Market Overview

Blue Hills Bancorp, Inc. Reports Fourth Quarter and Annual Earnings

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NORWOOD, Mass., Jan. 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 $3,998,000, or $0.17 per diluted share, for the fourth quarter of 2016 compared to net income of $1,630,000, or $0.07 per diluted share for the third quarter of 2016 and net income of $2,412,000, or $0.09 per diluted share, for the fourth quarter of 2015.  For the year ended December 31, 2016, net income was $8,653,000, or $0.35 per diluted share compared to net income of $7,227,000, or $0.28 per diluted share, for the year ended December 31, 2015.

The Company also announced an increase to its quarterly dividend to $0.05 from $0.03 per share, payable on or about February 22, 2017, to the stockholders of record as of the close of business on February 8, 2017.

2016 HIGHLIGHTS

  • Loans grew 25% to $1.9 billion at December 31, 2016 from the end of 2015 as the Company continued to execute on its balance sheet diversification strategy through an expansion of the residential mortgage, commercial real estate and commercial business loan portfolios.
  • The Company continued to expand its mortgage banking capabilities, including opening new Massachusetts offices in Franklin, Cambridge, and Winchester during 2016.  In addition, new offices will be opened in Concord and Hingham during the first quarter of 2017.  Mortgage banking income grew to $2.5 million in 2016 from $282,000 in 2015 as mortgage originations totaled $539 million in 2016; approximately double the amount of originations in 2015.  In 2016, 98% of mortgage originations were in-house compared to 87% in 2015.
  • Commercial loan originations (real estate and non-real estate combined) were $359 million in 2016, up $28 million, or 8%, from $331 million in 2015.  The commercial banking business added an asset-based lending team during the year which contributed to the loan growth.  In addition, during the fourth quarter the Company upgraded to a new cash management system for commercial customers and conversion of customers to the new platform should be completed in the first quarter of 2017.
  • The Company opened a new branch in the Seaport District of Boston in October, and by the end of 2016 the branch had taken in $30 million of deposits. The previous two branches opened by the Company also continued to have success in 2016.  At the end of 2016, the Milton Branch, which was opened in the fourth quarter of 2014, had $59 million in deposits, while the Westwood branch, which was opened in the fourth quarter of 2015, had $91 million in deposits.  The Brookline branch will close in the first quarter of 2017 as the Company focuses its resources on growing market share and deepening customer relationships at its other locations. Overall, total deposits increased 26% during 2016 while customer deposits were up 18%.
  • A new Business Banking team was added to expand the Company's small business customer base, including capitalizing on the attractive location of the new Seaport branch.
  • The Government Banking division added to the growth in deposits during the course of the year, as municipal deposits more than doubled during 2016 to $104 million at December 31, 2016.
  • The Company grew its quarterly dividend from $0.02 per share to $0.05 per share, an increase of 150%.
  • In late February, the Company announced the completion of its first stock repurchase program and at the same time a second program was announced.  The second program was completed in October and a third program began upon completion of the second program. As of December 31, 2016, a total of 2,637,640 shares have been repurchased under these programs at an average price of $14.20 per share for a total cost of $37.4 million.
  • In October, the Company relocated to a new headquarters building at 500 River Ridge in Norwood to accommodate the additional space needed due to the Company's expansion over the past few years. 
  • The Company and its foundations made donations in excess of $1 million in each of the last three years to various non-profits reflecting the Company's active involvement in the communities it serves. Most of the donations were made through the Blue Hills Bank charitable foundations which support non-profits in the fields of education and the arts, health and human services, affordable housing, financial literacy, and community services.

Commenting on the Company's results, William Parent, President and Chief Executive Officer of Blue Hills Bancorp, said, "We continued to make significant progress in 2016 in what was a very competitive environment.  Through the efforts of our talented and dedicated employees, all three of our key businesses, retail banking, commercial banking and mortgage banking turned in strong performances, enabling the Company to drive bottom line improvement for our shareholders while continuing to make the necessary investments in our businesses and infrastructure that will allow for future growth.  We also continued to return capital to our shareholders through our share repurchase program and increasing quarterly cash dividends.  We look forward to 2017 with great anticipation as we continue to transform Blue Hills Bank into one of New England's premier diversified full-service community banks."

