Independent Bank Corp. (INDB) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Independent Bank Corp. Third Quarter 2026 Earnings Call. [Operator Instructions] Before proceeding, please note that during this call, we will be making forward-looking statements. Actual results may differ materially from these statements due to a number of factors, including those described in our earnings release and other SEC filings. We undertake no obligation to publicly update any such statements. In addition, some of our discussion today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures, including reconciliation to GAAP measures, may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the Investor Relations section of our website. Finally, please note that this event is being recorded. I would now like to turn the call over to Jeff Tengel, CEO. Please go ahead.

Thank you. Good morning, and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. We are pleased with our third quarter results. We generated solid loan and deposit growth maintain the core net interest margin despite heightened deposit competition continue to aggressively buy back stock, managed our expenses tightly and had very modest net charge-off activity. Our deposit franchise continued to differentiate itself producing over $230 million of non-time deposits, representing [ 5.4% ] annualized growth. While up 6 basis points from last quarter, our 142 cost of deposits remains industry-leading. These results were achieved in a very competitive environment with growing expectations that the Fed will continue to move rates higher. On the lending front, we generated total loan growth of $158 million or nearly 3.5% annualized. We experienced growth across a number of asset classes, including C&I, commercial real estate, home equity and residential mortgage. Excluding the impact of the $11.5 million runoff from our dealer floorplan business, which has been fully exited, our C&I loans rose by $61 million or a healthy 5% on an annualized basis. While C&I growth was not as robust as in the second quarter, we have a very healthy pipeline heading into the fourth quarter and had several loan closings slip into October. Commercial real estate, including construction loans, grew by $31 million during the quarter, primarily reflecting increased construction draw activity and a reduced level of payoffs. We funded $202 million in new relationship-based commercial real estate loans in the third quarter. Loan payoffs and paydowns were down 27% from the second quarter, and our CRE concentration now stands at $278. On September 30, our approved commercial loan pipeline totaled $574 million, up from $510 million on June 30. Our loan pipeline has benefited from strong origination equity, new hires across several business segments and a pivot by the legacy Enterprise Bank relationship managers from defense to offense. Despite the competitive loan and deposit environment, the third quarter saw stability in our adjusted NIM. This reflects the favorable repricing of loan and bond cash flows as well as pricing discipline across both our loan and deposit portfolios. Mark will elaborate on our NIM during his comments. As the environment continues to shift, we recognize the best use of our capital is to build deep profitable customer relationships and not grow our balance sheet at thin risk-adjusted spreads. This means we will continue to support our customers, be competitive for the right deals and grow prudently. We also continue to maintain a proactive posture in returning excess capital to shareholders. Capital management will remain a key priority for the balance of the year. Regarding asset quality, while we continue to see movement in and out of our nonperforming loans and criticized and classified loan buckets, the levels are consistent with our historical credit performance. Our net charge-offs were just 2 basis points for the third quarter and have averaged just 6 basis points over the last 5 quarters. Our loan loss provision represented 14 basis points of average loans in the third quarter and has averaged 12 basis points over the last 5 quarters, excluding the impact of the Enterprise acquisition. Over the last 20 years, our loan loss provision and net charge-offs have had an average of 21 basis points and 16 basis points of average loans, respectively. The economic landscape continues to be challenged by higher interest rates, inflationary concerns the Iran war, tariffs, among other things. Importantly, however, we have not seen any degradation of credit from these pressures. We have seen a few instances where higher rates have resulted in business owners pausing planned spending and/or projects, particularly in the commercial real estate space. Excluding nonrecurring core systems conversion costs, expenses were down compared to the second quarter. We remain vigilant regarding our expense levels as we've stated in the past, given the investments we have made in people and technology over the past few years, we believe we have the scale to continue to grow without significant additions to our expense base. Of note, we have elected to move the timing of our planned systems upgrade from October to February to allow for additional preparation and ensure a smooth well-managed implementation. The revised time line provides additional flexibility to complete the necessary testing and readiness activities while minimizing potential disruption to our operations and customers. We believe this measured approach positions us for a successful implementation and does not change our overall objectives for the upgrade, which include enhanced operational efficiencies and additional product capability. I continue to tell the team, you only get 1 chance to do this well and minimize customer impact. So we are laser-focused on getting it done right. We've started to beta test some early AI applications, the first use cases will be internally oriented and will not have any customer impact. As I have mentioned in the past, this will allow us to develop muscle memory and gain confidence in our ability to execute before we take on bigger, more impactful applications. Beginning in November, we will consolidate our corporate headquarters into a single location at 1 technology place in Rockland Mass, bringing nearly 400 employees together from 5 separate office buildings. In addition to the operational efficiencies, we expect this move to foster greater collaboration, strengthen teamwork and further enhance our corporate culture. Our strategy remains straightforward, drive organic growth through new and existing relationships, maintain disciplined underwriting, generate positive operating leverage and deploy our strong capital position to create long-term shareholder value. I want to thank all of the Rockland Trust employees for their tremendous efforts on a daily basis. Every measure of our success is a direct result of their commitment. On that note, I will turn it over to Mark.

