Earnings Call Transcript - INDB Q2 2025

Operator, Operator

Good day, and welcome to the INDB Second Quarter 2025 Earnings Conference Call. Before proceeding, please note that during this call, we will make forward-looking statements. Actual results may differ materially from those 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. Please also note, today's event is being recorded. I would now like to turn the conference over to Jeff Tengel, CEO. Please go ahead, sir.

Jeffrey J. Tengel, CEO

Thank you. Good morning, and thanks for joining us today. I am accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. We had an eventful second quarter. We closed on the Enterprise transaction on July 1. We sold 2 of our large NPAs. We signed a lease on a new headquarters building, posted solid results and continue to make progress on a number of our strategic initiatives. In addition, we just announced a $150 million stock buyback. Results for the second quarter reflect better-than-expected NIM performance, solid C&I loan growth, strong deposit growth, lower credit costs, which were partly offset by higher expenses and a continued runoff in the CRE portfolio. Our PPNR return on average assets was 1.53% on an operating basis, and our tangible book value improved 2.1% from the first quarter and 8% from the year-ago quarter. As we signaled last quarter, we were successful in exiting our largest nonperforming loan as well as another of our prior quarter's top 5 problem loans. This brought nonperforming assets down to 35% from the first quarter. Unfortunately, we had one other office-related nonperforming loan we thought would be resolved in the second quarter, but the deal fell through and is now being remarketed for sale. While we are pleased with the progress we have made in resolving several of our problem office loans, we still have work to do. We continue to work constructively with our sponsors to find mutually agreeable solutions. From a business perspective, while the degree of economic uncertainty has improved, the combined impact of tariffs and other potential federal government actions remain unclear. Though it remains too early to tell what the true impact of the tariffs will be, our customers are moving cautiously through the plans they had established. The lack of certainty is causing them to pause any significant expansion or growth initiatives now as they assess the economic landscape. I would note there are many provisions in the recently passed legislation that are beneficial to the business community and could favorably impact future loan demand. We made solid progress on several of our key strategic priorities in the second quarter. We continue to reduce our commercial real estate concentration. C&I loans were up 3.4% in the second quarter. Conversely, CRE and construction loan balances were down 1.7% due to normal amortization and the intentional reduction of transactional CRE business. We've talked in the past about getting our CRE concentration below 300%. At June 30, our CRE concentration was 274% due to the sub-debt raise and contraction of CRE balances. However, the closing of Enterprise will move our concentration back up to between 310% and 315%. Our current expectations are to get this ratio to 290% by year-end 2027 through amortization and payoffs. We will also actively pursue loan sales where we can, which may accelerate a reduction in this ratio. We've also spoken in the past about our desire to grow C&I, in part to reduce our dependence on CRE and to drive more deposit and fee income growth. I want to spend a few minutes providing a bit more detail on how we are going to accomplish that. It starts with clearly defining the segments we are going to participate in and feel we can deliver the historical Rockland Trust client experience. The first segment is what we have called Community Banking. This segment is comprised of generalist relationship managers who market to both C&I and CRE customers and prospects. It is the ballast of the commercial bank and a segment we excel in. The average loan size is just over $1 million, which is the legacy Rockland Trust you are accustomed to. C&I customers are typically between $5 million and $50 million in revenue and credit needs are generally less than $10 million. In 2025, Greenwich named Rockland Trust the best bank in the Northeast for overall customer satisfaction and likelihood to recommend in this segment. The enterprise franchise fits squarely in this space. Growth in this segment will come from taking market share and doing more with our existing customers. The next segment is middle market and specialty business. This segment is comprised of 2 groups. The first group is focused on Massachusetts C&I companies with revenues between $50 million and $500 million and a team that has several industry verticals to include asset-based