Independent Bank Corp.

Ladies and gentlemen, thank you for joining us and welcome to the Independent Bank Corp first quarter earnings call. 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 also note that this event is being recorded. I would now like to turn the conference 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. When we last spoke in January, I highlighted several major areas of focus for Rockland Trust in 2026, organic growth, expense management, and capital optimization. Our first quarter results reflect progress in all of these areas. While reported loan and deposit growth were somewhat muted, I will talk later about why we remain encouraged with our ability to continue to grow organically. And we held the line on expenses and continue to proactively manage our capital. The first quarter also saw continued NIM improvement, increasing 13 basis points from the fourth quarter. This reflects pricing discipline across both our loan and deposit portfolios. Excluding loan accretion income, our adjusted NIM rose by eight basis points. Mark will elaborate on our NIM during his comments. Excluding M&A charges, expenses were down 1.5% from the fourth quarter as we realized the impact of cost savings from the enterprise transaction, which was offset by seasonally higher employee and occupancy costs. Additionally, the quarter reduction benefited from the absence of certain outsized expenses occurred in the fourth quarter. With 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. We returned $94 million of capital to shareholders in the first quarter, including the repurchase of 802,000 shares for $63 million. I would like to point out that despite our aggressive capital actions, tangible book value rose to $47.86. We also recently announced an 8.5% increase in our quarterly dividend. With expected further improvement in our profitability and moderate balance sheet growth, we expect capital management to remain a key priority for the balance of the year. There's a significant amount of work underway as we prepare to transition our core operating platform from Horizon to IBS, both part of the FIS ecosystem. The conversion is scheduled to take place in October of this year. The new operating system will provide additional product capability and enhance efficiencies that reflect the size and scale of our organization. This is an important milestone for Rockland Trust and will position us for future growth. Related, I'd like to take a moment to talk about AI. This is obviously a topic on investors' minds. In the first quarter, we established an Office of Digital Innovation. We have established a governance framework around our AI activities to ensure we stay within the guardrails of our moderate risk profile and any actions are consistent with our award-winning culture. This governance framework includes a steering committee that will serve as a clearinghouse for AI use cases. This will allow us to make AI investments in those areas that have a meaningful payback and avoid the proverbial boiling the ocean. I expect us to start with some relatively easy use cases as we build muscle memory. Over time, this should enable us to gain confidence in our ability to execute and take on bigger, more impactful applications. I mentioned earlier that loan and deposit growth was somewhat muted in the quarter. Given the Iran war, the marked volatility in interest rates, and the lingering inflationary environment, it should be no surprise there's not a uniform consensus on the current business climate from our bankers and customers. The duration of the war and its impact on oil prices will dictate the ultimate effect on distribution companies, contractors with truck fleets, manufacturers, construction firms, and energy-intensive operators. Clients broadly expect prolonged energy and commodity price volatility to weigh on cost structures. While a notable share of our clients indicate that they have adjusted to the current rate environment, others suggest that the higher rates have delayed expansion plans. Lastly, inflation remains a dominant concern across sectors, particularly with respect to labor, healthcare benefits, materials, and utilities. Suffice to say, the environment is best characterized as somewhat challenging. I would summarize our customer's mindset as cautious. Importantly, though, we've not seen any meaningful stress in our loan portfolios as a result of the current environment, and our customers continue to manage through this very well. With that as a backdrop, our total commercial loans declined by $50 million from the fourth quarter. If we peel back the onion a bit, though, underlying results were stronger than reported. For example, excluding the impact of the $39 million decrease in our dealer floor plan business, which we are exiting, our C&I loans rose at a healthy 7% on an annualized basis. In addition, we would note that the office portfolio contributed $56 million of the $94 million drop in commercial real estate balances for the quarter. Our CREE concentration now stands at 283%. and we believe we've achieved most of the targeted reduction in transactional Cree business. While we