Independent Bank Q3 2026 Earnings Call Transcript

Independent Bank (NASDAQ:INDB) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Independent Bank reported strong third-quarter results with notable loan and deposit growth, maintaining a core net interest margin despite competitive pressures, and active stock buybacks.

The company experienced a 5.4% annualized growth in non-time deposits, with a cost of deposits at 1.42% remaining industry-leading.

Total loan growth was $158 million, driven by increases in C&I, commercial real estate, home equity, and residential mortgage loans, despite some loan closings shifting to October.

The third quarter net income was $89.7 million, with diluted EPS of $1.90, marking a 12% increase over the previous quarter and achieving record earnings.

Asset quality remained stable with low net charge-offs, and a specific reserve of $6.5 million was established for a non-performing office loan in workout status.

The company plans to consolidate its headquarters to improve operational efficiencies and corporate culture, and it is testing AI applications internally.

Guidance for the fourth quarter includes expectations of modest growth in net interest income and loan growth, with operating expenses up slightly, excluding system conversion costs.

Management expressed a strategic focus on deepening customer relationships, maintaining disciplined underwriting, and returning excess capital to shareholders through buybacks.

Full Transcript

OPERATOR

Quarter 2026 earnings call. After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one 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. 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 call over to Jeff Tangle, CEO. Please go ahead.

Jeff Tangle, CEO

Thank you. Good morning, and thanks for joining us today. I’m 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 6 basis points from last quarter, our 1.42% cost of deposits remains industry leading. These results were achieved in a very competitive environment with growing expectations that the Fed 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 One 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.

Mark Ruggiero, CFO

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 and 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.

Though 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, while 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 30, our CET1 ratio sits at 12.7% and our tangible capital ratio was 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’ll switch gears now to asset quality and 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, and while net charge-offs for the quarter remained low at only 2 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.

And lastly, the uptick in delinquencies is driven primarily by both the new-to-nonperforming 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. I’ll highlight a few unique items in looking at quarter-over-quarter changes. First, within salaries and benefits, the third quarter results included a $1 million benefit relating to the fair valuation of life insurance split-dollar benefits. The FDIC assessment expense decreased as a result of improved ratings driving a lower premium, and that does include an approximate $400,000 retroactive adjustment.

Within other non-interest expense, the prior quarter expense included approximately $900,000 of expense associated with annual director equity grants, with minimal related expense in the third quarter. And as an update on our core conversion project, we incurred approximately $2.2 million of expenses associated with the project in the quarter, bringing the year-to-date total to $5.5 million. With the shift, as Jeff mentioned, now to a 2027 Q1 conversion date, we anticipate an additional $1.5 to $2 million of one-time expenses to be incurred over the next couple of quarters, with the majority of that to be incurred in the fourth quarter.

And lastly, as expected, the tax rate stayed relatively consistent at 23.3%. With that, I’ll now finish up by providing fourth quarter 2026 guidance. Regarding loan growth, we estimate CRE and construction to increase at a low single-digit annualized percentage, while for C&I we anticipate a mid single-digit annualized percentage increase. Regarding consumer real estate balances, we anticipate home equity to remain strong with high single-digit percentage annualized growth, while mortgage balances are anticipated to stay relatively flat to a low single-digit percentage increase.

For deposits, we also anticipate some level of seasonality impacting period-end balances, with point-in-time deposits likely staying relatively flat to a low single-digit annualized growth rate. And as more and more variables come into play regarding net interest income, we think it is appropriate to also guide net interest income dollars in addition to the margin. Regarding net interest income, we anticipate a modest increase versus third quarter results.

As a reminder, the third quarter benefited from the slightly elevated loan accretion and large seasonal increases in deposits that drove a big increase in average earning assets for the third quarter. Regarding the margin, if we assume no further Federal Reserve action, we would anticipate the reported margin to land slightly north of 3 point for the fourth quarter. And a reminder, that does include an estimated 10 basis point benefit from loan accretion.

