Independent Bank Corp. Stock

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 Ruggiero, CFO. [Operator Instructions]

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 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.

Before we discuss our quarterly results, I wanted to share an update on my health. We released an 8-K 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 1.36%. 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 C&I and Home Equity portfolios, offset by heavy loan payoffs within the CRE book. With respect to C&I, excluding the impact of the $37 million decrease in our Dealer Floor Plan business, which we have now largely exited, our C&I loans rose by $116 million a healthy 10% on an annualized basis. This growth was broad-based across all of our market segments. Investment CRE & 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 CRE commitments we added. Our CRE concentration now stands at $278.

On June 30, our approved commercial loan pipeline totaled $510 million, up from $313 million on March 31. 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 4 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 nonperforming 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 second quarter and have averaged just 9 basis points over the last 5 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 5 quarters, excluding the [ A1 ] impact of the Enterprise acquisition.

Excluding M&A charges and nonrecurring 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 clearing house 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 this 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 30 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 8 basis points in the second quarter. Core loan yields increased 3 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 5 basis points for the quarter with increased amortization and maturities expected in the second half of the year. And lastly, as Jeff noted, we're 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 4 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 C&I.

On the C&I side, the ability to enhance our combined offerings to both the smaller and mid-market C&I space was highlighted this quarter as C&I 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 is 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 the 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 nonperforming 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 [indiscernible], though we are seeing some increased volatility in delinquencies and nonperformers 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 2 basis points annualized, with total year-to-date charge-offs now at only 6 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 hypervigilant on effective early identification and development of workout strategies on problem loans.

Moving to noninterest 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 30, 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 0 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 noninterest 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 CRE & 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, 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 million to $557 million range, plus the onetime systems conversion expenses to land in the $5 million to $6 million total range for the year. And that concludes my comments.

And with that, we'll now open it up for questions.

[Operator Instructions] Your first question comes from the line of Justin Crowley from Piper Sandler.

First of all, Jeff, on the health update, congratulations. That's really excellent news and thrilled to hear it. I think we all are.

Wanted to start out on loan growth and maybe stick into that commercial real estate bucket where the guide was tweaked a bit lower. I was wondering if you can give a sense of what else may had gone into that? I know you mentioned the payoff activity. But just maybe some details just on the evolution of the market uncertainty and competition from where we were 90 days ago, we talked through this.

Yes. I mean especially in commercial real estate, it feels like the market has continued to get more aggressive as the year is has unfolded. Part of that is evidenced by -- we talked about the elevated pay downs in the second quarter. We had 2 loans in the second quarter that accounted for $120 million of those pay downs. So -- and one of both of the loans are refinanced away from us. And one of them was refinanced really on terms and conditions that we were very uncomfortable with. And so that's some of the headwinds that we have when we're trying to grow the commercial loan book.

Having said that, as Mark pointed out and I did as well in my comments, we still originated a healthy amount of commercial real estate in the quarter and feel like we can continue to do that in the back half of the year and really would expect paydowns to revert back to their more historical levels, which is why we think in the second half of the year, we could see flat to modestly up commercial real estate balances. It won't offset the the first half of the year headwinds, but we think that is a good signal for us in terms of growing the balance sheet.

Okay. And then, I guess, kind of like within commercial real estate, I know it's still early days here, but what have you been hearing from borrowers in the wake of the decision we got just on Massachusetts front control. I guess any read on how that could impact the commercial real estate market and just the overall level of activity in the state?

I think it's a little too early to say that we've seen a a big increase in the demand for multifamily construction. We have seen some asset sales that I think maybe wouldn't have occurred had that news not come out. But we do expect that there will be more activity as we move through the second half of the year in that -- in the multifamily construction space. And of course, it also impacts the permanent market as well to the extent that there are sponsors looking to sell their multifamily business. The cap rates have likely come in a bit because of the rent control ruling. So too early to tell, but we -- but I do think as we move through the balance of the year that we'll see an increase in activity.

Okay. Got it. That's helpful. And then maybe just one last one on credit. As you guys pointed out, overall, looks like stabilization, if not some improvement in a lot of areas. And I know there's some moving parts. I guess, just in the non-performing bucket, with the growth inflows picking up a bit over the last quarter, curious if you could talk through some of what you saw there? And then just some color on the payoffs that kind of help keep a lid on that net increase for the period.

Yes. I mean, the story on the nonperforming asset side on the commercial is fairly benign. I'd say the biggest movers was the actually resolution and pay down of one office nonperformer that we were talking about last quarter, that was about an $11 million loan that had been charged down to. That came off the NPA list and we had one new one go on at about $14 million. And outside of that, there was very little movement within the commercial bucket. I did mention in my prepared comments, what you're seeing really is the primary driver of the increase is a bit of an uptick on the resi side. But it's interesting as you go through each case, you're seeing a dynamic where the consumer will often suggest that the mortgage payment is one that they're willing to delay while still spending in other areas. So believe it or not, we have a lot of what we would call chronic nonperformers where -- they make periodic payments throughout, but it's not at a consistent pace where you can establish putting them back on accruing status. So in all cases, there's plenty of equity in the homes. We don't see really any emerging loss dynamics in that segment, you're just seeing a little bit of payment or payment issues where delays are ticking up a bit in terms of delinquencies and NPAs.

Yes, sorry, Justin. One of the comments I'd make on our nonperforming bucket is the largest nonperformer, which we've talked about multiple quarters, continues to improve. And we think there's a chance that it could return to performing status by year-end. So we're encouraged by the progress there.

In fact, it already started to make interest payments in July. So there was an 18-month no payment period that effectively started last January of last year. So that 18 months has come due, and they are starting to make the interest payments.

And one other comment on the rent control that you asked about Justin. And just to be clear, the organization that was bringing that forward. They can come back in 2 years. So that's the -- I'm not sure what the lead lease is around that, but they'll have the ability in 2 years to reintroduce that as a ballot measure.

Okay. That's helpful. I guess just on that one large nonperformers [indiscernible] that you called out, do you have -- how much -- what is the balance of that right now? I'm not sure if you have it handy?

The largest one that's been on nonperforming?

Yes, correct.

Yes, that's a $22 million large syndicated loan. We had taken a fairly sizable charge-off on that -- down to that balance. So it's staying on the books now at about $22 million.

Your next question comes from the line of David Konrad from KBW.

And I'd also like to say, Jeff, congrats on your health. It's great news. Mark, some questions for you. I mean, I think the quarter really isn't about the NIM, but it's about the balance sheet. And could the volatility in deposits, I'm looking at cash balances around $730 million EOP last quarter, $530 million average, and now we're up to $1 billion EOP in cash, kind of flat security. So kind of when we think about the guidance in the back half of the year, I guess my key question is, how quickly -- what do you think cash and securities that mix shift, what will that end up? Do you think by the end of the year? How quickly can you kind of remix that?

Yes. No, it's a great question. And we're already remixing that into securities right now. I mean, ideally, we'd like to see that obviously get redeployed into loan growth, but we absolutely will be more aggressive in putting more of that cash balance into the securities bucket. So ideally, I would say, targeting earning cash in the $400 million to $500 million range over the second half will be a bit -- we'll monitor the pipeline and see how much of that we get comfortable should get redeployed into loan growth. But I would expect that you'll see us -- sort of put more of that back into higher yielding securities.

And then you also have, what, about $0.5 billion or so rolling off in the second half like sub-2%, right? That's another benefit...

No, no. It's interesting. In the second quarter, you only saw about $70 million of runoff in the Securities portfolio, $45 million of it happened literally on the last day of the quarter. We had a treasury security mature at 87 basis points. So the 5 basis point lift you're seeing in the securities book for the second quarter, very, very comfortable suggesting that's a low point in terms of quarterly increase. The $200 million in the third quarter, $200 million in the fourth quarter, give or take, at 2% coupon, that should create more like a 15 basis point lift each quarter. All other things being equal, and I would think we can go even more north of that if we're putting more purchases into the book as well.

Got it. And what yields are you looking at now with the improved yield curve?

Yes. We're -- I mean we're still looking mostly at deep discounted MBS that give us sort of down rate protection. But as the rate environment and expectations are starting to shift more, we're more comfortable taking on a little bit more duration. So call it, high 4s, 5% on new purchases.

Your next question comes from the line of Steve Moss from Raymond James.

Jeff, just to echo what's already been said, congratulations on your health here. Great news there. Definitely glad to hear it. In terms of just the -- going back to the loan pipeline here. Just kind of curious on the -- as the mix shifted to more C&I in the pipeline on that $510 million number? Or is it kind of similar to what you guys disclosed in there in terms of what was originated for 2Q? And just one other thing to throw in there. Just curious on where you're seeing loan pricing these days?

Yes. The mix is, I would say, has shifted to C&I slightly in the pipeline. Part of that is we had a number of approved loans that honestly, we thought we're going to close in the second quarter and they didn't -- they slipped into the third quarter. So that's one of the reasons why I think the C&I pipeline is a little bit higher as a percentage of the overall than maybe it was in the in the first quarter. But I think we're -- we expect to see good originations in both asset classes, C&I and CRE as we move through the second half of the year.

I'll add on. And the good news is, as more of that pipeline has shifted to C&I, it's primarily more floating rate. So we've seen new originations on the commercial space move up into the mid-6% range. In the pipeline, I have the data, it's about 50-50 CRE, C&I today. I can't recall off the top of my head last quarter if it was materially different than that. But to Jeff's point, it probably it probably continues to tick a bit more up C&I versus creep from a mix standpoint.

Okay. Great. Appreciate that color there. And then in terms of capital deployment, you guys bought back 2% of shares outstanding here. Just kind of curious how -- and capital ratio has barely moved. Just kind of curious as to how you guys are thinking about the payout ratio here going forward on a combined basis. Do we think about it as 100% of quarterly earnings or maybe a bit more than that just given where your capital ratios are at the [indiscernible]?

Yes. I'd say 100% is the minimum, Steve. And I think ability to do more. I talked about this in the past, but we're A lot of that, I would like to fund via earnings in a bank holding company structure, dividend funding up from the bank to the holding company allows us to execute buybacks in a much more economic efficient way, not against borrowing to execute more buyback than that. But that's the calculus we'll go through each quarter to see how aggressive we want to get in terms of returning over 100% profits. But it's an appropriate question to ask. Obviously, the growth has been challenged. So we are definitely committed to executing the buyback in an aggressive manner.

Okay. Appreciate that. And then on expenses here, just kind of curious, obviously, you got the conversion coming up in October. It kind of seems like your underlying core expense run rate will be fairly stable, call it, [ 1.30%, 1.39-ish. ] As we kind of look at going forward, I know you guys have been looking to hire people and add more talent. How do you think about the -- your investments and maybe your expense growth rate a little further out here?

Yes. I mean I think, as Jeff said in his comments, the mentality here is sort of a whole line type mentality, meaning we can't take our foot off the pedal in terms of thinking about AI and technology investments and that's part of what you're seeing even in the last couple of quarters is increased IT bend and talent in those areas to help develop some of the technologies that we know we'll need to deploy throughout the bank internally. So it's looking for opportunities to find areas to reduce or smarter on and other spend across the bank. So I think it's still supporting the infrastructure that we think we need to be a bank that continues to grow in this space, but we need to find the offsets to make sure the expenses are held in check.

Your next question comes from the line of Laurie Hunsicker from Seaport Research Partners.

Yes. Yes. Congratulations. I'm so, so happy to hear that news. Just wanted to maybe start over with margin and [indiscernible], I just want to make sure I'm thinking about this right. So as I look linked quarter, you guys actually had a jump in your money market. I mean the line held flat on an average basis that I'm talking about the rate, right? So the rate went from [ 206 to 210 ]. So directionally a little different, that we're seeing. Is it just so competitive you're paying up? Or was that a special? Or how do we think about that?

Yes. It is we have a money market special that we introduced into the market, I'd say, halfway through the second quarter, that is a 4% sort of short-term money market rate. So it's not surprising, Laurie. We're seeing some of the new money come in on that special. So it's been pretty equally balanced between DDA low-cost deposits and higher rate promo money. But I'll be fully candid. We would expect the cost of deposits to tick up a bit in the second half. I'm still comfortable with the fourth quarter guidance range that we gave with the margin in the 3.90%, 3.95% range. But our spot cost of deposits in June was at 1.38%. So I think you'll see a little bit of pressure on the cost of deposits in the second half.

Okay. That's helpful. And then what was your spot margin?

Spot margin for June stayed at 3.76%, which is what the full quarter was despite that cost of deposit increase I just mentioned. So we're still seeing the asset side repriced to offset that.

Great. Okay. So 3.76%, and that's obviously excluding the accretion?

Exactly. That's a core number, correct.

Okay. Great. And then just going over -- back over to office. So you're down to -- you've got the two office nonperformers, obviously, the $22 million which you've talked about for some time. And I just want [indiscernible] I heard that potentially goes current in the fourth quarter?

By year-end, potentially.

Okay. And then the $18 million office that remains, that's the Life Sciences loan?

In classified -- in our performing. No, the $18 million is the -- that's a loan that had moved into nonperforming. Last quarter, we had taken a reserve on it. We're in the process of brokering that for sale based on some updated BOVs, that's one of the two properties we actually put a bit more reserve on. So we're hoping to get that resolved in the second half of the year. That's a $17.4 million balance but that has a full reserve on it based on our updated BOEs.

Okay. But that one -- is that on the Life Sciences? That's the one where you had a large tenant or am I -- is that a different...

It's not the labs, that has been built up and now has new tenants in it. This is another Life Science single-tenant facility.

Got you. Okay. And then next quarter, I'm just looking at Page 10 and I love all of your details here. But -- and this certainly was unchanged from last quarter. But the $20 million that's criticized that matures in the third quarter, is there anything that we should be thinking about there? Or how are you looking at that?

So the third quarter criticized levels is primarily two loans. Give me one second. Let me just make sure I'm getting you right data here. Yes, for the classified. So we have basically -- the classified as the loan we just talked about, within the other criticized the $26.8 million, it's two loans, $117 million, the other is $10 million. We're both we're working through on both of those for a resolution. We think one of them would likely either refinance out as that becomes reaching maturity. And the other, I believe, is likely on track to see sort of a short-term extension. So both of those right now based on the data we have, we don't see any imminent loss exposure on them, but we are looking for either short-term extension or hopefully, we refinance out on both.

Okay. Yes. So that's helpful. Okay. So that's the $27 million and $117 million we're talking about. I'm sorry, the one that comes up in the third quarter, the $19.9 million criticized that's maturing in the third quarter.

