Blue Hills Bancorp (BHBK) 10-Q 2016 Q3 Quarterly report

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 September 30, 2016

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)

500 River Ridge Drive

Norwood, Massachusetts 02062

(617) 360-6520

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

320 Norwood Park South

Norwood, Massachusetts 02062

(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 [X]
Non-accelerated filer [ ]	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 October 31, 2016, there were 26,781,573 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

Blue Hills Bancorp, Inc.

Form 10-Q

Index

Part I. Financial Information

Item 1.		Page No.
	Interim Financial Statements - unaudited	2
	Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	2
	Consolidated Statements of Net Income for the Three and Nine Months Ended September 30, 2016 and 2015	3
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2016 and 2015	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.
	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.
	Quantitative and Qualitative Disclosures about Market Risk	49
Item 4.
	Controls and Procedures	49
	Part II. Other Information
Item 1.
	Legal Proceedings	49
Item 1A.
	Risk Factors	50
Item 2.
	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.
	Defaults upon Senior Securities	51
Item 4.
	Mine Safety Disclosures	51
Item 5.
	Other Information	51
Item 6.
	Exhibits	51
	Signature Page

1

Blue Hills Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)

	September 30, 2016			December 31, 2015
(In thousands, except share data)
Assets
Cash and due from banks	$	15,490		$	10,932
Short-term investments	21,512			22,366
Total cash and cash equivalents	37,002			33,298
Securities available for sale, at fair value	210,273			231,690
Securities held to maturity, at amortized cost	197,863			200,141
Federal Home Loan Bank stock, at cost	13,505			13,567
Loans held for sale	2,134			12,877
Loans, net of allowance for loan losses of $17,730 at September 30, 2016 and $17,102 at December 31, 2015	1,741,490			1,523,275
Premises and equipment, net	21,362			20,015
Accrued interest receivable	5,388			5,344
Goodwill	9,160			9,160
Core deposit intangible	1,671			2,625
Net deferred tax asset	8,780			10,665
Bank-owned life insurance	31,743			31,626
Other assets	33,295			20,060
Total assets	$	2,313,666		$	2,114,343
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing	$	184,964		$	153,155
Interest bearing	1,496,493			1,280,694
Total deposits	1,681,457			1,433,849
Short-term borrowings	103,700			205,000
Long-term debt	105,000			55,000
Accrued expenses and other liabilities	33,820			21,665
Total liabilities	1,923,977			1,715,514
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; 26,996,942 and 28,492,732 issued and outstanding at September 30, 2016 and December 31, 2015, respectively)	261			276
Additional paid-in capital	251,341			269,078
Unearned compensation-ESOP	(20,686		)	(21,255		)
Retained earnings	158,620			155,918
Accumulated other comprehensive income (loss)	153			(5,188		)
Total stockholders' equity	389,689			398,829
Total liabilities and stockholders' equity	$	2,313,666		$	2,114,343

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 September 30,					Nine Months Ended September 30,
	2016		2015			2016		2015
	(In thousands, except share data)
Interest and dividend income:
Interest and fees on loans	$	15,113	$	11,509		$	42,854	$	32,695
Interest on securities	2,238		2,227			6,570		6,600
Dividends	312		1,673			606		1,885
Other	22		9			74		50
Total interest and dividend income	17,685		15,418			50,104		41,230
Interest expense:
Interest on deposits	2,732		1,926			7,508		5,434
Interest on borrowings	458		287			1,584		811
Total interest expense	3,190		2,213			9,092		6,245
Net interest and dividend income	14,495		13,205			41,012		34,985
Provision for loan losses	2,872		1,318			3,958		2,141
Net interest and dividend income, after provision for loan losses	11,623		11,887			37,054		32,844
Non-interest income:
Deposit account fees	347		319			971		987
Interchange and ATM fees	418		430			1,158		1,133
Mortgage banking	1,262		52			2,037		236
Loan level derivative income	770		513			1,731		1,287
Gains on sales and calls of available-for-sale securities	562		238			937		1,823
Gains on calls of held-to-maturity securities	—		—			45		—
Bank-owned life insurance income	262		258			776		763
Bank-owned life insurance death benefit gains	297		—			506		—
Miscellaneous	214		(116		)	159		126
Total non-interest income	4,132		1,694			8,320		6,355
Non-interest expense:
Salaries and employee benefits	7,596		5,591			21,619		16,721
Occupancy and equipment	1,807		1,617			5,079		4,579
Data processing	908		939			2,472		2,601
Professional fees	743		610			1,902		1,909
Advertising	495		620			1,746		1,682
FDIC deposit insurance	270		262			968		807
Directors’ fees	344		112			1,081		329
Amortization of core deposit intangible	294		390			954		1,241
Other general and administrative	777		707			2,416		2,265
Total non-interest expense	13,234		10,848			38,237		32,134
Income before income taxes	2,521		2,733			7,137		7,065
Provision for income taxes	891		923			2,482		2,250
Net income	$	1,630	$	1,810		$	4,655	$	4,815
Earnings per common share:
Basic	$	0.07	$	0.07		$	0.19	$	0.18
Diluted	$	0.07	$	0.07		$	0.19	$	0.18
Weighted average shares outstanding:
Basic	24,129,512		26,183,381			24,585,570		26,250,065
Diluted	24,307,540		26,183,381			24,708,559		26,250,065

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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(In thousands)
Net income	$	1,630		$	1,810		$	4,655		$	4,815
Other comprehensive income (loss):
Securities available for sale:
Change in unrealized holding gains (losses)	2,198			(4,504		)	9,125			(5,135		)
Reclassification adjustment for net gains realized in net income (1)	(562		)	(238		)	(937		)	(1,823		)
Reclassification of unrealized gains on securities transferred to held to maturity	—			(666		)	—			(666		)
Net change in unrealized gains (losses)	1,636			(5,408		)	8,188			(7,624		)
Tax effect	(570		)	1,887			(2,858		)	2,691
Net-of-tax amount	1,066			(3,521		)	5,330			(4,933		)
Securities held to maturity:
Reclassification of unrealized gains on securities transferred from available for sale	—			666			—			666
Reclassification adjustment for amortization of amounts previously recorded upon transfer from available for sale (2)	(39		)	(35		)	(188		)	(35		)
Tax effect	14			(252		)	67			(252		)
Net-of-tax amount	(25		)	379			(121		)	379
Defined benefit pension plan:
Reclassification adjustment for net actuarial loss recognized in net periodic benefit cost (3)	68			27			204			83
Tax effect	(24		)	(8		)	(72		)	(30		)
Net-of-tax amount	44			19			132			53
Other comprehensive income (loss)	1,085			(3,123		)	5,341			(4,501		)
Comprehensive income (loss)	$	2,715		$	(1,313	)	$	9,996		$	314

______________________

(1) Amounts are included in gains on sales and calls of available-for-sale securities, net, in the consolidated statements of net income. Income tax expense associated with the reclassification adjustments for the three months ended September 30, 2016 and 2015 was $196,000 and $76,000, respectively. Income tax expense associated with the reclassification adjustments for the nine months ended September 30, 2016 and 2015 was $327,000 and $640,000, respectively.

(2) Amounts are included in interest income on securities in the consolidated statements of net income.

(3) Amounts are included in salaries and benefits expense in the consolidated statements of net income.

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 Nine Months Ended September 30, 2016 and 2015 (unaudited)

	Common Stock					Additional paid-in capital			Unearned compensation- ESOP			Retained earnings			Accumulated other comprehensive income (loss)			Total
(In thousands, except share data)	Shares		Amount
Balance at December 31, 2014	28,466,813		$	285		$	281,035		$	(22,014	)	$	149,723		$	2,577		$	411,606
Comprehensive income (loss)	—		—			—			—			4,815			(4,501		)	314
ESOP shares committed to be released	—		—			213			569			—			—			782
Common stock dividends paid ($0.02 per common share)	—		—			—			—			(569		)	—			(569		)
Purchase of common stock	(316,500	)	(3		)	(4,518		)	—			—			—			(4,521		)
Balance at September 30, 2015	28,150,313		$	282		$	276,730		$	(21,445	)	$	153,969		$	(1,924	)	$	407,612
Balance at December 31, 2015	28,492,732		$	276		$	269,078		$	(21,255	)	$	155,918		$	(5,188	)	$	398,829
Comprehensive income	—		—			—			—			4,655			5,341			9,996
ESOP shares committed to be released	—		—			249			569			—			—			818
Common stock dividends paid ($0.08 per common share)	—		—			—			—			(1,953		)	—			(1,953		)
Repurchase of common stock	(1,517,840	)	(15		)	(21,592		)	—			—			—			(21,607		)
Restricted stock grants	31,450		—			—			—			—			—			—
Restricted stock awards forfeited	(9,400	)	—			—			—			—			—			—
Share-based compensation expense	—		—			3,606			—			—			—			3,606
Balance at September 30, 2016	26,996,942		$	261		$	251,341		$	(20,686	)	$	158,620		$	153		$	389,689

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)

	Nine Months Ended
	September 30,
	2016			2015
	(In thousands)
Cash flows from operating activities:
Net income	$	4,655		$	4,815
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	3,958			2,141
Net amortization of securities	2,427			2,813
Gains on sales and calls of available-for-sale securities, net	(937		)	(1,823		)
Gains on calls of held-to-maturity securities	(45		)	—
Net change in loans held for sale	(798		)	571
Net amortization (accretion) of deferred loan origination costs and discounts	414			(130		)
Depreciation and amortization of premises and equipment	1,448			1,303
Amortization of core deposit intangible	954			1,241
Bank-owned life insurance income	(1,282		)	(763		)
ESOP expense	818			782
Deferred income tax provision (benefit)	(978		)	274
Share-based compensation expense	3,606			—
Net change in:
Accrued interest receivable	(44		)	(741		)
Other assets	(13,235		)	(3,441		)
Accrued expenses and other liabilities	12,359			(6,875		)
Net cash provided by operating activities	13,320			167
Cash flows from investing activities:
Activity in securities available for sale:
Purchases	(54,835		)	(139,939		)
Sales	78,990			91,197
Maturities/calls	2,820			5,632
Principal paydowns	2,129			23,211
Activity in securities held to maturity:
Purchases	(46,396		)	(8,074		)
Maturities/calls	22,235			3,000
Principal paydowns	25,307			4,108
Loan originations and purchases, net of paydowns	(232,209		)	(236,228		)
Proceeds from residential portfolio loan sales	21,163			7,608
Net purchases of premises and equipment	(2,795		)	(2,000		)
Purchase of FHLBB stock	(4,044		)	—
Redemption of FHLBB stock	4,106			—
Proceeds from bank-owned life insurance death benefit	1,165			—
Net cash used in investing activities	(182,364		)	(251,485		)

(continued)

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

6

Blue Hills Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(concluded)

	Nine Months Ended
	September 30,
	2016			2015
	(In thousands)
Cash flows from financing activities:
Net change in deposits, excluding brokered deposits	209,201			96,484
Net change in brokered deposits	38,407			35,758
Net change in short-term borrowings	(101,300		)	75,000
Proceeds from long-term debt	50,000			10,000
Repurchase of common stock	(21,607		)	(4,521		)
Common stock dividends paid	(1,953		)	(569		)
Net cash provided by financing activities	172,748			212,152
Net change in cash and cash equivalents	3,704			(39,166		)
Cash and cash equivalents at beginning of period	33,298			60,146
Cash and cash equivalents at end of period	$	37,002		$	20,980
Supplementary information:
Interest paid	$	8,976		$	6,215
Income taxes paid, net of refunds	3,438			2,958
Amounts transferred from available for sale to held to maturity	—			196,958
Portfolio loans transferred to loans held for sale designation	—			20,669

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

Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of Blue Hills Bancorp, Inc. ("the Company") and its wholly-owned subsidiaries, Blue Hills Funding Corporation and Blue Hills Bank ("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 10 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, 2015, 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.

