UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2019

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

Commission File Number 001-37778

HarborOne Bancorp, Inc.

(Exact name of registrant as specified in its charter)


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

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

(508) 895-1000

(Registrant’s telephone number, including area code)

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


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

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

☒ Yes ☐ No

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

☒ Yes ☐ No

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

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☒

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

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

As of August 1, 2019 there were 32,573,244 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 June 30, 2019 and December 31, 2018 (unaudited)	1
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	61
ITEM 4.	Controls and Procedures	61

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	62
ITEM 1A.	Risk Factors	62
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
ITEM 3.	Defaults Upon Senior Securities	62
ITEM 4.	Mine Safety Disclosures	62
ITEM 5.	Other Information	62
ITEM 6.	Exhibits	62

EXHIBIT INDEX		63

SIGNATURE		64

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HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)


	June 30,		December 31,
(in thousands, except share data)	2019		2018

Assets
Cash and due from banks	$	27,205	$	27,686
Short-term investments		51,502		77,835
Total cash and cash equivalents		78,707		105,521

Securities available for sale, at fair value		202,457		209,293
Securities held to maturity, at amortized cost		34,752		44,688
Federal Home Loan Bank stock, at cost		14,876		24,969
Loans held for sale, at fair value		84,651		42,107
Loans		3,065,941		2,985,507
Less: Allowance for loan losses		(22,261)		(20,655)
Net loans		3,043,680		2,964,852
Accrued interest receivable		10,325		9,996
Other real estate owned and repossessed assets		504		749
Mortgage servicing rights, at fair value		18,156		22,217
Property and equipment, net		57,543		57,045
Retirement plan annuities		13,127		12,931
Bank-owned life insurance		45,136		44,635
Deferred income taxes, net		5,646		6,727
Goodwill and other intangible assets		76,735		78,467
Other assets		51,129		28,924
Total assets	$	3,737,424	$	3,653,121

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits	$	447,449	$	412,906
Interest-bearing deposits		2,390,220		2,194,647
Brokered deposits		131,936		77,508
Total deposits		2,969,605		2,685,061
Short-term borrowed funds		98,000		290,000
Long-term borrowed funds		211,149		229,936
Subordinated debt		33,843		33,799
Mortgagors' escrow accounts		5,214		4,551
Accrued interest payable		1,409		1,611
Other liabilities and accrued expenses		47,086		50,589
Total liabilities		3,366,306		3,295,547

Commitments and contingencies (Notes 10 and 11)

Common stock, $0.01 par value; 90,000,000 shares authorized; 32,654,920 and 32,645,161 shares issued; 32,573,244 and 32,563,485 shares outstanding at June 30, 2019 and December 31, 2018, respectively		327		327
Additional paid-in capital		154,730		152,156
Retained earnings		225,936		219,088
Treasury stock, at cost, 81,676 shares at June 30, 2019 and December 31, 2018, respectively		(1,548)		(1,548)
Accumulated other comprehensive income (loss)		1,466		(2,358)
Unearned compensation - ESOP		(9,793)		(10,091)
Total stockholders' equity		371,118		357,574
Total liabilities and stockholders' equity	$	3,737,424	$	3,653,121

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Income (unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except share data)	2019		2018		2019		2018

Interest and dividend income:
Interest and fees on loans	$	35,438	$	23,866	$	69,803	$	46,370
Interest on loans held for sale		542		521		900		932
Interest on taxable securities		1,703		1,351		3,366		2,630
Interest on non-taxable securities		147		216		331		433
Other interest and dividend income		448		297		931		571
Total interest and dividend income		38,278		26,251		75,331		50,936

Interest expense:
Interest on deposits		9,362		4,450		17,605		7,973
Interest on FHLB borrowings		1,679		906		3,954		1,944
Interest on subordinated debentures		524		—		1,029		—
Total interest expense		11,565		5,356		22,588		9,917

Net interest and dividend income		26,713		20,895		52,743		41,019
Provision for loan losses		1,750		886		2,607		1,694

Net interest and dividend income, after provision for loan losses		24,963		20,009		50,136		39,325