lending, dealer finance, franchise finance and security alarm. I've mentioned in the past, we recently hired a seasoned executive to lead these 2 groups who brings a demonstrated track record of success. He in turn has hired several people to round out the team, and I'm very encouraged by the early activity we have moving through the pipeline. These 2 groups, by their nature, will have higher credit holds, typically between $10 million and $35 million and will enable us to grow our C&I business in a meaningful way. And the third segment is our investment CRE portfolio. This segment focuses on investment CRE professionals where the loan size is typically greater than $10 million. As we've said in the past, our goal here is to exit transactional CRE as quickly and economically as possible while still serving our legacy client base. I know this is a drag on loan growth as we look to reduce our CRE concentration, and we are actively looking at ways to accelerate that transition so we can return to a more active originations posture. Our goal is to be able to grow loans in the mid-single-digit range, but until we can reduce our CRE concentration, it's likely to be closer to the low single digits. That's why this remains a top priority. We closed our acquisition of Enterprise Bank on July 1. Things are going extremely well. We've had great collaboration between the teams leading up to the close. As I've said previously, it feels like 2 puzzle pieces coming together and nothing we have seen to date would suggest otherwise. We continue to work closely with our enterprise counterparts as we plan the systems conversion that will occur in mid-October. Of note, their business model is very similar to ours. Unlike previous acquisitions we have done, there are no branch closures, no commercial businesses we are exiting due to a mismatch in strategy and credit philosophy. I feel confident this will enhance shareholder value as we assimilate the company, realize synergies from a broader product set and leverage a bigger balance sheet in the legacy enterprise markets. Concurrent with the conversion of Enterprise into Rockland Trust's core platform, we are preparing for our core conversion of the entire bank from Horizon to IBS scheduled for May of 2026. The move to a new platform within the FIS ecosystem will improve our technology infrastructure, enhance efficiency and scalability and support the future growth of the bank. We prudently grew deposits in the second quarter, which has been a historical strength of ours. Non-time deposits were up 3.6% year-over-year and 1.6% from the first quarter. In the second quarter, the cost of deposits was 1.54%, highlighting the immense value of our deposit franchise. Mark will provide additional color on our deposits in a few minutes. Finally, our Wealth Management business continues to be a key value driver. We grew our AUA by 4% in the second quarter to $7.4 billion, driven mostly by market appreciation. Total investment management revenues increased 1.4% from the first quarter and nearly 4% from the second quarter of '24. This business works seamlessly with our retail and commercial colleagues to deliver a holistic experience that resonates with our clients. The breadth of these services provides one-stop shopping for our clients that includes not only investment management, but financial planning, estate planning, tax preparation, insurance and business advisory services. This full suite of products is a differentiating factor for our wealth business. We've had very positive initial conversations with numerous enterprise wealth customers and believe like the rest of the Enterprise Bank, its customer base is very similar to ours, which will make the transition go smoothly. Enterprise adds approximately $1.6 billion in AUA to our platform and will offer additional cross-sell opportunities with our broader product offerings. While we are pleased with second-quarter results, I want to make very clear that we recognize our profitability metrics need to continue to improve. We are fortunate to have an enviable deposit franchise, a strong liquidity position and a robust capital base. Once we reduce our CRE office portfolio, we believe prudent expense and capital management together with continued NIM improvement and the realization of the benefits of the Enterprise acquisition, when coupled with the ongoing organic growth we are seeing in many of our businesses, we will begin to unlock the inherent earnings power of Rockland Trust. We have a skilled and experienced management team. We operate in attractive markets. We have strong brand recognition, a broad consumer, commercial and wealth customer base and an energized and engaged workforce. In short, we have all the ingredients to return INDB to its historical premium valuation. On that note, I'll turn it over to Mark.