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. Prior to the second quarter of 2016, for portfolios for which the Company had insufficient prior loss experience, the national peer group losses for relevant portfolios generally over the years 2008-2015 were used. Commencing in the second quarter of 2016, the Company began to phase in its own loss history by loan type based upon the age and loss experience of the loan portfolio. While this change impacted the loss factors used for our Residential real estate, Home equity, Commercial real estate, Commercial business and Consumer loan portfolios, there was no material impact to the amount of the allowance for loan losses. Loss experience is updated at least quarterly with consideration given to unique circumstances in the portfolio. 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.

8

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. 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 primarily on an extrapolated historical loss experience based on FDIC data for depository institutions with assets of one billion to five billion dollars for periods ranging from 2008-2015, adjusted for qualitative and environmental factors including changes to lending policies and procedures, economic and business conditions, portfolio characteristics, staff experience, problem loan trends, collateral values, concentrations and the competitive, legal and regulatory environment.

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 national 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 1^st or 2^nd 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 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 may be 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 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 loans, non-accruing loans and accruing adversely-rated loans) and 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.

9

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.

NOTE 2 – RECENT ACCOUNTING STANDARDS UPDATES

On August 26, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows such as debt repayments, settlement of zero-coupon bonds, settlement of insurance claims and policies, and distributions from equity method investees. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The impact to the consolidated financial statements upon adopting this Update is not expected to be material.

10

NOTE 3 - SECURITIES

The amortized cost and estimated fair value of securities available for sale and held to maturity, with gross unrealized gains and losses, follows:

	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities Available for Sale:
Debt securities:
Mortgage- and other asset-backed securities:
Privately issued commercial mortgage-backed securities	$	11,681	$	2	$	(29	)	$	11,654
Other asset-backed securities	9,790		15		(158		)	9,647
Total mortgage- and other asset-backed securities	21,471		17		(187		)	21,301
Municipal bonds	10,239		386		—			10,625
Financial services:
Banks	17,638		262		(2		)	17,898
Diversified financials	16,563		504		(32		)	17,035
Insurance and REITs	17,290		493		(3		)	17,780
Total financial services	51,491		1,259		(37		)	52,713
Other corporate:
Industrials	53,813		1,642		(80		)	55,375
Utilities	25,160		831		(54		)	25,937
Total other corporate	78,973		2,473		(134		)	81,312
Total debt securities	162,174		4,135		(358		)	165,951
Marketable equity securities:
Mutual funds:
Domestic community	3,216		115		(8		)	3,323
Global asset allocation	42,396		145		(1,542		)	40,999
Total marketable equity securities	45,612		260		(1,550		)	44,322
Total securities available for sale	$	207,786	$	4,395	$	(1,908	)	$	210,273

Securities Held to Maturity:
Debt securities:
U.S. Treasury	$	600	$	5	$	—		$	605
Government-sponsored enterprises	26,242		27		(54		)	26,215
Government-sponsored mortgage-backed and collateralized mortgage obligations	156,291		2,279		(52		)	158,518
SBA asset-backed securities	14,730		64		(203		)	14,591
Total securities held to maturity	$	197,863	$	2,375	$	(309	)	$	199,929

11

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities Available for Sale:
Debt securities:
Mortgage- and other asset-backed securities:
Privately issued commercial mortgage-backed securities	$	13,126	$	—	$	(195	)	$	12,931
Other asset-backed securities	11,395		—		(142		)	11,253
Total other mortgage- and asset-backed securities	24,521		—		(337		)	24,184
Municipal bonds	16,016		354		(55		)	16,315
Financial services:
Banks	18,813		138		(90		)	18,861
Diversified financials	23,124		349		(173		)	23,300
Insurance and REITs	16,883		1		(282		)	16,602
Total financial services	58,820		488		(545		)	58,763
Other corporate:
Industrials	55,470		306		(1,244		)	54,532
Utilities	31,952		7		(1,639		)	30,320
Total other corporate	87,422		313		(2,883		)	84,852
Total debt securities	186,779		1,155		(3,820		)	184,114
Marketable equity securities:
Mutual funds:
Global equity	5,000		388		—			5,388
Domestic community	3,216		70		(13		)	3,273
Global asset allocation	42,396		3		(3,484		)	38,915
Total marketable equity securities	50,612		461		(3,497		)	47,576
Total securities available for sale	$	237,391	$	1,616	$	(7,317	)	$	231,690

Securities Held to Maturity:
Debt securities:
U.S. Treasury	$	636	$	—	$	(2	)	$	634
Government-sponsored enterprises	28,256		94		(126		)	28,224
Government-sponsored mortgage-backed and collateralized mortgage obligations	155,232		10		(832		)	154,410
SBA asset-backed securities	16,017		—		(59		)	15,958
Total securities held to maturity	$	200,141	$	104	$	(1,019	)	$	199,226

During the third quarter of 2015, approximately $196.3 million of securities available for sale, with net unrealized gains of $666,000, were reclassified 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 reclassified from available for sale to held to maturity, the fair value at the time of transfer becomes the 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 security's remaining life as an adjustment of yield in a manner similar to a premium or discount. At September 30, 2016, there are $383,000 of net holding gains remaining in accumulated other comprehensive income.

12

The amortized cost and estimated fair value of debt securities by contractual maturity at September 30, 2016 are included in the following table. 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.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Within 1 year	$	3,458	$	3,460	$	600	$	605
After 1 year through 5 years	62,541		63,891		11,195		11,214
After 5 years through 10 years	64,129		66,406		15,047		15,001
After 10 years	10,575		10,893		—		—
	140,703		144,650		26,842		26,820
Mortgage- and asset-backed securities and collateralized mortgage obligations	21,471		21,301		171,021		173,109
	$	162,174	$	165,951	$	197,863	$	199,929

For the three months ended September 30, 2016 and 2015, proceeds from sales of securities available for sale amounted to $18.8 million and $4.5 million, respectively. Gross realized gains, for the same two periods, amounted to $569,000 and $236,000, respectively, and gross realized losses amounted to $7,000 and $0, respectively. For the nine months ended September 30, 2016 and 2015, proceeds from sales of securities available for sale amounted to $79.0 million and $91.2 million, respectively. Gross realized gains, for the same two periods, amounted to $1.9 million and $1.9 million, respectively, and gross realized losses amounted to $981,000 and $35,000, respectively.

13

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	September 30, 2016
	Less Than Twelve Months					More Than Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities Available for Sale:
Debt securities:
Mortgage- and other asset-backed securities:
Privately issued commercial mortgage- backed	$	(5	)	$	2,607	$	(24	)	$	7,023
Other asset-backed	(3		)	3,290		(155		)	3,732
Total mortgage- and other asset-backed securities	(8		)	5,897		(179		)	10,755
Financial services:
Banks	(2		)	1,766		—			—
Diversified financials	(32		)	1,492		—			—
Insurance and REITs	(3		)	1,325		—			—
Total financial services	(37		)	4,583		—			—
Other corporate:
Industrials	(35		)	5,918		(45		)	2,346
Utilities	(38		)	2,664		(16		)	779
Total other corporate	(73		)	8,582		(61		)	3,125
Total debt securities	(118		)	19,062		(240		)	13,880
Marketable equity securities:
Mutual funds:
Domestic community	—			—		(8		)	458
Global asset allocation	(89		)	11,794		(1,453		)	20,305
Total marketable equity securities	(89		)	11,794		(1,461		)	20,763
Total temporarily impaired available-for-sale securities	$	(207	)	$	30,856	$	(1,701	)	$	34,643

Securities Held to Maturity:
Debt securities:
Government-sponsored enterprises	$	(54	)	$	15,939	$	—	$	—
Government-sponsored mortgage-backed and collateralized mortgage obligations	(52		)	12,669		—		—
SBA asset-backed securities	(203		)	11,875		—		—
Total temporarily impaired held-to-maturity securities	$	(309	)	$	40,483	$	—	$	—

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.

14

At September 30, 2016, multiple debt securities have unrealized losses with aggregate depreciation of less than 2.0% from the Company’s amortized cost basis. The unrealized losses were primarily caused by interest rate fluctuations. 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 fair 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 September 30, 2016.

At September 30, 2016, the Company had several mutual funds with unrealized losses of $1.6 million, or 5.0% depreciation from the Company’s cost basis. No issues have been identified that cause management to believe the declines in fair value are other than temporary and the Company has the ability and intent to hold these investments until a recovery of fair value.

