Blue Hills Bancorp, Inc. Reports First Quarter Earnings

NORWOOD, Mass.--(BUSINESS WIRE)--Blue Hills Bancorp, Inc. (the “Company” or "Blue Hills Bancorp") (NASDAQ: BHBK), the parent of Blue Hills Bank (the "Bank"), today announced net income of $1,667,000, or $0.07 per diluted share, for the first quarter of 2016 compared to net income of $2,412,000, or $0.09 per diluted share, for the fourth quarter of 2015 and net income of $1,306,000, or $0.05 per diluted share for the first quarter of 2015.

Commenting on the Company's results, William Parent, President and Chief Executive Officer of Blue Hills Bancorp, said "We are off to a good start in 2016 with loans up another 3% in the quarter and up over 30% from a year ago. Over the past few years we have expanded our direct origination capabilities to the point that over 90% of the loan growth in residential and commercial loans for 2015 and the first quarter of 2016 were originated directly by Blue Hills Bank. In addition, our customer deposits are up 14% from a year ago and later this year we will open a new branch in the Seaport District of Boston that will further enhance our deposit taking capabilities. The transformation of the Company into a full service community bank has continued over the past few months as we brought in a team to launch an asset-based lending function, added an experienced banker focused on the municipal deposit business and experienced lenders to our residential lending team. Capital management remains a priority and we are now executing on our second stock buyback program after completing the first program in late February. We are greatly encouraged by the progress we continue to make during our transformation and look forward to the challenges and opportunities that lie ahead."

BALANCE SHEET
Compared to December 31, 2015, total assets grew $48 million, or 2%, to $2.2 billion at March 31, 2016. The increase was due to loan growth as total loans increased $47 million, or 3%, to $1.6 billion at March 31, 2016 driven by higher levels of commercial real estate and residential mortgage loans, partially offset by declines in commercial business loans and other consumer loans. The decline in commercial business loans was impacted by payoffs, however, the pipeline looks solid for the months ahead.

Compared to March 31, 2015, total assets increased $404 million, or 23%. Loans also drove the growth in total assets in this comparison, increasing $408 million, or 35%. By category, commercial real estate loans were up $180 million, or 45%; residential mortgages were up $158 million, or 34%; construction loans increased $33 million, or 55%; home equity loans increased $17 million, or 27%; commercial business loans were up $15 million, or 10%; and consumer loans were up $4 million, or 13%. During the first quarter of 2016, commercial loans (real estate and non-real estate combined) totaling $74 million were added to the balance sheet, of which 91% were originated by the Company. This compares to the first quarter of 2015 when $41 million of commercial loans were added, of which 92% were originated by the Company. In addition, $65 million of residential mortgages loans were added in the first quarter of 2016, of which 97% were originated by the Company. This compares to additions of $42 million in residential mortgage loans in the first quarter of 2015, of which 92% were originated by the Company.

The combined balance of available-for-sale and held-to-maturity securities at March 31, 2016 was $434 million compared to $432 million at December 31, 2015. Securities available for sale were $430 million at March 31, 2015. As previously disclosed, on July 31, 2015 the Company reclassified almost $200 million of securities available for sale to the held-to-maturity designation. Held-to-maturity investments are investments that management has the positive intent and ability to hold to maturity.

Compared to December 31, 2015, deposits grew $51 million, or 4%, to $1.5 billion at March 31, 2016. The increase from the fourth quarter of 2015 was driven by growth in money market deposits of $41 million and certificates of deposit of $17 million. All other deposit categories had minor changes. The growth in money market deposits was due, in part, to promotional rate programs. Deposit growth from the end of 2015 was helped by the Company's newest branch in Westwood, which opened in the fourth quarter of 2015. Deposits at this branch grew to $72 million at March 31, 2016 from $42 million at the end of 2015. Total borrowings (short and long-term combined) were little changed from the end of 2015.

Compared to March 31, 2015, deposits grew $263 million, or 22%. By category, the more significant increases were seen in money market deposits, which were up $139 million, brokered certificates of deposits, which were up $73 million, and NOW & demand deposits, which were up $29 million. Deposit growth from a year ago was helped by the new Westwood branch and further growth in deposits from the Milton branch that was opened in the fourth quarter of 2014. Together these branches contributed $93 million to the growth in deposits from a year ago. Short and long-term borrowings grew $100 million and $50 million, respectively, from the end of the first quarter of 2015, which helped support the growth in the loan portfolio.

Stockholders’ equity was $394 million at March 31, 2016 compared to $399 million at December 31, 2015 and $415 million at March 31, 2015. The decline in stockholders' equity from the end of 2015 mainly reflects share repurchases. The decline from a year ago also reflects share repurchases, as well as the payment of common stock dividends, and a lower level of other comprehensive income that was primarily due to a drop in the value of available-for-sale securities. These declines were partially offset by $7.4 million of earnings over the past four quarters.

