UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2022

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

Commission File Number 001-38955

HarborOne Bancorp, Inc.

(Exact name of registrant as specified in its charter)


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

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

(508) 895-1000

(Registrant’s telephone number, including area code)

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


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

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

☒ Yes ☐ No

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

☒ Yes ☐ No

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

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

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

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

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

Table of Contents

Index

		PAGE
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)	1
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	2
	Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)
	Note 1. Summary of Significant Accounting Policies	8
	Note 2. Debt Securities	10
	Note 3. Loans Held for Sale	14
	Note 4. Loans and Allowance for Credit Losses	15
	Note 5. Mortgage Loan Servicing	24
	Note 6. Goodwill and Other Intangible Assets	25
	Note 7. Deposits	25
	Note 8. Borrowings	26
	Note 9. Other Commitments and Contingencies	27
	Note 10. Derivatives	29
	Note 11. Operating Lease Right-of-Use Assets and Liabilities	31
	Note 12. Minimum Regulatory Capital Requirements	32
	Note 13. Comprehensive (Loss) Income	34
	Note 14. Fair Value of Assets and Liabilities	35
	Note 15. Earnings Per Share (“EPS”)	42
	Note 16. Revenue Recognition	43
	Note 17. Segment Reporting	43

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	68
ITEM 4.	Controls and Procedures	68

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	69
ITEM 1A.	Risk Factors	69
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
ITEM 3.	Defaults Upon Senior Securities	69
ITEM 4.	Mine Safety Disclosures	69
ITEM 5.	Other Information	69
ITEM 6.	Exhibits	70

EXHIBIT INDEX		70

SIGNATURE		71

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HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)


	September 30,		December 31,
(in thousands, except share data)	2022		2021

Assets
Cash and due from banks	$	39,910	$	35,549
Short-term investments		46,044		159,170
Total cash and cash equivalents		85,954		194,719

Securities available for sale, at fair value		304,852		394,036
Securities held to maturity, at amortized cost		15,000		—
Federal Home Loan Bank stock, at cost		15,973		5,931
Asset held for sale		—		881
Loans held for sale, at fair value		18,805		45,642
Loans		4,197,354		3,607,733
Less: Allowance for credit losses on loans		(44,621)		(45,377)
Net loans		4,152,733		3,562,356
Accrued interest receivable		12,746		10,624
Other real estate owned and repossessed assets		74		53
Mortgage servicing rights, at fair value		49,861		38,268
Property and equipment, net		49,115		50,745
Retirement plan annuities		14,511		14,174
Bank-owned life insurance		91,452		89,972
Goodwill		69,802		69,802
Intangible assets		2,461		3,164
Other assets		104,304		73,038
Total assets	$	4,987,643	$	4,553,405

Liabilities and Stockholders' Equity
Deposits:
Demand deposit accounts	$	795,945	$	743,051
NOW accounts		308,191		313,733
Regular savings and club accounts		1,289,825		1,138,979
Money market deposit accounts		889,517		858,970
Term certificate accounts		599,632		627,916
Total deposits		3,883,110		3,682,649
Short-term borrowed funds		330,000		—
Long-term borrowed funds		15,684		55,711
Subordinated debt		34,254		34,159
Mortgagors' escrow accounts		9,842		8,459
Accrued interest payable		950		1,083
Other liabilities and accrued expenses		102,433		92,083
Total liabilities		4,376,273		3,874,144

Commitments and contingencies (Notes 9 and 10)

Common stock, $0.01 par value; 150,000,000 shares authorized; 59,919,254 and 59,087,487 shares issued; 49,202,660 and 52,390,478 shares outstanding at September 30, 2022 and December 31, 2021, respectively		593		585
Additional paid-in capital		480,617		469,934
Retained earnings		350,049		325,699
Treasury stock, at cost, 10,716,594 and 6,693,504 shares at September 30, 2022 and December 31, 2021, respectively		(143,125)		(85,859)
Accumulated other comprehensive loss		(48,681)		(1,637)
Unearned compensation - ESOP		(28,083)		(29,461)
Total stockholders' equity		611,370		679,261
Total liabilities and stockholders' equity	$	4,987,643	$	4,553,405

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Income (unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except share data)	2022		2021		2022		2021


Interest and dividend income:
Interest and fees on loans	$	42,065	$	33,680	$	113,163	$	101,646
Interest on loans held for sale		377		665		972		2,841
Interest on taxable securities		1,971		1,293		5,545		2,671
Other interest and dividend income		143		170		335		384
Total interest and dividend income		44,556		35,808		120,015		107,542

Interest expense:
Interest on deposits		3,491		2,050		7,131		7,072
Interest on FHLB borrowings		1,209		431		1,516		1,514
Interest on subordinated debentures		524		524		1,571		1,571
Total interest expense		5,224		3,005		10,218		10,157

Net interest and dividend income		39,332		32,803		109,797		97,385
Provision (benefit) for credit losses		668		(1,627)		3,552		(5,822)

Net interest and dividend income, after provision (benefit) for credit losses		38,664		34,430		106,245		103,207

Noninterest income:
Mortgage banking income:
Gain on sale of mortgage loans		3,809		12,756		13,669		51,820
Changes in mortgage servicing rights fair value		1,816		(992)		7,963		(135)
Other		2,453		3,882		7,623		12,472
Total mortgage banking income		8,078		15,646		29,255		64,157
Deposit account fees		4,870		4,658		14,234		13,056
Income on retirement plan annuities		119		108		338		318
Gain on sale and call of securities, net		—		241		—		241
Bank-owned life insurance income		503		515		1,480		1,516
Other income		675		842		2,102		2,234
Total noninterest income		14,245		22,010		47,409		81,522

Noninterest expense:
Compensation and benefits		20,991		24,760		63,169		77,360
Occupancy and equipment		4,829		4,765		14,832		14,723
Data processing		2,311		2,205		6,811		6,910
Loan expenses		355		1,323		1,218		5,008
Marketing		850		880		3,054		2,524
Deposit expenses		587		431		1,646		1,209
Postage and printing		373		396		1,204		1,215
Professional fees		1,457		1,362		4,676		4,432
Prepayment penalties on Federal Home Loan Bank advances		—		1,095		—		1,095
Foreclosed and repossessed assets		—		(308)		18		(332)
Deposit insurance		357		341		1,060		993
Other expenses		2,363		2,024		6,574		5,537
Total noninterest expense		34,473		39,274		104,262		120,674

Income before income taxes		18,436		17,166		49,392		64,055

Income tax provision		4,678		4,907		13,380		18,128

Net income	$	13,758	$	12,259	$	36,012	$	45,927

Earnings per common share:
Basic	$	0.30	$	0.25	$	0.77	$	0.89
Diluted	$	0.30	$	0.24	$	0.76	$	0.88
Weighted average shares outstanding:
Basic		45,830,737		49,801,123		46,875,312		51,362,252
Diluted		46,420,527		50,663,415		47,541,647		52,094,749

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Comprehensive (Loss) Income (unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021


Net income	$	13,758	$	12,259	$	36,012	$	45,927
Other comprehensive income:

Unrealized gain/loss on cash flow hedge:
Unrealized holding gains (losses)		2,658		22		7,386		1,392
Reclassification adjustment for net losses (gains) included in net income		(420)		140		(380)		373
Net change in unrealized gains (losses) on derivatives in cash flow hedging instruments		2,238		162		7,006		1,765
Related tax effect		(628)		(46)		(1,968)		(494)
Net-of-tax amount		1,610		116		5,038		1,271

Unrealized gain/loss on securities available for sale:
Unrealized holding (losses) gains		(20,554)		(2,406)		(66,806)		(5,626)
Reclassification adjustment for net realized gains		—		(241)		—		(241)
Net unrealized (losses) gains		(20,554)		(2,647)		(66,806)		(5,867)
Related tax effect		4,530		584		14,724		1,293
Net-of-tax amount		(16,024)		(2,063)		(52,082)		(4,574)

Total other comprehensive (loss) income		(14,414)		(1,947)		(47,044)		(3,303)

Comprehensive (loss) income	$	(656)	$	10,312	$	(11,032)	$	42,624

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)


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

Balance at June 30, 2021	55,735,623	$	585	$	467,194	$	305,831	$	(38,588)	$	829	$	(30,380)	$	705,471

Comprehensive income	—		—		—		12,259		—		(1,947)		—		10,312
Dividends declared of $0.05 per share	—		—		—		(2,407)		—		—		—		(2,407)
ESOP shares committed to be released (57,680 shares)	—		—		340		—		—		—		459		799
Restricted stock awards forfeited	(3,000)		—		—		—		—		—		—		—
Share-based compensation expense	—		—		992		—		—		—		—		992
Treasury stock purchased	(2,500,513)		—		—		—		(35,135)		—		—		(35,135)

Balance at September 30, 2021	53,232,110	$	585	$	468,526	$	315,683	$	(73,723)	$	(1,118)	$	(29,921)	$	680,032


Balance at June 30, 2022	49,989,007	$	593	$	479,519	$	339,471	$	(132,296)	$	(34,267)	$	(28,542)	$	624,478

Comprehensive income (loss)	—		—		—		13,758		—		(14,414)		—		(656)
Dividends declared of $0.07 per share	—		—		—		(3,180)		—		—		—		(3,180)
ESOP shares committed to be released (57,680 shares)	—		—		354		—		—		—		459		813
Restricted stock awards forfeited, net of awards	(2,845)		—		—		—		—		—		—		—
Share-based compensation expense	—		—		744		—		—		—		—		744
Treasury stock purchased	(783,502)		—		—		—		(10,829)		—		—		(10,829)

Balance at September 30, 2022	49,202,660	$	593	$	480,617	$	350,049	$	(143,125)	$	(48,681)	$	(28,083)	$	611,370

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HarborOne Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)


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

Balance at December 31, 2020	57,205,458	$	584	$	464,176	$	277,312	$	(16,644)	$	2,185	$	(31,299)	$	696,314

Comprehensive income (loss)	—		—		—		45,927		—		(3,303)		—		42,624
Dividends declared of $0.15 per share	—		—		—		(7,556)		—		—		—		(7,556)
ESOP shares committed to be released (173,042 shares)	—		—		955		—		—		—		1,378		2,333
Restricted stock awards granted, net of forfeitures	185,377		—		—		—		—		—		—		—
Share-based compensation expense	—		—		2,753		—		—		—		—		2,753
Stock options exercised	62,840		1		642		—		—		—		—		643
Treasury stock purchased	(4,221,565)		—		—		—		(57,079)		—		—		(57,079)

Balance at September 30, 2021	53,232,110	$	585	$	468,526	$	315,683	$	(73,723)	$	(1,118)	$	(29,921)	$	680,032


Balance at December 31, 2021	52,390,478	$	585	$	469,934	$	325,699	$	(85,859)	$	(1,637)	$	(29,461)	$	679,261

Cumulative effect of change in accounting principle - ASC 326	—		—		—		(1,884)		—		—		—		(1,884)
Comprehensive income (loss)	—		—		—		36,012		—		(47,044)		—		(11,032)
Dividends declared of $0.21 per share	—		—		—		(9,778)		—		—		—		(9,778)
ESOP shares committed to be released (173,042 shares)	—		—		1,078		—		—		—		1,378		2,456
Restricted stock awards granted, net of forfeitures	97,971		—		—		—		—		—		—		—
Performance stock units vested	14,596		—		—		—		—		—		—		—
Share-based compensation expense	—		—		2,744		—		—		—		—		2,744
Stock options exercised	722,705		8		6,861		—		—		—		—		6,869
Treasury stock purchased	(4,023,090)		—		—		—		(57,266)		—		—		(57,266)

