Blue Hills Bancorp, Inc. Reports Second Quarter Earnings

NORWOOD, Mass., July 26, 2017 (GLOBE NEWSWIRE) -- 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 $3.9 million, or $0.16 per diluted share, for the second quarter of 2017 compared to net income of  $7.5 million, or $0.31 per diluted share, for the first quarter of 2017 and net income of $1.4 million, or $0.05 per diluted share, for the second quarter of 2016.

The second quarter of 2017 included a pre-tax gain of $928,000 ($595,000 after-tax, or $0.02 per diluted share) from the sale of the Company's remaining available-for-sale debt securities portfolio. Excluding this item, net income was $3.3 million, or $0.14 per diluted share, for the second quarter of 2017.  As first disclosed in a Form 10-Q as filed with the Securities and Exchange Commission on May 5, 2017, the Company’s Management Investment Committee approved a change in strategy to liquidate its externally managed available-for-sale debt securities portfolio (which largely consisted of corporate debt securities) during the second quarter as continued rising interest rates would likely negatively impact the returns of this portfolio over time. This portfolio had a carrying value of $164.6 million at the end of the first quarter.  The Company intends to ultimately invest approximately $100.0 million of the proceeds from the sale of these bonds in its internally managed fixed income securities portfolio, which is accounted for as held to maturity, and most of this liquidation and reinvestment had been accomplished by the end of the second quarter.  The remaining proceeds were used to fund incremental loan growth.

The first quarter of 2017 included a pre-tax gain of $5.9 million ($3.8 million after-tax, or $0.16 per diluted share) from the Company's investment in Northeast Retirement Services, Inc., which was acquired by Community Bank System, Inc., a pre-tax loss of $1.1 million ($676,000 after-tax, or $0.03 per diluted share) from the sale of the Company's investments in mutual funds, and the reversal of a valuation allowance for state taxes of $1.7 million, or $0.07 per diluted share.  Excluding these three items, net income was $2.7 million, or $0.11 per diluted share, for first quarter of 2017.

For the six months ended June 30, 2017, net income was $5.9 million, or $0.25 per diluted share, excluding the nonrecurring items discussed above, compared to net income of $3.0 million, or $0.12 per diluted share, for the six months ended June 30, 2016.  On a GAAP basis, the Company had net income of $11.4 million, or $0.47 per diluted share for the six months ended June 30, 2017 (see page 15 for a reconciliation of GAAP to non-GAAP measures).

Commenting on the Company's results, William Parent, President and Chief Executive Officer of Blue Hills Bancorp, said, "The first half of 2017 was an important period in the continued transformation of our bank.  We took some key steps to restructure our securities portfolio by selling our portfolio of mutual fund investments in the first quarter and restructuring of the remaining portfolio of available-for-sale debt securities in the second quarter.  These actions will reduce volatility in our quarterly financial statements and, together with the expansion of our loan portfolio over the past several years, have reduced the level of investment securities to just 12% of total assets at June 30, 2017.  As recently as the end of 2013, investment securities comprised approximately one-third of the Company's total assets.

Parent continued, "All of our businesses have performed well in 2017 as earnings per share from core operations more than doubled in the first half of 2017 from the comparable period in 2016.  Mortgage originations and revenues continued to climb, reflecting the successful and continued expansion of that business, our commercial lending teams have generated strong loan growth, and our retail banking team has done a great job bringing in deposits.  The three branches we have opened since the fourth quarter of 2014 have a combined deposit total of $229 million at June 30, 2017 while our division in Nantucket, which was acquired in early 2014, ended the second quarter with $339 million in deposits. Revenues, excluding securities gains and nonrecurring items, grew 31% in the second quarter compared to the year ago period and, importantly, much of the investment spending that gave rise to the revenue improvement is behind us.  The significant growth in revenue from the second quarter of last year was accompanied by a relatively modest 3% increase in noninterest expense and this has provided us with significant positive operating leverage while reducing our efficiency ratio to 67% in the second quarter from 80% a year ago.  We just crossed the three year anniversary of our mutual to stock conversion and are proud of the progress the Company has made.  We look forward to the future with enthusiasm and to creating value for our stakeholders."

BALANCE SHEET
Compared to March 31, 2017, total assets grew $17 million, or 1%, to $2.5 billion at June 30, 2017.  The increase was driven by loan growth as total loans increased $79 million, or 4%, to $2.1 billion at June 30, 2017.  By category, the increase was mainly driven by commercial real estate loans, which were up $55 million, or 8%, and commercial business loans, which were up $17 million, or 8%.  Residential mortgage loans were little changed as growth from new originations was offset by loan sales.  In addition to the increase in loans, short-term investments were up $14 million, or 73%.  These increases were partially offset by an $81 million, or 22%, decline in the combination of securities available-for-sale and held to maturity, reflecting the aforementioned sale of the remaining available-for-sale debt securities portfolio and the partial reinvestment of those proceeds into securities classified as held to maturity.  At June 30, 2017, 96% of all securities (and 100% of all debt securities) are classified as held to maturity.