In late February 2016, the Company announced the completion of its first stock repurchase program pursuant to which the Company bought back 1,423,340 shares of its common stock. At the same time, the Board of Directors authorized a second repurchase program for up to 1,119,000 shares of common stock. During the first quarter of 2016, the Company repurchased 730,040 shares of stock under both programs at an average price of $14.09 for a total cost of $10.3 million. This compares to repurchases of 612,800 shares at an average price of $13.99 for a total cost of $8.6 million in the fourth quarter of 2015 and 316,500 shares at an average price of $14.24 for a total cost of $4.5 million in the third quarter of 2015. The Company had 883,000 shares remaining to repurchase at March 31, 2016 under the second repurchase program.

NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income on a fully taxable equivalent basis was $13.3 million in the first quarter of 2016, down $1.4 million, or 9%, from $14.7 million in the fourth quarter of 2015. Net interest margin on a fully taxable equivalent basis declined to 2.62% in the first quarter of 2016 from 3.04% in the fourth quarter of 2015. The decline in net interest income and margin reflects a $2.0 million drop in dividends from mutual fund investments and a $176,000 decline in purchase accounting accretion related to the January 2014 Nantucket Bank acquisition. Purchase accounting accretion was $127,000 in the first quarter of 2016 compared to $303,000 in the fourth quarter of 2015. Mutual fund dividends were over $2.0 million in the fourth quarter of 2015 and were just $21,000 in the first quarter of 2016 as historically the Company receives the vast majority of mutual fund dividends during the second half of the year. Excluding the impact of mutual fund dividends and purchase accounting accretion, net interest and dividend income on a fully taxable equivalent basis was $13.1 million in the first quarter of 2016, up $850,000, or 7%, from the fourth quarter of 2015. On this basis, net interest margin was 2.65% in the first quarter of 2016 compared to 2.61% in the fourth quarter of 2015. The improvement in net interest income was helped by a $120 million, or 8%, increase in average loans driven mainly by growth in commercial real estate, residential mortgage, and construction loans. In addition, net interest income and margin benefited from the decision by the Federal Reserve Bank to raise interest rates in December 2015 with the benefit reflecting the Company's asset sensitive rate risk position.

Compared to the first quarter of 2015, net interest and dividend income on a fully taxable equivalent basis increased $2.5 million, or 24%, while net interest margin declined 2 basis points. Excluding the impact of mutual fund dividends and purchase accounting accretion from both quarters, net interest income on a fully taxable equivalent basis increased $2.6 million, or 25%, to $13.1 million while net interest margin improved one basis point to 2.65%. The improvement in net interest income was primarily due to a $391 million, or 33%, increase in average loans driven mainly by higher levels of commercial real estate and residential mortgage loans. Net interest income and margin were negatively impacted by a 10 basis point drop in loan yield and a 4 basis point increase in the cost of interest-bearing liabilities. The yield on loans declined due to competitive pricing pressures and a $93,000 decline in purchase accounting accretion, partially offset by a benefit in 2016 from repricing floating rate loans following the Fed's December, 2015 rate increase.

NONINTEREST INCOME
Noninterest income was $1.4 million in the first quarter of 2016, down $947,000, or 41%, from the fourth quarter of 2015. The decline was mainly due to the following factors:

• Miscellaneous income declined to an expense of $183,000 in the first quarter from income of $327,000 in the fourth quarter of 2015. As has been the case in most quarters, the biggest factor behind the change in miscellaneous income relates to the portfolio of commercial loan customer interest rate swap contracts where customers opt to convert their loans from floating to fixed rate via interest rate swaps. While fee income from these contracts is recorded to loan level derivative fee income, GAAP dictates that the Company must mark these contracts to fair value over the life of each swap and these valuation marks are reflected in miscellaneous income. During the first quarter of 2016, the Company recorded negative credit valuation marks as interest rates declined while in the fourth quarter of 2015 positive credit valuation marks on these contracts were recorded as interest rates increased. While these interest rate marks create quarterly volatility in operating results, barring unforeseen credit-related circumstances there is no net impact to earnings over the life of each contract. There were no other items of significance impacting the comparison of miscellaneous income with the fourth quarter of 2015.
• The Company recorded securities losses of $244,000 in the first quarter of 2016 compared to gains of $145,000 in the fourth quarter of 2015.
• Loan level derivative fee income was $639,000 in the first quarter, down $194,000 from the fourth quarter. Revenue in this category can be volatile since it is a function of the amount of commercial loans that customers opt to convert from floating to fixed rate via interest rate swaps in any given quarter.
• Partially offsetting the declines, mortgage banking income improved to $244,000 in the first quarter from $46,000 in the fourth quarter mainly due to a higher volume of loan sales.

Compared to the first quarter of 2015, noninterest income declined $807,000, or 37%. The Company recorded securities gains of $1.3 million in the first quarter of 2015 compared to losses of $244,000 in the first quarter of 2016. This was partially offset by loan level derivative income, which increased $635,000, and mortgage banking income, which increased $143,000.

