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EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION - Blue Hills Bancorp, Inc.a311certificationofthechie.htm
EX-32.0 - EXHIBIT 32.0 CEO AND CFO CERTIFICATION - Blue Hills Bancorp, Inc.a32certificationofchiefexc.htm
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EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO - Blue Hills Bancorp, Inc.a312certificationofthechie.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2015

OR

[   ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 001-36551

Blue Hills Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Maryland
 
 
 
46-5429062
(State or Other Jurisdiction of
 
 
 
(I.R.S. Employer
Incorporation or Organization)
 
 
 
Identification Number)
320 Norwood Park South
Norwood, Massachusetts 02062
(617) 360-6520
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices) 

N/A
(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YES [ X ]     NO [ ]
    
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X]     NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer [   ]
 
Accelerated filer [   ]
Non-accelerated filer [X]
 
Smaller reporting company [ ]
(Do not check if smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [   ]     NO [X]
As of August 6, 2015, there were 28,451,813 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding.





Blue Hills Bancorp, Inc.
Form 10-Q

Index
Part I. Financial Information
 
 
 
Item 1.


Page No.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II. Other Information
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
Signature Page
 

1



Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
 
June 30,
2015
 
December 31, 2014
Assets
(In thousands)
Cash and due from banks
$
10,162

 
$
15,345

Short-term investments
43,240

 
44,801

Total cash and cash equivalents
53,402

 
60,146

Securities available for sale, at fair value
431,827

 
416,447

Federal Home Loan Bank stock, at cost
11,702

 
11,702

Loans held for sale
1,833

 
14,591

Loans, net of allowance for loan losses of $13,777 at June 30, 2015 and $12,973 at December 31, 2014
1,256,049

 
1,132,914

Premises and equipment, net
18,969

 
18,788

Accrued interest receivable
4,878

 
4,433

Goodwill
9,160

 
9,160

Core deposit intangible
3,381

 
4,232

Net deferred tax asset
7,015

 
6,233

Bank-owned life insurance
31,100

 
30,595

Other assets
15,251

 
18,907

Total assets
$
1,844,567

 
$
1,728,148

Liabilities and Stockholders' Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
142,475

 
$
123,392

Interest bearing
1,131,647

 
1,089,324

Total deposits
1,274,122

 
1,212,716

Short-term borrowings
95,000

 
40,000

Long-term debt
35,000

 
35,000

Accrued expenses and other liabilities
26,704

 
28,826

Total liabilities
1,430,826

 
1,316,542

 

 

Stockholders' Equity:
 
 
 
Preferred stock, zero par value, (50,000,000 shares authorized; none issued and outstanding)

 

Common Stock, $0.01 par value, (100,000,000 shares authorized; 28,466,813 issued and outstanding)
285

 
285

Additional paid-in capital
281,164

 
281,035

Unearned compensation-ESOP
(21,635
)
 
(22,014
)
Retained earnings
152,728

 
149,723

Accumulated other comprehensive income
1,199

 
2,577

Total stockholders' equity
413,741

 
411,606

Total liabilities and stockholders' equity
$
1,844,567

 
$
1,728,148

The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Net Income (unaudited)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans
$
10,759

 
$
9,399

 
$
21,186

 
$
17,450

Interest on securities
2,237

 
2,003

 
4,373

 
3,940

Dividends
112

 
119

 
212

 
284

Other
22

 
30

 
41

 
46

Total interest and dividend income
13,130

 
11,551

 
25,812

 
21,720

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
1,745

 
1,348

 
3,508

 
2,699

Interest on borrowings
270

 
326

 
524

 
630

Total interest expense
2,015

 
1,674

 
4,032

 
3,329

Net interest and dividend income
11,115


9,877


21,780


18,391

Provision for loan losses
544

 
959

 
823

 
1,673

Net interest income, after provision for loan losses
10,571


8,918


20,957


16,718

Non-interest income:
 
 
 
 
 
 
 
Deposit account fees
335

 
343

 
668

 
633

Interchange and ATM fees
377

 
371

 
703

 
657

Mortgage banking
83

 
75

 
184

 
143

Loan level derivative income
770

 
57

 
774

 
207

Gains on sales of securities available for sale, net
267

 
1,191

 
1,585

 
1,732

Gains on trading assets, net

 

 

 
25

Bank-owned life insurance income
252

 
246

 
505

 
495

Miscellaneous
393

 
27

 
242

 
47

Total non-interest income
2,477

 
2,310

 
4,661

 
3,939

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
5,641

 
5,212

 
11,130

 
10,341

Occupancy and equipment
1,464

 
1,298

 
2,962

 
2,899

Data processing
843

 
701

 
1,662

 
1,306

Professional fees
667

 
1,123

 
1,299

 
2,282

Advertising
562

 
658

 
1,062

 
959

FDIC deposit insurance
253

 
196

 
545

 
375

Directors’ fees
93

 
156

 
217

 
306

Amortization of core deposit intangible
414

 
509

 
851

 
862

Other general and administrative
723

 
809

 
1,558

 
1,588

Total non-interest expense
10,660

 
10,662

 
21,286

 
20,918

Income (loss) before income taxes
2,388

 
566

 
4,332

 
(261
)
Provision (benefit) for income taxes
689

 
137

 
1,327

 
(292
)
Net income
$
1,699

 
$
429

 
$
3,005

 
$
31

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.06

 
n/a

 
$
0.11

 
n/a

Diluted
$
0.06

 
n/a

 
$
0.11

 
n/a

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
26,293,560

 
n/a

 
26,284,201

 
n/a

Diluted
26,293,560

 
n/a

 
26,284,201

 
n/a

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3



Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Net income
$
1,699

 
$
429

 
$
3,005

 
$
31

Other comprehensive income (loss):
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Change in unrealized holding gains
(4,793
)
 
5,584

 
(631
)
 
9,756

Reclassification adjustment for net gains realized in net income (1)
(267
)
 
(1,191
)
 
(1,585
)
 
(1,732
)
Net change in unrealized gains
(5,060
)
 
4,393

 
(2,216
)
 
8,024

Tax effect
1,864

 
(1,620
)
 
804

 
(3,017
)
Net-of-tax amount
(3,196
)
 
2,773

 
(1,412
)
 
5,007

Defined benefit pension plan:
 
 
 
 
 
 
 
Reclassification adjustment for net actuarial loss recognized in net periodic benefit cost (2)
56

 

 
56

 

Tax effect
(22
)
 

 
(22
)
 

Net-of-tax amount
34

 

 
34

 

Other comprehensive income (loss)
(3,162
)
 
2,773

 
(1,378
)
 
5,007

Comprehensive income (loss)
$
(1,463
)
 
$
3,202

 
$
1,627

 
$
5,038

______________________

(1)
Amounts are included in gains on sales of securities available for sale, net, in non-interest income in the consolidated statements of net income. Income tax expense associated with the reclassification adjustments for the three months ended June 30, 2015 and 2014 was $96,000 and $440,000, respectively. Income tax expense associated with the reclassification adjustment for the six months ended June 30, 2015 and 2014 was $557,000 and $639,000, respectively.

(2)
Amounts are included in salaries and benefits expense in the consolidated statements of net income. Income tax benefit associated with the reclassification adjustments for the three and six months ended June 30, 2015 was $(22,000) and $(22,000), respectively.

The accompanying notes are an integral part of these unaudited consolidated financial statements.


4



Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2015 and 2014 (unaudited)

 
SBLF Preferred
Stock
Common Stock
Additional paid-in capital
Unearned Compensation- ESOP
Retained
Earnings
Accumulated Other Comprehensive Income
Total
(in thousands, except share data)
Shares
Amount
 
 
 
 
Balance at December 31, 2013
$
18,724


$

$

$

$
150,345

$
2,465

$
171,534

Comprehensive income





31

5,007

5,038

Preferred stock dividends declared





(417
)

(417
)
Balance at June 30, 2014
$
18,724


$

$

$

$
149,959

$
7,472

$
176,155

 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$

28,466,813

$
285

$
281,035

$
(22,014
)
$
149,723

$
2,577

$
411,606

Comprehensive income (loss)





3,005

(1,378
)
1,627

ESOP shares committed to be released



129

379



508

Balance at June 30, 2015
$

28,466,813

$
285

$
281,164

$
(21,635
)
$
152,728

$
1,199

$
413,741


The accompanying notes are an integral part of these unaudited consolidated financial statements.



5

Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

 
Six Months Ended
 
June 30,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
3,005

 
$
31

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
823

 
1,673

Net amortization of securities available for sale
1,894

 
906

Gains on sales of securities available for sale, net
(1,585
)
 
(1,732
)
Proceeds from sale of loans
16,823

 
3,765

Loans originated for sale
(5,689
)
 
(3,660
)
Gains on sale of residential loans, net
(165
)
 
(105
)
Net amortization of deferred loan origination costs and (discounts)
(91
)
 
507

Depreciation and amortization
862

 
712

Amortization of core deposit intangible
851

 
862

Bank-owned life insurance income
(505
)
 
(495
)
ESOP expense
508

 

Deferred tax benefit

 
(747
)
Net change in:
 
 
 
Trading assets

 
750

Accrued interest receivable
(445
)
 
467

Other assets
3,656

 
(5,189
)
Accrued expenses and other liabilities
(2,066
)
 
3,453

Net cash provided by operating activities
17,876

 
1,198

Cash flows from investing activities:
 
 
 
Activity in securities available for sale:
 
 
 
Purchases
(126,698
)
 
(129,082
)
Sales
86,721

 
143,608

Maturities/calls
5,100

 
6,882

Principal paydowns
16,972

 
11,167

Loan originations and purchases net of paydowns
(129,686
)
 
(152,118
)
Proceeds from jumbo residential portfolio loan sale
7,608

 

Net purchases of premises and equipment
(1,043
)
 
(681
)
Purchase of FHLBB stock

 
(936
)
Cash provided by business combination, net of purchase price

 
151,587

Net cash provided by (used in) investing activities
(141,026
)
 
30,427


The accompanying notes are an integral part of these unaudited consolidated financial statements.


(continued)







6

Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

(concluded)
 
Six Months Ended
 
June 30,
 
2015
 
2014

(In thousands)
Cash flows from financing activities:



Net change in deposits, excluding brokered deposits
35,813


(28,138
)
Net change in brokered deposits
25,593

 
(10,418
)
Net change in short-term borrowings
55,000


(10,000
)
Repayment of long-term debt

 
(10,000
)
Stock subscriptions received

 
283,958

Preferred stock dividends paid


(417
)
Net cash provided by (used in) financing activities
116,406


224,985

Net change in cash and cash equivalents
(6,744
)
 
256,610

Cash and cash equivalents at beginning of year
60,146


40,316

Cash and cash equivalents at end of year
$
53,402


$
296,926

Supplementary information:



Interest paid
$
4,038


$
3,360

Income taxes paid, net of refunds
2,450


132

Preferred stock dividends declared

 
417

Fair value of non-cash assets acquired


123,755

Fair value of liabilities assumed


275,342

Portfolio loans transferred to loans held for sale designation

 
22,398

The accompanying notes are an integral part of these unaudited consolidated financial statements.