Balance at September 30, 2022	49,202,660	$	593	$	480,617	$	350,049	$	(143,125)	$	(48,681)	$	(28,083)	$	611,370

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)


	Nine Months Ended September 30,
(in thousands)	2022		2021


Cash flows from operating activities:
Net income	$	36,012	$	45,927
Adjustments to reconcile net income to net cash used by operating activities:
Provision (benefit) for credit losses		3,552		(5,822)
Net amortization of securities premiums/discounts		821		3,098
Proceeds from sale of loans		510,260		1,826,818
Loans originated for sale		(471,314)		(1,625,647)
Net accretion of net deferred loan costs/fees and premiums		(315)		(1,881)
Depreciation and amortization of premises and equipment		2,924		3,406
Change in mortgage servicing rights fair value		(7,963)		135
Mortgage servicing rights capitalized		(3,630)		(11,842)
Accretion of fair value adjustment on loans and deposits, net		(1,043)		(2,817)
Amortization of other intangible assets		703		971
Amortization of subordinated debt issuance costs		95		95
Gain on sale and call of securities, net		—		(241)
Net gains on mortgage loan sales, including fair value adjustments		(12,109)		(69,611)
Bank-owned life insurance income		(1,480)		(1,516)
Income on retirement plan annuities		(338)		(318)
Write-down of asset held for sale		196		—
Net loss on disposal of premises and equipment		41		—
Net gain on sale and write-down of other real estate owned and repossessed assets		(30)		(215)
ESOP expense		2,456		2,333
Share-based compensation expense		2,744		2,753
Decrease (increase) in operating lease right-of-use assets		1,019		(2,053)
(Decrease) increase in operating lease liabilities		(976)		2,436
Change in other assets		(13,909)		21,567
Change in other liabilities		5,570		(20,360)
Net cash provided by operating activities		53,286		167,216

Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		37,659		124,307
Purchases		(16,102)		(286,406)
Sales		—		39,321
Activity in securities held to maturity:
Purchases		(15,000)		—
Net (purchase) redemption of FHLB stock		(10,042)		1,910
Proceeds on asset held for sale		685		—
Loan pool purchase		(58,311)		—
Participation-in loan purchases		(116,144)		(30,742)
Net loan (originations) payments		(415,391)		70,452
Proceeds from sale of other real estate owned and repossessed assets		247		1,455
Additions to property and equipment		(1,335)		(5,187)
Net cash used by investing activities		(593,734)		(84,890)

(continued)

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)


	Nine Months Ended September 30,
(in thousands)	2022		2021

Cash flows from financing activities:
Net increase in deposits		200,379		187,799
Net change in short-term borrowed funds		330,000		(35,000)
Proceeds from other borrowed funds and subordinated debt		—		3,400
Repayment of other borrowed funds		(40,027)		(61,777)
Net change in mortgagors' escrow accounts		1,383		676
Proceeds from exercise of stock options		6,869		643
Treasury stock purchased		(57,266)		(57,079)
Dividends paid		(9,655)		(7,219)
Net cash provided by financing activities		431,683		31,443

Net change in cash and cash equivalents		(108,765)		113,769

Cash and cash equivalents at beginning of period		194,719		205,870

Cash and cash equivalents at end of period	$	85,954	$	319,639

Supplemental cash flow information:
Interest paid on deposits	$	6,667	$	7,079
Interest paid on borrowed funds		3,248		3,728
Income taxes paid, net		8,020		18,715
Transfer of loans to other real estate owned and repossessed assets		238		673
Transfer of asset to assets held for sale		—		881
Dividends declared		9,778		7,556

Supplemental disclosure related to adoption of ASU 2016-02, detailed in Note 1:
ROU asset	$	—	$	23,189
Operating lease liabilities		—		24,370

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The unaudited interim Consolidated Financial Statements of HarborOne Bancorp, Inc. (the “Company”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by the U.S. generally accepted accounting principles (“GAAP”). In the opinion of management, all adjustments and disclosures considered necessary for the fair presentation of the accompanying Consolidated Financial Statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the years ended December 31, 2021 and 2020 and notes thereto included in the Company’s Annual Report on Form 10-K.

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

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

Nature of Operations

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

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

Risks and Uncertainties

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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

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

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

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

ASUs not yet Adopted

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

2.	DEBT SECURITIES

Adoption of Topic 326

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

Accounting Policy Updates

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

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

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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

Debt Securities

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


			Gross		Gross		Allowance
	Amortized		Unrealized		Unrealized		for Credit		Fair
	Cost		Gains		Losses		Losses		Value

	(in thousands)

September 30, 2022:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	47,142	$	—	$	8,600	$	—	$	38,542
U.S. government agency and government-sponsored residential mortgage-backed securities		321,628		1		61,402		—		260,227
U.S. government-sponsored collateralized mortgage obligations		2,838		—		105		—		2,733
SBA asset-backed securities		2,685		—		195		—		2,490
Corporate bonds		1,000		—		140		—		860
Total securities available for sale	$	375,293	$	1	$	70,442	$	—	$	304,852


Securities held to maturity
U.S. government and government-sponsored enterprise obligations	$	15,000	$	—	$	549	$	—	$	14,451

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(in thousands)

December 31, 2021:
Securities available for sale
U.S. government and government-sponsored enterprise obligations	$	42,148	$	—	$	883	$	41,265
U.S. government agency and government-sponsored residential mortgage-backed securities		347,716		914		3,870		344,760
U.S. government-sponsored collateralized mortgage obligations		3,927		100		—		4,027
SBA asset-backed securities		3,880		104		—		3,984
Total securities available for sale	$	397,671	$	1,118	$	4,753	$	394,036

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

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



	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

	(in thousands)

After 1 year through 5 years	$	—	$	—	$	—	$	—
After 5 years through 10 years		48,142		39,402		15,000		14,451
Over 10 years		—		—		—		—
		48,142		39,402		15,000		14,451

U.S. government agency and government-sponsored residential mortgage-backed securities		321,628		260,227		—		—
U.S. government-sponsored collateralized mortgage obligations		2,838		2,733		—		—
SBA asset-backed securities		2,685		2,490		—		—

Total	$	375,293	$	304,852	$	15,000	$	14,451

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


		Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021

		(in thousands)

Sales
Proceeds	$	—	$	39,321	$	—	$	39,321
Gross gains		—		241		—		241
Gross losses		—		—		—		—

Calls
Proceeds	$	—	$	5,000	$	—	$	5,000
Gross gains		—		—		—		—
Gross losses		—		—		—		—

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


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

	(in thousands)

September 30, 2022:
Securities available for sale

U.S. government and government-sponsored enterprise obligations	$	229	$	4,771	$	8,371	$	33,771
U.S. government agency and government-sponsored residential mortgage-backed securities		10,653		66,455		50,749		193,735
U.S. government-sponsored collateralized mortgage obligations		105		2,733		—		—
SBA asset-backed securities		195		2,490		—		—
Corporate bonds		140		860		—		—
	$	11,322	$	77,309	$	59,120	$	227,506

Securities held to maturity

U.S. government and government-sponsored enterprise obligations	$	549	$	14,451		—		—

December 31, 2021:
Securities available for sale

U.S. government and government-sponsored enterprise obligations	$	883	$	41,265	$	—	$	—
U.S. government agency and government-sponsored residential mortgage-backed securities		2,835		262,889		1,035		35,552
	$	3,718	$	304,154	$	1,035	$	35,552

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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

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

3.	LOANS HELD FOR SALE

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


	September 30,		December 31,
	2022		2021

	(in thousands)

Loans held for sale, fair value	$	18,805	$	45,642
Loans held for sale, contractual principal outstanding		18,967		44,245
Fair value less unpaid principal balance	$	(162)	$	1,397

The Company has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them. Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to a decrease of $1.6 million in the nine months ended September 30, 2022 to negative $162,000, compared to a decrease of $7.6 million in the nine months ended September 30, 2021. These amounts are offset in earnings by the changes in fair value of forward sale commitments. The changes in fair value are reported as a component of gain on sale of mortgage loans in the Unaudited Consolidated Statements of Income.

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

4.	LOANS AND ALLOWANCE FOR CREDIT LOSSES

A summary of the balances of loans follows:


	September 30,		December 31,
	2022		2021

	(in thousands)

Residential real estate:
One- to four-family	$	1,326,645	$	1,047,819
Second mortgages and equity lines of credit		157,518		136,853
Residential real estate construction		36,646		33,308
Total residential real estate loans		1,520,809		1,217,980

Commercial:
Commercial real estate		2,041,905		1,699,877
Commercial construction		185,062		136,563
Commercial and industrial		397,112		421,608
Total commercial loans		2,624,079		2,258,048

Consumer loans:
Auto		44,685		124,354
Personal		7,781		7,351
Total consumer loans		52,466		131,705

Total loans		4,197,354		3,607,733
Allowance for loan losses		(44,621)		(45,377)
Loans, net	$	4,152,733	$	3,562,356

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

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

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

Adoption of Topic 326

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Accounting Policy Updates

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

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

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

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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

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

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


			Second Mortgages		Residential
	One- to Four-		and Equity		Real Estate		Commercial		Commercial		Commercial
	Family		Lines of Credit		Construction		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total

	(in thousands)

Balance at June 30, 2022	$	10,082	$	849	$	327	$	20,431	$	4,370	$	7,174	$	327	$	—	$	43,560

Charge-offs		—		—		—		(24)		—		(205)		(24)		—		(253)
Recoveries		2		15		—		7		—		1,021		7		—		1,052
Provision		834		(16)		(33)		741		99		(1,300)		(63)		—		262
Balance at September 30, 2022	$	10,918	$	848	$	294	$	21,155	$	4,469	$	6,690	$	247	$	—	$	44,621

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)


			Second Mortgages		Residential
	One- to Four-		and Equity		Real Estate		Commercial		Commercial		Commercial
	Family		Lines of Credit		Construction		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total

	(in thousands)

Balance at December 31, 2021	$	3,631	$	420	$	69	$	33,242	$	2,010	$	4,638	$	367	$	1,000	$	45,377

Adoption of Topic 326		5,198		391		185		(10,194)		1,698		2,288		123		(1,000)		(1,311)
Charge-offs		—		—		—		(2,810)		—		(246)		(55)		—		(3,111)
Recoveries		2		108		—		13		—		1,495		67		—		1,685
Provision		2,087		(71)		40		904		761		(1,485)		(255)		—		1,981
Balance at September 30, 2022	$	10,918	$	848	$	294	$	21,155	$	4,469	$	6,690	$	247	$	—	$	44,621

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

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


			Second Mortgages		Residential
	One- to Four-		and Equity		Real Estate		Commercial		Commercial		Commercial
	Family		Lines of Credit		Construction		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total

	(in thousands)

Balance at June 30, 2021	$	4,708	$	603	$	123	$	32,991	$	1,937	$	8,059	$	853	$	1,999	$	51,273