If the Fed increases again in the fourth quarter with no major changes on the longer end of the curve, we would anticipate a couple basis points reduction as a result. Our fee income is anticipated to grow in the low single-digit percentage range. And on the expense side, we anticipate operating expenses, which excludes system conversion costs, to be up slightly over third quarter operating expenses. And as I just mentioned, we anticipate approximately $1 to $1.5 million of one-time expense related to the core conversion in the quarter.

Lastly, we anticipate no material changes to the tax rate. And that concludes my comments. And with that we will now open it up for questions.

OPERATOR

Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one. Again, we ask that you pick up your handset when asking a question to allow for optimal sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Our first question is from the line of Fetty Strickland from Hovde Group. Your line is now open. Please go ahead.

Fetty Strickland, Analyst at Hovde Group

Hey, good morning, Jeff and Mark. Just start on the credit side. Can you provide any more detail on the office credit that entered nonaccrual this quarter? Geography, type, and just expectations for the workout process there?

Mark Ruggiero, CFO

Sure. It’s a local office loan. Basically another single tenant that is looking to leave and is planning to vacate. So it’ll essentially convert into a fairly empty office building. We’re working with the sponsor. There is a potential plan to convert that facility to multifamily. That’s early stages in terms of that process. So right now we thought it was appropriate to look at an appraisal and evaluation as an empty office building, as well as a potential increased value as a multifamily conversion.

And we reserve down to the average of those balances, which is the $6.5 million reserve.

Jeff Tangle, CEO

The other thing I would add is the sponsor has a history of supporting their projects, and so they’ve been supporting this one. We proactively put it on nonperforming status, and they’re looking for a partner to help them with the transition to a multifamily property. So it’ll probably take a little while for it to work itself out, but we do feel like there’s a little bit of optimism based on the sponsorship.

Mark Ruggiero, CFO

That’s a good point. So it had been performing up until September 30th. Just given the loss exposure and the likely resolution, we thought it was appropriate to put it on discretionary nonaccrual.

Fetty Strickland, Analyst at Hovde Group

Got it. Thanks for the color. And just more broadly, I think you’ve got about $17 million or so in classified office coming due in the fourth quarter. You know, can you just give us a high level of kind of how you think about, you know, those as they come due?

Mark Ruggiero, CFO

Yeah. You know, the good news there, Freddie, I guess, is that that’s one loan. So. And just a reminder, that is one that actually went to nonaccrual last quarter. We also have a $6 million reserve on that established, so it’s being marketed for sale. We’ve seen some early interest, so we’re hopeful for an early 2027 resolution on that. But that’s one loan with a $6 million reserve on it.

Fetty Strickland, Analyst at Hovde Group

Got it. If I could just squeeze in one more on loan growth. Seems like you’ve had some pretty solid momentum on the loan side, good pipeline building there. How should we think about the timeline for that getting deployed? And can you remind us on typical seasonality?

Jeff Tangle, CEO

Yeah. The C&I loan growth, I think, is not very seasonal in part because a lot of the growth has been new client acquisition, and so that hasn’t been very seasonal. My expectations on the C&I side is we’re going to continue to see kind of that mid-single-digit growth that we just talked about through the fourth quarter and into ’27. The commercial real estate portfolio is a little bit different, obviously. We grew a little bit this quarter in part because of the construction loan draws and the lack of paydowns.

If you recall, we had, you know, outsized paydowns in the second quarter, which really muted our loan growth in that asset class. We did not see the same elevated level of payoffs in the third quarter. And while rising interest rates can make it a challenge for new projects, it also makes it more difficult to refinance into a lower rate. So we think that the payoffs as we go forward hopefully will stay at a, you know, historical level and we won’t see the elevated payoffs we saw in the second quarter.

I don’t know, Mark, if you want to comment on the consumer portfolio.