7


BLUE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION

Conversion

Blue Hills Bancorp, Inc. (the “Company”) is a Maryland corporation formed in February 2014 for the purpose of becoming the holding company for Blue Hills Bank (the “Bank”) concurrent with the conversion of Hyde Park Bancorp, MHC from the mutual holding company to the stock holding company form of organization on July 21, 2014. In connection with the conversion, the Bank became a wholly-owned subsidiary of the Company and the Company sold 27,772,500 shares of its common stock, representing the adjusted maximum of the offering range, at $10.00 per share, for gross offering proceeds of approximately $277,725,000, including the sale of 2,277,345 shares to the employee stock ownership plan (“ESOP”) for $22,773,450. The purchase of common stock by the ESOP was financed by a loan from Blue Hills Funding Corporation, a subsidiary of the Company. Upon the completion of the conversion, Hyde Park Bancorp, MHC and the Bank’s former Massachusetts chartered mid-tier holding company, Hyde Park Bancorp, Inc., ceased to exist.

In connection with the plan of conversion, the Company established the Blue Hills Bank Foundation (the “Foundation”). The Foundation was funded with $7.0 million, including 694,313 shares of the Company’s common stock and $57,000 in cash, which was recorded as an expense by the Company in July 2014. The Company anticipates the contribution will be deductible for federal income tax purposes.
Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Blue Hills Funding Corporation and the Bank, the principal operating entity, and the Bank's wholly-owned subsidiaries, HP Security Corporation and B.H. Security Corporation, which are Massachusetts security corporations, and 1196 Corporation, which holds a restricted stock. All significant intercompany balances and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements of the Company presented herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and Article 8 of Regulation S-X and do not include all of the information and note disclosures required by GAAP for a complete set of financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the year. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2014, included in the Company's annual report on Form 10-K.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the realizability of deferred tax assets.



8



Reclassification

Certain amounts in the December 31, 2014 consolidated financial statements have been reclassified to conform to the current presentation.

Loan policies

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, charge-offs and any deferred fees and costs on originated and purchased loans. Interest income is accrued on the unpaid principal balance. Deferred loan origination fees/costs and discounts on purchased loans are recognized as an adjustment of the related loan yield using the interest method.
It is the policy of the Company to discontinue the accrual of interest on loans past due in excess of 90 days, unless the loan is well-secured and in the process of collection, or when in the judgment of management, the ultimate collectability of the principal or interest becomes doubtful and to reverse all interest previously accrued against interest income. Past due status is based on contractual terms of the loan. The interest on non-accrual loans is accounted for on the cash-basis or cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due have been current for six consecutive months and future payments are reasonably assured.
Allowance for loan losses
The allowance for loan losses is based on the size and the composition of the loan portfolio, delinquency levels, loss experience, economic conditions and other factors related to the collectability of the loan portfolio. For portfolios for which the Company had no prior loss experience, the national and state peer group losses for relevant portfolios generally over the years 2006-2014 were used. Charge-off factors are updated at least annually and management assesses them quantitatively on a quarterly basis. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated regularly by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available; however, because of the increase in risk exposures new to the Company, it is the intention of management to maintain an allowance that is prudently commensurate with the growth in the loan portfolio.
The allowance consists of general, allocated and unallocated components, as further described below.
General component
The general component of the allowance for loan losses is based on extrapolated historical loss experience for periods ranging from 2006-2014, adjusted for qualitative and environmental factors including levels/trends in delinquencies; trends in volumes and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate - The Company does not generally originate loans with a loan-to-value ratio greater than 80 percent and does not generally grant loans that would be classified as subprime upon origination. When the Company does extend credit either on a first- or second-lien basis at a loan-to-value ratio greater than 80 percent, such loans are supported by either mortgage insurance or state guarantee programs. All loans in this segment are collateralized by owner-occupied, 1-4 family residential real estate and repayment is dependent on the credit quality of the individual borrower. The health of the regional economy, including unemployment rates and housing prices, will have an effect on the credit quality of loans in this segment.
Home equity - Loans in this segment are generally secured by 1st or 2nd liens on residential real estate. Repayment is dependent on the credit quality of the individual borrower. The Company evaluates each loan application based on factors including the borrower’s credit score, income, length of employment, and other factors to establish the creditworthiness of the borrower.
Commercial real estate - Loans in this segment include investment real estate and are generally secured by assignments of leases and real estate collateral. In cases where there is a concentration of exposure to a single large

9



tenant, underwriting standards include analysis of the tenant’s ability to support lease payments over the duration of the loan. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Payments on loans secured by income-producing properties often depend on the successful operation and management of the properties. Management continually monitors the cash flows of these loans.
Construction - Loans in this segment primarily include real estate development loans for which payment is derived from permanent financing or sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial business - Loans in this segment are generally secured by business assets, including accounts receivable, inventory, real estate and intangible assets. Strict underwriting standards include considerations of the borrower’s ability to support the debt service requirements from the underlying historical and projected cash flows of the business, collateral values, the borrower’s credit history and the ultimate collectability of the debt. Economic conditions, real estate values, commodity prices, unemployment trends and other factors will affect the credit quality of loans in these segments.
Consumer - Loans in this segment primarily include used auto loans. A significant portion of the used auto loan portfolio is comprised of geographically diverse loans originated by and purchased from a third party, who also provides collection services. While this portfolio has generated minimal charge-offs, the provisions for loan losses reflect management’s estimate of inherent losses based on a review of regional and national historical losses of other institutions with similar portfolios.
Allocated component
The allocated component relates to loans that are on the watch list (partially charged-off, non-accruing loans and accruing adversely-rated loans) or are considered impaired. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management reviews all loan types for individual impairment. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired and generally remain impaired for the remaining life of the loan. The impaired classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate greater than or equal to that which would be provided to a borrower with similar credit risk at the time of restructuring.

Unallocated component
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.



10



NOTE 2 - SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale, with gross unrealized gains and losses, follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
June 30, 2015
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. Treasury
$
598

 
$
59

 
$

 
$
657

Government-sponsored enterprises
32,223

 
80

 
(71
)
 
32,232

Government-sponsored mortgage-backed and collateralized mortgage obligations
149,496

 
565

 
(631
)
 
149,430

Other mortgage- and asset-backed securities:
 
 
 
 
 
 


Privately issued commercial mortgage-backed securities
15,650

 
17

 
(107
)
 
15,560

SBA asset-backed securities
16,671

 
63

 
(15
)
 
16,719

Other asset-backed securities
11,375

 
8

 
(113
)
 
11,270

Total other mortgage- and asset-backed securities
43,696

 
88

 
(235
)
 
43,549

State and political subdivisions
16,178

 
301

 
(22
)
 
16,457

Financial services:
 
 
 
 
 
 


Banks
20,266

 
410

 
(65
)
 
20,611

Diversified financials
22,989

 
421

 
(94
)
 
23,316

Insurance and REITs
15,119

 
33

 
(231
)
 
14,921

Total financial services
58,374

 
864

 
(390
)
 
58,848

Other corporate:
 
 
 
 
 
 
 
Industrials
51,962

 
480

 
(577
)
 
51,865

Utilities
31,079

 
135

 
(442
)
 
30,772

Total other corporate
83,041

 
615

 
(1,019
)
 
82,637

Total debt securities
383,606

 
2,572

 
(2,368
)
 
383,810

 
 
 
 
 
 
 
 
Marketable equity securities:
 
 
 
 
 
 
 
Mutual funds:
 
 
 
 
 
 
 
Global equity
5,000

 
752

 

 
5,752

Domestic community
3,216

 
75

 
(9
)
 
3,282

Global asset allocation
36,956

 
2,045

 
(18
)
 
38,983

Total marketable equity securities
45,172

 
2,872

 
(27
)
 
48,017

Total securities available for sale
$
428,778

 
$
5,444

 
$
(2,395
)
 
$
431,827

 

11



 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
December 31, 2014
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. Treasury
$
13,037

 
$
182

 
$

 
$
13,219

Government-sponsored enterprises
26,335

 
131

 
(29
)
 
26,437

Government-sponsored mortgage-backed and collateralized mortgage obligations
160,091

 
756

 
(294
)
 
160,553

Other mortgage- and asset-backed securities:
 
 
 
 
 
 
 
Privately issued commercial mortgage-backed securities
22,100

 
30

 
(201
)
 
21,929

SBA asset-backed securities
27,765

 
308

 
(27
)
 
28,046

Other asset-backed securities
16,235

 

 
(43
)
 
16,192

Total other mortgage- and asset-backed securities
66,100

 
338

 
(271
)
 
66,167

State and political subdivisions
15,619

 
567

 
(3
)
 
16,183

Financial services:
 
 
 
 
 
 


Banks
12,364

 
531

 
(6
)
 
12,889

Diversified financials
15,796

 
354

 
(18
)
 
16,132

Insurance and REITs
9,387

 
138

 
(9
)
 
9,516

Total financial services
37,547

 
1,023

 
(33
)
 
38,537

Other corporate:
 
 
 
 
 
 
 
Industrials
34,408

 
681

 
(54
)
 
35,035

Utilities
16,873

 
265

 
(120
)
 
17,018

Total other corporate
51,281

 
946

 
(174
)
 
52,053

Total debt securities
370,010

 
3,943

 
(804
)
 
373,149

 
 
 
 
 
 
 
 
Marketable equity securities:
 
 
 
 
 
 
 
Mutual funds:
 
 
 
 
 
 
 
Global equity
5,000

 
623

 

 
5,623

Domestic community
3,216

 
86

 
(5
)
 
3,297

Global asset allocation
32,956

 
1,498

 
(76
)
 
34,378

Total marketable equity securities
41,172

 
2,207

 
(81
)
 
43,298

Total securities available for sale
$
411,182

 
$
6,150

 
$
(885
)
 
$
416,447
















12



The amortized cost and estimated fair value of debt securities by contractual maturity at June 30, 2015 follow. Expected maturities will differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Within 1 year
$
7,878

 
$
7,922

After 1 year through 5 years
101,841

 
102,611

After 5 years through 10 years
73,270

 
72,643

After 10 years
7,425

 
7,655

 
190,414

 
190,831

Mortgage- and asset-backed securities and collateralized mortgage obligations
193,192

 
192,979

 
$
383,606

 
$
383,810

The Company continually reviews investment securities for the existence of other-than-temporary impairment ("OTTI"), taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, or whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

13



Information pertaining to securities available for sale with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 
Less Than Twelve Months
 
More Than Twelve Months
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
June 30, 2015
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored enterprises
$
(71
)
 
$
15,012

 
$

 
$

Government-sponsored mortgage-backed and collateralized mortgage obligations
(622
)
 
116,275

 
(9
)
 
225

Other mortgage- and asset-backed securities:
 
 
 
 
 
 
 
Privately issued commercial mortgage- backed securities
(34
)
 
6,696

 
(73
)
 
7,642

SBA asset-backed securities
(15
)
 
5,223

 

 

Other asset-backed securities
(113
)
 
8,214

 

 

Total other mortgage- and asset-backed securities
(162
)
 
20,133

 
(73
)
 
7,642

State and political subdivisions
(22
)
 
2,380

 

 

Financial services:
 
 
 
 
 
 
 
Banks
(65
)
 
11,502

 

 

Diversified financials
(94
)
 
6,914

 

 

Insurance and REITs
(231
)
 
10,385

 

 

Total financial services
(390
)
 
28,801

 

 

Other corporate:
 
 
 
 
 
 
 
Industrials
(577
)
 
32,676

 

 

Utilities
(442
)
 
20,861

 

 

Total other corporate
(1,019
)
 
53,537

 

 

Total debt securities
(2,286
)
 
236,138

 
(82
)
 
7,867

Marketable equity securities:
 
 
 
 
 
 
 
Mutual funds:
 
 
 
 
 
 
 
Domestic community

 

 
(9
)
 
457

Global asset allocation
(18
)
 
3,982

 

 

Total marketable equity securities
(18
)
 
3,982

 
(9
)
 
457

Total temporarily impaired securities
$
(2,304
)
 
$
240,120

 
$
(91
)
 
$
8,324


At June 30, 2015, multiple debt securities have unrealized losses with aggregate depreciation of less than 1% from the Company’s amortized cost basis. The unrealized losses were primarily caused by interest rate fluctuations. A significant portion of these investments are guaranteed by U.S. Government-sponsored enterprises. It is expected that none of these securities would be settled at a price less than the par value of the investment. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
 
At June 30, 2015, the Company had two mutual funds with an unrealized loss of $27,000, or less than 1% depreciation from the Company’s cost basis. No issues have been identified that cause management to believe the declines in market value are other than temporary and the Company has the ability and intent to hold these investments until a recovery of fair value.