Thanks, Jeff. To summarize the quarter results, 2026 third quarter net income was $89.7 million and diluted EPS was $1.90, representing a 12% increase over prior quarter EPS results. The quarter results reflect record earnings and EPS for the bank and showcase our continued growth and overall profitability. Return on assets for the quarter was 1.42%, and return on average tangible common equity was 15.4%. Both metrics are already meeting profitability targets we set for the fourth quarter of this year. Though our eyes are set on continuing to improve profitability from these levels, there are a lot of moving pieces, and as such, we will provide full year 2027 guidance with our fourth quarter results. A key driver of the third quarter earnings increase was the overall increase in net interest income. With a strong rebound in overall deposit balances, including an increase in average deposits of over $630 million, the overall average balance sheet grew nicely with higher cash, securities and loan growth, fueling a $15 million increase in interest income versus the prior quarter. Countering the growth in interest income, total cost of deposits increased 6 basis points for the quarter. The net interest margin for the quarter of 3.89% increased 4 basis points from the prior quarter as a result of increased purchase accounting benefit, while the adjusted core margin, excluding purchase accounting and other noncore items, was flat at 3.76%. The average deposit increase that I just referenced was driven by growth across all segments, consumer business and municipal. However, due to typical seasonality, the quarter end balances reflected solid growth in the Business and Consumer segments, while municipal balances were down quarter-over-quarter. It's no secret that deposit rate competition is very high. Our approach remains steadfast, be competitive, grow prudently and reward strong customer relationships. On the loan side, as Jeff alluded to, we are seeing really good progress in a very competitive environment. As we discussed last quarter, the improved pipelines and anticipated closing activity led to a modest increase in total CRE and construction balances, while C&I grew at a 4% annualized rate. We did anticipate a slightly higher growth result in C&I. However, the activity remains very strong with approximately $40 million of anticipated Q3 fundings that got pushed into the first couple of weeks of October. On the consumer side, with long-term rates pushing up higher, home equity demand was very strong with approximately 12% annualized growth for the quarter, while residential mortgage activity remains challenged. Shifting gears a bit towards capital management. During the third quarter, we repurchased $57.4 million in capital, executing on our long-term goal of prudently returning excess capital to shareholders. As of September 30, our CET1 ratio sits at 12.7%, and our tangible capital ratio was at 9.4%. We do recognize the higher interest rate environment has already put some pressure on other comprehensive income within the capital stack. However, our strong overall capital and liquidity levels combined with a close monitoring of both our available-for-sale and held-to-maturity securities portfolios will continue to afford us the flexibility to stay aggressive with our buyback activity. Rounding out the overall financial position update on the borrowing side, we paid off a maturing $100 million FHLB borrowing and we paid down $100 million of our $125 million holding company line of credit with the remaining $25 million balance converting into a term debt structure. In addition, we executed on a new $125 million holding company 3-year term loan with pricing at 1 month SOFR plus 170 basis points. I'll switch gears now to asset quality, and we'll highlight the following notable items for the third quarter. Total nonperforming assets increased to $126.2 million or 0.5% of total assets. The increase is primarily driven by 1 office loan currently in workout status. This 1 loan has a newly established $6.5 million specific reserve. That reserve, along with some smaller moving pieces within the allowance model drove a $6.5 million provision for loan loss for the quarter. Total criticized and classified