Noninterest income:
Mortgage banking income:
Changes in mortgage servicing rights fair value		(2,241)		(306)		(4,392)		716
Other		10,896		8,765		17,549		15,026
Total mortgage banking income		8,655		8,459		13,157		15,742
Deposit account fees		4,056		3,224		7,834		6,191
Income on retirement plan annuities		100		119		196		232
Gain on sale and call of securities, net		1,267		—		1,267		—
Bank-owned life insurance income		253		243		506		482
Other income		1,387		512		2,600		1,259
Total noninterest income		15,718		12,557		25,560		23,906

Noninterest expense:
Compensation and benefits		20,585		17,345		39,830		33,697
Occupancy and equipment		4,411		2,961		8,859		6,236
Data processing		2,199		1,569		4,245		3,122
Loan expenses		1,334		1,390		2,605		2,652
Marketing		1,177		1,084		2,135		2,083
Deposit expenses		434		327		784		657
Postage and printing		422		354		910		720
Professional fees		1,384		915		2,330		1,883
Foreclosed and repossessed assets		(5)		45		(76)		108
Deposit insurance		589		491		1,255		985
Merger expenses		—		524		—		1,010
Other expenses		2,551		1,513		4,796		2,964
Total noninterest expense		35,081		28,518		67,673		56,117

Income before income taxes		5,600		4,048		8,023		7,114

Income tax provision		819		945		1,175		1,759

Net income	$	4,781	$	3,103	$	6,848	$	5,355

Earnings per common share:
Basic	$	0.15	$	0.10	$	0.22	$	0.17
Diluted	$	0.15	$	0.10	$	0.22	$	0.17
Weighted average shares outstanding:
Basic		31,582,546		31,578,961		31,572,211		31,574,411
Diluted		31,582,546		31,578,961		31,572,211		31,574,411

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2019		2018		2019		2018

Net income	$	4,781	$	3,103	$	6,848	$	5,355
Other comprehensive income:

Securities available for sale:
Unrealized holding gains (losses)		2,980		(1,328)		6,171		(3,975)
Reclassification adjustment for net realized gains		(1,267)		—		(1,267)		—
Net unrealized gains (losses)		1,713		(1,328)		4,904		(3,975)
Related tax effect		(377)		292		(1,080)		874
Net-of-tax amount		1,336		(1,036)		3,824		(3,101)

Comprehensive income	$	6,117	$	2,067	$	10,672	$	2,254

Realized gains on securities available for sale are included in gain on sale and call of securities, net, in the Consolidated Statements of Income. The related income tax expense for the three and six months ended June 30, 2019 was $365,000. There were no realized gains on sales of available for sale securities for the three and six months ended June 30, 2018.

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 March 31, 2018	32,622,695	$	327	$	148,559	$	209,946	$	(742)	$	(2,697)	$	(10,536)	$	344,857

Comprehensive income (loss)	—		—		—		3,103		—		(1,036)		—		2,067

ESOP shares committed to be released (14,840 shares)	—		—		123		—		—		—		148		271

Share-based compensation expense	—		—		1,381		—		—		—		—		1,381

Balance at June 30, 2018	32,622,695	$	327	$	150,063	$	213,049	$	(742)	$	(3,733)	$	(10,388)	$	348,576



Balance at March 31, 2019	32,560,136	$	327	$	153,326	$	221,155	$	(1,548)	$	130	$	(9,942)	$	363,448

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

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

Restricted stock awards forfeited, net of awards issued	13,108		—		—		—		—		—		—		—

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

Balance at June 30, 2019	32,573,244	$	327	$	154,730	$	225,936	$	(1,548)	$	1,466	$	(9,793)	$	371,118

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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, 2017	32,647,395	$	327	$	147,060	$	207,590	$	(280)	$	(528)	$	(10,685)	$	343,484

Comprehensive income (loss)	—		—		—		5,355		—		(3,101)		—		2,254

Reclassification of stranded effect of tax rate change	—		—		—		104		—		(104)		—		—

ESOP shares committed to be released (29,680 shares)	—		—		256		—		—		—		297		553

Share-based compensation expense	—		—		2,747		—		—		—		—		2,747

Treasury stock purchased	(24,700)		—		—		—		(462)		—		—		(462)

Balance at June 30, 2018	32,622,695	$	327	$	150,063	$	213,049	$	(742)	$	(3,733)	$	(10,388)	$	348,576