14



 
Less Than Twelve Months
 
More Than Twelve Months
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
December 31, 2014
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored enterprises
$
(12
)
 
$
5,932

 
$
(17
)
 
$
1,080

Government-sponsored mortgage-backed and collateralized mortgage obligations
(190
)
 
93,364

 
(104
)
 
8,425

Other mortgage- and asset-backed securities:
 
 
 
 
 
 
 
Privately issued commercial mortgage- backed securities
(69
)
 
9,412

 
(132
)
 
8,759

SBA asset-backed securities
(27
)
 
5,529

 

 

Other asset-backed securities
(43
)
 
16,192

 

 

Total other mortgage- and asset-backed securities
(139
)
 
31,133

 
(132
)
 
8,759

State and political subdivisions
(3
)
 
1,955

 


 

Financial services:
 
 
 
 
 
 
 
Banks
(6
)
 
2,907

 

 

Diversified financials
(18
)
 
7,676

 

 

Insurance and REITs
(9
)
 
4,177

 

 

Total financial services
(33
)
 
14,760

 

 

Other corporate:
 
 
 
 
 
 
 
Industrials
(54
)
 
9,575

 

 

Utilities
(120
)
 
7,291

 

 

Total other corporate
(174
)
 
16,866

 

 

Total debt securities
(551
)
 
164,010

 
(253
)
 
18,264

Marketable equity securities:
 
 
 
 
 
 
 
Mutual funds:
 
 
 
 
 
 
 
Domestic community

 

 
(5
)
 
462

Diversified bonds
(76
)
 
7,057

 

 

Total marketable equity securities
(76
)
 
7,057

 
(5
)
 
462

Total temporarily impaired securities
$
(627
)
 
$
171,067

 
$
(258
)
 
$
18,726














15



NOTE 3 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES
A summary of the balances of loans follows: 
 
June 30,
 
December 31,
 
2015
 
2014
 
(In thousands)
Real estate:
 
 
 
1-4 family residential
$
508,796

 
$
460,273

Home equity
65,795

 
61,750

Commercial real estate
450,212

 
387,807

Construction
60,878

 
53,606

 
1,085,681

 
963,436

Commercial business
151,181

 
151,823

Consumer
33,168

 
31,778

Total loans
1,270,030

 
1,147,037

Allowance for loan losses
(13,777
)
 
(12,973
)
Discount and fair value adjustments on purchased loans
(3,330
)
 
(3,850
)
Deferred loan costs and fees, net
3,126

 
2,700

Loans, net
$
1,256,049

 
$
1,132,914


Activity in the allowance for loan losses for the three and six months ended June 30, 2015 and 2014 and allocation of the allowance to loan segments as of June 30, 2015 and December 31, 2014 follows: 


1-4 Family
Residential

Home
Equity

Commercial
Real Estate

Construction

Commercial
Business

Consumer

Unallocated

Total
 
(In thousands)
Three Months Ended June 30, 2015















Allowance at March 31, 2015
$
3,215

 
$
380

 
$
3,722


$
1,176


$
3,332


$
747


$
666


$
13,238

Provision (credit) for loan losses
192

 
39

 
846


(152
)

(341
)

(62
)

22


544

Loans charged-off

 

 






(5
)



(5
)
Recoveries

 

 











Allowance at June 30, 2015
$
3,407

 
$
419

 
$
4,568


$
1,024


$
2,991


$
680


$
688


$
13,777

Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance at March 31, 2014
$
2,887

 
$
268

 
$
2,928

 
$
414

 
$
2,589

 
$
602

 
$
658

 
$
10,346

Provision for loan losses
201

 
37

 
314

 
285

 
66

 
56

 

 
959

Loans charged-off

 

 

 

 

 
(13
)
 

 
(13
)
Recoveries

 

 

 

 

 

 

 

Allowance at June 30, 2014
$
3,088

 
$
305

 
$
3,242

 
$
699

 
$
2,655

 
$
645

 
$
658

 
$
11,292



16



 
1-4 Family
Residential
 
Home
Equity
 
Commercial
Real Estate
 
Construction
 
Commercial
Business
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance at December 31, 2014
$
3,222

 
$
340

 
$
3,551

 
$
1,056

 
$
3,410

 
$
736

 
$
658

 
$
12,973

Provision (credit) for loan losses
185

 
79

 
1,017

 
(32
)
 
(419
)
 
(37
)
 
30

 
823

Loans charged-off

 

 

 

 

 
(19
)
 

 
(19
)
Recoveries

 

 

 

 

 

 

 

Allowance at June 30, 2015
$
3,407

 
$
419

 
$
4,568

 
$
1,024

 
$
2,991

 
$
680

 
$
688

 
$
13,777

Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance at December 31, 2013
$
2,835

 
$
247

 
$
2,608

 
$
303

 
$
2,416

 
$
574

 
$
688

 
$
9,671

Provision (credit) for loan losses
271

 
58

 
634

 
396

 
239

 
105

 
(30
)
 
1,673

Loans charged-off
(18
)
 

 

 

 

 
(34
)
 

 
(52
)
Recoveries

 

 

 

 

 

 

 

Allowance at June 30, 2014
$
3,088

 
$
305

 
$
3,242

 
$
699

 
$
2,655

 
$
645

 
$
658

 
$
11,292


17



Additional information pertaining to the allowance for loan losses at June 30, 2015 and December 31, 2014 is as follows:
 
1-4 Family
Residential
 
Home
Equity
 
Commercial
Real Estate
 
Construction
 
Commercial
Business
 
Consumer
 
Unallocated
 
Total
 
(In thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance related to impaired loans
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Allowance related to non-impaired loans
3,407

 
419

 
4,568

 
1,024

 
2,991

 
680

 
688

 
13,777

Total allowance for loan losses
$
3,407

 
$
419

 
$
4,568

 
$
1,024

 
$
2,991

 
$
680

 
$
688

 
$
13,777

Impaired loans
$
4,705

 
$
717

 
$

 
$

 
$

 
$
39

 
$

 
$
5,461

Non-impaired loans
504,091

 
65,078

 
450,212

 
60,878

 
151,181

 
33,129

 

 
1,264,569

Total loans
$
508,796

 
$
65,795

 
$
450,212

 
$
60,878

 
$
151,181

 
$
33,168

 
$

 
$
1,270,030

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance related to impaired loans
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Allowance related to non-impaired loans
3,222

 
340

 
3,551

 
1,056

 
3,410

 
736

 
658

 
12,973

Total allowance for loan losses
$
3,222

 
$
340

 
$
3,551

 
$
1,056

 
$
3,410

 
$
736

 
$
658

 
$
12,973

Impaired loans
$
4,419

 
$
578

 
$

 
$

 
$

 
$
27

 
$

 
$
5,024

Non-impaired loans
455,854

 
61,172

 
387,807

 
53,606

 
151,823

 
31,751

 

 
1,142,013

Total loans
$
460,273

 
$
61,750

 
$
387,807

 
$
53,606

 
$
151,823

 
$
31,778

 
$

 
$
1,147,037



The following is a summary of past due and non-accrual loans, by loan class, at June 30, 2015 and December 31, 2014:
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Past Due 90
Days or More
 
Total
Past Due
 
Loans on
Non-accrual
 
(In thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
1-4 family residential
$
611

 
$
1,149

 
$
745

 
$
2,505


$
4,182

Home equity
781

 
216

 
624

 
1,621


717

Commercial real estate
451

 

 

 
451

 

Commercial Business
299

 

 

 
299

 

Consumer
132

 
2

 

 
134


39

Total
$
2,274


$
1,367


$
1,369


$
5,010


$
4,938

 
December 31, 2014
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
1-4 family residential
$
3,137

 
$
522

 
$
1,370

 
$
5,029

 
$
3,876

Home equity
680

 

 
475

 
1,155

 
578

Consumer
217

 

 
5

 
222

 
$
27

Total
$
4,034

 
$
522

 
$
1,850

 
$
6,406

 
$
4,481

There were no loans past due 90 days or more and still accruing interest at June 30, 2015 and December 31, 2014.


18



The following is a summary of information pertaining to impaired loans by loan class at the dates indicated: 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
June 30, 2015
(In thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
Real estate:
 
 
 
 
 
1-4 family residential
$
4,705

 
$
5,497

 
$

Home equity
717

 
947

 

Consumer
39

 
40

 

Total
$
5,461

 
$
6,484

 
$

 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
Impaired loans without a valuation allowance:
 
 
 
 
 
Real estate:
 
 
 
 
 
1-4 family residential
$
4,419

 
$
5,211

 
$

Home equity
578

 
804

 

Consumer
27

 
32

 

Total
$
5,024

 
$
6,047

 
$


The following tables set forth information regarding average balances and interest income recognized (all on a cash basis) on impaired loans by class, for the periods indicated:
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Three Months Ended June 30, 2015
(In thousands)
Real estate:
 
 
 
1-4 family residential
$
4,588

 
$
76

Home equity
647

 
8

Consumer
35

 
2

Total
$
5,270

 
$
86

 
 
 
 
Three Months Ended June 30, 2014
 
 
 
Real estate:
 
 
 
1-4 family residential
$
3,753

 
$
49

Home Equity
683

 

Commercial Business
276

 

Consumer
29

 

Total
$
4,741

 
$
49


19



 
Average
Recorded
Investment
 
Interest
Income
Recognized
Six Months Ended June 30, 2015
(In thousands)
Real estate:
 
 
 
1-4 family residential
$
4,532

 
$
143

Home equity
624

 
14

Consumer
32

 
2

Total
$
5,188

 
$
159

 
 
 
 
Six Months Ended June 30, 2014
 
 
 
Real estate:
 
 
 
1-4 family residential
$
3,241

 
$
83

Home Equity
455

 
4

Commercial Business
184

 
4

Consumer
19

 

Total
$
3,899

 
$
91


No additional funds are committed to be advanced in connection with impaired loans.
Troubled debt restructurings entered into during the three and six months ended June 30, 2015 are as follows:
Three Months Ended June 30, 2015
Number of contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Real estate:
 
 
 
 
 
1-4 family residential
2

 
$
477

 
$
494

Six Months Ended June 30, 2015
 
 
 
 
 
Real estate:
 
 
 
 
 
1-4 family residential
4

 
946

 
984

During the three and six months ended June 30, 2015, four residential real estate loans were modified to capitalize past due interest.
There were no troubled debt restructurings recorded during the three and six months ended June 30, 2014 and there were no troubled debt restructurings that defaulted during the three and six months ended June 30, 2015 and 2014, for which default was within one year of the restructure date.
Credit Quality Information
The Company utilizes a ten-grade internal loan rating system for all loans as follows:
Loans rated 1 – 6 are considered “acceptable” rated loans that are performing as agreed, and generally require only routine supervision.
Loans rated 7 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 8 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected. Generally, all loans 90 days delinquent are rated 8.
Loans rated 9 are considered “doubtful.” Serious problems exist to the point where a partial loss of principal is likely. Weakness is so pronounced that on the basis of current information, conditions and values, collection in full is highly improbable.
Loans rated 10 are considered "loss" and the credit extended to the customer is considered uncollectible or of such little value that it does not warrant consideration as an active asset.

