Independent Bank Corp.

Ladies and gentlemen, thank you for joining us and welcome to the Independent Bank Corp. Fourth Quarter Earnings Call. Before proceeding, please note that during this call, we will be making forward-looking 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 conference over to Jeff Tengel, President and 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. Our fourth quarter results reflect ongoing progress towards restoring Rockland Trust's historically strong performance. Quarterly highlights included continued NIM expansion, strong CNI growth, solid non-taught deposit growth, stable credit costs, realized cost savings from the enterprise acquisition, and the return of excess capital to shareholders. Between the first quarter of 2025 and the fourth quarter of 2025, our operating EPS increased by 60%, our operating ROAA rose by 40 basis points, and our operating ROTC improved by 529 basis points. Reflecting on 2025, it was a busy and rewarding year as we gained traction on a number of key initiatives. First, we closed an integrated enterprise. I want to extend my immense gratitude to their former chairman and founder, George Duncan, as well as all of the enterprise colleagues who helped champion the integration process. Acquisitions are never easy and often are disruptive to the day-to-day operations of a bank. The Rockland Trust and enterprise team members collaborated to ensure disruptions were kept to a minimum. Let me share a few examples with you. On the commercial banking side, we've retained almost 100% of client-facing personnel and have experienced negligible customer loss. Obviously, keeping the relationship managers has helped retain the customers. Despite distractions from the acquisition and integration process, there has been no material drop-off in enterprise loan production, and their pipeline remains as strong as it was when they joined Rockland Trust in July. On the retail banking side, It is again important to emphasize that we did not close any enterprise branches, and all enterprise branch employees were retained, excluding ICS and municipal deposits. All enterprise branches have exceeded our 95% deposit retention target, with approximately 60% of these branches having stable to increasing deposit balances. Given the acquired bank typically loses 10% of their deposits post-deal, we are delighted with our performance. In the fourth quarter, we opened 271 business relationships and 837 new consumer relationships in the acquired branches. Within our investment management group, we've been able to retain almost all employees we have targeted. The caliber of talent and 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. Secondly, we made solid progress on the credit front. Our net charge offs average just 11 basis points over the last three quarters of the year. And the challenges within our office portfolio are identifiable and manageable. Third, we continue to rebalance our commercial lending business. CNI loans increased 9% organically in 2025 and now represent 25% of total loans versus 22% at year end 24. Commercial real estate balances were down 3.6% organically from year end 2024 or flat from the third quarter. Our CREE concentration stood at 289% at year end we believe we have achieved most of the targeted reduction in transactional CREE business. Total commercial loans closed and were $789 million in the fourth quarter, up from $754 million last quarter. Funding on these commitments were $454 million versus $396 million last quarter. 52% of fourth quarter fundings were CNI. Our middle market CNI group continues to gain momentum, as evidenced by the fact that it represented 27% of total closed commitments in the quarter. The regional banking group, which represents Rockland's traditional lending business, accounted for 39% of total closed commitments. I would also note that our low-income housing tax credit business injected $100 million of capital into our communities. And lastly, we were named Massachusetts Third Party Lender of the Year for 2025, showing solid progress in the SBA space. Fourth, we generated solid organic growth in non-time deposits of 4.2% in 2025, which has been a historical strength of ours. DDAs represent a healthy 28% of overall deposits. about where we were pre-pandemic. The cost of total deposits was 1.46% in the fourth quarter, highlighting the immense value of our deposit franchise. Legacy Rockland Trust branches generated record new business relationships, totaling 6,921 and 3,463 net new relationships. 97% of branches achieved positive net new growth in business relationships in 2025. 