Compared to June 30, 2016, total assets increased $273 million, or 12%.  Loans also drove the growth in total assets in this comparison, increasing $381 million, or 23%. By category, the increase from June 30, 2016 was due to residential mortgage loans, which were up $219 million, or 32%, commercial real estate loans, which were up $147 million, or 24%, and commercial business loans, which were up $49 million, or 28%.  Residential mortgage loan originations were $139 million in the second quarter of 2017 compared to $126 million in the second quarter of 2016 as the expanded origination team continued to grow the business and gain market share. In the second quarter of 2017, commercial loans (real estate and non-real estate combined) totaling $137 million were added to the balance sheet compared to $109 million in the second quarter of 2016.  The growth in loans was partially offset by a $107 million, or 27%, decline in the combination of securities available-for-sale and held to maturity, due to the previously discussed sales of the mutual fund investment portfolio and the remaining available-for-sale debt securities portfolio.

Compared to March 31, 2017, deposits grew $109 million, or 6%, to $2.0 billion at June 30, 2017 mainly reflecting growth in municipal deposits and brokered certificates of deposit.  Deposits at the Company's newest branch, which was opened in the fourth quarter of 2016 and is located in the Seaport District of Boston, grew $12 million during the second quarter to $63 million at June 30, 2017.  The Company's branch in Westwood, which was opened in the fourth quarter of 2015, surpassed the $100 million mark in deposits during the second quarter.  Borrowings declined to $130 million at June 30, 2017 from $223 million at March 31, 2017 due to the sale of the remaining available-for-sale debt securities portfolio and a shift in wholesale funding to a higher level of brokered certificates of deposit.

Compared to June 30, 2016, deposits grew $364 million, or 23%, and included growth in all customer segments (consumer, small business, commercial and municipal).  By category, the most significant increases were seen in money market deposits, which were up $168 million, brokered certificates of deposit, which were up $140 million, and NOW and demand deposits, which were up $62 million.  A $130 million decline in short-term borrowings was partially offset by a $45 million increase in long-term borrowings.  All borrowings at June 30, 2017 are classified as long-term.

Stockholders’ equity was $397 million at June 30, 2017 and March 31, 2017 compared to $392 million at June 30, 2016. The increase from a year ago was mainly due to net income over the past four quarters, which added $17.0 million to stockholders' equity, partially offset by share repurchases that took place in the second half of 2016 and dividends, including a special dividend of $0.20 per common share in the second quarter of 2017.  There were no share repurchases in the first half of 2017.

NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income was $16.4 million in the second quarter of 2017, up $527,000, or 3%, from $15.9 million in the first quarter of 2017 and up $3.1 million, or 23%, from $13.3 million in the second quarter of 2016.  Net interest margin was 2.75% in the second quarter of 2017, up from 2.70% in the first quarter of 2017 and from 2.56% in the second quarter of 2016.

Net interest and dividend income on a fully taxable equivalent basis (referred to herein as "Reported net interest and dividend income (FTE)", a Non-GAAP measure) was $16.5 million in the second quarter of 2017, up $521,000, or 3%, from $15.9 million in the first quarter of 2017, and up $3.1 million, or 23%, from $13.4 million in the second quarter of 2016.  Net interest margin on a fully taxable equivalent basis (referred to herein as "Reported net interest margin (FTE)", a Non-GAAP measure) improved to 2.76% in the second quarter of 2017 from 2.71% in the first quarter of 2017 and 2.58% in the second quarter of 2016.  

The table shown below provides a reconciliation of reported to adjusted net interest and dividend income and margin for the last five quarters (referred to herein as "Adjusted net interest and dividend income (FTE)" and "Adjusted net interest margin (FTE)", which are Non-GAAP measures).  Commentary which follows the table will focus on changes in Adjusted net interest and dividend income and Adjusted net interest margin.