BALANCE SHEET
Compared to September 30, 2016, total assets grew $156 million, or 7%, to $2.5 billion at December 31, 2016.  The increase was driven by loan growth as total loans increased $172 million, or 10%, to $1.9 billion at December 31, 2016.  By category, residential mortgage loans grew $108 million, or 15%, commercial business loans increased $37 million, or 22%, and commercial real estate loans were up $26 million, or 4%.

Compared to December 31, 2015, total assets increased $355 million, or 17%. Loans also drove the growth in total assets in this comparison, increasing $391 million, or 25%. By category, the increase was driven by residential mortgages, which were up $252 million, or 42%, commercial real estate loans, which were up $127 million, or 23%, and commercial business loans, which were up $23 million, or 13%.  Residential mortgage loan originations were $176 million in the fourth quarter of 2016, up 147% from the fourth quarter of 2015, as the expanded origination team continued to grow the business and gain market share. In the fourth quarter of 2016, commercial loans (real estate and non-real estate combined) totaling $93 million were added to the balance sheet compared to $82 million in the third quarter of 2016 and $149 million in the fourth quarter of 2015.  The growth in loans was partially offset by a decline in securities available for sale, which were $205 million at December 31, 2016, down 12% from $232 million at December 31, 2015.  The decline reflects lower levels of corporate and municipal bonds, mortgage backed securities and mutual funds.

Compared to September 30, 2016, deposits grew $127 million, or 8%, to $1.8 billion at December 31, 2016.  The increase from the third quarter of 2016 was primarily driven by a $77 million increase in brokered certificates of deposit and a $55 million increase in money market accounts.  Growth in deposits from the end of the third quarter was mitigated by a seasonal decline of $28 million at the Nantucket branches. Compared to December 31, 2015, deposits grew $375 million, or 26%, 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 $205 million, brokered certificates of deposit, which were up $111 million, and NOW and demand deposits, which were up $43 million.  A $59 million decline in short-term borrowings was mostly offset by a $50 million increase in long-term borrowings.

Stockholders' equity was $387 million at December 31, 2016 compared to $390 million at September 30, 2016 and $399 million at December 31, 2015. The decline in stockholders' equity from both prior periods reflects share repurchases, as well as the payment of common stock dividends, partially offset by earnings. The decline from September 30, 2016 was also impacted by a higher level of unrealized losses on available-for-sale securities reflecting a rise in interest rates during the fourth quarter.

During the fourth quarter of 2016, the Company repurchased 190,500 shares of stock at an average price of $14.80 for a total cost of $2.8 million.  This brings total repurchases over the six quarters ending December 31, 2016 to 2,637,640 shares at an average price of $14.20 for a total cost of $37.4 million. At December 31, 2016, the Company had repurchased 7% of the 1,345,087 shares authorized under its third share repurchase program, which was announced in September 2016.

NET INTEREST AND DIVIDEND INCOME
Net interest and dividend income was $16.0 million in the fourth quarter of 2016, up $1.5 million, or 10%, from $14.5 million in the third quarter of 2016 and up $1.4 million, or 9%, from $14.6 million in the fourth quarter of 2015.  Net interest margin improved to 2.81% in the fourth quarter of 2016 from 2.67% in the third quarter of 2016, but was down from 3.03% in the fourth quarter of 2015.

Net interest and dividend income on a fully taxable equivalent basis (referred to herein as "net interest and dividend income (FTE)", a Non-GAAP measure) was $16.0 million for the fourth quarter of 2016, up $1.4 million, or 10%, from $14.6 million for the third quarter of 2016 and up $1.3 million, or 9%, from $14.7 million in the fourth quarter of 2015.  Net interest margin on a fully taxable equivalent basis (referred to herein as "net interest margin (FTE)", a Non-GAAP measure) improved to 2.82% for the fourth quarter of 2016 from 2.68% for the third quarter of 2016, but was down from 3.04% in the fourth quarter of 2015.

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.