Mark J. Ruggiero, CFO

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8-K filing and is available on our website in today's investor portal. Starting on Slide 3 of the deck, 2025 second quarter GAAP net income was $51.1 million and diluted EPS was $1.20, resulting in a 1.04% return on assets, a 6.68% return on average common equity and a 9.89% return on average tangible common equity. Excluding $2.2 million of merger and acquisition expenses and the related tax impact, the adjusted operating net income for the quarter was $53.5 million or $1.25 diluted EPS, representing a 1.09% return on assets, a 6.99% return on average common equity and a 10.35% return on average tangible common equity. The improved operating results reflect asset repricing benefit driving an improved net interest margin and contained loan loss provision. In addition, tangible book value per share increased by $0.99 during the quarter, reflecting solid earnings retention and a $0.28 benefit from other comprehensive income. Staying on capital, as Jeff highlighted, we recently approved a $150 million share buyback plan. This plan is in place to be opportunistic in buying back stock and will be governed by 3 major tenets. First, the stock price will obviously be a key component in how aggressive we may or may not be in the market. Second, we will balance the timing and the pace of buyback activity while simultaneously working to reduce our CRE concentration to the target level that Jeff just highlighted. Lastly, the pace will also be impacted by ensuring we have adequate cash at the holding company to service our debt requirements. I'll now cover the key highlights of the second-quarter results, and then I'll address some updates regarding the July 1 closing of Enterprise Bank. Turning to Slide 4. Core deposit growth remained strong with period-end balances up $218 million or 1.39% for the quarter, while average balances increased $116 million or 0.75%. The mix of deposits has stabilized with noninterest-bearing DDA comprising 28.5% of total deposits at quarter-end, while time deposits as a percentage of deposits decreased modestly to 17.1%. With steady emphasis on core relationships within both the consumer and business segments, net core households have increased for the 10th consecutive quarter, which has really served as the primary driver of our differentiated funding base. Moving to Slide 5. Total loans increased modestly in the quarter. And as Jeff just highlighted, our relationship banking strategic focus drove an increase in C&I balances of 3.4% or 13% annualized, attrition in our transactional CRE balances, offset by balanced new originations and steady volume in both our small business and consumer real estate portfolios. As an update on asset quality, we'll move to Slide 6, which reflects a few developments worth highlighting. First, total nonperforming loans decreased significantly from $89.5 million last quarter to $56.2 million at the end of the second quarter or 39 basis points of total loans. In terms of an update on the biggest movers for the quarter, the acquired $54 million relationship that was charged down to $28 million last quarter was fully resolved in late June. The other positive development was the final resolution of a $7 million previously disclosed nonperforming office loan. Regarding the previously disclosed nonperforming syndicated office loan that is located in downtown Boston, the bank group executed a modification during the second quarter, restructuring that debt into multiple notes with a full payment deferral period through July of 2026. As a result of the modification, no additional loss was recognized, and we expect this loan to stay on nonperforming status for the near term. Although we are certainly encouraged by the meaningful reduction in nonperforming loans, we recognize the environment remains uncertain. We acknowledge total criticized and classified loans experienced a bit of an uptick this quarter, but we are confident we can continue to proactively work through these loans as evidenced by the over $100 million reduction since last year levels. As a result of the moving pieces I just discussed, provision for loan loss in the second quarter was $7.2 million, reflecting modest adjustments related to individual credits and overall loan growth. Shifting gears now to the net interest margin. Let's jump to Slide 11, where you can see the reported and core net interest margin was 3.37%, reflecting minimal impact from purchase accounting and other nonrecurring items in the current quarter. The second