		(1,494)
Other		8,765		11,200		15,026		19,046
Total mortgage banking income		8,459		10,148		15,742		17,552
Deposit account fees		3,224		3,071		6,191		5,916
Income on retirement plan annuities		119		113		232		223
Gain on sale of consumer loans		—		—		—		78
Bank-owned life insurance income		243		261		482		518
Other income		512		706		1,259		1,466
Total noninterest income		12,557		14,299		23,906		25,753
Noninterest expense:
Compensation and benefits		17,345		16,319		33,697		31,243
Occupancy and equipment		2,961		2,726		6,236		5,714
Data processing		1,569		1,528		3,122		3,050
Loan expenses		1,390		1,882		2,652		3,245
Marketing		1,084		1,041		2,083		1,523
Deposit expenses		327		367		657		708
Postage and printing		354		295		720		637
Professional fees		915		1,080		1,883		2,010
Foreclosed and repossessed assets		45		25		108		52
Deposit insurance		491		446		985		908
Other expenses		2,037		1,169		3,974		2,193
Total noninterest expense		28,518		26,878		56,117		51,283
Income before income taxes		4,048		5,166		7,114		9,382
Income tax provision		945		1,953		1,759		3,434
Net income	$	3,103	$	3,213	$	5,355	$	5,948
Earnings per common share:
Basic	$	0.10	$	0.10	$	0.17	$	0.19
Diluted	$	0.10	$	0.10	$	0.17	$	0.19
Weighted average shares outstanding:
Basic		31,578,961		31,013,002		31,574,411		31,005,623
Diluted		31,578,961		31,013,002		31,574,411		31,005,623

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 June 30,				Six Months Ended June 30,
(in thousands)	2018		2017		2018		2017
Net income	$	3,103	$	3,213	$	5,355	$	5,948
Other comprehensive income:
Securities available for sale:
Unrealized holding gains (losses)		(1,328)		541		(3,975)		975
Related tax effect		292		(188)		874		(340)
Net-of-tax amount		(1,036)		353		(3,101)		635
Supplemental director retirement plan:
Reclassification adjustment for amortization of prior service cost		—		61		—		121
Related tax effect		—		(25)		—		(34)
Net-of-tax amount		—		36		—		87
Total other comprehensive income (loss)		(1,036)		389		(3,101)		722
Comprehensive income	$	2,067	$	3,602	$	2,254	$	6,670

Amortization of prior service cost is included in compensation and benefits in the unaudited interim Consolidated Statements of Operations. 

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			Treasury		Other		Unearned		Total
	Common Stock				Paid-in	Retained		Stock,		Comprehensive		Compensation		Stockholders'
(in thousands, except share data)	Shares		Amount		Capital	Earnings		at Cost		Loss		- ESOP		Equity
Balance at December 31, 2016	32,120,880	$	321	$	144,420	$	197,211	$	—	$	(1,290)	$	(11,278)	$	329,384
Comprehensive income	—		—		—		5,948		—		722		—		6,670
ESOP shares committed to be released  (29,680 shares)	—		—		285		—		—		—		296		581
Balance at June 30, 2017	32,120,880	$	321	$	144,705	$	203,159	$	—	$	(568)	$	(10,982)	$	336,635
Balance at December 31, 2017	32,647,395	$	327	$	147,060	$	207,590	$	(280)	$	(528)	$	(10,685)	$	343,484
Comprehensive income (loss)	—		—		—		5,355		—		(3,101)		—		2,254
Stranded effect of tax rate change (Note 1)	—		—		—		104		—		(104)		—		—
ESOP shares committed to be released (29,680 shares)	—		—		256		—		—		—		297		553
Share-based compensation expense	—		—		2,747		—		—		—		—		2,747
Treasury stock purchased	(24,700)		—		—		—		(462)		—		—		(462)
Balance at June 30, 2018	32,622,695	$	327	$	150,063	$	213,049	$	(742)	$	(3,733)	$	(10,388)	$	348,576

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

4

HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

	Six Months Ended June 30,
(in thousands)	2018		2017
Cash flows from operating activities:
Net income	$	5,355	$	5,948
Adjustments to reconcile net income to net cash used by operating activities:
Provision for loan losses		1,694		735
Net amortization of securities premiums/discounts		280		360
Net amortization of net deferred loan costs/fees and premiums		1,753		2,524
Depreciation and amortization of premises and equipment		1,429		1,389
Change in mortgage servicing rights fair value		(716)		1,494
Mortgage and consumer servicing rights capitalized		(1,024)		(1,503)
Amortization of consumer servicing rights		24		28
Accretion of fair value adjustment on loans and deposits, net		(166)		(199)
Amortization of intangible assets		44		44
Bank-owned life insurance income		(482)		(518)
Income on retirement plan annuities		(232)		(223)
Gain on sale of portfolio loans		—		(36)
Net loss on sale and write-down of other real estate owned and repossessed assets		56		20
Deferred income tax benefit		—		(91)
ESOP expenses		553		581
Share-based compensation expense		2,747		—
Net change in:
Loans held for sale		(11,557)		(5,406)
Other assets and liabilities, net		(3,453)		(9,226)
Net cash used by operating activities		(3,695)		(4,079)
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		11,083		10,901
Purchases		(30,019)		(34,442)
Activity in securities held to maturity:
Maturities, prepayment and calls		1,446		2,047
Purchases		(2,996)		—
Net redemption (purchase) of FHLB stock		222		(607)
Proceeds from sale of portfolio loans		—		5,007
Participation-in loan purchases		(51,652)		(49,927)
Loan originations, net of principal payments		(57,456)		(56,567)
Proceeds from sale of other real estate owned and repossessed assets		487		1,418
Additions to property and equipment		(1,168)		(1,410)
Net cash used by investing activities		(130,053)		(123,580)

(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)

	Six Months Ended June 30,
(in thousands)	2018		2017
Cash flows from financing activities:
Net increase in deposits		188,764		189,038
Net change in borrowed funds with maturities less than ninety days		26,000		(50,000)
Proceeds from other borrowed funds		31,075		55,000
Repayment of other borrowed funds		(60,002)		(15,002)
Net change in mortgagors' escrow accounts		78		5
Treasury stock purchased		(462)		—
Net cash provided by financing activities		185,453		179,041
Net change in cash and cash equivalents		51,705		51,382
Cash and cash equivalents at beginning of period		80,791		50,215
Cash and cash equivalents at end of period	$	132,496	$	101,597
Supplemental cash flow information:
Interest paid on deposits	$	7,999	$	4,984
Interest paid on borrowed funds		1,992		2,471
Income taxes paid		782		5,227
Transfer of loans to other real estate owned and repossessed assets		854		728
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, 2017 and 2016 and notes thereto included in the Company’s Annual Report on Form 10-K.

The unaudited interim Consolidated Financial Statements include the accounts of the Company; the Company’s subsidiaries, Legion Parkway Company LLC, a security corporation formed on July 13, 2016, HarborOne Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries.  The Bank’s subsidiaries consist of a mortgage company and two security corporations.  Merrimack Mortgage Company, LLC was acquired and became a wholly-owned subsidiary of the Bank on July 1, 2015, and effective April 3, 2018 became HarborOne Mortgage, LLC (“HarborOne Mortgage”).  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 the Company as 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, two commercial lending offices in Boston, Massachusetts and Providence, Rhode Island, and a loan office in Westford, Massachusetts.  HarborOne Mortgage maintains 36 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, home equity, and consumer loans. The Company also originates, sells and services residential mortgage loans through HarborOne 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 2017 or the six months ended June 30, 2018.  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 restructurings (“TDRs”), the Company does not separately identify individual consumer loans for impairment evaluation. 

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

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

Unallocated component

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating 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 Plan

The Company’s stock-based compensation plan provides 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 accounts 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 option awards and are determined using the treasury stock method.

Recent Accounting Pronouncements

As an “emerging growth company”, as defined in Title 1 of the Jumpstart Our Business Startups (“JOBS”) Act, the Company has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.  As of June 30, 2018, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220):  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income; (“ASU 2018-02”).  ASU 2018-02 amends ASU Topic 220 and allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Act”), to eliminate the stranded tax effects resulting from the Tax Act.  The Company early adopted this amendment in the first quarter of 2018 and reclassified $104,000 from accumulated other comprehensive income to retained earnings.

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

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 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

10

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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.BUSINESS COMBINATION

On March 14, 2018, the Company entered into an agreement to acquire Coastway Bancorp, Inc. (“Coastway”) in an all cash transaction valued at approximately $125.6 million. Coastway, the holding company of Coastway Community Bank, is headquartered in Warwick, Rhode Island. With nine branches in the greater Providence area, as well as three mortgage lending offices, Coastway had assets of $834.9 million and deposits of $501.9 million as of June 30, 2018.   The stockholders of Coastway approved the merger on June 21, 2018.  The transaction is expected to close in the second half of 2018 and is subject to customary closing conditions, including the required regulatory approvals.    

3.SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(in thousands)
June 30, 2018:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	17,986	$	—	$	691	$	17,295
U.S. government-sponsored residential mortgage-backed securities		93,177		5		2,357		90,825
U.S. government-sponsored collateralized mortgage obligations		34,010		—		684		33,326
SBA asset-backed securities		45,315		40		1,099		44,256
Total securities available for sale	$	190,488	$	45	$	4,831	$	185,702
Securities held to maturity
U.S. government-sponsored residential mortgage-backed securities	$	16,206	$	81	$	523	$	15,764
U.S. government-sponsored collateralized mortgage obligations		1,870		7		1		1,876
SBA asset-backed securities		5,920		—		102		5,818
Municipal bonds		24,255		624		—		24,879
Total securities held to maturity	$	48,251	$	712	$	626	$	48,337
December 31, 2017:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	17,985	$	—	$	178	$	17,807
U.S. government-sponsored residential mortgage-backed securities		74,368		132		630		73,870
U.S. government-sponsored collateralized mortgage obligations		36,753		35		106		36,682
SBA asset-backed securities		42,558		102		166		42,494
Total securities available for sale	$	171,664	$	269	$	1,080	$	170,853
Securities held to maturity
U.S. government-sponsored residential mortgage-backed securities	$	17,452	$	97	$	214	$	17,335
U.S. government-sponsored collateralized mortgage obligations		2,042		54		—		2,096
SBA asset-backed securities		2,991		—		14		2,977
Municipal bonds		24,384		882		—		25,266
Total securities held to maturity	$	46,869	$	1,033	$	228	$	47,674

There were no securities pledged as collateral as of June 30, 2018. 

12

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2018 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	$	17,986	$	17,295	$	4,409	$	4,486
Over 10 years		—		—		19,846		20,393
		17,986		17,295		24,255		24,879
U.S. government-sponsored residential mortgage-backed securities		93,177		90,825		16,206		15,764
U.S. government-sponsored collateralized mortgage obligations		34,010		33,326		1,870		1,876
SBA asset-backed securities		45,315		44,256		5,920		5,818
Total	$	190,488	$	185,702	$	48,251	$	48,337

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 four to 29 years; however, it is expected that such securities will have shorter actual lives due to prepayments.

There were no sales or calls of securities during the three and six months ended June 30, 2018 and the three months ended June 30, 2017.  There were no sales of securities and proceeds of $400,000 from a call of a held to maturity security, during the six months ended June 30, 2017.