Mark Ruggiero, CFO

Similar to the third quarter results, I would expect you’ll see home equity demand continue to stay pretty strong, and for the same reason Jeff just talked about, sort of some of the CRE dynamics. Certainly the higher interest rates are challenging salable mortgage volume. You know, a lot of what we’re seeing now is, you know, it’s basically 80% purchase, 20% refi, and most of that purchase. If, you know, if there’s an adjustable-rate demand, we will portfolio that.

So you may see a little bit of portfolio growth, but I would expect mortgage banking income to stay challenged.

Jeff Tangle, CEO

Thank you.

OPERATOR

Your next question is from the line of Justin Crowley from Piper Sandler. Your line is now open. Please go ahead.

Justin Crowley, Analyst at Piper Sandler

Hey, good morning, everyone. Justin wanted to start off on the NIM. Mark, do you have detail on just how the margin progressed through the quarter, you know, where that ended the period, and then maybe just also the spot cost of deposits, if you have it?

Mark Ruggiero, CFO

Sure. So we did see a gradual increase into September. I will caveat, so the spot NIM for September was 3.81%. But you’ll start to see a little bit of noise there because the securities portfolio will print at a meaningfully higher yield as you see a little bit more of that OCI unrealized loss in that number. We can certainly, going forward, think about maybe giving that yield also on a kind of an adjusted book basis. But for now, you know, you’ll see a little bit of elevated yield in the securities book just because of that loss piece embedded in it.

And we did a better job of shifting some of that excess cash into the securities portfolio, so just the mix of earning assets got better as the quarter progressed. So that, you know, that drove a bit of a lift in the margin over probably where July was, where we saw, you know, probably the biggest impact on the cost of deposits hitting the NIM. So if I think through to the fourth quarter, spot cost of deposits for September was 1.44%. So I would expect to see a bit more deposit cost pressure heading into the fourth quarter.

What you’re not seeing in the third-quarter margin results is the front end of the curve index-based loans getting the benefit on loan yields. So we’ll see a little bit of acceleration in loan yields out of the gate. We’ll still have the repricing benefit effect in both loans and securities. So I do expect earning asset, you know, the asset yields to improve nicely. I’ll expect deposit costs to go up a little bit, but I do think we’ll be able to, you know, increase the adjusted core margin by a few basis points here.

Does that make sense? A lot of moving pieces there. Hopefully I gave a little bit of color on each component.

Justin Crowley, Analyst at Piper Sandler

Yeah, no, that’s super helpful. I appreciate that. I guess, like, any early read on how you think that margin could behave as we get into next year with maybe a couple more hikes on the table? And maybe just more thematically, as I know you’ll get into formal outlook come January, but you’ve got that constant debate between defending NIM or tolerating some pressure to grow NII. So just kind of curious how you’re thinking about that moving forward.

Mark Ruggiero, CFO

Yeah, I know in a number of conversations over the last quarter or two we’ve been asked, is there a realistic expectation for a 4% NIM? I think the answer there is still yes, particularly because of that back-book repricing benefit. With rates continuing to inch up a bit higher, you’re seeing really strong lift in the securities yields with over $500 million of cash flow expected over the next four to five quarters. That alone can drive upwards of seven basis points of expansion in the margin.

So assuming we can equalize any Fed action with loan yields and deposit costs, that back-book repricing would still drive some pretty good margin expansion over the next four or five quarters. So I do think there is a path to end of ’27 looking at a 4% margin.

Justin Crowley, Analyst at Piper Sandler

Okay, got it. And then if I could just squeeze maybe one last one just on the buyback. You’ve got at least the optics of OCI moving against you, but what’s the overall thinking there? And could you look to get even more active just given how the stock, and really the whole group, has traded over the past couple months?

