Independent Bank Corp.

Good day and welcome to the INDB Independent Bancorp Third Quarter 2025 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone cell. To withdraw your question, please press star then two. 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 may be accessed via the investor relations section of our website. Finally, please note this event is being recorded. I would now like to turn the conference over to Jeff Tangle, CEO. Please go ahead.

Good morning, and thanks for joining us today. I'm accompanied this morning by CFO and head of consumer lending, Mark Ruggiero. We had a busy third quarter. We closed on the enterprise transaction on July 1st and completed the systems conversion this past weekend. We posted solid financial results and continue to make progress on several of our strategic initiatives. Results for the third quarter reflect continued NIM improvement, strong CNI loan growth, solid growth in low-cost deposits, lower credit costs, and the beginning of the realization of cost savings from the enterprise acquisition. Our PPNR return on average assets was 1.7% on an operating basis, and our operating return on average tangible common equity improved 283 basis points to 13.2%. I wanted to focus most of my comments on the enterprise integration and conversion. Before we get into some of the specifics, I would like to highlight one important difference in this transaction. The typical pattern in most of the acquisitions I've been involved in is for the acquired CEO to get a big payday and ride off into the sunset. In the case of Enterprise, their former chairman and founder, George Duncan, remains actively involved. He is an advisor to our board, chairs the newly created Lowell Advisory Board, and continues to be an advocate for Rockland Trust and the community. There are several other senior executives from Enterprise who also continue to be a resource and advocate for us. The involvement and insights provided by George and his colleagues have been invaluable as we bring these two banks together. Simply put, they care. Regarding the integration, things went extremely well. We've had great collaboration between the teams post-close and the lead-up to the systems integration and conversion that took place this past weekend. While it's still early, we think the conversion went exceptionally well. Many colleagues across various business lines commented on how this transaction felt different than others they were involved in. The level of teamwork and appreciation for what each side brought to the table was a common theme across many I spoke with. For Rockland Trust colleagues, we have been open to acknowledge ways in which the Enterprise Bank did things differently and perhaps better, and we have already adopted some practices and approaches from Enterprise. On the commercial banking side, we've retained almost 100% of client-facing personnel and have experienced negligible customer loss. Obviously, keeping the lenders has helped retain the customers. The enterprise lenders are fully embracing Rockland Trust's diverse lending product set as well as our treasury management and fee income offerings. As evidence of this engagement, enterprise bankers' originations for the third quarter this year were 27% higher than the prior year period. This is a testament to my comment last quarter where I highlighted our similar credit culture. As such, there has not been the typical transition period where the acquired bankers must figure out where the new bank's credit appetite is. A key initiative going forward will be to continue to cross-sell deeper into this enterprise customer base. On the retail banking side, it's important to emphasize that no enterprise branches were closed and all enterprise branch employees were retained. There are many strategic and tactical methodologies that we have found to be beneficial and will be working to incorporate those at Rockland. These include incentive plans, position responsibilities within a branch, and de novo branch openings. Excluding brokered funds, deposit retention at Enterprise has been better than expected. We are also eager to bring our broader consumer lending product set to this market, with early activity indicating the team is well-positioned to introduce both mortgage and home equity offerings to further support these strong communities. Within our investment management group, we've been able to retain all employees we had targeted. The caliber of talent, the strength of the client base, and the depth of relationships between colleagues and clients are outstanding. At both Rockland Trust and Enterprise, at a client-centric focus and the cultural integration has been excellent. In summary, success is driven by having talented and engaged employees. It was great to note that over 90% of enterprise employees who had a job offer extended accepted that offer. We can't be more excited about the merits of this transaction. Shifting gears a bit to the general business conditions in the current environment, we can now add the government shutdown to the existing list of tariffs, government funding, and inflation and unemployment that weigh on clients' minds. Overall, the word I think our clients would use to characterize all this is uncertainty. yet our client base remains resilient. The recent AIM poll, which is the Associated Industries of Massachusetts, showed that their Massachusetts business confidence was in the high 40s, right where it's been for the last five months. A score of 50 is considered negative. Of note, the poll was taken prior to the government shutdown. Turning to results at INDB, I would like to touch on just a few financial highlights before I turn