13

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Information pertaining to securities with gross unrealized losses at June 30, 2018 and December 31, 2017 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

	Less Than Twelve Months				Twelve Months and Over
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	(in thousands)
June 30, 2018:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	212	$	7,788	$	479	$	9,507
U.S. government-sponsored residential mortgage-backed securities		1,421		62,211		936		23,556
U.S. government-sponsored collateralized mortgage obligations		591		30,838		93		2,488
SBA asset-backed securities		931		34,762		168		4,500
	$	3,155	$	135,599	$	1,676	$	40,051
Securities held to maturity
U.S. government-sponsored residential mortgage-backed securities	$	256	$	7,505	$	267	$	6,340
U.S. government-sponsored collateralized mortgage obligations		1		970		—		—
SBA asset-backed securities		102		5,818		—		—
	$	359	$	14,293	$	267	$	6,340
December 31, 2017:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	20	$	4,980	$	158	$	9,827
U.S. government-sponsored residential mortgage-backed securities		155		31,684		475		26,123
U.S. government-sponsored collateralized mortgage obligations		53		10,886		53		2,870
SBA asset-backed securities		95		24,205		71		4,730
	$	323	$	71,755	$	757	$	43,550
Securities held to maturity
U.S. government-sponsored residential mortgage-backed securities	$	91	$	8,211	$	123	$	6,970
SBA asset-backed securities		14		2,977		—		—
	$	105	$	11,188	$	123	$	6,970

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

At June 30, 2018, 65 debt securities with an amortized cost of $201.7 million have unrealized losses with aggregate depreciation of 2.70% from the Company’s amortized cost basis. 

The unrealized losses on the Company’s securities were primarily caused by changes in interest rates.  All of these investments are guaranteed by government and government-sponsored enterprises.  Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment.  Because the decline in fair value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be OTTI at June 30, 2018.

14

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

4.LOANS

A summary of the balances of loans follows:

	June 30,		December 31,
	2018		2017
	(in thousands)
Residential real estate:
One- to four-family	$	668,397	$	677,837
Second mortgages and equity lines of credit		87,610		89,080
Commercial real estate		726,276		655,419
Construction		163,240		128,643
Total mortgage loans on real estate		1,645,523		1,550,979
Commercial		132,293		109,523
Consumer loans:
Auto		504,396		513,728
Personal		12,501		14,092
Total consumer loans		516,897		527,820
Total loans		2,294,713		2,188,322
Allowance for loan losses		(19,244)		(18,489)
Net deferred loan costs		5,982		6,645
Loans, net	$	2,281,451	$	2,176,478

The Company did not sell indirect auto loans during the three and six months ended June 30, 2018 or the three months ended June 30, 2017.  In the six months ended June 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.  The unpaid principal balance of indirect auto loans serviced for others was $16.9 million and $22.4 million at June 30, 2018 and December 31, 2017, respectively. 

The Company has transferred a portion of its originated commercial real estate loans to participating lenders.  The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying unaudited interim Consolidated Balance Sheets.  The Company and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan.  The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties.  At June 30, 2018 and December 31, 2017, the Company was servicing loans for participants aggregating $106.9 million and $85.2 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 six months ended June 30, 2018 and 2017:

	Mortgage Loans
			Commercial
	Residential		Real Estate		Construction		Commercial		Consumer		Unallocated		Total
	(in thousands)
Balance at March 31, 2018	$	3,877	$	8,220	$	2,176	$	1,943	$	1,232	$	1,415	$	18,863
Provision (credit) for loan losses		(436)		452		191		416		122		141		886
Charge-offs		—		—		—		(390)		(202)		—		(592)
Recoveries		20		—		—		—		67		—		87
Balance at June 30, 2018	$	3,461	$	8,672	$	2,367	$	1,969	$	1,219	$	1,556	$	19,244
Balance at March 31, 2017	$	4,530	$	6,661	$	999	$	2,009	$	1,046	$	1,639	$	16,884
Provision (credit) for loan losses		(158)		414		(63)		154		173		(50)		470
Charge-offs		(7)		—		—		(51)		(300)		—		(358)
Recoveries		69		—		—		2		114		—		185
Balance at June 30, 2017	$	4,434	$	7,075	$	936	$	2,114	$	1,033	$	1,589	$	17,181

	Mortgage Loans
			Commercial
	Residential		Real Estate		Construction		Commercial		Consumer		Unallocated		Total
	(in thousands)
Balance at December 31, 2017	$	3,900	$	7,835	$	1,910	$	2,254	$	1,000	$	1,590	$	18,489
Provision (credit) for loan losses		(466)		837		457		449		451		(34)		1,694
Charge-offs		—		—		—		(735)		(342)		—		(1,077)
Recoveries		27		—		—		1		110		—		138
Balance at June 30, 2018	$	3,461	$	8,672	$	2,367	$	1,969	$	1,219	$	1,556	$	19,244
Balance at December 31, 2016	$	4,963	$	7,150	$	924	$	1,920	$	780	$	1,231	$	16,968
Provision (credit) for loan losses		(532)		(75)		12		312		660		358		735
Charge-offs		(144)		—		—		(134)		(560)		—		(838)
Recoveries		147		—		—		16		153		—		316
Balance at June 30, 2017	$	4,434	$	7,075	$	936	$	2,114	$	1,033	$	1,589	$	17,181

16

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Allocation of the allowance to loan segments at June 30, 2018 and December 31, 2017 follows:

	Mortgage Loans
			Commercial
	Residential		Real Estate		Construction		Commercial		Consumer		Unallocated		Total
	(in thousands)
June 30, 2018:
Loans:
Impaired loans	$	31,750	$	391	$	—	$	2,060	$	—	$	—	$	34,201
Non-impaired loans		724,257		725,885		163,240		130,233		516,897		—		2,260,512
Total loans	$	756,007	$	726,276	$	163,240	$	132,293	$	516,897	$	—	$	2,294,713
Allowance for loan losses:
Impaired loans	$	1,234	$	—	$	—	$	—	$	—	$	—	$	1,234
Non-impaired loans		2,227		8,672		2,367		1,969		1,219		1,556		18,010
Total allowance for loan losses	$	3,461	$	8,672	$	2,367	$	1,969	$	1,219	$	1,556	$	19,244
December 31, 2017:
Loans:
Impaired loans	$	34,310	$	312	$	130	$	3,069	$	—	$	—	$	37,821
Non-impaired loans		732,607		655,107		128,513		106,454		527,820		—		2,150,501
Total loans	$	766,917	$	655,419	$	128,643	$	109,523	$	527,820	$	—	$	2,188,322
Allowance for loan losses:
Impaired loans	$	1,242	$	—	$	—	$	739	$	—	$	—	$	1,981
Non-impaired loans		2,658		7,835		1,910		1,515		1,000		1,590		16,508
Total allowance for loan losses	$	3,900	$	7,835	$	1,910	$	2,254	$	1,000	$	1,590	$	18,489

17

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following is a summary of past due and non-accrual loans at June 30, 2018 and December 31, 2017:

					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans on
	Past Due		Past Due		Past Due		Past Due		Non-accrual
	(in thousands)
June 30, 2018
Residential real estate:
One- to four-family	$	1,349	$	4,243	$	6,140	$	11,732	$	12,967
Second mortgages and equity lines of credit		315		235		227		777		704
Commercial real estate		—		—		391		391		391
Commercial		5		10		2,060		2,075		2,060
Consumer:
Auto		1,725		552		166		2,443		216
Personal		72		4		27		103		30
Total	$	3,466	$	5,044	$	9,011	$	17,521	$	16,368
December 31, 2017
Residential real estate:
One- to four-family	$	3,269	$	1,116	$	5,267	$	9,652	$	13,308
Second mortgages and equity lines of credit		256		110		296		662		876
Commercial real estate		—		312		—		312		312
Construction		—		—		—		—		130
Commercial		2		—		260		262		3,038
Consumer:
Auto		1,641		342		165		2,148		162
Personal		32		22		18		72		29
Total	$	5,200	$	1,902	$	6,006	$	13,108	$	17,855

At June 30, 2018 and December 31, 2017, there were no loans past due 90 days or more and still accruing.

The following information pertains to impaired loans:

	June 30, 2018						December 31, 2017
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(in thousands)
Impaired loans without a valuation allowance:
Residential	$	12,473	$	12,994	$	—	$	12,561	$	13,171	$	—
Commercial real estate		391		391		—		312		312		—
Construction		—		—		—		130		130		—
Commercial		2,060		2,591		—		—		—		—
Total	$	14,924	$	15,976	$	—	$	13,003	$	13,613	$	—
Impaired loans with a valuation allowance:
Residential	$	19,277	$	19,867	$	1,234	$	21,749	$	22,457	$	1,242
Commercial		—		—		—		3,069		3,153		739
Total	$	19,277	$	19,867	$	1,234	$	24,818	$	25,610	$	1,981

18

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

	Three Months Ended June 30,
	2018						2017
					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	$	32,113	$	409	$	307	$	40,225	$	526	$	419
Commercial real estate		350		—		—		—		—		—
Construction		—		—		—		132		2		2
Commercial		2,380		—		—		4,129		30		30
Total	$	34,842	$	409	$	307	$	44,486	$	558	$	451

	Six Months Ended June 30,
	2018						2017
					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	$	32,845	$	985	$	789	$	41,154	$	1,227	$	998
Commercial real estate		337		—		—		—		—		—
Construction		43		—		—		132		8		8
Commercial		2,610		8		5		3,731		133		131
Total	$	35,835	$	993	$	794	$	45,017	$	1,368	$	1,137

Interest income recognized and interest income recognized on a cash basis in the table above represents interest income for the three and six months ended June 30, 2018 and 2017, not for the time period designated as impaired.  No additional funds are committed to be advanced in connection with impaired loans.

There were no material TDR loan modifications for the three and six months ended June 30, 2018.  For the three and six months ended June 30, 2017, there were two commercial TDR loan modifications totaling $1.5 million.

The recorded investment in TDRs was $23.5 million and $30.4 million at June 30, 2018 and 2017, respectively.  Of these loans, $5.5 million and $8.3 million were on non-accrual at June 30, 2018 and 2017, 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 six months ended June 30, 2018 and 2017, 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. 

19

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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.

The following table presents the Company’s loans by risk rating at June 30, 2018 and December 31, 2017:

	June 30, 2018						December 31, 2017
	Commercial						Commercial
	Real Estate		Commercial		Construction		Real Estate		Commercial		Construction
	(in thousands)
Loans rated 1 - 6	$	723,688	$	127,068	$	150,710	$	652,625	$	105,888	$	116,739
Loans rated 7		—		3,165		—		—		818		—
Loans rated 8		—		—		—		—		1,990		—
Loans rated 9		—		2,060		—		—		827		—
Loans rated 10		—		—		—		—		—		—
Loans not rated		2,588		—		12,530		2,794		—		11,904
	$	726,276	$	132,293	$	163,240	$	655,419	$	109,523	$	128,643

5.MORTGAGE LOAN SERVICING

The Company sells residential mortgages to government-sponsored entities and other parties.  The Company retains no beneficial interests in these loans, but may retain the servicing rights of the loans sold.  Mortgage loans serviced for others are not included in the accompanying unaudited interim Consolidated Balance Sheets.  The risks inherent in mortgage servicing rights (“MSRs”) relate primarily to changes in prepayments that primarily result from shifts in mortgage interest rates.  The unpaid principal balance of mortgage loans serviced for others was $1.93 billion as of June 30, 2018 and December 31, 2017, 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

20

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

speeds, discount rates, default rates, cost to service, and contractual servicing fees.  At June 30, 2018 and December 31, 2017, the following weighted average assumptions were used in the calculation of fair value of MSRs:

	June 30,		December 31,
	2018		2017
Prepayment speed	8.76	%	9.79	%
Discount rate	9.28		9.26
Default rate	1.77		2.23

The following summarizes changes to MSRs for the three and six months ended June 30, 2018 and 2017:

	Three Months Ended  June 30,				Six Months Ended  June 30,
	2018		2017		2018		2017
	(in thousands)
Balance, beginning of period	$	22,696	$	20,839	$	21,092	$	20,333
Additions from loans sold with servicing retained		442		526		1,024		1,474
Changes in fair value due to :
Reductions from loans paid off during the period		(517)		(409)		(841)		(723)
Changes in valuation inputs or assumptions		211		(643)		1,557		(771)
Balance, end of period	$	22,832	$	20,313	$	22,832	$	20,313

Contractually specified servicing fees included in other mortgage banking income amounted to $1.4 million and $2.7 million for the three and six months ended June 30, 2018, respectively, and $1.3 million and $2.6 million for the three and six months ended June 30, 2017, respectively. 