	December 31, 2015
	Less Than Twelve Months					More Than Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities Available for Sale:
Debt securities:
Other mortgage- and asset-backed securities:
Privately issued commercial mortgage- backed securities	$	(84	)	$	5,166	$	(111	)	$	7,765
Other asset-backed securities	(142		)	11,253		—			—
Total other mortgage- and asset-backed securities	(226		)	16,419		(111		)	7,765
Municipal bonds	(55		)	3,324		—			—
Financial services:
Banks	(90		)	14,070		—			—
Diversified financials	(173		)	15,397		—			—
Insurance and REITs	(282		)	14,487		—			—
Total financial services	(545		)	43,954		—			—
Other corporate:
Industrials	(957		)	43,848		(287		)	395
Utilities	(1,387		)	25,353		(252		)	1,618
Total other corporate	(2,344		)	69,201		(539		)	2,013
Total debt securities	(3,170		)	132,898		(650		)	9,778
Marketable equity securities:
Mutual funds:
Domestic community	—			—		(13		)	453
Global asset allocation	(3,484		)	36,609		—			—
Total marketable equity securities	(3,484		)	36,609		(13		)	453
Total temporarily impaired available-for-sale securities	$	(6,654	)	$	169,507	$	(663	)	$	10,231

15

	December 31, 2015
	Less Than Twelve Months					More Than Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held to Maturity:
Debt securities:
U.S. Treasury	$	(2	)	$	634	$	—	$	—
Government-sponsored enterprises	(126		)	14,084		—		—
Government-sponsored mortgage-backed and collateralized mortgage obligations	(832		)	144,820		—		—
SBA asset-backed securities	(59		)	15,958		—		—
Total temporarily impaired held-to-maturity securities	$	(1,019	)	$	175,496	$	—	$	—

NOTE 4 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

A summary of the balances of loans follows: 

	September 30,			December 31,
	2016			2015
	(In thousands)
Real estate:
1-4 family residential	$	743,601		$	599,938
Home equity	80,220			77,399
Commercial real estate	661,467			561,203
Construction	71,641			79,773
	1,556,929			1,318,313
Commercial business	169,532			182,677
Consumer	30,925			38,186
Total loans	1,757,386			1,539,176
Allowance for loan losses	(17,730		)	(17,102		)
Discount and fair value adjustments on purchased loans	(1,912		)	(1,959		)
Deferred loan costs and fees, net	3,746			3,160
Loans, net	$	1,741,490		$	1,523,275

16

Activity in the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015, and by loan segment follows: 

	1-4 Family Residential		Home Equity		Commercial Real Estate			Construction			Commercial Business			Consumer			Unallocated			Total
	(In thousands)
Three Months Ended September 30, 2016
Allowance at June 30, 2016	$	3,940	$	539	$	7,622		$	1,747		$	3,282		$	496		$	453		$	18,079
Provision (credit) for loan losses	272		5		834			(568		)	2,351			(13		)	(9		)	2,872
Loans charged-off	—		—		(321		)	—			(2,985		)	(17		)	—			(3,323		)
Recoveries	100		—		—			—			2			—			—			102
Allowance at September 30, 2016	$	4,312	$	544	$	8,135		$	1,179		$	2,650		$	466		$	444		$	17,730

Three Months Ended September 30, 2015
Allowance at June 30, 2015	$	3,407	$	419	$	4,568	$	1,024		$	2,991	$	680		$	688	$	13,777
Provision (credit) for loan losses	153		126		652		(302		)	580		44			65		1,318
Loans charged-off	—		—		—		—			—		(13		)	—		(13		)
Recoveries	—		—		—		—			—		—			—		—
Allowance at September 30, 2015	$	3,560	$	545	$	5,220	$	722		$	3,571	$	711		$	753	$	15,082

	1-4 Family Residential		Home Equity			Commercial Real Estate			Construction			Commercial Business			Consumer			Unallocated		Total
	(In thousands)
Nine Months Ended September 30, 2016
Allowance at December 31, 2015	$	3,916	$	636		$	7,147		$	1,364		$	2,839		$	772		$	428	$	17,102
Provision (credit) for loan losses	296		(92		)	1,309			(185		)	2,874			(260		)	16		3,958
Loans charged-off	—		—			(321		)	—			(3,098		)	(46		)	—		(3,465		)
Recoveries	100		—			—			—			35			—			—		135
Allowance at September 30, 2016	$	4,312	$	544		$	8,135		$	1,179		$	2,650		$	466		$	444	$	17,730

Nine Months Ended September 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	338		205		1,669		(334		)	161		7			95		2,141
Loans charged-off	—		—		—		—			—		(32		)	—		(32		)
Recoveries	—		—		—		—			—		—			—		—
Allowance at September 30, 2015	$	3,560	$	545	$	5,220	$	722		$	3,571	$	711		$	753	$	15,082

17

Additional information pertaining to the allowance for loan losses at September 30, 2016 and December 31, 2015 is as follows:

	1-4 Family Residential		Home Equity		Commercial Real Estate		Construction		Commercial Business		Consumer		Unallocated		Total
	(In thousands)
September 30, 2016
Allowance related to impaired loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Allowance related to non-impaired loans	4,312		544		8,135		1,179		2,650		466		444		17,730
Total allowance for loan losses	$	4,312	$	544	$	8,135	$	1,179	$	2,650	$	466	$	444	$	17,730
Impaired loans	$	6,401	$	589	$	752	$	—	$	70	$	178	$	—	$	7,990
Non-impaired loans	737,200		79,631		660,715		71,641		169,462		30,747		—		1,749,396
Total loans	$	743,601	$	80,220	$	661,467	$	71,641	$	169,532	$	30,925	$	—	$	1,757,386
December 31, 2015
Allowance related to impaired loans	$	—	$	—	$	384	$	—	$	10	$	10	$	—	$	404
Allowance related to non-impaired loans	3,916		636		6,763		1,364		2,829		762		428		16,698
Total allowance for loan losses	$	3,916	$	636	$	7,147	$	1,364	$	2,839	$	772	$	428	$	17,102
Impaired loans	$	6,114	$	270	$	4,631	$	—	$	10	$	145	$	—	$	11,170
Non-impaired loans	593,824		77,129		556,572		79,773		182,667		38,041		—		1,528,006
Total loans	$	599,938	$	77,399	$	561,203	$	79,773	$	182,677	$	38,186	$	—	$	1,539,176

The following is a summary of past due and non-accrual loans, by loan class, at September 30, 2016 and December 31, 2015:

	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)
September 30, 2016
Real estate:
1-4 family residential	$	2,176	$	1,311	$	1,012	$	4,499	$	6,260
Home equity	693		387		396		1,476		589
Commercial real estate	—		—		752		752		752
Commercial business	15		—		28		43		70
Construction	981		—		—		981		—
Consumer	408		—		82		490		178
Total	$	4,273	$	1,698	$	2,270	$	8,241	$	7,849

December 31, 2015
Real estate:
1-4 family residential	$	2,287	$	—	$	990	$	3,277	$	5,688
Home equity	1,031		19		176		1,226		270
Commercial real estate	—		1,249		—		1,249		4,631
Commercial business	23		—		—		23		10
Consumer	3		80		120		203		145
Total	$	3,344	$	1,348	$	1,286	$	5,978	$	10,744

18

There were no loans past due 90 days or more and still accruing interest at September 30, 2016 and December 31, 2015.

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
September 30, 2016	(In thousands)
Impaired loans without a valuation allowance:
Real estate:
1-4 family residential	$	6,401	$	7,011	$	—
Home equity	589		764		—
Commercial real estate	752		1,073		—
Commercial	70		3,140		—
Consumer	178		187		—
Total impaired loans	$	7,990	$	12,175	$	—
December 31, 2015
Impaired loans without a valuation allowance:
Real estate:
1-4 family residential	$	6,114	$	6,824	$	—
Home equity	270		425		—
Consumer	35		39		—
Total	6,419		7,288		—
Impaired loans with a valuation allowance:
Commercial real estate	4,631		4,631		384
Commercial business	10		11		10
Consumer	110		110		10
Total	4,751		4,752		404
Total impaired loans	$	11,170	$	12,040	$	404

19

The following tables set forth information regarding average balances and interest income recognized (the majority of which is on a cash basis) on impaired loans by class, for the periods indicated: 

	Average Recorded Investment		Interest Income Recognized
Three Months Ended September 30, 2016	(In thousands)
Real estate:
1-4 family residential	$	6,445	$	186
Home equity	520		5
Commercial real estate	3,037		41
Consumer	136		2
Commercial	1,538		6
Total	$	11,676	$	240
Three Months Ended September 30, 2015
Real estate:
1-4 family residential	$	4,559	$	53
Home equity	717		6
Consumer	95		1
Total	$	5,371	$	60
Nine Months Ended September 30, 2016
Real estate:
1-4 family residential	$	6,383	$	331
Home equity	405		13
Commercial real estate	3,755		135
Consumer	156		6
Commercial	771		36
Total	$	11,470	$	521
Nine Months Ended September 30, 2015
Real estate:
1-4 family residential	$	4,558	$	196
Home equity	652		20
Consumer	62		3
Total	$	5,272	$	219

No additional funds are committed to be advanced in connection with impaired loans.

There were no significant troubled debt restructurings recorded during the three and nine months ended September 30, 2016 or 2015.

20

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.

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 commercial 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 September 30, 2016 and December 31, 2015: 

	1-4 Family Residential		Home Equity		Commercial Real Estate		Construction		Commercial Business		Consumer		Total Loans
	(In thousands)
September 30, 2016
Loans rated 1 - 6	$	1,062	$	295	$	644,198	$	71,641	$	162,047	$	4	$	879,247
Loans rated 7	4,033		504		11,242		—		7,442		157		23,378
Loans rated 8	2,003		144		6,027		—		43		31		8,248
Loans rated 9	648		—		—		—		—		—		648
Loans rated 10	—		—		—		—		—		—		—
Loans not rated	735,855		79,277		—		—		—		30,733		845,865
	$	743,601	$	80,220	$	661,467	$	71,641	$	169,532	$	30,925	$	1,757,386
December 31, 2015
Loans rated 1 - 6	$	1,950	$	465	$	548,360	$	79,773	$	181,792	$	6	$	812,346
Loans rated 7	4,461		321		7,765		—		874		—		13,421
Loans rated 8	1,592		144		5,078		—		—		149		6,963
Loans rated 9	701		—		—		—		11		—		712
Loans rated 10	—		—		—		—		—		—		—
Loans not rated	591,234		76,469		—		—		—		38,031		705,734
	$	599,938	$	77,399	$	561,203	$	79,773	$	182,677	$	38,186	$	1,539,176

21

NOTE 5 - DERIVATIVES

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 net income.

The table below presents information about derivative financial instruments not designated as hedging instruments at September 30, 2016 and December 31, 2015.

	Derivative Gains				Derivative Losses
	Notional Amount		Fair Value		Notional Amount		Fair Value
	(In thousands)
September 30, 2016
Economic hedges:
Commercial loan level interest rate swap agreements	$	379,736	$	18,783	$	379,736	$	19,893
Other contracts	15,983		33		27,853		140
Total derivatives	$	395,719	$	18,816	$	407,589	$	20,033
December 31, 2015
Economic hedges:
Commercial loan level interest rate swap agreements	$	282,546	$	7,956	$	282,546	$	8,411
Other contracts	8,300		6		12,698		78
Total derivatives	$	290,846	$	7,962	$	295,244	$	8,489

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.

Mortgage Banking Derivatives

The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that loans will subsequently be sold in the secondary market. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. These commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in non-interest income.

Outstanding loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might change from inception of the rate lock to funding of the loan due to changes in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. The notional amount of mortgage loan commitments as of September 30, 2016 was $6.4 million. The fair value of such commitments was $129,000 and was included in other assets on the consolidated balance sheet.

22

To protect against the price risk inherent in derivative loan commitments, the Company utilizes “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).

The Company expects that these forward sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of forward loan sale commitments at September 30, 2016 was $8.5 million. The fair value of such commitments was a gain of $19,000 included in other assets and a loss of $35,000 included in other liabilities on the consolidated balance sheet.

