Independent Bank Corp.

Hello, everyone. Thank you for joining us and welcome to the Independent Bank Corp. Second Quarter 2026 Earnings Call. Joining me on today's call is Jeff Tengel, CEO, and Mark Ruggero, CFO. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. 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. 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. Before we discuss our quarterly results, I wanted to share an update on my health. We released an 8K in February disclosing that I had been diagnosed with non-Hodgkin's lymphoma. I'm happy to report that I have finished my treatments and learned last Friday that I am cancer-free and in remission. So on that good note, I'd like to turn to our quarterly results. While activity was slow early in the second quarter, momentum accelerated as the quarter progressed, resulting in solid deposit growth, strong C&I loan growth, continued improvement in the adjusted NIM, aggressive buyback activity, and excellent results in our wealth management business. These positives were offset by a smaller average balance sheet and lower loan accretion income. Our deposit franchise continued to differentiate itself, producing over $300 million of non-time deposits, representing 7% annualized growth, while maintaining a stable cost of deposits of 136. These results were achieved in an environment of heightened competition and expectations that the Fed will keep rates higher for longer. On the lending front, we experienced robust growth in the CNI and home equity portfolios, offset by heavy loan payoffs within the Cree book. With respect to CNI, excluding the impact of the $37 million decrease in our dealer floor plan business, which we have now largely exited, our CNI loans rose by $116 million, a healthy 10% on an annualized basis. This growth was broad-based across all of our market segments. Investment Cree and construction loans conversely declined $176 million during the quarter. primarily reflecting elevated payoffs due to a variety of factors, including asset sales, refinancing done away from us, and construction loans maturing and going to the permanent market. We like the CRE asset class and will continue to support our clients in this space the way we always have. This is evidenced by the $203 million in new relationship-based CRE loans we funded in the quarter, up 11% from the first quarter, and the $300 million of new Cree commitments we added. Our Cree concentration now stands at 278. On June 30th, our approved commercial loan pipeline totaled $510 million, up from $313 million on March 31st. This strong loan pipeline, together with continued strong origination activity, and an expected normalization of payoff activity positions us well to return to positive commercial loan growth. The second quarter also saw continued improvement in the adjusted NIM, which rose by four basis points, right in line with our guidance. This reflects pricing discipline across both our loan and deposit portfolios. Mark will elaborate on our NIM during his comments. As Mark will also further expand on, we maintained a proactive posture in returning excess capital to shareholders. With expected further improvement in our profitability and moderate balance sheet growth, capital management will remain a key priority for the balance of the year. Our wealth management business continues to be a key fee income driver for us. Second quarter results benefited from strength in our traditional asset management business as well as inroads we have made in the enterprise footprint. I would also highlight momentum in our business advisory services segment, where we assist business owners to prepare for and manage the sale of their companies, which has shown early signs of being a real positive catalyst for potential AUM inflows. With respect to asset quality, while we continue to see movement in and out of our non-performing loans and criticized and classified loan buckets, The levels are consistent with our historical credit performance. Our net charge-offs were just two basis points for the second quarter and have averaged just nine basis points over the last five quarters. Our loan loss provision represented 14 basis points of average loans in the second quarter and has averaged 13 basis points over the last five quarters, excluding the day one impact of the enterprise acquisition. Excluding M&A charges and non-recurring core system conversion costs, expenses were flat versus the first quarter. Mark will provide a detailed breakdown of the moving parts within our expenses. We remain vigilant regarding our expense levels. As we have 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. There is 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 IBS platform positions us to improve client service, enhance operating efficiencies, accelerate the introduction of new products, and support 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've stood up a governance framework around our AI activities to ensure we stay within the guardrails of our moderate risk profile and that 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 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. Our strategy remains straightforward. 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 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'll turn it over to Mark.