20



The Company assigns a 6 risk-rating to otherwise performing, satisfactorily collateralized Consumer and Residential loans where the Bank becomes aware of deterioration in a FICO score or other indication of potential inability to service the debt. The Company assigns risk ratings of 7-10 to residential or consumer loans that have a well-defined weakness that may jeopardize the collection of the contractual principal and interest, are contractually past due 90 days or more or legal action has commenced against the borrower. All other residential mortgage and consumer loans have no risk rating.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial and construction loans. At least annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. In addition, management utilizes delinquency reports, the watch list and other loan reports to monitor credit quality of other loan segments.
The following tables present the Company’s loans by risk rating at June 30, 2015 and December 31, 2014:
 
 
1-4 Family
Residential
 
Home
Equity
 
Commercial
Real Estate
 
Construction
 
Commercial
Business
 
Consumer
 
Total
Loans
 
(In thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans rated 1 - 6
$
2,063

 
$
471

 
$
449,752

 
$
60,878

 
$
151,046

 
$
5

 
$
664,215

Loans rated 7
4,283

 
848

 

 

 
135

 

 
5,266

Loans rated 8
1,658

 
144

 
460

 

 

 
39

 
2,301

Loans rated 9
705

 

 

 

 

 

 
705

Loans rated 10

 

 

 

 

 

 

Loans not rated
500,087

 
64,332

 

 

 

 
33,124

 
597,543

 
$
508,796

 
$
65,795

 
$
450,212

 
$
60,878

 
$
151,181

 
$
33,168

 
$
1,270,030

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans rated 1 - 6
$
3,381

 
$
473

 
$
387,651

 
$
53,606

 
$
150,960

 
$
5

 
$
596,076

Loans rated 7
3,095

 
852

 
156

 

 
863

 

 
4,966

Loans rated 8
1,331

 

 

 

 

 
31

 
1,362

Loans rated 9
709

 

 

 

 

 

 
709

Loans rated 10

 

 

 

 

 

 

Loans not rated
451,757

 
60,425

 

 

 

 
31,742

 
543,924

 
$
460,273

 
$
61,750

 
$
387,807

 
$
53,606

 
$
151,823

 
$
31,778

 
$
1,147,037


NOTE 4 - INTEREST RATE SWAP AGREEMENTS
The Company is party to derivative financial instruments in the normal course of business to manage exposure to fluctuations in interest rates and to meet the needs of commercial customers. These financial instruments have been generally limited to loan level interest rate swap agreements, which are entered into with counterparties that meet established credit standards. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. The fair value of the derivative instruments is reflected on the Company’s consolidated balance sheet as other assets or accrued expenses and other liabilities as appropriate. Changes in the fair value of these agreements are recorded in miscellaneous income in the consolidated statements of operations.
 
The Company did not have derivative fair value hedges or derivative cash flow hedges at June 30, 2015 and December 31, 2014. The table below presents information about derivative financial instruments not designated as hedging instruments at June 30, 2015 and December 31, 2014.

21



 
Derivative Gains
 
Derivative Losses
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
 
(In thousands)
June 30, 2015
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
Commercial loan level interest rate swap agreements
$
246,278

 
$
6,165

 
$
246,278

 
$
6,625

Other contracts
8,458

 
7

 
8,217

 
69

Total derivatives
$
254,736

 
$
6,172

 
$
254,495

 
$
6,694

December 31, 2014
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
Commercial loan level interest rate swap agreements
$
202,970

 
$
5,446

 
$
202,970

 
$
5,759

Other contracts
8,616

 
8

 
8,287

 
83

Total derivatives
$
211,586

 
$
5,454

 
$
211,257

 
$
5,842


The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company has minimum collateral posting thresholds with certain of its interest rate swap derivative counterparties.
Other contracts represent risk participation agreements on commercial loan level interest rate swap agreements. The Company has entered into risk participation agreements with the correspondent institutions to share in any interest rate swap gains or losses incurred as a result of the commercial loan customers’ termination of a loan level interest rate swap agreement prior to maturity. The Company records these risk participation agreements at fair value.



22



NOTE 5 - DEPOSITS
A summary of deposit balances, by type, is as follows: 
 
June 30,
 
December 31,
 
2015
 
2014
 
(In thousands)
NOW and demand
$
268,126

 
$
245,117

Regular savings
291,628

 
303,834

Money market
296,539

 
280,139

Brokered money market
23,759

 
23,166

Total non-certificate accounts
880,052

 
852,256

 
 
 
 
Term certificates of $100,000 or more
151,167

 
142,569

Term certificates less than $100,000
159,198

 
159,186

Brokered term certificates
83,705

 
58,705

Total certificate accounts
394,070

 
360,460

Total deposits
$
1,274,122

 
$
1,212,716


At June 30, 2015, the scheduled maturities of term certificate accounts, including brokered deposits, are as follows:
 
Amount
 
Weighted
Average
Rate
 
(Dollars in thousands)
Within 1 year
$
203,395

 
0.59
%
1-2 years
67,373

 
1.15

2-3 years
45,934

 
1.26

3-4 years
11,971

 
1.23

4 years and beyond
65,397

 
2.01

 
$
394,070

 
1.02
%

NOTE 6 - FAIR VALUE MEASURMENTS
Determination of fair value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and due from banks and short-term investments approximate fair value.
Securities available for sale: All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include U.S. Treasuries and marketable equity securities. All other securities are measured at fair value in Level 2 based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

23



Federal Home Loan Bank stock: The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
 
Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other types of loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans held for sale: Fair values are based on commitments in effect from investors or prevailing market prices.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value.

Deposits: The fair values for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificate accounts are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings: The carrying value of short-term borrowings approximates fair value based on the short-term nature of the instruments. The fair values of long-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Derivative instruments: The fair values of interest rate swap agreements are based on a valuation model that uses primarily observable inputs, such as benchmark yield curves and interest rates and also include the value associated with counterparty credit risk.

Off-balance sheet instruments: Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The estimated fair value of off-balance sheet financial instruments at June 30, 2015 and December 31, 2014, was immaterial since fees charged are not material.
 

24



Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
(In thousands)
June 30, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Debt securities
$
657

 
$
383,153

 
$

 
$
383,810

Marketable equity securities
48,017

 

 

 
48,017

Derivative assets

 
6,172

 

 
6,172

Total assets
$
48,674

 
$
389,325

 
$

 
$
437,999

Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
6,694

 
$

 
$
6,694

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Debt securities
$
13,219

 
$
359,930

 
$

 
$
373,149

Marketable equity securities
43,298

 

 

 
43,298

Derivative assets

 
5,454

 

 
5,454

Total assets
$
56,517

 
$
365,384

 
$

 
$
421,901

Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
5,842

 
$

 
$
5,842


Assets measured at fair value on a non-recurring basis
The Company may also be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. At June 30, 2015, there are no assets measured at fair value on a non-recurring basis. At June 30, 2014, there was one impaired loan measured at fair value on a non-recurring basis using level 3 inputs, in the amount of $120,000, with losses on this loan for the three and six months ended June 30, 2014 amounting to $18,000. At June 30, 2015 and December 31, 2014 there were no liabilities measured at fair value on a non-recurring basis.
Losses applicable to impaired loans are based on the appraised value of the underlying collateral, discounted as necessary due to management’s estimates of changes in market conditions. The losses applicable to impaired loans are not recorded as a direct adjustment to current earnings or comprehensive income, but rather as a component in determining the overall adequacy of the allowance for loan losses. Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses.

Summary of fair values of financial instruments
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company. 

25



 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
53,402

 
$
53,402

 
$

 
$

 
$
53,402

Securities available for sale
431,827

 
48,674

 
383,153

 

 
431,827

Federal Home Loan Bank stock
11,702

 

 

 
11,702

 
11,702

Loans and loans held for sale
1,257,882

 

 

 
1,233,309

 
1,233,309

Accrued interest receivable
4,878

 

 

 
4,878

 
4,878

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
1,274,122

 

 

 
1,276,127

 
1,276,127

Borrowings
130,000

 

 
131,016

 

 
131,016

On-balance sheet derivative financial instruments:
 
 
 
 
 
 
 
 
 
Interest rate swap agreements:
 
 
 
 
 
 
 
 
 
Assets
6,172

 

 
6,172

 

 
6,172

Liabilities
6,694

 

 
6,694

 

 
6,694

 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
December 31, 2014
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
60,146

 
$
60,146

 
$

 
$

 
$
60,146

Securities available for sale
416,447

 
56,517

 
359,930

 

 
416,447

Federal Home Loan Bank stock
11,702

 

 

 
11,702

 
11,702

Loans and loans held for sale
1,147,505

 

 

 
1,132,024

 
1,132,024

Accrued interest receivable
4,433

 

 

 
4,433

 
4,433

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
1,212,716

 

 

 
1,214,251

 
1,214,251

Borrowings
75,000

 

 
76,074

 

 
76,074

On-balance sheet derivative financial instruments:
 
 
 
 
 
 
 
 
 
Interest rate swap agreements:
 
 
 
 
 
 
 
 
 
Assets
5,454

 

 
5,454

 

 
5,454

Liabilities
5,842

 

 
5,842

 

 
5,842


NOTE 7 - COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of stockholders' equity on the consolidated balance sheets, such items, along with net income, are components of comprehensive income.