NOTE 6 - DEPOSITS

A summary of deposit balances, by type, is as follows:

	September 30,		December 31,
	2016		2015
	(In thousands)
NOW and demand	$	337,225	$	288,143
Regular savings	270,067		287,344
Money market	518,360		368,050
Brokered money market	46,235		41,807
Total non-certificate accounts	1,171,887		985,344
Term certificates of $250,000 or more	79,815		65,364
Term certificates less than $250,000	259,249		246,614
Brokered term certificates	170,506		136,527
Total term certificate accounts	509,570		448,505
Total deposits	$	1,681,457	$	1,433,849

At September 30, 2016, the scheduled maturities of term certificate accounts, including brokered deposits, are as follows:

	Amount		Weighted Average Rate
	(Dollars in thousands)
Within 1 year	$	285,918	0.66	%
1-2 years	96,686		1.26
2-3 years	46,631		1.47
3-4 years	59,640		1.98
4 years and beyond	20,695		1.79
	$	509,570	1.05	%

NOTE 7 - FAIR VALUE MEASUREMENTS

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 assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation

23

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 asset or liability.

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: 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. Treasury securities 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.

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: Fair values 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 fair value of borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Interest rate swap agreements: 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.

Forward loan sale commitments and derivative loan commitments: Fair values of forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and, for derivative loan commitments, fair values also include the value of servicing, deferred origination fees/costs and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements.

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 September 30, 2016 and December 31, 2015, 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)
September 30, 2016
Assets
Securities available for sale:
Debt securities	$	—	$	165,951	$	—	$	165,951
Marketable equity securities	44,322		—		—		44,322
Derivative assets:
Interest rate swap agreements	—		18,816		—		18,816
Forward loan sale commitments	—		—		19		19
Mortgage loan commitments	—		—		129		129
Total assets	$	44,322	$	184,767	$	148	$	229,237
Liabilities
Derivative liabilities:
Interest rate swap agreements	$	—	$	20,033	$	—	$	20,033
Forward loan sale commitments	—		—		35		35
Total liabilities	$	—	$	20,033	$	35	$	20,068
December 31, 2015
Assets
Securities available for sale:
Debt securities	$	—	$	184,114	$	—	$	184,114
Marketable equity securities	47,576		—		—		47,576
Interest rate swap agreements	—		7,962		—		7,962
Total assets	$	47,576	$	192,076	$	—	$	239,652
Liabilities
Interest rate swap agreements	$	—	$	8,489	$	—	$	8,489

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 non-recurring 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. There are no liabilities measured at fair value on a non-recurring basis. The following table summarizes the fair value hierarchy applicable to assets measured at fair value on a non-recurring basis:

	September 30, 2016						December 31, 2015
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans	$	—	$	—	$	812	$	—	$	—	$	4,752
Total assets	$	—	$	—	$	812	$	—	$	—	$	4,752

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The following table summarizes the total losses on assets measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016			2015
	(In thousands)
Impaired loans	$	(2,690	)	$	—	$	(2,997	)	$	—

Gains and 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. 

	Carrying Amount		Fair Value
			Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2016
Financial assets:
Cash and cash equivalents	$	37,002	$	37,002	$	—	$	—	$	37,002
Securities available for sale	210,273		44,322		165,951		—		210,273
Securities held to maturity	197,863		605		199,324				199,929
Federal Home Loan Bank stock	13,505		—		—		13,505		13,505
Loans and loans held for sale	1,743,624		—		—		1,752,000		1,752,000
Accrued interest receivable	5,388		—		—		5,388		5,388
Financial liabilities:
Deposits	1,681,457		—		—		1,684,592		1,684,592
Borrowings	208,700		—		209,099		—		209,099
On-balance sheet derivative financial instruments:
Derivative assets:
Interest rate swap agreements	18,816		—		18,816		—		18,816
Forward loan sale commitments	19		—		—		19		19
Mortgage loan commitments	129		—		—		129		129
Derivative liabilities:
Interest rate swap agreements	20,033		—		20,033		—		20,033
Forward loan sale commitments	35		—		—		35		35

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December 31, 2015
Financial assets:
Cash and cash equivalents	$	33,298	$	33,298	$	—	$	—	$	33,298
Securities available for sale	231,690		47,576		184,114		—		231,690
Securities held to maturity	200,141		634		198,592		—		199,226
Federal Home Loan Bank stock	13,567		—		—		13,567		13,567
Loans and loans held for sale	1,536,152		—		—		1,538,809		1,538,809
Accrued interest receivable	5,344		—		—		5,344		5,344
Financial liabilities:
Deposits	1,433,849		—		—		1,434,179		1,434,179
Borrowings	260,000		—		260,244		—		260,244
On-balance sheet derivative financial instruments:
Interest rate swap agreements:
Assets	7,962		—		7,962		—		7,962
Liabilities	8,489		—		8,489		—		8,489

NOTE 8 - 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.

The components of accumulated other comprehensive income (loss), included in stockholders' equity, are as follows:

	September 30,			December 31,
	2016			2015
	(In thousands)
Securities available for sale:
Net unrealized gain (loss)	$	2,487		$	(5,701	)
Tax effect	(913		)	1,945
Net-of-tax amount	1,574			(3,756		)
Securities held to maturity:
Net unrealized gain on transferred securities	383			571
Tax effect	(130		)	(197		)
Net-of-tax amount	253			374
Defined benefit pension plan:
Unrecognized net actuarial loss	(2,654		)	(2,858		)
Tax effect	980			1,052
Net-of-tax amount	(1,674		)	(1,806		)
	$	153		$	(5,188	)

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Changes in accumulated other comprehensive income (loss), by component, follow:

	Three Months Ended September 30, 2016
	Securities Available for Sale			Securities Held to Maturity			Defined Benefit Pension Plan			Total
	(In thousands)
Balance at June 30, 2016	$	508		$	278		$	(1,718	)	$	(932	)
Other comprehensive income before reclassification adjustments	2,198			—			—			2,198
Reclassification adjustments:
Net realized gains	(562		)	—			—			(562		)
Amortization of actuarial losses	—			—			68			68
Amortization of amounts previously recorded upon transfer from available for sale	—			(39		)	—			(39		)
Tax effects	(570		)	14			(24		)	(580		)
Net current-period other comprehensive income (loss)	1,066			(25		)	44			1,085
Balance at September 30, 2016	$	1,574		$	253		$	(1,674	)	$	153

	Three Months Ended September 30, 2015
	Securities Available for Sale			Securities Held to Maturity			Defined Benefit Pension Plan			Total
	(In thousands)
Balance at June 30, 2015	$	1,980		$	—		$	(781	)	$	1,199
Other comprehensive loss before reclassification adjustments	(4,504		)	—			—			(4,504		)
Reclassification adjustments:
Net realized gains	(238		)	—			—			(238		)
Amortization of actuarial losses	—			—			27			27
Unrealized gains on securities reclassified as held to maturity	(666		)	666			—			—
Amortization of amounts previously recorded upon transfer from available for sale	—			(35		)	—			(35		)
Tax effects	1,887			(252		)	(8		)	1,627
Net current-period other comprehensive income (loss)	(3,521		)	379			19			(3,123		)
Balance at September 30, 2015	$	(1,541	)	$	379		$	(762	)	$	(1,924	)

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	Nine Months Ended September 30, 2016
	Securities Available for Sale			Securities Held to Maturity			Defined Benefit Pension Plan			Total
	(In thousands)
Balance at December 31, 2015	$	(3,756	)	$	374		$	(1,806	)	$	(5,188	)
Other comprehensive income before reclassification adjustments	9,125			—			—			9,125
Reclassification adjustments:
Net realized gains	(937		)	—			—			(937		)
Amortization of actuarial losses	—			—			204			204
Amortization of amounts previously recorded upon transfer from available for sale	—			(188		)	—			(188		)
Tax effects	(2,858		)	67			(72		)	(2,863		)
Net current-period other comprehensive income (loss)	5,330			(121		)	132			5,341
Balance at September 30, 2016	$	1,574		$	253		$	(1,674	)	$	153

	Nine Months Ended September 30, 2015
	Securities Available for Sale			Securities Held to Maturity			Defined Benefit Pension Plan			Total
	(In thousands)
Balance at December 31, 2014	$	3,392		$	—		$	(815	)	$	2,577
Other comprehensive loss before reclassification adjustments	(5,135		)	—			—			(5,135		)
Reclassification adjustments:
Net realized gains	(1,823		)	—			—			(1,823		)
Amortization of actuarial losses	—			—			83			83
Unrealized gains on securities reclassified as held to maturity	(666		)	666			—			—
Amortization of amounts previously recorded upon transfer from available for sale	—			(35		)	—			(35		)
Tax effects	2,691			(252		)	(30		)	2,409
Net current-period other comprehensive income (loss)	(4,933		)	379			53			(4,501		)
Balance at September 30, 2015	$	(1,541	)	$	379		$	(762	)	$	(1,924	)

NOTE 9 - 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.

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Effective January 1, 2015, federal banking regulations changed with regard to minimum capital requirements for community banking institutions. The regulations include a minimum ratio of common equity Tier 1 capital to risk-weighted assets of

4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of 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 bonuses. The capital conservation buffer is being phased in over three years, commencing January 1, 2016. Also, certain new deductions from and adjustments to regulatory capital will be phased in over several years. Management believes that the Company's capital levels will remain characterized as "well capitalized" throughout the phase in periods. The application of the Capital Conservation Buffer resulted in no limitations to payout of retained earnings as of September 30, 2016.

As of September 30, 2016, 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 ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank's category. Management believes, as of September 30, 2016 and December 31, 2015, that the Company and the Bank meet all capital adequacy requirements to which they are subject. The Company's and the Bank's actual capital amounts and ratios as of September 30, 2016 and December 31, 2015 are also presented in the following table.

