BLUE HILLS BANCORP INC BHBK
September 04, 2014 - 11:48am EST by
jcoviedo
2014 2015
Price: 13.07 EPS $0.00 $0.00
Shares Out. (in M): 29 P/E 0.0x 0.0x
Market Cap (in $M): 372 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Recent IPO
  • Demutualization
  • Potential Acquisition Target
  • Banks
  • Discount to book
  • Property Loans
  • Potential Initiation of Coverage
  • Potential Dividend Initiation
  • Potential Buybacks
 

Description

I had some trouble pasting in pictures and charts so I set up a scribd link for this write up:

 

http://www.scribd.com/doc/238655950/Blue-Hills-Bancorp-BHBK-VIC?secret_password=TDiaGm8Wn09ehmPuxkQa

Blue Hills Bancorp (NASDAQ: BHBK)

 

Thesis

BHBK presents a compelling opportunity to invest in a $1.8B, clean, recently demutualized, Boston-based community bank with 22% TCE/TA and growing share in attractive markets, at a discount (0.95x) to tangible book value.  The bank has been strategically repositioning the balance sheet to become a full-service community bank since 2010.  Additionally, it has built a truly exceptional, new executive management team and Board of Directors that have drawn upon high-level talent from larger financial institutions and lending organizations.  The combination of an excellent management team and Board, with a clean franchise of scale in economically-attractive markets positions the company to drive shareholder value, especially at the discounted entry valuation.  We expect BHBK to draw upon its recent track record of growth and expansion, in addition to using the levers described above along with share repurchases and dividends, to lever its excess capital as a result of its recent IPO in connection with its standard demutualization transaction (completed 7/21/14), grow its footprint and create a compelling consolidation target to a prospective acquirer. At similar tangible book value multiples to recent transactions in New England, BHBK would be worth roughly $25/share in 3 years when its restriction on being acquired expires.

Background – Recent IPO Through Standard Demutualization

BHBK recently converted from a mutual-owned (MHC) company to a stock-owned (public) company via a standard thrift demutualization transaction.  The offering was completed on 7/21/14 at the adjusted maximum of the range, which resulted in gross proceeds of $278 million, pro forma TCE ratio of 22% and pro forma TBVPS of $13.67 per share.  Today’s stock price of $13/share therefore represents a pro forma entry valuation of 0.95x P/TBV.

Background – Franchise & Strategy

Organized in 1871 and reorganized into a mutual holding company structure in 2008, Blue Hills Bancorp is a $1.8B community banking institution with nine full-service branches in the attractive Greater Boston market (southern and eastern MA regions) as well as Nantucket Island (acquired footprint).

 

Source:  BHBK S-1 Filing.

The business mix is concentrated in Residential Mortgage and CRE lending, funded by a strong deposit footprint with 60% MMDA and 30% CDs.  According to the S-1 filing, since 2010:

the Bank has significantly revised its strategic direction and operating strategy, its executive management team and its board of directors. The Bank appointed William M. Parent as its Chief Executive Officer and President in mid-2010 and developed a strategic plan to transform the Bank into a full service community bank serving the needs of retail and business customers residing and operating in eastern Massachusetts. The Bank has appointed seven new directors since 2010, many of whom have direct experience with larger financial institutions or the local communities served by the Bank. In addition, the Bank has hired a new executive management team, with eight of its executive officers joining the Bank since 2011. All of the Bank’s new executive officers have experience with larger financial institutions and commercial lending organizations.

Source:  BHBK S-1 Filing.

The bank’s business strategy is focused on lending growth and diversification as it has added approximately 34 employees involved in loan origination, underwriting and servicing over the past few years.  In addition, BHBK is focused on improving its already solid deposit franchise, utilizing mobile products and expanding the franchise via M&A.  We expect share repurchases and dividends to be part of the shareholder value proposition to lever the bank’s excess capital, as is typical for recently demutualized thrifts.

 

Source:  BHBK IPO Pitchbook.

 

Source:  BHBK IPO Pitchbook.

 

Source:  BHBK IPO Pitchbook.

 

Source:  BHBK IPO Pitchbook.