The third quarter is also two loans. Yes. So sorry, third quarter is also to loans. One of them is $14 million, the other is about $5 million. I'd say the $14 million loan. We're also working with the broker to sell that property based on data now, we do expect full payment. So we hope to get out of that here in the second half.

The $5 million loan, that one is a little bit of a different situation. It's anchored by one primary tenant who is indicating they may be leaving the space. So if that ends up happening, we would expect that, that will have maybe a modest impact on the valuation. So right now, there's no loss reserve on that.

Jeff, you've now held, I think, for at least a quarter, maybe 2 quarters that were [indiscernible] on office, which is still strong [indiscernible] inning? Or were you supposed to be [indiscernible]? How are you thinking about it?

Yes, it still feels like we're in like kind of this long seventh inning. I am encouraged, though, by the amount of work that we're doing that I think is going to -- over the next couple of quarters, hopefully, bring down the office loans in our criticized and classified buckets. We have an awful lot of energy around moving as many of those out as we can. So hopefully, we can get into the eighth and ninth inning before too long. But -- but we still have a lot of work to do, but we're doing the work. And I think we'll have some positive outcomes over the second half of the year.

Okay. Great. And then just income statement, just two questions here. Noninterest income looks like outsized fully debt benefits and sort of outside loan level derivative. I mean, if we're looking at your projected numbers have increased, do you exclude that BOLI debt benefit or maybe a better way to ask this, taking sort of about a core number of $41.6 million would be a closer number, the quarterly run rate?

Yes, I mean, I think you'll lose a little bit of tax prep fees in the third quarter, obviously, off of the second quarter numbers. But I think a lot of the other major components were these deposit-related fees, interchange those all should be pretty consistent and continuing to increase modestly. So I think I would expect to see us pretty consistent with Q2 results all in.

A bit on the BOLI side, it's pretty modest, right? So I think even with or without that, you should stay in that $42 million plus range. .

Okay. And then last question for me. On your expenses. So the core systems upgrade was $1 million, and then you mentioned another $1 million that was -- that was nonrecurring in the quarter. I guess just what was that? And then if we look at the core systems upgrade relative, it looks like you sort of up-ticked your spend a little bit there. We're going to have maybe a $4 million charge in the third quarter [indiscernible] into that or are you still going to take some of that in the fourth quarter because it's an October event. How should we think about that?

Yes. So just to be clear, we had $1.1 million of core charges in the first quarter, that increased to $2.1 million in the second quarter. So we're a $3.2 million all-in already year-to-date. So the $1 million reference is the increase quarter-over-quarter, but both quarter had meaningful charges in there. In terms of the remaining, so call it $2 million to $3 million, I would expect most of it to be in the third quarter, or because the conversion date is in October. You may see some added consulting expense in the fourth quarter to help with whether it's call center or other sort of customer-facing work that we would expect post conversion. But I would imagine the bulk of that will be in the third quarter.

Your next question comes from the line of Matthew Breese from Stephens Inc.

Jeff, I'd be remiss if I didn't congratulate you on that, the health news. It feels a little out of [indiscernible] hopscotch to NIM and loan growth dynamics, but very glad to hear the news. Everything else I suppose is secondary.

Mark, you touched on a little bit deposit competition. I guess I'm curious, you had mentioned the spot rate, I think, is 1.38%. Should we expect that kind of cadence, maybe 1 or 2 bps of deposit cost increases through the end of the year? And then as we think about -- because you're also growing DDAs, as we think about kind of the all-in new money rate for deposits. What is that relative to where you're at?

Yes.Yes. I think your first question is spot on there, Matt. I would expect I mean we're already talking about 2 basis points in terms of that spot rate number I gave. But I'd like to see us counter that a bit and kind of keep that in check through the third quarter and and probably even a little bit more pressure heading into the fourth quarter. So when I look out into the margin guidance and reaffirming the 3.90% to 3.95% range, I'm comfortable suggesting that with an expectation you could see cost of deposits tick up towards 1.40%. I think there's still enough asset repricing benefit and with some growth, hopefully on the commercial side.

I think you even land in the low end of that range even with some of that cost of deposit pressure. And the reason we're seeing that pressure hit on it in the second part of your question, we're seeing basically almost 50-50 kind of DDA plus promo money driving those new deposit results. So that's going to create sort of an all-in weighted average cost on new deposits, call it, around 2%. So as the deposit environment -- our deposit situation has stabilized significantly through June I think it's prudent for us to revisit sort of the promo strategy and make sure we're finding the right sort of marketing and I guess, new sales efforts to keep that new cost of deposit in check. So I don't want to promise anything quite yet out of the gate, but we recognize the more that comes in on that promo money, the more pressure that is on cost of deposits though with with the modest growth and the nice lift we got through June, I think it gives us the opportunity to get a bit more tactical on that front in the second half.

Okay. And then just a follow-up, Mark, on the NIM. When you model it out. How much longer might we see the fixed asset repricing benefits flow through to the NIM? When do you think it starts to peter out? And I'm particularly focused on 2028 as loan yields kind of spiked in 2023. And just my gut is that we start to see some of those benefits from '23 roll off in '28. And I'm curious if that kind of aligns with what you're seeing?

It does. It does. I think there's certainly additional repricing benefit, both on the securities and the loans through 2027. And I would suggest early '28 is when you start to see most of that really low coupon, not impacting as much.

Okay. Jeff, one for you. Kind of marrying 2 [indiscernible] together and considering your background and the continued disruption in Connecticut with Webster being sold. Is there an opportunity for you all to kind of expand the geography, start to hire or de novo in Connecticut considering how many folks you're close to there. I would also throw in hiring and/or M&A, but I know what the M&A answer is going to be.

Yes. So the M&A answer would be the same as it's been in past quarters. And I think de novo branching would probably be a ways off. But having said that, we are having active dialogue with some of the people that are in Connecticut that I know. And honestly, we've done this in the past, our Head of Commercial Banking, [ Jim Rezo ]. I don't know, Mark, how many years ago, this was that we established effectively an LPO in Providence and experienced a lot of success there. And so we're having conversations as we speak about thinking about doing the same thing in Connecticut, which again, we have confidence we can do because we've done it before.

But it's all about the people. We wouldn't do it if we couldn't get the right people on the ground that we felt confident could build a business.

Would that be like a Hartford play or more Northern Connecticut?

Could be Hartford. It could be New Haven, Fairfield County at this point, we've been open-minded about it as we've been having discussions with various people. Our preference would probably be Hartford just because it's closer but not exclusively.

Okay. And last one for me. Wealth Management, good quarter, nice to see AUM tick up as well. But as I measure kind of fees to AUM, that ratio has started to creep up in recent quarters. It's now at 63 basis points versus 59 just a few quarters ago. Anything to that? What's going on behind the scenes to drive a higher level of profitability there? And do you expect it to continue?

Yes. I'm not sure, Matt, if you're using from an income perspective, if you have just what I would call managed money or if some of our other ancillary businesses might be in that revenue number you're using. But we've seen our fee ratio stay relatively flat, to be honest, over the last couple of quarters. So I wouldn't suggest where -- we're seeing any dynamic that is driving an increase in fee ratio I think it just might be other services that we've put into the Wealth business that are also giving us some nice lift on the revenue side. I can help maybe break that down...

Yes, I'll follow up with you there.

Yes. The [ 14.9% ] just that's all an all-in number. If you look at the slide deck we include in the slide we included in the earnings deck, we try and break out what is really tied to the AUA versus what's tax prep, we have estate planning. We have a business advisory fee services, all that is in that $14.9 million number.

[Operator Instructions] Your next question comes from the line of Jared Shaw from Barclays.

Congratulations as well. That's great news. Yes. So I think a lot has been addressed. I guess, just on the loan side, what's giving you confidence that the pace of prepayments on the CRE side is going to slow down in the second half? Is that just more of a willingness on your part to to engage? Or you just are looking at sort of the pipeline of what's coming down?

I think it's both of those things. And then I would add one a third, which was I mentioned in my comments a little bit earlier, we had two rather large loans, and one of them wasn't one loan. It was a it was two or three different loans, but to one sponsor. But the two -- I'll call it, the two relationships totaled $120 million of pay-downs, incredibly lumpy, a bit unusual in terms of our normal pay-down activity. So -- so it would be a combination of those three things, Jared, we don't expect that kind of lumpiness of size in the second half.

And and we think we're going to get good originations as we move through the second half of the year. And we're going to continue to defend our existing clients when they're refinancing and be as aggressive as we think is appropriate without doing something stupid. But I guess is -- so a combination of those factors is what gives us confidence.

We have very few $50 million exposures in the book at all. So to have two of them pay off is pretty unusual.

Yes. Okay. So I guess if we just sort of look at the expectations for the second half of the year and some of those trends, I mean, when we look at '27, is that the type of thing where we could be mid- to high single digit loan growth overall?

I would think mid-single digits overall, if we can get some traction in CRE, I feel very confident we'll continue to to generate the kind of loan growth that we've had on the C&I side. And we're just talking commercial here, not consumer, but I think we could get back to the mid-single digits.

And then what's the new loan yields going on right now on the commercial on the C&I and the CRE side for you?

Yes. On the commercial side, C&I is mid- to high 6s, CRE probably low 6s. So all in, it was trending around 6.5% for the second quarter. So it's up nicely quarter-over-quarter. On the consumer side, home equity is typically prime minus 50%, give or take, on average, and then on the mortgage side, we're still only putting into portfolio both [ 5 or 71 ] product, we have not opened up 30-year fixed to the balance sheet. So that's pricing, we're staying fairly competitive on and kind of the high 5s, call it, 6% range.

Okay. All right. And then on the DDA side, good trends on growth there. Is that just getting a bigger wallet are from existing customers? Or maybe you could break down what's sort of new to bank versus existing customers doing a little bit more?

Yes, it is both, Jared. We see a lot of seasonality in the second quarter, and this is probably the biggest drop in rebound that I've seen here since I've been at the bank. I think to give that perspective, we got probably as low as like $19.6 billion during the quarter. So significant rebound. A lot of that is existing relationships, and just kind of we have a lot of activity on the Cape and the Islands. That's more seasonal tax time period always creates some drops and then rebounds. So a lot of it was rebounding on existing relationships.

On the new money, we're still very much on the consumer side, community bank driven with a free checking product that doesn't bring in a lot of big single deposit relationships, but it brings in a lot of units and it adds up in dollars over time. So that continues to be a big driver of new money. And on the business side, it's -- we're at a [indiscernible] treasury management, some of the C&I activity that we're doing, that's going to lead to better full-wallet deposit relationships on the commercial side. muni is always a bit volatile. We had a big uptick on municipal in June as well, but that's an area that we have a good team on and is sourcing some new wins as well.

Good. And then just finally, I know it's a relatively small part of the overall number, but good growth in the interchange and ATM fees. Is that anything to call out there? Is that the impact of Enterprise? Or is that just sort of seasonality?

I think a little bit of seasonality. I wouldn't say there's anything unique to call out there. But yes, it's it's a focus on operating accounts that continues to put that debit card in their hand and drive interchange. So that's -- it's nice to see that lift play out.

At this time, there are no further questions. I will now pass the call back to Jeff Tengel for closing remarks.

Thank you. We appreciate everybody's interest in Independent Bank Corp. Have a great rest of the day.

This concludes today's call. Thank you all for attending. You may now disconnect.

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 8 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 scheduled to take place in October of this year. The new operating system will provide additional product capability and enhanced 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 clearing house 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 into 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 is 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 and 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, health care benefits, materials and utilities. Suffice to say, the environment is best characterized as somewhat challenging. I would summarize our customers' 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 CRE concentration now stands at 283%, and we believe we've achieved most of the targeted reduction in transactional CRE business. While we have reduced transactional free balances, we funded $179 million of relationship-based free loans in the first quarter and added $290 million of CRE commitments. We still like the CRE asset class, and we'll continue to support our clients in this space the way we always have.

This dynamic continues the rebalancing of our commercial lending business. C&I loans now represent 25% of total loans versus 22% at year-end 2024. It's important to note that our C&I 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-end 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 criticized status. We continue to believe the challenges within our office portfolio are identifiable and manageable. As I've mentioned in the past, there is 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-based 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 CRE office portfolio and prudent capital management. These actions, coupled with our industry-leading deposit costs, disciplined 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 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 and 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 1 particular asset class where we have seen this impact. With the reduced CRE 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 CRE strategy continues to play out, we remain extremely optimistic over our near-term C&I growth prospects. Reiterating the $39 million decrease associated with our winding down of the dealer floor plan portfolio, other C&I 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. In 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 8 basis point lift in the core margin. And with elevated purchase accounting 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 nonperforming assets increased to $98.7 million or 0.52% of total loans, driven primarily by the downgrade of 1 office loan which has an approximately $2.8 million specific reserve established. 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. And as a quick positive update, this $4 million charge-off loan was associated to a nonperforming 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 criticized 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 C&I 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 2 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 increased our estimate to suggest that the 2026 fourth quarter margin will now be in the range of $3.90 to 3.95% and while still assuming a 10 basis point impact from purchase 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.

[Operator Instructions] Your first question comes from the line of Justin Crowley with Piper Sandler.

I was wondering if you could start off on loan growth. You tweaked the guide a bit lower on the CRE side of course. So I was just curious if you could expand even a little more on what informed that decision. And then also if you could just give us a sense, you mentioned some caution on the borrower side. But just as far as demand, how you seen borrowers respond with some of the heightened macro volatility? And how long you think that could maybe persist here?

Yes. On the CRE side, it's interesting because the commercial real estate market has gotten very, very competitive. It's really competitive at -- we see it at the low end with a lot of the smaller banks and the mutuals and we see it at the larger end, too with some of the larger banks. And it's a space where, as I said in my comments, we're not going to stretch for structure or for rate. And so we think the environment has been -- is really very, very competitive. So we're continuing to support our existing clients where we can.

The other thing that I think is providing a little bit of a cloud over the commercial real estate business in Eastern Massachusetts anyways, is the prospect of rent control. And so a lot of the multifamily projects, and these would be mostly construction loans really aren't happening. A lot of the investors are on the sidelines and they're not commencing with any of the maybe historical pace that they would have in the construction space in that multifamily asset class. So we've definitely seen a marked slowdown there.