6.DEPOSITS

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

	June 30,		December 31,
	2018		2017
	(in thousands)
NOW and demand deposit accounts	$	429,397	$	395,153
Regular savings and club accounts		403,732		356,300
Money market deposit accounts		681,524		721,021
Total non-certificate accounts		1,514,653		1,472,474
Term certificate accounts greater than $250,000		122,048		78,165
Term certificate accounts less than or equal to $250,000		486,405		389,609
Brokered deposits		79,396		73,490
Total certificate accounts		687,849		541,264
Total deposits	$	2,202,502	$	2,013,738

The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions.  The reciprocal deposit program provides access to FDIC-insured deposit products in aggregate amounts

21

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

exceeding the current limits for depositors.  At June 30, 2018 and December 31, 2017, total reciprocal deposits were $189.8 million and $174.2 million, respectively,  consisting primarily of money market accounts.  

A summary of certificate accounts by maturity at June 30, 2018 is as follows:

			Weighted
			Average
	Amount		Rate
	(dollars in thousands)
Within 1 year	$	482,502	1.70	%
Over 1 year to 2 years		144,132	2.09
Over 2 years to 3 years		32,964	1.72
Over 3 years to 4 years		25,048	1.69
4 years and beyond		3,203	1.92
	$	687,849	1.79	%

7.BORROWED FUNDS

Borrowed funds at June 30, 2018 and December 31, 2017 consist of Federal Home Loan Bank (“FHLB”) advances.  Short-term advances were $70.0 million with a weighted average rate of 2.16% at June 30, 2018.  Short-term advances were $44.0 million with a weighted average rate of 1.50% at December 31, 2017.  Long-term advances are summarized by maturity date below. 

	June 30, 2018						December 31, 2017
					Weighted						Weighted
			Redeemable		Average				Redeemable		Average
	Amount		at Call Date (1)		Rate (2)		Amount		at Call Date (1)		Rate (2)
	(dollars in thousands)
Year ending December 31:
2018	$	51,250	$	56,250	1.43	%	$	111,250	$	111,250	1.47	%
2019		60,000		60,000	1.66			60,000		60,000	1.66
2020		50,000		60,000	1.84			50,000		50,000	1.84
2021		30,000		20,000	1.81			20,000		20,000	1.79
2022		5,000		—	0.96			—		—	—
2023 and thereafter*		21,188		21,188	1.03			5,115		5,115	0.65
	$	217,438	$	217,438	1.59	%	$	246,365	$	246,365	1.60	%
* Includes an amortizing advance requiring monthly principal and interest payments of $1,000.
(1) Callable FHLB advances are shown in the respective periods assuming that the callable debt is redeemed at the call date, while all other advances are shown in the periods corresponding to their scheduled maturity date.  There were no callable advances at December 31, 2017.
(2) Weighted average rates are based on scheduled maturity dates.

The FHLB advances are secured by a blanket security agreement on qualified collateral defined primarily as 81% of the carrying value of first mortgage loans on residential property. 

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 balances amounting to $102.3 million and $136.1 million, respectively, of which no amount was outstanding at June 30, 2018 and December 31, 2017, respectively.

22

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

8.INCOME TAXES

For the three and six months ended June 30, 2018, the Company recorded an expense of $945,000 and $1.8 million, respectively, representing an effective tax rate of 23.3% and 24.7%,  respectively.  For the three and six months ended June 30, 2017, the Company recorded an income tax provision of $2.0 million and $3.4 million, respectively, representing an effective tax rate of 37.8% and 36.6%, respectively.  The decrease in the effective tax rate in 2018 is due primarily to the lower tax rates established by the Tax Cuts and Jobs Act of 2017 that took effect on January 1, 2018.

9.OTHER COMMITMENTS AND CONTINGENCIES

Loan Commitments

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

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

The following off-balance sheet financial instruments were outstanding at June 30, 2018 and December 31, 2017.  The contract amounts represent credit risk.

	June 30,		December 31,
	2018		2017
	(in thousands)
Commitments to grant loans	$	81,103	$	86,790
Unadvanced funds on home equity lines of credit		78,276		77,117
Unadvanced funds on revolving lines of credit		89,753		71,151
Unadvanced funds on construction loans		172,058		144,918

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.

10.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 June 30, 2018 and December 31, 2017. 

23

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Derivative Loan Commitments

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

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

Forward Loan Sale Commitments

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

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

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

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

Interest Rate Swaps

The Company enters into interest rate swap agreements that are transacted to meet the financing needs of its commercial customers. Offsetting interest rate swap agreements are simultaneously transacted with a third-party financial institution to effectively eliminate the Company’s interest rate risk associated with the customer swaps. The primary risks associated with these transactions arise from exposure to the ability of the counterparties to meet the terms of the contract.  At June 30, 2018, there are no securities pledged to the third-party financial institutions to secure interest rate swap liabilities. 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.

24

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)
June 30, 2018:
Derivative loan commitments	$	114,530	Other assets	$	1,747	Other liabilities	$	122
Forward loan sale commitments		114,000	Other assets		8	Other liabilities		378
Interest rate swaps		276,283	Other assets		4,409	Other liabilities		4,409
Risk participation agreements		67,176	Other assets		—	Other liabilities		—
Total				$	6,164		$	4,909
December 31, 2017:
Derivative loan commitments	$	81,604	Other assets	$	1,047	Other liabilities	$	27
Forward loan sale commitments		95,680	Other assets		46	Other liabilities		92
Interest rate swaps		246,704	Other assets		2,153	Other liabilities		2,153
Risk participation agreements		42,856	Other assets		—	Other liabilities		—
Total				$	3,246		$	2,272

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 June 30,				Six Months Ended June 30,
	Location of Gain (Loss)		2018		2017		2018		2017
		(in thousands)
Derivative loan commitments	Mortgage banking income	$	464	$	(565)	$	605	$	399
Forward loan sale commitments	Mortgage banking income		(260)		1,044		(324)		(789)
Total		$	204	$	479	$	281	$	(390)

11.COMPENSATION AND BENEFIT PLANS

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. 

25

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents share information held by the ESOP:

	June 30, 2018		December 31, 2017
Allocated shares		118,719		59,359
Shares committed to be allocated		29,680		59,359
Unallocated shares		1,038,789		1,068,470
Total shares		1,187,188		1,187,188
Fair value of unallocated shares	$	19,625,000	$	20,472,000

Total compensation expense recognized in connection with the ESOP was $270,000 and $553,000 for the three and six months ended June 30, 2018, respectively.  Total compensation expense recognized in connection with the ESOP was $299,000 and $581,000 for the three and six months ended June 30, 2017, respectively. 

12.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 the Equity Plan, 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.

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

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

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

No stock options were granted in the first half of 2018.

26

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

A summary of the status of the Company’s stock option grants for the six months ended June 30, 2018, is presented in the table below:

					Weighted
					Average
			Weighted		Remaining		Aggregate
	Stock Option		Average		Contractual		Intrinsic
	Awards		Exercise Price		Term (years)		Value
Balance at January 1, 2018		1,326,063	$	18.35		9.13
Granted		—		—		—
Balance at June 30, 2018		1,326,063	$	18.35		9.13	$	782,377
Exercisable at June 30, 2018		—	$	—		—	$	—
Unrecognized cost inclusive of directors' awards	$	4,765,000
Weighted average remaining recognition period (years)		2.13

For the three and six months ended June 30, 2018, stock-based compensation expense applicable to the stock options was $557,000 and $1.1 million, respectively, and the recognized tax benefit related to this expense was $117,000 and $233,000, respectively.  There was no stock-based compensation expense for the three and six months ended June 30, 2017.

Restricted Stock

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

The following table presents the activity in non-vested stock awards under the Equity Plan for the six months ended June 30, 2018:

	Restricted		Weighted Average
	Stock Awards		Grant Price
Non-vested stock awards at January 1, 2018		541,415	$	18.35
Granted		—		—
Non-vested stock awards at June 30, 2018		541,415	$	18.35
Unrecognized cost inclusive of directors' awards	$	7,046,000
Weighted average remaining recognition period (years)		2.13

Total expense for the restricted stock awards was $824,000 and $1.6 million for the three and six months ended June 30, 2018, and the recognized tax benefits related to this expense was $173,000 and $344,000, respectively.  There was no expense related to restricted stock awards in the three and six months ended June 30, 2017.

27

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

13.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, common equity Tier 1, and total risk-based capital, respectively, by risk-weighted assets.  Assets and off-balance sheet credit equivalents are assigned to one of several risk-weight categories, based primarily on relative risk.  The rules require banks and bank holding companies to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%.  In addition, a Tier 1 leverage ratio of 4.0% is required.  Additionally, 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, an insured state nonmember bank is considered “well capitalized” if its capital ratios meet or exceed the ratios as set forth in the following table and is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.  The Bank must meet well capitalized requirements under prompt corrective action provisions.  Prompt corrective action provisions are not applicable to bank holding companies.

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

At June  30, 2018, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes.  The capital levels of both the Company and the Bank at June  30, 2018 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 1.875%.

28

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The Company’s and the Bank’s actual regulatory capital ratios as of June  30, 2018 and December 31, 2017 are presented in the table below. 