(Unaudited, dollars in thousands)   December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015
Net Interest and Dividend Income            
Reported net interest and dividend income   $ 15,950   $ 14,495   $ 13,316   $ 13,201   $ 14,572  
FTE adjustment   78   65   77   87   87  
Reported net interest and dividend income (FTE)   16,028   14,560   13,393   13,288   14,659  
Mutual fund dividends (2)   (844 ) (96 )   (21 ) (2,066 )
Purchase accounting accretion (2)   (137 ) (115 ) (133 ) (127 ) (303 )
Accelerated bond amortization/(accretion) on note redemptions     (193 ) 203      
Adjusted net interest and dividend income (FTE) (1)   $ 15,047   $ 14,156   $ 13,463   $ 13,140   $ 12,290  
             
Net Interest Margin            
Reported net interest margin   2.81 % 2.67 % 2.56 % 2.61 % 3.03 %
FTE adjustment   0.01   0.01   0.02   0.01   0.01  
Reported net interest margin (FTE)   2.82   2.68   2.58   2.62   3.04  
Mutual fund dividends (2)   (0.10 ) 0.03   0.05   0.06   (0.36 )
Purchase accounting accretion (2)   (0.03 ) (0.02 ) (0.03 ) (0.03 ) (0.07 )
Accelerated bond amortization/(accretion) on note redemptions     (0.04 ) 0.04      
Adjusted net interest margin (FTE) (1)   2.69 % 2.65 % 2.64 % 2.65 % 2.61 %
             
(1) Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis (FTE), using a federal statutory tax rate of 35% (a statutory tax rate of 34% was used prior to the fourth quarter of 2016). Therefore, management believes, these measures provide useful information to investors by allowing them to make peer comparisons.
 
(2) Note: In calculating the net interest margin impact of mutual fund dividends and purchase accounting accretion, average earning assets were adjusted to remove the average balances associated with each item. In quarters where mutual fund dividend income is low, the removal of the dividend and its related average balance has a positive impact on the adjusted net interest margin.  Management believes this adjusted net interest margin is useful because of the volatility or non-recurring nature of certain items from quarter to quarter.
 

Adjusted net interest and dividend income on a fully tax equivalent basis increased $891,000, or 6%, to $15.0 million in the fourth quarter of 2016 compared to the third quarter of 2016 while adjusted net interest margin improved to 2.69% in the fourth quarter from 2.65% in the third quarter. The increase was mainly driven by a $100 million, or 6%, increase in average loans due primarily to higher levels of residential mortgages.  There were smaller increases in the average balances of commercial real estate and commercial business loans. The improvement in net interest income also reflects higher floating rate loan yields as the market anticipated the interest rate increase announced by the Federal Reserve Bank in mid-December.  The Company maintains an asset sensitive interest rate risk position.

Compared to the fourth quarter of 2015, adjusted net interest and dividend income on a fully taxable equivalent basis increased $2.8 million, or 22%, while adjusted net interest margin improved by eight basis points to 2.69%.  As was the case in the comparison with the third 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 $374 million, or 26%, from the fourth quarter of last year driven mainly by increases in residential mortgages, commercial real estate loans, and construction loans.  Net interest margin benefited from rate hikes announced by the Federal Reserve in both December 2015 and December 2016.

NONINTEREST INCOME
Noninterest income was $3.8 million in the fourth quarter of 2016, down $325,000, or 8%, from $4.1 million in the third quarter of 2016.  This was mainly due to mortgage banking revenue, which declined $826,000, or 66%, to $436,000 in the fourth quarter from $1.3 million in the third quarter.  This decline mainly reflects a lower volume of loan sales in the fourth quarter.  In addition, securities gains declined $264,000, or 47%, to $298,000 in the fourth quarter, and the third quarter included $297,000 of bank-owned life insurance death benefit gains compared to none in the fourth quarter. Loan level derivative fee income also declined $130,000, or 17%, to $640,000 in 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. 

The declines in noninterest income from the third quarter as discussed above were partially offset by $1.2 million improvement in miscellaneous income to $1.4 million in the fourth quarter.  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 requires 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 records positive credit valuation marks in quarters when rates increase and negative marks in quarters when rates declined.  Rates increased in both the fourth and third quarters but the magnitude of the rate increases was higher in the fourth quarter resulting in positive adjustments to credit marks. 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.

Compared to the fourth quarter of 2015, noninterest income increased $1.5 million, or 64%. The increase was primarily due to higher miscellaneous income which was impacted by the Company recording higher positive credit marks on commercial loan customer interest rate swap contracts in 2016. In addition, mortgage banking revenue and securities gains increased and these improvements were partially offse

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