With respect to the second part of your question, it's kind of hard to pinpoint when that's going to turn. If you could tell me when the war is going to be over and when the price of oil is going to return to where it was prior to the war, I think I might have maybe a little bit better answer or maybe in listening to our clients have a better sense for how they're thinking about it. But I think caution right now is definitely the word I would use to express how generally our -- that middle market and lower middle market client base deals -- but it doesn't mean there's no activity at all.

We still have clients that are very healthy and very strong, and they'll continue to invest where they think it's prudent. But it definitely is causing the owner-operators that we typically bank. It's just giving them pause and it probably makes some think a little bit long and hard, the phrase about measure twice and cut once, I think, is definitely something that they're probably running through their minds.

Okay. Got it. That's helpful.

Sorry, I'd just add from a guide standpoint. I think all of that uncertainty certainly has increased a bit over the first quarter. And I think just a bit of a positive element to it. That -- the $40 million office loan, we had a sense could come to fruition here in 2026. But having that play out in the first quarter and creating a little bit more of a drag on net loan growth was -- those are probably the 2 primary drivers to just being practical around the expectations going forward.

But I think in terms of opportunity and the pipeline growing, as Jeff alluded to, there's still a lot of optimism and positivity there. I think it's just a little bit more uncertainty with the war and the office payoffs to be quite honest driving the guide reset.

Okay. Understood. And then just flipping to -- on the credit side, you saw nonperformers up a bit and then had the criticized inflow. Can you provide a little more detail on the drivers there? I think you mentioned office as a fact there, at least on the nonperforming side a bit. I'm not sure the extent when you look at criticized balances? And then I know it's pretty formulaic at this point, but just how all the inputs, how that gets you to an allowance that was pretty flat for the quarter, just where you feel or how you stand on credit quality.

Yes. I'll take the first part of that, Justin, and then I'll let Mark take the second part. With respect to the criticized assets, we really had 3 larger loans that moved to criticized status at make up the bulk of that increase. And all 3 are in different asset classes. Only one of those is in the office asset class, one of them is C&I. And the other one, I think, is in the multifamily space, which is really the first multifamily loan that I think has been criticized in quite some time. And in that particular instance, it's just a little bit slower lease-up, which we're not overly concerned about. It's just taken a bit longer and we were just being prudent in moving it to criticized status but still feel really, really confident that things are going to work out.

So that's the quick overview of the increase in criticized loans. And as Mark pointed out, we're still well within the historical levels of criticized loans that we've operated at in the past. I'll let Mark address the second part of your question.

Yes. Well, I think from a provision and standpoint, it dovetails into a bit of that answer, which is obviously the downgrades on those loans Jeff talked about drive a bit higher allocation in the model, as you'd expect. But they're not at a point now where we have any reason to suggest the specific reserves or actual loss reserve that needs to be set. So as a, call it, a risk-rated 7 loan versus a risk-weighted 6 loan there's a higher allocation in the model, but it won't move the needle too much. So that drove a little bit of the need for provision.

I talked about the $4 million charge-off in the quarter. That was a couple of million dollars higher than what we had reserved as of last quarter. So that required a couple of million dollars in provision. And then we are tweaking the model a bit to have a bit more of a conservative macroeconomic environment factor playing through.

I think on the consumer side, we feel really good about the credit picture right now, but I think you'd be naive to suggest there isn't a little bit more pressure on the health of the consumer. So $1 million or $2 million of added reserve on mortgage home equity portfolios is appropriate. So those would be the 3 main drivers behind the $5.5 million provision. Obviously, there wasn't much loan growth. So that helps from a provision standpoint, but it was really the charge-off, the downgrades and a little bit of build on the consumer side.

Great. And then just one last one. I gave a chunk of the buyback executed in the quarter. Obviously, a lot of volatility in the market, but with average pricing coming in about where we're at today. Just curious if you could speak a little more on the ability and appetite to keep this sort of a pace as you look to reduce excess capital?

Yes. I can tell you it will absolutely be a priority. The goal high level would be to keep capital relatively flat. Now we can lever up and down a little bit from there. But I think that's the right level that will allow us and afford us to do a bit of a management over holding company liquidity, Cree concentration and obviously optimizing capital.

So I would say -- we haven't announced a new plan yet. I would very comfortable suggesting we will likely put 1 in place here in the second quarter, but the level of buybacks should be at a pace where we're going to try and keep capital relatively flat.

Your next question comes from the line of David Konrad with KBW.

Just really a follow-up on the capital and the buyback. I mean, your CET1 levels is about 12:9. And you started the buyback and it really didn't buy and I think earnings power is going to improve even if loan growth improves a bit. So maybe balance the discussion on why you would want desire to keep that flat instead of working that down a bit? And how you weigh the environment with like narrowing credit spreads in excess competition with potential using macro potential buybacks to offset that?

Yes. It's a fair question. I think we're -- we're still feeling like there's a growth path that we'd like to leave some level of capital flexibility. Ideally, I've said this a few times now, ideally, we grow into that excess capital position. But we also are being realistic and recognize we're talking a lot about uncertainty in the environment, that's going to keep loan growth somewhat at bay. So we absolutely are looking at a minimum to basically keep flat.

Doing more than that, David, to be honest, some of the practical limitations there will be funding. So in a holding company bank structure to basically fund that ideally would be through earnings and through bank to holding company dividends, doing that at a pace that exceeds earnings, put some pressure on the ability to rely on that as a funding base. So we would have to go to the outside market to borrow if we really wanted to ratchet that up. And I'm not saying we wouldn't do it, but we're still weighing that pro and con.

And then we are still being cautious about keeping CRE concentration at a range that we think is appropriate and allows us to grow when the market turns. So that $2.80 to $2.90 range, we're very comfortable with. But the more we do on the buyback side, the more that constrains keeping that the pre ratio in that range. So we're trying to find that right balance of about, like I say, at a minimum, keeping capital flat that will not pressure funding and/or CRE concentration. But when you start to exceed that, we would just have to weigh sort of the pros and cons.

Got it. Fair enough. And then maybe a follow-up. Just regarding the Fed's proposal for Basel III, just wondering if you had any thoughts on risk-weighted assets with any potential benefit in your mortgage or CRE portfolio given their guidance.

Yes. Yes, we've done some rough modeling on that, and I think we would be comfortable suggesting our impact would be aligned with probably what you're seeing as sort of the industry expectation, meaning with 25% of our book in the consumer space, mortgage, home equity, where our LTVs are, I think you'd expect to see somewhere around 15 basis points of risk-weighted asset relief there. And then on the commercial side, in general, 5 basis points of RWA relief. So that probably pencils out to 7% or 8% size of basis points, a 5% reduction in RWA, 15% reduction on the mortgage side.

So it's about a 7% to 8% reduction in risk-weighted assets, which gives you about $150 million, $160 million of capital relief when this comes to fruition. It certainly allows for an expectation for even more buyback or obviously just more capital flexibility.

Your next question comes from the line of Steve Moss with Raymond James.

Jeff, Mark, maybe just going back to the loan pipeline here and loan yields, just to see the step up in activity and the organic growth there. Just kind of curious where are you guys putting on loans these days?

Yes. On the commercial side, Steve, it's low 6s, probably 6%, 10%, 6%, 20% range. runoff is in the 5% to 5.25% range on the commercial side. So you're still getting that 100 basis point lift or so on the churn. On the consumer side, there's not a lot of portfolio mortgage going in, but that's probably a little bit lower yield, call it, 5.75% to 6%. Most of the home equity volume continues to be prime. So that's obviously at a better rate. But the biggest driver on the commercial side, call it, low 6s replacing low 5s dynamic.

Okay. And then in terms of the securities cash flows here that you have coming on come off, just curious, Mark, you mentioned deposit pricing, obviously, saw some things run off. Are you thinking of using some of those cash flows to continue to managed higher cost deposits lower? Or are you thinking about parking those into securities here? Or just what's the dynamic you're thinking going forward here?

Yes. I think from a balance sheet position and liquidity management perspective, we'd be looking to keep the securities portfolio pretty flat where it is. I probably wouldn't want it to get too much lower than where we are, maybe down to 11%, 12%, we certainly would be comfortable. But I think I'd expect to see the majority of the cash flow go back into the securities portfolio. We're seeing good yields there, and we're very conservative in terms of managing that portfolio.

We're buying deep discounted fairly matured, mortgage-backed securities. We're not stretching for yield in that portfolio, but we're getting, on average, 4.25 rate. and that's replacing in the first quarter, actually, the $100 million that came off was at a $150 million rate. I would expect more of what's going to run off in the second half of the year to be closer to 2%. But that dynamic giving you 200 to 225 basis points of lift on the securities book is another big driver of the margin expansion you saw. But I would -- long way of saying, I would expect us to keep that portfolio relatively flat.

Okay. I appreciate that color. And then in terms of just the multifamily business in Massachusetts, you guys have about a $2.9 billion book. Just kind of curious with the rent legislation here, are you guys going to tight underwriting standards. Are there any thoughts of adjusting the way you operate on that front? And could that be a little more of a headwind beyond just this year if it passes?

Yes. I mean the most obvious headwind would just be the muted new business coming from construction loans in the multifamily space. As I mentioned in my comments, I think a number of investors, and I've spoken to several of them, and they'll tell me, look, we have choices. We don't have to invest in Massachusetts. We can invest in Connecticut or New York or wherever. And so I think we're going to -- until that issue gets -- there's some clarity around it. I think there's going to continue to be muted demand on the construction side.

Within the existing portfolio, our multifamily portfolio is, I would suggest is pretty seasoned. It's been underwritten consistent with historical Rockland Trust conservatism. We don't underwrite the trended rents or any of those sorts of things. So we feel really good about the existing portfolio of multifamily loans that we have. We haven't seen any signs of stress as we kind of move through these quarters. So I think the biggest the biggest challenge is going to be with new business as opposed to feeling like our existing portfolio is going to experience stress.

Okay. Fair. And then in terms of just going back to the office credit here, just want to clarify with regard to the payoff and the charge-off. Is it fair -- did I understand correctly that you charged off of $4 million and then the remaining balance, which I assume is the $137 million on the -- in the deck was paid off just a few days ago? Or is there a [indiscernible]

No. No. We charge it off to the P&S that we knew was going to be the sale price, and then that sale went through like this week.

Wasn't quite sure I heard it right. Great. And then one more thing just on the noninterest-bearing dynamics for the quarter. Just kind of curious, they went down quite a bit, but EOP was flattish. Was there anything seasonal that maybe we should have been thinking about...

On the deposit side, particularly?

Yes, on non-interest bearing.

Yes. Yes, there's definitely seasonality particularly in our business segment, where when you look at the data in the reporting for the quarter, we're encouraged by a couple of things. The first is we're still -- we still brought in new relationships and deposit dollars associated with new relationships that outpaced close relationships. So where we saw some of that average deposit pressure is in existing balances being utilized.

And I would attribute that to a couple of things. One is typical seasonality tax payments, distributions, whatever it may be. We always see the low point of our deposits in the first quarter of a calendar year. Second is, I think there is some level of just inflationary pressure that's probably increasing to some modest degree, a level of spend. So I think that's putting a little bit of pressure on outstanding deposit balances. And then third, to be very candid, there is some money that we knew we let go due to just not a willingness to match some of the rates that we're seeing in our market.

So you may see a customer with x amount of dollars in their account, they're coming out a small piece and looking for top rate. And we're going to -- sometimes that answer is we price up and match sometimes depending on the overall relationship, we've been willing to not match. So all factors are in play in the first quarter, but I'd say the biggest majority is the typical usage that we would look to see rebound in the second quarter.

Your next question comes from the line of Laurie Hunsicker with Seaport Research.

I just wanted to say where see was on office. So just to go back to office for a minute because I think I'm just a little bit confused. When I'm looking at your office nonperformers of $53.8 million, that $18 million that repaid is already out of those numbers, correct?

It's the $13.7 million is out of those numbers. It was originally being charged down to $13.7 million, and that paid off in April, correct.

Okay. Perfect. Okay, right. So -- and then you initially had a $2 million reserve on that in the fourth quarter. So you took another 2 before you charged it off and then this new when it came on, you took a $2.8 million specific reserve. So if I look at your loan loss provision for the quarter, it basically was all office. Am I thinking about that the right way?

The new non to performer, the $17.7 million that has a $2.8 million reserve. We had already reserved $2 million of that last quarter. So just -- the appraisal suggests a bit more feedstock that would be needed. So it was only another call it, $800,000 of provision needed to establish that reserve. So I probably 3 out of the 5 is office related. The rest is just general reserve build.

Perfect. Perfect. Okay. And then the $17.7 million that's new, is that a Class A or B? And do you have any occupancy? Can you give us any kind of color around that?

The $17.7 million new.

Yes. Yes.

Yes. Do you have that's A or B, Jeff, I don't. But it's basically -- the issue with that is it's a single tenant life science tenant that has represented to us, they will be exiting the facility.

It's probably Class B would be my venture a guess.

So we don't expect sponsor support when that happens. So we would likely be looking at a future foreclosure and the reserve that was established is based on an appraisal kind of on an appraisal on kind of as is basis.

Got you. Okay. And just remind me, your Life Sciences book, how big is that?

It's not very big, Laurie. I'm going to -- I don't have it in front of me, but I'd say it's $100 million, plus or minus. It's not very big, and it's a little bit lumpy. I know we have a couple of larger loans in there, 1 in particular that it was a construction loan and I think we may have spoken about this in the past, but it continues to lease up really well, which is kind of bucking a trend in the general in that space. And so it continues to get better. Honestly, that larger loan that I'm referring to is criticized, and we think it's likely to get upgraded sometime over the course of 2026.

Yes. That's a $28 million loan that is in the Q4 maturity bucket. So that's $28 million out of the $54 million is that life science if you recall, it was once an empty building when we first started talking about this. So it's been very positive development.

With good sponsorship, I might add.

That's great. And actually, that segue to my other question. By the way, I love the Slide 10 details. Thanks for continuing to include that. So yes, so you touched on the $54 million that's coming due in the fourth quarter of '26. Is there anything kind of looking between the third and the fourth quarter, you've got $20 million coming due and obviously, of the $54 million you just touched on the '28. Is there anything -- I guess, maybe how should we be thinking about that? Is there any color you can give us on those loans?

Yes, to be honest, some of them, we've probably talked about in the past. I mean they each have their own story based on those stories if there is any loss exposure, we've reserved for it. But as you know, I think we've probably talked about most of the loans that have a specific reserve on and a lot of these either do not have reserve because we expect full resolution or they're pretty modest reserves. So we feel genuinely good about that.

