Blue Hills Bancorp, Inc. Reports Second 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 $1,358,000, or $0.05 per diluted share, for the second quarter of 2016 compared to net income of $1,667,000, or $0.07 per diluted share, for the first quarter of 2016 and net income of $1,699,000, or $0.06 per diluted share for the second quarter of 2015. For the six months ended June 30, 2016, net income was $3,025,000, or $0.12 per diluted share, versus net income of $3,005,000, or $0.11 per diluted share, for the six months ended June 30, 2015.

Commenting on the Company's results, William Parent, President and Chief Executive Officer of Blue Hills Bancorp, said "The second quarter reflected the ongoing progression of the Bank’s strategy of diversified growth. We had strong direct origination volume across our residential mortgage, commercial business and commercial real estate lending platforms matched with continued progress in core deposit growth driven by de novo branches and growing commercial and municipal relationships. The addition of experienced lenders to our residential lending team has been paying off with strong growth in mortgage banking revenue and our asset based lending and government banking teams are already contributing. While these initiatives are progressing strongly, they do put short-term pressure on our ability to generate operating leverage, which is important to our earnings strategy. We will be closely managing that impact going forward."

BALANCE SHEET
Compared to March 31, 2016, total assets grew $79 million, or 4%, to $2.2 billion at June 30, 2016. The increase was due to loan growth as total loans increased $98 million, or 6%, to $1.7 billion at June 30, 2016 driven mainly by higher levels of residential mortgage loans and commercial real estate loans. The growth in loans was partially offset by a $33 million, or 14%, decline in available-for-sale securities reflecting sales during the quarter.

Compared to June 30, 2015, total assets increased $396 million, or 22%. Loans also drove the growth in total assets in this comparison, increasing $415 million, or 33%. By category, residential mortgages were up $165 million, or 32%; commercial real estate loans were up $161 million, or 36%; construction loans increased $46 million, or 77%; commercial business loans were up $27 million, or 18%; and home equity loans increased $16 million, or 24%. In the second quarter of 2016, commercial loans (real estate and non-real estate combined) totaling $109 million were added to the balance sheet with over half related to commercial business loans versus the prior year where commercial real estate and construction accounted for the vast majority of the growth. Residential mortgage loan originations were $126 million in the second quarter of 2016, up 60% from the second quarter of 2015, as the expanded origination team gained traction.

The combined balance of available-for-sale and held-to-maturity securities at June 30, 2016 was $401 million. Securities available for sale were $432 million at June 30, 2015. The decline reflects sales of securities during the second quarter of 2016. 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 March 31, 2016, deposits grew $116 million, or 8%, to $1.6 billion at June 30, 2016. The increase from the first quarter of 2016 was driven by increases in municipal and commercial deposits. By category, the growth was mainly reflected in money market deposits which were up $98 million. All other deposit categories had minor changes. The increase in deposits enabled the Company to fund loan growth and reduce short-term borrowings by $40 million from March 31, 2016.

Compared to June 30, 2015, deposits grew $327 million, or 26% and included growth in all customer segments (consumer, small business, commercial and municipal). By category, the most significant increase in customer deposits was seen in money market deposits, which were up $210 million. Brokered deposits were also up $75 million, while short and long-term borrowings grew $35 million and $50 million, respectively, from the end of the second quarter of 2015. The increase in these categories helped support the growth in the loan portfolio.

Stockholders’ equity was $392 million at June 30, 2016 compared to $394 million at March 31, 2016 and $414 million at June 30, 2015. The decline in stockholders' equity from a year ago reflects share repurchases, as well as the payment of common stock dividends, and a lower level of accumulated other comprehensive income that was due, in part, to a drop in the value of available-for-sale securities. These declines were partially offset by $7.2 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 second quarter of 2016, the Company repurchased 386,900 shares of stock under the second program at an average price of $14.27 for a total cost of $5.5 million. This brings total repurchases under both programs over the past four quarters to 2,046,240 shares at an average price of $14.12 for a total cost of $28.9 million. The Company had 496,100 shares remaining to repurchase at June 30, 2016 under the second repurchase program.

NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income was $13.3 million in the second quarter of 2016, up $115 thousand, or 1%, from $13.2 million in the first quarter of 2016. Net interest margin declined to 2.56% in the second quarter of 2016 from 2.61% in the first quarter of 2016. Net interest and dividend income on a fully taxable equivalent basis was $13.4 million in the second quarter of 2016, up $105 thousand, or 1%, from $13.3 million in the first quarter of 2016. Net interest margin on a fully taxable equivalent basis declined to 2.58% in the second quarter of 2016 from 2.62% in the first quarter of 2016. Included in net interest income and margin is a $203,000 accelerated bond premium amortization on the Agribank note redemption. The table shown below provides a reconciliation of reported to adjusted net interest and dividend income and margin for the last five quarters. Commentary which follows the table will focus on changes in adjusted net interest income and margin.

Adjusted net interest and dividend income on a fully tax equivalent basis increased $323,000, or 3%, to $13.5 million in the second quarter of 2016 compared to the first quarter of 2016. The increase was mainly driven by a $66 million, or 4.2%, increase in average loans due mainly to higher levels of residential mortgages, commercial real estate loans, and construction loans. This improvement was partially offset by a one basis point decline in adjusted net interest margin to 2.64% in the second quarter of 2016 as loan and deposit yields remain under pressure in the current low rate and competitive environment.

Compared to the second quarter of 2015, adjusted net interest and dividend income on a fully taxable equivalent basis increased $2.6 million, or 24%, while adjusted net interest margin was flat at 2.64%. As was the case in the linked quarter comparison, the growth in adjusted net interest and dividend income was mainly due to a higher level of average loans which were up $412 million, or 34%, from the second quarter of last year. All categories of loans increased led by residential mortgages and commercial real estate loans.

In 2015 and 2014, The Company received mutual funds dividends in the second half of each year, totaling $3.6 million and $3.5 million, respectively. The Company believes mutual fund dividends could be meaningfully lower in the second half of 2016 than in either of the past two years.

NONINTEREST INCOME
Noninterest income was $2.8 million in the second quarter of 2016, up $1.4 million, or 104%, from $1.4 million in the first quarter of 2016. The increase was mainly due to the following factors:

• Mortgage banking revenue was $531,000 in the second quarter, up $287,000, or 118%, from the first quarter. Mortgage originations nearly doubled from the first quarter and the revenue improvement was mainly due to a higher level of gains on the sale of loans.
• The Company recorded net securities gains of $664,000 in the second quarter compared to losses of $244,000 in the first quarter.
• Miscellaneous income improved to income of $128,000 in the second quarter from an expense of $183,000 in the first quarter. The improvement in miscellaneous income was mainly due to a higher level of income received on CRA-qualified SBIC investments in the second quarter. In addition, and as has been the case in most quarters, miscellaneous income is impacted by the portfolio of commercial loan customer back to back 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. The Company recorded negative credit valuation marks in both the first and second quarters as interest rates declined and the negative marks were higher in the second quarter. 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.
• The second quarter included $209,000 of bank-owned life insurance death benefit gains.
• Partially offsetting these improvements, loan level derivative fee income was $322,000 in the second quarter compared to $639,000 in the first 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.

Compared to the second quarter of 2015, noninterest income increased $334,000, or 14%. The increase was primarily due to higher mortgage banking revenue, securities gains, and bank-owned life insurance death benefit gains partially offset by declines in loan level derivative fee income and miscellaneous income. The latter was impacted by the Company recording negative credit valuation marks on commercial loan customer interest rate swap contracts in the second quarter of 2016 compared to positive marks in the second quarter of 2015.