Nantucket Branch Acquisition

On January 18, 2014, the bank completed its acquisition of three branches on Nantucket Island that operate under the name Nantucket Bank for a purchase price of $10.3 million.  This purchase price equates to a deposit premium of approximately 3.75% on acquired balances of $275M.  The total assets acquired were $285M.  All loans acquired were performing.  The majority of loans was 1-4 Family and CRE and had an all-in blended rate of 4.3%.  Deposits acquired were 90% non-CDs with all-in cost of 34bps.  The transaction is arguably a net positive for shareholders as it continues the bank’s growth plans in attractive markets at a reasonable cost, with attractive balance sheet economics.  According to the bank’s S-1 filing:

The Nantucket Branch Acquisition assisted in the implementation of our business strategy as it added a strong local market share of core deposits and reduced our dependence on wholesale funding and brokered deposits to fund loan growth. The acquisition provided net cash of $151.6 million, the majority of which was subsequently used to pay down Federal Home Loan Bank advances and brokered deposits.  The transaction also changed the interest rate sensitivity of the Bank through the addition of core deposits and the use of cash to reduce short-term wholesale funding and brokered deposits.

Source:  BHBK S-1 Filing.

A description of the acquired B/S:

Assets acquired:

  

   

Cash, net of purchase price

  

$

161,900

  

Loans

  

 

97,466

  

Real property

  

 

10,762

  

Core deposit intangible

  

 

6,041

  

Goodwill

  

 

8,876

  

Accrued interest on loans acquired

  

 

304

  

 

  

 

 

 

Total assets acquired

  

 

285,349

  

  

Liabilities assumed:

  

   

Deposits

  

 

(274,601

Accrued expenses and other liabilities

  

 

(435

 

  

 

 

 

Total liabilities assumed

  

 

(275,036

 

  

 

 

 

Net purchase price

  

$

10,313

  

     
     

Source:  BHBK S-1 Filing.

Loan Portfolio

New management aims to grow and diversify the lending portfolio.  Today the portfolio is predominantly real estate loans (84%) with the majority in 1-4 Family and CRE.  The all-in yield on earning assets is just over 3%, an opportunity for improvement as NIM sits slightly below industry averages.

At March 31,
2014

 

 

At December 31,
2013

 

 

  

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

  

(Dollars in thousands)

 

Real estate:

  

   

 

   

 

   

 

   

One- to four-family residential

  

$

381,459

  

 

 

41.14

 

$

365,707

  

 

 

47.31

Home equity

  

 

64,110

  

 

 

6.91

  

 

 

25,535

  

 

 

3.30

  

Commercial

  

 

313,775

  

 

 

33.84

  

 

 

228,688

  

 

 

29.59

  

Construction

  

 

23,895

  

 

 

2.58

  

 

 

16,559

  

 

 

2.14

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate

  

 

783,239

  

 

 

84.47

  

 

 

636,489

  

 

 

82.34

  

Commercial business

  

 

115,321

  

 

 

12.43

  

 

 

111,154

  

 

 

14.38

  

Consumer

  

 

28,702

  

 

 

3.10

  

 

 

25,372

  

 

 

3.28

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

  

 

927,262

  

 

 

100.00

 

 

773,015

  

 

 

100.00

 

  

   

 

 

 

 

 

   

 

 

 

 

Allowance for loan losses

  

 

(10,346

 

   

 

 

(9,671

 

   

Discount on purchased loans

  

 

(4,964

 

   

 

 

(340

 

   

Deferred loan costs, net

  

 

2,345

  

 

   

 

 

2,343

  

 

   
 

  

 

 

 

 

   

 

 

 

 

 

   

Loans, net

  

$

914,297

  

 

   

 

$

765,347

  

 

   

Source:  BHBK S-1 Filing.

Credit Quality

The bank has a record of pristine credit quality.  Management aims to maintain this profile while growing and diversifying the balance sheet, drawing upon its extensive experience in the Greater Boston banking market.

 

Source:  Hyde Park Bancorp (MHC) per SNL Financial.

 

Source:  BHBK IPO Pitchbook.

 

 

 

 

Investment Securities Portfolio

 

Source:  BHBK IPO Pitchbook.

Deposit Base

The bank’s all-in cost of interest-bearing liabilities is a relatively strong 58 basis points, with potential for substantive improvement as the bank grows and diversifies its business banking relationships.  CDs account for approximately 1/3rd of the deposit base.

 

Source:  Palmetto Bay Capital Management.

Preferred Equity Redemption

BHBK had $18.7 million in Small Business Lending Fund (SBLF) Preferred Equity as of March 2014.  This paper was issued in September 2011.  The bank redeemed its SBLF using proceeds from its recent IPO completed 7/21/14.

 

Sensitivity to Market Risk

The bank is liability sensitive.  According to the S-1 filing, a 200 basis point upward movement in rates would result in a (2.47%) change in NII over a one-year period.  For the same shock in rates, the bank’s EVE would decline (8.8%).  Recent initiatives, such as the Nantucket branch acquisition, coupled with management’s view to grow and diversify the balance sheet, will help rate risk positioning.