100% of all our legacy branches achieved positive net new consumer growth. Fifth, our wealth management business continues to be a key driver. Our AUA remained stable at $9.2 billion in the fourth quarter, while revenues grew at a 4% annual rate. Lastly, we returned 164 million of capital to shareholders in 2025, including the repurchase of 913,000 shares for $61 million. With the enterprise acquisition completed in six months of customer integration behind us, and with credit trends stabilized, we'll enter 2026 laser focused on organic growth, expense management and capital optimization. With respect to growth, I would highlight the following items. We hired a number of commercial lenders in 2025. In addition, we're working to ensure our alignment and incentive structures to emphasize both loan and deposit growth. We are also intently focused on identifying opportunities within our acquired footprint to deepen our relationships with our expanded product set. Lastly, given the improved credit metrics, We are more open to resuming normal commercial real estate growth. As we always highlight, loan growth will be commensurate with our deposit growth. On the expense front, with the enterprise transaction complete, we believe a hold the line mentality with respect to staffing levels is appropriate. We will continue to invest prudently in technology to leverage efficiencies. Examples include our core systems convergence scheduled for later this year and our AI innovation team. Our AI efforts are focused on enhancing back office efficiency, including fraud review, day-to-day processing, and BSA AML. With respect to capital, we acknowledge that current levels are above our internal targets and our improved profitability will add upward pressure to our capital position. We remain committed to returning excess capital to shareholders. We believe fourth quarter results represent another major step forward in driving improved growth and profitability at Rockland Trust. We expect to build on this strong performance in the quarters ahead. Prudent expense and capital management combined with improved organic growth and sustained NIMS expansion position us to unlock inherent earning power. I feel particularly confident in Rockland Trust's positioning across our markets. Driven by the strength of our products, the dedication of our people, and the effectiveness of the strategies we've put in place. I want to thank all Rockland Trust employees for their tremendous efforts in making 2025 a successful year. Every measure of our success is a direct result of your commitment. On that note, I will turn it over to Mark.

Thanks, Jeff. I will now provide a bit more color into some of the fourth quarter numbers that Jeff just discussed. and wrap up with full year 2026 guidance. To summarize the quarter results, 2025 fourth quarter gap net income was $75.3 million, and diluted earnings per share was $1.52, resulting in a 1.20% return on assets, an 8.38% return on average common equity, and a 12.77% return on average tangible common equity. Excluding $12.3 million of merger and acquisition expenses in the related tax impact, the adjusted operating net income for the quarter was $84.4 million, or $1.70 diluted EPS, representing a 1.34% return on assets, a 9.38% return on average common equity, and a 14.30% return on average tangible common equity. It is worth noting that the fourth quarter results also benefited from a lower tax rate due to one-time adjustments associated with the filing and true-up accounting of the 2024 corporate tax return, as well as the finalization of all tax-related estimates inclusive of the enterprise acquisition. Diving more into the fourth quarter results, we'll start with loan and deposit growth. As Jeff alluded to in his comments, commercial growth was driven entirely by C&I, which increased 7% annualized for the quarter and over 9% on an organic basis for the year. This focus on C&I lending has also helped fuel an almost 50% increase in new commercial deposit generation in 2025 versus the prior year. On the consumer real estate side, total loan balances were relatively flat with an increased level of mortgage production sitting at year end in the health for sale category, which bodes well for mortgage banking income momentum heading into 2026. And lastly, though much smaller in volume, a 2025 initiative to build out a more robust premier banking offering drove a nice increase in the quarter in our wealth management secured consumer lines of credit. On the deposit side, I already mentioned the calendar year commercial deposit activity. Before the quarter, total period and deposit balances declined 0.8%, due mostly to seasonal business deposit activity related to year-end bonuses, distributions, and tax payments. We are encouraged by the growth in average deposits for the quarter across both the consumer and business lines, with 3.6% annualized growth in average core deposits, while we allowed for some level of attrition in our highest-rate time deposits. In terms of a capital update, tangible book value grew nicely at $1.04 for the quarter to $47.55 at year end. During the quarter, we repurchased approximately 548,000 shares for 37.5 million, representing a weighted average repurchase price of $68.39. And as Jeff noted, we are committed to returning capital to shareholders via buyback in a prudent manner throughout 2026. Shifting gears to asset quality, the overall picture remains very stable. Total non-performing assets stayed relatively consistent at 85.7 million, or 0.45% of total loans. Net charge-offs for the quarter were 5.3 million, with 4 million of that related to a C&I