Balance at December 31, 2018	32,563,485	$	327	$	152,156	$	219,088	$	(1,548)	$	(2,358)	$	(10,091)	$	357,574

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

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

Restricted stock awards forfeited, net of awards issued	9,759		—		—		—		—		—		—		—

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

Balance at June 30, 2019	32,573,244	$	327	$	154,730	$	225,936	$	(1,548)	$	1,466	$	(9,793)	$	371,118

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)


	Six Months Ended June 30,
(in thousands)	2019		2018

Cash flows from operating activities:
Net income	$	6,848	$	5,355
Adjustments to reconcile net income to net cash used by operating activities:
Provision for loan losses		2,607		1,694
Net amortization of securities premiums/discounts		156		280
Net amortization of net deferred loan costs/fees and premiums		1,491		1,753
Depreciation and amortization of premises and equipment		2,204		1,429
Change in mortgage servicing rights fair value		4,392		(716)
Mortgage servicing rights capitalized		(331)		(1,024)
Amortization of consumer servicing rights		15		24
Accretion of fair value adjustment on loans and deposits, net		(864)		(166)
Amortization of other intangible assets		1,279		44
Amortization of subordinated debt issuance costs		44		—
Gain on sale of securities, net		(1,267)		—
Bank-owned life insurance income		(506)		(482)
Income on retirement plan annuities		(196)		(232)
Net (gain) loss on sale and write-down of other real estate owned and repossessed assets		(67)		56
Deferred income tax expense		1		—
ESOP expense		510		553
Share-based compensation expense		2,362		2,747
Net change in:
Loans held for sale		(42,544)		(11,557)
Other assets and liabilities, net		(25,796)		(3,453)
Net cash used by operating activities		(49,662)		(3,695)

Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		14,514		11,083
Purchases		(29,930)		(30,019)
Sales		28,391		—
Activity in securities held to maturity:
Maturities, prepayment and calls		9,812		1,446
Purchases		—		(2,996)
Net redemption of FHLB stock		10,093		222
Participation-in loan purchases		(16,561)		(51,652)
Loan originations, net of principal payments		(66,045)		(57,456)
Proceeds from sale of other real estate owned and repossessed assets		1,355		487
Additions to property and equipment		(2,702)		(1,168)
Net cash used by investing activities		(51,073)		(130,053)

(continued)

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

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)


	Six Months Ended June 30,
(in thousands)	2019		2018

Cash flows from financing activities:
Net increase in deposits		284,045		188,764
Net change in borrowed funds with maturities less than ninety days		(192,000)		26,000
Proceeds from other borrowed funds and subordinated debt		11,220		31,075
Repayment of other borrowed funds		(30,007)		(60,002)
Net change in mortgagors' escrow accounts		663		78
Treasury stock purchased		—		(462)
Net cash provided by financing activities		73,921		185,453

Net change in cash and cash equivalents		(26,814)		51,705

Cash and cash equivalents at beginning of period		105,521		80,791

Cash and cash equivalents at end of period	$	78,707	$	132,496

Supplemental cash flow information:
Interest paid on deposits	$	15,578	$	7,999
Interest paid on borrowed funds		5,225		1,992
Income taxes paid, net		859		782
Transfer of loans to other real estate owned and repossessed assets		1,044		854

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The unaudited interim Consolidated Financial Statements of HarborOne Bancorp, Inc. (the “Company”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by the U.S. generally accepted accounting principles (“GAAP”). In the opinion of management, all adjustments and disclosures considered necessary for the fair presentation of the accompanying Consolidated Financial Statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2018 and 2017 and notes thereto included in the Company’s Annual Report on Form 10-K.

The unaudited interim Consolidated Financial Statements include the accounts of the Company; the Company’s subsidiaries, Legion Parkway Company LLC, a security corporation formed on July 13, 2016, HarborOne Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries. The Bank’s subsidiaries consist of a mortgage company, a passive investment corporation and two security corporations. Merrimack Mortgage Company, LLC was acquired and became a wholly-owned subsidiary of the Bank on July 1, 2015, and effective April 3, 2018 became HarborOne Mortgage, LLC (“HarborOne Mortgage”). The security corporations were established for the purpose of buying, holding and selling securities on their own behalf. The passive investment corporation maintains and manages certain assets of the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Business Combinations

Effective October 5, 2018, the Company completed the acquisition of Coastway Bancorp, Inc. (“Coastway”) the holding company of Coastway Community Bank in an all cash transaction valued at approximately $125.6 million, with $835.1 million in total assets, $736.2 million in gross loans and $478.3 million in deposits.