Management Team

Name

  

Age

  

Positions Held (1)

William M. Parent

  

52

  

President and Chief Executive Officer of Blue Hills Bank and Blue Hills Bancorp

Jim Kivlehan 

  

53

  

Executive Vice President, Chief Financial Officer of Blue Hills Bank and Blue Hills Bancorp

Thomas E. O’Leary

  

61

  

Executive Vice President, Commercial Banking

Scott Thimann

  

56

  

Executive Vice President, Chief Retail Officer

Robert Driscoll

  

39

  

Senior Vice President, Residential Lending

Carol J. Dubé

  

59

  

Senior Vice President, Chief Information Officer

Karen Marryat

  

51

  

Senior Vice President, Chief Marketing Officer

Lauren Messmore

  

43

  

Senior Vice President, Corporate Strategy

Thomas R. Sommerfield

  

58

  

Senior Vice President, Chief Risk Officer

 

(1)

Positions held relate to Blue Hills Bank, except as indicated.

Source:  BHBK S-1 Filing.

The management team is new and draws upon experienced professionals with commendable track records at larger banking institutions like Citizens (RBS) and Sovereign/Santander.  This level of experience should drive the bank’s growth and diversification strategy in its markets, particularly since banks like Citizens (RBS) have dominant market positions in the Boston markets.  Since 2011, eight new executive officers have been hired post the new CEO in 2010: Senior Commercial Officer, Chief Risk Officer, Chief Retail Officer, Chief Information Officer, Chief Marketing Officer and the CFO.  CEO Parent joined BHBK in 2010; prior, he was Partner and CIO of Grail Partners, a boutique merchant bank.  He has 27 years of experience in the banking industry, including 16 years at Bank of Boston, FleetBoston and Bank of America.  Thomas O’Learly, EVP Commercial Banking, joined in 2011, has 39 years of experience, and was previously at Citizens Bank (RBS).  Jim Kivlehan, CFO, joined in 2013 and was also previously at Citizens Bank (RBS).  Lauren Messmore, SVP Corporate Strategy, joined in 2012 and was previously an investment banker at Citigroup and founded her own boutique firm.  Scott Thimann, EVP and Chief Retail Officer, joined in 2011 and was previously at Sovereign/Santander Bank from 2000-2011.

Board of Directors

12 directors serving three-year staggered terms.

Name

  

Position(s) Held With

Blue Hills Bancorp

  

Age

  

Director
Since

  

Current Term
Expires

David J. Houston, Jr.

  

Chairman of the Board

  

67

  

1977

  

2017

George E. Clancy

  

Director

  

55

  

1996

  

2016

Ken D’Amato

  

Director

  

53

  

2010

  

2015

Brian G. Leary

  

Director

  

58

  

2012

  

2015

Peter J. Manning

  

Director

  

74

  

2010

  

2017

Thomas M. Menino

  

Director

  

71

  

2014

  

2017

Karen B. O’Connell

  

Director

  

50

  

2003

  

2015

William M. Parent

  

President, Chief Executive Officer and Director

  

52

  

2010

  

2016

Ronald K. Perry

  

Director

  

55

  

2012

  

2015

David A. Powers

  

Director

  

65

  

1998

  

2016

Janice L. Shields

  

Director

  

66

  

2010

  

2017

Scott Smith

  

Director

  

48

  

1998

  

2016

Source:  BHBK S-1 Filing.

The Board has many members with high level, senior leadership experience at large banking institutions.  Thomas Menino was former Mayor of Boston for five terms from 1993-2014.  Chairman David Houston Jr. has been on the BOD since 1977 and is a senior member of an independent insurance agency.  Ken D’Amato is Managing Director, Global Equity and Fixed Income at Manulife Asset Management of Boston, MA.  Peter J. Manning is former Vice Chairman of FleetBoston Financial Corporation and joined the BHBK BOD in 2010.

The exceptional caliber of local talent and experience represented on the Board and senior management team is highly uncommon for a community business bank and should drive outperformance in terms of gaining market share in the Greater Boston banking market and achieving sustainable profitability.

Markets

The bank operates in an attractive geography in and around the Boston market area.

Due to our proximity to Boston, our market area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several financial investment companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. As a result, healthcare, high-tech and financial services companies constitute major sources of employment in our regional market area, as well as the colleges and universities that populate the Boston Metropolitan Statistical Area (“MSA”). These factors affect the demand for residential homes, apartments, office buildings, shopping centers, industrial warehouses and other commercial properties. Tourism also is a prominent component of our market area’s economy, as Boston annually ranks as one of the nation’s top tourist destinations.

Source:  BHBK S-1 Filing.

Household income and population projections exceed the national averages, according to SNL Financial:

 

Source:  Hyde Park Bancorp (MHC) per SNL Financial.

