Blue Hills Bancorp, Inc. Announces Third Quarter 2014 Earnings

Blue Hills Bancorp, Inc. (the “Company” or "Blue Hills Bancorp") (NASDAQ: BHBK), the parent of Blue Hills Bank (the "Bank"), today announced net income, excluding certain nonrecurring items, of $836,000 for the third quarter of 2014 compared to net income of $761,000 for the second quarter of 2014 and net income of $372,000 for the third quarter of 2013. Net income, excluding certain nonrecurring items, was $2,032,000 for the first nine months of 2014 versus net income of $1,560,000 for the first nine months of 2013.

The following nonrecurring items were excluded from the results discussed above:

• A pre-tax expense of $7,000,000 recorded in the third quarter of 2014 related to the Company's funding of a new charitable foundation at the time of the mutual to stock conversion that was completed on July 21, 2014 and was previously disclosed. The Foundation was funded with 694,113 shares of Blue Hills Bancorp, Inc. stock and $57,000 in cash.
• A pre-tax pension curtailment gain of $1,304,000 recorded in the third quarter of 2014 related to the Company's decision to freeze its defined benefit pension plan as of October 31, 2014.
• Pre-tax expenses of $51,000 in the third quarter of 2014, $330,000 in the second quarter of 2014, and $869,000 for the first nine months of 2014 related to the Company's mutual to stock conversion.
• Pre-tax expenses of $2,000 in the third quarter of 2014, $173,000 in the second quarter of 2014, and $950,000 for the first nine months of 2014 related to the January 2014 Nantucket Bank acquisition. The Company also incurred expenses related to this acquisition of $233,000 in the third quarter of 2013.
• Pre-tax gains of $401,000 in the third quarter of 2013 and $1,872,000 in the first nine months of 2013 related to death benefits received on bank-owned life insurance.

On a GAAP basis, which includes the nonrecurring items discussed above, the Company reported a net loss of $2,958,000 for the third quarter of 2014 compared to net income of $429,000 for the second quarter of 2014 and net income of $619,000 for the third quarter of 2013. The Company also reported a net loss of $2,928,000 for the first nine months of 2014 compared to net income of $3,278,000 for the first nine months of 2013.

“We were energized by the strong reception our stock received from depositors during the initial public offering that was completed in late July", said William Parent, President and Chief Executive Officer of Blue Hills Bancorp. "The stock's performance has been strong since the IPO and we were pleased to be added to the Russell 2000 index at the end of September. As we go forward, we will be carefully assessing our options for deploying the new capital as we continue to work towards transforming the Company into a diversified, full-service community bank. In addition, we are committed to remaining very active in the communities we serve and the large contribution made to our Foundation in July will help us meet this commitment."

Mr. Parent continued, "Our third quarter financial statements reflect the progress we continue to make in executing our strategy. Loans and deposits are up 65% and 25%, respectively, over the past year and net interest and dividend income for the first nine months of 2014 is up 75% from the comparable period in 2013. Our January 2014 Nantucket Bank acquisition has gone well as deposit levels there were higher at the end of September than they were on the acquisition date and the Nantucket business has helped boost core fee income categories. We are also very excited by the opening of our new Milton branch in October, which brings our total branch count to ten."

BALANCE SHEET

Total assets at September 30, 2014 were $1.7 billion compared to $1.8 billion at June 30, 2014. As previously announced, the subscription offering period related to the Company’s mutual-to-stock conversion ended on June 19, 2014 and the funds were held in escrow until the closing of the conversion and offering in late July. This resulted in a temporary increase in short-term investments on the June 30, 2014 balance sheet which declined to a more normal level during the third quarter. As a result, short-term investments dropped $242 million from the end of the second quarter and this decline was partially offset by a $124 million, or 12%, increase in loans due, in part, to an increase in loans with floating interest rates. By category, the bulk of the increase in loans was driven by higher levels of residential mortgage and commercial real estate loans. There were also increases in commercial business and construction loans.

Compared to September 30, 2013, total assets increased $467 million, or 38%. Loans accounted for $445 million of the growth in total assets reflecting a combination of originations, purchases and participations as the Company continues to execute on its strategy to diversify its balance sheet, particularly through an expansion of the residential mortgage, commercial real estate and commercial business loan portfolios. In addition, the January 2014 Nantucket Bank acquisition added approximately $100 million of primarily commercial real estate and home equity loans. By category, approximately two-thirds of the growth in loans over the past twelve months came from the residential mortgage and commercial real estate categories.