Stock Conversion

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

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

Plan of Conversion and Reorganization

On March 5, 2019, the Board of Trustees of the MHC adopted a Plan of Conversion pursuant to which the MHC will reorganize into a fully-public stock holding company structure and will conduct an offering of shares of common stock.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

In the conversion, the Bank will become a wholly-owned subsidiary of a new holding company, which will also be named HarborOne Bancorp, Inc. Shares of Company common stock held by persons other than the MHC will be converted into shares of common stock of the new holding company pursuant to an exchange ratio designed to preserve the approximate percentage ownership interests of such persons, excluding any shares purchased in the stock offering and receipt of cash in lieu of fractional shares. Shares of Company common stock owned by the MHC will be canceled and the amount of the MHC’s ownership interest in the Company will be sold in an offering. In the offering, depositors of the Bank and former depositors of Coastway Community Bank, with qualifying deposits as of February 28, 2018, will have first priority to purchase the new shares of common stock. The offering is expected to close in the second half of 2019 and is subject to customary conditions, including the required regulatory approvals. As of June 30, 2019 other assets includes $2.1 million in capitalized costs for the offering.

Nature of Operations

The Company provides a variety of financial services to individuals and businesses through its 24 full-service branches in Massachusetts and Rhode Island, one limited-service bank branch, and a commercial lending office in each of Boston, Massachusetts and Providence, Rhode Island. HarborOne Mortgage maintains more than 30 offices in Massachusetts, Rhode Island, New Hampshire, Maine, and New Jersey and is also licensed to lend in four additional states.

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

Use of Estimates

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

Allowance for Loan Losses

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

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

General component

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

pertaining to the general component of the allowance for loan losses during 2018 or the six months ended June 30, 2019. The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

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

Residential construction –Residential construction loans include loans to build one- to four-family owner-occupied properties, which are subject to the same credit quality factors as residential real estate loans.

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

Commercial construction –Commercial construction loans may include speculative real estate development loans for which payment is derived from lease or sale of the property. Credit risk is affected by cost overruns, time to lease or sell at an adequate price, and market conditions.

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

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

Allocated component

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

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

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

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan.

Unallocated component

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

Earnings Per Share

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

Recent Accounting Pronouncements

As an “emerging growth company”, as defined in Title 1 of the Jumpstart Our Business Startups (“JOBS”) Act, the Company has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As of June 30, 2019, there is no significant difference in the comparability of the financial statements as a result of this extended transition period. The Company’s emerging growth company status is scheduled to end December 31, 2021 unless a triggering event occurs sooner.

In October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-16, Derivatives and Hedging (Topic 815) – Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedging Accounting Purposes. The purpose of ASU 2018-16 is to permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The amendments in ASU 2018-16 are effective for public business entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, if ASU 2017-12 has already been adopted. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted in any interim period upon issuance of ASU 2018-16 if a public business entity has adopted ASU 2017-12. The amendments in ASU 2018-16 should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company does not have any derivatives within the scope of the ASU.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this standard is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. This guidance changes the recognition and presentation requirements of hedge

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line as the hedged item. This guidance also provides new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged item in fair value hedges of interest rate risk, reducing the complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method, and reducing the risk of material error corrections if a company applies the shortcut method inappropriately. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not have any derivatives within the scope of the ASU.

In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. For public entities that are SEC filers, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For non-public entities, this ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management has identified an implementation team that is in the process of developing an understanding of this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.

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

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

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, a company should apply a five step approach to revenue recognition. For public business entities, this ASU was effective for annual reporting periods, including interim periods, beginning after December 15, 2017. For non-public business entities, this ASU is effective for annual reporting periods

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Bank's primary source of revenue is interest income on financial assets and income from mortgage banking activities, which are explicitly excluded from the scope of the new guidance. The Company adopted the updated guidance using the modified retrospective approach effective January 1, 2019, with no material impact on its Consolidated Financial Statements.

2.SECURITIES

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

Gross

Amortized

Unrealized

HarborOne Bancorp, Inc. 10-Q