Blue Hills Bancorp, Inc. Reports First Quarter Earnings

NORWOOD, Mass., April 25, 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 $7.5 million, or $0.31 per diluted share, for the first quarter of 2017, compared to net income of $4.0 million, or $0.17 per diluted share, for the fourth quarter of 2016 and net income of $1.7 million, or $0.07 per diluted share, for the first quarter of 2016.

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.

Commenting on the Company's results, William Parent, President and Chief Executive Officer of Blue Hills Bancorp, said, "We got off to a good start in 2017 with loan and deposit growth continuing at a solid pace.  Compared to a year ago, loans are up 25% and deposits, excluding brokered deposits, are up 21% with deposit growth seen across all customer segments.  Deposits at our newest branch in the Seaport District of Boston, which opened in October of last year, have grown to $51 million at the end of March.  In-house mortgage originations in the first quarter increased compared to a year ago and this comes after in-house originations doubled in 2016 from 2015.  During the first quarter, we also made a strategic decision to sell our portfolio of mutual fund investments, which allowed us to reduce wholesale funding and will help to alleviate some of the volatility we had experienced in our quarterly earnings with regard to mutual fund dividends.  Finally, improving our operating leverage, returns and efficiency ratio continues to be a top priority for us.  Progress this quarter is reflected in the improvement in our core net interest margin, which has benefited from Federal Reserve interest rate increases, and a linked-quarter decline in noninterest expense."

BALANCE SHEET
Compared to December 31, 2016, total assets grew $27 million, or 1%, to $2.5 billion at March 31, 2017.  The increase was driven by loan growth as total loans increased $56 million, or 3%, to $2.0 billion at March 31, 2017.  By category, the increase was mainly driven by residential mortgage loans, which were up $42 million, or 5%, and commercial real estate loans, which were up $15 million, or 2%.  The increase in loans was partially offset by a $31 million, or 15%, decline in securities available for sale, primarily due to the aforementioned sale of the mutual fund portfolio. 

Compared to March 31, 2016, total assets increased $334 million, or 15%. Total loans also drove the growth in total assets in this comparison, increasing $400 million, or 25%. By category, the increase from March 31, 2016 was due to residential mortgage loans, which were up $275 million, or 44%, commercial real estate loans, which were up $115 million, or 20%, and commercial business loans, which were up $41 million, or 24%.  Residential mortgage loan originations were $91 million in the first quarter of 2017 compared to $65 million in the first quarter of 2016 as the expanded origination team continued to grow the business and gain market share. In the first quarter of 2017, commercial loans (real estate and non-real estate combined) totaling $55 million were added to the balance sheet compared to $74 million in the first quarter of 2016.  The growth in loans was partially offset by a $64 million, or 27%, decline in securities available for sale, due to the previously discussed sale of the mutual fund portfolio and lower levels of fixed income securities.

Compared to December 31, 2016, deposits grew $48 million, or 3%, to $1.9 billion at March 31, 2017 reflective of growth in all customer segments (consumer, small business, commercial and municipal).  The new Seaport branch contributed $21 million to the increase.  By category, the increase was primarily driven by a $50 million increase in money market accounts and smaller increases in NOW and demand, regular savings and certificates of deposit.  These increases were partially offset by a $19 million decline in brokered certificates of deposit, which along with a $28 million, or 19%, decrease in short-term borrowings to $118 million at March 31, 2017 contributed to a reduced reliance on wholesale funding.

Compared to March 31, 2016, deposits grew $372 million, or 25%, and included growth in all customer segments.  By category, the most significant increases were seen in money market deposits, which were up $214 million, brokered certificates of deposit, which were up $97 million, and NOW and demand deposits, which were up $57 million.  A $52 million decline in short-term borrowings was partially offset by a $20 million increase in long-term borrowings.

Stockholders’ equity was $397 million at March 31, 2017 compared to $387 million at December 31, 2016 and $394 million at March 31, 2016. The increase in stockholders' equity from the end of 2016 was mainly due to first quarter 2017 net income of $7.5 million coupled with a $1.9 million decline in the accumulated other comprehensive loss. The major factors impacting the change in stockholders' equity from March 31, 2016 were net income over the past four quarters, which added $14.5 million to stockholders' equity, and repurchases of 978,300 shares of stock, which reduced stockholders' equity by $14.1 million.

Total share repurchases for the seven quarters ending March 31, 2017 were 2,637,640 shares at an average price of $14.20 for a total cost of $37.4 million. At March 31, 2017, the Company had repurchased 7% of the 1,345,087 shares authorized under its third share repurchase program, which was announced in September 2016. There were no share repurchases during the first quarter of 2017.

NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income was $15.9 million in the first quarter of 2017, down $69,000, or 0.4%, from $16.0 million in the fourth quarter of 2016 and up $2.7 million, or 20%, from $13.2 million in the first quarter of 2016.  Net interest margin was 2.70% in the first quarter of 2017, down from 2.81% in the fourth quarter of 2016, but up from 2.61% in the first 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 $15.9 million in the first quarter of 2017, down $81,000, or 0.5%, from $16.0 million in the fourth quarter of 2016, but up $2.7 million, or 20%, from $13.3 million in the first 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) declined to 2.71% in the first quarter of 2017 from 2.82% for the fourth quarter of 2016, but was up from 2.62% in the first 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 $793,000, or 5%, to $15.8 million in the first quarter of 2017 compared to $15.0 million in the fourth quarter of 2016 while adjusted net interest margin improved to 2.72% in the first quarter of 2017 from 2.69% in the fourth quarter of 2016. The increase was mainly driven by a $136 million, or 7%, increase in average loans due to higher levels of residential mortgages, and, to a lesser extent, increases in commercial real estate loans and commercial business loans.