quarter core net interest margin was higher than our previous guidance as we saw slightly higher asset repricing benefit while also being able to move on some deposit pricing to extract another 2 basis points benefit from reduced deposit costs. In addition, the strong deposit growth allowed for the repayment of FHLB borrowings, further improving the margin while continuing to structure the balance sheet for sustainable strong margin with very little wholesale borrowings. Moving to Slide 12. Noninterest income increased modestly in the second quarter, reflecting solid wealth management income results, increased deposit-related fees and an outsized benefit from bank-owned life insurance. In addition, total expenses, when excluding merger and acquisition costs, increased 1.8% when compared to the prior quarter. Some key changes for the quarter include annual salary merit increases and director equity award grants as well as increased check and fraud losses, timing on advertising expenses and legal loan costs. Lastly, the reported tax rate for the quarter was approximately 22.3%. I'll now shift gears and provide some insight into the Enterprise acquisition. Though we are only 18 days out from the closing, we are able to provide some updates regarding a few key deal metrics. First, excluding any fair value adjustments, we acquired approximately $4.1 billion of loan balances and $4.4 billion of deposits. Given the stock price at closing, the book value of the net assets acquired and the yield curve position at the time of closing, we now anticipate the deal to be approximately 8% to 9% dilutive to tangible capital on day 1, inclusive of the anticipated one-time merger costs and the non-PCD loan double count impact. Given that longer-term rates have contracted a bit since the time of announcement, this would suggest slightly lower tangible capital dilution than expected with the trade-off being modestly lower earnings accretion with no material impact on tangible book value earn-back period versus original expectations. In addition, we recognize that the FASB has issued proposed guidance that would effectively eliminate the non-PCD double count. However, it is anticipated that the final guidance will not be promulgated until later in the year. As such, we expect to close and report our third quarter results with existing PCD, non-PCD treatment. Lastly, with the core conversion scheduled for mid-October, we expect to recognize full cost save synergies during the first quarter of 2026, which we reaffirm to be approximately 30% of the enterprise expense base. In closing out my comments, I'll turn to Slide 16, where we will now focus on next-quarter guidance only given all the moving pieces of the recent merger closing. In terms of organic loan growth, we anticipate a low single-digit percentage increase on a combined basis. For organic deposit growth, past experiences suggest we may see some modest level of deposit attrition from the acquired balances. As such, we are estimating flat to slightly down combined deposit balances. Regarding asset quality, we still do not see any pervasive broad-based issues across segments, and as such, the provision will likely continue to be highly driven by developments of individual commercial credits. For noninterest income, we estimate a low single-digit percentage increase off of the combined results. For noninterest expense, as I just alluded to a little while ago, we will expect to see a flat to low single-digit percentage increase on the INDB stand-alone results, which includes some level of costs associated with our 2026 core system migration. Regarding the enterprise expense base, we should realize some modest level of cost savings in the third quarter. However, we will refine the assumptions over the timing and extent of full cost savings as we work through the second half of the year. Regarding the net interest margin, we provided a revised chart on Slide 17 to show the path of what is expected for continued margin expansion from both the core INDB and Enterprise results, along with the anticipated lift from purchase accounting. This indicates we would project the third quarter margin to be in the mid-3.60s range. As a reminder, the purchase accounting estimates are based on the preliminary work that has been completed to date as the fair value marks have not been fully finalized at this point. Lastly, in closing out the guidance, the tax rate for the quarter is expected to be in the 23% range. That concludes my comments. And with that, we'll now open it up for questions.

