Independent Bank Corp/MA 2026 Q3 Earnings Call

Good morning, and thanks for joining us today. I am 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, maintained the core net interest margin despite heightened deposit competition, continued 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 six 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 Federal Reserve 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 floor plan 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 pay downs were down 27% from the second quarter, and our CRE concentration now stands at 278.

On September 30th, our approved commercial loan pipeline totaled $574 million, up from $510 million on June 30th. Our loan pipeline has benefited from strong origination activity, 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 non-performing 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 five 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 five 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 non-recurring 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 timeline 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 one 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 five 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 in 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 already meeting profitability targets we set for the fourth quarter of this year. 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 decent 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. The adjusted core margin, excluding purchase accounting and other non-core 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 30th, our CET1 ratio sits at 12.7%, and our tangible capital ratio is 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 three-year term loan with pricing at one month SOFR plus 170 basis points. I will switch gears now to asset quality, and we will highlight the following notable items for the third quarter. Total non-performing assets increased to $126.2 million or 0.5% of total assets. The increase is primarily driven by one office loan currently in workout status. This one 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.

While net charge-offs for the quarter remained low at only two 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. Lastly, the uptick in delinquencies is driven primarily by both the new-to-non-performing loan as well as previously impaired workout loans reaching maturity dates. Moving now to non-interest 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.