26



The components of accumulated other comprehensive income, included in stockholders' equity, are as follows:
 
 
June 30,
 
December 31,
 
2015
 
2014
 
(In thousands)
Securities available for sale:
 
 
 
Net unrealized gain
$
3,049

 
$
5,265

Tax effect
(1,069
)
 
(1,873
)
Net-of-tax amount
1,980

 
3,392

Defined benefit pension plan:
 
 
 
Unrecognized net actuarial loss
(1,302
)
 
(1,358
)
Tax effect
521

 
543

Net-of-tax amount
(781
)
 
(815
)
 
$
1,199

 
$
2,577


Changes in accumulated other comprehensive income, by component, follows:
 
Three Months Ended June 30, 2015
 
Securities Available for Sale
 
Defined Benefit Pension Plan
 
Total
Balance at March 31, 2015
$
5,176

 
$
(815
)
 
$
4,361

Other comprehensive income before reclassification
(4,793
)
 

 
(4,793
)
Amounts reclassified
(267
)
 
56

 
(211
)
Tax effects
1,864

 
(22
)
 
1,842

Net current-period other comprehensive income
(3,196
)
 
34

 
(3,162
)
Balance at June 30, 2015
$
1,980

 
$
(781
)
 
$
1,199

 
Three Months Ended June 30, 2014
 
Securities Available for Sale
 
Defined Benefit Pension Plan
 
Total
Balance at March 31, 2014
$
4,217

 
$
482

 
$
4,699

Other comprehensive income before reclassification
5,584

 

 
5,584

Amounts reclassified
(1,191
)
 

 
(1,191
)
Tax effects
(1,620
)
 

 
(1,620
)
Net current-period other comprehensive income
2,773

 

 
2,773

Balance at June 30, 2014
$
6,990

 
$
482

 
$
7,472


27



 
Six Months Ended June 30, 2015
 
Securities Available for Sale
 
Defined Benefit Pension Plan
 
Total
Balance at December 31, 2014
$
3,392

 
$
(815
)
 
$
2,577

Other comprehensive income before reclassification
(631
)
 

 
(631
)
Amounts reclassified
(1,585
)
 
56

 
(1,529
)
Tax effects
804

 
(22
)
 
782

Net current-period other comprehensive income
(1,412
)
 
34

 
(1,378
)
Balance at June 30, 2015
$
1,980

 
$
(781
)
 
$
1,199

 
Six Months Ended June 30, 2014
 
Securities Available for Sale
 
Defined Benefit Pension Plan
 
Total
Balance at December 31, 2013
$
1,983

 
$
482

 
$
2,465

Other comprehensive income before reclassification
9,756

 

 
9,756

Amounts reclassified
(1,732
)
 

 
(1,732
)
Tax effects
(3,017
)
 

 
(3,017
)
Net current-period other comprehensive income
5,007

 

 
5,007

Balance at June 30, 2014
$
6,990

 
$
482

 
$
7,472










NOTE 8- STOCKHOLDERS' EQUITY
Minimum regulatory capital requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require minimum ratios of Tier 1 capital to average assets (Leverage Ratio) and common equity Tier 1, Tier 1 and Total capital to risk-weighted assets. These capital guidelines assign risk weights to on- and off-balance sheet items in arriving at total risk-weighted assets. Minimum capital levels are based upon the perceived risk of various asset categories and certain off-balance sheet instruments.
In July 2013, federal banking regulators approved final rules that implement changes to the regulatory capital framework for U.S. banks. The rules set minimum requirements for both the quantity and quality of capital held by community banking institutions. The final rule includes a new minimum ratio of common equity Tier 1 capital to risk weighted assets of 4.5%, raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of

28



common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The phase-in period for the rules began for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. The final rules also apply, effective January 1, 2015, consolidated capital requirements to the Company that are not less stringent than those applicable to the Bank.
As of June 30, 2015, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized an institution must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.


29



The Bank’s and the Company’s actual and minimum required capital amounts and ratios as of June 30, 2015 and December 31, 2014 are presented below.
 
Actual
 
Minimum
Capital
Requirement
 
Minimum
To Be Well
Capitalized
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
Blue Hills Bancorp, Inc.:
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 

Total capital (to risk weighted assets)
$
414,490

 
29.0
%
 
$
114,180

 
8.0
%
 
$
142,726

 
10.0
%
Tier 1 capital (to risk weighted assets)
399,433

 
28.0

 
85,636

 
6.0

 
114,181

 
8.0

Common equity Tier 1(to risk weighted assets)
399,433

 
28.0

 
64,227

 
4.5

 
92,772

 
6.5

Tier 1 capital (to average assets)
399,433

 
22.6

 
70,699

 
4.0

 
88,374

 
5.0

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk weighted assets)
$
409,545

 
32.6
%
 
$
100,513

 
8.0
%
 
N/A

 
N/A

Tier 1 capital (to risk weighted assets)
395,615

 
31.5

 
50,527

 
4.0

 
N/A

 
N/A

Common equity Tier 1(to risk weighted assets)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 capital (to average assets)
395,615

 
23.3

 
67,820

 
4.0

 
N/A

 
N/A

Blue Hills Bank:
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk weighted assets)
$
291,821

 
20.5
%
 
$
114,148

 
8.0
%
 
$
142,684

 
10.0
%
Tier 1 capital (to risk weighted assets)
276,764

 
19.4

 
85,611

 
6.0

 
114,148

 
8.0

Common equity Tier 1(to risk weighted assets)
276,764

 
19.4

 
64,208

 
4.5

 
92,745

 
6.5

Tier 1 capital (to average assets)
276,764

 
15.7

 
70,695

 
4.0

 
88,369

 
5.0

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk weighted assets)
$
283,443

 
22.7
%
 
$
99,973

 
8.0
%
 
$
124,966

 
10.0
%
Tier 1 capital (to risk weighted assets)
269,513

 
21.6

 
49,987

 
4.0

 
74,980

 
6.0

Common equity Tier 1(to risk weighted assets)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 capital (to average assets)
269,513

 
15.9

 
67,707

 
4.0

 
84,634

 
5.0


Dividends
On July 22, 2015, the Company announced that its Board of Directors declared a cash dividend of $0.02 per common share. The dividend will be payable on or about August 20, 2015, to stockholders of record as of August 6, 2015.
Stock Repurchase Program
On July 22, 2015, the Company announced that its Board of Directors authorized a stock repurchase program pursuant to which the Company intends to purchase up to 1,423,340 shares of its issued and outstanding shares of common stock, which represents approximately 5% of the Company's issued and outstanding shares.

NOTE 9- EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released per year is 75,912 through 2043. Shares held by the ESOP include the following:

30



 
June 30, 2015
 
 
Allocated
75,912

Committed to be allocated
37,644

Unallocated
2,163,789

 
2,277,345

The fair value of unallocated shares was approximately $30.3 million at June 30, 2015.
Total compensation expense recognized in connection with the ESOP for the three and six months ended June 30, 2015 was $259,000 and $508,000. There was no compensation expense recognized in connection with the ESOP during the three and six months ended June 30, 2014.

NOTE 10 – EARNINGS PER COMMON SHARE
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. There were no potentially dilutive common stock equivalents as of June 30, 2015. Earnings per share is not applicable for the periods ended June 30, 2014.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2015
 
(Dollars in thousands)
Net income applicable to common stock
$
1,699

 
$
3,005

 
 
 
 
Average number of common shares outstanding
28,466,813

 
28,466,813

Less: Average unallocated ESOP shares
(2,173,253
)
 
(2,182,612
)
Average number of common shares outstanding used to calculate basic and diluted earnings per common share
26,293,560

 
26,284,201

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.06

 
$
0.11

Diluted
$
0.06

 
$
0.11





31



NOTE 11 – SUBSEQUENT EVENTS
On July 31, 2015, approximately $196.3 million of securities available for sale, with unrealized gains of $666,000, were transfered to held to maturity designation. Held to maturity investments are investments that management has the positive intent and ability to hold to maturity. If a security is transferred from available for sale to held to maturity, the fair value at the time of transfer becomes the held-to-maturity security’s new cost basis. The unrealized holding gain at the transfer date continues to be reported in other comprehensive income and is amortized over the investments remaining life as an adjustment of yield in a manner similar to a premium or discount.

32



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of the financial condition and results of operations at and for the three and six months ended June 30, 2015 and 2014 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the asset quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We do not undertake any obligation to update any forward-looking statements after the date of this quarterly report, except as required by law.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
our ability to implement successfully our new business strategy, which includes significant asset and liability growth;
our ability to increase our market share in our market areas and capitalize on growth opportunities;
our ability to implement successfully our branch network expansion strategy;
general economic conditions, either nationally or in our market areas, that are worse than expected;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
adverse changes in the securities markets which, given the significant size of our investment securities portfolio, could cause a material decline in our reported equity and/or our net income if we must record impairment charges or a decline in the fair value of our securities, which are all available for sale;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board and the Securities and Exchange Commission
changes in our organization, compensation and benefit plans;
changes in our financial condition or results of operations that reduce capital available to pay dividends; and
changes in the financial condition or future prospects of issuers of securities that we own.
    
Additional factors that may affect our results are discussed in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission under the heading “Risk Factors.”

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies


33



There are no material changes to the critical accounting policies disclosed in Blue Hills Bancorp, Inc.’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

Comparison of Financial Condition at June 30, 2015 and December 31, 2014

Total Assets. Total assets increased $116.4 million, or 6.7%, to $1.8 billion at June 30, 2015 from $1.7 billion at December 31, 2014, mainly driven by loan growth.

Loans. Net loans grew $123.1 million, or 10.9%, from the end of 2014 to $1.3 billion at June 30, 2015. The higher level of net loans was driven primarily by growth from direct originations in the commercial real estate portfolio which was up $62.4 million, or 16.1%, and the 1-4 family residential mortgage portfolio which was up $48.5 million, or 10.5%, from December 31, 2014. Other loan categories had smaller changes.

The following table sets forth the composition of our loan portfolio at the dates indicated.
 
At June 30, 2015
 
At December 31, 2014
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real estate:
 
 
 
 
 
 
 
1-4 family residential
$
508,796

 
40.06
%
 
$
460,273

 
40.13
%
Home equity
65,795

 
5.18

 
61,750

 
5.38

Commercial
450,212

 
35.45

 
387,807

 
33.81

Construction
60,878

 
4.79

 
53,606

 
4.67

Total real estate
1,085,681

 
85.48

 
963,436

 
83.99

Commercial business
151,181

 
11.90

 
151,823

 
13.24

Consumer
33,168

 
2.62

 
31,778

 
2.77

Total loans
1,270,030

 
100.00
%
 
1,147,037

 
100.00
%
Allowance for loan losses
(13,777
)
 
 
 
(12,973
)
 
 
Discount and fair value adjustments on purchased loans
(3,330
)
 
 
 
(3,850
)
 
 
Deferred loan costs, net
3,126

 
 
 
2,700

 
 
Loans, net
$
1,256,049

 
 
 
$
1,132,914

 
 

34



Securities Available for Sale. Total securities available for sale increased by $15.4 million, or 3.7%, to $431.8 million at June 30, 2015 from $416.4 million at December 31, 2014. An increase in corporate bonds due primarily from a repositioning of the debt securities portfolio that was completed in the first quarter has been partially offset by a net decline in other categories. Unrealized gains on securities available for sale decreased to $3.0 million at June 30, 2015 from $5.3 million at December 31, 2014 reflecting a decline in the value of debt securities in the available for sale portfolio caused by the rise in interest rates.
The following table sets forth the amortized cost and fair value of our securities at the dates indicated, all of which were available for sale.
 
At June 30, 2015
 
At December 31, 2014
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Securities available for sale:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. Treasury
$
598

 
$
657

 
$
13,037

 
$
13,219

U.S. government and government-sponsored enterprise obligations
32,223

 
32,232

 
26,335

 
26,437

U.S. government-sponsored mortgage-backed and collateralized mortgage obligations
149,496

 
149,430

 
160,091

 
160,553

Other mortgage- and asset-backed securities:
 
 
 
 
 
 
 
Private label commercial mortgage-backed securities
15,650

 
15,560

 
22,100

 
21,929

SBA asset-backed securities
16,671

 
16,719

 
27,765

 
28,046

Other asset-backed securities
11,375

 
11,270

 
16,235

 
16,192

Total other mortgage- and asset-backed securities
43,696

 
43,549

 
66,100

 
66,167

Other bonds and obligations:
 
 
 
 
 
 
 
State and political subdivisions
16,178

 
16,457

 
15,619

 
16,183

Financial services:
 
 
 
 
 
 
 
Banks
20,266

 
20,611

 
12,364

 
12,889

Diversified financials
22,989

 
23,316

 
15,796

 
16,132

Insurance and REITs
15,119

 
14,921

 
9,387

 
9,516

Total financial services
58,374

 
58,848

 
37,547

 
38,537

Other corporate:
 
 
 
 
 
 
 
Industrials
51,962

 
51,865

 
34,408

 
35,035

Utilities
31,079

 
30,772

 
16,873

 
17,018

Total other corporate
83,041

 
82,637

 
51,281

 
52,053

Total debt securities
383,606

 
383,810

 
370,010

 
373,149

Marketable equity securities:
 
 
 
 
 
 
 
Mutual funds:
 
 
 
 
 
 
 
Global equity
5,000

 
5,752

 
5,000

 
5,623

Domestic community
3,216

 
3,282

 
3,216

 
3,297

Global asset allocation
36,956

 
38,983

 
32,956

 
34,378

Total marketable equity securities
45,172

 
48,017

 
41,172


43,298

Total securities available for sale
$
428,778

 
$
431,827

 
$
411,182

 
$
416,447

The Company only purchases investment grade debt securities. Private label commercial mortgage-backed securities are in the senior tranches of the capital structures and are investment grade. The other asset-backed securities are also in the senior tranches of the capital structures, and are supported by automobile, equipment, and commercial real estate financings.