	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Blue Hills Bancorp, Inc.:
September 30, 2016
Total capital (to risk weighted assets)	$	394,035	21.7	%	$	145,244	8.0	%	181,555		10.0	%
Tier 1 capital (to risk weighted assets)	376,305		20.7		108,933		6.0		145,244		8.0
Common equity Tier 1 (to risk weighted assets)	376,305		20.7		81,700		4.5		118,011		6.5
Tier 1 capital (to average assets)	376,305		16.7		90,155		4.0		112,693		5.0
December 31, 2015
Total capital (to risk weighted assets)	$	407,444	24.8	%	$	131,231	8.0	%	164,039		10.0	%
Tier 1 capital (to risk weighted assets)	390,342		23.8		98,423		6.0		131,231		8.0
Common equity Tier 1 (to risk weighted assets)	390,342		23.8		73,818		4.5		106,625		6.5
Tier 1 capital (to average assets)	390,342		19.6		79,658		4.0		99,573		5.0
Blue Hills Bank:
September 30, 2016
Total capital (to risk weighted assets)	$	308,013	17.0	%	$	144,952	8.0	%	$	181,190	10.0	%
Tier 1 capital (to risk weighted assets)	290,283		16.0		108,714		6.0		144,952		8.0
Common equity Tier 1 (to risk weighted assets)	290,283		16.0		81,536		4.5		117,774		6.5
Tier 1 capital (to average assets)	290,283		12.9		90,127		4.0		112,659		5.0
December 31, 2015
Total capital (to risk weighted assets)	$	296,309	18.1	%	$	130,832	8.0	%	$	163,540	10.0	%
Tier 1 capital (to risk weighted assets)	279,207		17.1		98,124		6.0		130,832		8.0
Common equity Tier 1 (to risk weighted assets)	279,207		17.1		73,593		4.5		106,301		6.5
Tier 1 capital (to average assets)	279,207		14.0		79,867		4.0		99,608		5.0

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NOTE 10- 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:

	September 30, 2016	December 31, 2015
Allocated	150,229	75,912
Committed to be allocated	56,986	75,912
Unallocated	2,068,533	2,124,846
	2,275,748	2,276,670

The fair value of unallocated shares was approximately $31.1 million and $32.5 million at September 30, 2016 and December 31, 2015, respectively.

Total compensation expense recognized in connection with the ESOP for the three months ended September 30, 2016 and 2015 was $277,000 and $274,000, respectively. Total compensation expense recognized for the nine months ended September 30, 2016 and 2015 was $818,000 and $782,000, respectively.

NOTE 11 – 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.

	Three Months Ended September 30,
	2016			2015
	(In thousands, except share amounts)
Net income applicable to common stock	$	1,630		$	1,810
Average number of common shares outstanding	26,207,612			28,337,603
Less: Average unallocated ESOP shares	(2,078,100		)	(2,154,222		)
Average number of common shares outstanding used to calculate basic earnings per common share	24,129,512			26,183,381
Effect of dilutive unvested restricted stock awards	178,028			—
Average number of common shares outstanding used to calculate diluted earnings per common share	24,307,540			26,183,381
Earnings per common share:
Basic	$	0.07		$	0.07
Diluted	$	0.07		$	0.07

31

	Nine Months Ended September 30,
	2016			2015
	(In thousands, except share amounts)
Net income applicable to common stock	$	4,655		$	4,815
Average number of common shares outstanding	26,682,260			28,423,110
Less: Average unallocated ESOP shares	(2,096,690		)	(2,173,045		)
Average number of common shares outstanding used to calculate basic earnings per common share	24,585,570			26,250,065
Effect of dilutive unvested restricted stock awards	122,989			—
Average number of common shares outstanding used to calculate diluted earnings per common share	24,708,559			26,250,065
Earnings per common share:
Basic	$	0.19		$	0.18
Diluted	$	0.19		$	0.18

Options for 2,461,350 shares were not included in the computation of diluted earnings per common share because to do so would have been antidilutive for the three and nine months ended September 30, 2016.

NOTE 12 - SHARE-BASED COMPENSATION

Under the Blue Hills Bancorp, Inc. 2015 Equity Incentive Plan (the "Equity Plan"), the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan, with the total shares reserved for options equaling 2,846,681. Board members may only receive non-qualified stock options. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The total number of shares reserved for restricted stock or restricted units is 1,138,673. The vast majority of options and awards vest ratably over five years. The fair value of shares awarded is based on the market price at the date of grant.

Expense related to options and restricted stock granted to directors is recognized as directors' fees within noninterest expense.

The Company has standard form agreements used for stock option and restricted stock awards. The standard form agreements used for the Chief Executive Officer and all other Executive Officers have previously been disclosed in Securities and Exchange Commission filings and generally provide that: (1) any unvested options or unvested restricted stock vest upon a Change in Control; and, that (2) any stock options which vest pursuant to a Change in Control, which is an event described in Section 280G of the Internal Revenue Code of 1986, will be cashed out at the difference between the acquisition price and the exercise price of the stock option.

Stock Options

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

• Volatility is based on peer group volatility because the Company does not have a sufficient trading history.

• Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period.

• Expected dividend yield is based on the Company's history and expectation of dividend payouts.

• The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

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The Company made the following awards of options to purchase shares of common stock during the nine months ended September 30, 2016.

Date of grant	February 29, 2016
Options granted	55,000
Vesting period (years)	5
Expiration date	February 28, 2026
Expected volatility	28.47		%
Expected life (years)	6.5
Expected dividend yield	0.58		%
Risk free interest rate	1.38		%
Fair value per option	$	4.02

A summary of the status of the Company's stock option grants for the nine months ended September 30, 2016, is presented in the table below:

	Stock Option Awards			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding at December 31, 2015	2,434,000			$	14.07		$	—
Granted	55,000			13.80			—
Forfeited	(27,650		)	14.07			—
Outstanding at September 30, 2016	2,461,350			$	14.06	9.03	$	2,353,133
Exercisable at September 30, 2016	—			$	—	—	$	—
Unrecognized compensation cost at September 30, 2016	$	8,237,000
Weighted average remaining recognition period (years)	4.03

For the three and nine months ended September 30, 2016, share-based compensation expense applicable to the stock options was $513,000 and $1,509,000, respectively, and the recognized tax benefit related to this expense was $126,000 and $376,000. There was no share-based compensation expense related to stock options for the three and nine months September 30, 2015.

Restricted Stock

Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the plan. The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. Of the restricted shares granted, 40,000 are performance based.

33

The following table presents the activity in non-vested stock awards under the Equity Plan for the nine months endedSeptember 30, 2016:

	Outstanding Restricted Stock Awards		Weighted Average Grant Price
Nonvested stock awards at December 31, 2015	983,175		$	14.07
Granted	31,450		13.83
Forfeited	(9,400	)	14.07
Nonvested stock awards at September 30, 2016	1,005,225		$	14.06
Unrecognized compensation cost inclusive of directors' fees at September 30,2016	$11,388,000
Weighted average remaining recognition period (years)	4.04

For the three and nine months ended September 30, 2016, share-based compensation expense applicable to restricted stock awards was $712,000 and $2,097,000, respectively, and the recognized tax benefit related to this expense was $249,000 and $738,000 respectively. There was no share-based compensation expense related to restricted stock awards for the three and nine months ended September 30, 2015.

NOTE 13 - SUBSEQUENT EVENTS

On November 2, 2016, the Bank notified customers that on Wednesday February 1, 2017 they would be closing the Brookline Branch location.

34

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

General

Management’s discussion and analysis of the financial conditionand results of operations at and for the three and nine months ended September 30, 2016 and 2015 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 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 asset quality including an unanticipated credit deterioration in our loan portfolio

• 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;

• 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;

• changes in the financial condition or future prospects of issuers of securities that we own; and

• cyber security attacks or intrusions that could adversely impact our businesses.

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.

35

Critical Accounting Policies

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 September 30, 2016 and December 31, 2015

Total Assets. Total assets increased $199.3 million, or 9.4%, to $2.3 billion at September 30, 2016 from $2.1 billion at December 31, 2015, mainly driven by loan growth.

Loans. Net loans grew $218.2 million, or 14.3%, from the end of 2015 to $1.7 billion at September 30, 2016. The higher level of net loans was driven primarily by growth in residential mortgage and commercial real estate loans. Other categories had minor changes with home equity up slightly while commercial business loans, construction loans and other consumer loans declined.

The following table sets forth the composition of our loan portfolio at the dates indicated.

	At September 30, 2016					At December 31, 2015
	Amount			Percent		Amount			Percent
	(Dollars in thousands)
Real estate:
1-4 family residential	$	743,601		42.31	%	$	599,938		38.98	%
Home equity	80,220			4.56		77,399			5.03
Commercial	661,467			37.64		561,203			36.46
Construction	71,641			4.08		79,773			5.18
Total real estate	1,556,929			88.59		1,318,313			85.65
Commercial business	169,532			9.65		182,677			11.87
Consumer	30,925			1.96		38,186			2.48
Total loans	1,757,386			100.00	%	1,539,176			100.00	%
Allowance for loan losses	(17,730		)			(17,102		)
Discount and fair value adjustments on purchased loans	(1,912		)			(1,959		)
Deferred loan costs, net	3,746					3,160
Loans, net	$	1,741,490				$	1,523,275

Securities Available for Sale and Securities Held to Maturity. Total securities were $408.1 million at September 30, 2016 compared to $431.8 million at December 31, 2015. The decline mainly reflects sales of securities. Net unrealized gains on securities available for sale were $2.5 million at September 30, 2016 compared to net unrealized losses of $5.7 million at December 31, 2015. The improvement mainly reflects the impact of a decline in interest rates on the value of fixed income securities. At September 30, 2016, 52% of securities were in the available for sale category compared to 54% at December 31, 2015.

36

The following table sets forth the amortized cost and fair value of our securities at the dates indicated.

	At September 30, 2016				At December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities available for sale:
Debt securities:
Mortgage- and asset-backed securities:
Private label commercial mortgage-backed securities	$	11,681	$	11,654	$	13,126	$	12,931
Other asset-backed securities	9,790		9,647		11,395		11,253
Total mortgage- and asset-backed securities	21,471		21,301		24,521		24,184
Municipal bonds	10,239		10,625		16,016		16,315
Financial services:
Banks	17,638		17,898		18,813		18,861
Diversified financials	16,563		17,035		23,124		23,300
Insurance and REITs	17,290		17,780		16,883		16,602
Total financial services	51,491		52,713		58,820		58,763
Other corporate:
Industrials	53,813		55,375		55,470		54,532
Utilities	25,160		25,937		31,952		30,320
Total other corporate	78,973		81,312		87,422		84,852
Total debt securities	162,174		165,951		186,779		184,114
Marketable equity securities:
Mutual funds:
Global equity	—		—		5,000		5,388
Domestic community	3,216		3,323		3,216		3,273
Global asset allocation	42,396		40,999		42,396		38,915
Total marketable equity securities	45,612		44,322		50,612		47,576
Total securities available for sale	$	207,786	$	210,273	$	237,391	$	231,690
Securities held to maturity:
Debt securities:
U.S. Treasury	$	600	$	605	$	636	$	634
Government-sponsored enterprises - debt	26,242		26,215		28,256		28,224
Government-sponsored enterprises - mortgage-backed and collateralized mortgage obligations	156,291		158,518		155,232		154,410
SBA asset-backed securities	14,730		14,591		16,017		15,958
Total securities held to maturity	$	197,863	$	199,929	$	200,141	$	199,226

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 real estate financings.

At September 30, 2016, 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 increased by $3.7 million, or 11.1%, to $37.0 million at September 30, 2016 from $33.3 million at December 31, 2015. The increase mainly reflects a higher level of cash and due from banks.