loans remained relatively stable at 3.9% of total commercial loans. And while net charge-offs for the quarter remained low at only 2 basis points annualized. We remind folks that we have approximately $17 million of established specific reserves in the commercial book that we do anticipate will be charged off over the next couple of quarters. And lastly, the uptick in delinquencies is driven primarily by both the new to nonperforming loan as well as previously impaired workout loans reaching maturity dates. Moving now to noninterest items. Fee income of $41.2 million was down approximately 3% from the prior quarter. While deposit interchange and ATM fees all experienced increases, overall wealth management income decreased due primarily to elevated tax prep fees in the second quarter, while the higher interest rate environment softened demand in saleable mortgage banking and loan level swap activity. On the expense side, the quarterly results reflect prudent expense management across all major categories. I'll highlight a few unique items in looking at quarter-over-quarter changes. First, within salaries and benefits, the third quarter results included a $1 million benefit relating to the fair valuation of life insurance split dollar benefits. The FDIC assessment expense decreased as a result of improved ratings driving a lower premium, and that does include an approximate $400,000 retroactive adjustment. Within other noninterest expense, the prior quarter expense included approximately $900,000 of expense associated with annual director equity grants with minimal related expense in the third quarter. And as an update on our core inversion project, we incurred approximately $2.2 million of expenses associated with the project in the quarter, bringing the year-to-date total to $5.5 million. With the shift, as Jeff mentioned now to a 2027 Q1 conversion date, we anticipate an additional $1.5 million to $2 million of onetime expenses to be incurred over the next couple of quarters with the majority of that to be incurred in the fourth quarter. And lastly, as expected, the tax rate stayed relatively consistent at 23.3%. With that, I'll now finish up by providing fourth quarter 2026 guidance. Regarding loan growth, we estimate [ Korean ] construction to increase at a low single-digit annualized percentage while for C&I, we anticipate a mid-single-digit annualized percentage increase. Regarding consumer real estate balances, we anticipate home equity to remain strong with high single-digit percentage annualized growth while mortgage balances are anticipated to stay relatively flat or low single-digit percentage increase. For deposits, we also anticipate some level of seasonality impacting period-end balances with point-in-time deposits likely staying relatively flat to a low single-digit annualized growth rate. And as more and more variables come into play regarding net interest income, we think it is appropriate to also guide net interest income dollars in addition to the margin. Regarding net interest income, we anticipate a modest increase versus third quarter results. As a reminder, the third quarter benefited from the slightly elevated loan accretion and large seasonal increases in deposits that drove a big increase in average earning assets for the third quarter. Regarding the margin, if we assume no further Federal Reserve action, we would anticipate the reported margin to land slightly north of 3.9% for the fourth quarter, and a reminder that does include an estimated 10 basis point benefit from loan accretion. If the Fed increases again in the fourth quarter with no major changes on the longer end of the curve, we would anticipate a couple of basis points reduction as a result. Our fee income is anticipated to grow in the low single-digit percentage range. And on the expense side, we anticipate operating expenses, which excludes system conversion costs to be up slightly over third quarter operating expenses. And as I just mentioned, we anticipate approximately $1 million to $1.5 million of onetime expense related to the core conversion in the quarter. Lastly, we anticipate no material changes to the tax rate. And that concludes my comments. And with that, we will now open it up for questions.