Provision for loan losses		(1,667)		(270)		(72)		2,059		615		(815)		(478)		(999)		(1,627)
Charge-offs		—		—		—		(381)		—		(1,277)		(61)		—		(1,719)
Recoveries		1		7		—		1		—		18		34		—		61
Balance at September 30, 2021	$	3,042	$	340	$	51	$	34,670	$	2,552	$	5,985	$	348	$	1,000	$	47,988


			Second Mortgages		Residential
	One- to Four-		and Equity		Real Estate		Commercial		Commercial		Commercial
	Family		Lines of Credit		Construction		Real Estate		Construction		and Industrial		Consumer		Unallocated		Total

	(in thousands)

Balance at December 31, 2020	$	6,168	$	1,054	$	197	$	34,765	$	1,955	$	5,311	$	2,475	$	3,470	$	55,395

Provision for loan losses		(3,270)		(797)		(146)		293		597		2,101		(2,129)		(2,470)		(5,821)
Charge-offs		—		—		—		(393)		—		(1,463)		(147)		—		(2,003)
Recoveries		144		83		—		5		—		36		149		—		417
Balance at September 30, 2021	$	3,042	$	340	$	51	$	34,670	$	2,552	$	5,985	$	348	$	1,000	$	47,988

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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

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


			Related
	Carrying Value		Allowance

	(in thousands)

Commercial:
Commercial real estate	$	10,576	$	3,034
Commercial and industrial		3,384		63
Commercial construction		—		—
Total Commercial		13,960		3,097
Residential real estate		9,135		356
Total	$	23,095	$	3,453

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


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

	(in thousands)

December 31, 2021:
Loans:
Impaired loans	$	23,110	$	20,203	$	—	$	4,182	$	—			$	47,495
Non-impaired loans		1,194,870		1,679,674		136,563		417,426		131,705				3,560,238
Total loans	$	1,217,980	$	1,699,877	$	136,563	$	421,608	$	131,705			$	3,607,733
Allowance for loan losses:
Impaired loans	$	650	$	7,275	$	—	$	21	$	—	$	—	$	7,946
Non-impaired loans		3,470		25,967		2,010		4,617		367		1,000		37,431
Total allowance for loan losses	$	4,120	$	33,242	$	2,010	$	4,638	$	367	$	1,000	$	45,377

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following information pertains to impaired loans:


	December 31, 2021
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance

	(in thousands)

Impaired loans without a specific reserve:
Residential real estate	$	14,115	$	15,335	$	—
Commercial real estate		2,641		2,692		—
Commercial construction		—		—		—
Commercial and industrial		1,389		3,396		—
Total		18,145		21,423		—

Impaired loans with a specific reserve:
Residential real estate		8,995		9,791		650
Commercial real estate		17,562		24,847		7,275
Commercial construction		—		—		—
Commercial and industrial		2,793		3,596		21
Total		29,350		38,234		7,946

Total impaired loans	$	47,495	$	59,657	$	7,946


	Three Months Ended September 30, 2021
					Interest
	Average		Interest		Income
	Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis

	(in thousands)

Residential real estate	$	22,268	$	279	$	121
Commercial real estate		12,455		60		60
Commercial construction		—		—		—
Commercial and industrial		7,834		13		13
Total	$	42,557	$	352	$	194


	Nine Months Ended September 30, 2021
					Interest
	Average		Interest		Income
	Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis

	(in thousands)

Residential real estate	$	23,973	$	822	$	280
Commercial real estate		13,894		125		125
Commercial construction		—		—		—
Commercial and industrial		7,802		149		149
Total	$	45,669	$	1,096	$	554

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


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

	(in thousands)

September 30, 2022
Residential real estate:
One- to four-family	$	—	$	2,163	$	5,990	$	8,153	$	8,921
Second mortgages and equity lines of credit		98		—		222		320		415
Commercial real estate		—		—		288		288		10,576
Commercial construction		—		—		—		—		—
Commercial and industrial		275		434		2,841		3,550		3,287
Consumer:
Auto		345		51		53		449		82
Personal		18		42		12		72		12
Total	$	736	$	2,690	$	9,406	$	12,832	$	23,293

December 31, 2021
Residential real estate:
One- to four-family	$	5,578	$	2,901	$	3,777	$	12,256	$	11,210
Second mortgages and equity lines of credit		202		—		336		538		600
Commercial real estate		149		—		11,334		11,483		20,053
Commercial construction		—		—		—		—		—
Commercial and industrial		616		1		3,277		3,894		4,114
Consumer:
Auto		747		162		140		1,049		144
Personal		67		—		12		79		12
Total	$	7,359	$	3,064	$	18,876	$	29,299	$	36,133

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

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

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Credit Quality Indicators

Commercial

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

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

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

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

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

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

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

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

Residential and Consumer

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


													Revolving		Revolving Loans
	Term Loans at Amortized Cost by Origination Year												Loans		Converted to
	2022		2021		2020		2019		2018		Prior		Amortized Cost		Term Loans		Total

	(in thousands)

As of September 30, 2022

Commercial real estate
Pass	$	575,951	$	422,759	$	244,248	$	268,148	$	143,176	$	354,200	$	—	$	—	$	2,008,482
Special mention		—		—		—		—		22,516		331		—		—		22,847
Substandard		—		—		—		—		—		10,576		—		—		10,576
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial real estate		575,951		422,759		244,248		268,148		165,692		365,107		—		—		2,041,905

Commercial and industrial
Pass		33,935		93,811		82,504		27,521		38,314		54,254		64,726		—		395,065
Special mention		—		—		2		—		53		14		5		—		74
Substandard		47		—		—		—		—		365		50		—		462
Doubtful		—		—		—		—		—		1,461		50		—		1,511
Total commercial and industrial		33,982		93,811		82,506		27,521		38,367		56,094		64,831		—		397,112

Commercial construction
Pass		53,088		98,047		11,761		10,073		195		1,497		868		—		175,529
Special mention		—		—		—		9,533		—		—		—		—		9,533
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial construction		53,088		98,047		11,761		19,606		195		1,497		868		—		185,062

Residential real estate
Accrual		320,255		512,357		216,914		42,236		25,831		247,332		145,042		1,506		1,511,473
Non-accrual		—		203		140		206		1,067		7,591		91		38		9,336
Total residential real estate		320,255		512,560		217,054		42,442		26,898		254,923		145,133		1,544		1,520,809

Consumer
Accrual		7,917		3,920		2,324		25,916		8,222		2,994		1,079		—		52,372
Non-accrual		—		4		7		55		—		27		1		—		94
Total Consumer		7,917		3,924		2,331		25,971		8,222		3,021		1,080		—		52,466

Total Loans	$	991,193	$	1,131,101	$	557,900	$	383,688	$	239,374	$	680,642	$	211,912	$	1,544	$	4,197,354

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


	December 31, 2021
	Commercial		Commercial		Commercial
	Real Estate		Construction		and Industrial

	(in thousands)

Loans rated 1 - 6	$	1,645,871	$	136,563	$	417,408
Loans rated 7		33,953		—		85
Loans rated 8		20,053		—		694
Loans rated 9		—		—		3,421
Loans rated 10		—		—		—
	$	1,699,877	$	136,563	$	421,608

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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


	Three Months Ended		Nine Months Ended
	September 30, 2021		September 30, 2021

	(in thousands)

Balance at beginning of period	$	136	$	141
Additions		—		—
Accretion		(1)		(6)
Reclassification from nonaccretable difference		—		—
Balance at end of period	$	135	$	135

5.	MORTGAGE LOAN SERVICING

The Company sells residential mortgages to government-sponsored entities and other parties. The Company retains no beneficial interests in these loans, but may retain the servicing rights of the loans sold. Mortgage loans serviced for others are not included in the accompanying unaudited interim Consolidated Balance Sheets. The risks inherent in mortgage servicing rights (“MSRs”) relate primarily to changes in prepayments that primarily result from shifts in mortgage interest rates. The unpaid principal balance of mortgage loans serviced for others was $3.63 billion and $3.65 billion as of September 30, 2022 and December 31, 2021.

The Company accounts for MSRs at fair value. The Company obtains and reviews valuations from independent third parties to determine the fair value of MSRs. Key assumptions used in the estimation of fair value include prepayment speeds, discount rates, and default rates. At September 30, 2022 and December 31, 2021, the following weighted average assumptions were used in the calculation of fair value of MSRs:


	September 30,		December 31,
	2022		2021
Prepayment speed	7.00	%	9.40	%
Discount rate	9.45		9.20
Default rate	1.65		1.64

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)

Balance, beginning of period	$	47,130	$	35,955	$	38,268	$	24,833
Additions		915		1,577		3,630		11,842
Changes in fair value due to:
Reductions from loans paid off during the period		(747)		(1,613)		(2,351)		(4,713)
Changes in valuation inputs or assumptions		2,563		621		10,314		4,578
Balance, end of period	$	49,861	$	36,540	$	49,861	$	36,540

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

6.	GOODWILL AND OTHER INTANGIBLE ASSETS

As of September 30, 2022, the Company had $69.8 million in goodwill, of which $59.0 million was allocated to the HarborOne Bank reporting unit and $10.8 million was allocated to the HarborOne Mortgage reporting unit. The Company typically performs its goodwill impairment test during the fourth quarter of the year, unless certain indicators suggest earlier testing to be warranted. Other intangible assets were $2.5 million and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company determined that there was no triggering event that warranted an interim impairment test at September 30, 2022.

7.	DEPOSITS

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


	September 30,		December 31,
	2022		2021

	(in thousands)

NOW and demand deposit accounts	$	1,104,136	$	1,056,784
Regular savings and club accounts		1,289,825		1,138,979
Money market deposit accounts		889,517		858,970
Total non-certificate accounts		3,283,478		3,054,733

Term certificate accounts greater than $250,000		103,323		108,426
Term certificate accounts less than or equal to $250,000		381,613		419,490
Brokered deposits		114,696		100,000
Total certificate accounts		599,632		627,916
Total deposits	$	3,883,110	$	3,682,649

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


			Weighted
			Average
	Amount		Rate

	(dollars in thousands)

Within 1 year	$	406,623	0.83	%
Over 1 year to 2 years		159,658	1.51
Over 2 years to 3 years		23,587	0.93
Over 3 years to 4 years		7,359	0.65
Over 4 years to 5 years		2,552	0.74
Total certificate deposits		599,779	1.01	%
Less unaccreted acquisition discount		(147)
Total certificate deposits, net	$	599,632

8.BORROWINGS

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


	September 30, 2022				December 31, 2021
	Amount by		Weighted		Amount by				Weighted
	Scheduled		Average		Scheduled		Amount by		Average
	Maturity*		Rate ⁽²⁾		Maturity*		Call Date ⁽¹⁾		Rate ⁽²⁾

	(dollars in thousands)

Year ending December 31:
2022	$	—	—	%	$	—		40,000	—	%
2023		182	1.42			185		185	1.46
2024		13,400	1.39			13,400		13,400	1.39
2025		987	—			40,987		987	1.32
2026		—	—			—		—	—
2027 and thereafter		1,115	2.00			1,139		1,139	2.00
	$	15,684	1.35	%	$	55,711	$	55,711	1.35	%

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

⁽¹⁾ Callable FHLB advances are shown in the respective periods assuming that the callable debt is redeemed at the call date, while all other advances are shown in the periods corresponding to their scheduled maturity date. There were no callable advances at September 30, 2022.