37

Goodwill and Core Deposit Intangible. At September 30, 2016, goodwill and core deposit intangible assets totaled $10.8 million compared to $11.8 million at December 31, 2015. 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 2015 is due solely to amortization of the core deposit intangible.

Bank-Owned Life Insurance. The Company's investment in bank-owned life insurance was relatively unchanged during the first nine months of 2016 as a result of current period earnings on such policies being offset by the receipt of death benefits. The investment was $31.7 million at September 30, 2016 compared to $31.6 million at December 31, 2015.

Deposits. Total deposits increased by $247.6 million, or 17.3%, from the end of 2015 to $1.7 billion at September 30, 2016. The increase from December 31, 2015 was primarily driven by growth in money market deposits of $150.3 million, NOW and demand deposits of $49.1 million, brokered certificates of deposit of $34.0 million and customer certificates of deposit of $27.1 million. The growth in money market deposits was mainly due to higher levels of municipal deposits as well as promotional rate programs at the Company's newest branch in Westwood, which opened in the fourth quarter of 2015. All customer segments (consumer, commercial and municipal) contributed to the growth in deposits during the first nine months of 2016.

Borrowings. Total borrowings declined by $51.3 million, or 19.7%, from the end of 2015 to $208.7 million at September 30, 2016. Despite the increase in loans during the first half of 2016, the Company was able to reduce borrowings due to growth in deposits and sales of securities. Short-term borrowings were $103.7 million at September 30, 2016 compared to $205.0 million at December 31, 2015 and consisted of advances from the Federal Home Loan Bank of Boston. Long-term borrowings were $105.0 million at September 30, 2016 compared to $55.0 million at December 31, 2015 and consisted predominately of fixed-rate advances from the Federal Home Loan Bank of Boston, with maturities ranging from 2017 through 2021.

Stockholders' Equity. Total stockholders' equity decreased $9.1 million, or 2.3%, to $389.7 million at September 30, 2016 from $398.8 million at December 31, 2015. The decline in stockholders' equity from the end of 2015 mainly reflects the repurchase of 1,517,840 shares of the Company's common stock at an average price of $14.20 for a total cost of $21.6 million. In late February 2016, the Company announced the completion of its first stock repurchase program pursuant to which the Company bought back 1,423,340 shares, representing approximately 5% of its outstanding shares. At the same time, the Board of Directors authorized a second repurchase program for up to 1,119,000 shares of common stock which represents approximately 4% of the Company's issued and outstanding shares. On September 13, 2016, the Company announced that the Board of Directors authorized the Company’s third repurchase program for up to 1,345,087 shares of common stock, which represents approximately 5% of the Company's issued and outstanding shares, and that the third repurchase program would

commence upon completion of the second repurchase program. At September 30, 2016, the Company had 95,200 shares remaining to repurchase under the second repurchase program, however, the program was completed in October 2016. Partial offsets to the decline in shareholders' equity from share repurchases and dividend payments, consisted primarily of an improvement of $5.3 million in accumulated other comprehensive income related to an increase in the value of available-for-sale securities and $4.7 million of net income in the first nine months of 2016. The tangible common equity ratio declined to 16.45% at September 30, 2016 from 18.41% at December 31, 2015.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2016 and 2015

General. The Company reported net income of $1.6 million, or $0.07 per diluted share, for the three months ended September 30, 2016 compared to net income of $1.8 million, or $0.07 per diluted share, for the three months ended September 30, 2015. The Company reported net income of $4.7 million, or $0.19 per diluted share, for the nine months ended September 30, 2016 compared to net income of $4.8 million, or $0.18 per diluted share, for the nine months ended September 30, 2015.

As previously disclosed in a Form 8-K as filed with the Securities and Exchange Commission on September 13, 2016, the Company recorded a charge-off of $3.3 million in the third quarter of 2016 related to problem loans to one commercial customer and this charge-off, when combined with the effect of a specific reserve of $558,000 ($366,000 after-tax) established against these loans during the second quarter of 2016, resulted in a pre-tax charge against third quarter income of $2.7 million ($1.8 million after-tax). Excluding these charges, net income for the third quarter of 2016 would have been $3.5 million, or $0.14 per diluted share while for the nine months ended September 30, 2016, net income would have been $6.9 million, or

$0.28 per diluted share.

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Average Balances and Yields

The following tables set 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 statutory tax rate of 34%.

	For the Three Months Ended September 30,
	2016								2015
	Average Outstanding Balance			Interest			Yield/ Cost		Average Outstanding Balance			Interest			Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	1,726,088		$	15,166		3.50	%	$	1,316,514		$	11,562		3.48	%
Securities	403,038			2,414			2.38		429,667			3,838			3.54
Other interest earning assets (1)	31,236			170			2.17		34,061			106			1.23
Total interest-earning assets	2,160,362			17,750			3.27	%	1,780,242			15,506			3.46	%
Non-interest-earning assets	106,589								89,085
Total assets	$	2,266,951							$	1,869,327
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts	$	140,273		17			0.05	%	$	128,298		15			0.05	%
Regular savings accounts	272,950			229			0.33		289,236			269			0.37
Money market accounts	560,098			1,173			0.83		348,658			606			0.69
Certificates of deposit	471,040			1,313			1.11		392,170			1,036			1.05
Total interest-bearing deposits	1,444,361			2,732			0.75		1,158,362			1,926			0.66
Borrowings	224,660			458			0.81		135,554			287			0.84
Total interest-bearing liabilities	1,669,021			3,190			0.76	%	1,293,916			2,213			0.68	%
Non-interest-bearing deposits	171,317								142,328
Other non-interest-bearing liabilities	33,936								20,368
Total liabilities	1,874,274								1,456,612
Equity	392,677								412,715
Total liabilities and equity	$	2,266,951							$	1,869,327
Net interest-earning assets (2)	$	491,341							$	486,326
Net interest and dividend income (FTE)				14,560								13,293
Less: FTE adjustment				(65		)						(88		)
Net interest and dividend income (GAAP)				$	14,495							$	13,205
Net interest rate spread (FTE) (3)							2.51	%							2.78	%
Net interest margin (FTE) (4)							2.68	%							2.96	%
Average interest-earning assets to interest-bearing liabilities	129.44		%						137.59		%
Total deposits cost							0.67	%							0.59	%

______________________

(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.

39

	For the Nine Months Ended September 30,
	2016								2015
	Average Outstanding Balance			Interest			Yield/ Cost		Average Outstanding Balance			Interest			Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	1,643,829		$	43,013		3.50	%	$	1,240,142		$	32,844		3.54	%
Securities	417,526			6,862			2.20		427,064			8,391			2.63
Other interest earning assets (1)	34,835			458			1.76		42,438			249			0.78
Total interest-earning assets	2,096,190			50,333			3.21	%	1,709,644			41,484			3.24	%
Non-interest-earning assets	102,425								92,937
Total assets	$	2,198,615							$	1,802,581
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts	$	138,254		49			0.05	%	$	124,832		43			0.05	%
Regular savings accounts	278,624			713			0.34		296,364			880			0.40
Money market accounts	490,472			3,002			0.82		314,828			1,585			0.67
Certificates of deposit	455,039			3,744			1.10		372,408			2,926			1.05
Total interest-bearing deposits	1,362,389			7,508			0.74		1,108,432			5,434			0.66
Borrowings	257,798			1,584			0.82		126,256			811			0.86
Total interest-bearing liabilities	1,620,187			9,092			0.75	%	1,234,688			6,245			0.68	%
Non-interest-bearing deposits	154,877								132,900
Other non-interest-bearing liabilities	29,324								20,694
Total liabilities	1,804,388								1,388,282
Equity	394,227								414,299
Total liabilities and equity	$	2,198,615							$	1,802,581
Net interest-earning assets (2)	$	476,003							$	474,956
Net interest and dividend income (FTE)				41,241								35,239
Less: FTE adjustment				(229		)						(254		)
Net interest and dividend income (GAAP)				$	41,012							$	34,985
Net interest rate spread (FTE) (3)							2.46	%							2.56	%
Net interest margin (FTE) (4)							2.63	%							2.76	%
Average interest-earning assets to interest-bearing liabilities	129.38		%						138.47		%
Total deposits cost							0.66	%							0.59	%

______________________

(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.

40

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 September 30,
	2016 vs. 2015
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate
	(In thousands)
Interest-earning assets:
Loans	$	3,539		$	65		$	3,604
Securities	(227		)	(1,197		)	(1,424		)
Other	(8		)	72			64
Total interest-earning assets	3,304			(1,060		)	2,244
Interest-bearing liabilities:
NOW accounts	2			—			2
Savings accounts	(14		)	(26		)	(40		)
Money market accounts	311			256			567
Certificates of deposit	202			75			277
Total interest-bearing deposits	501			305			806
Borrowings	181			(10		)	171
Total interest-bearing liabilities	682			295			977
Change in net interest and dividend income (FTE)	$	2,622		$	(1,355	)	$	1,267

	Nine Months Ended September 30,
	2016 vs. 2015
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate
	(In thousands)
Interest-earning assets:
Loans	$	10,543		$	(374	)	$	10,169
Securities	(155		)	(1,374		)	(1,529		)
Other	(37		)	246			209
Total interest-earning assets	10,351			(1,502		)	8,849
Interest-bearing liabilities:
NOW accounts	4			2			6
Savings accounts	(52		)	(115		)	(167		)
Money market accounts	723			694			1,417
Certificates of deposit	596			222			818
Total interest-bearing deposits	1,271			803			2,074
Borrowings	812			(39		)	773
Total interest-bearing liabilities	2,083			764			2,847
Change in net interest and dividend income (FTE)	$	8,268		$	(2,266	)	$	6,002

41

Net Interest and Dividend Income. Net interest and dividend income was $14.5 million in the third quarter of 2016, up $1.3 million, or 9.8%, from $13.2 million in the third quarter of 2015. Net interest and dividend income on a fully tax equivalent basis was $14.6 million in the third quarter of 2016, up $1.3 million, or 9.5%, from $13.3 million in the third quarter of 2015. Net interest margin declined to 2.68% in the third quarter of 2016 from 2.96% in the third quarter of 2015.

Excluding the impact of mutual fund dividends and Nantucket purchase accounting accretion from both quarters and accelerated bond premium accretion from note redemptions from the third quarter of 2016, net interest income on a fully taxable-equivalent basis increased $2.5 million, or 21.6%, to $14.2 million in the third quarter of 2016 while net interest margin declined one basis point to 2.65%. The improvement in net interest income mainly reflects a 31.1% increase in average loans.

Compared to the first nine months of 2015, net interest and dividend income increased $6.0 million, or 17.0%, to $41.2 million, on a fully taxable-equivalent basis, while net interest margin declined 13 basis points to 2.63%. Excluding the impact of mutual fund dividends and Nantucket purchase accounting accretion from both periods and accelerated bond premium amortization and accretion from note redemptions from the first nine months of 2016, net interest income on a fully taxable-equivalent basis increased $7.7 million, or 23.4%, to $40.8 million while net interest margin remained unchanged at 2.65%.