[Operator Instructions] Our first question is from the line of Feddie Strickland from Hovde Group.

Jeff and Mark, I just start on the credit side. Can you provide any more detail on the office credit that entered nonaccrual this quarter, geography type and just expectations for the workout process there?

Sure. It's a local office loan. Basically, another single tenant that is looking to leave and is planned to vacate. So it will essentially convert into a [indiscernible] office building. We're working with the sponsor. There is a potential plan to convert that facility to multifamily. That's early stages in terms of that process. So right now, we thought it was appropriate to look at an appraisal and evaluation as an empty office building as well as a potential increased value as a multifamily conversion, and we reserve down to the average of those balances, which is the $6.5 million reserve.

The other thing I would add is the sponsor has a history of supporting their projects. And so they've been supporting this one. We proactively put it on nonperforming status, and they're looking for a partner to help them with the transition to a multifamily property. So it will probably take a little while for it to work itself out, but we do feel like there's some -- a little bit of optimism based on the sponsorship.

That's a good point. So it had been performing up until September 30, just given the loss exposure and the likely resolution we thought it was appropriate to put it on discretionary nonaccrual.

Got it. And just more broadly, I think you've got about $17 million or so classified office coming due in the fourth quarter. Can you just give us a high level of kind of how you think about those they come due?

Yes. The good news there, Feddie, I guess, that's 1 loan. So -- and just a reminder, that is 1 that actually went to nonaccrual last quarter. We also have a $6 million reserve on that loan already established. So it's being marketed for sale. We've seen some early interest. So we're hopeful for an early 2027 resolution on that, but that's 1 loan with a $6 million reserve on it.

Got it. If I can just squeeze in 1 more on loan growth. I like you've had some pretty solid momentum on the loan side, a good pipeline building there. How should we think about the time line for that getting deployed? And can you remind us on typical seasonality?

Yes. The C&I loan growth, I think, is not very seasonal, in part because a lot of the growth has been new client acquisition. And so that hasn't been very seasonal side. My expectations on the C&I side is we're going to continue to see kind of that mid-single-digit growth that we just talked about through the fourth quarter and into '27. The commercial real estate portfolio is a little bit different. Obviously, we grew a little bit this quarter, in part because of the construction loan draws and the lack of pay downs. If you recall, we had outsized paydowns in the second quarter, which really muted our loan growth in that asset class. We did not see the same elevated level of payoffs in the third quarter. And while rising interest rates make -- can make it a challenge for new projects, it also makes it more difficult to refinance into a lower rate. So we think the payoffs as we go forward, hopefully will stay at a historical level, and we won't see the elevated payoffs we saw in the second quarter. I don't know, Mark, if you want to comment on the consumer portfolio.

Yes. Similar to the third quarter results, I would expect you'll see home equity demand continue to stay pretty strong. And for the same reason, Jeff just talked about so that some of the CRE dynamics, certainly, the higher interest rates is challenging, salable mortgage volume. A lot of what we're seeing now is it's basically 80% purchase, 20% refi. And most of that purchase, if there's an adjustable rate demand, we will portfolio that. So you may see a little bit of portfolio growth, but I would expect mortgage banking income to stay challenged.

Your next question is from the line of Justin Crowley from Piper Sandler.

Wanted to start off on the NIM. Mark, do you have a detail on just how the margin progressed through the quarter, where that ended the period? And then maybe just also the spot cost of deposits, if you have it?

Sure. So we did see a gradual increase into September. I will caveat, so the spot NIM for September was $381 million. But you'll start to see a little bit of noise there because the securities portfolio will print at a meaningfully higher yield as you see a little bit more of that OCI unrealized loss in that number. We can certainly going forward, think about maybe giving that yield also on kind of an adjusted book basis. But for now, you'll see a little bit of elevated yields in the securities book just because of that loss piece embedded in it. And we did a better job of shifting some of that excess cash into the securities portfolio. So just the mix of earning assets got better as the quarter progressed. So that drove a bit of a lift in the margin over probably where July was where we saw probably the biggest impact on the cost of deposits hitting the NIM. So if I think through to the fourth quarter, spot cost of deposits for September was 1.44%, 1.44%. So I would expect to see a bit more deposit cost pressure heading into the fourth quarter. What you're not seeing in the third quarter margin results is the front end of the curve, index-based loans getting the benefit on loan yields. So we'll see a little bit of acceleration in loan yields out of the gate. We'll still have the repricing benefit in both loans and securities. So I do expect earning asset -- the asset yields to improve nicely. I'll expect deposit costs to go up a little bit. But I do think we'll be able to increase the adjusted core margin by a few basis points here. Does that make sense? There's a lot of moving pieces there. Hopefully, I gave a little bit of color on each component.