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

The FHLB advances are secured by a blanket security agreement which requires the Bank to maintain certain qualifying assets as collateral, principally residential mortgage loans and certain multi-family and commercial real estate loans held in the Bank’s portfolio. The carrying value of the loans pledged as collateral for these borrowings totaled $1.61 billion at September 30, 2022 and $1.22 billion at December 31, 2021. As of September 30, 2022, the Company had $772.6 million of available borrowing capacity with the FHLB.

The Company also has additional borrowing capacity under a $25.0 million unsecured federal funds line with a correspondent bank and a secured line of credit with the Federal Reserve Bank of Boston (“FRBB”), secured by 67% of the carrying value of indirect auto and commercial loans with principal balances amounting to $100.0 million and $101.4 million at September 30, 2022 and December 31, 2021, respectively. No amounts were outstanding under either line at September 30, 2022 or December 31, 2021.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

9.	OTHER COMMITMENTS AND CONTINGENCIES

Adoption of Topic 326

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

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

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

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

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


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

	(in thousands)

Balance at June 30, 2022	$	337	$	482	$	3,638	$	624	$	15	$	5,096
Provision		(7)		29		135		253		(4)		406
	$	330	$	511	$	3,773	$	877	$	11	$	5,502

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


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

	(in thousands)

Balance at December 31, 2021	$	—	$	—	$	—	$	—	$	—	$	—
Adoption of Topic 326		318		380		2,561		658		14		3,931
Provision		12		131		1,212		219		(3)		1,571
	$	330	$	511	$	3,773	$	877	$	11	$	5,502

Loan Commitments

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

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

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


	September 30,		December 31,
	2022		2021

	(in thousands)

Commitments to grant residential real estate loans-HarborOne Mortgage	$	122,378	$	142,781
Commitments to grant other loans		174,272		27,029
Unadvanced funds on home equity lines of credit		242,496		211,120
Unadvanced funds on revolving lines of credit		329,153		223,110
Unadvanced funds on construction loans		338,792		194,101

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

10.

DERIVATIVES

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

Interest Rate Swaps Designated as a Cashflow Hedge

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

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

Derivative Loan Commitments

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

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

Forward Loan Sale Commitments

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

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Interest Rate Swaps

The Company enters into interest rate swap agreements that are transacted to meet the financing needs of its commercial customers. Offsetting interest rate swap agreements are simultaneously transacted with a third-party financial institution to effectively eliminate the Company’s interest rate risk associated with the customer swaps. The primary risks associated with these transactions arise from exposure to the ability of the counterparties to meet the terms of the contract. At September 30, 2022, there were no securities pledged to secure the Company’s liability for the offsetting interest rate swaps (see Note 2). The interest rate swap notional amount is the aggregate notional amount of the customer swap and the offsetting third-party swap. The Company also assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determines whether the credit valuation adjustments are significant to the overall valuation of its derivatives. During 2021, a credit valuation adjustment related to an interest rate swap was determined to be significant and required a negative fair value adjustment of $430,000, which was included in other income. During the first quarter of 2022, the interest rate swap was terminated, which resulted in a reversal of $329,000 to the negative fair value adjustment recorded in 2021 to a negative fair value adjustment of $101,000 at March 31, 2022.

Risk Participation Agreements

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

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


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

		(in thousands)

September 30, 2022:
Derivatives designated as Hedging Instruments
Interest rate swaps	$	100,000	Other assets	$	8,669	Other liabilities	$	—
Derivatives not designated as Hedging Instruments
Derivative loan commitments	$	47,154	Other assets	$	901	Other liabilities	$	343
Forward loan sale commitments		42,606	Other assets		1,334	Other liabilities		16
Interest rate swaps		657,517	Other assets		29,243	Other liabilities		29,243
Risk participation agreements		130,875	Other assets		—	Other liabilities		—
Total				$	40,147		$	29,602

December 31, 2021:
Derivatives designated as Hedging Instruments
Interest rate swaps	$	100,000	Other assets	$	1,663	Other liabilities	$	—
Derivatives not designated as Hedging Instruments
Derivative loan commitments	$	86,134	Other assets	$	1,527	Other liabilities	$	95
Forward loan sale commitments		96,000	Other assets		56	Other liabilities		94
Interest rate swaps		740,235	Other assets		18,874	Other liabilities		19,214
Risk participation agreements		139,109	Other assets		—	Other liabilities		—
Total				$	22,120		$	19,403

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)

Derivatives designated as hedging instruments
(Loss) gain in OCI on derivatives (effective portion), net of tax	$	1,610	$	116	$	5,038	$	1,271
(Loss) gain reclassified from OCI into interest income or interest expense (effective portion)	$	420	$	(140)	$	380	$	(373)

Derivatives not designated as hedging instruments
Changes in fair value of derivative loan commitments
Mortgage banking income	$	(606)	$	(1,897)	$	(874)	$	(9,178)
Changes in fair value of forward loan sale commitments
Mortgage banking income		1,377		1,064		1,356		3,059
Changes in fair value of interest rate swaps
Other income		—		—		330		—
Total	$	771	$	(833)	$	812	$	(6,119)

11.

OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES

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

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

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


	September 30, 2022
	(in thousands)

2022	$	815
2023		3,162
2024		2,817
2025		2,509
2026		2,461
Thereafter		21,515
Total lease payments		33,279
Imputed interest		(5,885)
Total present value of operating lease liabilities	$	27,394

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


	September 30, 2022		December 31, 2021
Weighted-average discount rate	1.97	%	1.94	%
Weighted-average remaining lease term (years)	16.42		16.77

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

The following table presents the components of total lease expense:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

	(in thousands)

Lease Expense:
Operating lease expense	$	836	$	742	$	2,472	$	2,032
Short-term lease expense		37		52		105		122
Variable lease expense		—		2		—		21
Sublease income		(4)		—		(9)		—
Total lease expense	$	869	$	796	$	2,568	$	2,175
Other Information
Cash paid for amounts included in the measurement of lease liabilities-
operating cash flows for operating leases		845		751		2,446		2,108
Operating Lease - Operating cash flows (Liability reduction)		701		624		2,041		1,745
Right-of-use assets obtained in exchange for new operating lease liabilities		77		276		1,160		27,267

12.MINIMUM REGULATORY CAPITAL REQUIREMENTS

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

Under the capital rules, risk-based capital ratios are calculated by dividing Tier 1, common equity Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several risk-weight categories, based primarily on relative risk. The rules require banks and bank holding companies to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%. In addition, a Tier 1 leverage ratio of 4.0% is required. Additionally, the capital rules require a bank holding company to maintain a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements equal to 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


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

	(dollars in thousands)

HarborOne Bancorp, Inc.
September 30, 2022
Common equity Tier 1 capital to risk-weighted assets	$	588,467	13.4	%	$	197,880	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		588,467	13.4			263,839	6.0			N/A	N/A
Total capital to risk-weighted assets		673,590	15.3			351,786	8.0			N/A	N/A
Tier 1 capital to average assets		588,467	12.3			191,473	4.0			N/A	N/A

December 31, 2021
Common equity Tier 1 capital to risk-weighted assets	$	608,804	16.4	%	$	167,475	4.5	%		N/A	N/A
Tier 1 capital to risk-weighted assets		608,804	16.4			223,300	6.0			N/A	N/A
Total capital to risk-weighted assets		689,181	18.5			297,733	8.0			N/A	N/A
Tier 1 capital to average assets		608,804	13.6			179,710	4.0			N/A	N/A

HarborOne Bank
September 30, 2022
Common equity Tier 1 capital to risk-weighted assets	$	517,127	11.8	%	$	197,813	4.5	%	$	285,731	6.5	%
Tier 1 capital to risk-weighted assets		517,127	11.8			263,751	6.0			351,668	8.0
Total capital to risk-weighted assets		567,251	12.9			351,668	8.0			439,585	10.0
Tier 1 capital to average assets		517,127	10.8			191,434	4.0			239,293	5.0

December 31, 2021
Common equity Tier 1 capital to risk-weighted assets	$	485,239	13.1	%	$	166,660	4.5	%	$	240,731	6.5	%
Tier 1 capital to risk-weighted assets		485,239	13.1			222,214	6.0			296,285	8.0
Total capital to risk-weighted assets		530,616	14.3			296,285	8.0			370,356	10.0
Tier 1 capital to average assets		485,239	10.9			178,279	4.0			222,849	5.0

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

13.COMPREHENSIVE (LOSS) INCOME

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

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


	September 30,		December 31,
	2022		2021

	(in thousands)

Cash flow hedge:
Net unrealized gain	$	8,669	$	1,663
Related tax effect		(2,434)		(466)
Total accumulated other comprehensive income	$	6,235	$	1,197

Securities available for sale:
Net unrealized loss	$	(70,441)	$	(3,635)
Related tax effect		15,525		801
Total accumulated other comprehensive loss	$	(54,916)	$	(2,834)

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


	Three Months Ended September 30,
	2022						2021

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

	(in thousands)

Balance at beginning of period	$	(38,892)	$	4,625	$	(34,267)	$	687	$	142	$	829

Other comprehensive (loss) income before reclassifications		(20,554)		2,658		(17,896)		(2,406)		22		(2,384)
Amounts reclassified from accumulated other comprehensive income (loss)		—		(420)		(420)		(241)		140		(101)
Net current period other comprehensive (loss) income		(20,554)		2,238		(18,316)		(2,647)		162		(2,485)
Related tax effect		4,530		(628)		3,902		584		(46)		538
Balance at end of period	$	(54,916)	$	6,235	$	(48,681)	$	(1,376)	$	258	$	(1,118)

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)


	Nine Months Ended September 30,
	2022						2021

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

	(in thousands)

Balance at beginning of period	$	(2,834)	$	1,197	$	(1,637)	$	3,198	$	(1,013)	$	2,185

Other comprehensive (loss) income before reclassifications		(66,806)		7,386		(59,420)		(5,626)		1,392		(4,234)
Amounts reclassified from accumulated other comprehensive income (loss)		—		(380)		(380)		(241)		373		132
Net current period other comprehensive (loss) income		(66,806)		7,006		(59,800)		(5,867)		1,765		(4,102)
Related tax effect		14,724		(1,968)		12,756		1,293		(494)		799
Balance at end of period	$	(54,916)	$	6,235	$	(48,681)	$	(1,376)	$	258	$	(1,118)

14.

FAIR VALUE OF ASSETS AND LIABILITIES

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

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

•Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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

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

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

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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

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

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

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

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

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

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

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

Forward loan sale commitments and derivative loan commitments - Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. The assumptions for pull-through rates are derived from internal data and adjusted using management judgment. Derivative loan commitments include the value of servicing rights and non-refundable costs of originating the loan based on the Company’s internal cost analysis that is not observable. The weighted average pull-through rate for derivative loan commitments was approximately 93% and 88% at September 30, 2022 and December 31, 2021, respectively.

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Although the Company has determined that the majority of the inputs used to value its interest rate swaps and risk participation agreements fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2022 and December 31, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company classified its derivative valuations in their entirety as Level 2.