35



At June 30, 2015, we had no investments in a single company or entity, other than the U.S. Government-sponsored enterprises, that had an aggregate fair value in excess of 10% of our equity.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $6.7 million, or 11.2%, to $53.4 million at June 30, 2015 from $60.1 million at December 31, 2014.
Bank-Owned Life Insurance. The Company's investment in bank-owned life insurance changed only slightly during the first half of 2015 as a result of current period earnings on such policies. At June 30, 2015, the investment was $31.1 million, compared to $30.6 million at December 31, 2014.

Goodwill and Core Deposit Intangible. At June 30, 2015, goodwill and core deposit intangible assets totaled $12.5 million compared to $13.4 million at December 31, 2014. The balances relate to the Nantucket Bank acquisition and are a combination of the core deposit intangible associated with the deposit liabilities assumed and the goodwill resulting from the transaction. The decline from the end of 2014 is due solely to amortization of the core deposit intangible.
Deposits. Total deposits increased by $61.4 million, or 5.1%, from the end of 2014 to $1.3 billion at June 30, 2015. Increases in the NOW/demand, money market, brokered deposit, and the certificates of deposit categories were partially offset by declines in regular savings. Deposits were impacted by continued growth in the new Milton, Massachusetts branch and a seasonal decline at Nantucket Bank.
Borrowings. Total borrowings increased 73.3%, from $75.0 million at December 31, 2014 to $130.0 million at June 30, 2015 and the higher level of borrowings was used to fund asset growth. Short-term borrowings were $95.0 million at June 30, 2015 compared to $40.0 million at December 31, 2014 and consisted of advances from the Federal Home Loan Bank of Boston. Long-term borrowings were $35.0 million at June 30, 2015 and December 31, 2014 and consisted of fixed-rate advances from the Federal Home Loan Bank of Boston, with maturities ranging from 2016 through 2018.
Stockholders' Equity. Total stockholders' equity increased $2.1 million, or 0.5%, to $413.7 million at June 30, 2015 from $411.6 million at December 31, 2014. The increase from the end of 2014 is mainly due the addition of current period earnings, partially offset by a lower level of other comprehensive income. The balance in other comprehensive income declined from December 31, 2014 due to a drop in the value of debt securities in the available for sale portfolio caused by the rise in interest rates. As noted in Note 12, on July 31, 2015, approximately$196.3 million of securities available for sale, with unrealized gains of$666,000, were transfered to held to maturity designation. The unrealized holding gain at the transfer date continues to be reported in other comprehensive income and is amortized over the investments remaining life as an adjustment of yield in a manner similar to a premium or discount.
The tangible common equity (total equity less goodwill and intangibles, or $401.2 million) to tangible assets (total assets less goodwill and intangibles, or $1.8 billion) ratio decreased to 21.9% at June 30, 2015 from 23.2% at December 31, 2014.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2015 and 2014
General. The Company reported net income of $1.7 million for the three months ended June 30, 2015 compared to net income of $429,000 for the three months ended June 30, 2014. The second quarter of 2014 results included pre-tax expenses of $330,000 related to the Company's mutual-to-stock conversion and $173,000 related to the January 2014 Nantucket Bank acquisition (related tax benefits for these items amounted to $171,000). Excluding these items, net income was $761,000 for the second quarter of 2014.




36



Average Balances and Yields
The following tables sets forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Interest income on tax-exempt securities and loans has been adjusted to a fully taxable-equivalent (FTE) basis using a federal tax rate of 34%. Prior periods have been restated to reflect this change.
 
For the Three Months Ended June 30,
 
2015
 
2014
 
Average
Outstanding
Balance
 
Interest
 
Yield/
Cost
 
Average
Outstanding
Balance
 
Interest
 
Yield/
Cost
 
(in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
1,223,681

 
$
10,812

 
3.54
%
 
$
969,417

 
$
9,454

 
3.91
%
Securities
429,348

 
2,332

 
2.18

 
422,335

 
2,128

 
2.02

Other interest earning assets (1)
42,832

 
73

 
0.68

 
94,149

 
71

 
0.30

Total interest-earning assets
1,695,861

 
13,217

 
3.13
%
 
1,485,901

 
11,653

 
3.15
%
Non-interest-earning assets
92,390

 
 
 
 
 
90,026

 
 
 
 
Total assets
$
1,788,251

 
 
 
 
 
$
1,575,927

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
$
123,904

 
14

 
0.05
%
 
$
121,263

 
19

 
0.06
%
Regular savings accounts
298,850

 
292

 
0.39

 
345,837

 
329

 
0.38

Money market accounts
297,903

 
471

 
0.63

 
191,972

 
251

 
0.52

Certificates of deposit
371,150

 
968

 
1.05

 
359,668

 
749

 
0.84

Total interest-bearing deposits
1,091,807

 
1,745

 
0.64

 
1,018,740

 
1,348

 
0.53

Borrowings
134,362

 
270

 
0.81

 
206,077

 
326

 
0.63

Total interest-bearing liabilities
1,226,169

 
2,015

 
0.66
%
 
1,224,817

 
1,674

 
0.55
%
Non-interest-bearing deposits
130,276

 
 
 
 
 
112,849

 
 
 
 
Other non-interest-bearing liabilities
16,091

 
 
 
 
 
63,496

 
 
 
 
Total liabilities
1,372,536

 
 
 
 
 
1,401,162

 
 
 
 
Equity
415,715

 
 
 
 
 
174,765

 
 
 
 
Total liabilities and equity
$
1,788,251

 
 
 
 
 
$
1,575,927

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets (2)
$
469,692

 
 
 
 
 
$
261,084

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest and dividend income (FTE)
 
 
11,202

 
 
 
 
 
9,979

 
 
Less: FTE adjustment
 
 
(87
)
 
 
 
 
 
(102
)
 
 
Net interest and dividend income (GAAP)
 
 
$
11,115

 
 
 
 
 
$
9,877

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest rate spread (FTE) (3)
 
 
 
 
2.47
%
 
 
 
 
 
2.60
%
Net interest margin (FTE) (4)
 
 
 
 
2.65
%
 
 
 
 
 
2.69
%
Average interest-earning assets to interest-bearing liabilities
138.31
%
 
 
 
 
 
121.32
%
 
 
 
 
Total deposits cost
 
 
 
 
0.57
%
 
 
 
 
 
0.48
%
______________________
(1)
Includes Federal Home Loan Bank stock and short-term investments.
(2)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)
Net interest margin represents net interest and dividend income as a percentage of average interest-earning assets.

37



 
For the Six Months Ended June 30,
 
2015
 
2014
 
Average
Outstanding
Balance
 
Interest
 
Yield/
Cost
 
Average
Outstanding
Balance
 
Interest
 
Yield/
Cost
 
(in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
1,201,323

 
$
21,282

 
3.57
%
 
$
925,331

 
$
17,560

 
3.83
%
Securities
425,740

 
4,553

 
2.16

 
432,652

 
4,241

 
1.98

Other interest earning assets (1)
46,696

 
143

 
0.62

 
70,295

 
123

 
0.35

Total interest-earning assets
1,673,759

 
25,978

 
3.13
%
 
1,428,278

 
21,924

 
3.10
%
Non-interest-earning assets
94,894

 
 
 
 
 
83,328

 
 
 
 
Total assets
$
1,768,653

 
 
 
 
 
$
1,511,606

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
$
123,070

 
28

 
0.05
%
 
$
118,113

 
40

 
0.07
%
Regular savings accounts
299,986

 
611

 
0.41

 
348,094

 
684

 
0.40

Money market accounts
297,633

 
979

 
0.66

 
181,187

 
460

 
0.51

Certificates of deposit
362,364

 
1,890

 
1.05

 
357,577

 
1,515

 
0.85

Total interest-bearing deposits
1,083,053

 
3,508

 
0.65

 
1,004,971

 
2,699

 
0.54

Borrowings
121,530

 
524

 
0.87

 
185,818

 
630

 
0.68

Total interest-bearing liabilities
1,204,583

 
4,032

 
0.67
%
 
1,190,789

 
3,329

 
0.56
%
Non-interest-bearing deposits
128,108

 
 
 
 
 
104,567

 
 
 
 
Other non-interest-bearing liabilities
20,858

 
 
 
 
 
42,143

 
 
 
 
Total liabilities
1,353,549

 
 
 
 
 
1,337,499

 
 
 
 
Equity
415,104

 
 
 
 
 
174,107

 
 
 
 
Total liabilities and equity
$
1,768,653

 
 
 
 
 
$
1,511,606

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets (2)
$
469,176

 
 
 
 
 
$
237,489

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest and dividend income (FTE)
 
 
21,946

 
 
 
 
 
18,595

 
 
Less: FTE adjustment
 
 
(166
)
 
 
 
 
 
(204
)
 
 
Net interest and dividend income (GAAP)
 
 
$
21,780

 
 
 
 
 
$
18,391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest rate spread (FTE) (3)
 
 
 
 
2.46
%
 
 
 
 
 
2.54
%
Net interest margin (FTE) (4)
 
 
 
 
2.64
%
 
 
 
 
 
2.63
%
Average interest-earning assets to interest-bearing liabilities
138.95
%
 
 
 
 
 
119.94
%
 
 
 
 
Total deposits cost
 
 
 
 
0.58
%
 
 
 
 
 
0.49
%
______________________
(1)
Includes Federal Home Loan Bank stock and short-term investments.
(2)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)
Net interest margin represents net interest and dividend income as a percentage of average interest-earning assets.