									Minimum Required to be
									Considered "Well Capitalized"
					Minimum Required for				Under Prompt Corrective
	Actual				Capital Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
HarborOne Bancorp, Inc.
June 30, 2018
Common equity Tier 1 capital to risk-weighted assets	$	338,563	14.5	%	$	105,326	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		338,563	14.5			140,434	6.0			N/A	N/A
Total capital to risk-weighted assets		357,807	15.3			187,245	8.0			N/A	N/A
Tier 1 capital to average assets		338,563	12.5			108,598	4.0			N/A	N/A
December 31, 2017
Common equity Tier 1 capital to risk-weighted assets	$	330,514	15.1	%	$	98,292	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		330,514	15.1			131,056	6.0			N/A	N/A
Total capital to risk-weighted assets		349,002	16.0			174,741	8.0			N/A	N/A
Tier 1 capital to average assets		330,514	12.5			105,423	4.0			N/A	N/A
HarborOne Bank
June 30, 2018
Common equity Tier 1 capital to risk-weighted assets	$	257,779	11.0	%	$	105,273	4.5	%	$	152,062	6.5	%
Tier 1 capital to risk-weighted assets		257,779	11.0			140,365	6.0			187,153	8.0
Total capital to risk-weighted assets		277,023	11.8			187,153	8.0			233,941	10.0
Tier 1 capital to average assets		257,779	9.6			107,700	4.0			134,625	5.0
December 31, 2017
Common equity Tier 1 capital to risk-weighted assets	$	249,532	11.4	%	$	98,266	4.5	%	$	141,939	6.5	%
Tier 1 capital to risk-weighted assets		249,532	11.4			131,021	6.0			174,695	8.0
Total capital to risk-weighted assets		268,021	12.3			174,695	8.0			218,368	10.0
Tier 1 capital to average assets		249,532	9.6			104,264	4.0			130,329	5.0

14.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:

	June 30,		December 31,
	2018		2017
	(in thousands)
Securities available for sale:
Net unrealized loss	$	(4,786)	$	(811)
Related tax effect		1,053		283
Total accumulated other comprehensive loss	$	(3,733)	$	(528)

29

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 six months ended June 30, 2018 and 2017:

	Three Months Ended June 30,
	2018		2017
	Unrealized Gains		Unrealized Gains
	and Losses on		and Losses on		Director's
	Available-for-Sale		Available-for-Sale		Retirement
	Securities		Securities		Plan		Total
	(in thousands)
Balance at beginning of period	$	(2,697)	$	(383)	$	(574)	$	(957)
Other comprehensive income (loss) before reclassifications		(1,328)		541		—		541
Reclassification adjustment for amortization of prior service cost		—		—		61		61
Net current period other comprehensive income (loss)		(1,328)		541		61		602
Related tax effect		292		(188)		(25)		(213)
Balance at end of period	$	(3,733)	$	(30)	$	(538)	$	(568)
	Six Months Ended June 30,
	2018		2017
	Unrealized Gains		Unrealized Gains
	and Losses on		and Losses on		Directors'
	Available-for-Sale		Available-for-Sale		Retirement
	Securities		Securities		Plan		Total
	(in thousands)
Balance at beginning of period	$	(528)	$	(665)	$	(625)	$	(1,290)
Other comprehensive income (loss) before reclassifications		(3,975)		975		—		975
Stranded effect of tax rate change		(104)		—		—		—
Reclassification adjustment for amortization of prior service cost		—		—		121		121
Net current period other comprehensive income (loss)		(4,079)		975		121		1,096
Related tax effect		874		(340)		(34)		(374)
Balance at end of period	$	(3,733)	$	(30)	$	(538)	$	(568)

The directors’ retirement plan was frozen effective December 31, 2017.

15.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. 

30

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 June 30, 2018 and December 31, 2017, 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:

	June 30,		December 31,
	2018		2017
	(in thousands)
Loans held for sale, fair value	$	71,017	$	59,460
Loans held for sale, contractual principal outstanding		69,067		57,575
Fair value less unpaid principal balance	$	1,950	$	1,885

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.

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

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

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

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

Forward loan sale commitments and derivative loan commitments - Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised.  The assumptions for pull-through rates are derived from internal data and adjusted using management judgment. Derivative loan commitments include the value of servicing rights and non-refundable costs of originating the loan based on the Company’s internal cost analysis that is not observable.   At both June 30, 2018 and December 31, 2017, the weighted average pull-through rate for derivative loan commitments was 86%.  

31

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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.

32

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

							Total
	Level 1		Level 2		Level 3		Fair Value
	(in thousands)
June 30, 2018
Assets
Securities available for sale	$	—	$	185,702	$	—	$	185,702
Loans held for sale		—		71,017		—		71,017
Mortgage servicing rights		—		22,832		—		22,832
Derivative loan commitments		—		—		1,747		1,747
Forward loan sale commitments		—		—		8		8
Interest rate swaps		—		4,409		—		4,409
	$	—	$	283,960	$	1,755	$	285,715
Liabilities
Derivative loan commitments	$	—	$	—	$	122	$	122
Forward loan sale commitments		—		—		378		378
Interest rate swaps		—		4,409		—		4,409
	$	—	$	4,409	$	500	$	4,909
December 31, 2017
Assets
Securities available for sale	$	—	$	170,853	$	—	$	170,853
Loans held for sale		—		59,460		—		59,460
Mortgage servicing rights		—		21,092		—		21,092
Derivative loan commitments		—		—		1,047		1,047
Forward loan sale commitments		—		—		46		46
Interest rate swaps		—		2,153		—		2,153
	$	—	$	253,558	$	1,093	$	254,651
Liabilities
Derivative loan commitments	$	—	$	—	$	27	$	27
Forward loan sale commitments		—		—		92		92
Interest rate swaps		—		2,153		—		2,153
	$	—	$	2,153	$	119	$	2,272

33

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The table below presents, for the three and six months ended June 30, 2018 and 2017, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis.

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)
Assets:  Derivative and Forward Loan Sale Commitments:
Balance at beginning of period	$	1,277	$	2,113	$	1,093	$	2,722
Total gains (losses) included in net income (1)		478		(119)		662		(728)
Balance at end of period	$	1,755	$	1,994	$	1,755	$	1,994
Changes in unrealized gains relating to instruments at period end	$	1,755	$	1,994	$	1,755	$	1,994

Liabilities:  Derivative and Forward Loan Sale Commitments:
Balance at beginning of period	$	(226)	$	(836)	$	(119)	$	(576)
Total gains (losses) included in net income (1)		(274)		598		(381)		338
Balance at end of period	$	(500)	$	(238)	$	(500)	$	(238)
Changes in unrealized losses relating to instruments at period end	$	(500)	$	(238)	$	(500)	$	(238)
(1)  Included in mortgage banking income on the Consolidated Statements of Net Income.

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with generally accepted accounting principles.  These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.  There were no liabilities measured at fair value on a non-recurring basis at June 30, 2018 and December 31, 2017.  The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets.

	June 30, 2018						December 31, 2017
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(in thousands)
Impaired loans	$	—	$	—	$	2,486	$	—	$	—	$	3,277
Other real estate owned and repossessed assets		—		—		1,029		—		—		762
	$	—	$	—	$	3,515	$	—	$	—	$	4,039

Losses in the following table represent the amount of the fair value adjustments recorded during the period on the carrying value of the assets held at June 30, 2018 and December 31, 2017, respectively.

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)
Impaired loans	$	50	$	7	$	101	$	65
Other real estate owned and repossessed assets		5		47		5		47
	$	55	$	54	$	106	$	112

34

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.

	June 30, 2018
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash and cash equivalents	$	132,496	$	132,496	$	—	$	—	$	132,496
Securities available for sale		185,702		—		185,702		—		185,702
Securities held to maturity		48,251		—		48,337		—		48,337
Federal Home Loan Bank stock		15,310		—		—		15,310		15,310
Loans held for sale		71,017		—		71,017		—		71,017
Loans, net		2,281,451		—		—		2,263,187		2,263,187
Retirement plan annuities		12,730		—		—		12,730		12,730
Mortgage servicing rights		22,832		—		22,832		—		22,832
Accrued interest receivable		7,284		—		7,284		—		7,284
Financial liabilities:
Deposits		2,202,502		—		—		2,197,562		2,197,562
Borrowed funds		287,438		—		284,819		—		284,819
Mortgagors' escrow accounts		5,299		—		—		5,299		5,299
Accrued interest payable		417		—		417		—		417
Derivative loan commitments:
Assets		1,747		—		—		1,747		1,747
Liabilities		122		—		—		122		122
Interest rate swap agreements:
Assets		4,409		—		4,409		—		4,409
Liabilities		4,409		—		4,409		—		4,409
Forward loan sale commitments:
Assets		8		—		—		8		8
Liabilities		378		—		—		378		378

35

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

	December 31, 2017
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash and cash equivalents	$	80,791	$	80,791	$	—	$	—	$	80,791
Securities available for sale		170,583		—		170,853		—		170,853
Securities held to maturity		46,869		—		47,674		—		47,674
Federal Home Loan Bank stock		15,532		—		—		15,532		15,532
Mortgage loans held for sale		59,460		—		59,460		—		59,460
Loans, net		2,176,478		—		—		2,175,423		2,175,423
Retirement plan annuities		12,498		—		—		12,498		12,498
Mortgage servicing rights		21,092		—		21,092		—		21,092
Accrued interest receivable		6,545		—		6,545		—		6,545
Financial liabilities:
Deposits		2,013,738		—		—		2,010,052		2,010,052
Borrowed funds		290,365		—		288,939		—		288,939
Mortgagors' escrow accounts		5,221		—		—		5,221		5,221
Accrued interest payable		518		—		518		—		518
Derivative loan commitments:
Assets		1,047		—		—		1,047		1,047
Liabilities		27		—		—		27		27
Interest rate swap agreements:
Assets		2,153		—		2,153		—		2,153
Liabilities		2,153		—		2,153		—		2,153
Forward loan sale commitments:
Assets		64		—		—		46		46
Liabilities		92		—		—		92		92

16.EARNINGS PER SHARE (“EPS”)

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

	Three Months Ended June 30,
	2018		2017
Net income applicable to common stock (in thousands)	$	3,103	$	3,213
Average number of common shares outstanding		32,622,695		32,120,880
Less: Average unallocated ESOP shares		(1,043,734)		(1,107,878)
Average number of common shares outstanding used to calculate basic earnings per common share		31,578,961		31,013,002
Common stock equivalents		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		31,578,961		31,013,002
Earnings per common share:
Basic	$	0.10	$	0.10
Diluted	$	0.10	$	0.10

36

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

	Six Months Ended June 30,
	2018		2017
Net income applicable to common stock (in thousands)	$	5,355	$	5,948
Average number of common shares outstanding		32,626,503		32,120,880
Less: Average unallocated ESOP shares		(1,052,092)		(1,115,257)
Average number of common shares outstanding used to calculate basic earnings per common share		31,574,411		31,005,623
Common stock equivalents		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		31,574,411		31,005,623
Earnings per common share:
Basic	$	0.17	$	0.19
Diluted	$	0.17	$	0.19

Stock options for 1,326,063 shares of common stock for the three and six months  ended June 30, 2018 were not considered in computing diluted earnings per share because they were antidilutive.  There were no potentially dilutive common stock equivalents for the 2017 periods.

37

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

17.SEGMENT REPORTING

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

Effective April 3, 2018, the Bank’s residential mortgage lending division was consolidated with HarborOne Mortgage.  Mortgage banking income at the Bank will primarily consist of servicing fee income and changes related to previously originated mortgage servicing rights.  Residential real estate portfolio loans will be originated by HarborOne Mortgage and purchased by the Bank.

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.

38

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Information about the reportable segments and reconciliation to the unaudited interim Consolidated Financial Statements at June 30, 2018 and 2017 and for the three months then ended is presented in the tables below. 