it over to Mark. First, C&I loans grew organically at a 13% annualized rate. This represents continued strong performance in our legacy markets like Plymouth County, coupled with some of our newer initiatives maturing. Second, commercial real estate loan balances declined organically at a 6.7% annualized rate due to normal amortization and the intentional reduction of transactional CRE business. We've talked in the past about getting our CRE concentration below 300%. As expected, the enterprise acquisition resulted in our CRE concentration increasing. However, the quarter end number landed at 295%, indicating we have quickly met our challenge to get our concentration below 300%. Despite this, there remains additional transactional CRE. We wish to exit as quickly and as economically as possible while still serving our legacy client base. In all, we see a clear path for the bank to return to a rate of loan growth more commensurate with our solid deposit growth. Third, we think generating organic demand deposit growth of 5% annualized in the third quarter, which has been an historical strength of ours. DDAs represent a healthy 28% of overall deposits, about where we were pre-pandemic. In the third quarter, the cost of deposits was 1.58%, highlighting the immense value of our deposit franchise. Lastly, our wealth management business continues to be a key value driver. We grew our AUA to $9.2 billion in the third quarter, inclusive of the $1.4 billion acquired from Enterprise. Now that we have the Enterprise contract, conversion behind us, we will continue to prepare for our core conversion of the entire bank, scheduled for May 26. The move to a new platform within the FIS ecosystem will improve our technology infrastructure, enhance efficiencies and scalability, and support the future growth of the bank. We think third quarter results are an important stepping stone to improved growth and profitability for Rockland Trust. We expect to build off these solid results in the quarters ahead. We believe prudent expense and capital management, continued NIM improvement, the realization of the benefits of the enterprise acquisition, and improved organic growth will unlock the inherent earning power of Rockland Trust. On that note, I'll turn it over to Mark.

Thanks, Jeff. As Jeff just hit on a lot of the key drivers for the quarter, I will go into a bit more detail in a few areas, focusing primarily on the enterprise acquisition and some of the big moving pieces during the quarter, and expected trends going forward. To summarize the quarter results, 2025 third quarter gap net income was $34.3 million, and diluted EPS was 69 cents, resulting in a 0.55% return on assets, a 3.82% return on average common equity, and a 5.84% return on average tangible common equity. excluding $23.9 million of merger and acquisition expenses and $34.5 million of Day 2 CECL provision for non-PCD acquired loans and their related tax impacts, the adjusted operating net income for the quarter was $77.4 million, or $1.55 diluted EPS, representing a 1.23% return on assets, an 8.63% return on average common equity, and a 13.2% return on average tangible common equity. I'll start with some of the key metrics that are heavily impacted by the enterprise acquisition. First, in terms of a capital update, as a reminder, we originally estimated the enterprise deal to result in 9.8% tangible book dilution, including estimated M&A to be incurred in the fourth quarter we pegged actual tangible book dilution right around 7% as the loan interest and credit marks came in lower than originally modeled. As such, we anticipate slightly lower earnings accretion than originally modeled as well. In addition, we repurchased $23.4 million of capital at an average price per share of $64.07 during the quarter. Despite the deal impact dilution and repurchase activity, our improved earnings profile and OCI movement resulted in a tangible book value per share decrease for the quarter of only $2.17, or 4.5%, while the tangible book value per share is up modestly over the year-ago metric. Regarding the net interest margin, the reported margin improves meaningfully to 3.62% for the quarter. The 25 basis point increase from the prior quarter can be summarized by highlighting a few key components. First, both the Rockman Trust and Enterprise Bank balance sheet profiles are well positioned to experience margin growth from loan and securities cash flow repricing, and we saw that drive a good portion of the increase this quarter. In addition, though it has negligible impact on the actual net interest income results, The margin also improved slightly by the payoff of approximately $110 million of acquired debt from enterprise. The margin also expanded approximately five basis points due to purchase discount accretion on the acquired securities book. And lastly, we saw approximately eight basis points of expansion from purchase loan accretion. Regarding this last item, we recognize that the loan accretion results are less than suggested in our guidance last quarter. I would suggest this is purely a timing issue. The total accretable loan interest and credit mark is approximately $160 million, and we will expect the vast majority of that to come in over the next five to seven years. However, we remind everyone that the actual results can often be lumpy due to prepayments, individual loan payoffs, and repricing events. As long as longer-term rates remain intact, we are confident that our reported margin will sustain – will reflect a sustainable level as those accretion numbers roll down. With the Federal Reserve cut occurring in mid-September, the quarterly results had very little impact from the Fed action. We