38



Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest and dividend income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
 
Three Months Ended June 30,
 
2015 vs. 2014
 
Increase (Decrease) Due to
 
Total
Increase
(Decrease)
 
Volume
 
Rate
 
 
(in thousands)
Interest-earning assets:
 
 
 
 
 
Loans
$
2,312

 
$
(954
)
 
$
1,358

Securities
35

 
169

 
204

Other
(23
)
 
25

 
2

Total interest-earning assets
2,324

 
(760
)
 
1,564

Interest-bearing liabilities:
 
 
 
 
 
NOW accounts

 
(5
)
 
(5
)
Savings accounts
(44
)
 
7

 
(37
)
Money market accounts
115

 
105

 
220

Certificates of Deposit
23

 
196

 
219

Total interest-bearing deposits
94

 
303

 
397

Borrowings
(94
)
 
38

 
(56
)
Total interest-bearing liabilities

 
341


341

Change in net interest and dividend income (FTE)
$
2,324

 
$
(1,101
)

$
1,223

 
Six Months Ended June 30,
 
2015 vs. 2014
 
Increase (Decrease) Due to
 
Total
Increase
(Decrease)
 
Volume
 
Rate
 
 
(in thousands)
Interest-earning assets:
 
 
 
 
 
Loans
$
4,976

 
$
(1,254
)
 
$
3,722

Securities
(67
)
 
379

 
312

Other
(31
)
 
51

 
20

Total interest-earning assets
4,878

 
(824
)
 
4,054

Interest-bearing liabilities:
 
 
 
 
 
NOW accounts
2

 
(14
)
 
(12
)
Savings accounts
(91
)
 
18

 
(73
)
Money market accounts
232

 
287

 
519

Certificates of Deposit
20

 
355

 
375

Total interest-bearing deposits
163

 
646

 
809

Borrowings
(182
)
 
76

 
(106
)
Total interest-bearing liabilities
(19
)
 
722

 
703

Change in net interest and dividend income (FTE)
$
4,897

 
$
(1,546
)
 
$
3,351


39






Net Interest and Dividend Income. Net interest and dividend income was $11.1 million in the second quarter of 2015, up $1.2 million, or 12.5%, from $9.9 million in the second quarter of 2014. Net interest margin declined to 2.65% in the second quarter of 2015 from 2.69% in the second quarter of 2014. Purchase accounting accretion related to the January 2014 Nantucket Bank acquisition was $779,000 in the second quarter of last year compared to $268,000 in the second quarter of 2015. Excluding Nantucket accretion, net interest income increased $1.7 million, or 19.2%, while net interest margin improved 11 basis points to 2.59%. The improvement in net interest income reflects a $254.3 million, or 26.2%, increase in average loans, the bulk of which was funded with an increase in non-interest bearing funds, which benefited both net interest income and margin. Average equity increased $241.0 million due to the Company's mutual-to-stock conversion while average non-interest bearing deposits increased $17.4 million, or 15.4%, to $130.3 million in the second quarter of 2015. Net interest income and margin also benefited from a higher securities yield reflecting a repositioning of the debt securities portfolio. These benefits were partially offset by a decline in loan yield and an increase in the cost of interest bearing liabilities from the second quarter of last year due, in part, to promotional rate programs.
    
Compared to the first six months of 2014, net interest and dividend income increased $3.4 million, or 18.4%, while net interest margin improved one basis point to 2.64%. Purchase accounting accretion related to the January 2014 Nantucket Bank acquisition was $969,000 in the first half of last year compared to $488,000 in the first half of 2015. Excluding Nantucket accretion, net interest income increased $3.9 million, or 22.2%, while net interest margin improved 10 basis points to 2.59%. The improvements in net interest and dividend income and margin were mainly driven by the same factors discussed above in the quarterly comparison. Average loans grew $276.0 million, or 29.8%, the bulk of which was funded by a $264.6 million increase in non-interest bearing funds, mainly reflecting the Company's mutual-to-stock conversion. In addition, the securities yield improved due to a repositioning of the debt securities portfolio and these benefits were partially offset by an increase in the cost of interest bearing liabilities.

Interest and Dividend Income. Interest and dividend income increased $1.6 million, or 13.7%, to $13.1 million for the three months ended June 30, 2015 from $11.6 million for the three months ended June 30, 2014. Interest and fees on loans grew $1.4 million, or 14.5%, to $10.8 million in the three months ended June 30, 2015 from $9.4 million in the second quarter of 2014. The increase reflects a $254.3 million, or 26.2%, increase in average loans driven by higher levels of loans in all categories, with the more significant growth seen in the residential mortgage and commercial real estate portfolios. Loan yield declined 37 basis points to 3.54% for the three months ended June 30, 2015 from 3.91% for the three months ended June 30, 2014 due to a decline in Nantucket accretion, the low interest rate environment and competitive pricing pressures, however, excluding the impact of Nantucket accretion loan yield was down 15 basis points. Interest on securities increased $234,000, or 11.7%, to $2.2 million for the three months ended June 30, 2015 from $2.0 million for the three months ended June 30, 2014. The improvement, was due, in part, to a repositioning of our debt securities portfolio which has resulted in a higher yield.

Compared to the first six months of 2014, interest and dividend income increased $4.1 million, or 18.8%, to $25.8 million for the first half of 2015. Interest and fees on loans grew $3.7 million, or 21.4%, to $21.2 million in the six months ended June 30, 2015 from $17.5 million in the first half of 2014 as average loans grew $276.0 million, or 29.8%, from a year ago. The impact of a higher level of loans was partially offset by a decline in loan yield to 3.57% in the first half of 2015 from 3.83% in the first half of 2014. This reflects a decline in Nantucket accretion, the low interest rate environment and competitive pricing pressures. Excluding the impact of Nantucket accretion, loan yield was down 15 basis points to 3.49%. Interest on securities increased $433,000, or 11.0%, to $4.4 million for the six months ended June 30, 2015 from $3.9 million for the six months ended June 30, 2014. The improvement, was due, in part, to a repositioning of our debt securities portfolio which has resulted in a higher yield.

Interest Expense. Interest expense increased $341,000, or 20.4%, to $2.0 million for the three months ended June 30, 2015 from $1.7 million for the three months ended June 30, 2014. Interest expense on deposits increased $397,000, or 29.5%, to $1.7 million for the three months ended June 30, 2015 from $1.3 million for the three months ended June 30, 2014. The increase was mainly due to a $73.1 million, or 7.2%, increase in average interest bearing deposits to $1.1 billion in the second quarter of 2015 mainly due to a higher level of money market deposits partially offset by a decline in regular savings. In addition, there was an 11 basis point increase in the cost of interest bearing deposits to 0.64% in the second quarter of 2015 driven mainly by promotional rate deposit pricing programs. The growth in interest expense on deposits was partially offset by a $56,000, or 17.2%, decline in interest expense on borrowings to $270,000 for the three months ended June 30, 2015 from $326,000 for the three months ended June 30, 2014. The lower level of expense was primarily due to a $71.7 million, or 34.8%, decline in the average balance of borrowings to $134.4 million in the second quarter of 2015 as the increase in deposits and the proceeds from the mutual-to-stock conversion enabled the Company to reduce borrowings.

40



Compared to the first six months of 2014, interest expense increased $703,000, or 21.1%, to $4.0 million for the first six months of 2015. The comparison of interest expense in the six month period was mainly impacted by the same factors discussed above in the quarterly comparison. Interest expense on deposits increased $809,000, or 30.0%, to $3.5 million for the six months ended June 30, 2015 from $2.7 million for the first six months of 2014. The increase was mainly due to a $78.1 million, or 7.8%, increase in average interest bearing deposits to $1.1 billion in the first half of 2015 mainly due to a higher level of money market deposits partially offset by a decline in regular savings. In addition, there was an 11 basis point increase in the cost of interest bearing deposits to 0.65% in the first half of 2015 driven mainly by promotional rate deposit pricing programs. The growth in interest expense on deposits was partially offset by a $106,000, or 16.8%, decline in interest expense on borrowings to $524,000 for the six months ended June 30, 2015 from $630,000 for the six months ended June 30, 2014. The lower level of expense was primarily due to a $64.3 million, or 34.6%, decline in the average balance of borrowings to $121.5 million in the first half of 2015 as the increase in deposits and the proceeds from the mutual-to-stock conversion enabled the Company to reduce borrowings.

Provision for Loan Losses. The provision for loan losses was $544,000 in the second quarter of 2015 compared to $959,000 in the second quarter of 2014. For the first six months of 2015, the provision for loan losses was $823,000 compared to $1.7 million in the first half of 2014. The provision in all periods reflects management’s assessment of the growth and risks inherent in the loan portfolio. The allowance for loan losses as a percentage of total loans was 1.08% at June 30, 2015 compared to 1.13% at December 31, 2014. The Company maintains an unallocated component of the allowance for loan losses to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The unallocated component was 5.0% of the total allowance for loan losses at June 30, 2015 compared to 5.1% at December 31, 2014.

Non-interest Income. Non-interest income increased $167,000, or 7.2%, from the second quarter of 2014 to $2.5 million in the first quarter of 2015. The increase was due mainly due to increases in loan level derivative fee income and miscellaneous income. Loan level derivative fee income was $770,000 in the second quarter of 2015 compared to $57,000 in the second quarter of 2014. 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. Miscellaneous income improved to $393,000 in the second quarter of 2015 from $27,000 in the second quarter of 2014. The most significant factor behind the change in miscellaneous income relates to the portfolio of commercial loan customer interest rate swap contracts discussed above. While fee income from these contracts is recorded to loan level derivative fee income, these contracts are marked to market over the life of each swap and these valuation marks are reflected in miscellaneous income. During the second quarter of 2014, the Company recorded negative valuation marks on these contracts as interest rates declined while in the second quarter of 2015 the Company recorded positive valuation marks as interest rates increased. 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.  Miscellaneous income was also impacted by a higher level of income received on CRA-qualified investments in the second quarter of 2015. The improvements were partially offset by a $924,000 decline in securities gains.
    
Non-interest income increased $722,000, or 18.3%, from the first half of 2014 to $4.7 million in the first six months of 2015. Loan level derivative fee income was $774,000 in the first half of 2015 compared to $207,000 in the first half of 2014 reflecting higher fees from commercial customers opting to convert loans from floating to fixed rate via interest rate swaps. Miscellaneous income improved to $242,000 in the first half of 2015 from $47,000 in the first half of 2014 due mainly to the impact in each period of marking commercial loan customer interest rate swap contracts to market. In addition, increases in deposit account fees, interchange and ATM fees, and mortgage banking income were partially offset by a decline in securities gains.

Non-interest Expense. Non-interest expense was $10.7 million in both the second quarter of 2015 and the second quarter of 2014. The first quarter of last year included $330,000 of expenses related to the Company's mutual-to-stock conversion and $173,000 related to one-time costs associated with the January 2014 Nantucket Bank acquisition. Excluding these items, non-interest expense in the second quarter of 2015 was $501,000 higher than the second quarter of 2014. The second quarter of 2015 included $259,000 of expense related to the employee stock ownership plan (ESOP) that was implemented in the second half of 2014 in connection with the mutual-to-stock conversion. In addition, salaries expense increased from last year reflecting merit and promotional increases, as well as expenses related to the Milton, Massachusetts branch and a loan production office in Plymouth, Massachusetts, both of which were opened subsequent to the second quarter of 2014.
    

41



For the first six months of 2015, non-interest expense was $21.3 million, up $368,000, or 1.8%, from the first half of 2014. The first half of last year included $948,000 related to one-time costs associated with the January 2014 Nantucket Bank acquisition and $818,000 of expenses related to the Company's mutual-to-stock conversion. Excluding these items, non-interest expense in the first half of 2015 was up $2.1 million, or 11.1% from the first half of 2014. The first half of 2015 included $508,000 of expense related to the ESOP that was implemented in the second half of 2014 in connection with the mutual-to-stock conversion. In addition, the growth in expenses reflects the opening of the Milton, Massachusetts branch and a loan production office in Plymouth, Massachusetts, subsequent to June 30, 2014 and higher operating expenses related to Nantucket Bank which was acquired in January 2014.

Income Tax Provision. The Company recorded an income tax provision of $689,000 in the second quarter of 2015 and had an effective tax rate in the quarter of 28.9% on pre-tax income of $2.4 million. In the second quarter of 2014, the Company recorded a tax provision of $137,000 and had an effective tax rate of 24.2% on pre-tax income of $566,000. The tax provision in the first half of 2015 was $1.3 million and the effective tax rate was 30.6% on pre-tax income of $4.3 million compared to a tax benefit of $292,000 and the effective tax rate of 111.9% on a pre-tax loss of $261,000 in the first half of 2014. The tax provision in any period is a function of the level of pre-tax earnings as well as the level of tax exempt income, which includes bank-owned life insurance income.