	Three Months Ended June 30, 2018
	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated
	(In thousands)
Net interest and dividend income	$	20,619	$	225	$	51	$	—	$	20,895
Provision for loan losses		886		—		—		—		886
Net interest income, after provision for loan losses		19,733		225		51		—		20,009
Mortgage banking income:
Changes in mortgage servicing rights fair value		(80)		(226)		—		—		(306)
Other		357		8,408		—		—		8,765
Total mortgage banking income		277		8,182		—		—		8,459
Other noninterest income		4,086		12		—		—		4,098
Total noninterest income		4,363		8,194		—		—		12,557
Noninterest expense		19,728		8,365		425		—		28,518
Income (loss) before income taxes		4,368		54		(374)		—		4,048
Provision (benefit) for income taxes		1,027		23		(105)		—		945
Net income (loss)	$	3,341	$	31	$	(269)	$	—	$	3,103
	Six Months Ended June 30, 2018
	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated
	(in thousands)
Net interest and dividend income	$	40,486	$	431	$	102	$	—	$	41,019
Provision for loan losses		1,694		—		—		—		1,694
Net interest income, after provision for loan losses		38,792		431		102		—		39,325
Mortgage banking income:
Changes in mortgage servicing rights fair value		119		597		—		—		716
Other		879		14,147		—		—		15,026
Total mortgage banking income		998		14,744		—		—		15,742
Other noninterest income		8,137		27		—		—		8,164
Total noninterest income		9,135		14,771		—		—		23,906
Noninterest expense		40,151		15,136		830		—		56,117
Income (loss) before income taxes		7,776		66		(728)		—		7,114
Provision (benefit) for income taxes		1,937		27		(205)		—		1,759
Net income (loss)	$	5,839	$	39	$	(523)	$	—	$	5,355
Total assets at period end	$	2,812,983	$	115,444	$	348,695	$	(397,408)	$	2,879,714
Goodwill at period end	$	3,186	$	10,442	$	—	$	—	$	13,628

39

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

	Three Months Ended June 30, 2017
	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated
	(In thousands)
Net interest and dividend income	$	17,772	$	402	$	41	$	—	$	18,215
Provision for loan losses		470		—		—		—		470
Net interest income, after provision for loan losses		17,302		402		41		—		17,745
Mortgage banking income:
Changes in mortgage servicing rights fair value		(301)		(751)		—		—		(1,052)
Other		812		10,388		—		—		11,200
Total mortgage banking income		511		9,637		—		—		10,148
Other noninterest income		4,137		14		—		—		4,151
Total noninterest income		4,648		9,651		—		—		14,299
Noninterest expense		17,893		8,929		56		—		26,878
Income (loss) before income taxes		4,057		1,124		(15)		—		5,166
Provision (benefit) for income taxes		1,508		450		(5)		—		1,953
Net income (loss)	$	2,549	$	674	$	(10)	$	—	$	3,213
	Six Months Ended June 30, 2017
	HarborOne		HarborOne		HarborOne
	Bank		Mortgage		Bancorp, Inc.		Eliminations		Consolidated
	(in thousands)
Net interest and dividend income	$	34,842	$	764	$	41	$	—	$	35,647
Provision for loan losses		735		—		—		—		735
Net interest income, after provision for loan losses		34,107		764		41		—		34,912
Mortgage banking income:
Changes in mortgage servicing rights fair value		(553)		(941)		—		—		(1,494)
Other		1,642		17,404		—		—		19,046
Total mortgage banking income		1,089		16,463		—		—		17,552
Other noninterest income		8,192		9		—		—		8,201
Total noninterest income		9,281		16,472		—		—		25,753
Noninterest expense		35,215		15,963		105		—		51,283
Income (loss) before income taxes		8,173		1,273		(64)		—		9,382
Provision (benefit) for income taxes		2,949		510		(25)		—		3,434
Net income (loss)	$	5,224	$	763	$	(39)	$	—	$	5,948
Total assets at period end	$	2,567,750	$	127,909	$	333,141	$	(396,730)	$	2,632,070
Goodwill at period end	$	3,186	$	10,179	$	—	$	—	$	13,365

40

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at June 30, 2018, and our results of operations for the three and six months ended June 30, 2018 and 2017. 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, 2017, as updated by the Company’s quarterly reports on Form 10-Q, including this report, and other filings with the Securities and Exchange Commission; the Company and Coastway’s ability to achieve the synergies and value creation contemplated by the proposed acquisition; the Company and Coastway’s ability to successfully integrate operations in the proposed acquisition; the effect of the announcement of the proposed acquisition on the ability of Coastway to maintain relationships with its key partners, customers and employees, and on its operating business generally; 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

41

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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. 

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.

Business Combination

On March 14, 2018, the Company entered into an agreement to acquire Coastway Bancorp, Inc. (“Coastway”) in an all cash transaction valued at approximately $125.6 million. Coastway, the holding company of Coastway Community Bank, is headquartered in Warwick, Rhode Island. With nine branches in the greater Providence area, as well as three mortgage lending offices, Coastway had assets of $835 million and deposits of $502 million as of June 30, 2018.  The stockholders of Coastway approved the merger on June 21, 2018.  The transaction is expected to close in the second half of 2018 and is subject to customary closing conditions, including the required regulatory approvals.

Comparison of Financial Condition at June 30, 2018 and December 31, 2017

Total Assets.    Total assets increased $194.8 million, or 7.3%, to $2.88 billion at June 30, 2018 from $2.68 billion at December 31, 2017 primarily due to the continued execution of our commercial loan growth strategy. 

Cash and Cash Equivalents.    Cash and cash equivalents increased $51.7 million to $132.5 million at June 30, 2018 from $80.8 million at December 31, 2017 as excess funding was invested in Federal funds in the short term.

Loans Held for Sale.    Loans held for sale at June 30, 2018 were $71.0 million, an increase of $11.6 million from $59.5 million at December 31, 2017, primarily reflecting seasonal mortgage demand.

Loans, net.    At June 30, 2018, net loans were $2.28 billion, an increase of $105.0 million, or 4.8%, from $2.18 billion at December 31, 2017, primarily due to an increase in the Bank’s commercial real estate, construction and commercial loan originations, partially offset by decreases in residential mortgage loans and consumer loans. Total commercial real estate and commercial loans at June 30, 2018 were $858.6 million, an increase of $93.6 million, or 12.2%, from $764.9 million at December 31, 2017, reflecting our business strategy to increase commercial lending. Construction loans increased $34.6 million, or 26.9%, in the same period, primarily due to commercial construction loan advances and originations. Consumer loans decreased $10.9 million, or 2.1% and our residential portfolio decreased by $10.9 million, or 1.4%. The allowance for loan losses was $19.2 million at June 30, 2018 and $18.5 million at December 31, 2017.

42

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

	June 30, 2018				December 31, 2017
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Residential real estate:
One- to four-family	$	668,397	29.1	%	$	677,837	31.0	%
Second mortgages and equity lines of credit		87,610	3.8			89,080	4.1
Commercial real estate		726,276	31.6			655,419	30.0
Construction		163,240	7.1			128,643	5.9
Total real estate		1,645,523	71.7			1,550,979	70.9
Commercial		132,293	5.8			109,523	5.0
Consumer:
Auto		504,396	22.0			513,728	23.5
Personal		12,501	0.5			14,092	0.6
Total consumer		516,897	22.5			527,820	24.1
Total loans		2,294,713	100.0	%		2,188,322	100.0	%
Allowance for loan losses		(19,244)				(18,489)
Net deferred loan origination costs		5,982				6,645
Loans, net	$	2,281,451			$	2,176,478

Securities.    Total investment securities at June 30, 2018 were $233.9 million, an increase of $16.2 million, or 7.5%, from December 31, 2017. There were no sales or calls of securities in the six months ended June 30, 2018.  The following table provides the composition of our securities available for sale and held to maturity at the dates indicated:

	June 30, 2018				December 31, 2017
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(in thousands)
Securities available for sale:
Debt securities:
U.S. government and government-sponsored enterprise obligations	$	17,986	$	17,295	$	17,985	$	17,807
U.S. government-sponsored mortgage-backed and collateralized mortgage obligations		127,187		124,151		111,121		110,552
SBA asset-backed securities		45,315		44,256		42,558		42,494
Total securities available for sale	$	190,488	$	185,702	$	171,664	$	170,853
Securities held to maturity:
Debt securities:
U.S. government-sponsored mortgage-backed and collateralized mortgage obligations	$	18,076	$	17,640	$	19,494	$	19,431
SBA asset-backed securities		5,920		5,818		2,991		2,977
Other bonds and obligations:
State and political subdivisions		24,255		24,879		24,384		25,266
Total securities held to maturity	$	48,251	$	48,337	$	46,869	$	47,674

Mortgage servicing rights.    Mortgage servicing rights (“MSRs”) are created as a result of our mortgage banking origination activities and accounted for at fair value. At June 30, 2018, we serviced mortgage loans for others with an aggregate outstanding principal balance of $1.93 billion. Total MSRs were $22.8 million at June 30, 2018 and $21.1 million at December 31, 2017.

43

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

	Three Months Ended  June 30,				Six Months Ended  June 30,
	2018		2017		2018		2017
	(in thousands)
Balance, beginning of period	$	22,696	$	20,839	$	21,092	$	20,333
Additions from loans sold with servicing retained		442		526		1,024		1,474
Changes in fair value due to :
Reductions from loans paid off during the period		(517)		(409)		(841)		(723)
Changes in valuation inputs or assumptions		211		(643)		1,557		(771)
Balance, end of period	$	22,832	$	20,313	$	22,832	$	20,313

The fair value of our MSRs is provided by a third party 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 MSRs at June 30, 2018 and December 31, 2017:

	June 30,		December 31,
	2018		2017
Prepayment speed	8.76	%	9.79	%
Discount rate	9.28		9.26
Default rate	1.77		2.23

Prepayment speeds are significantly impacted by mortgage rates. Generally, decreasing mortgage rates encourage increased mortgage refinancing activity, which reduces the life of the loans underlying the MSRs, thereby reducing the value of MSRs. Conversely, increasing mortgage rates inhibit mortgage refinancing activity, which extends the life of the underlying MSRs and increases the value.

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

44

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Deposits.    Deposits increased $188.8 million, or 9.4%, to $2.20 billion at June 30, 2018 from $2.01 billion at December 31, 2017.  The following table sets forth information concerning the composition of deposits:

	June 30,		December 31,		Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Non-interest bearing deposits	$	294,944	$	264,453	$	30,491		11.5	%
NOW accounts		134,392		130,543		3,849		2.9
Regular savings		335,311		318,294		17,017		5.3
Money market accounts		487,730		511,883		(24,153)		(4.7)
Term certificate accounts		558,916		405,110		153,806		38.0
Retail deposits		1,811,293		1,630,283		181,010		11.1
Municipal deposits		219,671		231,602		(11,931)		(5.2)
Wholesale deposits		171,538		151,853		19,685		13.0
	$	2,202,502	$	2,013,738	$	188,764		9.4	%
Reciprocal deposits	$	189,814	$	174,244	$	15,570		8.9	%

The growth in deposits was driven by an increase of $181.1 million in retail deposits and $19.7 million in wholesale deposits, partially offset by a decrease of $11.9 million in municipal deposits. The decrease in municipal balances primarily reflects municipalities’ fiscal year end occurring at June 30. The increase in retail deposits was largely driven by 7 and 13 month term deposit specials offered during the first half of the year. Wholesale deposits include brokered deposits of $79.4 million, $23.7 million in certificates of deposits from institutional investors and $68.4 million in deposits from the Company. The Bank participates in a reciprocal deposit program that converts the Company’s deposit at the Bank into multiple deposits at other financial institutions which are not eliminated in consolidation. The reciprocal deposit program provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. Total deposits includes $189.8 million in reciprocal deposits, including the Company’s $68.4 million deposit and $117.5 million in municipal deposits. The wholesale deposits provide a channel for the Company to seek additional funding outside the Bank’s core market.

Borrowings.   Total borrowings from the FHLB decreased $3.0 million, or 1.0%, to $287.4 million at June 30, 2018 from $290.4 million at December 31, 2017.

Stockholders’ equity.Total stockholders’ equity was $348.6 million at June 30, 2018 compared to $343.5 million at December 31, 2017, an increase of 1.5%.

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017

Overview.   Consolidated net income for the three and six months ended June 30, 2018 was $3.1 million and $5.4 million, respectively, compared to net income of $3.2 million and $5.9 million, respectively, for the three and six months ended June 30, 2017.

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 has been adjusted to a fully taxable-equivalent basis using a federal tax rate of 21% for the periods ended June 30, 2018 and 35% for the periods ended June 30, 2017.  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.