Yes. No, that's super helpful. I appreciate that. I guess like any early read on how you think that margin could behave as we get into next year with maybe a couple of more hikes on the table? And maybe just more thematically as I know you'll get into formal outlook from January, but you've got that constant debate between defending NIM or tolerating some pressure to grow NII. So just kind of curious how you're thinking about that moving forward.

Yes. I know in a number of conversations over the last quarter or 2, we've been asked is there a realistic expectation for a 4% NIM. I think the answer there is still, yes, particularly because of that back book repricing benefit with rates continuing to inch up a bit higher. You're seeing really strong lift in the securities yields with over $500 million of cash flow expected over the next 4 to 5 quarters. That alone can drive upwards of 7 basis points of expansion in the margin. So assuming we can equalize any Fed action with loan yields and deposit costs, that back book repricing would still drive some pretty good margin expansion over the next 4 or 5 quarters. So I do think there is a path to end of '27 looking at a 4% margin.

Okay. Got it. And then if I could just squeeze maybe one last one. Just on the buyback, you've got at least the optics of OCI moving against you, but what's the overall thinking there? And could you look to get even more active just given how the stock and really the whole group traded over the past couple of months?

It's a fair question. I would reaffirm certainly, that expectation of 100% of profits being returned via common dividend and buyback is still the expectation. Right now, I don't know if we'll get much more aggressive than that. I've always talked about just balancing the funding of that and continuing to fund through bank profits is important. But we certainly have the capacity, I think, in the appetite to do a little bit more. But I'd say a minimum level of 100% of profits, inclusive of the dividend.

Your next question comes from the line of Laurie Hunsicker from Seaport Research Partners.

Just wanted to circle back to credit here. I know the jump the nonperformers, it looks like, as you said, was all August, but I just wanted to get the actual dollar amount. Was that a $22 million loan then or do to have a better number?

Yes. Sorry, we didn't make that clear. It is a $22 million loan, $22.4 million.

$22.4 million. Okay, great. And then obviously -- so if I'm just looking at the breakdown of the $62 million in nonperformers, office nonperformers. So $22.4 million is the new nonperformer, you still have that $22 million SNC? Or is there a better balance on that one?

Yes, that's paid down a little bit, Laurie. That's basically $22 million even now, $21.9 million, $22 million, right around there.

Okay. And is there still a thought that, that 1 might come current in the fourth quarter or what you mean?

I think it will be January of 2027, if I understand sort of the PR 18 month -- sorry, 6-month performance period. So I think it's going to be a Q1 event. But yes, it is still on track returning to accrual.

That's great. Okay. And then the $17 million that you have in Life Sciences nonperformers, is that your only nonperformer in Life Sciences?

Yes. It's about a $100 million portfolio, and I'm pretty certain that's the only nonperformer. And just a reminder on that one, Laurie, we also have a [indiscernible] reserve on that. That's the other $17 million with our lodge reserve.

Okay. Okay. Great. And any thoughts on when we might see movement on that one?

Yes. I'm hoping if we could get that resolved by calendar year, that would be great, it could spill over into the first quarter. That's a little of my prepared comments. Just a reminder, between the new nonperformer in this loan, there's $12 million plus of reserves. There's another $1.6 million on another office property that is a much longer, I think it's a 2030 maturity date. But there is a little over $14 million in reserves, $2 million of which we hope to reserve -- I mean, to resolve in the next couple of quarters. So we will -- you will see those charge-offs come through when they get resolved. But as I mentioned, the good news is the loss has been taken for the most part. So it should not result in much more needed provision levels.

Yes. Laurie, we -- because we have a lot of conversations going on now with a handful of the larger office loan, and we feel pretty good about the quality of the dialogue and moving forward, resolving them, as Mark suggested, there is some loss content in some of those, but we're aggressively moving them off the balance sheet and for the most part, working with cooperative sponsors in order to do that.

Okay. Okay. And then just sort of last question here on credit. So within that $62 million bucket of office nonperformers, that leaves, I don't know, $5 million or $6 million? What is that?

We have -- bear with me here, there is the... [Technical Difficulty]