42



Asset Quality
    
Delinquencies. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
 
Loans Delinquent For
 
Total
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
At June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Real estate loans and lines:
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
2

 
$
1,149

 
5

 
$
745

 
7

 
$
1,894

Home equity
5

 
216

 
2

 
624

 
7

 
840

Total real estate loans and lines
7

 
1,365

 
7

 
1,369

 
14

 
2,734

Consumer loans
1

 
2

 

 

 
1

 
2

Total loans
8

 
$
1,367

 
7

 
$
1,369

 
15

 
$
2,736

At December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Real estate loans and lines:
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
3

 
$
522

 
8

 
$
1,370

 
11

 
$
1,892

Home equity

 

 
1

 
475

 
1

 
475

Total real estate loans and lines
3

 
522

 
9

 
1,845

 
12

 
2,367

Consumer loans

 

 
1

 
5

 
1

 
5

Total loans
3

 
$
522

 
10

 
$
1,850

 
13

 
$
2,372


Non-performing Assets. The following table provides information with respect to non-performing assets at the dates indicated. There was no other real estate owned at June 30, 2015 and December 31, 2014.
 
At June 30, 2015
 
At December 31, 2014
 
(Dollars in thousands)
Non-accrual loans:
 
 
 
1-4 family residential
$
4,182

 
$
3,876

Home equity
717

 
578

Consumer
39

 
27

Total non-accrual loans
$
4,938

 
$
4,481

 
 
 
 
Ratios:
 
 
 
Non-accrual loans to total loans
0.39
%
 
0.39
%
Non-performing assets to total assets
0.27
%
 
0.26
%
    








43



Troubled Debt Restructurings. We periodically modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. The table below sets forth the amounts of our troubled debt restructurings (all residential) at the dates indicated.
 
At June 30, 2015
 
At December 31, 2014
 
(Dollars in thousands)
 
 
 
 
Performing troubled debt restructurings
$
241

 
$
255

Nonaccrual troubled debt restructurings
1,203

 
467

Total
$
1,444

 
$
722

 
 
 
 
Ratios:
 
 
 
Performing troubled debt restructurings as a % of total loans
0.02
%
 
0.02
%
Nonaccrual troubled debt restructurings as a % of total loans
0.09
%
 
0.04
%
Total troubled debt restructurings as a % of total loans
0.11
%
 
0.06
%
The following table sets forth the amounts of criticized loans as of the dates indicated.
 
At June 30, 2015
 
At December 31, 2014
 
(In thousands)
Classified loans:
 
 
 
Substandard
$
2,301

 
$
1,362

Doubtful
705

 
709

Loss

 

Total classified loans
3,006

 
2,071

Special mention
5,266

 
4,966

Total criticized loans
$
8,272

 
$
7,037

    
Assets that do not expose the Company to risk sufficient to warrant classified loan status, but which possess potential weaknesses that deserve close attention, are designated as special mention. As of June 30, 2015, there were $5.3 million of assets designated as special mention compared to $5.0 million at December 31, 2014. At June 30, 2015, over 90% of criticized loans are in the residential mortgage and home equity loan categories. We have not identified any potential problem loans that are not included in the table above.
        

44



Allowance for Loan Losses. The ratio of the allowance for loan losses to total loans declined to 1.08% at June 30, 2015 from 1.13% at December 31, 2014. The decline reflects generally improving economic conditions in eastern Massachusetts and a seasoning of our lending and risk management teams. Changes in the allowance for loan losses during the periods indicated were as follow:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Balance at beginning of period
$
13,238

 
$
10,346

 
$
12,973

 
$
9,671

Charge-offs:
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
1-4 family residential

 

 

 
(18
)
Consumer loans
(5
)
 
(13
)
 
(19
)
 
(34
)
Total charge-offs
(5
)
 
(13
)
 
(19
)

(52
)
Recoveries:
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
1-4 family residential

 

 

 

Total recoveries

 

 

 

Net (charge-offs) recoveries
(5
)
 
(13
)
 
(19
)
 
(52
)
Provision for loan losses
544

 
959

 
823

 
1,673

Balance at end of period
$
13,777

 
$
11,292

 
$
13,777


$
11,292

Ratios:
 
 
 
 
 
 
 
Net (charge-offs) recoveries to average loans outstanding
 %
 
(0.01
)%
 
 %
 
(0.01
)%
Allowance for loan losses to non-accrual loans at end of period
278
 %
 
251
 %
 
278
 %
 
251
 %
Allowance for loan losses to total loans at end of period (1)
1.08
 %
 
1.13
 %
 
1.08
 %
 
1.13
 %

(1)
Total loans does not include deferred costs or discounts.
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:
 
At June 30, 2015
 
At December 31, 2014
 
Amount
 
Percent of Loans in Category of Total Loans
 
Amount
 
Percent of Loans in Category of Total Loans
 
(Dollars in thousands)
Real estate:
 
 
 
 
 
 
 
1-4 family residential
$
3,407

 
40.06
%
 
$
3,222

 
40.13
%
Home equity
419

 
5.18

 
340

 
5.38

Commercial
4,568

 
35.45

 
3,551

 
33.81

Construction
1,024

 
4.79

 
1,056

 
4.67

Commercial business loans
2,991

 
11.90

 
3,410

 
13.24

Consumer loans
680

 
2.62

 
736

 
2.77

Total allocated allowance
13,089

 
100.00
%
 
12,315

 
100.00
%
Unallocated
688

 
 
 
658

 
 
Total
$
13,777

 
 
 
$
12,973

 
 

Management of Market Risk


45



Net Interest Income Analysis.  Income simulation is the primary tool for measuring the interest-rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over specified time horizons, under a range of interest rate ramp and shock scenarios. These simulations take into account repricing, maturity and prepayment characteristics of individual products. These estimates require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on our net interest income. Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
As of June 30, 2015, net interest income simulation indicated that our exposure to changing interest rates was within our internal guidelines. The following table presents the estimated impact of interest-rate ramps on our estimated net interest income over the period indicated:
Change in Interest
Rates (basis points) (1)
 
Change in Net Interest Income
Year One
(% Change From Year One Base)
+200
 
2.0%
-100
 
0.3%
_______________________ 
(1)
The calculated change in net interest income assumes a gradual parallel shift across the yield curve over a one-year period.    

The table above indicates that at June 30, 2015, in the event of a 200 basis point increase in interest rates over a one year period, assuming a gradual parallel shift across the yield curve over such period, we would experience a 2.0% increase in net interest income.  At the same date, in the event of a 100 basis point decrease in interest rates over a one year period, assuming a gradual parallel shift across the yield curve over such period, we would experience a 0.3% increase in net interest income. 

Economic Value of Equity Analysis. We also analyze the sensitivity of our financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between predicted changes in the present value of our assets and predicted changes in the present value of our liabilities assuming various changes in current interest rates. Our economic value of equity analysis as of June 30, 2015 indicated that, in the event of an instantaneous 200 basis point increase in interest rates, we would experience an estimated 8.2% decrease in the economic value of our equity. At the same date, our analysis indicated that, in the event of an instantaneous 100 basis point decrease in interest rates, we would experience an estimated 0.40% decrease in the economic value of our equity. The impact on our economic value of equity under all scenarios discussed above are within our internal guidelines. The estimates of changes in the economic value of our equity require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of our equity and will differ from actual results.
    
 

Liquidity and Capital Resources
At June 30, 2015, there were $130.0 million of Federal Home Loan Bank of Boston (“FHLBB”) advances outstanding with an ability to borrow up to an additional $315.5 million. All borrowings from the FHLBB are secured by a blanket security agreement on qualified collateral. At June 30, 2015, the market value of collateral pledged consisted of $570.8 million of residential and commercial mortgage loans and $21.1 million of U.S. government and government-sponsored securities.

At June 30, 2015, the Company also had $32.0 million available under an unsecured federal funds line with a correspondent bank, which could be drawn upon as needed. There were no amounts outstanding under this line of credit at June 30, 2015.


46



The most liquid assets are cash and cash equivalents and the level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2015, cash and cash equivalents totaled $53.4 million, which was down from $60.1 million at December 31, 2014.

Financing activities consist primarily of activity in deposit accounts and borrowings. There was a net increase in deposits of $61.4 million during the six months ended June 30, 2015. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. There was also a net increase in borrowings of $55.0 million for the six months ended June 30, 2015.

At June 30, 2015, we had $86.7 million in loan commitments outstanding. In addition to commitments to originate loans, we had $186.8 million in unused lines of credit to borrowers and letters of credit and $51.8 million in undisbursed construction loans. Certificates of deposit due within one year of June 30, 2015 totaled $203.4 million, or 16.0% of total deposits. Excluding brokered deposits, certificates of deposit due within one year of June 30, 2015 totaled $133.4 million, or 10.5% of total deposits.

We are subject to various regulatory capital requirements, including a risk-based capital measure. At June 30, 2015, we exceeded all regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.



Item 3.
Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in Part I, Item 2 of this report under “Management of Market Risk.”

Item 4.
Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2015. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended June 30, 2015, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II- Other Information

Item 1.
Legal Proceedings

We are not involved in any material pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. We are not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.
On May 7, 2014, a complaint was filed with the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”) by a former employee terminated by Blue Hills Bank in October 2013 by which the former employee alleged retaliatory employment practices in violation of the whistleblower provisions of the Consumer Financial Protection Act of 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Sarbanes-Oxley Act. The OSHA complaint requested reinstatement of the employee, payment with interest of foregone compensation, including bonuses and employee benefits, medical expenses and attorney’s fees and litigation expenses in unspecified amounts. On December 30, 2014, the same former employee filed a complaint in U.S. Federal District Court of Massachusetts, based on the same general factual allegations, that alleged violations of the Federal Deposit Insurance Act, the False Claims Act, and the Family and Medical Leave Act. By this complaint, the former employee requested payment with interest of foregone compensation, including bonuses and employee benefits, compensatory and punitive damages, and attorney’s fees and litigation expenses in unspecified amounts. Blue Hills Bancorp, Inc. and Blue Hills Bank believe the allegations in these complaints to be completely without merit and intend to vigorously defend both actions and any other action initiated by the former employee.

47







Item 1A.
Risk Factors

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 26, 2015. As of June 30, 2015 the risk factors of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2014.


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

On July 22, 2015, the Company announced a stock repurchase program pursuant to which the Company intends to purchase up to 1,423,340 shares of its issued and outstanding shares of common stock, which represents approximately 5% of the Company's then issued and outstanding shares. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that will be adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Any repurchased shares will be held by the Company as authorized but unissued shares. The repurchase program has no expiration date, but may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.


Item 3.        Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

Item 6.
Exhibits
 

31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, (ii) the Consolidated Statements of Net Income for the three and six months ended June 30, 2015 and 2014 (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014, (iv) the Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2015 and 2014, (v) the Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014, and (vi) the Notes to the unaudited Consolidated Financial Statements.

48





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
BLUE HILLS BANCORP, INC.
 
 
 
 
 
 
 
 
 
Date:   August 7, 2015
By:
/s/ William M. Parent
 
 
 
William M. Parent
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
Date:   August 7, 2015
By:
/s/ James Kivlehan
 
 
 
James Kivlehan
 
 
 
Executive Vice President and Chief Financial Officer
 

49