I think, to provide maybe 1 notable update. So I believe it's a fourth -- yes, one of the fourth quarter maturity items now, it's about a $10 million loan. That was originally intended to mature here in the first quarter. So if you went back to our deck from last quarter, I believe you would have seen a $9.9 million or would have been part of what was set to mature in Q1. That was extended to Q4. But that is a participation deal. The sponsor is looking to refinance or sell. Cash flow is improving. We felt a short-term extension was the right call to get that to a resolution that we still feel would get us paid out in full.

So that's probably one to note just a few -- I know, Laurie, you've done a nice job of tracking some of these through the life cycle here. So that one is probably one worth noting. But in general, like I said, the rest of the short-term maturities, we feel knock on wood pretty good about.

Okay. Okay. And then just switching over to the dealer floor plan loans. So you mentioned you're discontinuing that book. How quickly does that book run off? And can you give us the current balance and just any color behind your reasoning for discontinuing?

Yes. So the reason we decided to exit was just we felt like we didn't have scale to compete. The segment that we were in was tended to be smaller, I'll say, relatively undercapitalized used car dealers. That industry, as you know, has consolidated quite a bit, and the larger more well-capitalized companies didn't really fit our kind of our traditional profile. And so as we looked at it, we said to ourselves, we're not very big in this space. And we don't really feel great about the prospects to grow it in a meaningful way. And I'm not a big fan of hobbies and I tell our people all the time.

If we like the business and like the space, and let's put resources against it and let's grow it. If we don't, then let's exit because otherwise, we're going to make a mistake and then it'll come back to bite us. And so this was a good example of where we just didn't feel good about the go-forward strategy and our ability to be a meaningful player. And so we decided to exit I think it started with like $100 million, $150 million roughly of outstandings. And we're down to I think...

$70 million or $80 million.

Yes, $70 million or $80 million. It's actually gone quite well, to be honest with you, we've -- our team has done just a terrific job of placing -- facilitating the placement of a lot of these relationships with other banks. So that the client, we're very -- trying to be very client-centric. The client isn't disadvantaged. They're able to get financing from another local bank that is interested in being in this business. And so we've -- I think we've done a nice job of doing this without a lot of customer disruption or negative implications in the market.

I just looked up. I think we're actually -- it's only about $50 million, a little over $50 million left. So I would imagine, Laurie, that will play out over the next year, probably 9 to 12 months.

Yes, we'll probably be substantially done by year-end.

Okay. That's great. Okay. And then expenses, obviously, great guidance that you gave on Slide 15. But if I'm just looking at a very high level, so you're at $143 million for this quarter, $3 million in merger, $3 million of snow and then $1 million of core conversion systems that takes you down to $137 million. And then obviously, this quarter had the FICA. How much was the FICA?

Payroll taxes quarter-over-quarter are up $1.2 million. I wouldn't suggest that goes back down -- that will gradually reduce over time. So if I had to predict, Laurie, it's probably you get $300,000 or $400,000 of expense relief in Q2 versus Q1, if you follow me?

Yes, I'm just looking at it just seems like your core expenses taking out that core seasons. I mean, you're just -- you're running better, lower, right? Am I thinking about that the right way? Or is there some other [indiscernible]

No, you are. You're seeing the full cost save. There was a little bit here in Q1 that I admit we didn't capture a little bit left of M&A. So you actually have that in for half of the quarter in the expense base as well. We're also cognizant of April is when we do our annual merit increases. So you will see an uptick in salaries, all other things being equal, just from annual merit, call it, 3% on average.

So I think it's holding the line. That's the mentality we're talking about is hold the line in all the major areas. But I think you -- I would hope and expect to see this kind of in that $1.38-ish million, $139 million range.

And just as an anecdote, Laurie, we've talked a lot about the number of bankers that we've added over the last 6 to 12 months, mostly in the C&I space, and we've been able to do that without any net incremental increase in our FTEs in that commercial banking space. it's been people who either have retired or we performance manage out or whatever.

So when you look at the totals of our salespeople in our commercial space, it's relatively flat despite the fact that we've added a lot of really talented people over the last 12 months.

Got you. Okay. That's great. And then, Mark, just one quick question. You -- and you flagged the outsized loan accretion income, and I appreciate that. But do you have a spot margin for March? Maybe even a spot margin...

Yes, spot for March was -- yes, sorry, go ahead. I didn't mean to jump in. You're looking for our core spot margin.

Core -- yes, if you have it, yes.

It was $372 million. So in line with the total quarter. February actually had a little bit of a lift. We saw some more securities accretion with a little bit elevated payoffs. So I still expect it to increase, obviously, off of that number, but spot was $372 million.

Okay. Okay. Great. And then, Jeff, last question for you. I know you've been pencils down on M&A., any sort of refresh now that BTC is fully digested and your core systems conversion is right around the corner. How are you thinking about that?

Yes. So just to be clear, like pencils down on bank M&A, we still remain interested in if it was in the wealth space or if there were unique deposit opportunities, whether it was branches or other ways that we could improve the overall franchise. But I would say we're still penciled down on bank M&A. The conversion that we have coming up in October, is really a big deal. And so we're pretty focused on getting that done and getting it done well as I told a bunch of our people a few days ago.

We have one chance to make a good impression through this conversion. So we have to get it right. And so we've been spending a lot of our time and energy making sure that we do that. We also feel like we have a lot of really positive momentum and a good path to growth in a number of our core businesses, whether it's the wealth business, which we talked about, the C&I business, which we've been talking about the last couple of quarters. So we feel like organic growth very much remains kind of top of mind, and 1 of the things that we're focused on in addition to getting the conversion done well.

So -- and that, coupled with the environment. I mean the environment right now, as you know, is a little bit uncertain, but I would I would characterize our posture as pencil down.

Your next question comes from the line of Matthew Breese with Stephens Inc.

Mark, maybe to start with you. Could you provide if you have the spot cost of deposits at quarter end? And just maybe expand upon your commentary around competition. I'd be curious in terms of, is it -- where is the most aggressive product-wise? And competitor-wise, are you seeing that mostly from the bigger kind of -- the bigger banks or the mutuals.

Yes. Taking the latter both, to be honest. It's certainly, Massachusetts is a bit of a unique environment. You have still a lot of mutuals at play that good operators, but they can be a bit aggressive on pricing. And we're seeing offers even from larger banks, other typical similar-size banking a lot in the forehandle on the deposit side. In some cases, even $4.25, I think I saw $4.50 offer out recently on a pretty large relationship.

So it's very, very competitive. And it's those types of dynamics that I was alluding to, where, of course, we're looking at the overall relationship in if there's a portion of money that needs to be a 4 handle in the overall cost of deposits is where we'd like it to be, that's the relationship we're going to continue to support. It's when you start to get the majority of a deposit looking for, in some cases, higher than 4% rates. That's a tough one to justify, in my opinion.

So you're seeing some of that dynamic. And like I said, it's probably heightened by the level of mutuals and I can appreciate it's in the markets where we -- especially where we did the enterprise deal, you have some competitors in that space that are going to look to be aggressive because they view it as an opportunity. The spot rate on the cost of deposits for March, I'm pretty sure it was right in line, Matt, with the quarter end, like around 1.36%.

So we're at a point now where I think you're still seeing the Fed cut in December. We were able to make some reductions. You had a little bit of the CD book still giving us some benefit as that was repricing. You're basically at a point now where any CD maturities are going to sort of be neutral to cost of deposits. And I think because of the competition, I would imagine new money coming on is going to challenge the 1.36% rate to some degree. But I think keeping deposits flat or slightly up in this environment, it will be a pretty successful profile.

Got it. And then maybe just transitioning that into the NIM and the NIM guide. The presentation suggests that you're going to end the year with the NIM in the 3.90% to 3.95% range, I'm assuming that's the core NIM. Is that accurate?

That is reported NIM with a 10 basis point accretion assumption.

So the 10 bps would be additive? Or is the...

Sorry, go ahead.

So let's work off of the 3 to low 3.70s core NIM this quarter. Expected anticipated expansion is the 3.90% by end of the year, tack on another 10 bps, all in NIM close to 4% or just over by the end of the year. That's the way to think about it?

No. I would suggest 3.72% core goes to, call it, 3.82% core tack on 10 to get you to the 3.90% to 3.95% range.

Got it. Okay. So I guess with that in mind, just considering flat deposit costs and then you roll on versus roll-off dynamics are still accretive by it sounds like 100 or so basis points. It feels like the longer-term trajectory here is north of 4% on that NIM. Is that a fair assumption?

I do think if the rate environment stays if the longer term and longer part of the curve stays where it is and we could move the loan yields closer to 6% then, yes, I think a NIM above 4 is a realistic end goal. I think that the guidance now, call it, 3 to 4 basis points of core expansion per quarter does take into account the fact that we may see a basis point or 2 tick up in cost of deposits, if we're being realistic.

So I think that's a little bit of the development that I would suggest over the next 3 quarters, you're going to get the loan repricing benefit, you're going to get the securities repricing benefit. Our goal will be to keep deposits flat. But having the pricing pressure that's out there, I'd say that's an area where you may see that eat into it slightly where it's probably more like a like I said, a 3 to 4 basis point core margin expansion.

Got it. Okay. Jeff, maybe one for you. We talked about transactional commercial real estate a few times now. I'm not sure I've ever seen a dollar amount put on it. What is the identified balance of transactional commercial real estate. Where was it? Where does it stand today? I think you said it's not as much of a headwind to growth, but maybe just characterize for us where you want it to be.

Yes. So that's a good question, Matt. I don't know that we have a specific number that I would point to in terms of what that is. We've actually talked about trying to get a bit more specific and then ring fence it and be able to talk about our commercial real estate businesses like a core relationship legacy Rockland Trust originated business and then a transactional book. But it's obviously less today than it was a year ago, 1.5 years ago.

If I had to venture a guess, I'd say it's probably somewhere between $300 million and $500 million, maybe towards the lower end of that $300 million. But we haven't really put pencil to paper to really identify, okay, how much is it? And then when is it running off as you can imagine, some of the transactional real estate is just -- it has a maturity date that's well beyond next year or 2. And as long as it's performing, we're just going to have to continue to live with it.

And that's not necessarily a bad thing because we're getting, obviously, the income off of it as long as the credit profile is okay. It's really the ones where we feel like there's some stress that we've been a lot more proactive at addressing and looking to move off.

Okay. Two other.

I hope that answers your question.

No, that's great. The first one is just -- I would love your view on which way the pendulum is swinging on the rent control. just for kind of a quick Google search, it sounds like there's some -- it's contested. I'm just not sure to what extent. And I'd be curious what you think there. Is this like a likely outcome or not.

Yes. I don't know, maybe we need to go to the betting markets to see what they're saying about this. My own intuition and this is not based on any like inside baseball or anything like that. is I think there's a good chance that it doesn't pass because there's so much research out there that would suggest that it's not a good thing for the economy or for the commercial real estate in general, it can have a muted impact on new affordable housing, new development, and that's clearly not what we would like. We want to continue to see investments in affordable housing and new development. And I'm -- we're hopeful that, that argument kind of wins the day, but I'm no expert on this or have a -- my crystal ball is not -- it's not all that precise. Mark, I don't know if you have anything to...

I was just going to add, I mean, I think in terms of significant influence. Our governor has publicly stated being against it. I think there's a lot of business community, lobbyists, including a chamber that I'm part of that would likely stock to weigh in and lean in on suggesting why this is not a good answer for the economy. So the question becomes whether those voices outweigh sort of the voters, the consumers that on paper here, rent control and think that will help my pocket. So will the business community sort of messaging of why in the long term, this is not good, helped defend what probably has some consumer momentum to get it past.

But I think to Jeff's point, there'll be enough lobbyists in business offset to hopefully come against that. I think the other mitigant to here, though, is even if it does get passed, Massachusetts, if you look at the last decade, historically, rent increases have been below 5%, which is the proposed sort of cap of rent increases if this were to go through the greater of 5 or CPI. So this is a state where rent has been pretty well contained and it is partly because there's so much demand and need for affordable housing. So it's an area that I think has been somewhat contained.

So I do think it wouldn't -- if this does get passed, there is a path forward here to suggest that it still works without a meaningful impact on our economy, but there is a lot of opposition against it.

Great. Last one, Jeff, you had mentioned the onset and work into AI and putting some resources aside for it. Just curious what your initial impressions are? Would love your thoughts on kind of impact to the longer-term expense trajectory or maybe even revenue benefits. Just curious. That's all I had.

Yes. It's probably a little too early to quantify what we think the benefits will be. I would say it's -- for us, it's initially going to be around things like just making efficiencies, freeing up people's time to reinvest in other activities, if they're doing things that are very standardized and routine and we think can be easily accommodated through a chat bot or something like that. I am a believer in not trying to bite off more than we can chew, meaning I'd like to get some wins under our belt here, which in my mind, probably means a bit more modest use cases. And then once we get some wins under our belt, I think that will give us some confidence that we can continue to do this well.

And I think as I said in my comments, we can develop some muscle memory around how we roll this out. And then as we think about use cases, the more confidence we get, I think the bigger use cases we'll take on, which will have a bigger impact on the company. My intuition would also be it's going to probably lean more towards the expense side of things versus the revenue side of things, but a lot of that is still TBD.

Your next question comes from the line of Jared Shaw with Barclays.

Just a couple of quick ones to wrap up. So Mark, I don't know if you have the securities accretion you sort of called out some of the indirect impacts, but you have the dollar of security accretion this quarter and maybe actually last quarter?

I don't only because we're -- it's basically just like any other discount on a bond is how we're capturing it. So I don't have the actual dollar amount, Jared, I'd have to follow up on that, just to give you sort of the discount amortization, I guess, on the enterprise bond is how I would quantify that, right?

Okay. And then when you look at the -- do you still feel that you can get to that 80% CD beta through the cycle? And then I guess, how are you looking at staying active in the deposit space given the competition versus sort of the loan-to-deposit ratio? And how are you thinking about that dynamic?

Yes. I think on the CD base, where all in, I think, cost of CDs is what, right around $330. Let me just triple check my math, yes, it's right about $330. So I think in terms of repricing down, as I mentioned in one of my earlier answers, that we've probably seen the vast majority of that. So even though Fed funds sitting around $360, 1-month money, brokered CDs in the 1-month space is probably closer to 4% now.

So I think of it as we've sort of achieved that beta based on where we are today in our CD ladder. I would expect because of the pricing pressure that's out there and the competitive dynamics we still have a 4-month 360 offer out there. That's the primary driver of any new CD money. So I think it's going to keep like I said, cost of CDs somewhat at where they are right now, if not maybe a little bit of an uptick.