Thanks, Jeff. And to summarize the quarter results, 2026 second quarter net income was $81.8 million, and diluted EPS was $1.70. resulting in a 1.34% return on assets, a 9.24% return on average common equity, and a 14.05% return on average tangible common equity. The second quarter results were a great reflection of the bank's ability to drive strong core profitability and return capital to shareholders despite the highly competitive environment keeping loan growth relatively flat. Touching first on the capital management aspect, During the quarter, we completed the previous year's buyback authorization and in May announced a new $200 million share repurchase plan. During the second quarter, we repurchased $75 million in capital, bringing our capital ratios down slightly, with the CET1 ratio at June 30th now at 12.8% and the tangible capital ratio at 9.7%. Going forward, we will continue to leverage the buyback plan as our primary means of returning excess capital to our shareholders. In terms of the core profitability improvement, the main drivers continue to be core net interest margin expansion coupled with prudent share repurchases. Regarding the margin, though reported loan yields were down eight basis points in the second quarter, Core loan yields increased three basis points when adjusted for the exclusion of volatile purchase accounting accretion and other non-core items. And although commercial real estate loan growth has been a challenge, we are originating a significant volume of new loans to offset the pay downs and amortization in this portfolio. And that continues to fuel the cash flow and repricing benefit dynamic in our loan yields. Similar characteristics in the securities portfolio drove an increase of five basis points for the quarter, with increased amortization and maturities expected in the second half of the year. And lastly, as Jeff noted, we are extremely pleased with our ability to hold the line on cost of deposits, keeping that flat at 1.36%. With these all primary drivers, the core net interest margin increased four basis points for the quarter. I mentioned the challenges in the commercial real estate and construction books, but on a positive note, as Jeff mentioned, the second quarter approved commercial pipeline grew nicely to $510 million, a 63% increase from the prior quarter, and reflects a healthy mix of both commercial real estate and CNI. On the CNI side, the ability to enhance our combined offerings to both the smaller and mid-market CNI space was highlighted this quarter, as CNI balances increased 10% on an annualized basis when excluding balance runoff from the exited dealer floor plan business. In addition, consumer home equity balances increased $35 million or 11% on an annualized basis, while residential mortgage activity reflected a nice balance between increased portfolio balances and mortgage banking gain on sale results. On the deposit side, there's no secret in our industry when it comes to how competitive the environment is. We believe the second quarter results are a testament to the amazing deposit franchise that continues to differentiate Rockland Trust. Not only did we grow period end balances at a 5.9% annualized rate, we did so while maintaining a flat cost of deposits. Average balances, however, were down for much of a quarter. which created a temporary drag on our cash position and overall average earning assets. But we are encouraged by the rebound of balances late in the quarter in our consistent quarterly trends of attracting new core deposit relationships to the bank. As a result of the strong core deposit growth, we paid down 100 million of maturing FHLB borrowings while increasing our working capital line of credit by only 25 million. I'll now switch gears to asset quality And I'll highlight the following notable items for the second quarter. Total non-performing assets increased modestly to 103.8 million or 56 basis points of total assets. The changes reflect some normal ins and outs on the commercial loan side and a net $4.7 million increase in residential loans. Regarding the latter, though we are seeing some increased volatility in delinquencies and non-performers, In almost all workout cases to date, there is sufficient equity in the homes and net charge-offs remain extremely low in this portfolio. Along those lines, net charge-offs for the quarter were only $911,000 or two basis points annualized, with total year-to-date charge-offs now at only six basis points on an annualized basis. The second quarter provision of $6.3 million and increase in the allowance for loan loss to 1.06% of loans was primarily driven by modest specific reserves on a couple of commercial loans. And lastly, total criticized and classified loans decreased versus the prior quarter, as we remain hyper vigilant on effective early identification and development of workout strategies on problem loans. Moving to non-interest items, fee income of 42.4 million was up over 5% from the prior quarter. The wealth management business continues to lead the way with AUA at 9.5 billion as of June 30th, driving higher wealth management fees combined with elevated tax preparation fees of $537,000 during the quarter. In addition to wealth, we saw solid fee income growth from our deposit and treasury management services as well as increased swap volume. On the expense side, the quarter over quarter results reflect a few moving pieces that I'll highlight. Specific to quarter over quarter trends, the second quarter has zero merger related expenses versus $3 million recognized in the first quarter. Secondly, we incurred approximately $2.1 million of expenses related to the ongoing preparation of our core conversion project versus 1.1 million of similar expenses in the first quarter. The majority of these are consulting related, included in the other non-interest category in our earnings release. After excluding these two items, our remaining core expenses were relatively flat versus the prior quarter, as reductions in incentive expense, payroll taxes, and snow removal were offset by annual merit increases, annual director equity compensation grants, And some other miscellaneous increases. And lastly, as expected, the tax rate stayed relatively consistent at 23.4%. With that, I'll now finish up by revisiting our 2026 full year guidance. First, we reaffirm our 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%. Regarding loan growth, given the pay down activity experienced in the second quarter, we update our CREE and construction full year estimates to now be flat to low single digit percentage decrease. For C&I growth, with minimal headwinds from the exited floor plan business, we would expect to land on the high end of the mid single digit percentage range of the guidance. And for total consumer, we now assume a full year increase in the low single digit percentage range. Our full year deposit growth guidance remains unchanged. And similarly, with the core margin increase as expected for the quarter, we reaffirm our 2026 fourth quarter margin will be in the range of 3.9 to 3.95%, though likely on the low end of that range. I would also point out this range includes a 10 basis point impact assumption from purchase accounting accretion. Our fee income and tax guidance also remains unchanged. And lastly, on the expense side, we anticipate core expenses, which exclude the systems conversion expenses, to be in the $553 to $557 million range, plus the one-time systems conversion expenses to land in the $5 to $6 million total range for the year. And that concludes my comments. And with that, we'll open it up for questions.