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


							Total
	Level 1		Level 2		Level 3		Fair Value

	(in thousands)

September 30, 2022
Assets

Securities available for sale	$	—	$	304,852	$	—	$	304,852
Loans held for sale		—		18,805		—		18,805
Mortgage servicing rights		—		49,861		—		49,861
Derivative loan commitments		—		—		901		901
Forward loan sale commitments		—		—		1,334		1,334
Interest rate management agreements		—		8,669		—		8,669
Interest rate swaps		—		29,243		—		29,243
	$	—	$	411,430	$	2,235	$	413,665
Liabilities

Derivative loan commitments	$	—	$	—	$	343	$	343
Forward loan sale commitments		—		—		16		16
Interest rate swaps		—		29,243		—		29,243
	$	—	$	29,243	$	359	$	29,602

December 31, 2021
Assets

Securities available for sale	$	—	$	394,036	$	—	$	394,036
Loans held for sale		—		45,642		—		45,642
Mortgage servicing rights		—		38,268		—		38,268
Derivative loan commitments		—		—		1,527		1,527
Forward loan sale commitments		—		—		56		56
Interest rate management agreements		—		1,663		—		1,663
Interest rate swaps		—		18,874		—		18,874
	$	—	$	498,483	$	1,583	$	500,066
Liabilities

Derivative loan commitments	$	—	$	—	$	95	$	95
Forward loan sale commitments		—		—		94		94
Interest rate swaps		—		19,214		—		19,214
	$	—	$	19,214	$	189	$	19,403

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)

Assets: Derivative and Forward Loan Sale Commitments:

Balance at beginning of period	$	1,344	$	5,134	$	1,583	$	12,623

Total gains (losses) included in net income ⁽¹⁾		891		(1,103)		652		(8,592)
Balance at end of period	$	2,235	$	4,031	$	2,235	$	4,031

Changes in unrealized gains relating to instruments at period end	$	2,235	$	4,031	$	2,235	$	4,031


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)

Liabilities: Derivative and Forward Loan Sale Commitments:

Balance at beginning of period	$	(239)	$	(342)	$	(189)	$	(2,545)

Total gains (losses) included in net income ⁽¹⁾		(120)		270		(170)		2,473
Balance at end of period	$	(359)	$	(72)	$	(359)	$	(72)

Changes in unrealized losses relating to instruments at period end	$	(359)	$	(72)	$	(359)	$	(72)

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

Assets Measured at Fair Value on a Non-recurring Basis

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


	September 30, 2022						December 31, 2021
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

	(in thousands)


Collateral-dependent impaired loans	$	—	$	—	$	8,996	$	—	$	—	$	21,615
Other real estate owned and repossessed assets		—		—		74		—		—		53
	$	—	$	—	$	9,070	$	—	$	—	$	21,668

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)


Collateral-dependent impaired loans	$	92	$	5,132	$	840	$	7,948
Other real estate owned and repossessed assets		—		—		—		24
	$	92	$	5,132	$	840	$	7,972

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


	Fair Value
	September 30,		December 31,		Valuation Technique
	2022		2021

	(in thousands)


Collateral-dependent impaired loans	$	5,862	$	21,615	Sales Comparison Approach ⁽¹⁾
Real estate owned and repossessed assets	$	—	$	—


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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Summary of Fair Values of Financial Instruments

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


	September 30, 2022
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total

	(in thousands)

Financial assets:
Cash and cash equivalents	$	85,954	$	85,954	$	—	$	—	$	85,954
Securities available for sale		304,852		—		304,852		—		304,852
Securities held to maturity		15,000		—		14,451		—		14,451
Federal Home Loan Bank stock		15,973		N/A		N/A		N/A		N/A
Loans held for sale		18,805		—		18,805		—		18,805
Loans, net		4,152,733		—		—		4,067,780		4,067,780
Retirement plan annuities		14,511		—		—		14,511		14,511
Accrued interest receivable		12,746		—		12,746		—		12,746

Financial liabilities:
Deposits		3,883,110		—		—		3,861,090		3,861,090
Borrowed funds		345,684		—		344,611		—		344,611
Subordinated debt		34,254		—		—		31,054		31,054
Mortgagors' escrow accounts		9,842		—		—		9,842		9,842
Accrued interest payable		950		—		950		—		950

Derivative loan commitments:
Assets		901		—		—		901		901
Liabilities		343		—		—		343		343

Interest rate management agreements:
Assets		8,669		—		8,669		—		8,669
Liabilities		—		—		—		—		—

Interest rate swap agreements:
Assets		29,243		—		29,243		—		29,243
Liabilities		29,243		—		29,243		—		29,243

Forward loan sale commitments:
Assets		1,334		—		—		1,334		1,334
Liabilities		16		—		—		16		16

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)


	December 31, 2021
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total

	(in thousands)

Financial assets:
Cash and cash equivalents	$	194,719	$	194,719	$	—	$	—	$	194,719
Securities available for sale		394,036		—		394,036		—		394,036
Federal Home Loan Bank stock		5,931		N/A		N/A		N/A		N/A
Loans held for sale		45,642		—		45,642		—		45,642
Loans, net		3,562,356		—		—		3,558,934		3,558,934
Retirement plan annuities		14,174		—		—		14,174		14,174
Accrued interest receivable		10,624		—		10,624		—		10,624

Financial liabilities:
Deposits		3,682,649		—		—		3,683,465		3,683,465
Borrowed funds		55,711		—		55,765		—		55,765
Subordinated debt		34,159		—		—		35,790		35,790
Mortgagors' escrow accounts		8,459		—		—		8,459		8,459
Accrued interest payable		1,083		—		1,083		—		1,083

Derivative loan commitments:
Assets		1,527		—		—		1,527		1,527
Liabilities		95		—		—		95		95

Interest rate management agreements:
Assets		1,663		—		1,663		—		1,663
Liabilities		—		—		—		—		—

Interest rate swap agreements:
Assets		18,874		—		18,874		—		18,874
Liabilities		19,214		—		19,214		—		19,214

Forward loan sale commitments:
Assets		56		—		—		56		56
Liabilities		94		—		—		94		94

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

15.

EARNINGS PER SHARE (“EPS”)

Basic EPS represents net income attributable to common shareholders divided by the weighted-average number of common shares outstanding during the period. Non-vested restricted shares that are participating securities are included in the computation of basic EPS. Diluted EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding, plus the effect of potential dilutive common stock equivalents outstanding during the period.

The following table presents earnings per common share.


	Three Months Ended September 30,
	2022		2021

Net income available to common stockholders (in thousands)	$	13,758	$	12,259

Average number of common shares outstanding		49,626,152		54,021,542
Less: Average unallocated ESOP shares and non-vested restricted shares		(3,795,415)		(4,220,419)
Weighted average number of common shares outstanding used to calculate basic earnings per common share		45,830,737		49,801,123
Dilutive effect of share-based compensation		589,790		862,292
Weighted average number of common shares outstanding used to calculate diluted earnings per common share		46,420,527		50,663,415

Earnings per common share:
Basic	$	0.30	$	0.25
Diluted	$	0.30	$	0.24


	Nine Months Ended September 30,
	2022		2021

Net income available to common stockholders (in thousands)	$	36,012	$	45,927

Average number of common shares outstanding		50,738,918		55,599,758
Less: Average unallocated ESOP shares and non-vested restricted shares		(3,863,606)		(4,237,506)
Weighted average number of common shares outstanding used to calculate basic earnings per common share		46,875,312		51,362,252
Dilutive effect of share-based compensation		666,335		732,497
Weighted average number of common shares outstanding used to calculate diluted earnings per common share		47,541,647		52,094,749

Earnings per common share:
Basic	$	0.77	$	0.89
Diluted	$	0.76	$	0.88

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

16.

REVENUE RECOGNITION

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

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

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

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

17.

SEGMENT REPORTING

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Information about the reportable segments and reconciliation to the unaudited interim Consolidated Financial Statements at September 30, 2022 and 2021 and for the three and nine months then ended is presented in the tables below.


	Three Months Ended September 30, 2022
	HarborOne		HarborOne
	Bank		Mortgage		Consolidated

	(in thousands)


Net interest and dividend income	$	39,373	$	437	$	39,332
Provision for credit losses		668		—		668
Net interest and dividend income, after provision for credit losses		38,705		437		38,664
Mortgage banking income:
Gain on sale of mortgage loans		—		3,809		3,809
Intersegment gain (loss)		(904)		698		—
Changes in mortgage servicing rights fair value		164		1,652		1,816
Other		218		2,235		2,453
Total mortgage banking income (loss)		(522)		8,394		8,078
Other noninterest income (loss)		6,180		(13)		6,167
Total noninterest income		5,658		8,381		14,245
Noninterest expense		27,707		6,610		34,473
Income before income taxes		16,656		2,208		18,436
Provision for income taxes		4,166		687		4,678
Net income	$	12,490	$	1,521	$	13,758


	Nine Months Ended September 30, 2022
	HarborOne		HarborOne
	Bank		Mortgage		Consolidated

	(in thousands)


Net interest and dividend income	$	110,043	$	1,198	$	109,797
Provision for credit losses		3,552		—		3,552
Net interest and dividend income, after provision for credit losses		106,491		1,198		106,245
Mortgage banking income:
Gain on sale of mortgage loans		—		13,669		13,669
Intersegment gain (loss)		(2,607)		2,632		—
Changes in mortgage servicing rights fair value		881		7,082		7,963
Other		670		6,953		7,623
Total mortgage banking income (loss)		(1,056)		30,336		29,255
Other noninterest income		18,151		3		18,154
Total noninterest income		17,095		30,339		47,409
Noninterest expense		81,663		21,613		104,262
Income before income taxes		41,923		9,924		49,392
Provision for income taxes		11,273		2,777		13,380
Net income	$	30,650	$	7,147	$	36,012

Total assets at period end	$	5,000,963	$	132,431	$	4,987,643
Goodwill at period end	$	59,042	$	10,760	$	69,802

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)


	Three Months Ended September 30, 2021

	HarborOne		HarborOne
	Bank		Mortgage		Consolidated

	(in thousands)


Net interest and dividend income	$	32,494	$	792	$	32,803
Provision (benefit) for credit losses		(1,627)		—		(1,627)
Net interest and dividend income, after provision (benefit) for credit losses		34,121		792		34,430
Mortgage banking income:
Gain on sale of mortgage loans		—		12,756		12,756
Intersegment gain (loss)		(1,373)		2,366		—
Changes in mortgage servicing rights fair value		(74)		(918)		(992)
Other		263		3,619		3,882
Total mortgage banking income (loss)		(1,184)		17,823		15,646
Other noninterest income		6,339		25		6,364
Total noninterest income		5,155		17,848		22,010
Noninterest expense		26,570		12,387		39,274
Income before income taxes		12,706		6,253		17,166
Provision for income taxes		3,575		1,559		4,907
Net income	$	9,131	$	4,694	$	12,259


	Nine Months Ended September 30, 2021

	HarborOne		HarborOne
	Bank		Mortgage		Consolidated

	(in thousands)

Net interest and dividend income	$	95,876	$	2,897	$	97,385
Provision (benefit) for credit losses		(5,822)		—		(5,822)
Net interest and dividend income, after provision (benefit) for credit losses		101,698		2,897		103,207
Mortgage banking income:
Gain on sale of mortgage loans		—		51,820		51,820
Intersegment gain (loss)		(2,945)		3,938		—
Changes in mortgage servicing rights fair value		(207)		72		(135)
Other		839		11,633		12,472
Total mortgage banking income (loss)		(2,313)		67,463		64,157
Other noninterest income		17,328		37		17,365
Total noninterest income		15,015		67,500		81,522
Noninterest expense		75,161		44,545		120,674
Income before income taxes		41,552		25,852		64,055
Provision for income taxes		11,873		6,905		18,128
Net income	$	29,679	$	18,947	$	45,927

Total assets at period end	$	4,575,798	$	208,888	$	4,567,094
Goodwill at period end	$	59,042	$	10,760	$	69,802

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at September 30, 2022, and our results of operations for the nine months ended September 30, 2022 and 2021. This section should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes thereto of the Company appearing in Part I, Item 1 of this Form 10-Q.