In terms of the overall -- I mean, our deposit strategy, it's -- I would just sort of reiterate what I was suggesting earlier, which is continuing to stay as competitive as we think is appropriate on what we value as total relationship funding and continuing to do what this bank has done for such a long time in attracting new money. That's the branches. That's the retail network, involved in their communities. It's working with nonprofits. It's the C&I wins that we've been having typically coming over with more deposits. We still have good CRE relationships that hold money with us. So it's -- a lot of those pieces are still in place that have been able to drive deposit growth for us in the past. And then we're just -- we've coupled that with being really smart about our pricing strategy.

The only other thing I'd add to that because I agree with everything Mark just said about our deposit gathering is we are trying to get a little bit more focused and a little bit more specific around some of the market disruption that's happening here. And we think that, that's an opportunity for us because we -- I think we're viewed as sort of the stable, not a lot of change going on, and that's not true with some of our competitors. And so we've been very focused on developing marketing programs and have our -- both our commercial and our retail bankers, arming them with data to help them try and take advantage of some of the market disruption that we're seeing.

So we're really focused on deposit. We know that's an important part of our the overall company and funding the loan growth that we hope. So it's a lot of the things Mark talked about, it's being more strategic with some of the market disruption that we're seeing. And we have a number of businesses that aren't credit-oriented businesses. They're just deposit verticals that were doubling back on and seeing if there's ways that we can't accelerate the growth in some of those areas.

There are no further questions at this time. I will now turn the call back to CEO, Jeff Tengel, for closing remarks.

Thanks, everybody. Appreciate your interest in INDB and Rockland Trust, and have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Ladies and gentlemen, thank you for joining us, and welcome to the Independent Bank Corp Fourth Quarter Earnings Call. Before proceeding, please note that during this call, we will be making forward-looking 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 conference over to Jeff Tengel, President and CEO. Please go ahead.

Good morning, and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero.

Our fourth quarter results reflect ongoing progress towards restoring Rockland Trust's historically strong performance. Quarterly highlights included continued NIM expansion, strong C&I growth, solid non [indiscernible] deposit growth, stable credit costs, realized cost savings from the Enterprise acquisition and the return of excess capital to shareholders.

Between the first quarter of 2025 and the fourth quarter of 2025, our operating EPS increased by 60%. Our operating ROA rose by 40 basis points, and our operating ROTC improved by 529 basis points. Reflecting on 2025, it was a busy and rewarding year as we gained traction on a number of key initiatives. First, we closed an integrated enterprise. I want to extend my immense gratitude to their former Chairman and Founder, George Duncan, as well as all of the enterprise colleagues who help champion the integration process. acquisitions are never easy and often are disruptive to the day-to-day operations of the bank, the Rockland Trust and Enterprise team members collaborated to ensure disruptions were kept to a minimum. Let me share a few examples with you. On the commercial banking side, we have retained almost 100% of client-facing personnel and have experienced negligible customer loss. Obviously, keeping the relationship managers has helped retain the customers. Despite distractions from the acquisition and integration process, there has been no material drop in enterprise loan production, and their pipeline remains as strong as it was when they joined Rockland Trust in July.

On the retail banking side, it is again important to emphasize that we did not close any enterprise branches and all Enterprise branch employees were retained. Excluding ICS and municipal deposits, all Enterprise branches have exceeded our 95% deposit retention target with approximately 60% of these brand is having stable to increasing deposit balances. Given the acquired bank typically loses 10% of their deposits post deal, we are delighted with our performance. In the fourth quarter, we opened 271 business relationships and 837 new consumer relationships in the acquired branches.

Within our investment management group, we've been able to retain almost all employees. We have targeted the caliber of talent and strength of the client base and the depth of relationships between colleagues and clients are outstanding at both Rockland Trust and Enterprise at a client-centric focus and the cultural integration has been excellent.

Secondly, we made solid progress on the credit front. Our net charge-offs averaged just 11 basis points over the last 3 quarters of the year and the challenges within our office portfolio are identifiable and manageable.

Third, we continue to rebalance our commercial lending business. C&I loans increased 9% organically in 2025 and now represent 25% of total loans versus 22% at year-end '24. Commercial real estate balances were down [ $0.036 ] organically from year-end 2024 or flat from the third quarter. Our CRE concentration stood at 289% at year-end, we believe we have achieved most of the targeted reduction in transactional CRE pre business.

Total commercial loans closed and were $789 million in the fourth quarter, up from $754 million last quarter. Funding on these commitments were $454 million versus $396 million last quarter. 52% of fourth quarter fundings were C&I. Our middle market C&I group continues to gain momentum as evidenced by the fact that it represented 27% of total closed commitments in the quarter.

The regional banking, which represents Rockland's traditional lending business accounted for 39% of total closed commitments. I would also note that our low-income housing tax credit business injected $100 million of capital into our communities.

And lastly, we were named Massachusetts third-party Lender of the Year for 2025, showing a solid progress in the SBA space. Fourth, we generated solid organic growth in nontime deposits of 4.2% in 2025, which has been a historical strength of ours. DDAs represent a healthy 28% of overall deposits about where we were pre-pandemic. The cost of total deposits was 1.46% in the fourth quarter, highlighting the immense value of our deposit franchise.

Legacy Rockland Trust branches generated record new business relationships totaling 6,921 and 3,463 net new relationships. 97% of branches achieved positive net new growth in business relationships in 2025. 100% of all our legacy branches achieved positive net new consumer growth.

Fifth, our wealth [indiscernible] business continues to be a key driver. Our [ AUA ] remained stable at $9.2 billion in the fourth quarter, while revenues grew at a 4% annual rate. Last week, we returned $164 million of capital to shareholders in 2025, including the repurchase of 913,000 shares for $61 million. With the Enterprise acquisition completed in 6 months of customer integration behind us and with credit trends stabilize, will enter 2026 laser-focused on organic growth, expense management and capital optimization.

With respect to growth, I would highlight the following items. We hired a number of commercial lenders in 2025. In addition, we're working to ensure our alignment and incentive structures to emphasize both loan and deposit growth. We are also intently focused on identifying opportunities within our acquired footprint to deepen our relationships with our expanded product set.

Lastly, given the improved credit metrics we are more open to resuming normal commercial real estate growth. As we always highlight, loan growth will be commensurate with our deposit growth.

On the expense front, with the Enterprise transaction complete, we believe a hold align [ mentality ] with respect to staffing levels as appropriate. We will continue to invest prudently in technology to leverage efficiencies. Examples include our core systems conversion scheduled for later this year and our AI innovation team. Our AI efforts are focused on enhancing back office efficiency, including fraud review day-to-day processing and BSA AML.

With respect to capital, we acknowledge that current levels are above our internal targets, and our improved profitability will add upward pressure to our capital position. We remain committed to returning excess capital to shareholders.

Early fourth quarter results represent another major step forward in driving improved growth and profitability at Rockland Trust. We expect to build on this strong performance in orders ahead. Prudent expense and capital management combined with improved organic growth and sustained NIM expansion position us to unlock inherent earnings power. I feel particularly confident in Rockland Trust 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 2025 a successful year. Every measure of our success is a direct result of your commitment.

On that note, I will turn it over to Mark.

Thanks, Jeff. I will now provide a bit more color into some of the fourth quarter numbers that Jeff just discussed and wrap up with full year 2026 guidance. .

To summarize the quarter results, 2025 fourth quarter GAAP net income was $75.3 million and diluted earnings per share was $1.52, resulting in a 1.20% return on assets, an 8.8% return on average common equity and a 12.77% return on average tangible common equity. Excluding $12.3 million of merger and acquisition expenses and the related tax impact, the adjusted operating net income for the quarter was $84.4 million or $1.70 diluted EPS, representing a 1.34% return on assets, a 9.8% return on average common equity and a 14.3% return on average tangible common equity. It is worth noting that the fourth quarter results also benefited from a lower tax rate due to onetime adjustments associated with the filing and true-up accounting of the 2024 corporate tax return as well as the finalization of all tax-related estimates inclusive of the Enterprise acquisition.

Diving more into the fourth quarter results, we'll start with loan and deposit growth. As Jeff alluded to in his comments, commercial growth was driven entirely by C&I, which increased 7% annualized for the quarter and over 9% on an organic basis for the year. This focus on C&I lending has also helped fuel an almost 50% increase in new commercial deposit generation in 2025 versus the prior year. On the consumer real estate side, total loan balances were relatively flat with an increased level of mortgage production sitting at year-end in the held-for-sale category, which bodes well for mortgage banking income momentum heading into 2026.

And lastly, though much smaller in volume, a 2025 initiative to build out a more robust premier banking offering, drove a nice increase in the quarter and our wealth management secured consumer lines of credit.

On the deposit side, I already mentioned the calendar year commercial deposit activity. But for the quarter, total period end deposit balances declined 0.8% and due mostly to seasonal business deposit activity related to year-end bonuses, distributions and tax payments. We are encouraged by the growth in average deposits for the quarter across both the consumer and business lines, with 3.6% annualized growth in [indiscernible] core deposits, while we allowed for some level of attrition in our highest rate time deposits.

In terms of a capital update, tangible book value grew nicely at $1.04 for the quarter to $47.55 at year-end. During the quarter, we repurchased approximately 548,000 shares for $37.5 million, representing a weighted-average repurchase price of $68.39, and as Jeff noted, we are committed to returning capital to shareholders via buyback in a prudent manner throughout 2026.

Shifting gears to asset quality, the overall picture remains very stable. Total nonperforming assets stayed relatively consistent at $85.7 million or 0.45% of total loans. Net charge-offs for the quarter were $5.3 million, with $4 million of that related to a C&I relationship that was fully reserved for last quarter. Provision for loan loss was $4.75 million and total criticized and classified levels decreased 8.9% during the quarter.

Moving to net interest income. Despite the modest balance sheet growth, Net interest income increased $9.1 million to $212.5 million for the quarter. The reported margin increased 15 basis points to 3.77%, while the adjusted margin, which excludes purchase loan accretion and other significant onetime items, increased 10 basis points to 3.64%. Breaking down the components of that 10 basis point increase First, we were able to effectively reduce our cost of deposits by 12 basis points during the quarter to an impressive 1.46% total asset deposits. This reflects an approximately 30% beta on the average Fed funds decrease of 40 basis points quarter-over-quarter, right in line with our expectations. [indiscernible] loan yields stayed relatively flat when excluding purchased loan accretion, as immediate repricing on floating rate loans was nicely offset by continued yield expansion from cash flow repricing.

And lastly, the vast majority of the securities book continues to see yield expansion driven by repricing. Our fee income businesses performed right in line with expectations for the quarter. Assets under administration ended the year at $9.2 billion, with the expanded footprint and resources providing nice momentum heading into 2026. And we are optimistic that both loan level swap up in mortgage banking income should continue to serve as a natural hedge against any pressure over longer-term rates.

On the expense side, I would point you to Slide 12 in our earnings deck to provide some context over the fourth quarter results. In addition to providing insight into our 2026 guidance, which I'll soon share. As noted on this slide, total fourth quarter expenses of $142 million on an operating basis, represent a 3.7% increase versus the prior quarter, which can primarily be attributed to a number of large onetime or outsized expenses. To highlight a few, the fourth quarter included a $2 million increase in incentive expense versus the prior quarter. $750,000 of consulting expense related to our 2026 core system upgrade, a $750,000 swing in equity securities valuations, an updated FDIC insurance premium assessment, which created an almost $1 million change quarter-over-quarter, and approximately $325,000 in snow removal expense. So as noted on this slide, which is difficult to extract from the noisy reported results, we peg our core expenses plus full cost saves from enterprise right around the $136 million number for a quarter.

With that, I'll now finish up with full year 2026 guidance. Before I get into the various components, a lot of the fundamentals that we have been highlighting over the last few quarters give us strong conviction in our ability to improve earnings in a focused, sustainable manner throughout 2026. As such, we have established 2 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%. As for the drivers behind those targets, starting first with loan growth, we are targeting mid-single-digit percentage growth for C&I loans, low single-digit percentage growth for combined [ CRE ] construction and flat to low single-digit percentage growth for total consumer as we anticipate a higher percentage of mortgage volume to be sold versus the 2025 levels.

For deposit growth, we are targeting low- to mid-single-digit percentage growth for total core deposits while relatively flat to slightly lower balances for time deposits. For the net interest margin, we are modeling in 2 Federal Reserve rate cuts, which we continue to suggest will drive a fairly neutral impact on the margin. Assuming the 5- to 10-year part of the curve stays consistent with current rates, we anticipate continued margin expansion from cash flow repricing dynamics in both the loan and securities portfolios. Assuming purchase loan accretion of 10 basis points, we estimate the net interest margin to continue to grow to a range of 3.85% to 3.90% in the fourth quarter of 2026. From a credit standpoint, we have no significant loss exposures that are currently in workout status. And as such, we expect overall asset quality metrics to remain stable. Regarding noninterest income, we guide low single-digit percentage growth off of the 202 second half combined annualized results. And for noninterest expense, again, referring back to the details on Slide 12, we are estimating a range of $550 million to $555 million for full year operating expenses, plus another $4 million to $5 million for onetime costs associated with our planned core system upgrade.

And lastly, for the tax rate, with the significant increase in pretax income versus 2025 results, we project a full year tax rate in the 23.50% to 24% range.

I will close out with a reminder that the fewer number of business days in the first quarter will typically result in lower first quarter earnings versus the rest of the year.

And with that, that concludes my comments, and we'll now open it up for questions.

[Operator Instructions] Your first question comes from the line of Jared Shaw with Barclays.

Maybe if we could just start with the -- on the credit side in Slide 9 with the office. Can you just walk through some of the dynamics with the change that we've seen, sort of the criticized classified was down, but NPLs are up and it looks like the criticized classified 26 maturities increased. What was sort of the backdrop of that?

Yes. I'd say the most notable mover in terms of NPAs versus prior quarter is one specific loan that is now in the first quarter 2026 maturity bucket. So that's the $18.1 million classified balance there. That's one relationship that was actually originally scheduled to mature last quarter. We put it on a short-term extension, that deal is actually with our current [ P&S ]. We expect that to go through. Right now, the negotiations are going well. the appraisal we had on that actually suggested there was sufficient protection from a valuation standpoint, but the P&S that is in process suggests a small loss there. So we did reserve about a $2 million loss in the fourth quarter. So that's already in the allowance, but we expect that to get resolved here early in 2026. So that was probably the biggest -- the only downgrade for the quarter, Jared. I think on a positive front, we had a maturity in the last quarter that was approved. This was a $27 million loan. That continues to perform well. That was actually upgraded from a risk rating standpoint. When you look out into 2026 and you look at the criticized and classified levels that are disclosed, it's really just a handful of loans. As I mentioned in my guidance, there isn't really anything out there that has imminent loss exposure that we feel exposed to, I think, anything with a very modest loss like the one I just talked about, we've already specifically reserved for us. So we feel good about the office.