continue to reiterate our guidance that the bank is positioned to see little impact on the net interest margin from the recent and any future Fed cuts. Shifting gears to loan and deposit activity for the quarter, we are very pleased with the organic results for the quarter. As Jeff just alluded to, you saw our strategic initiative to focus on relationship CRE and CNI lending on display, as total CNI balances increased organically over 13% on an annualized basis for the quarter and are up over 7% through the first nine months of the year. In addition, we are still optimistic over CRE and construction activity moving forward, with the year-to-date declines driven primarily by runoff and workouts of more transactional balances. Specific to the enterprise acquisition, our newly acquired teams are working off of the same playbook, prioritizing C&I and Relationship Cree, and they have not missed a beat, remaining very active in the deal flow during the quarter. This focus resulted in a modest decline of approximately $45 million in total loan balances from the enterprise activity, which was nicely offset by growth in the legacy Rockland book. Moving to the deposit side of the balance sheet, the story is equally positive. First, specific to the enterprise acquired balances, the third quarter results reflected a decline of approximately $80 million. However, only $30 million of that relates to relationship balances, while $50 million reflected the payoff of a maturing brokered CD. And similar to the loan activity, the legacy Rockland deposit organic growth more than offset the enterprise-related reductions. resulted in approximately 1% combined annualized growth for the quarter. Switching gears to asset quality, the quarterly results capture a few different moving pieces related to the allowance for loan loss and provision levels. High-level net charge-off activity was only $1.8 million for the quarter, or four basis points on an annualized basis, and overall asset quality metrics remain strong. To provide a little more color on the reported results, The allowance for loan loss increased $45.7 million for the quarter, which includes $34.5 million of day two provision on non-PCD acquired loans, $9 million of carryover allowance on acquired PCD loans, and $4 million of core provision, less charge-off activity. Total non-performing assets at September 30th are 0.35 percent of total assets and include approximately $25 million of acquired NPAs from Enterprise. And though new to non-performing activity was up slightly from the prior quarter, no material loss exposures were identified in those recent downgrades. Rounding out the update on non-interest related items, we are pleased to report that both non-interest income and non-interest expense are right in line with expectations following the Enterprise merger. On the fee income side, as Jeff just mentioned, it's worth re-highlighting that the merger brought over an additional $1.4 billion in assets under administration. And with the current quarter activity, total AUA grew to $9.2 billion as of September 30th. On the expense side, I will highlight a few key items. First, we reaffirm our original guidance of achieving 30 percent cost saves on the acquired enterprise expense base. to be fully realized during the first quarter of 2026. Merger-related expenses totaled $23.9 million for the quarter and were comprised primarily of severance-related costs and professional fees. Amortization of intangible assets for the quarter was $7.3 million, with $6.1 million related to the newly acquired intangibles from the enterprise deal. And as Jeff mentioned in his comments, we are working through implementation efforts for a core system upgrade in May of 26. We had little impact from this in the third quarter expenses, though we do anticipate approximately $5 million of one-time costs to be incurred over the next couple of quarters. And lastly, the reported tax rate for the quarter stayed relatively consistent at 22.8%. I'll now just close out my comments with fourth quarter guidance only, as I will plan to give full year 2026 guidance with our fourth quarter results. In terms of both loan and deposit growth, we anticipate a low single-digit percentage increase off the September balances. Regarding asset quality, as I've been stating, we still do not see any pervasive issues across segments. And as such, provision will continue to be highly driven by developments of individual commercial credits. Regarding the net interest margin, we reaffirm and anticipate four to six basis points of expansion on an adjusted basis, which excludes loan accretion impact, which, as I noted before, can be volatile on a quarter-to-quarter basis. For non-interest income, we estimate flat to a low single-digit percentage increase off the third quarter results. And for non-interest expense, we anticipate total core expenses, excluding merger-related costs and one-time conversion upgrade costs, to decrease by approximately $2 million. This decrease represents a portion of the remaining enterprise cost saves expected to be realized, as some temporary salary costs will extend into the first quarter. As I just alluded to earlier, with the enterprise core conversion behind us, we are ramping up efforts and preparation work for our upcoming core system upgrade, which we estimate will result in approximately 3 to 5 million of one-time costs during the fourth quarter. And lastly, the core tax rate for the fourth quarter is expected to be in the 23 percent range, further impacted by any one-time adjustments associated with finalizing the 2024 tax returns. And that concludes my comments, and with that, we'll now open it up for questions.