Forward-Looking Statements

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

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

Critical Accounting Policies and Estimates

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

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

•Allowance for Credit Losses

•Income Taxes

•Goodwill and Identifiable Intangible Assets

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

COVID-19 Update

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

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

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

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

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


	September 30,		December 31,		Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Residential real estate:
One- to four-family	$	1,326,645	$	1,047,819	$	278,826		26.6	%
Second mortgage and equity lines of credit		157,518		136,853		20,665		15.1
Residential construction		36,646		33,308		3,338		10.0
Total residential real estate loans		1,520,809		1,217,980		302,829		24.9
Commercial:
Commercial real estate		2,041,905		1,699,877		342,028		20.1
Commercial construction		185,062		136,563		48,499		35.5
Commercial and industrial		397,112		421,608		(24,496)		(5.8)
Total commercial loans		2,624,079		2,258,048		366,031		16.2

Consumer loans		52,466		131,705		(79,239)		(60.2)

Total loans		4,197,354		3,607,733		589,621		16.3	`
Allowance for loan losses		(44,621)		(45,377)		756		1.7
Loans, net	$	4,152,733	$	3,562,356	$	590,377		16.6	%

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

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

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

Any future declines in interest rates would likely cause decreases in the fair value of the MSRs, and a corresponding decrease in earnings, whereas increases in interest rates would result in increases in fair value, and a corresponding increase in earnings. MSRs recorded during the period of July 2021 through December 2021 may be less sensitive to falling rates in the future as they were originated in a low mortgage rate environment.

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


	September 30,		December 31,		Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Noninterest-bearing deposits	$	795,945	$	743,051	$	52,894		7.1	%
NOW accounts		308,128		313,684		(5,556)		(1.8)
Regular savings		1,289,825		1,138,980		150,845		13.2
Money market accounts		506,894		548,830		(41,936)		(7.6)
Term certificate accounts		484,567		527,548		(42,981)		(8.1)
Consumer and business deposits		3,385,359		3,272,093		113,266		3.5
Municipal deposits		383,055		310,556		72,499		23.3
Wholesale deposits		114,696		100,000		14,696		14.7
Total deposits	$	3,883,110	$	3,682,649	$	200,461		5.4	%

Reciprocal deposits	$	27,736	$	43,757	$	(16,021)		(36.6)	%

The growth in deposits was driven by an increase of $113.3 million in consumer and business deposits. Consumer and business deposit growth was primarily a response to marketing and promotions of retail products and customers maintaining liquidity due to market uncertainty. At September 30, 2022, wholesale deposits were brokered deposits of $114.7 million. We participate in a reciprocal deposit program that provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. Total deposits included $27.7 million in reciprocal deposits. The wholesale deposits provide a channel for the Company to seek additional funding outside the Company’s core market.

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

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

HarborOne Bancorp, Inc. Consolidated

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

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis


	Three Months Ended September 30,
	2022							2021
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost		Balance			Interest		Cost

	(dollars in thousands)

Interest-earning assets:
Investment securities ⁽¹⁾	$	390,577		$	1,971	2.00	%	$	358,927		$	1,293	1.43	%
Other interest-earning assets		27,723			143	2.05			372,892			170	0.18
Loans held for sale		28,046			377	5.33			84,399			665	3.13
Loans
Commercial loans ⁽²⁾		2,522,359			28,298	4.45			2,121,432			22,394	4.19
Residential real estate loans⁽²⁾		1,470,305			12,972	3.50			1,121,898			9,352	3.31
Consumer loans ⁽²⁾		63,220			795	4.99			170,366			1,934	4.50
Total loans		4,055,884			42,065	4.11			3,413,696			33,680	3.91
Total interest-earning assets		4,502,230			44,556	3.93			4,229,914			35,808	3.36
Noninterest-earning assets		308,734							347,060
Total assets	$	4,810,964						$	4,576,974
Interest-bearing liabilities:
Savings accounts	$	1,293,598			1,211	0.37		$	1,136,131			365	0.13
NOW accounts		305,777			42	0.05			283,725			45	0.06
Money market accounts		893,452			1,382	0.61			832,340			392	0.19
Certificates of deposit		486,923			787	0.64			570,570			1,087	0.76
Brokered deposits		102,875			69	0.27			100,000			161	0.64
Total interest-bearing deposits		3,082,625			3,491	0.45			2,922,766			2,050	0.28
FHLB advances		196,036			1,209	2.45			84,438			431	2.03
Subordinated debentures		34,237			524	6.07			34,111			524	6.09
Total borrowings		230,273			1,733	2.99			118,549			955	3.20
Total interest-bearing liabilities		3,312,898			5,224	0.63			3,041,315			3,005	0.39
Noninterest-bearing liabilities:
Noninterest-bearing deposits		789,214							756,927
Other noninterest-bearing liabilities		80,304							90,366
Total liabilities		4,182,416							3,888,608
Total equity		628,548							688,366
Total liabilities and equity	$	4,810,964						$	4,576,974
Net interest income as reported					39,332							32,803
Interest rate spread ⁽³⁾						3.30	%						2.97	%
Net interest-earning assets ⁽⁴⁾	$	1,189,332						$	1,188,599
Net interest margin ⁽⁵⁾						3.47	%						3.08	%
Ratio of interest-earning assets to interest-bearing liabilities		135.90	%						139.08	%

Supplemental information:
Total deposits, including demand deposits	$	3,871,839		$	3,491			$	3,679,693		$	2,050
Cost of total deposits						0.36	%						0.22	%
Total funding liabilities, including demand deposits	$	4,102,112		$	5,224			$	3,798,242		$	3,005
Cost of total funding liabilities						0.51	%						0.31	%


⁽¹⁾ Includes securities available for sale and securities held to maturity.
⁽²⁾ Includes nonaccruing loan balances and interest received on such loans.
⁽³⁾ Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
⁽⁴⁾ Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
⁽⁵⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis


	Nine Months Ended September 30,
	2022							2021
	Average							Average
	Outstanding					Yield/		Outstanding					Yield/
	Balance			Interest		Cost		Balance			Interest		Cost

	(dollars in thousands)

Interest-earning assets:
Investment securities ⁽¹⁾		391,786			5,545	1.89			318,817			2,671	1.12
Other interest-earning assets		80,540			335	0.56			317,837			384	0.16
Loans held for sale		29,114			972	4.46			130,622			2,841	2.91
Loans
Commercial loans ⁽²⁾		2,400,290			75,688	4.22			2,144,726			65,253	4.07
Residential real estate loans⁽²⁾		1,341,508			34,296	3.42			1,090,361			29,439	3.61
Consumer loans ⁽²⁾		89,934			3,179	4.73			209,443			6,954	4.44
Total loans		3,831,732			113,163	3.95			3,444,530			101,646	3.95
Total interest-earning assets		4,333,172			120,015	3.70			4,211,806			107,542	3.41
Noninterest-earning assets		315,781							338,980
Total assets	$	4,648,953						$	4,550,786
Interest-bearing liabilities:
Savings accounts	$	1,242,533			2,203	0.24		$	1,104,765			1,363	0.16
NOW accounts		306,115			116	0.05			242,623			123	0.07
Money market accounts		879,310			2,320	0.35			849,041			1,369	0.22
Certificates of deposit		497,744			2,186	0.59			589,404			3,760	0.85
Brokered deposits		100,969			306	0.41			100,000			457	0.61
Total interest-bearing deposits		3,026,671			7,131	0.32			2,885,833			7,072	0.33
FHLB advances		96,015			1,516	2.11			94,482			1,514	2.14
Subordinated debentures		34,206			1,571	6.14			34,080			1,571	6.16
Total borrowings		130,221			3,087	3.17			128,562			3,085	3.21
Total interest-bearing liabilities		3,156,892			10,218	0.43			3,014,395			10,157	0.45
Noninterest-bearing liabilities:
Noninterest-bearing deposits		765,479							749,426
Other noninterest-bearing liabilities		80,727							90,763
Total liabilities		4,003,098							3,854,584
Total equity		645,855							696,202
Total liabilities and equity	$	4,648,953						$	4,550,786
Net interest income as reported					109,797							97,385
Interest rate spread ⁽³⁾						3.27	%						2.96	%
Net interest-earning assets ⁽⁴⁾	$	1,176,280						$	1,197,411
Net interest margin ⁽⁵⁾						3.39	%						3.09	%
Ratio of interest-earning assets to interest-bearing liabilities		137.26	%						139.72	%

Supplemental information:
Total deposits, including demand deposits	$	3,792,150		$	7,131			$	3,635,259		$	7,072
Cost of total deposits						0.25	%						0.26	%
Total funding liabilities, including demand deposits	$	3,922,371		$	10,218			$	3,763,821		$	10,157
Cost of total funding liabilities						0.35	%						0.36	%


⁽¹⁾ Includes securities available for sale and securities held to maturity.
⁽²⁾ Includes nonaccruing loan balances and interest received on such loans.
⁽³⁾ Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
⁽⁴⁾ Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
⁽⁵⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022 v. 2021						2022 v. 2021
	Increase (Decrease)				Total		Increase (Decrease)				Total
	Due to Changes in				Increase		Due to Changes in				Increase
	Volume		Rate		(Decrease)		Volume		Rate		(Decrease)

	(in thousands)

Interest-earning assets:
Investment securities	$	104	$	574	$	678	$	510	$	2,364	$	2,874
Other interest-earning assets		(27)		—		(27)		(124)		75		(49)
Loans held for sale		(288)		—		(288)		(1,516)		(353)		(1,869)
Loans
Commercial loans		2,289		3,615		5,904		6,547		3,888		10,435
Residential real estate loans		2,772		848		3,620		6,417		(1,560)		4,857
Consumer loans		(1,083)		(56)		(1,139)		(3,724)		(51)		(3,775)
Total loans		3,978		4,407		8,385		9,240		2,277		11,517
Total interest-earning assets		3,767		4,981		8,748		8,110		4,363		12,473
Interest-bearing liabilities:
Savings accounts		43		803		846		154		686		840
NOW accounts		3		(6)		(3)		28		(35)		(7)
Money market accounts		27		963		990		47		904		951
Certificates of deposit		(148)		(152)		(300)		(524)		(1,050)		(1,574)
Brokered deposit		5		(97)		(92)		4		(155)		(151)
Total interest-bearing deposits		(70)		1,511		1,441		(291)		350		59
FHLB advances		881		(103)		778		2		—		2
Subordinated debentures		—		—		—		—		—		—
Total borrowings		881		(103)		778		2		—		2
Total interest-bearing liabilities		811		1,408		2,219		(289)		350		61
Change in net interest income	$	2,956	$	3,573	$	6,529	$	8,399	$	4,013	$	12,412