46

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

	Three Months Ended June 30,
	2018							2017
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost (6)		Balance			Interest		Cost (6)
		(dollars in thousands)
Interest-earning assets:
Loans (1)	$	2,303,245		$	24,387	4.25	%	$	2,129,280		$	20,260	3.82	%
Investment securities (2)		233,587			1,613	2.77			209,691			1,408	2.69
Other interest-earning assets		41,584			297	2.87			81,370			320	1.58
Total interest-earning assets		2,578,416			26,297	4.09			2,420,341			21,988	3.64
Noninterest-earning assets		130,551							129,281
Total assets	$	2,708,967						$	2,549,622
Interest-bearing liabilities:
Savings accounts	$	346,201			150	0.17		$	351,948			151	0.17
NOW accounts		128,360			21	0.06			128,794			20	0.06
Money market accounts		698,591			1,496	0.86			654,127			821	0.50
Certificates of deposit		592,811			2,534	1.71			469,249			1,369	1.17
Brokered deposits		66,892			249	1.50			76,555			206	1.08
Total interest-bearing deposits		1,832,855			4,450	0.97			1,680,673			2,567	0.61
FHLB advances		217,712			906	1.67			254,832			1,130	1.78
Total interest-bearing liabilities		2,050,567			5,356	1.05			1,935,505			3,697	0.77
Noninterest-bearing liabilities:
Noninterest-bearing deposits		278,846							250,654
Other noninterest-bearing liabilities		33,561							29,432
Total liabilities		2,362,974							2,215,591
Total equity		345,993							334,031
Total liabilities and equity	$	2,708,967						$	2,549,622
Tax equivalent net interest income					20,941							18,291
Tax equivalent interest rate spread (3)						3.04	%						2.87	%
Less: tax equivalent adjustment					46							76
Net interest income as reported				$	20,895						$	18,215
Net interest-earning assets (4)	$	527,849						$	484,836
Net interest margin (5)						3.25	%						3.02	%
Tax equivalent effect						0.01							0.01
Net interest margin on a fully tax equivalent basis						3.26	%						3.03	%
Ratio of interest-earning assets to interest-bearing liabilities		125.74	%						125.05	%
Supplemental information:
Total deposits, including demand deposits	$	2,111,701		$	4,450			$	1,931,327		$	2,567
Cost of total deposits						0.85	%						0.53	%
Total funding liabilities, including demand deposits	$	2,329,413		$	5,356			$	2,186,159		$	3,697
Cost of total funding liabilities						0.92	%						0.68	%
(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 21% for 2018 and 35% for the period ended June 30, 2017.  The yield on investments before tax equivalent adjustments for the quarters presented were 2.69% and 2.55%, 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.

47

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

	Six Months Ended June 30,
	2018							2017
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost (6)		Balance			Interest		Cost
	(dollars in thousands)
Interest-earning assets:
Loans (1)	$	2,275,834		$	47,302	4.19	%	$	2,120,573		$	39,941	3.80	%
Investment securities (2)		230,492			3,154	2.76			203,642			2,700	2.67
Other interest-earning assets		39,477			571	2.92			74,437			572	1.55
Total interest-earning assets		2,545,803			51,027	4.04			2,398,652			43,213	3.63
Noninterest-earning assets		128,109							126,729
Total assets	$	2,673,912						$	2,525,381
Interest-bearing liabilities:
Savings accounts	$	339,149			285	0.17		$	339,409			302	0.18
NOW accounts		126,988			41	0.06			126,037			39	0.06
Money market accounts		707,633			2,881	0.82			640,676			1,574	0.50
Certificates of deposit		545,090			4,252	1.57			469,510			2,719	1.17
Brokered deposits		72,878			514	1.42			71,156			365	1.03
Total interest-bearing deposits		1,791,738			7,973	0.90			1,646,788			4,999	0.61
FHLB advances		235,437			1,944	1.66			273,262			2,415	1.78
Total interest-bearing liabilities		2,027,175			9,917	0.99			1,920,050			7,414	0.78
Noninterest-bearing liabilities:
Noninterest-bearing deposits		269,701							243,937
Other noninterest-bearing liabilities		32,516							29,207
Total liabilities		2,329,392							2,193,194
Total equity		344,520							332,187
Total liabilities and equity	$	2,673,912						$	2,525,381
Tax equivalent net interest income					41,110							35,799
Tax equivalent interest rate spread (3)						3.05	%						2.85	%
Less: tax equivalent adjustment					91							152
Net interest income as reported				$	41,019						$	35,647
Net interest-earning assets (4)	$	518,628						$	478,602
Net interest margin (5)						3.25	%						3.00	%
Tax equivalent effect						0.01							0.01
Net interest margin on a fully tax equivalent basis						3.26	%						3.01	%
Ratio of interest-earning assets to  interest-bearing liabilities		125.58	%						124.93	%
Supplemental information:
Total deposits, including demand deposits	$	2,061,439		$	7,973			$	1,890,725		$	4,999
Cost of total deposits						0.78	%						0.53	%
Total funding liabilities, including demand deposits	$	2,296,876		$	9,917			$	2,163,987		$	7,414
Cost of total funding liabilities						0.87	%						0.69	%
(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 21% for 2018 and 35% for 2017.  The yield on investments before tax equivalent adjustments was 2.68% and 2.52% for the years ended June 30, 2018 and 2017, 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.

48

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2018 v. 2017						2018 v. 2017
	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	$	1,586	$	2,541	$	4,127	$	2,848	$	4,513	$	7,361
Investment securities		158		47		205		353		101		454
Other interest-earning assets		(109)		86		(23)		(188)		187		(1)
Total interest-earning assets		1,635		2,674		4,309		3,013		4,801		7,814
Interest-bearing liabilities:
Savings accounts		(2)		1		(1)		—		(17)		(17)
NOW accounts		—		1		1		2		—		2
Money market accounts		53		622		675		153		1,154		1,307
Certificates of deposit		301		864		1,165		396		1,137		1,533
Brokered deposit		(23)		66		43		9		140		149
Total interest-bearing deposits		329		1,554		1,883		560		2,414		2,974
FHLB advances		(157)		(67)		(224)		(311)		(160)		(471)
Total interest-bearing liabilities		172		1,487		1,659		249		2,254		2,503
Change in net interest income	$	1,463	$	1,187	$	2,650	$	2,764	$	2,547	$	5,311

Interest and Dividend Income.    Interest and dividend income increased $4.3 million, or 19.8%, to $26.3 million for the three months ended June 30, 2018, compared to $21.9 million for the three months ended June 30, 2017. The increase was primarily due to a $4.1 million, or 20.3%, increase in interest on loans and loans held for sale to $24.4 million for the three months ended June 30, 2018 from $20.3 million for the three months ended June 30, 2017. Additionally, the increase in loan interest income was attributable to an 8.2% increase in average loans outstanding as well as the shift in mix to higher yielding commercial loans. The average yield on loans and loans held for sale increased 43 basis points.

49

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Interest and dividend income on securities increased by $205,000, or 14.6%, from $1.4 million for the three months ended June 30, 2017 to $1.6 million for the three months ended June 30, 2018.

Compared to the first six months of 2017, interest and dividend income increased $7.8 million, or 18.3%, reflecting similar trends in the quarter over quarter results.  Average loans and loans held for sale increased $155.3 million, or 7.3%, coupled with a 39 basis point increase in yield resulting in a $7.4 million increase in interest income on loans and loans held for sale.

Interest Expense.    Interest expense increased $1.7 million, or 44.9%, to $5.4 million for the three months ended June 30, 2018 from $3.7 million for the three months ended June 30, 2017. The increase resulted from a $1.9 million increase in interest expense on deposits partially offset by a $224,000 decrease in interest expense on borrowings. The increase in interest expense on deposits resulted from a 9.1% increase in average balances and a 36 basis point increase in the cost of deposits. Increases in the average balances and the rates on money market accounts and certificates of deposit were the significant components of the growth, driven by new products with higher rates. Average money market deposits increased by $44.5 million, or 6.8% and the cost of money market deposits was 0.86% for the second quarter of 2018 compared to 0.50% for the second quarter of 2017.  The cost of certificates of deposit increased 54 basis point to 1.71% for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and the average balance increased 26.3%.  The decrease in interest expense on borrowings reflects the 14.6% decrease in average balance and the 11 basis point decrease in rate when comparing the three months ended June 30, 2018 and 2017.

Compared to the first six months of 2017, interest expense increased $2.5 million, or 33.8% to $9.9 million from $7.4 million reflecting the quarter over quarter trend of increasing deposit average balances.  Average interest bearing deposits increased $145.0 million, or 8.8% and the cost of funds increased 29 basis points year over year.  The decrease in interest expense on borrowings is due to a 13 basis point decrease in the cost of borrowed funds and by the average balance decrease of $37.8 million, or 13.8%.

Net Interest and Dividend Income.    Net interest and dividend income on a tax equivalent basis increased $2.7 million, or 14.5%, to $20.9 million for the three months ended June 30, 2018 from $18.3 million for the three months ended June 30, 2017. Growth in higher yielding commercial loans was primarily funded with deposit growth. The tax equivalent net interest spread increased 17 basis points to 3.04% for the three months ended June 30, 2018 from 2.87% for the three months ended June 30, 2017, and net interest margin on a tax equivalent basis increased by 23 basis points to 3.26% for the three months ended June 30, 2018 from 3.03% for the three months ended June 30, 2017.

Compared to the first six months of 2017, net interest and dividend income increased $5.3 million, or 14.8%, to $41.1 million from $35.8 million.  The tax equivalent net interest spread increased 20 basis points to 3.05% for the six months ended June 30, 2018 from 2.85% for the six months ended June 30, 2017, and net interest margin on a tax equivalent basis also rose by 25 basis points to 3.26% for the six months ended June 30, 2018 from 3.01% for the six months ended June 30, 2017.

50

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The tables below show the results of operations for HarborOne Bank (excluding HarborOne Mortgage) for the three and six months ended June 30, 2018 and 2017, the increase or decrease in those results, the results of operations for HarborOne Mortgage for the three and six months ended June 30, 2018 and 2017, and the increase or decrease in those results. Revenue and expenses for the holding company are not material and not reflected in the below tables. 

Effective April 3, 2018, the Bank’s residential mortgage lending division was consolidated with HarborOne Mortgage.  Mortgage banking income at the Bank will primarily consist of servicing fee income and changes related to previously originated mortgage servicing rights.  Residential real estate portfolio loans will be originated by HarborOne Mortgage and purchased by the Bank.