Jeff Tangle, CEO

It’s a fair question. I would reaffirm certainly that expectation of 100% of profits being returned via common dividend and buyback is still the expectation. You know, right now I don’t know if we’ll get much more aggressive than that. I’ve always talked about just balancing the funding of that, and continuing to fund through bank profits is important, but we certainly have the capacity, I think, and the appetite to do a little bit more. But I’d say a minimum level of 100% of profits, inclusive of the dividend.

Justin Crowley, Analyst at Piper Sandler

I’ll leave it there. I appreciate it.

Jeff Tangle, CEO

No problem.

OPERATOR

Your next question comes from the line of Lori Hunsicker from Seaport Research Partners. Your line is now open. Please go ahead.

Lori Hunsicker, Analyst at Seaport Research Partners

Yeah, hi, good morning, Jeff and Mark. Thanks for taking my questions. Just wanted to circle back to credit here. You know, I know the jump to non-performers, it looks like, as you said, was all office, but I just wanted to get the actual dollar amount. Was that a $22 million loan then, or do you have a better number?

Mark Ruggiero, CFO

Yes. Yeah, sorry we didn’t make that clear. It is a $22 million loan. $22.4 million.

Lori Hunsicker, Analyst at Seaport Research Partners

22.4. Okay, great. And then, obviously, so if I’m just looking at the breakdown of the $62 million in non-performers, office non-performers, so 22.4 is the new non-performer. You still have that $22 million SNCC, or is there a better balance on that one?

Mark Ruggiero, CFO

Yep, that’s paid down a little bit, Lori. That’s basically 22 even now. 21.9, 22, right around there.

Lori Hunsicker, Analyst at Seaport Research Partners

Okay. And is there still a thought that that one might come current in the fourth quarter, or what’s the latest?

Mark Ruggiero, CFO

I think it’ll be, I think it’ll be January of ’27, if I understand sort of the pure six-month performance period. So I think it’s going to be a Q1 event. But yes, it is still on track returning to accrual.

Lori Hunsicker, Analyst at Seaport Research Partners

That’s great. Okay, and then the $17 million that you have in life sciences non-performers, is that your only non-performer in life sciences?

Mark Ruggiero, CFO

Yes, yes. It’s about a $100 million portfolio, and I’m pretty certain that’s the only non-performer. And just a reminder on that one, Lori, we also have a $6 million reserve on that. That’s the other $17 million with the large reserve.

Lori Hunsicker, Analyst at Seaport Research Partners

Okay. Okay, great. And any thought on when we might see movement on that one?

Mark Ruggiero, CFO

Yeah, I’m hoping, you know, if we could get that resolved by calendar year, that would be great. It could spill over into the first quarter. You know, that’s a little of my prepared comments. Just a reminder, between, you know, the new non-performer and this loan, there’s, you know, $12 million plus of reserves. There’s another $1.6 million on another office property that has a much longer, I think it’s a 2030, maturity date. But there is, you know, a little over $14 million in reserves, two of which we hope to resolve in the next couple of quarters.

So you will see those charge-offs come through when they get resolved. But as I mentioned, the good news is the loss has been taken for the most part, so it should not result in much more needed provision levels.

Jeff Tangle, CEO

Yeah, because we have a lot of conversations going on now with a handful of larger office loans, and, you know, we feel pretty good about the quality of the dialogue and moving forward resolving them, as Mark suggested. You know, there is some loss content in some of those, but we’re aggressively moving them off the balance sheet and for the most part have been working with cooperative sponsors in order to do that.

Lori Hunsicker, Analyst at Seaport Research Partners

Okay, okay. And then just sort of last question here on credit. So within that $62 million bucket of office non-performers, that leaves, I don’t know, five or six million. What is that—

Mark Ruggiero, CFO

We have—bear with me here. There’s the—

Lori Hunsicker, Analyst at Seaport Research Partners

Oops, did I get disconnected?

OPERATOR

Ladies and gentlemen, we are currently experiencing technical difficulties. Please stand by as we resolve the issue.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.