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

●

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

●

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

●

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

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

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

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

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

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

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

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

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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


	HarborOne Bank								HarborOne Mortgage
	Three Months Ended								Three Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent		2022		2021		Dollars		Percent

	(dollars in thousands)

Net interest and dividend income	$	39,373	$	32,494	$	6,879	21.2	%	$	437	$	792	$	(355)	(44.8)	%
Provision (benefit) for credit losses		668		(1,627)		2,295	141.1			—		—		—	—
Net interest and dividend income, after provision (benefit) for credit losses		38,705		34,121		4,584	13.4			437		792		(355)	(44.8)
Mortgage banking income:
Gain on sale of mortgage loans		—		—		—	—			3,809		12,756		(8,947)	(70.1)
Intersegment gain (loss)		(904)		(1,373)		469	34.2			698		2,366		(1,668)	(70.5)
Changes in mortgage servicing rights fair value		164		(74)		238	321.6			1,652		(918)		2,570	280.0
Other		218		263		(45)	(17.1)			2,235		3,619		(1,384)	(38.2)
Total mortgage banking income (loss)		(522)		(1,184)		662	55.9			8,394		17,823		(9,429)	(52.9)
Other noninterest income (loss)		6,180		6,339		(159)	(2.5)			(13)		25		(38)	(152.0)
Total noninterest income		5,658		5,155		503	9.8			8,381		17,848		(9,467)	(53.0)
Noninterest expense		27,707		26,570		1,137	4.3			6,610		12,387		(5,777)	(46.6)
Income before income taxes		16,656		12,706		3,950	31.1			2,208		6,253		(4,045)	(64.7)
Provision for income taxes		4,166		3,575		591	16.5			687		1,559		(872)	(55.9)
Net income	$	12,490	$	9,131	$	3,359	36.8	%	$	1,521	$	4,694	$	(3,173)	(67.6)	%


	HarborOne Bank								HarborOne Mortgage
	Nine Months Ended								Nine Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent		2022		2021		Dollars		Percent

	(dollars in thousands)


Net interest and dividend income	$	110,043	$	95,876	$	14,167	14.8	%	$	1,198	$	2,897	$	(1,699)	(58.6)	%
Provision (benefit) for credit losses		3,552		(5,822)		9,374	161.0			—		—		—	—
Net interest and dividend income, after provision (benefit) for credit losses		106,491		101,698		4,793	4.7			1,198		2,897		(1,699)	(58.6)
Mortgage banking income:
Gain on sale of mortgage loans		—		—		—	—			13,669		51,820		(38,151)	(73.6)
Intersegment gain (loss)		(2,607)		(2,945)		338	11.5			2,632		3,938		(1,306)	(33.2)
Changes in mortgage servicing rights fair value		881		(207)		1,088	525.6			7,082		72		7,010	NM
Other		670		839		(169)	(20.1)			6,953		11,633		(4,680)	(40.2)
Total mortgage banking income (loss)		(1,056)		(2,313)		1,257	54.3			30,336		67,463		(37,127)	(55.0)
Other noninterest income		18,151		17,328		823	4.7			3		37		(34)	(91.9)
Total noninterest income		17,095		15,015		2,080	13.9			30,339		67,500		(37,161)	(55.1)
Noninterest expense		81,663		75,161		6,502	8.7			21,613		44,545		(22,932)	(51.5)
Income before income taxes		41,923		41,552		371	0.9			9,924		25,852		(15,928)	(61.6)
Provision for income taxes		11,273		11,873		(600)	(5.1)			2,777		6,905		(4,128)	(59.8)
Net income	$	30,650	$	29,679	$	971	3.3	%	$	7,147	$	18,947	$	(11,800)	(62.3)	%

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

HarborOne Bank Segment

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

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

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

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

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

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

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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


	Three Months Ended September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Intersegment loss	$	(904)	$	(1,373)	$	469		34.2	%
Secondary market loan servicing fees, net of guarantee fees		218		263		(45)		(17.1)
Changes in mortgage servicing rights fair value		164		(74)		238		321.6
Total mortgage banking loss		(522)		(1,184)		662		55.9	%
Interchange fees		2,574		2,674		(100)		(3.7)
Other deposit account fees		2,296		1,984		312		15.7
Income on retirement plan annuities		119		108		11		10.2
Gain on sale and call of securities		—		241		(241)		(100.0)
Bank-owned life insurance income		503		515		(12)		(2.3)
Swap fee income		70		20		50		100.0
Other		618		797		(179)		(22.5)
Total noninterest income	$	5,658	$	5,155	$	503		9.8	%


	Nine Months Ended September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Intersegment loss	$	(2,607)	$	(2,945)	$	338		11.5	%
Secondary market loan servicing fees, net of guarantee fees		670		839		(169)		(20.1)
Changes in mortgage servicing rights fair value		881		(207)		1,088		525.6
Total mortgage banking loss		(1,056)		(2,313)		1,257		54.3	%
Interchange fees		7,754		7,825		(71)		(0.9)
Other deposit account fees		6,480		5,231		1,249		23.9
Income on retirement plan annuities		338		318		20		6.3
Gain on sale and call of securities		—		241		(241)		(100.0)
Bank-owned life insurance income		1,480		1,516		(36)		(2.4)
Swap fee income		112		315		(203)		(64.4)
Other		1,987		1,882		105		5.6
Total noninterest income	$	17,095	$	15,015	$	2,080		13.9	%

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

●

The Bank records an intersegment loss on loans purchased from HarborOne Mortgage that is offset in consolidation. The Bank purchased $335.0 million of residential mortgage loans from HarborOne Mortgage during the nine months ended September 30, 2022, as compared to $372.0 million for the prior year period.

●

The change in the MSR fair value is generally consistent with the change in the 10-year Treasury Constant Maturity rate. As interest rates rise and prepayment speeds decrease, MSR fair value tends to increase. Conversely, when interest rates fall and prepayment speeds increase, MSR fair value tends to decrease. The 10-year Treasury Constant Maturity rate increased 85 basis points and 231 basis points for the three and nine months ended September 30, 2022, respectively, positively impacting the fair value of the MSRs, partially offset by amortization related to principal payments.

●	The increase in other deposit account fees reflects an increase in overdraft protection fees of $249,000 and $1.1 million for the three and nine months ended September 30, 2022, respectively.

Table of Contents

HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

●

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

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


	Three Months Ended September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	16,455	$	14,736	$	1,719		11.7	%
Occupancy and equipment		4,096		4,013		83		2.1
Data processing expenses		2,219		2,028		191		9.4
Loan expenses		68		320		(252)		(78.8)
Marketing		728		795		(67)		(8.4)
Deposit expenses		587		431		156		36.2
Postage and printing		358		374		(16)		(4.3)
Professional fees		1,258		1,075		183		17.0
Prepayment penalties on Federal Home Loan Bank advances		—		1,095		(1,095)		(100.0)
Foreclosed and repossessed assets		—		(308)		308		100.0
Deposit insurance		357		341		16		4.7
Other expenses		1,581		1,670		(89)		(5.3)
Total noninterest expense	$	27,707	$	26,570	$	1,137		4.3	%


	Nine Months Ended September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	47,942	$	41,664	$	6,278		15.1	%
Occupancy and equipment		12,598		12,239		359		2.9
Data processing expenses		6,552		6,479		73		1.1
Loan expenses		298		925		(627)		(67.8)
Marketing		2,776		2,334		442		18.9
Deposit expenses		1,646		1,209		437		36.1
Postage and printing		1,128		1,098		30		2.7
Professional fees		3,419		2,960		459		15.5
Prepayment penalties on Federal Home Loan Bank advances		—		1,095		(1,095)		(100.0)
Foreclosed and repossessed assets		18		(332)		350		105.4
Deposit insurance		1,060		993		67		6.7
Other expenses		4,226		4,497		(271)		(6.0)
Total noninterest expense	$	81,663	$	75,161	$	6,502		8.7	%

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

●

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

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

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

●	The increase in deposit expense reflects check losses.

HarborOne Mortgage Segment

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

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

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


	Three Months Ended September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Gain on sale of mortgage loans	$	3,809	$	12,756	$	(8,947)		(70.1)	%
Intersegment gain		698		2,366		(1,668)		(70.5)
Processing, underwriting and closing fees		466		1,974		(1,508)		(76.4)
Secondary market loan servicing fees net of guarantee fees		1,769		1,645		124		7.5
Changes in mortgage servicing rights fair value		1,652		(918)		2,570		280.0
Total mortgage banking income	$	8,394	$	17,823	$	(9,429)		(52.9)	%

Originated mortgage servicing rights included in gain on sale of mortgage loans	$	915	$	1,577	$	(662)		(42.0)	%
Change in 10-year Treasury Constant Maturity rate in basis points		85		7


	Nine Months Ended September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Gain on sale of mortgage loans	$	13,669	$	51,820	$	(38,151)		(73.6)	%
Intersegment gain		2,632		3,938		(1,306)		(33.2)
Processing, underwriting and closing fees		1,723		7,147		(5,424)		(75.9)
Secondary market loan servicing fees net of guarantee fees		5,230		4,486		744		16.6
Changes in mortgage servicing rights fair value		7,082		72		7,010		9,736.1
Total mortgage banking income	$	30,336	$	67,463	$	(37,127)		(55.0)	%

Originated mortgage servicing rights included in gain on sale of mortgage loans	$	3,630	$	11,823	$	(8,193)		(69.3)	%
Change in 10-year Treasury Constant Maturity rate in basis points		231		59

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

●

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

●	Quarter over quarter, gain on sale of mortgages and processing, underwriting and closing fees decreased as loan closings decreased due to slowing mortgage demand on rising interest rates.

●	The increase in the secondary market loan servicing fee net of guarantee fees reflects the increase in the average serviced mortgage loans for the three and nine months ended September 30, 2022, as compared to the respective prior year periods.

The following tables provide additional loan production detail:


	Three Months Ended September 30,
	2022				2021
	Loan					Loan
	Amount		% of Total			Amount		% of Total

	(dollars in thousands)

Product Type
Conventional	$	117,536	46.9	%		$	379,934	62.8	%
Government		15,020	6.0				35,021	5.9
State Housing Agency		12,037	4.8				20,739	3.4
Jumbo		105,776	42.2				168,999	27.9
Seconds		95	0.1				193	—
Total	$	250,464	100.0	%		$	604,886	100.0	%

Purpose
Purchase	$	228,934	91.4	%		$	324,886	53.7	%
Refinance		15,007	6.0				269,011	44.5
Construction		6,523	2.6				10,989	1.8
Total	$	250,464	100.0	%		$	604,886	100.0	%


	Nine Months Ended September 30,
	2022				2021
	Loan				Loan
	Amount		% of Total		Amount		% of Total

	(dollars in thousands)

Product Type
Conventional	$	421,436	52.6	%	$	1,395,093	69.7	%
Government		44,784	5.6			126,724	6.3
State Housing Agency		30,112	3.7			55,792	2.8
Jumbo		305,291	38.1			425,819	21.2
Seconds		195	0.0			457	—
Total	$	801,818	100.0	%	$	2,003,885	100.0	%

Purpose
Purchase	$	603,289	75.2	%	$	844,973	42.2	%
Refinance		169,362	21.1			1,132,700	56.5
Construction		29,167	3.7			26,212	1.3
Total	$	801,818	100.0	%	$	2,003,885	100.0	%

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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


	Three Months Ended September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	4,788	$	10,022	$	(5,234)		(52.2)	%
Occupancy and equipment		691		702		(11)		(1.6)
Data processing expenses		92		153		(61)		(39.9)
Loan expenses		287		1,003		(716)		(71.4)
Marketing		122		85		37		43.5
Postage and printing		11		20		(9)		(45.0)
Professional fees		108		242		(134)		(55.4)
Other expenses		511		160		351		219.4
Total noninterest expense	$	6,610	$	12,387	$	(5,777)		(46.6)	%


	Nine Months Ended September 30,				Increase (Decrease)
	2022		2021		Dollars		Percent

	(dollars in thousands)

Compensation and benefits	$	15,974	$	35,660	$	(19,686)		(55.2)	%
Occupancy and equipment		2,094		2,314		(220)		(9.5)
Data processing expenses		259		375		(116)		(30.9)
Loan expenses		920		4,083		(3,163)		(77.5)
Marketing		278		190		88		46.3
Postage and printing		47		89		(42)		(47.2)
Professional fees		484		1,303		(819)		(62.9)
Other expenses		1,557		531		1,026		193.2
Total noninterest expense	$	21,613	$	44,545	$	(22,932)		(51.5)	%

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

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

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

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

●	The decrease in professional fees primarily reflects expenses for outsourced quality control services and mortgage consulting services that were utilized in 2021.