The table shown below provides a reconciliation of reported to adjusted net interest and dividend income and margin for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, dollars in thousands)	2016			2015			2016			2015
Net Interest and Dividend Income
Reported net interest and dividend income	$	14,495		$	13,205		$	41,012		$	34,985
FTE adjustment	65			88			229			254
Reported net interest and dividend income (FTE)	14,560			13,293			41,241			35,239
Mutual fund dividends	(96		)	(1,509		)	(117		)	(1,582		)
Purchase accounting accretion	(115		)	(142		)	(375		)	(630		)
Accelerated bond amortization (accretion) on note redemptions	(193		)	—			10			—
Adjusted net interest and dividend income (FTE) (1)	$	14,156		$	11,642		$	40,759		$	33,027
Net Interest Margin
Reported net interest margin	2.67		%	2.94		%	2.61		%	2.74		%
FTE adjustment	0.01			0.02			0.02			0.02
Reported net interest margin (FTE)	2.68		%	2.96		%	2.63		%	2.76		%
Mutual fund dividends (2)	0.03			(0.27		)	0.04			(0.06		)
Purchase accounting accretion (2)	(0.02		)	(0.03		)	(0.03		)	(0.05		)
Accelerated bond amortization (accretion) on note redemptions	(0.04		)	—			0.01			—
Adjusted net interest margin (FTE) (1)	2.65		%	2.66		%	2.65		%	2.65		%

______________________

(1) Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons.

(2) Note: In calculating the net interest margin impact of mutual fund dividends and purchase accounting accretion, average earning assets were adjusted to remove the average balances associated with each item. In quarters where mutual fund dividend income is low, the removal of the dividend and its related average balance has a positive impact on the adjusted net interest margin. Management believes this adjusted net interest margin is useful because of the volatility or non-recurring nature of certain items from quarter to quarter.

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Interest and Dividend Income. Interest and dividend income on a fully taxable-equivalent basis increased $2.2 million or 14.5% to $17.8 million for the three months ended September 30, 2016 from $15.5 million for the three months ended September 30, 2015. Interest and fees on loans on a fully tax-equivalent basis grew $3.6 million, or 31.2%, to $15.2 million in the three months ended September 30, 2016 from $11.6 million in the third quarter of 2015. The increase reflects a $409.6 million, or 31.1%, increase in average loans driven mainly by increases in residential mortgages, commercial real estate loans, and construction loans.Loan yield improved two basis points to 3.50% for the three months ended September 30, 2016 from 3.48% for the three months ended September 30, 2015 due mainly to a change in loan mix and a benefit in 2016 from repricing floating rate loans due, in part, to the Federal Reserve's December 2015 rate increase. Interest on securities on a fully taxable-equivalent basis declined $1.4 million, or 37.1%, to $2.4 million for the three months ended September 30, 2016 from $3.8 million for the three months ended September 30, 2015. The decline was due to a $1.4 million decline in dividends received on mutual fund investments.

Compared to the first nine months of 2015, interest and dividend income on a fully taxable-equivalent basis increased $8.8 million, or 21.3%, to $50.3 million for the first nine months of 2016. Interest and fees on loans grew $10.2 million, or 31.0%, to $43.0 million, on a fully taxable-equivalent basis, in the nine months ended September 30, 2016 from $32.8 million in the first nine months of 2015 as average loans grew $403.7 million, or 32.6%, from a year ago. All categories of loans increased led by residential mortgages and commercial real estate loans. The impact of a higher level of loans was partially offset by a decline in loan yield to 3.50% in the first nine months of 2016 from 3.54% in the first nine months of 2015. This reflects competitive pricing pressures, the low interest rate environment, and a $255,000 decline in Nantucket purchase accounting accretion, partially offset by a benefit in 2016 from repricing floating rate loans due, in part, to the Federal Reserve's December 2015 rate increase. Interest on securities declined $1.5 million, or 18.2%, to $6.9 million for the nine months ended September 30, 2016 from $8.4 million for the nine months ended September 30, 2015. The decline was due to a $1.5 million decline in dividends received on mutual fund investments as well as lower average balances on securities due to sales in the current year.

Interest Expense. Interest expense increased $1.0 million, or 44.1%, to $3.2 million for the three months ended September 30, 2016 from $2.2 million for the three months ended September 30, 2015. Interest expense on deposits increased $806,000, or 41.8%, to $2.7 million for the three months ended September 30, 2016, from $1.9 million for the three months ended September 30, 2015. The increase was mainly due to a $286.0 million, or 24.7%, increase in the average balance of interest bearing deposits to $1.4 billion in the third quarter of 2016 driven by higher levels of money market deposits and certificates of deposit. In addition, there was a nine basis point increase in the cost of interest bearing deposits to 0.75% in the third quarter of 2016 due mainly to promotional rate deposit pricing programs. Interest expense on borrowings was $458,000 for the three months ended September 30, 2016, compared to $287,000 for the three months ended September 30, 2015. The average balances of borrowings grew $89.1 million, or 65.7%, from the third quarter of 2015 to $224.7 million in the third quarter of 2016. The increase in borrowings was used to help fund the growth in loans. The cost of borrowings declined to 0.81% in the third quarter of 2016 from 0.84% in the third quarter of 2015.

Compared to the first nine months of 2015, interest expense increased $2.8 million, or 45.6%, to $9.1 million for the first nine months of 2016. The comparison of interest expense in the nine month period was mainly impacted by the same factors discussed above in the quarterly comparison. Interest expense on deposits increased $2.1 million, or 38.2%, to $7.5 million for the nine months ended September 30, 2016 from $5.4 million for the first nine months of 2015. The increase was mainly due to a $254.0 million, or 22.9%, increase in average interest bearing deposits to $1.4 billion in the first nine months of 2016 mainly due to a higher level of money market deposits and certificates of deposit. In addition, there was an eight basis point increase in the cost of interest bearing deposits to 0.74% in the first nine months of 2016 driven mainly by promotional rate deposit pricing programs. Interest expense on borrowings was $1.6 million in the first nine months of 2016 compared to $811,000 in the first nine months of 2015. The average balances of borrowings grew $131.5 million, or 104.2%, from the first nine months of 2015 to $257.8 million in the first nine months of 2016. The increase in borrowings was used to help fund the higher level of year over year loan growth. The cost of borrowings fell to 0.82% in the first nine months of 2016 from 0.86% in the first half of 2015.

Provision for Loan Losses. The provision for loan losses was $2.9 million in the third quarter of 2016 compared to $1.3 million in the third quarter of 2015. The provision for loan losses reflects management’s assessment of risks inherent in the loan portfolio. The provision in the third quarter of 2016 includes $2.7 million related to problem loans to one commercial customer (total charge-offs related to this customer in the third quarter of 2016 were $3.3 million). Loan growth and loan mix impact the level of provision needed each quarter and a decline in loan growth to 4% in the third quarter of 2016 from 8% in the third quarter of 2015 coupled with a change in loan mix resulted in a lower provision. The allowance for loan losses as a percentage of total loans was 1.01% September 30, 2016 compared to 1.11% at December 31, 2015. The continuing

43

reassessment of the qualitative factor components of the reserve methodology, along with the full migration of historical loss rates from national FDIC data to our own loan loss experience may continue to impact our provision for loan losses in the future. 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 2.5% of the total allowance for loan losses at September 30, 2016 and December 31, 2015.

Non-interest Income. Non-interest income increased $2.4 million, or 143.9%, from the third quarter of 2015 to $4.1 million in the third quarter of 2016. The increase reflects:

• Mortgage banking revenue grew to $1.3 million in the third quarter of 2016 from $52,000 in the third quarter of 2015. The increase reflects mortgage originations more than doubling from the third quarter of last year and a higher volume of loan sales as well as the initial recording of mortgage loan commitment derivatives amounting to $146,000.

• Loan level derivative income increased $257,000, or 50.1%, from the third quarter of 2015 to $770,000 in the third quarter of 2016 due to a higher level of fees received from commercial loan customers who opted to convert their loans from floating to fixed rate via interest rate swaps.

• Realized securities gains increased to $562,000 in the third quarter of 2016 from $238,000 in the third quarter of 2015.

• The Company recorded bank-owned life insurance death benefit claims of $297,000 in the third quarter of 2016. There were no such gains in the third quarter of 2015.

• Miscellaneous income increased to $214,000 in the third quarter of 2016 from a loss of $116,000 in the third quarter of 2015. This increase reflects the Company recording positive credit valuation marks on commercial loan customer interest rate swap contracts in the third quarter of 2016 compared to negative marks in the third quarter of 2015.

Non-interest income increased $2.0 million, or 30.9%, from the first nine months of 2015 to $8.5 million in the first nine months of 2016. The increase was driven by (1) a $1.8 million, or 763.1%, increase in mortgage banking revenue to $2.0 million in the first nine months of 2016 reflecting an increase in mortgage originations and a higher volume of loan sales, (2) a $444,000, or 34.5%, increase in loan level derivative income to $1.7 million in the first nine months of 2016 due to a higher level of fees received from commercial loan customers who opted to convert their loans from floating to fixed rate via interest rate swaps, and (3) $506,000 of bank-owned life insurance death benefit claims received in the first nine months of 2016 while no such gains were recognized in the first nine months of 2015. Partially offsetting these improvements was a $841,000 or 46.1%, decline in realized securities gains (including gains on calls) to $982,000 in the first nine months of 2016.

Non-interest Expense. Non-interest expense increased $2.4 million, or 22.0%, from the third quarter of 2015 to $13.2 million in the third quarter of 2016. A major factor driving this increase was the recording of $1.2 million of expense in the third quarter of 2016 related to the awards under the Equity Incentive Plan. Approximately 80% of the expense related to the Equity Incentive Plan is included in salaries and benefits expense and the remainder in directors' fees. The comparison with the prior year was also impacted by the recording of a $359,000 one-time adjustment in the third quarter of 2016 to appropriately match the accrual and deferral of mortgage-related commissions. The third quarter of 2016 also contained approximately $200,000 of costs associated with the problem loans to one commercial customer that gave rise to a $3.3 million charge-off. In addition, franchise growth also contributed to the increase in noninterest expense, including the opening of a new branch in Westwood in the fourth quarter of 2015, as well as new loan and mortgage production offices and the onboarding of new asset-based lending and municipal banking businesses.

For the first nine months of 2016, non-interest expense was $38.2 million, up $6.1 million, or 19.0%, from the first nine months of 2015. The increase reflects:

• The recording of $3.6 million of expense in the first nine months of 2016 related to the Equity Incentive Plan discussed in the quarterly discussion above.

• Franchise growth also contributed to the increase in noninterest expense, including the opening of a new branch in Westwood in the fourth quarter of 2015 as well as new loan and mortgage production offices and the onboarding of new asset-based lending and municipal banking businesses.