have reduced transactional Cree balances, we funded $179 million of relationship-based Cree loans in the first quarter and added $290 million of Cree commitments. We still like the Cree asset class and will continue to support our clients in this space the way we always have. This dynamic continues the rebalancing of our commercial lending business. CNI loans now represent 25% of total loans versus 22% at year end 2024. It's important to note that our CNI growth is being driven by core relationship banking. We do not have any exposure to the NDFI or private credit segments that have driven much of the industry's loan growth. In summary, we're optimistic about our market position, We have the product set and talent to drive commercial loan growth going forward. Our approved commercial loan pipeline totaled $313 million, up from $278 million at year end. But importantly, we will not sacrifice credit structure or rate for new business. This is consistent with how the legacy Rockland Trust has always operated. On the funding side, period and deposit balances were essentially flat. The 1.5% decrease in average deposits from the fourth quarter is consistent with prior years as seasonality tends to adversely impact business operating balances in the first quarter of the year. DDAs represent 28% of overall deposits, and the cost of total deposits was 1.36% in the first quarter, highlighting the immense value of our deposit franchise. Similar to the loan portfolio, and as we've said many times, we will not sacrifice rate to show deposit growth with transactional one-product customers. With respect to asset quality, our net charge-offs were 11 basis points for the first quarter and have averaged just 11 basis points over the last year. As we suggested last quarter, we're not out of the woods yet with respect to our office portfolio. This quarter, several office loans exited the bank, while a couple of new office loans were added to criticize status. We continue to believe the challenges within our office portfolio are identifiable and manageable. As I've mentioned in the past, there's no quick fix here. We remain diligent in managing this portfolio segment, and while we are confident the worst is behind us, we'll continue to be transparent with the market as we work down this asset class. Our wealth management business continues to be a key fee income driver for us. Despite an incredibly volatile market, our AUA were essentially flat at $9.2 billion as positive net asset flows and strong relative portfolio performance mostly offset market-related declines. Importantly, we were pleased with the diversity of new client inflows. Revenues grew at an 11% annual rate driven by higher asset base fee revenue and insurance commissions. We believe first quarter results represent another step forward in driving improved profitability at Rockland Trust. We remain focused on accelerating our organic growth, reducing our CREE office portfolio, and prudent capital management. These actions coupled with our industry-leading deposit costs, discipline expense management, and operational excellence will return INDB to our historical market premium valuation. I feel particularly confident about 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 the first quarter a success. Every measure of our success is a direct result of their commitment. On that note, I'll turn it over to Mark.

Thanks, Jeff. To summarize the quarter results, 2026 first quarter GAAP net income was $79.9 million and diluted EPS was $1.63, resulting in a 1.31% return on assets, a 9.02% return on average common equity, and a 13.67% return on average tangible common equity. Excluding $3 million of merger and acquisition expenses and the related tax impact, the adjusted operating net income for the quarter was 82.1 million, or $1.68 diluted EPS, representing a 1.35% return on assets, a 9.27% return on average common equity, and a 14.05% return on average tangible common equity. As Jeff alluded to in his comments, we maintained our robust CET1 capital ratios at 12.87% while repurchasing $63.3 million in capital during the quarter and increasing our common dividend 8.5% to $0.64 per quarter. With only $24 million left on the current repurchase authorization, We anticipate establishing another round here in the second quarter as we continue to prioritize capital return to shareholders amidst an uncertain economic environment. We saw this element of uncertainty play out during the quarter in a couple of areas. The first area I'll note is in regards to pricing competition, particularly on the deposit side. As a bank that has never looked to lead with rate, we have seen some flow of excess customer funds leave for pricing that we are not willing to match. This dynamic combined with seasonal volatility led to the fairly flat deposit balances quarter over quarter. We operate with conviction that finding the right balance of pricing discipline while supporting our relationship customers is crucial. And we believe the Q1 results of flat deposit balances while reducing the cost of deposits 10 basis points is a strong outcome of this philosophy. On the lending side, we saw