Total deposits were $1.2 billion at both September 30, 2014 and June 30, 2014. An increase in core deposits, mainly driven by a higher level of money market deposits, was offset by a decline in brokered deposits. Compared with September 30, 2013, deposits increased $231 million, or 25%. The increase was primarily due to deposits assumed in the Nantucket Bank acquisition, which totaled $275 million as of the acquisition date in January 2014 and have grown slightly since then. Approximately 10% of the deposits assumed in the Nantucket Bank acquisition were certificates of deposit and the remainder was demand, savings and money market deposits. In addition, the growth in deposits from a year ago reflects a higher level of commercial deposits due to the Company’s increased emphasis on leveraging commercial lending relationships, including those in Nantucket. The increase in deposits from the factors discussed above was partially offset by declines in brokered CDs and in the higher-yielding categories of consumer deposits, reflecting the Company’s strategy of reducing its reliance on higher priced deposits as evidenced by the yield on interest bearing deposits declining to 0.54% for the first nine months of 2014 compared to 0.85% for the comparable period in 2013.

Stockholders’ equity was $410 million at September 30, 2014 compared to $176 million at June 30, 2014 and $172 million at September 30, 2013. The increases from both prior periods reflect the Company's mutual to stock conversion that was completed in July 2014. Proceeds from the stock offering were used to fund asset growth and to pay down debt during the third quarter. As a result, short-term borrowings declined to $75 million at September 30, 2014 from $160 million at June 30, 2014. As part of the conversion, the Company also (1) redeemed $18.7 million of preferred stock that had been issued to the U. S. Treasury as part of the Small Business Lending Fund Program and (2) established an employee stock ownership plan ("ESOP") which acquired 8% of the shares issued in the conversion, including shares contributed to the Foundation. The $22.4 million related to the ESOP is shown as a reduction to stockholders' equity in the balance sheet. The tangible common equity to tangible assets ratio increased to 23.69% at September 30, 2014 from 7.91% at June 30, 2014 as a result of the additional capital received from the mutual to stock conversion.

NET INTEREST INCOME

Net interest and dividend income was $11.4 million in the third quarter of 2014, up $1.5 million, or 15.6%, from $9.9 million in the second quarter of 2014. Net interest margin improved to 2.81% in the third quarter of 2014 from 2.67% in the second quarter of 2014. Net interest income and margin in both quarters were impacted by purchase accounting accretion related to the January 2014 Nantucket Bank acquisition. Accretion in the third quarter contributed $179,000 to net interest income and 4 basis points to net interest margin compared to $779,000 and 21 basis points, respectively, in the second quarter. The reduced impact from purchase accounting accretion in the third quarter was due to fewer loan paydowns. The approximately $3.8 million remaining balance of accretable yield at June 30, 2014 is expected to be recorded to net interest income in future quarters. More than offsetting the negative impact on net interest income and margin from the decline in accretable yield was a $1.2 million increase in dividends from mutual fund investments. The growth in net interest income from the second quarter was also helped by a $117 million, or 12%, increase in average loans. Loan yield fell 34 basis points to 3.55% in the third quarter of 2014 as LIBOR-based floating rate loans grew in proportion to the rest of the portfolio and the contribution to loan yield from purchase accounting accretion declined 25 basis points.

Compared to the third quarter of 2013, net interest and dividend income increased $5.4 million, or 90%, while net interest margin improved 77 basis points. The improvement in both net interest income and margin reflects:

• The transformation of the Company’s consumer deposits, including the impact of the January 2014 Nantucket Bank acquisition, which reduced the yield on interest bearing deposits to 0.54% in the third quarter of 2014 from 0.78% in the prior year period. In addition, the average balance of noninterest bearing deposits increased to $117 million in the third quarter of 2014 from $30 million in the prior year period.
• Average equity, another source of noninterest bearing funds, grew $188 million, or 110%, from the third quarter of 2013 as a result of the Company's mutual to stock conversion.
• Purchase accounting accretion in the third quarter of 2014 contributed $179,000 to net interest income and 4 basis points to net interest margin.
• Dividends from mutual fund investments increased $1.1 million compared to the third quarter of 2013.

Net interest income was also helped by a $459 million, or 73%, increase in average loans driven by higher levels of loans in all categories, mainly residential mortgages and commercial real estate. A portion of the loan growth from a year ago was in LIBOR-based floating rate loans.

NONINTEREST INCOME

Noninterest income, excluding a $1.3 million pension curtailment gain, was $2.1 million in the third quarter of 2014 compared to $2.3 million in the second quarter of 2014. The decline of $240,000, or 10%, was mainly due to a drop of $842,000 in gains from sales of securities. This was partially offset by a third quarter gain of $240,000 related to a bulk sale of jumbo residential mortgage loans and a $239,000 increase in loan level derivative income as a higher level of commercial customers were interested in converting floating rate loans to fixed rate via interest rate swaps.