Okay. And then maybe shifting over to deposits as you move through the year and with that guidance or a backdrop, where do you see betas coming through with potentially a couple more cuts here. Do you still feel like you can get 20% in the non-CD beta and 80% in CD? Or how should we think about that?

Yes. I do, Jared. I think fourth quarter was a really good example of our ability to do that. I talk a lot about how the -- this deposit franchise is structured. We have real visibility into a lot of the small balance core deposits that we don't move a lot on what we would call our rack rate pricing. We're probably only in a 5% to 10% beta in that bucket, but it's the higher rate more sensitive where we do very deliberate what we call exception pricing, and that's the bucket where we typically are seeing 70% to 80% beta. So that combined methodology gets you to that 20%, give or take, all-in deposit base beta on the non-time deposits. We've talked a lot about keeping the CD book relatively short for that reason as well. So we are really well positioned to continue to get some cost savings on the CD book, if you see the Fed continuing to cut.

Okay. And if I could just sneak 1 final one. Looking at capital continuing to grow and the success you've had with some of the deals in the past, what's the outlook on M&A? And I guess, maybe what's the sort of the feeling on the ground from potential sellers in the market?

Yes. So we've said this a lot over the last few quarters that we're really not focused on M&A at the moment. We -- the priorities are organic growth, launching our expenses and focused on the conversion that's coming towards the latter part of the year. And we got to get the conversion right. You don't get a second chance if you don't. And we were able to get the conversion and enterprise done, we think, pretty well. And so we're working at making sure the same experience happens with the entire the entire enterprise come October. And so those are the things that we're really focused on. I would say M&A is not one of them.

Your next question comes from the line of Mark Fitzgibbon with Piper Sandler.

First, I just wanted to follow up on Jared's question as it relates to capital. Jeff, you had mentioned that you have internal capital targets. Is that something you'd be willing to share with us, whether TCE or CET1 or whatever you look at?

Yes, I can jump in there, Mark. I'd say long-term capital targets for us, CET1, probably in the 11 -- high 11% to 12% range, call it, 11.75% to 12%. I think that suggests your tangible capital in the 8.75% to 9% range. So certainly, suggests lower than where we are today, which is why we are talking a lot about expecting to continue to return capital to shareholders via buyback in a prudent manner. I don't think you're going to see us get to those levels certainly in the next 12 months just from buying back stock. But I'd say long term, that's where we should be optimizing capital. .

I guess the challenge is based on your projections, organic growth is going to be relatively modest in the near term. So it looks like capital will continue to build unless you're aggressive with buybacks. And I would suspect that sort of [ $168 or $170 ] a book, it's kind of hard to justify doing buybacks up at these levels. So I guess how else -- if M&A is out of the equation and buybacks that are out of the equation, organic growth all get you there? Do you raise the dividend? Or is there something else that we're missing?

I would suggest, I don't believe buybacks are out of the equation. I know -- I get your point in terms of the valuation has moved nicely. I look at our profitability profile in the future profitability profile, and I would suggest we'd be comfortable buying back at levels in 2026. So I think that the target would be to keep capital fairly flat via buyback through 2026 and allow us to deploy capital, hopefully in a better growth environment heading into 2027.

I would also just add, Mark, maybe to slice it a little bit finer on the M&A question, bank M&A clearly not interested. But if there is a [Audio Gap].

Your next question is from Stephen Moss with Raymond James.

Maybe just starting here on loan pricing here. Just kind of curious what you guys are seeing in the market for C&I and CRE loans these days?

Yes, it's competitive. I think not surprisingly in our market. I think in some C&I deals, you're seeing some of the spreads competitively bidding out under 200 basis points. But we're getting our fair share of deal flow at the pricing we would like, which is 200 plus. So I think in the fourth quarter, all in, you saw total loan yields in the mid 6s. So that kind of reflects the pricing that we'd like to be getting in an environment like this. So I think as long as we're kind of my caveat there on the margin guidance, as long as you're seeing the 5-, 7-year part of the curve, stay where it is. I'd like to see loan yields staying in that range, which has given us the nice lift on the repricing aspect of it. .

Okay. appreciate that. And then in terms of just the maturing cash flows from the securities book this year, Mark, what are your thoughts in terms of deploying that -- you just into securities or maybe be a little more aggressive on pricing CDs down? Just kind of curious how you're thinking about that?

Yes. I really like where we are with total securities as a percentage of the balance sheet today. So I would say the vast majority of what will generate cash flow out of the securities book will likely go right back into the securities book. if we start to see any major variations and the rest of the balance sheet composition, that could change slightly. But I think general guidance would be expect to see securities stay relatively flat, meaning we're putting the $670 million that's repricing [indiscernible] coming off right back into the bank. And just a reminder there, a big portion of that, Stephen, is at lower rates. So of the $60 $70 million, $625 million of that is yielding about $180 million today. So if we're conservatively assuming to put that back into 4% securities, that's a nice lift to the securities book throughout 2026.

Yes, 100% on that. And then in terms of maybe just the other thing on to hiring talent here. Just kind of curious what are your guys' plans for hiring additional commercial loan officers? I know, Jeff, you talked about wanting more organic growth. I'm just kind of curious as to how you guys are thinking about those plans and where they may be these days?

Yes. I think at the moment, we're in a good position. A number of the people that we hired in the second half of last year came over into a relatively new segment of the commercial business. And so some of them came over without a portfolio. And so I think there's a lot of just inherent C&I growth that we can get from getting some of our new hires, basically the support that they need and just let them go. They all came over with a [indiscernible], and we feel pretty good about their ability to drive activity and drive volume.

Excellent. Well, nice quarter. I appreciate all the color here.

Thank you.

Your next question comes from the line of Laurie Hunsicker with Seaport Research.

Jeff and Mark. I Wanted to start here with expenses and really appreciate the Slide 12 and really appreciate your breakdown of the $5.1 million. But I just wanted to make sure that I heard it right. Included in that $700,000 was from the core systems upgrade and that's...

That's right. so the fourth quarter, we had some consulting to start preparing some of the work associated with that upgrade that would be somewhat onetime in nature.

Got you. Okay. And that the $4 million to $5 million of onetime, that's going to be spread over the year or sort of over the first 2, 3 quarters. How should we think about that?

Yes. I'd say probably pretty evenly spread over the year, maybe a little bit more in the first quarter to come. But if I had to guess, it's probably $1 million or $2 million here in the first quarter, probably another $1 million or $2 million in the second quarter. And then as we get to the October time line, it probably -- I think a lot of that will be the work that needs to happen over the 6 months, including third-party consulting to just get a lot of the processes documented as we gear up for that conversion. .

Okay. And the conversion is in October?

That's right. Recall, we're originally talking about it as May as we started to do some of the initial work in lining up all the teams that are going to be needed. We just felt it was appropriate to give us a bit more time. Further complicating it, you need to get the core provider with the weekend where they can facilitate the conversion as well. So it's almost similar to scheduling and acquisition physician deal where you need the FISs of the world to be able to have a slot. So the next table slot that we were comfortable with was in October.

Okay. Okay. And then you mentioned the AI innovation team. What is your spend this next year on AI? Can we share that?

I actually don't know what the spend is, but I can tell you what we're doing about it, because I think one of the things that could get people caught in the AI space is trying to boil the ocean and do too much. And so what we've been doing is putting a governance model in place and then have all the kind of AI business use cases flow through this governance to make sure that we're thinking about the right thing. We don't want to have every one of our different business units all off doing their own kind of AI, skunkworks. So we'd rather get that flowing through a centralized governance. [indiscernible] let that team, which is, as you can imagine, heavily populated by our IT and [indiscernible] folks and have them pick and choose 2 or 3 of these business cases and get them done and show ourselves that we can get and get them done right and then we'll bring more ideas into the centralized utility that is going to have a hand in the AI work that we do anyways. So we're trying to be methodical about it because I'd rather get 2 or 3 wins and knowing that it got done correctly, and we got the output that we're looking for than try and do 25 of these in each business unit kind of doing it themselves. I think that would be counterproductive.

Yes. I'll jump on to that. So from a dedicated spend, the guidance for '26 is exactly as kind of Jeff laid out, it's specifically 3 dedicated individuals that we would expect to sort of create this initiated project. And I would propose, as we learn more through what their capabilities are, if we feel the need to invest more money and/or ramp up from a people standpoint and/or a technology standpoint, we would need conviction that, that is being done with offsets and other expenses through the environment so that it's ultimately beneficial to the expense run rate to keep investing in AI. So I think we need to see those benefits come through, give us [indiscernible] to continue to invest in AI, which should allow us to either reduce or at a worst case, hold the line in other expenses.

Okay. Okay. That's helpful. And then just one more on expenses. Your onetime charges with EBTC, those are finished, correct?

Those are finished, correct.

Yes. Okay. Okay. Great. And then just jumping over to margins. Do you have a spot margin you can share with us?

For December? You know what? Well, I actually forgot to bring that with me and at the top of my head, I don't have it. Because I want to give you a core number. But I can follow up with that. I don't have it in front of me. .

Okay. Okay. And then just 2 more questions on the in [indiscernible] statement. Just thinking about sort of the nonrecurring, I guess, obviously, the $315,000 of [ BOLI ] benefits, but the $7.6 million that you had of other income, what's the nonrecurring piece in there? I mean that should be running $1 million, $1.5 million lower. Is that right?

Yes. In the fourth quarter, it was about $400,000 or so on our equity securities book. So whether you call it nonrecurring or not, you do -- we always see a fourth quarter lift because you get capital gain distributions and redistribution that may generate realized gains. So increased interest, dividends, cap gain distributions [indiscernible] ISO is probably a few different pieces with $100,000 increases quarter-over-quarter. So nothing really unusual that I would definitively pull out as onetime or nonrecurring in nature outside of those equity securities gains.

Okay. Okay. And then just last question, just circling back here on office. So I know you talked about the $18.1 million classified that is maturing in the first quarter. The $9.9 million that's criticized, how should we think about that?

Yes. Let me just -- so the $9.9 million that is criticized in Q1. That is a participated deal that we have basically received an appraisal that had suggested valuation had been challenged a bit. That appraisal came in at the time the government announced kind of some of the DOGE initiatives, and there was a pullback on GSA leases. So this is a property that is being impacted by that sort of out of market. The sponsor is looking to either refinance or sell. We'll likely be working with the sponsor on that. So we expect there'll be an extension coming. The property is cash flowing. It's continuing to make payments. It's current, but there is likely a longer-term resolution to hopefully get repaid out of that. So I think -- if I had to guess right now, Laurie, I'd say you'd see that probably with an extension that gets executed in this quarter with hopefully exiting out of that without really any loss at some point in '26, hopefully.

Okay. Okay. That's great. And then just lastly, the actual increase in the office non performers from the $22 million to the $41 million. Can you just break down roughly what that $18 million, $19 million is?

Yes. That's one loan. So that was a loan that I mentioned earlier, we actually have a P&S on, where we accepted a slightly lower value than what the appraisal suggested. So that $2 million loss that we expect is already reserved for. That's the only change.

Got you. Okay. I thought you were talking about the $8 million classified. My apologies.

So I know that's the -- well, that is -- yes, that's the [indiscernible] classified in Q1. So that was new to nonperforming.

[Operator Instructions] your next question comes from the line of David Konrad with KBW.

Yes. Just had a follow-up question on the Commercial Banking platform. Your guide for '26 mid-single-digit increases is fair. Probably what I would do with all the uncertainty as well. But on the other hand, you've hired a lot of people in the back half of '25, and you grew by, I think Mark said about 9% organically in '25 as well. So it feels like you got a lot of momentum, and this is kind of a slower growth. So are you seeing something in the marketplace, whether it's competition that hold that back? Or maybe talk about potential upside to that growth rate?

Yes. So there probably is some potential upside just because I know all the people we hired last year and are all very, very talented. I would also point out that in addition to just getting our teams that are already doing well, pushing the zoo even more. We had one line of business that we started in '25 will be done in '26 that we just decided it wasn't where we wanted to be. And so we wound up -- we're in the middle, I should say, of exiting that business. It's around $100 million, give or take. And so we've been in process of moving that. So any of the growth that you see is going to include $100 million of runoff in this specific business segment. And that's a little bit of the headwinds that I think if you -- if we wind up, we're sitting here at the end of the year and we exclude in act of that runoff, I think the low to mid-digit -- single-digit percentage increase could be higher.

Got it. Got it. Okay. And then what was -- what type of loans were in this specific segment you're running now?

It's our floor plan business, not to be confused with our ABL business, which we like a lot. This was a business that had floor plan lines to very small used car dealerships. It was a bit of a legacy Rockland Trust business. And we just got to the point that we didn't have the right systems that help track the collateral. And the loans were small. We didn't think the outlook for this business was good, given the nature of the business. All of the lot of the floor plan companies are consolidating, just like the OEM part of this. And so to the extent that this just really didn't fit our risk profile.

Got it. And I know, historically, those loans are actually pretty tight credit reads as well.

Yes. Can be.

There are no further questions at this time. I will now turn the call back to President and CEO, Jeff Tengel, for closing remarks.

Thank you. Appreciate everybody's interest in Rockland Trust and have a terrific weekend. And go [indiscernible]. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Good day, and welcome to the INDB Independent Bank Corp. Third Quarter 2025 Earnings Call.

[Operator Instructions]

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 reconciliations to GAAP measures, may be found in our earnings release and other SEC filings. These SEC filings may be accessed via the Investor Relations section of our website. Finally, please note this event is being recorded.

I would now like to turn the conference over to Jeff Tengel, CEO. Please go ahead.

Good morning, and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. We had a busy third quarter. We closed on the Enterprise transaction on July 1 and completed the systems conversion this past weekend. We posted solid financial results and continue to make progress on several of our strategic initiatives. Results for the third quarter reflect continued NIM improvement, strong C&I loan growth, solid growth in low-cost deposits, lower credit costs and the beginning of the realization of cost savings from the Enterprise acquisition. Our PPNR return on average assets was 1.7% on an operating basis, and our operating return on average tangible common equity improved 283 basis points to 13.2%.