Income Tax Provision. The Company recorded an income tax provision of $891,000 in the third quarter of 2016 and had an effective tax rate in the quarter of 35.3% on pre-tax income of $2.5 million. In the third quarter of 2015, the Company recorded an income tax provision of $923,000 and had an effective tax rate of 33.8% on pre-tax income of $2.7 million.

The Company recorded an income tax provision of $2.5 million in the first nine months of 2016 and had an effective tax rate of 34.8% on pre-tax income of $7.1 million. In the first nine months of 2015, the Company recorded an income tax provision of $2.3 million and had an effective tax rate of 31.8% on pre-tax income of $7.1 million.

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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. The increase in effective rate for both the three and nine month periods ending September 30, 2016 compared to September 30, 2015 is primarily due to non-deductible share-based compensation expense and a decrease in the dividends received deduction.

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
	(In thousands)
At September 30, 2016
Real estate loans and lines:
1-4 family residential	6	$	1,311	8	$	1,012	14	$	2,323
Home equity	2	387		5	396		7	783
Commercial real estate	—	—		1	752		1	752
Total real estate loans and lines	8	1,698		14	2,160		22	3,858
Commercial business	—	—		3	28		3	28
Consumer loans	—	—		2	82		2	82
Total loans	8	$	1,698	19	$	2,270	27	$	3,968
At December 31, 2015
Real estate loans and lines:
1-4 family residential	—	$	—	5	$	990	5	$	990
Home equity	1	19		2	176		3	195
Commercial real estate	1	1,249		—	—		1	1,249
Total real estate loans and lines	2	1,268		7	1,166		9	2,434
Consumer loans	1	80		2	120		3	200
Total loans	3	$	1,348	9	$	1,286	12	$	2,634

Non-performing Assets. The following table provides information with respect to non-performing loans at the dates indicated. There was no other real estate owned at September 30, 2016 and December 31, 2015. The decline in nonperforming assets from the end of 2015 is mainly due to the removal from nonaccrual status of loans secured by one income property totaling $4.2 million, which were originally placed on nonaccrual in the fourth quarter of 2015. The credit situation has improved and the loans have been performing in accordance with the terms. This was partially offset by the placement on nonaccrual, in the second quarter of 2016, of loans to one commercial customer. Loans to this customer on nonaccrual at September 30, 2016 totaled $776,000, which is net of a $3.3 million third quarter charge-off.

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	At September 30, 2016			At December 31, 2015
	(Dollars in thousands)
Non-accrual loans:
1-4 family residential	$	6,260		$	5,688
Home equity loans and lines	589			270
Commercial real estate	752			4,631
Commercial business	70			10
Consumer	178			145
Total non-accrual loans	$	7,849		$	10,744
Ratios:
Non-accrual loans to total loans	0.45		%	0.70		%
Non-performing assets to total assets	0.34		%	0.51		%

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 September 30, 2016			At December 31, 2015
	(Dollars in thousands)
Performing troubled debt restructurings	$	141		$	148
Non-accrual troubled debt restructurings	1,159			1,183
Total	$	1,300		$	1,331
Ratios:
Performing troubled debt restructurings as a % of total loans	0.01		%	0.01		%
Nonaccrual troubled debt restructurings as a % of total loans	0.07		%	0.08		%
Total troubled debt restructurings as a % of total loans	0.07		%	0.09		%

The following table sets forth the amounts of criticized loans as of the dates indicated.

	At September 30, 2016		At December 31, 2015
	(In thousands)
Classified loans:
Substandard	$	8,248	$	6,963
Doubtful	648		712
Loss	—		—
Total classified loans	8,896		7,675
Special mention	23,378		13,421
Total criticized loans	$	32,274	$	21,096

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 September 30, 2016, there were $23.4 million of assets designated as special mention compared to $13.4 million at December 31, 2015. We have not identified any potential problem loans that are not included in the table above.

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Allowance for Loan Losses. The ratio of the allowance for loan losses to total loans declined to 1.01% at September 30, 2016 from 1.11% at December 31, 2015. The decline was due, in part, to the quarterly reassessment of the qualitative factor components of the reserve methodology, especially those associated with 1-4 family residential lending and home equity loans. Changes in the allowance for loan losses during the periods indicated were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	18,079		$	13,777		$	17,102		$	12,973
Charge-offs:
Commercial real estate	(321		)	—			(321		)	—
Commercial business	(2,985		)	—			(3,098		)	—
Consumer loans	(17		)	(13		)	(46		)	(32		)
Total charge-offs	(3,323		)	(13		)	(3,465		)	(32		)
Recoveries:
1-4 family residential	100			—			100			—
Commercial business	2			—			35			—
Total recoveries	102			—			135			—
Net charge-offs	(3,221		)	(13		)	(3,330		)	(32		)
Provision for loan losses	2,872			1,318			3,958			2,141
Balance at end of period	$	17,730		$	15,082		$	17,730		$	15,082
Ratios:
Net charge-offs to average loans outstanding	0.74		%	—		%	0.27		%	—		%
Allowance for loan losses to non-accrual loans at end of period	226		%	251		%	226		%	251		%
Allowance for loan losses to total loans at end of period (1)	1.01		%	1.10		%	1.01		%	1.10		%

(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 September 30, 2016				At December 31, 2015
	Amount		Percent of Loans in Category to Total Loans		Amount		Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate:
1-4 family residential	$	4,312	42.31	%	$	3,916	38.98	%
Home equity	544		4.56		636		5.03
Commercial	8,135		37.64		7,147		36.46
Construction	1,179		4.08		1,364		5.18
Commercial business loans	2,650		9.65		2,839		11.87
Consumer loans	466		1.76		772		2.48
Total allocated allowance	17,286		100.00	%	16,674		100.00	%
Unallocated	444				428
Total	$	17,730			$	17,102

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Management of Market Risk

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 September 30, 2016, 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	1.9%
-100	(0.1)%

_______________________ 

(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 September 30, 2016, 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 1.9% 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 0.1% decrease 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 September 30, 2016 indicated that, in the event of an instantaneous 200 basis point increase in interest rates, we would experience an estimated 6.7% 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 4.6% decrease in the economic value of our equity. The impact on our economic value of equity under all scenarios discussed above is 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 September 30, 2016, there were $208.7 million of Federal Home Loan Bank of Boston (“FHLBB”) advances outstanding with an ability to borrow up to an additional $510.7 million. All borrowings from the FHLBB are secured by a blanket security agreement on qualified collateral. At September 30, 2016, the market value of collateral pledged consisted of $970.7 million of residential and commercial mortgage loans and $13.0 million of U.S. government and government-sponsored securities.

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At September 30, 2016, the Company also had $39.0 million available under unsecured federal funds lines with two correspondent banks, which could be drawn upon as needed. There were no amounts outstanding under this line of credit at September 30, 2016.

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 September 30, 2016, cash and cash equivalents totaled $37.0 million, which was up from $33.3 million at December 31, 2015.

Financing activities consist primarily of activity in deposit accounts and borrowings. There was a net increase in deposits of $247.6 million during the nine months ended September 30, 2016. 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 decline in borrowings of $51.3 million for the nine months ended September 30, 2016.

At September 30, 2016, we had $104.2 million in commitments to originate loans. In addition to commitments to originate loans, we had $239.8 million in unused lines of credit to borrowers and letters of credit and $38.1 million in undisbursed construction loans. Certificates of deposit due within one year of September 30, 2016 totaled $285.9 million, or 17.0% of total deposits. Excluding brokered deposits, certificates of deposit due within one year of September 30, 2016 totaled $126.1 million, or 7.5% of total deposits.

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 September 30, 2016. 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 September 30, 2016, 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 December 30, 2014, a former employee filed a complaint in U.S. Federal District Court of Massachusetts, claiming wrongful termination following a whistleblower claim. This complaint alleged violations of the Federal Deposit Insurance Act, the False Claims Act, and the Family and Medical Leave Act (FMLA). The former employee has since withdrawn his claim under the FMLA, but continues to seek alleged damages 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 this complaint to be completely without merit and are defending this action in the Federal District Court.

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Item 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted Accounting Standards Update 2016-13, which will be effective for Blue Hills Bancorp, Inc. and Blue Hills Bank for our first quarter of 2020. This standard, often referred to as “CECL” (reflecting a current expected credit loss model), will require companies to recognize an allowance for credit losses based on estimates of losses expected to be realized over the contractual lives of the loans. Under current U.S. GAAP, companies generally recognize credit losses only when it is probable that a loss has been incurred as of the balance sheet date. This new standard will require us to collect and review increased types and amounts of data for us to determine the appropriate level of the allowance for loan losses, and may require us to increase our allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.

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

On July 22, 2015, the Company announced that the Board of Directors authorized and regulators approved a stock repurchase program pursuant to which the Company would purchase up to 1,423,340 shares of its common stock, which represented approximately 5% of the Company's then issued and outstanding shares. The Company completed this repurchase program in February 2016, with an average price per share purchased of $14.14. On February 26, 2016, the Company announced that its Board of Directors authorized a second share repurchase program, pursuant to which the Company may repurchase an additional 4%, or 1,119,000 shares, of the Company's issued and outstanding shares. Repurchased shares are returned to the status of authorized but unissued shares. On September 13, 2016, the Company announced that its Board of Directors authorized a third share repurchase program, pursuant to which the Company may repurchase an additional 5% of the Company's issued and outstanding shares, or approximately 1,345,087 shares. The new stock repurchase program commenced on October 21, 2016, following the completion of the Company’s existing stock repurchase program. As of September 30, 2016 there were 95,200 shares remaining under the second program. 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 or pursuant to a trading plan adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The following table sets forth information with respect to any purchases made by or on behalf of the Company during the indicated periods under the repurchase plans:

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Period	Total Number of Shares (or Units) Purchased	Average Price Paid Per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Appropriate Dollar Value) of Shares (Or Units) that May Yet be Purchased Under the Plans or Programs
July 1, 2016-July 31, 2016	61,500	$	14.34	61,500	434,600
August 1, 2016-August 31, 2016	187,800	$	14.13	187,800	246,800
September 1, 2016-September 30, 2016	151,600	$	14.69	151,600	1,440,287
	400,900	$	14.32	400,900	1,440,287

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 September 30, 2016 and December 31, 2015, (ii) the Consolidated Statements of Net Income for the three and nine months ended September 30, 2016 and 2015 (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015, (iv) the Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2016 and 2015, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015, and (vi) the Notes to the unaudited Consolidated Financial Statements.

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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:  November 4, 2016	By:	/s/ William M. Parent
		William M. Parent
		President and Chief Executive Officer
Date:  November 4, 2016	By:	/s/ James Kivlehan
		James Kivlehan
		Executive Vice President and Chief Financial Officer

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