Competitive Positioning

The bank ranks in the top 20 by deposit market share in all counties of operation, illustrating both its comparative scarcity value to a prospective acquirer as well as its potential for market share growth.  Total deposits in these counties amount to over $110 billion, illustrating the compelling growth opportunity.

 

Source:  Hyde Park Bancorp (MHC) per SNL Financial.

Precedent Demutualizations in Massachusetts

On average, thrifts demutualize in MA at 75% of TBV with 17.7% capital (TE/TA)…the mean pricing and capital ratio for the group “today” (or, for those institutions that have sold, the most recent time period before sale) is 160% of TBV and 9.7%, respectively.  These metrics suggest a compelling risk/reward for thrift investors in Massachusetts’ demutualization transactions.

 

Precedent Bank & Thrift M&A Transactions since 2010 in Massachusetts

Of most interest to BHBK investors, comparable institutions of size - United Financial Bancorp, Danvers Bancorp and Wainwright Bank & Trust Company - sold for P/TBV multiples of 140%, 184% and 200%, respectively.  All were clean banks with strong profitability (70-80 basis points ROA) and capital ratios (7-10%).  BHBK is similarly well poised to reach these metrics and become a compelling takeout candidate.

 

Model & Valuation

The model was developed independently based on a reading of the bank’s public filings.  The central questions underlying the model are the capacity to which the bank can lever its excess capital through organic growth, share repurchases and dividends, as well as achieve sustainable earnings through improved NIM and lower expenses.  Key model assumptions include:

  1. Pro forma offering (IPO) adjustments in 2Q 2014
  2. Annual balance sheet growth (loans and deposits) of 6%, in-line with historical trends
  3. NIM rises to 3.0% driven by growth, mix improvement and rising rates
  4. Credit profile remains solid as NPAs / Assets remains < 1%.  ALLL maintained at 1.12%
  5. Fee income increases at rate of 4% per year
  6. Operating leverage “right-sized” (i.e. decline in Expenses/Assets) in order to achieve positive earnings, and to reflect core run-rate after integration of Nantucket branches.  An acquirer is likely able to cut expenses more quickly and with greater value for shareholders than BHBK on a standalone basis
  7. Dividends:  none modeled
  8. Share repurchases:  10%/yr starting in June 2014 at market valuation
  9. TCE levered from pro forma 22% in June 2014 to 17% by 2017 (three-year anniversary).  Model does not assume any acquisitions
  10. TBVPS moves from $13.67 per share to $15.55 per share in 2017

Returns and Exit Considerations

We believe the franchise is well positioned to be an attractive takeout candidate given its growth profile, exceptional management team and Board and geographic/market positioning.  If BHBK can lever its excess capital through organic growth and disciplined M&A activity, proving to the market its growth strategy, while reducing expenses to achieve higher ROAs and ROEs, it could garner a higher P/TBV multiple more in-line with peers.  To illustrate the potential returns as based on the model, assuming the long-term average takeout multiple of 1.6x P/TBV, as seen in the MA thrift and M&A tables earlier, this would result in a 2017E nominal value per share of $24.88.  Discounted at 10% back to today, this equates to a $17.40 per share stock price.

Merits

  1. Highly attractive entry valuation / margin of safety for bank of this size (already at critical mass > $1B in assets), caliber (growth trajectory, people talent) and geography (attractive Greater Boston market)
  2. Strong management team and Board of Directors with uncommon talent and resources for a community bank
  3. Strong credit quality
  4. Earnings power upside through enhanced NIM as rates rise and opportunity to diversify lending niches (more commercial loans vs. real estate loans), plus reconfigure deposit mix
  5. Good hedge against broader market, as mutual conversions are generally uncorrelated

Risks

  1. Abundant excess capital (22% TCE ratio) – overcapitalized, dragging returns (ROA, ROE)
  2. Acquisition philosophy and willingness to do deals (banks and branches)
  3. Strategic philosophy – standalone or sell in three years
  4. Growth philosophy – including de novo branching and syndicated loans (participations)
  5. Securities portfolio risk – equity securities
  6. Share repurchases
  7. Dividends
  8. Regulatory risk
  9. Expense management
  10. Credit risk with high growth – special mention loans, classic car portfolio

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1 year restriction on dividends and buybacks is removed in July 2015
 
3 year restriction on being acquired is removed in July 2017
 
Company recieves sell side converage and is "discovered" by investors
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    Description

    I had some trouble pasting in pictures and charts so I set up a scribd link for this write up:

     

    http://www.scribd.com/doc/238655950/Blue-Hills-Bancorp-BHBK-VIC?secret_password=TDiaGm8Wn09ehmPuxkQa