I wanted to focus most of my comments on the enterprise integration and conversion. Before we get into some of the specifics, I would like to highlight one important difference in this transaction. The typical pattern in most of the acquisitions I've been involved is for the acquired CEO to get a big payday and ride off into the sunset. In the case of Enterprise, their former Chairman and Founder, George Duncan, remains actively involved. He is an adviser to our Board, chairs the newly created Lowell Advisory Board and continues to be an advocate for Rockland Trust in the community. There are several other senior executives from Enterprise who also continue to be a resource and advocate for us. The involvement and insights provided by George and his colleagues have been invaluable as we bring these 2 banks together. Simply put, they care.

Regarding the integration, things went extremely well. We've had great collaboration between the teams post close and the lead up to the systems integration and conversion that took place this past weekend. While it's still early, we think the conversion went exceptionally well. Many colleagues across various business lines commented on how this transaction felt different than others they were involved in. The level of teamwork and appreciation for what each side brought to the table was a common theme across many I spoke with. For Rockland Trust colleagues, we have been open to acknowledge ways in which the Enterprise Bank did things differently and perhaps better, and we have already adopted some practices and approaches from Enterprise.

On the commercial banking side, we've retained almost 100% of client-facing personnel and have experienced negligible customer loss. Obviously, keeping the lenders has helped retain the customers. The enterprise lenders are fully embracing Rockland Trust's diverse lending product set as well as our treasury management and fee income offerings. As evidence of this engagement, Enterprise Bankers originations for the third quarter this year were 27% higher than the prior year period. This is a testament to my comment last quarter where I highlighted our similar credit culture. As such, there has not been the typical transition period where the acquired bankers must figure out where the new bank's credit appetite is.

A key initiative going forward will be to continue to cross-sell deeper into this enterprise customer base. On the retail banking side, it's important to emphasize that no enterprise branches were closed and all enterprise branch employees were retained. There are many strategic and tactical methodologies that we have found to be beneficial, and we'll be working to incorporate those at Rockland. These include incentive plans, position responsibilities within a branch and de novo branch openings. Excluding brokered funds, deposit retention at Enterprise has been better than expected. We are also eager to bring our broader consumer lending product set to this market with early activity indicating the team is well positioned to introduce both mortgage and home equity offerings to further support these strong communities.

Within our Investment Management group, we've been able to retain all employees we had targeted. The caliber of talent, the strength of the client base and the depth of relationships between colleagues and clients are outstanding at both Rockland Trust and Enterprise at a client-centric focus and the cultural integration has been excellent.

In summary, success is driven by having talented and engaged employees. It was great to note that over 90% of enterprise employees who had a job offer extended accepted that offer. We can't be more excited about the merits of this transaction. Shifting gears a bit to the general business conditions in the current environment, we can now add the government shutdown to the existing list of tariffs, government funding and inflation and unemployment that weigh on clients' minds. Overall, the word I think our clients would use to characterize all this is uncertainty, yet our client base remains resilient. The recent AIM poll, which is the Associated Industries of Massachusetts, showed that their Massachusetts business confidence was in the high 40s, right where it's been for the last 5 months. A score of 50 is considered negative. Of note, the poll was taken prior to the government shutdown.

Turning to results at INDB. I would like to touch on just a few financial highlights before I turn it over to Mark. First, C&I loans grew organically at a 13% annualized rate. This represents continued strong performance in our legacy markets like Plymouth County, coupled with some of our newer initiatives maturing.

Second, commercial real estate loan balances declined organically at a 6.7% annualized rate 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%. As expected, the Enterprise acquisition resulted in our CRE concentration increasing. However, the quarter end number landed at 295% indicating we have quickly met our challenge to get our concentration below 300%. Despite this, there remains additional transactional CRE we wish to exit as quickly and as economically as possible while still serving our legacy client base. In all, we see a clear path for the bank to return to a rate of loan growth more commensurate with our solid deposit growth.

Third, we think generating organic demand deposit growth of 5% annualized in the third quarter, which has been a historical strength of ours. DDAs represent a healthy 28% of overall deposits, about where we were pre-pandemic. In the third quarter, the cost of deposits was 1.58%, highlighting the immense value of our deposit franchise. Lastly, our Wealth Management business continues to be a key value driver. We grew our AUA to $9.2 billion in the third quarter, inclusive of the $1.4 billion acquired from Enterprise. Now that we have the enterprise conversion behind us, we will continue to prepare for our core conversion of the entire bank scheduled for May of '26. The move to a new platform within the FIS ecosystem will improve our technology infrastructure, enhance efficiencies and scalability and support the future growth of the bank.

We think third quarter results are an important stepping stone to improved growth and profitability for Rockland Trust. We expect to build off these solid results in the quarters ahead. We believe prudent expense and capital management, continued NIM improvement, the realization of the benefits of the Enterprise acquisition and improved organic growth will unlock the inherent earnings power of Rockland Trust. On that note, I'll turn it over to Mark.

Thanks, Jeff. As Jeff just hit on a lot of the key drivers for the quarter, I will go into a bit more detail in a few areas, focusing primarily on the Enterprise acquisition, some of the big moving pieces during the quarter and expected trends going forward. To summarize the quarter results, 2025 third quarter GAAP net income was $34.3 million and diluted EPS was $0.69, resulting in a 0.55% return on assets a 3.82% return on average common equity and a 5.84% return on average tangible common equity.

Excluding $23.9 million of merger and acquisition expenses and $34.5 million of day 2 CECL provision for non-PCD acquired loans and their related tax impacts, the adjusted operating net income for the quarter was $77.4 million or $1.55 diluted EPS, representing a 1.23% return on assets, an 8.63% return on average common equity and a 13.2% return on average tangible common equity.

I'll start with some of the key metrics that are heavily impacted by the Enterprise acquisition. First, in terms of a capital update, as a reminder, we originally estimated the Enterprise deal to result in 9.8% tangible book dilution. Including estimated M&A to be incurred in the fourth quarter, we pegged actual tangible book dilution right around 7% as the loan interest and credit marks came in lower than originally modeled. As such, we anticipate slightly lower earnings accretion than originally modeled as well.

In addition, we repurchased $23.4 million of capital at an average price per share of $64.07 during the quarter. Despite the deal impact dilution and repurchase activity, our improved earnings profile and OCI movement resulted in a tangible book value per share decrease for the quarter of only $2.17 or 4.5%, while the tangible book value per share is up modestly over the year ago metric. Regarding the net interest margin, the reported margin improved meaningfully to 3.62% for the quarter. The 25 basis point increase from the prior quarter can be summarized by highlighting a few key components. First, both the Rockman Trust and Enterprise Bank balance sheet profiles are well positioned to experience margin growth from loan and securities cash flow repricing, and we saw that drive a good portion of the increase this quarter.

In addition, though it has negligible impact on the actual net interest income results, the margin also improved slightly by the payoff of approximately $110 million of acquired debt from Enterprise. The margin also expanded approximately 5 basis points due to purchase discount accretion on the acquired securities book. And lastly, we saw approximately 8 basis points of expansion from purchased loan accretion.

Regarding this last item, we recognize that the loan accretion results are less than suggested in our guidance last quarter. I would suggest this is purely a timing issue. The total accretable loan interest and credit mark is approximately $160 million, and we will expect the vast majority of that to come in over the next 5 to 7 years. However, we remind everyone that the actual results can often be lumpy due to prepayments, individual loan payoffs and repricing events. As long as longer-term rates remain intact, we are confident that our reported margin will sustain -- will reflect a sustainable level as those accretion numbers roll down.

With the Federal Reserve cut occurring in mid-September, the quarterly results had very little impact from the Fed action. We continue to reiterate our guidance that the bank is positioned to see little impact on the net interest margin from the recent and any future Fed cuts.

Shifting gears to loan and deposit activity for the quarter. We are very pleased with the organic results for the quarter. As Jeff just alluded to, you saw our strategic initiative to focus on relationship CRE and C&I lending on display as total C&I balances increased organically over 13% on an annualized basis for the quarter and are up over 7% through the first 9 months of the year. In addition, we are still optimistic over CRE and construction activity moving forward with the year-to-date declines driven primarily by runoff and workouts of more transactional balances.

Specific to the Enterprise acquisition, our newly acquired teams are working off of the same playbook, prioritizing C&I and relationship CRE, and they have not missed a beat remaining very active in the deal flow during the quarter. This focus resulted in a modest decline of approximately $45 million in total loan balances from the enterprise activity, which was nicely offset by growth in the legacy Rockland book.

Moving to the deposit side of the balance sheet. The story is equally positive. First, specific to the enterprise acquired balances, the third quarter results reflected a decline of approximately $80 million. However, only $30 million of that relates to relationship balances, while $50 million reflected the payoff of a maturing brokered CD. And similar to the loan activity, the legacy Rockland deposit organic growth more than offset the enterprise-related reductions, resulting in approximately 1% combined annualized growth for the quarter.

Switching gears to asset quality. The quarterly results capture a few different moving pieces related to the allowance for loan loss and provision levels. High level, net charge-off activity was only $1.8 million for the quarter or 4 basis points on an annualized basis and overall asset quality metrics remain strong. To provide a little more color on the reported results, the allowance for loan loss increased $45.7 million for the quarter, which includes $34.5 million of day 2 provision on non-PCD acquired loans, $9 million of carryover allowance on acquired PCD loans and $4 million of core provision less charge-off activity.

Total nonperforming assets at September 30 are 0.35% of total assets and include approximately $25 million of acquired NPAs from Enterprise. And though new to nonperforming activity was up slightly from the prior quarter, no material loss exposures were identified in those recent downgrades. Rounding out the update on noninterest-related items, we are pleased to report that both noninterest income and noninterest expense are right in line with expectations following the enterprise merger. On the fee income side, as Jeff just mentioned, it's worth re-highlighting that the merger brought over an additional $1.4 billion in assets under administration. And with the current quarter activity, total AUA grew to $9.2 billion as of September 30.

On the expense side, I will highlight a few key items. First, we reaffirm our original guidance of achieving 30% cost saves on the acquired enterprise expense base to be fully realized during the first quarter of 2026. Merger-related expenses totaled $23.9 million for the quarter and were comprised primarily of severance-related costs and professional fees. Amortization of intangible assets for the quarter was $7.3 million, with $6.1 million related to the newly acquired intangibles from the enterprise deal. And as Jeff mentioned in his comments, we are working through implementation efforts for a core system upgrade in May of '26. We had little impact from this in the third quarter expenses, though we do anticipate approximately $5 million of onetime costs to be incurred over the next couple of quarters.

And lastly, the reported tax rate for the quarter stayed relatively consistent at 22.8%. I'll now just close out my comments with fourth quarter guidance only as I will plan to give full year 2026 guidance with our fourth quarter results. In terms of both loan and deposit growth, we anticipate a low single-digit percentage increase off the September balances. Regarding asset quality, as I've been stating, we still do not see any pervasive issues across segments. And as such, provision will continue to be highly driven by developments of individual commercial credits. Regarding the net interest margin, we reaffirm and anticipate 4 to 6 basis points of expansion on an adjusted basis, which excludes loan accretion impact, which, as I noted before, can be volatile on a quarter-to-quarter basis.

For noninterest income, we estimate flat to a low single-digit percentage increase of the third quarter results. And for noninterest expense, we anticipate total core expenses, excluding merger-related costs and onetime conversion upgrade costs to decrease by approximately $2 million. This decrease represents a portion of the remaining enterprise cost saves expected to be realized as some temporary salary costs will extend into the first quarter. And as I just alluded to earlier, with the enterprise core conversion behind us, we are ramping up efforts in preparation work for our upcoming core system upgrade, which we estimate will result in approximately $3 million to $5 million of onetime costs during the fourth quarter. And lastly, tax returns.

That concludes my comments. And with that, we'll now open it up for questions.

[Operator Instructions]

The first question comes from Steve Moss with Raymond James.

Nice quarter here and definitely a lot of moving pieces. Maybe just one thing to start here. I noticed in the deck you guys had said there was good C&I growth. Just wondering if you could quantify that number here as you're kind of hard with the merger noise. And then also just talk about the loan pipeline.

Yes. So the C&I growth has been, as I said in my comments, really a function of we're really good at what we do, and we've been doing it a long time, but it's really been in the kind of the lower middle market. And so we've continued to make progress there. As I mentioned, in some of our legacy markets like Plymouth County, we've changed the incentives of the bankers there to incent more C&I than CRE. And with the balanced scorecard, C&I usually checks more of those boxes like with deposits and treasury management and such. So we think that's part of it.

And then we had -- as I mentioned in the last couple of quarters, we hired somebody to lead our effort in the middle market and in some of our specialty businesses, and he's had an immediate impact. And the loans that his groups and that he are responsible for are all C&I, and they tend to be a little bit bigger than some of the things we've done historically. And so that's really what's driving the C&I growth that we've been seeing over the last quarter or 2.

With regard to the pipelines, I'd say they're pretty healthy. I mean we haven't seen a dramatic increase or decrease. I think they've been somewhat stable with where they've been in the past. Obviously, kind of with the caveat that as you clear out portions of your pipeline with closings, you got to rebuild it a bit. So we've been experiencing some of that quarter-to-quarter. But overall, I think they've been pretty healthy.

Okay. Appreciate that color. And just curious where is loan pricing for you guys these days?

Yes. I mean, still on a spread basis, Steve, we stay disciplined. We're still looking to get above 200 basis points on a spread, especially on the C&I side. Given where rates are today, as you can expect, that tends to lead you to around 6%, low 6s. So we're always looking at staying disciplined to get the appropriate spread over whatever term we're funding.

Steve, one other comment maybe on our C&I exposure since I know it's a topic that will probably get asked about later is none of the growth that we're talking about in C&I is coming in the NDFI space. So we don't have any specialty businesses that are geared to that space or have much in the way. We have a couple of one-off relationships with leasing companies where we provide a line to them, but it's incredibly modest, and we don't have any of our initiatives pointed at that space. So all of the C&I growth that we're talking about is all Eastern Massachusetts, and it's all kind of middle market companies.

Right. And then just kind of curious here in terms of the -- on the office side of things, a stable quarter, I guess, is kind of how it seems to -- I would characterize it for office. Just kind of curious how are you guys thinking about resolution here? Are you guys feeling better in terms of office credit? There's obviously a few -- a decent number of classified loans coming to maturity next year in particular. Just kind of curious if you have any updated thoughts as to what you're seeing in resolution on the criticized and classified.