Compared to the third quarter of 2013, noninterest income, excluding a $1.3 million pension curtailment gain recognized in the third quarter of 2014 and a $401,000 bank-owned life insurance death benefit recognized in the third quarter of 2013, declined $675,000, or 25%. The decline was driven by a $904,000 drop in gains from sales of securities, the absence of $283,000 of gains on trading assets recognized in the third quarter of 2013 as the trading operation was discontinued, and a $319,000 decline in loan level derivative income from fewer conversions of commercial loans from floating to fixed rate. These declines were partially offset by increases of $189,000 in deposit account fees and $176,000 in interchange and ATM fees primarily driven by the Nantucket Bank acquisition. In addition and as noted above there was a $240,000 gain on a bulk loan sale in the third quarter of 2014.

NONINTEREST EXPENSE

Noninterest expense was $17.7 million in the third quarter of 2014 vs. $10.7 million in the second quarter of 2014. The third quarter included a $7.0 million expense related to the Company's funding of a new charitable foundation that was set up at the time of the mutual-to-stock conversion that was completed on July 21, 2014. The third quarter also included $51,000 related to costs associated with the Company’s mutual-to-stock conversion and $2,000 related to one-time costs associated with the Nantucket Bank acquisition, compared to $330,000 and $173,000, respectively in the second quarter. Excluding the items described above, noninterest expense increased $536,000 from the second quarter. The increase was mainly due to the implementation of the employee stock ownership program which added nearly $500,000 to third quarter expenses. Both the ESOP as well as the decision to freeze the Company's pension plan as of October 31, 2014 were done in connection with the mutual to stock conversion as part of an overall realignment of compensation and benefit programs.

Compared to the third quarter of 2013, noninterest expense increased $10.1 million. The third quarter of 2014 included the $7.0 million expense related to the charitable foundation, $51,000 of expenses associated with the mutual-to-stock conversion, and nearly $500,000 related to the employee stock ownership program. The noninterest expense comparison with the prior year quarter was also heavily impacted by the January 2014 Nantucket Bank acquisition, which caused noninterest expense to increase approximately $1.4 million compared to the third quarter of 2013 taking into account operating expenses, core deposit intangible amortization, and one-time acquisition costs. In addition, operating expenses were boosted by higher costs associated with becoming a diversified community bank, including a continued expansion of the management team and other infrastructure to meet the needs associated with the current business plan as well as increased advertising. On a full time equivalent basis, total employees were 198 at September 30, 2014 compared to 146 at September 30, 2013.

ASSET QUALITY

The provision for loan losses was $1.4 million in the third quarter of 2014 compared to $959,000 in the second quarter of 2014 and $1.1 million in the third quarter of 2013. The provisions in all quarters reflect management’s assessment of the risks inherent in the loan portfolio.

The allowance for loan losses as a percentage of total loans was 1.13% at both September 30, 2014 and June 30, 2014, compared to 1.27% at September 30, 2013. The decline in the allowance coverage ratio from a year ago is due, in part, to placing the loans obtained in the Nantucket Bank acquisition on the balance sheet at estimated fair value. As a result, there was no associated allowance for loan losses established on the Nantucket Bank loans which resulted in an overall lower allowance coverage ratio for the Company.

The Company had net loan chargeoffs of $9,000 in the third quarter of 2014 compared to net chargeoffs of $13,000 in the second quarter of 2014 and net chargeoffs of $77,000 in the third quarter of 2013.

Nonperforming assets were $4.6 million at September 30, 2014 compared to $4.8 million at June 30, 2014 and $3.0 million at September 30, 2013. Nonperforming assets as a percentage of total assets were 0.27% at September 30, 2014, 0.26% at June 30, 2014, and 0.24% at September 30, 2013.

ABOUT BLUE HILLS BANCORP

Blue Hills Bancorp, Inc. had assets of $1.7 billion at September 30, 2014 and operates 10 branch offices in Brookline, Dedham, Hyde Park, Milton, Nantucket, Norwood and West Roxbury, Massachusetts. Blue Hills Bank is a full service, community bank with its main office in Hyde Park, MA. The 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 and industrial 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. Previously known as Hyde Park Savings Bank, 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 new 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 prospectus dated May 14, 2014, as filed with the Securities and Exchange Commission on May 23, 2014. 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.

No tax equivalent yield adjustments have been made as the effect of such adjustments would not be material.

No tax equivalent yield adjustments have been made as the effect of such adjustments would not be material.

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.