Adjusted net interest and dividend income on a fully tax equivalent basis increased $447,000, or 3%, to $16.3 million in the second quarter of 2017 from $15.8 million in the first quarter of 2017 and was up $2.8 million, or 21%, from $13.5 million in the second quarter of 2016.  Adjusted net interest margin improved to 2.73% in the second quarter of 2017 from 2.72% in the first quarter of 2017 and 2.64% in the second quarter of 2016.  Adjusted net interest income and net interest margin benefited in both comparisons from higher floating rate loan yields related to the interest rate increases announced by the Federal Reserve Bank in June 2017, March 2017, and December 2016.  The Company maintains an asset sensitive interest rate risk position.  In addition, adjusted net interest income was helped by loan growth as average loans increased $88 million, or 4%, from the first quarter of this year and $411 million, or 25%, from the second quarter of last year.  In both comparisons, average loan growth was driven by higher levels of commercial real estate loans, residential mortgages and commercial business loans.  Partially offsetting the improvement from loan growth was a decline in average securities which were down $88 million, or 22%, from the first quarter and $110 million, or 26%, from last year's second quarter.  These declines reflected the sales of the mutual fund investment portfolio and the remaining portfolio of available-for-sale debt securities. 

NONINTEREST INCOME
Noninterest income was $4.5 million in the second quarter of 2017, down from $6.8 million in the first quarter of 2017.  The second quarter includes a $928,000 gain on the sale of the Company's remaining available-for-sale debt securities portfolio while the first quarter included a gain of $5.9 million from the Company's investment in Northeast Retirement Services, Inc., which was acquired by Community Bank System, Inc., and a $1.1 million loss from the sale of the Company's investments in mutual funds. Excluding these items, noninterest income was $3.6 million in the second quarter of 2017, up $1.7 million, or 86%, from the first quarter of 2017.  The improvement is due to a $1.2 million increase in loan level derivative income related to the portfolio of commercial loan customer interest rate swap contracts. The amount of revenue in the loan level derivative income 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.  Also contributing to the increase was a $479,000 improvement in mortgage banking income reflecting a higher level of loan sale gains.

Compared to the second quarter of 2016, noninterest income increased $1.7 million, or 60%. As noted previously, the second quarter of 2017 includes a $928,000 gain on the sale of the Company's remaining available-for-sale debt securities portfolio, however, the second quarter of 2016 also includes $664,000 of securities gains.  Excluding securities gains, the improvement was driven by the same factors that caused the increase in the linked quarter comparison.  Loan level derivative income was up $1.0 million and mortgage banking income grew $688,000.

NONINTEREST EXPENSE
Noninterest expense was $13.4 million in the second and first quarters of 2017 compared to $12.9 million in the second quarter of 2016.  The $431,000, or 3%, increase from the second quarter of last year is mainly due to franchise growth and this can mainly be seen in the salaries and benefits as well as the occupancy and equipment expense categories.  The new Seaport branch, as well as the opening of new loan and mortgage production offices, contributed to the growth in both salaries and benefits expense and occupancy and equipment expense.

ASSET QUALITY
The provision for loan losses, which in all quarters reflects management’s assessment of risks inherent in the loan portfolio, was $1.1 million in the second quarter of 2017 compared to $57,000 in the first quarter of 2017 and $1.1 million in the second quarter of 2016.  Loan growth and loan mix impact the level of provision needed each quarter and the increase in the provision from the first quarter reflected both factors.  Loan growth was higher in the second quarter than in the first quarter and there was a change in loan mix during the second quarter with commercial real estate loans becoming a higher percentage of the total loan portfolio and residential mortgages becoming a lower percentage.

The allowance for loan losses as a percentage of total loans was 0.97% at June 30, 2017 compared to 0.95% at March 31, 2017 and 1.07% June 30, 2016. The decline in the allowance for loan losses as a percentage of total loans from a year ago was impacted by the general improvement in historical loss rates from national FDIC data, as well as the planned migration of loss rates to those more reflective of the Company's own loan loss experience.  The Company had net loan chargeoffs of $76,000 in the second quarter of 2017 compared to net loan recoveries of $68,000 in the first quarter of 2017 and net loan chargeoffs of $19,000 in the second quarter of 2016.  

Nonperforming assets were $12.8 million at June 30, 2017 compared to $13.1 million at March 31, 2017 and $15.0 million at June 30, 2016.  The decline from a year ago was mainly due to the chargeoff of one commercial credit in the third quarter of last year.  Nonperforming assets as a percentage of total assets was 0.51% at June 30, 2017 compared to 0.53% at March 31, 2017 and 0.67% at June 30, 2016.

ABOUT BLUE HILLS BANCORP
Blue Hills Bancorp, Inc., with corporate headquarters in Norwood, MA, had assets of $2.5 billion at June 30, 2017 and operates 11 branch offices in Boston, 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, commercial and municipal deposit and loan products in Eastern Massachusetts through its branch network, loan production offices 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 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.