    Blue Hills Bancorp (NASDAQ: BHBK)

     

    Thesis

    BHBK presents a compelling opportunity to invest in a $1.8B, clean, recently demutualized, Boston-based community bank with 22% TCE/TA and growing share in attractive markets, at a discount (0.95x) to tangible book value.  The bank has been strategically repositioning the balance sheet to become a full-service community bank since 2010.  Additionally, it has built a truly exceptional, new executive management team and Board of Directors that have drawn upon high-level talent from larger financial institutions and lending organizations.  The combination of an excellent management team and Board, with a clean franchise of scale in economically-attractive markets positions the company to drive shareholder value, especially at the discounted entry valuation.  We expect BHBK to draw upon its recent track record of growth and expansion, in addition to using the levers described above along with share repurchases and dividends, to lever its excess capital as a result of its recent IPO in connection with its standard demutualization transaction (completed 7/21/14), grow its footprint and create a compelling consolidation target to a prospective acquirer. At similar tangible book value multiples to recent transactions in New England, BHBK would be worth roughly $25/share in 3 years when its restriction on being acquired expires.

    Background – Recent IPO Through Standard Demutualization

    BHBK recently converted from a mutual-owned (MHC) company to a stock-owned (public) company via a standard thrift demutualization transaction.  The offering was completed on 7/21/14 at the adjusted maximum of the range, which resulted in gross proceeds of $278 million, pro forma TCE ratio of 22% and pro forma TBVPS of $13.67 per share.  Today’s stock price of $13/share therefore represents a pro forma entry valuation of 0.95x P/TBV.

    Background – Franchise & Strategy

    Organized in 1871 and reorganized into a mutual holding company structure in 2008, Blue Hills Bancorp is a $1.8B community banking institution with nine full-service branches in the attractive Greater Boston market (southern and eastern MA regions) as well as Nantucket Island (acquired footprint).

     

    Source:  BHBK S-1 Filing.

    The business mix is concentrated in Residential Mortgage and CRE lending, funded by a strong deposit footprint with 60% MMDA and 30% CDs.  According to the S-1 filing, since 2010:

    the Bank has significantly revised its strategic direction and operating strategy, its executive management team and its board of directors. The Bank appointed William M. Parent as its Chief Executive Officer and President in mid-2010 and developed a strategic plan to transform the Bank into a full service community bank serving the needs of retail and business customers residing and operating in eastern Massachusetts. The Bank has appointed seven new directors since 2010, many of whom have direct experience with larger financial institutions or the local communities served by the Bank. In addition, the Bank has hired a new executive management team, with eight of its executive officers joining the Bank since 2011. All of the Bank’s new executive officers have experience with larger financial institutions and commercial lending organizations.

    Source:  BHBK S-1 Filing.

    The bank’s business strategy is focused on lending growth and diversification as it has added approximately 34 employees involved in loan origination, underwriting and servicing over the past few years.  In addition, BHBK is focused on improving its already solid deposit franchise, utilizing mobile products and expanding the franchise via M&A.  We expect share repurchases and dividends to be part of the shareholder value proposition to lever the bank’s excess capital, as is typical for recently demutualized thrifts.

     

    Source:  BHBK IPO Pitchbook.

     

    Source:  BHBK IPO Pitchbook.

     

    Source:  BHBK IPO Pitchbook.

     

    Source:  BHBK IPO Pitchbook.

    Nantucket Branch Acquisition

    On January 18, 2014, the bank completed its acquisition of three branches on Nantucket Island that operate under the name Nantucket Bank for a purchase price of $10.3 million.  This purchase price equates to a deposit premium of approximately 3.75% on acquired balances of $275M.  The total assets acquired were $285M.  All loans acquired were performing.  The majority of loans was 1-4 Family and CRE and had an all-in blended rate of 4.3%.  Deposits acquired were 90% non-CDs with all-in cost of 34bps.  The transaction is arguably a net positive for shareholders as it continues the bank’s growth plans in attractive markets at a reasonable cost, with attractive balance sheet economics.  According to the bank’s S-1 filing:

    The Nantucket Branch Acquisition assisted in the implementation of our business strategy as it added a strong local market share of core deposits and reduced our dependence on wholesale funding and brokered deposits to fund loan growth. The acquisition provided net cash of $151.6 million, the majority of which was subsequently used to pay down Federal Home Loan Bank advances and brokered deposits.  The transaction also changed the interest rate sensitivity of the Bank through the addition of core deposits and the use of cash to reduce short-term wholesale funding and brokered deposits.

    Source:  BHBK S-1 Filing.