Yes. So I'll start, and then, Mark, you can comment. I would say, in general, I feel better today than I did 6 months ago. And part of that is we've resolved several of the larger problems we've had. And part of that is when I sit through a lot of the meetings where we're talking about these credits, I think the general feeling I walk away with is we still have work to do. So we're not out of the woods yet, but it feels like there's a good number of the work we're doing with these loans where we expect a positive resolution or a positive outcome in part because the sponsor working with us. We're reaching middle grounds on this. We're providing them time to get the asset they own maybe in better shape, and they're providing us with money or a master lease or what have you.

So there's a bunch of different ways to get to that point. But I would say, net-net, I feel positive. That's not something I could put numbers to, but it's just a general feeling.

Yes. I don't have too much more to add, Jeff, outside of -- when you look at, as you were indicating to some of the practical implications of what's coming due over the next couple of quarters, it's really concentrated in just a handful of loans. And to be honest, a couple of these are trending in the right direction where there's potential for upgrades of risk ratings and good resolution. If there is a little bit of an uncertainty, you're certainly not seeing the loss exposures that we experienced earlier in the quarter. So I think from that perspective, it feels like true losses and provision expectations feel much more contained.

Okay. That's great. And maybe just one last one for me, and I'll hop back in the queue. But you guys sound a bit more constructive on commercial real estate balances and definitely talking about a better C&I loan pipeline. And I know, Jeff, you've been talking about more organic growth for a little while now. Historically, you guys have done mid-single-digit type -- I'm sorry, low single-digit type loan growth. Could we maybe see something a little better next year given what kind of sounds like things are shaking out?

Yes, I think we could. If the trends continue here and we get our enterprise bankers continuing on the same path that they just demonstrated in the first quarter that we've owned them. I feel like kind of if I were to bracket it, kind of low to mid-single digits. So I think previously, we would have said low single digits. So I don't think we're ready to put a stake in the ground and say this is what we think the number is going to be. But I think we feel pretty good about it.

The next question comes from Mark Fitzgibbon with Piper Sandler.

Mark, first question I had for you is your guidance on the margin of 4 to 6 basis points of expansion in the fourth quarter, does that assume 1 or 2 Fed rate cuts?

Somewhat moved to Fed cuts, I guess, I would say, Mark, because we're -- as I mentioned in the call, I really feel good about our ability to neutralize any Fed cuts pretty quickly. So I would suggest that's similar guidance regardless of the Fed action.

Okay. And then secondly, now that you've marked the securities portfolio of enterprise, any plans to kind of restructure that? Or should you?

Probably not at this point. I mean, not that it's about a reporting answer here, but I think we view that as now being market securities. So whether we sell those off and replace with new securities, I think you're in the same position. So it's asset classes we're comfortable with. We're comfortable with the total book of the securities portfolio. And the all-in now yield on that book is certainly a lot better. So I don't feel strongly there's any reason to restructure that at this point.

Okay. And then I wonder if you could give us any color on the $16.8 million of new nonaccruals. Any particular -- is it concentrated in a couple of loans? What type of loans? Anything you could share with us?

Sure. Yes. It's actually really only 3 loans greater than $1 million in that number, the largest being about a $4.5 million construction loan that came over with the Enterprise acquisition. That -- it's a fairly benign story there in terms of what we expect from. Probably, hopefully no loss. This was a construction loan that was under an agreement and had just been delayed and kind of pushed out. That P&S has since expired, but the interest is still there, and we're hopeful and feel pretty optimistic that there is a sale that will get paid out in full on that. So that's a $4.7 million loan. That was the biggest of them.

After that, you dropped to $1.6 million and $1.1 million, one of those being a residential loan. That appraisal is well in support of the outstanding balance. And then it's just a handful of smaller stuff. So I know the number ticked up a bit from the prior quarter, but we really don't see any loss exposure in that bucket at this point.

Okay. And then I noticed you bought a little bit of stock back this quarter at an average price like $64 and change. How do you think about the tangible book value dilution from buying it up here at, call it, $140 million or $145 million of tangible book value?

Yes. I mean it's always a valuation consideration. Certainly, we're always a bank that's sensitive to tangible book dilution. But at the same time, it really comes down to do we feel the bank is appropriately valued and what's the right level to be buying at. So I think it's something we're going to continue to reassess at what ranges we'll tier up activity. I'd like to suggest we will continue to stay active, but we'll just revisit that over the next month or 2 and see what the right levels are to keep buying at.

Okay. And then lastly, for you, Jeff, I was curious, given how friendly the regulatory environment seems to be for M&A these days, what are your thoughts about doing another transaction? And would you look at all sort of further afield from what you have traditionally?

Yes. So I guess I would point back to the last couple of quarters, and our posture hasn't really changed, which is not really interested or focused on M&A at the moment. We're very focused on organic growth and getting our company positioned to continue to be a good earner and the integration and conversion of enterprise. And just because the conversion is behind us, that doesn't mean our work is done. So we still have a lot of work to do, making sure that continues to be a good story, the conversion I'm speaking of. And then we still have a lot of integration activities going on in order to synergize the enterprise franchise with the rest of our franchise. So message hasn't really changed in my mind.

The next question comes from Laurie Hunsicker with Seaport Research.

So Jeff, I just wanted to start by asking a question that I think you largely answered, but I just want to hear it because it's so great. NDFI exposure is basically nothing.

It's -- I mean, to the extent you want to call a couple of local leasing companies where we have some exposure to, but beyond that is really -- it's negligible. It's not -- hasn't ever been really a focus of ours, isn't today. We don't have any businesses geared towards that sector of the economy.

Right. Okay. And then office, just circling back to that. So the $42.9 million of criticized that you've got maturing in the fourth quarter, I guess, how much of that came from EBTC, so it's marked? Or how should we think about that piece? It's up from where you were last quarter, but obviously, last quarter didn't include EBTC. Is there any color you can give us around that 42.9% criticized office maturing in fourth quarter?

Yes. You've seen this now play out on a few loans. I think over the last couple of quarters here, Laurie, those were primarily the same 2 loans that we talked about as maturing last quarter. We entered into a couple of short-term extensions as we were working through more permanent resolutions. So happy to report on one of those loans, which is a $27 million relationship that was just recently approved for a new 2-year renewal with some injected equity as well. The projected debt service coverage looks very strong. So that property has morphed into a much better position and was just recently extended.

The other remaining balance. So there's really only 2 notes that make up that $42 million. The other one is likely to be sold. We're entertaining that right now. The offer we see on the table falls just a little bit short, but nothing of a material nature. So we're hopeful for a resolution there as well, but that one is just potentially a pending sale.

Got you. And that's $16 million?

That's about $16 million, correct. There's another couple of million dollars related to that relationship that is not in that number that is exposure to the same borrower, but the office exposure is only $16 million.

Got you. Okay. And then it looks like your office nonperformers down to $22 million. That's great. That's just that Class A office next that maybe is going to go back on performing status here in the next 1 or 2 quarters. Can you just help us think about that one? Any updated information?

That one would not be returning. They have essentially payment-free period for quite some time now heading out into 2026. So we're of the -- even though it's technically performing under the modification, we're of the opinion that we would not restore it back to accruing until we see cash flow resuming. So that's going to stick around on NPA for a bit, unless there's a path to a full resolution through another channel. But if it stays as is, it will just -- it will be on payment deferral for quite some time.

Got you. Okay. And that still is $22 million. Is that right?

It is still $22 million, yes. That is the one -- that's just one loan.

Okay. Great. I appreciate all the details you gave on office. Okay. So maybe jumping over to margin. What was your spot margin?

Spot margin for September, excluding loan accretion, I think, is the appropriate number to give you. That was 3.57%.

Okay. And then...

Bond accretion back to maybe Mark's question earlier, we view that as the core margin now or what we refer to as our adjusted margin. So that is inclusive of the bond pickup we got with Enterprise, but I will continue to isolate the loan accretion as that can be a bit lumpy.

Perfect. Okay. And then I do appreciate that loan accretion income is lumpy. Initially, obviously, your guide was 18 basis points. You had less dilution, the tangible book on the deal, which was amazing, but obviously less accretion. I mean -- and I know it can jump around, but thinking about it, like 8 basis points, give or take on margin, is that the right way to be thinking about it?

To be candid, Laurie, I think it will probably move up a bit from there. I don't want to predict an exact number, but you didn't see a lot of payoffs this quarter, which typically can accelerate some of the marks. So I would expect that to move north a bit. I just don't want to pick a number. I think it's important to note, though, the 18 basis points, I think, that you were referring to was also inclusive of the securities accretion as well. So that's 5 basis points of the 18. So I think if you're isolating just the loan mark, that would have originally thought to be 13 basis points or so.

You may see a quarter where it actually is in that range or you may see a quarter like you saw here. So I think you're going to see -- I think you will see volatility between 10, 13 basis points on a given quarter, if that makes sense.

Okay. That's helpful. Okay. And then just jumping over to expenses. So by my math, you got onetime charges left of $32 million. Is that right? Or is there a better number?

The $61 million we originally modeled, we -- a lot of that actually went through enterprise. I shouldn't say a lot, but about $22 million of that went through Enterprise's books in the second quarter. There were change of controls that was pushed through on their side prior to close because they were change of control contracts and the accounting nature suggested it was their expense. So $22 million of it already went through Enterprise. We've incurred about $27 million or $29 million year-to-date. And based on the revised estimates, I'm probably looking around an $8 million number -- $8 million to $10 million in the fourth quarter. finish.

Okay. And that finishes it. Okay. Great. And then if we think, to your point, that core expenses here increased $2 million ex merger, ex system upgrade. I mean, I guess if we sort of fast forward [ instead ] we would be looking to a clean quarterly run rate on expenses. How should we be thinking about that number?

Yes. It's a good question. I will reserve formal guidance for 2026 till next quarter. But I think if you just look at the third quarter, round it to $137 million of what I would call core expenses, excluding M&A, we're pegging additional cost saves of about $2 million. That gets you to $135 fully baked cost saves will probably get a little better than that. We're going to go through the budget process and strategic planning in the next couple of months. I wouldn't suggest there's meaningful increases by any means coming. But I don't want to pick a new number yet for 2026, but I don't think you're going to see it move too far north from that math that I was just suggesting, which is about $135 million per quarter type number.

The next question comes from David Konrad with KBW.

I was hoping you could help me out a little bit with the securities portfolio, if I promise this will be the last time that I'll ask it. But I was wondering if you can kind of split out the kind of legacy with the enterprise book. In other words, you went from 2.32% to 2.84%. Just wondering what the yields are on the marked enterprise side? And then what kind of improvement from the 2.32% on the legacy side? And kind of what's the new investment run rate you're getting there? So I'm trying to kind of figure out where the cash flows are going and where the yield can improve, if that makes sense.

It does. I may not have all the pieces for you, so I may need to follow up. But I would peg the yield on the acquired book in the low 4% range, and I can follow up with an exact number there. But I believe the discount mark that you're seeing accrete in essentially brings that piece of the portfolio into the low 4s, which is consistent with what we're replacing runoff of our legacy securities at with new securities. And that's the lift you're seeing on the Rockland side.

So the cash flows we're anticipating on our book, I guess, on the combined book going forward is about $700 million in 2026. I guess, technically, a portion of that is already at market rate because if it's enterprise related, it's been marked up to the 4% range. But a good portion of that will be on average, probably 1.5%, 2% coupons that are being replaced at 4% yields. And that's a piece of that overall margin expansion that we've been talking about pretty consistently now for a few quarters, that 4 to 6 basis point range is because a basis point or 2 of that is because of the securities repricing that we're seeing.

Got it. Okay. Perfect. And then following up with the earlier comment, a question from Steve on loan yields, I think that was more directed towards C&I. Maybe the belly of the curve has come in a little bit, maybe more than I thought. But on the new CRE, is there a difference in kind of the new money yield you're looking at there?

Not much, David. I think fixed rate is probably penciling out somewhere around there. I'm sure we're seeing some competition get below 6% given, as you mentioned, the contraction at that part of the curve. So I'm not suggesting we're not doing deals that might be slightly under 6%, but it's going to be right around probably 6%. We are seeing a pretty modest pickup in swap activity. I think that's back on the table for borrowers to be thinking about. That's a product we've always been very comfortable with. So you saw a bit of an uptick in the third quarter fee income as it relates to swap fees. So again, swap pricing, I wouldn't suggest is that far off. It's just -- I think borrowers are thinking about that a bit more now as well.

[Operator Instructions]

We do have a follow-up from Steve Moss with Raymond James.

2 follow-ups for me, guys. In terms of the balance sheet, you guys have a reasonably healthy cash position here, been running it for a little bit. Just kind of curious if there's any thoughts on deploying some of that into securities here and maybe shifting the mix given Fed rate cuts? Or just any thought process around that?

Yes. Yes. It's a good question. I mean I think as the balance sheet has grown, there's certainly a slightly elevated cash position that we believe is appropriate just from a liquidity management standpoint. But I do think there's opportunity to put a little of that back into securities. I think right now, we're comfortable with the current level as we work through the acquisition. We get a bit more visibility into what loan growth expectations look like. So I'm not feeling anti to rush to put that cash to work. I really would like to see what the loan demand looks like. Obviously, how deposits play out post acquisition. So sitting on a little bit of excess cash feels appropriate right now.

Okay. Appreciate that. And then on capital here, you guys are almost at a 13% CET1 ratio. Kind of curious how you're thinking about a longer-term target? And given good profitability and where credit is these days, could you be a little bit maybe more aggressive on the buyback? I heard your answer on TBV buying back, but it seems like you have room here.

No, it's a fair question. Certainly, I think optimal levels of CET for us in this environment, I would certainly be comfortable at 12% CET1, 8.5% to 9% tangible capital and you're hitting the nail on the head, that suggests there's opportunity to continue to engage in buyback activity to work that down. So that would require a lot of buyback, I think, to be realistic there. So it's something that we understand and appreciate. Ideally, we would love to be able to take advantage of these great new markets that we're in with enterprise and grow into that capital. Growth will need to be driven by good core funding. I think that's going to be a lot of what our mentality will be.

So if we can find better growth because we're getting good deposits and good funding, I'd prefer to grow into that capital. If growth stays in that low to mid-single-digit range, I think buyback is certainly a tool that we should be exploring more.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Tengel for any closing remarks.

Thanks. We appreciate your interest in INDB, and everybody, have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.