Compared to the first quarter of 2016, adjusted net interest and dividend income on a fully taxable equivalent basis increased $2.7 million, or 21%, while adjusted net interest margin improved by seven basis points to 2.72%. As was the case in the comparison with the fourth quarter of 2016, the growth in adjusted net interest and dividend income was mainly due to a higher level of average loans which were up $389 million, or 25%, from the first quarter of last year driven by increases in residential mortgages and commercial real estate loans. 

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 March 2017, December 2016 and December 2015.  The Company maintains a nominal asset sensitive interest rate risk position.

NONINTEREST INCOME
Noninterest income was $6.8 million in the first quarter of 2017, up $3.0 million, or 79%, from $3.8 million in the fourth quarter of 2016.  The increase was mainly due to 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 $304,000 or 70%, increase in mortgage banking revenue due to a higher level of loan sale gains in the first quarter.  These improvements were partially offset by a first quarter loss of $1.1 million from the sale of the Company's investments in mutual funds, a $476,000 decline in loan level derivative fee income, and a $1.4 million decline in miscellaneous income.  The latter reflects the absence of large positive valuation adjustments recorded in the fourth quarter on the portfolio of commercial loan customer back-to-back interest rate swap contracts due to an increase in interest rates. 

Compared to the first quarter of 2016, noninterest income increased $5.4 million, or 395%. The increase was primarily due to the $5.9 million gain from the Company's investment in Northeast Retirement Services, Inc., and a $496,000, or 203%, increase in mortgage banking revenue.  The improvements were partially offset by the loss of $1.1 million from the sale of the Company's investments in mutual funds during the first quarter of 2017 and a $475,000, or 74%, decline in loan level derivative fee income.

NONINTEREST EXPENSE
Noninterest expense was $13.4 million in the first quarter of 2017, down $109,000, or 1%, from the fourth quarter of 2016.  By category, the most significant declines were in advertising, which was high in the fourth quarter due to seasonality and promotions related to the new Seaport branch, in occupancy and equipment expense, and in other general and administrative expenses.  These declines were partially offset by an increase in salaries and benefits expense due, in part, to higher health insurance costs, equity compensation, a seasonal increase in payroll taxes, and merit increases. 

Compared to the first quarter of 2016, noninterest expense increased $1.3 million, or 11%.  Franchise growth was the major factor causing the increase in expenses from the prior year period 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 $57,000 in the first quarter of 2017 compared to $927,000 in the fourth quarter of 2016 and a credit of $27,000 in the first quarter of 2016.  Loan growth and loan mix impact the level of provision needed each quarter and a decline in loan growth to 3% in the first quarter of 2017 from 10% in the fourth quarter of 2016 was a major contributor to the lower provision.

The allowance for loan losses as a percentage of total loans was 0.95% at March 31, 2017 compared to 0.97% at December 31, 2016 and 1.07% at March 31, 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 recoveries of $68,000 in the first quarter of 2017 compared to net loan recoveries of $93,000 in the fourth quarter of 2016 and net loan charge-offs of $90,000 in the first quarter of 2016.

Nonperforming assets were $13.1 million at March 31, 2017 compared to $9.0 million at December 31, 2016 and $10.9 million at March 31, 2016.  The increase from December 31, 2016 was mainly due to loans secured by one income property which were placed back on nonaccrual in the first quarter of 2017.  These loans were also on nonaccrual at March 31, 2016.  The increase from March 31, 2016 was mainly due to increases in home equity and commercial real estate nonaccrual loans.  Nonperforming assets as a percentage of total assets was 0.53% at March 31, 2017, 0.36% at December 31, 2016, and 0.51% at March 31, 2016.

ABOUT BLUE HILLS BANCORP
Blue Hills Bancorp, Inc., with corporate headquarters in Norwood, MA, had assets of $2.5 billion at March 31, 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.

(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 35%. A statutory tax rate of 34% was used prior to the fourth quarter of 2016.

(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 35%. A statutory tax rate of 34% was used prior to the fourth quarter of 2016.

The Company's management believes that the presentation of net income on a non-GAAP basis, excluding nonrecurring items, provides useful information for evaluating the Company's operating results and any related trends that may be affecting the Company's business. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP.

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

(2) Efficiency ratio equals noninterest expense divided by net interest and dividend income and noninterest income

(3) ROATCE and the efficiency ratio are non-GAAP measures and may not be comparable to similar non-GAAP measures used by other companies. Management believes that these non-GAAP measures are meaningful because it is standard practice for companies in the banking industry to disclose these measures. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons.

See page 11 for Non-GAAP financial measures.

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

(2)Tangible common equity/tangible assets is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. Management believes that this non-GAAP measure is meaningful because it is standard practice for companies in the banking industry to disclose this measure. Therefore, management believes this measure provides useful information to investors by allowing them to make peer comparisons.