●	The quarter-to-date and year-to-date increase in other expenses reflects increased intercompany management fees, cloud-computing expenses, and employment agency fees.

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

Asset Quality

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


	September 30,			December 31,
	2022			2021

	(dollars in thousands)

Non-accrual loans:
Residential real estate:
One- to four-family	$	8,921		$	11,210
Second mortgages and equity lines of credit		415			600
Commercial real estate		10,576			20,053
Commercial construction		—			—
Commercial and industrial		3,287			4,114
Consumer		94			156
Total non-accrual loans ⁽¹⁾		23,293			36,133
Other real estate owned and repossessed assets:
One- to four-family residential real estate owned		—			—
Other repossessed assets		74			53
Total nonperforming assets		23,367			36,186
Performing troubled debt restructurings		8,847			10,003
Total nonperforming assets and performing troubled debt restructurings	$	32,214		$	46,189

Period end allowance for credit losses balance		44,621			45,377
Period end total loan balance		4,197,354			3,607,733
Allowance for credit losses to total loans		1.06	%		1.26	%
Allowance for credit losses to non-accrual loans		191.56	%		125.58	%
Total nonperforming loans to total loans ⁽²⁾		0.55	%		1.00	%
Total nonperforming assets and performing troubled debt restructurings to total assets		0.65	%		1.01	%
Total nonperforming assets to total assets		0.47	%		0.79	%

⁽¹⁾ $2.9 million and $1.0 million of troubled debt restructurings are included in total non-accrual loans at September 30, 2022 and December 31, 2021, respectively.
⁽²⁾ Total loans are presented before allowance for loan losses, but include deferred loan origination costs (fees), net.

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

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

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

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


	September 30, 2022						December 31, 2021
			% of						% of
			Allowance						Allowance
			Amount to		% of Loans				Amount to		% of Loans
			Total		in Category				Total		in Category
	Amount		Allowance		to Total Loans			Amount	Allowance		to Total Loans

	(dollars in thousands)

Residential real estate:
One- to four-family	$	10,918	24.47	%	31.61	%	$	3,631	8.00	%	29.04	%
Second mortgages and equity lines of credit		848	1.90		3.75			420	0.93		3.79
Residential construction		294	0.66		0.87			69	0.15		0.93
Commercial real estate		21,155	47.41		48.65			33,242	73.26		47.12
Commercial construction		4,469	10.02		4.41			2,010	4.43		3.79
Commercial and industrial		6,690	14.99		9.46			4,638	10.22		11.69
Consumer		247	0.55		1.24			367	0.81		3.64
Total general and allocated allowance		44,621	100.00		100.00	%		44,377	97.80		100.00	%
Unallocated		—	0.00					1,000	2.20
Total	$	44,621	100.00	%			$	45,377	100.00	%

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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


	Three Months Ended September 30,
	2022						2021
			Net		Net Charge-				Net		Net Charge-
	Average		Charge-offs		off (Recovery)		Average		Charge-offs		off (Recovery)
	Balance		(Recoveries)		Rate		Balance		(Recoveries)		Rate

	(dollars in thousands)

Residential real estate:
One- to four-family	$	1,276,112	$	(2)	(0.00)	%	$	954,917	$	(1)	(0.00)	%
Second mortgages and equity lines of credit		154,601		(15)	(0.04)	%		134,978		(7)	(0.02)	%
Residential real estate construction		39,592		—	—	%		32,003		—	—	%
Total residential real estate loans	$	1,470,305	$	(17)	(0.00)	%	$	1,121,898	$	(8)	(0.00)	%

Commercial:
Commercial real estate	$	2,042,145	$	17	0.00	%	$	1,551,868	$	380	0.10	%
Commercial construction		177,999		—	—	%		127,576		—	—	%
Commercial and industrial		302,215		(816)	(1.08)	%		441,988		1,259	1.14	%
Total commercial loans	$	2,522,359	$	(799)	(0.13)	%	$	2,121,432	$	1,639	0.31	%

Total Consumer loans	$	63,220	$	17	0.11	%	$	170,366	$	27	0.06	%

Total loans	$	4,055,884	$	(799)	(0.08)	%	$	3,413,696	$	1,658	0.19	%


	Nine Months Ended September 30,
	2022						2021
			Net		Net Charge-				Net		Net Charge-
	Average		Charge-offs		off (Recovery)		Average		Charge-offs		off (Recovery)
	Balance		(Recoveries)		Rate		Balance		(Recoveries		Rate

	(dollars in thousands)

Residential real estate:
One- to four-family	$	1,157,063	$	(2)	(0.00)	%	$	921,334	$	(144)	(0.02)	%
Second mortgages and equity lines of credit		145,965		(108)	(0.10)	%		137,371		(84)	(0.08)	%
Residential real estate construction		38,480		—	—	%		31,656		—	—	%
Total residential real estate loans	$	1,341,508	$	(110)	(0.01)	%	$	1,090,361	$	(228)	(0.03)	%

Commercial:
Commercial real estate	$	1,937,531	$	2,797	0.19	%	$	1,555,887	$	388	0.03	%
Commercial construction		156,709		—	—	%		114,362		—	—	%
Commercial and industrial		306,050		(1,249)	(0.54)	%		474,477		1,427	0.40	%
Total commercial loans	$	2,400,290	$	1,548	0.09	%	$	2,144,726	$	1,815	0.11	%

Total Consumer loans	$	89,934	$	(12)	(0.02)	%	$	209,443	$	(2)	(0.00)	%

Total loans	$	3,831,732	$	1,426	0.05	%	$	3,444,530	$	1,585	0.06	%

Management of Market Risk

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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

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


September 30, 2022
	Change in Net Interest Income
Changes in Interest Rates	(% change from year one base)
(basis points) ⁽¹⁾	Year One		Year Two
+300	(6.9)	%	(4.4)	%
+200	(4.4)	%	(2.5)	%
+100	(2.2)	%	(1.2)	%
-100	0.8	%	(1.1)	%

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

Economic Value of Equity Analysis. The Company also uses the net present value of equity at risk, or “EVE,” methodology. This methodology calculates the difference between the present value of expected cash flows from assets and liabilities. The comparative scenarios assume an immediate parallel shift in the yield curve up 100, 200, and 300 basis points and down 100 basis points.

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

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


At September 30, 2022
							EVE as a Percentage of Economic
			Estimated Increase (Decrease)				Value of Assets
Changes in Interest Rates		Estimated	in EVE						Changes in
(basis points) ⁽¹⁾		EVE	Amount		Percent		EVE Ratio ⁽²⁾		Percent
(dollars in thousands)

+ 300	$	625,554	$	(238,149)	(27.6)	%	14.8	%	(3.6)	%
+ 200		713,882		(149,821)	(17.3)		16.3		(2.1)
+ 100		788,855		(74,848)	(8.7)		17.4		(1.0)
0		863,703		—	—		18.4		—
- 100		893,747		30,044	3.5		18.4		—

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

Liquidity Management and Capital Resources

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

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

refinancings, deposit balance changes, liability issuances and settlements, and off-balance sheet funding commitments. We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions. Management regularly adjusts our investments in liquid assets based upon an assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of our interest rate risk and investment policies.

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

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

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

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

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

At September 30, 2022, we had outstanding commitments to originate loans of $296.7 million and unadvanced funds on loans of $910.4 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2022 totaled $406.6 million. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may use FHLB advances, brokered deposits, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. For additional information on financial instruments with off-balance sheet risk see Note 9 of the unaudited interim Consolidated Financial Statements included in Part I, item I of this Form 10-Q.

Non-GAAP Financial Measures and Reconciliation to GAAP

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

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HarborOne Bancorp, Inc.

Management’s Discussion and Analysis

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


	Quarters Ended
	September 30,			December 31,			September 30,
	2022			2021			2021
(dollars on thousands)

Tangible common equity:
Total stockholders' equity	$	611,370		$	679,261		$	680,032
Less: Goodwill		69,802			69,802			69,802
Less: Other intangible assets⁽¹⁾		2,461			3,164			3,399
Tangible common equity	$	539,107		$	606,295		$	606,831

Tangible assets:
Total assets	$	4,987,643		$	4,553,405		$	4,567,094
Less: Goodwill		69,802			69,802			69,802
Less: Other intangible assets		2,461			3,164			3,399
Tangible assets	$	4,915,380		$	4,480,439		$	4,493,893

Tangible common equity / tangible assets ⁽²⁾		10.97	%		13.53	%		13.50	%

⁽¹⁾ Other intangible assets are core deposit intangibles.
⁽²⁾ This non-GAAP ratio is total stockholders' equity less goodwill and intangible assets to total assets less goodwill and intangible assets.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Internal Control Over Financial Reporting

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

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

a)	Unregistered Sales of Equity Securities. None

b)	Use of Proceeds. None

c)	Repurchase of Equity Securities.


	Issuer Purchases of Equity Securities

	Total Number
	of Shares		Average Price
Index	Purchased		Paid Per Share
July 1 to July 31, 2022		303,127		13.98
August 1 to August 31, 2022		80,002		13.79
September 1 to September 30, 2022		400,373		13.71
Total		783,502	$	13.82

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

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

EXHIBIT INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (and are numbered in accordance with Item 601 of Regulation S-K):


Exhibit No.		Description


31.1*		Certification of Chief Executive Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
31.2*		Certification of Chief Financial Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
32.1**		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 (iii) the Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2022 and 2021, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, and (vi) the Notes to the unaudited Consolidated Financial Statements.
104		Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)

*Filed herewith

**Furnished herewith

† Management contract or compensation plan or arrangement.

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SIGNATURES

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


	HarborOne Bancorp, Inc.

Date: November 8, 2022	By:	/s/ Joseph F. Casey
		Joseph F. Casey
		President and Chief Executive Officer (Principal Executive Officer)

Date: November 8, 2022	By:	/s/ Linda H. Simmons
		Linda H. Simmons
		Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)