    A description of the acquired B/S:

    Assets acquired:

      

       

    Cash, net of purchase price

      

    $

    161,900

      

    Loans

      

     

    97,466

      

    Real property

      

     

    10,762

      

    Core deposit intangible

      

     

    6,041

      

    Goodwill

      

     

    8,876

      

    Accrued interest on loans acquired

      

     

    304

      

     

      

     

     

     

    Total assets acquired

      

     

    285,349

      

      

    Liabilities assumed:

      

       

    Deposits

      

     

    (274,601

    Accrued expenses and other liabilities

      

     

    (435

     

      

     

     

     

    Total liabilities assumed

      

     

    (275,036

     

      

     

     

     

    Net purchase price

      

    $

    10,313

      

         
         

    Source:  BHBK S-1 Filing.

    Loan Portfolio

    New management aims to grow and diversify the lending portfolio.  Today the portfolio is predominantly real estate loans (84%) with the majority in 1-4 Family and CRE.  The all-in yield on earning assets is just over 3%, an opportunity for improvement as NIM sits slightly below industry averages.

    At March 31,
    2014

     

     

    At December 31,
    2013

     

     

      

    Amount

     

     

    Percent

     

     

    Amount

     

     

    Percent

     

     

      

    (Dollars in thousands)

     

    Real estate:

      

       

     

       

     

       

     

       

    One- to four-family residential

      

    $

    381,459

      

     

     

    41.14

     

    $

    365,707

      

     

     

    47.31

    Home equity

      

     

    64,110

      

     

     

    6.91

      

     

     

    25,535

      

     

     

    3.30

      

    Commercial

      

     

    313,775

      

     

     

    33.84

      

     

     

    228,688

      

     

     

    29.59

      

    Construction

      

     

    23,895

      

     

     

    2.58

      

     

     

    16,559

      

     

     

    2.14

      

     

      

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total real estate

      

     

    783,239

      

     

     

    84.47

      

     

     

    636,489

      

     

     

    82.34

      

    Commercial business

      

     

    115,321

      

     

     

    12.43

      

     

     

    111,154

      

     

     

    14.38

      

    Consumer

      

     

    28,702

      

     

     

    3.10

      

     

     

    25,372

      

     

     

    3.28

      

     

      

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Total loans

      

     

    927,262

      

     

     

    100.00

     

     

    773,015

      

     

     

    100.00

     

      

       

     

     

     

     

     

       

     

     

     

     

    Allowance for loan losses

      

     

    (10,346

     

       

     

     

    (9,671

     

       

    Discount on purchased loans

      

     

    (4,964

     

       

     

     

    (340

     

       

    Deferred loan costs, net

      

     

    2,345

      

     

       

     

     

    2,343

      

     

       
     

      

     

     

     

     

       

     

     

     

     

     

       

    Loans, net

      

    $

    914,297

      

     

       

     

    $

    765,347

      

     

       

    Source:  BHBK S-1 Filing.

    Credit Quality

    The bank has a record of pristine credit quality.  Management aims to maintain this profile while growing and diversifying the balance sheet, drawing upon its extensive experience in the Greater Boston banking market.

     

    Source:  Hyde Park Bancorp (MHC) per SNL Financial.

     

    Source:  BHBK IPO Pitchbook.

     

     

     

     

    Investment Securities Portfolio

     

    Source:  BHBK IPO Pitchbook.

    Deposit Base

    The bank’s all-in cost of interest-bearing liabilities is a relatively strong 58 basis points, with potential for substantive improvement as the bank grows and diversifies its business banking relationships.  CDs account for approximately 1/3rd of the deposit base.

     

    Source:  Palmetto Bay Capital Management.

    Preferred Equity Redemption

    BHBK had $18.7 million in Small Business Lending Fund (SBLF) Preferred Equity as of March 2014.  This paper was issued in September 2011.  The bank redeemed its SBLF using proceeds from its recent IPO completed 7/21/14.

     

    Sensitivity to Market Risk

    The bank is liability sensitive.  According to the S-1 filing, a 200 basis point upward movement in rates would result in a (2.47%) change in NII over a one-year period.  For the same shock in rates, the bank’s EVE would decline (8.8%).  Recent initiatives, such as the Nantucket branch acquisition, coupled with management’s view to grow and diversify the balance sheet, will help rate risk positioning.