demand impacted in a few areas, as all of the macroeconomic uncertainty that Jeff just talked about is keeping some customers on the sidelines. Our largest commercial portfolio, multifamily, is one particular asset class where we have seen this impact. With the reduced CREE portfolio much more representative of our legacy relationship lending profile and an overall concentration level now in the low 280 range, we are comfortable suggesting a forward growth strategy commensurate with our historical approach. While this Cree strategy continues to play out, we remain extremely optimistic over our near-term CNI growth prospects. Reiterating the $39 million decrease associated with our winding down of the dealer floor plan portfolio, other CNI balances increased $78 million during the first quarter, or 7% on an annualized basis. In addition, the rebuild of our approved total commercial pipeline should bode well for second half growth in 2026. On the consumer side, typical seasonality drove reduced overall volumes in the mortgage business, but an increase in saleable activity kept mortgage banking results relatively flat while absorbing runoff of lower yielding portfolio balances. And home equity volume has remained consistently strong with the $10 million increase in balances despite continued lower utilization rates versus pre-COVID levels. Switching gears a bit, the combination of the deposit cost reductions that I just discussed, along with loan and securities cash flow repricing dynamics, drove a solid eight basis point lift in the core margin. And with elevated purchase account and accretion versus the prior quarter, the reported margin rose sharply to 3.90% for the quarter. The balance sheet remains very well positioned to continue to drive consistent improvement in the net interest margin while providing flexibility to lever up or down as needed to stay neutral to any short-term rate changes from the Fed Reserve. Moving to asset quality, we highlight the following notable items for the first quarter. Total non-performing assets increased to 98.7 million, or 0.52% of total loans, Dariush Mozaffarian, driven primarily by the downgrade of one office loan, which has an approximately $2.8 million specific reserve established. Dariush Mozaffarian, Net charge offs for the quarter were 4.8 million or 11 basis points annualized with 4 million related to a pre relationship that was partially reserved for last quarter. Dariush Mozaffarian, And as a quick positive update this $4 million charge off loan. was associated to a non-performing office loan that actually repaid the full remaining balance subsequent to year end, in fact, just a few days ago. The first quarter provision for loan loss was $5.5 million, and while total criticized and classified loans increased versus the prior quarter, Q1 levels of 4% of total commercial loans remain in the range we have experienced over the last year or so. The downgrades to criticize status during the quarter were primarily isolated to a few credits with no identified loss reserve recognized at this point. Our fee income businesses performed in line with expectations for the quarter, coming in relatively consistent with the prior quarter results despite fewer days in the quarter. Jeff provided color on the positive momentum within our wealth management group, and we are also pleased with the continued expansion of our treasury management services as many of the newer CNI customers leverage the full suite of cash management products that we offer. On the expense side, I'll first point out that we did have a final round of severance related to the enterprise acquisition that made up the majority of the $3 million of M&A expenses for the quarter. Total core expenses of $139.9 million are slightly higher than our guidance due primarily to significant snow removal expenses which was a little over $2 million for the quarter. We remain focused on analyzing all areas of the bank to ensure expenses are appropriate and justified as we move forward into an environment where we know technology will play a larger role. Along those lines, our work on the upcoming core conversion is ongoing with approximately $1.1 million of expenses in the first quarter directly attributable to those conversion efforts. And lastly, as expected, the tax rate increased from the prior quarter to 23.38%. With that, I'll now finish up by revisiting our 2026 guidance. First, we reaffirm our two primary profitability targets for the fourth quarter of 2026. The first is return on average assets of 1.40%, and the second is return on average tangible capital of 15%. Regarding loan growth, we update our Korean construction full year estimates to now be flat to low single digit percentage increases. All other loan and deposit estimates remain unchanged. From the net interest margin, we increase our estimate to suggest that the 2026 fourth quarter margin will now be in the range of 390 to 395%, while still assuming a 10 basis point impact from purchased accounting accretion. All other guidance remains unchanged from the prior quarter. That concludes my comments. And with that, we will now open it up for questions.