Operator, Operator

Today's first question comes from Steve Moss at Raymond James.

Unidentified Analyst, Analyst

This is Thomas on for Steve. So where were new loan originations during the quarter? And maybe can you speak to some of the competitive dynamics you're seeing there and how those dynamics are impacting loan pricing and demand?

Jeffrey J. Tengel, CEO

Really, we've seen good loan originations across most all of the segments I mentioned. Obviously, we're being more conservative with respect to our CRE portfolio. But whether it's in some of the specialty businesses or just our core middle market and the commercial segment I just described, I wouldn't say it's been more heavily weighted in any of the different segments. It's been pretty broad-based. The competitive landscape just continues to be a challenge. There's an awful lot of banks that are, I think, similarly interested in growing their C&I portfolio. So I think it's particularly keen there. But I would also tell you, even within the commercial real estate space, we're starting to see some of the banks that maybe a year ago were really not interested in commercial real estate at all, kind of tiptoe back into the market and begin to get a bit more aggressive in the commercial real estate space.

Mark J. Ruggiero, CFO

And just I'll add from a yield perspective, Thomas, that on the commercial side, we see our second quarter closings in the high 6s, probably in the 6.70% to 6.80% range. And on the consumer book, a bit lower, probably mid-6s.

Unidentified Analyst, Analyst

And then one more for me. Your small business lending continues to be a bright spot for you guys. Can you just talk about maybe a little bit why you've seen so much success there in recent years and whether you expect that to continue?

Jeffrey J. Tengel, CEO

We do expect it to continue. It's really an extension of what we see in our core business. We have long-time Rockland Trust bankers who are very well known in the market and are actively involved. Additionally, we have a centralized underwriting unit that allows us to quickly process loan requests. The combination of these two factors is very powerful. Our extensive experience and streamlined process enable us to be much more nimble than many of our competitors.

Operator, Operator

And our next question today comes from Mark Fitzgibbon with Piper Sandler.

Mark Thomas Fitzgibbon, Analyst

First question, Mark, just a follow-up. So you're suggesting the third quarter margin is going to be something in the mid-3.60s. And even with some deposit runoff, you think assuming the Fed cuts in the back half of the year, we'll see the margin gradually rising. Would that be fair?

Mark J. Ruggiero, CFO

That is fair. Yes. I think we're really positioned pretty well on the short end of the curve if there's a Fed cut where I think we would neutralize the impact on our asset downward pressure, and we'd be able to move on deposits to essentially negate that. And as long as the longer end of the curve stays elevated, that's been the big driver of the margin expansion you've been seeing.

Mark Thomas Fitzgibbon, Analyst

Okay. And then yesterday, 2 other large New England banks came out and essentially said on their calls that the worst is behind for credit. It didn't sound like you all were saying that in your comments about credit. Would you agree with that statement that those other 2 banks made that the worst is behind here on credit?

Jeffrey J. Tengel, CEO

Honestly, Mark, it's hard to tell because things are so property specific. And so I'd like to think the worst is behind, but I'm not ready to call the ball on that. As I said in my comments, we feel really good about the progress we've made, and we're continuing to make progress. We're working constructively with all of our borrowers, including the ones that are a bit stressed. But I'm not sure that I would say that we're out of the woods. So I guess, as I think about it, we may be past the worst in terms of an inflection point, but we're still working through some of the challenges we have.

Mark Thomas Fitzgibbon, Analyst

Okay. And then just with respect to that, I think this quarter, you made one large loan modification. Could you share with us what that modification looked like, what the term changes were? Just give us a sense for how those are progressing.

Mark J. Ruggiero, CFO

Are you referring to the large syndicated downtown Boston loan that I alluded to in my comments, Mark?

Mark Thomas Fitzgibbon, Analyst

Yes.

Mark J. Ruggiero, CFO

Yes. This is one we've talked about now, I think, for the last couple of quarters that had reached maturity. And this is a much larger syndicated deal. We're one of 7 or 8 banks in the deal. So we anticipated that this would be coming to a point where the bank group would be working with the borrower who's a very strong sponsor to find some form of modification and where the bank group landed in this case was to essentially restructure this into a note A, note B structure, whereby the note A loan is representative of a valuation and expected debt service coverage to support the appropriate metrics. And then the note B structure is one that I think is where there's to be seen impact going forward. So because of that modification, some of the concessions there was essentially no cash payments until mid-2026. So even though they're technically performing under the modified terms, we will not suggest this is a loan that would come back on accrual status anytime soon.

Jeffrey J. Tengel, CEO

The sponsor is investing in this property for lease-up and tenant improvements. We are waiting for this process to unfold, which will lead to full leasing, improved debt service coverage, and better cash flow. Eventually, we expect to return it to performing status.

Operator, Operator

Our next question today comes from Laura Hunsicker with Seaport Research.