    Management Team

    Name

      

    Age

      

    Positions Held (1)

    William M. Parent

      

    52

      

    President and Chief Executive Officer of Blue Hills Bank and Blue Hills Bancorp

    Jim Kivlehan 

      

    53

      

    Executive Vice President, Chief Financial Officer of Blue Hills Bank and Blue Hills Bancorp

    Thomas E. O’Leary

      

    61

      

    Executive Vice President, Commercial Banking

    Scott Thimann

      

    56

      

    Executive Vice President, Chief Retail Officer

    Robert Driscoll

      

    39

      

    Senior Vice President, Residential Lending

    Carol J. Dubé

      

    59

      

    Senior Vice President, Chief Information Officer

    Karen Marryat

      

    51

      

    Senior Vice President, Chief Marketing Officer

    Lauren Messmore

      

    43

      

    Senior Vice President, Corporate Strategy

    Thomas R. Sommerfield

      

    58

      

    Senior Vice President, Chief Risk Officer

     

    (1)

    Positions held relate to Blue Hills Bank, except as indicated.

    Source:  BHBK S-1 Filing.

    The management team is new and draws upon experienced professionals with commendable track records at larger banking institutions like Citizens (RBS) and Sovereign/Santander.  This level of experience should drive the bank’s growth and diversification strategy in its markets, particularly since banks like Citizens (RBS) have dominant market positions in the Boston markets.  Since 2011, eight new executive officers have been hired post the new CEO in 2010: Senior Commercial Officer, Chief Risk Officer, Chief Retail Officer, Chief Information Officer, Chief Marketing Officer and the CFO.  CEO Parent joined BHBK in 2010; prior, he was Partner and CIO of Grail Partners, a boutique merchant bank.  He has 27 years of experience in the banking industry, including 16 years at Bank of Boston, FleetBoston and Bank of America.  Thomas O’Learly, EVP Commercial Banking, joined in 2011, has 39 years of experience, and was previously at Citizens Bank (RBS).  Jim Kivlehan, CFO, joined in 2013 and was also previously at Citizens Bank (RBS).  Lauren Messmore, SVP Corporate Strategy, joined in 2012 and was previously an investment banker at Citigroup and founded her own boutique firm.  Scott Thimann, EVP and Chief Retail Officer, joined in 2011 and was previously at Sovereign/Santander Bank from 2000-2011.

    Board of Directors

    12 directors serving three-year staggered terms.

    Name

      

    Position(s) Held With

    Blue Hills Bancorp

      

    Age

      

    Director
    Since

      

    Current Term
    Expires

    David J. Houston, Jr.

      

    Chairman of the Board

      

    67

      

    1977

      

    2017

    George E. Clancy

      

    Director

      

    55

      

    1996

      

    2016

    Ken D’Amato

      

    Director

      

    53

      

    2010

      

    2015

    Brian G. Leary

      

    Director

      

    58

      

    2012

      

    2015

    Peter J. Manning

      

    Director

      

    74

      

    2010

      

    2017

    Thomas M. Menino

      

    Director

      

    71

      

    2014

      

    2017

    Karen B. O’Connell

      

    Director

      

    50

      

    2003

      

    2015

    William M. Parent

      

    President, Chief Executive Officer and Director

      

    52

      

    2010

      

    2016

    Ronald K. Perry

      

    Director

      

    55

      

    2012

      

    2015

    David A. Powers

      

    Director

      

    65

      

    1998

      

    2016

    Janice L. Shields

      

    Director

      

    66

      

    2010

      

    2017

    Scott Smith

      

    Director

      

    48

      

    1998

      

    2016

    Source:  BHBK S-1 Filing.

    The Board has many members with high level, senior leadership experience at large banking institutions.  Thomas Menino was former Mayor of Boston for five terms from 1993-2014.  Chairman David Houston Jr. has been on the BOD since 1977 and is a senior member of an independent insurance agency.  Ken D’Amato is Managing Director, Global Equity and Fixed Income at Manulife Asset Management of Boston, MA.  Peter J. Manning is former Vice Chairman of FleetBoston Financial Corporation and joined the BHBK BOD in 2010.

    The exceptional caliber of local talent and experience represented on the Board and senior management team is highly uncommon for a community business bank and should drive outperformance in terms of gaining market share in the Greater Boston banking market and achieving sustainable profitability.

    Markets

    The bank operates in an attractive geography in and around the Boston market area.

    Due to our proximity to Boston, our market area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several financial investment companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. As a result, healthcare, high-tech and financial services companies constitute major sources of employment in our regional market area, as well as the colleges and universities that populate the Boston Metropolitan Statistical Area (“MSA”). These factors affect the demand for residential homes, apartments, office buildings, shopping centers, industrial warehouses and other commercial properties. Tourism also is a prominent component of our market area’s economy, as Boston annually ranks as one of the nation’s top tourist destinations.

    Source:  BHBK S-1 Filing.

    Household income and population projections exceed the national averages, according to SNL Financial:

     

    Source:  Hyde Park Bancorp (MHC) per SNL Financial.