NONINTEREST EXPENSE
During the first half of 2016, the Company continued to execute on its investment spending plans to further its transformation into a full service community bank and enhance the overall value of the franchise. Noninterest expense was $25.0 million in the first half of 2016, up $3.7 million, or 17%, from the first half of 2015. A substantial portion of the increase comes from expenses related to the Equity Incentive Plan, the Westwood branch, which was opened in the fourth quarter of 2015, the expansion of the mortgage banking business, as in-house residential mortgage loan originations increased 79% in the first half of 2016 compared to the first half of 2015, the on boarding of new asset based lending and municipal banking businesses, accelerated advertising spending, and merit salary increases.

Noninterest expense was $12.9 million in the second quarter of 2016, up $867,000, or 7%, from the first quarter of 2016. Salaries and benefits expense increased $253,000 as the number of full-time equivalent employees grew by 12 during the second quarter to 231 at June 30, 2016. The growth included new hires as well as the impact of seasonality. Professional fees are volatile from quarter to quarter and increased $197,000 from the first quarter (although they were relatively flat with the second quarter of 2015). In addition, advertising expense grew $187,000 due to accelerated programs versus prior periods.

Compared to the second quarter of 2015, noninterest expense increased $2.3 million, or 21%. A major factor driving this increase was the recording of $1.2 million of expense in the second quarter of 2016 related to the awards under the Equity Incentive Plan. Approximately 80% of the expense related to the Equity Incentive Plan is included in salaries and benefits expense and the remainder in directors' fees. Also contributing to the growth in expense were franchise expansion, which included the opening of a new branch in Westwood in the fourth quarter of 2015 as well as new loan and mortgage production offices, the on boarding of new asset based lending and municipal banking businesses, accelerated advertising spending, and merit increases.

ASSET QUALITY
The provision for loan losses, which in all quarters reflects management’s assessment of risks inherent in the loan portfolio, was a $1.1 million charge in the second quarter of 2016 compared to a credit of $27,000 in the first quarter of 2016 and a $544,000 charge in the second quarter of 2015. The increase in the provision from the first quarter is due to the following factors:

• The establishment of a specific reserve of $558,000 in the second quarter of 2016 against loans to one commercial customer. The Company has a full commercial relationship with this customer, including an owner occupied commercial real estate loan and loans to finance other business assets. The loans were placed on nonaccrual during the second quarter of 2016.
• The reversal of the remainder of specific reserves originally established in the fourth quarter of 2015 against loans secured by one income property as the credit situation improved. The amount of the reserve reversal in the first quarter was $290,000 higher than in the second quarter which caused an increase in the loan loss provision in the second quarter. The loan remained on nonaccrual at June 30, 2016.
• Loan growth impacts the level of provision needed each quarter and an increase in loan growth to 6% in the second quarter from 3% in the first quarter resulted in a higher provision.

The allowance for loan losses as a percentage of total loans was 1.07% at June 30, 2016. This was unchanged from March 31, 2016 and down slightly from 1.08% at June 30, 2015. The Company had net loan charge-offs of $19,000 in the second quarter of 2016 compared to net charge-offs of $90,000 in the first quarter of 2016 and net charge-offs of $5,000 in the second quarter of 2015.

Nonperforming assets were $15.0 million at June 30, 2016 compared to $10.9 million at March 31, 2016 and $4.9 million at June 30, 2015. At June 30, 2016, more than half of the nonperforming assets total related to the two commercial loans mentioned above and the vast majority of the remainder were residential mortgage loans. Nonperforming assets as a percentage of total assets were 0.67% at June 30, 2016, 0.51% at March 31, 2016 and 0.27% at June 30, 2015.

ABOUT BLUE HILLS BANCORP
Blue Hills Bancorp, Inc., with corporate headquarters in Norwood MA, had assets of $2.2 billion at June 30, 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%.

(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) Average tangible common equity equals average total equity less goodwill and intangibles.

(1) Average tangible common equity equals average total equity less goodwill and intangibles.

(2) Tangible common equity equals total equity less goodwill and intangibles, Tangible assets equals total assets less goodwill and intangibles.