	HarborOne Bank								HarborOne Mortgage
	Three Months Ended								Three Months Ended
	June 30,				Increase (Decrease)				June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent		2018		2017		Dollars		Percent
	(dollars in thousands)
Net interest and dividend income	$	20,619	$	17,772	$	2,847	16.0	%	$	225	$	402	$	(177)	(44.0)	%
Provision for loan losses		886		470		416	88.5			—		—		—	—
Net interest income, after provision for loan losses		19,733		17,302		2,431	14.1			225		402		(177)	(44.0)
Mortgage banking income:
Changes in mortgage servicing rights fair value		(80)		(301)		221	73.4			(226)		(751)		525	69.9
Other		357		812		(455)	(56.0)			8,408		10,388		(1,980)	(19.1)
Total mortgage banking income		277		511		(234)	(45.8)			8,182		9,637		(1,455)	(15.1)
Other noninterest income		4,086		4,137		(51)	(1.2)			12		14		(2)	(14.3)
Total noninterest income		4,363		4,648		(285)	(6.1)			8,194		9,651		(1,457)	(15.1)
Noninterest expense		19,728		17,893		1,835	10.3			8,365		8,929		(564)	(6.3)
Income before income taxes		4,368		4,057		311	7.7			54		1,124		(1,070)	(95.2)
Provision for income taxes		1,027		1,508		(481)	(31.9)			23		450		(427)	(94.9)
Net income	$	3,341	$	2,549	$	792	31.1	%	$	31	$	674	$	(643)	(95.4)	%
	HarborOne Bank								HarborOne Mortgage
	Six Months Ended								Six Months Ended
	June 30,				Increase (Decrease)				June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent		2018		2017		Dollars		Percent
	(dollars in thousands)
Net interest and dividend income	$	40,486	$	34,842	$	5,644	16.2	%	$	431	$	764	$	(333)	(43.6)	%
Provision for loan losses		1,694		735		959	130.5			—		—		—	—
Net interest income, after provision for loan losses		38,792		34,107		4,685	13.7			431		764		(333)	(43.6)
Mortgage banking income:
Changes in mortgage servicing rights fair value		119		(553)		672	121.5			597		(941)		1,538	163.4
Other		879		1,642		(763)	(46.5)			14,147		17,404		(3,257)	(18.7)
Total mortgage banking income		998		1,089		(91)	(8.4)			14,744		16,463		(1,719)	(10.4)
Other noninterest income		8,137		8,192		(55)	(0.7)			27		9		18	200.0
Total noninterest income		9,135		9,281		(146)	(1.6)			14,771		16,472		(1,701)	(10.3)
Noninterest expense		40,151		35,215		4,936	14.0			15,136		15,963		(827)	(5.2)
Income before income taxes		7,776		8,173		(397)	(4.9)			66		1,273		(1,207)	(94.8)
Provision for income taxes		1,937		2,949		(1,012)	(34.3)			27		510		(483)	(94.7)
Net income	$	5,839	$	5,224	$	615	11.8	%	$	39	$	763	$	(724)	(94.9)	%

51

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

HarborOne Bank Segment

Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017

Net Income.    The Bank’s net income increased by $792,000 to $3.3 million for the three months ended June 30, 2018 from $2.6 million for the three months ended June 30, 2017.  Pre-tax income was $4.4 million for the three months ended June 30, 2018, a $311,000 increase from the three months ended June 30, 2017. The increase in pre-tax income reflects a $2.4 million increase in net interest income partially offset by an increase in noninterest expense of $1.8 million, a $416,000 increase in the provision for loan losses and a $285,000 decrease in noninterest income.  The provision for income taxes decreased $481,000 primarily due to a lower federal tax rate, offset by the increase in pre-tax income.

Compared to the first six months of 2017, the Banks’s net income for the six months ended June 30, 2018 increased $615,000 to $5.8 million from $5.2 million. Pre-tax income decreased $397,000, or 4.9%, due to a $4.9 million increase in noninterest expenses and a $959,000 increase in provision for loan losses partially offset by a $5.6 million increase in net interest and dividend income. The provision for income taxes decreased $1.0 million offsetting the pre-tax income decrease for the six months ended June 30, 2018, due to the lower federal tax rate.

Provision for Loan Losses.    The Bank recorded a provision for loan losses of $886,000 for the three months ended June 30, 2018 and $470,000 for the three months ended June 30, 2017.  The provisions primarily reflect the continued growth in commercial loans and the need for replenishment driven by charge-off activity.  Net charge-offs were $505,000 for the three months ended June 30, 2018 compared to $173,000 for the same period in 2017. Credit quality improved as nonaccrual loans declined to $16.4 million at June 30, 2018 from $21.5 million at June 30, 2017.

Noninterest Income.    Total noninterest income decreased to $4.4 million and $9.1 million for the three and six months ended June 30, 2018 compared to $4.6 million and $9.3 million for the prior year period. The following tables set forth the components of noninterest income:

	Three Months Ended June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Gain on sale of mortgage loans	$	65	$	400	$	(335)		(83.8)
Intersegment loss		(58)		—		(58)		(100.0)
Processing, underwriting and closing fees		11		41		(30)		(73.2)
Secondary market loan servicing fees, net of guarantee fees		339		371		(32)		(8.6)
Changes in mortgage servicing rights fair value		(80)		(301)		221		(73.4)
Total mortgage banking income		277		511		(234)		(45.8)	%
Deposit account fees		3,224		3,071		153		5.0
Income on retirement plan annuities		120		113		7		6.2
Gain on sale of consumer loans		—		(12)		12		100.0
Bank-owned life insurance income		243		261		(18)		(6.9)
Other		499		704		(205)		(29.1)
Total noninterest income	$	4,363	$	4,648	$	(285)		(6.1)	%
Originated mortgage servicing rights included in gain on sale of mortgage loans	$	92	$	128	$	(36)		(28.1)	%

.

52

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

	Six Months Ended June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Gain on sale of mortgage loans	$	207	$	814	$	(607)		(74.6)
Intersegment loss		(58)		—		(58)		(100.0)
Processing, underwriting and closing fees		42		80		(38)		(47.5)
Secondary market loan servicing fees, net of guarantee fees		688		748		(60)		(8.0)
Changes in mortgage servicing rights fair value		119		(553)		672		121.5
Total mortgage banking income		998		1,089		(91)		(8.4)	%
Deposit account fees		6,191		5,916		275		4.6
Income on retirement plan annuities		232		223		9		4.0
Gain on sale of consumer loans		—		66		(66)		(100.0)
Bank-owned life insurance income		482		518		(36)		(6.9)
Other		1,232		1,469		(237)		(16.1)
Total noninterest income	$	9,135	$	9,281	$	(146)		(1.6)	%
Originated mortgage servicing rights included in gain on sale of mortgage loans	$	190	$	290	$	(100)		(34.5)	%

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

The decrease in total mortgage banking income reflects the consolidation of the Banks’s residential mortgage lending division into HarborOne Mortgage at the start of the second quarter of 2018.

The change in the MSRs fair value is consistent with change in the 10-year Treasury Constant Maturity rate, as rising interest rates tend to slow prepayment speeds and increase MSR fair value. The decreases for the periods ended June 30, 2018 reflect reductions from loans paid off being greater than the positive fair value adjustment for the periods.

The increase in deposit account fees reflects increased debit card interchange income.

The decrease in other income is due to lower interest rate swap fee income on commercial loans during 2018 as result of the origination mix.

53

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Expense.    Total noninterest expense increased to $19.7 million and $40.2 million for the three and six months ended June 30, 2018 compared to $17.9 million and $35.2 million for the prior year periods. The following tables set forth the components of noninterest expense:

	Three Months Ended June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Compensation and benefits	$	11,081	$	9,922	$	1,159		11.7	%
Occupancy and equipment		2,347		2,224		123		5.5
Data processing expenses		1,555		1,499		56		3.7
Loan expenses		398		412		(14)		(3.4)
Marketing		1,027		978		49		5.0
Deposit expenses		327		367		(40)		(10.9)
Postage and printing		312		247		65		26.3
Professional fees		689		818		(129)		(15.8)
Foreclosed and repossessed assets		45		25		20		80.0
Deposit insurance		490		446		44		9.9
Other expenses		1,457		955		502		52.6
Total noninterest expense	$	19,728	$	17,893	$	1,835		10.3	%

	Six Months Ended June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Compensation and benefits	$	22,649	$	19,776	$	2,873		14.5	%
Occupancy and equipment		5,022		4,712		310		6.6
Data processing expenses		3,095		2,999		96		3.2
Loan expenses		759		768		(9)		(1.2)
Marketing		1,973		1,402		571		40.7
Deposit expenses		657		708		(51)		(7.2)
Postage and printing		623		537		86		16.0
Professional fees		1,448		1,550		(102)		(6.6)
Foreclosed and repossessed assets		108		52		56		107.7
Deposit insurance		984		908		76		8.4
Other expenses		2,833		1,803		1,030		57.1
Total noninterest expense	$	40,151	$	35,215	$	4,936		14.0	%

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

Compensation and benefits increased primarily due to equity plan expense of $985,000 and $2.0 million for the three and six months ended June 30, 2018 with no such expense in 2017 and an increase in salary expense reflecting annual increases and additional staffing. Additionally, the consolidation of the Bank’s residential real estate mortgage division into HarborOne Mortgage resulted in a decrease of approximately $393,000 in the three and six months ended June 30, 2018.

54

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

The increase in occupancy and equipment expense reflects an increase in software licensing expense as we invest in technologies to support the Bank’s growth.

Marketing expense increased due to increased marketing to broaden our market reach and brand name recognition as well as for specific marketing campaigns for the term certificate specials.

Other expenses increased primarily due to Coastway acquisition expense of $524,000 and $1.0 million for the three and six months ended June 30, 2018, respectively.

Income Tax Provision.    Provision for income taxes for the three and six months ended June 30, 2018 was $1.0 million and $1.9 million, respectively, compared to $1.5 million and $2.9 million, respectively, for the three and six months ended June 30, 2017. The decreased provision for income taxes was mainly due to the lower federal income tax rate established by the Tax Cuts and Jobs Act of 2017.

HarborOne Mortgage Segment

Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017

Net Income.   HarborOne Mortgage recorded net income of $31,000 and $39,000, respectively, for the three and six months ended June 30, 2018, as compared to $674,000 and $763,000, respectively, for the three and six months ended June 30, 2017. HarborOne Mortgage segment’s results are heavily impacted by prevailing rates, refinancing activity and home sales.

Noninterest Income.    Total noninterest income decreased to $8.2 million and $14.7 million, respectively, for the three and six months ended June 30, 2018 as compared to $9.6 million and $16.5 million for the prior year periods. Noninterest income is primarily from mortgage banking income for which the following tables provides further detail:

	Three Months Ended June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Gain on sale of mortgage loans	$	6,429	$	8,552	$	(2,123)		(24.8)	%
Intersegment gain		58		—		58		100.0
Processing, underwriting and closing fees		948		932		16		1.7
Secondary market loan servicing fees net of guarantee fees		973		904		69		7.6
Changes in mortgage servicing rights fair value		(226)		(751)		525		(69.9)
Total mortgage banking income	$	8,182	$	9,637	$	(1,455)		(15.1)	%
Originated mortgage servicing rights included in gain on sale of mortgage loans	$	350	$	396	$	(46)		(11.6)	%
Change in 10-year Treasury Constant Maturity rate in basis points		13		(9)

55

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

	Six Months Ended June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Gain on sale of mortgage loans	$	10,611	$	14,038	$	(3,427)		(24.4)	%
Intersegment gain		58		—		58		100.0
Processing, underwriting and closing fees		1,548		1,599		(51)		(3.2)
Secondary market loan servicing fees net of guarantee fees		1,930		1,767		163		9.2
Changes in mortgage servicing rights fair value		597		(941)		1,538		163.4
Total mortgage banking income	$	14,744	$	16,463	$	(1,719)		(10.4)	%
Originated mortgage servicing rights included in gain on sale of mortgage loans	$	834	$	1,183	$	(349)		(29.5)	%
Change in 10-year Treasury Constant Maturity rate in basis points		47		(17)

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

The change in the MSRs fair value is consistent with change in the 10-year Treasury Constant Maturity rate, as rising interest rates tend to slow prepayment speeds and increase MSR fair value. The negative change for the three months ended June 30, 2018 reflects reductions from loans paid off being greater than the positive fair value adjustment for the period.

The decrease on gain on sale of mortgages is due to decreased residential mortgage originations and a decrease in originated MSRs from a decrease in volume of servicing retained sales as compared to the prior year.