NONINTEREST EXPENSE

Noninterest expense was $12.1 million in the first quarter of 2016, up $120,000, or 1%, from the fourth quarter of 2015 as a $1.0 million increase in salaries and benefits expense was partially offset by declines in most other expense categories. The increase in salaries and benefits expense reflects the absence of a downward fourth quarter adjustment made to non-equity related incentive compensation expense. That adjustment was made after the Company conducted a review of its overall compensation program in light of the awards made under the Equity Incentive Plan as discussed in more detail below. Other factors impacting the increase in salaries and benefits expense included a seasonal increase in payroll taxes, merit increases, a full quarter of Equity Incentive Plan expense in the first quarter vs. a partial quarter in the fourth quarter, and an increase in headcount, which included staffing the new asset based lending and municipal deposit businesses.

Compared to the first quarter of 2015, noninterest expense increased $1.4 million, or 14%. The major factor driving this increase is the recording of $1.2 million of expense in the first quarter of 2016 related to the awards under the Equity Incentive Plan. As previously disclosed, at the Company’s 2015 Annual Shareholders Meeting held on September 3, 2015 shareholders approved the Company's 2015 Equity Incentive Plan and, on October 7, 2015, the Company granted 983,175 restricted stock awards and 2,434,000 stock options subject to vesting provisions. Approximately 80% of the expense related to the Equity Incentive Plan is included in salaries and benefits expense and the remainder in directors' fees. Beyond that item, the new Westwood branch, which opened in the fourth quarter of last year, contributed just under $300,000 to the growth in noninterest expense.

ASSET QUALITY
The provision for loan losses, which in all quarters reflects management’s assessment of risks inherent in the loan portfolio, was a credit of $27,000 in the first quarter of 2016 compared to a $1.9 million charge in the fourth quarter of 2015 and a $279,000 charge in the first quarter of 2015. The decline in the provision from the fourth quarter is due to the following factors:

• The reversal of a significant portion of a specific reserve established in the fourth quarter against loans secured by one income property as the credit situation improved.
• Changes to certain qualitative factors used in the calculation of the allowance for loans resulted in a lower allowance/loans ratio. The allowance for loan losses as a percentage of total loans declined to 1.07% at March 31, 2016 from 1.11% at December 31, 2015 and 1.12% at March 31, 2015. The impact on the first quarter provision for loan losses from this change was mainly related to the residential mortgage portfolio.
• Loan growth impacts the level of provision needed each quarter and a decline in loan growth to 3% in the first quarter from 13% in the fourth quarter resulted in a smaller provision.

The Company had net loan charge-offs of $90,000 in the first quarter of 2016 compared to net recoveries of $71,000 in the fourth quarter of 2015 and net charge-offs of $14,000 in the first quarter of 2015. Nonperforming assets were $10.9 million at March 31, 2016 compared to $10.7 million at December 31, 2015 and $4.8 million at March 31, 2015. At March 31, 2016, 56% of the nonperforming assets were residential mortgage loans and 40% related to the aforementioned loans secured by one income property, which were first placed on nonaccrual in the fourth quarter of last year. Nonperforming assets as a percentage of total assets were 0.51% at both March 31, 2016 and December 31, 2015, compared to 0.27% at March 31, 2015.

ABOUT BLUE HILLS BANCORP

Blue Hills Bancorp, Inc., with corporate headquarters in Norwood MA, had assets of $2.2 billion at March 31, 2016 and operates 11 branch offices in Brookline, Dedham, Hyde Park, Milton, Nantucket, Norwood, West Roxbury, and Westwood, Massachusetts. Blue Hills Bank is a full service, community bank with its main office in Hyde Park, Massachusetts. The Bank's three branches in Nantucket, Massachusetts operate under the name, Nantucket Bank, a division of Blue Hills Bank. The Bank provides consumer and commercial deposit and loan products to Eastern Massachusetts through a growing branch network and eCommerce channels. The Bank offers commercial business and commercial real estate loans in addition to cash management services and commercial deposit accounts. The Bank also serves consumers through a full suite of consumer banking products including checking accounts, mortgage loans, equity lines of credit and traditional savings and certificate of deposit accounts. The Bank has invested substantially in online technology including online account opening and funding, online mortgage applications, online banking, mobile banking, bill pay and mobile deposits. Blue Hills Bank has been serving area residents for over 140 years. For more information about Blue Hills Bank, visit the Blue Hills web site at www.bluehillsbank.com.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This press release, as well as other written communications made from time to time by the Company and its subsidiaries and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the PSLRA). Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "intend" and "potential." For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

The Company cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. Such factors include, but are not limited to: our ability to implement successfully our business strategy, which includes significant asset and liability growth; changes that could adversely affect the business in which the Company and the Bank are engaged; prevailing economic and geopolitical conditions; changes in interest rates, loan demand, real estate values and competition; changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; and other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services. For additional information on some of the risks and important factors that could affect the Company’s future results and financial condition, see “Risk Factors” in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The forward-looking statements are made as of the date of this release, and, except as may be required by applicable law or regulation, the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

(1) Interest income on tax-exempt securities and loans was adjusted to a fully taxable-equivalent (FTE) basis using a federal statutory tax rate of 34%.

(1) Interest income on tax-exempt securities and loans was adjusted to a fully taxable-equivalent (FTE) basis using a federal statutory tax rate of 34%.