    Competitive Positioning

    The bank ranks in the top 20 by deposit market share in all counties of operation, illustrating both its comparative scarcity value to a prospective acquirer as well as its potential for market share growth.  Total deposits in these counties amount to over $110 billion, illustrating the compelling growth opportunity.

     

    Source:  Hyde Park Bancorp (MHC) per SNL Financial.

    Precedent Demutualizations in Massachusetts

    On average, thrifts demutualize in MA at 75% of TBV with 17.7% capital (TE/TA)…the mean pricing and capital ratio for the group “today” (or, for those institutions that have sold, the most recent time period before sale) is 160% of TBV and 9.7%, respectively.  These metrics suggest a compelling risk/reward for thrift investors in Massachusetts’ demutualization transactions.

     

    Precedent Bank & Thrift M&A Transactions since 2010 in Massachusetts

    Of most interest to BHBK investors, comparable institutions of size - United Financial Bancorp, Danvers Bancorp and Wainwright Bank & Trust Company - sold for P/TBV multiples of 140%, 184% and 200%, respectively.  All were clean banks with strong profitability (70-80 basis points ROA) and capital ratios (7-10%).  BHBK is similarly well poised to reach these metrics and become a compelling takeout candidate.

     

    Model & Valuation

    The model was developed independently based on a reading of the bank’s public filings.  The central questions underlying the model are the capacity to which the bank can lever its excess capital through organic growth, share repurchases and dividends, as well as achieve sustainable earnings through improved NIM and lower expenses.  Key model assumptions include:

    1. Pro forma offering (IPO) adjustments in 2Q 2014
    2. Annual balance sheet growth (loans and deposits) of 6%, in-line with historical trends
    3. NIM rises to 3.0% driven by growth, mix improvement and rising rates
    4. Credit profile remains solid as NPAs / Assets remains < 1%.  ALLL maintained at 1.12%
    5. Fee income increases at rate of 4% per year
    6. Operating leverage “right-sized” (i.e. decline in Expenses/Assets) in order to achieve positive earnings, and to reflect core run-rate after integration of Nantucket branches.  An acquirer is likely able to cut expenses more quickly and with greater value for shareholders than BHBK on a standalone basis
    7. Dividends:  none modeled
    8. Share repurchases:  10%/yr starting in June 2014 at market valuation
    9. TCE levered from pro forma 22% in June 2014 to 17% by 2017 (three-year anniversary).  Model does not assume any acquisitions
    10. TBVPS moves from $13.67 per share to $15.55 per share in 2017

    Returns and Exit Considerations

    We believe the franchise is well positioned to be an attractive takeout candidate given its growth profile, exceptional management team and Board and geographic/market positioning.  If BHBK can lever its excess capital through organic growth and disciplined M&A activity, proving to the market its growth strategy, while reducing expenses to achieve higher ROAs and ROEs, it could garner a higher P/TBV multiple more in-line with peers.  To illustrate the potential returns as based on the model, assuming the long-term average takeout multiple of 1.6x P/TBV, as seen in the MA thrift and M&A tables earlier, this would result in a 2017E nominal value per share of $24.88.  Discounted at 10% back to today, this equates to a $17.40 per share stock price.

    Merits

    1. Highly attractive entry valuation / margin of safety for bank of this size (already at critical mass > $1B in assets), caliber (growth trajectory, people talent) and geography (attractive Greater Boston market)
    2. Strong management team and Board of Directors with uncommon talent and resources for a community bank
    3. Strong credit quality
    4. Earnings power upside through enhanced NIM as rates rise and opportunity to diversify lending niches (more commercial loans vs. real estate loans), plus reconfigure deposit mix
    5. Good hedge against broader market, as mutual conversions are generally uncorrelated

    Risks

    1. Abundant excess capital (22% TCE ratio) – overcapitalized, dragging returns (ROA, ROE)
    2. Acquisition philosophy and willingness to do deals (banks and branches)
    3. Strategic philosophy – standalone or sell in three years
    4. Growth philosophy – including de novo branching and syndicated loans (participations)
    5. Securities portfolio risk – equity securities
    6. Share repurchases
    7. Dividends
    8. Regulatory risk
    9. Expense management
    10. Credit risk with high growth – special mention loans, classic car portfolio

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    1 year restriction on dividends and buybacks is removed in July 2015
     
    3 year restriction on being acquired is removed in July 2017
     
    Company recieves sell side converage and is "discovered" by investors

    Messages


    SubjectRE: RE: RE: Thoughts
    Entry09/04/2014 05:07 PM
    Memberjcoviedo
    Management and the board bought 3.3% of the ipo. This has only been public a month so I'm not shocked there haven't been open market purchases.
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