relationship that was fully reserved for last quarter. Provision for loan loss was 4.75 million, and total criticized and classified levels decreased 8.9% during the quarter. Moving to net interest income, despite the modest balance sheet growth, net interest income increased $9.1 million to $212.5 million for the quarter. The reported margin increased 15 basis points to 3.77%, while the adjusted margin, which excludes purchase loan accretion and other significant one-time items, increased 10 basis points to 3.64%. Breaking down the components of that 10 basis point increase, first, we were able to effectively reduce our cost of deposits by 12 basis points during the quarter to an impressive 1.46% total cost of deposits. This reflects an approximately 30% beta on the average Fed funds decrease of 40 basis points quarter over quarter, right in line with our expectations. Second, loan yields stayed relatively flat when excluding purchase loan accretion as immediate repricing on floating rate loans was nicely offset by continued yield expansion from cash flow repricing. And lastly, the vast majority of the securities book continues to see yield expansion driven by repricing. Our fee income businesses performed right in line with expectations for the quarter. Assets under administration ended the year at 9.2 billion with the expanded footprint and resources providing nice momentum heading into 2026. And we are optimistic that both loan level swap and mortgage banking income should continue to serve as a natural hedge against any pressure over longer term rates. On the expense side, I would point you to slide 12 in our earnings deck to provide some context over the fourth quarter results. In addition to providing insight into our 2026 guidance, which I'll soon share. As noted on this slide, total fourth quarter expenses of $142 million on an operating basis represent a 3.7% increase versus the prior quarter, which can primarily be attributed to a number of large one-time or outsized expenses. To highlight a few, the fourth quarter included a $2 million increase in incentive expense versus the prior quarter, $750,000 of consulting expense related to our 2026 core system upgrade, a $750,000 swing in equity securities valuations, an updated FDIC insurance premium assessment, which created an almost $1 million change quarter over quarter, and approximately $325,000 in snow removal expense. So as noted on this slide, which is difficult to extract from the noisy reported results, we peg our core expenses plus full cost saves from enterprise right around the $136 million number for a quarter. With that, I'll now finish up with full year 2026 guidance. Before I get into the various components, a lot of the fundamentals that we have been highlighting over the last few quarters give us strong conviction in our ability to improve earnings in a focused, sustainable manner throughout 2026. As such, we have established two primary profitability targets for the fourth quarter of 2026. The first is return on average assets of 1.4%, and the second is return on average tangible capital of 15%. As for the drivers behind those targets, starting first with loan growth, we are targeting mid-single-digit percentage growth for CNI loans, low single-digit percentage growth for combined decree and construction, and flat to low single digit percentage growth for total consumer, as we anticipate a higher percentage of mortgage volume to be sold versus the 2025 levels. For deposit growth, we are targeting low to mid single digit percentage growth for total core deposits, while relatively flat to slightly lower balances for time deposits. For the net interest margin, we are modeling in two Federal Reserve rate cuts, which we continue to suggest will drive a fairly neutral impact on the margin. Assuming the 5- to 10-year part of the curve stays consistent with current rates, we anticipate continued margin expansion from cash flow repricing dynamics in both the loan and securities portfolios. Assuming purchase loan accretion of 10 basis points, we estimate the net interest margin to continue to grow to a range of 3.85 to 3.90% in the fourth quarter of 2026. From a credit standpoint, we have no significant loss exposures that are currently in workout status. And as such, we expect overall asset quality metrics to remain stable. Regarding non-interest income, we guide low single digit percentage growth off of the 2025 second half combined annualized results. And for non-interest expense, Again, referring back to the details on slide 12, we are estimating a range of 550 to 555 million for full year operating expenses, plus another four to $5 million for one time costs associated with our planned core system upgrade. And lastly, for the tax rate, with the significant increase in pre tax income versus 2025 results, we project a full year tax rate in the 2350 to 24% range. I will close out with a reminder that the fewer number of business days in the first quarter will typically result in lower first quarter earnings for the rest of the year. And with that, that concludes my comments and we'll now open it up for questions.