56

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

 The decrease in residential mortgage originations is primarily due to increased rates and the tight residential real estate market. The following tables provide additional loan production detail:

	Three Months Ended June 30,
	2018				2017
	Loan					Loan
	Amount		% of Total			Amount		% of Total
	(dollars in thousands)
Source
Retail Offices	$	215,994	87.9	%		$	221,972	78.2	%
Third Party		29,693	12.1				61,942	21.8
Total	$	245,687	100.0	%		$	283,914	100.0	%
Product Type
Conventional	$	155,964	63.5	%		$	160,781	56.6	%
Government		52,522	21.4				92,192	32.5
State Housing Agency		16,912	6.9				10,735	3.8
Jumbo		20,289	8.2				19,961	7.0
Seconds		—	—				245	0.1
Total	$	245,687	100.0	%		$	283,914	100.0	%
Purpose
Purchase	$	203,680	82.9	%		$	239,843	84.5	%
Refinance		39,292	16.0				44,071	15.5
Construction		2,715	1.1				—	—
Total	$	245,687	100.0	%		$	283,914	100.0	%
	Six Months Ended June 30,
	2018				2017
	Loan					Loan
	Amount		% of Total			Amount		% of Total
	(dollars in thousands)
Source
Retail Offices	$	355,719	88.1	%		$	369,830	79.1	%
Third Party		48,244	11.9				98,003	20.9
Total	$	403,963	100.0	%		$	467,833	100.0	%
Product Type
Conventional	$	256,875	63.6	%		$	270,227	57.8	%
Government		95,050	23.5				155,638	33.2
State Housing Agency		16,912	4.2				19,555	4.2
Jumbo		35,126	8.7				22,031	4.7
Seconds		—	—				382	0.1
Total	$	403,963	100.0	%		$	467,833	100.0	%
Purpose
Purchase	$	315,953	78.2	%		$	369,209	78.9	%
Refinance		84,024	20.8				98,624	21.1
Construction		3,986	1.0				—	—
Total	$	403,963	100.0	%		$	467,833	100.0	%

57

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Noninterest Expense.    Total noninterest expense decreased to $8.4 million and $15.1 million for the three and six months ended June 30, 2018 compared to $8.9 million and $16.0 million for the prior year periods. The following tables set forth the components of noninterest:

	Three Months Ended June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Compensation and benefits	$	6,315	$	6,497	$	(182)		(2.8)	%
Occupancy and equipment		607		503		104		20.7
Data processing expenses		14		28		(14)		(50.0)
Loan expenses		988		1,469		(481)		(32.7)
Marketing		58		63		(5)		(7.9)
Postage and printing		37		43		(6)		(14.0)
Professional fees		203		149		54		36.2
Other expenses		143		177		(34)		(19.2)
Total noninterest expense	$	8,365	$	8,929	$	(564)		(6.3)	%

	Six Months Ended June 30,				Increase (Decrease)
	2018		2017		Dollars		Percent
	(dollars in thousands)
Compensation and benefits	$	11,219	$	11,663	$	(444)		(3.8)	%
Occupancy and equipment		1,202		1,002		200		20.0
Data processing expenses		27		51		(24)		(47.1)
Loan expenses		1,889		2,477		(588)		(23.7)
Marketing		111		121		(10)		(8.3)
Postage and printing		80		88		(8)		(9.1)
Professional fees		331		253		78		30.8
Other expenses		277		308		(31)		(10.1)
Total noninterest expense	$	15,136	$	15,963	$	(827)		(5.2)	%

Generally, HarborOne Mortgage expenses decreased consistent with the decreased mortgage loan volume. Occupancy and equipment expense increased due to expenses related to the conversion to a new mortgage origination system as part of the residential mortgage group integration.  The integration also resulted in an increase in compensation and benefits of approximately $468,000 and an increase in professional fees of $75,000 for an intercompany management fee during the second quarter of 2018.

The three month period ended June 30, 2018 includes $80,000 in severance expense related to a workforce reduction, which is expected to result in annual cost reductions of approximately $1.0 million. The right-sizing was in response to efficiencies created by the consolidation of HarborOne Mortgage and the Bank’s residential mortgage group, as well as economic pressures within the mortgage industry.

58

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Asset Quality

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

	June 30,			December 31,
	2018			2017
	(dollars in thousands)
Nonaccrual loans:
Residential real estate:
One- to four-family	$	12,967		$	13,308
Second mortgages and equity lines of credit		704			876
Commercial real estate		391			312
Construction		—			130
Commercial		2,060			3,038
Consumer		246			191
Total nonaccrual loans (1)		16,368			17,855
Other real estate owned:
One- to four-family residential		832			665
Other repossessed assets		197			97
Total nonperforming assets		17,397			18,617
Performing troubled debt restructurings		18,079			20,377
Total nonperforming assets and performing troubled debt restructurings	$	35,476		$	38,994
Total nonperforming loans to total loans (2)		0.71	%		0.81	%
Total nonperforming assets and performing troubled debt restructurings to total assets		1.23	%		1.45	%
Total nonperforming assets to total assets		0.60	%		0.69	%
(1) $5.5 million and $6.9 million of troubled debt restructurings are included in total nonaccrual loans at  June 30, 2018 and December 31, 2017, 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 in June 30, 2018 and 2017, amounted to $409,000 and $558,000, respectively. Income related to impaired loans included in interest income for the six months ended June 30, 2018 and 2017, amounted to $993,000 and $1.4 million, respectively. 

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

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

	June 30,		December 31,
	2018		2017
	(in thousands)
Classified loans:
Substandard	$	—	$	1,990
Doubtful		2,060		827
Loss		—		—
Total classified loans		2,060		2,817
Special mention		3,165		818
Total criticized loans	$	5,225	$	3,635

None of the special mention assets at June 30, 2018 and December 31, 2017 were on nonaccrual.

59

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

At June 30, 2018, our allowance for loan losses was $19.2 million, or 0.84% of total loans and 117.57% of nonperforming loans. At December 31, 2017, our allowance for loan losses was $18.5 million, or 0.84% of total loans and 103.55% of nonperforming loans. Nonperforming loans at June 30, 2018 were $16.3 million, or 0.71% of total loans, compared to $17.9 million, or 0.81% of total loans, at December 31, 2017. The allowance for loan losses is maintained at a level that represents management’s best estimate of losses in the loan portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan losses will be adequate to cover losses which may be realized in the future or that additional provisions for loan losses will not be required.

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

	June 30, 2018						December 31, 2017
			% 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	$	2,986	15.52	%	29.13	%	$	3,375	18.25	%	30.98	%
Second mortgages and equity lines of credit		475	2.47		3.82			525	2.84		4.07
Commercial real estate		8,672	45.06		31.64			7,835	42.38		29.95
Construction		2,367	12.30		7.11			1,910	10.33		5.88
Commercial		1,969	10.23		5.77			2,254	12.19		5.00
Consumer		1,219	6.33		22.53			1,000	5.41		24.12
Total general and allocated allowance		17,688	91.91		100.00	%		16,899	91.40		100.00	%
Unallocated		1,556	8.09					1,590	8.60
Total	$	19,244	100.00	%			$	18,489	100.00	%

60

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(dollars in thousands)
Allowance at beginning of period	$	18,863		$	16,884		$	18,489		$	16,968
Provision for loan losses		886			470			1,694			735
Charge offs:
Residential real estate:
One- to four-family		—			(7)			—			(126)
Second mortgages and equity lines of credit		—			—			—			(18)
Commercial real estate		—			—			—			—
Construction		—			—			—			—
Commercial		(390)			(51)			(735)			(134)
Consumer		(202)			(300)			(342)			(560)
Total charge-offs		(592)			(358)			(1,077)			(838)
Recoveries:
Residential real estate:
One- to four-family		1			7			6			81
Second mortgages and equity lines of credit		19			62			21			66
Commercial real estate		—			—			—			—
Construction		—			—			—			—
Commercial		—			2			1			16
Consumer		67			114			110			153
Total recoveries		87			185			138			316
Net charge-offs		(505)			(173)			(939)			(522)
Allowance at end of period	$	19,244		$	17,181		$	19,244		$	17,181
Total loans outstanding (1)	$	2,294,713		$	2,087,982		$	2,294,713		$	2,087,982
Average loans outstanding	$	2,258,192		$	2,067,634		$	2,233,329		$	2,064,307
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		0.09	%		0.03	%		0.04	%		0.05	%
Allowance for loan losses to nonperforming loans		117.57	%		80.04	%		117.57	%		80.04	%
(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 $886,000 and $470,000 for the three months ended June 30, 2018 and 2017.  For the six months ended June 30, 2018 and 2017, we recorded a provision for loan losses of $1.7 million and $735,000, respectively. The provisions primarily reflect loan loss allocations commensurate with commercial loan growth and other changes in the loan portfolio. 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 $506,000 for the quarter ended June 30, 2018, or 0.09%, of average loans outstanding on an annualized basis, compared to $173,000 and 0.03% for the quarter ended June 30, 2017. Nonperforming assets were $17.4 million at June 30, 2018 compared to $18.6 million at December 31, 2017 and $22.5 million at June 30, 2017. Nonperforming assets as a percentage of total assets were 0.60% at June 30, 2018, 0.69% at December 31, 2017 and 0.86% at June 30, 2017. The continued improvement in asset quality reflects the Company’s continued efforts to minimize nonperforming assets through diligent collection efforts and prudent workout arrangements.

61

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Management of Market Risk

Net Interest Income Analysis.  The Bank 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 June 30, 2018, 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:

June 30, 2018
	Change in Net Interest Income
Changes in Interest Rates	Year One
(basis points) (1)	(% change from year one base)
+300	4.30	%
(100)	(4.20)	%
(1) The calculated change in net interest income assumes an instantaneous parallel shift of the yield curve.

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

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

The table below sets forth, as of June 30, 2018, the estimated changes in the EVE that would result from the designated changes in the Treasury yield curve under an instantaneous parallel shift for the Bank. Computations of

62

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

At June 30, 2018
							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	$	415,197	$	(1,372)	0.3	%	16.1	%	1.13
0		416,569		—	—		14.9
- 100		380,177		(36,392)	8.7		13.4		(1.58)
(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 used by operating activities was $3.7 million and $4.1 million for the six months ended June 30, 2018 and 2017, respectively. 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 $130.1 million and $123.6 million for the six months ended June 30, 2018 and 2017, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, FHLB advances and the issuance of common stock was $185.5 million and $179.0 million for the six months ended June 30, 2018 and 2017, 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 June 30, 2018, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. See Note 13 to our unaudited interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

At June 30, 2018, we had outstanding commitments to originate loans of $81.1 million and unadvanced funds on loans of $340.2 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from June 30, 2018 totaled $482.5 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.

63

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 9 to the unaudited Consolidated Financial Statements.

64

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 June 30, 2018. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well-designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.  Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

During the quarter ended June 30, 2018, 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.

65

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to the Company’s Risk Factors described in Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.

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

a) Unregistered Sales of Equity Securities.  None

b) Use of Proceeds.  None

c) Repurchase of Equity Securities.

The Company adopted a share repurchase program on October 27, 2017.  The Company may repurchase up to 1,633,155 shares of the Company’s common stock, or approximately 5% of the Company’s current issued and outstanding shares.  The repurchase program may be suspended or terminated at any time without prior notice, and it will expire October 28, 2019.

The Company had no repurchases of its common stock during the three months ended June 30, 2018.

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.

66

EXHIBIT INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 (and are numbered in accordance with Item 601 of Regulation S-K):

Exhibit No.	Description
31.1*	Certification of Chief Executive Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
31.2*	Certification of Chief Financial Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
32.1**	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, (ii) the Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2018 and 2017, (v) the Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017, and (vi) the Notes to the unaudited Consolidated Financial Statements.

*Filed herewith

**Furnished herewith

67

SIGNATURES

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

	HarborOne Bancorp, Inc.
Date: August 8, 2018	By:	/s/ James W. Blake
		James W. Blake
		Chief Executive Officer and Director (Principal Executive Officer)
Date: August 8, 2018	By:	/s/ Linda H. Simmons
		Linda H. Simmons
		Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

68