Image source: The Motley Fool.
DATE
Friday, Oct. 16, 2026
CALL PARTICIPANTS
- President and Chief Executive Officer – Jeffrey Tengel
- Chief Financial Officer and Executive Vice President of Consumer Lending – Mark J. Ruggiero
TAKEAWAYS
- Net Income — $89.7 million, representing a 12% increase in diluted earnings per share over the second quarter of 2026.
- Net Interest Margin — 3.89%, representing a four basis point increase from the prior quarter primarily due to increased purchase accounting benefits.
- Adjusted Core Margin — 3.76%, which remained flat compared to the second quarter when excluding purchase accounting and other non-core items.
- Total Loan Growth — $158 million, representing nearly 3.5% annualized growth with expansion across C&I, commercial real estate, home equity, and residential mortgage classes.
- C&I Loans — $61 million increase, representing 5% annualized growth when excluding the $11.5 million runoff from the fully exited dealer floor plan business.
- Commercial Real Estate Growth — $31 million, driven by increased construction draw activity and a 27% reduction in loan payoffs compared to the second quarter.
- Approved Commercial Loan Pipeline — $574 million as of Sept. 30, 2026, an increase from $510 million as of June 30, 2026.
- Non-time Deposits — $230 million increase, representing 5.4% annualized growth driven by consumer and business segments.
- Cost of Deposits — 1.42%, an increase of six basis points from the prior quarter despite heightened competition for deposits.
- Net Charge-offs — 0.02% of average loans for the third quarter, compared to a 20-year average of 0.16%.
- Provision for Loan Losses — $6.5 million, primarily reflecting a specific reserve for one office real estate loan that moved to non-performing status.
- Non-performing Assets — $126.2 million, or 0.5% of total assets, driven by one local office loan in workout status.
- Stock Repurchases — $57.4 million, involving the repurchase of approximately 679,000 shares at an average price of $84.60 per share during the third quarter.
- Common Equity Tier 1 Ratio — 12.7% as of Sept. 30, 2026, compared to 12.8% at the end of the second quarter.
- Home Equity Demand — 12% annualized growth for the quarter, while residential mortgage activity remained soft due to higher long-term rates.
- Holding Company Debt — $125 million, representing a new three-year term loan priced at one month SOFR plus 170 basis points.
- System Conversion Expenses — $2.2 million for the quarter, with an additional $1.5 million to $2 million expected over the next two quarters.
- Fee Income — $41.3 million, a 2.6% decrease from the second quarter due to lower wealth management tax fees and softened mortgage banking demand.
- Commercial Real Estate Concentration — 278% of capital as of Sept. 30, 2026.
- FDIC Assessment Expense — $2.5 million, a decrease from $3.2 million in the prior quarter that included a $400,000 retroactive adjustment.
- Securities Portfolio — $3.5 billion, representing 14% of total assets, with a weighted average yield of 3.36%.
- Q4 Margin Guidance — Slightly north of 3.9%, assuming no further Federal Reserve action and including a 10 basis point benefit from loan accretion.
- Q4 Loan Growth Guidance — Mid-single digit annualized growth for C&I and low single-digit annualized growth for CRE and construction.
Need a quote from a Motley Fool analyst? Email [email protected]
RISKS
- Ruggiero stated, “we have approximately $17 million of established specific reserves in the commercial book that we do anticipate will be charged off over the next couple of quarters,” noting that these anticipated losses are already largely recognized in reserves.
- Tengel stated, “We have seen a few instances where higher rates have resulted in business owners pausing planned spending and/or projects, particularly in the commercial real estate space,” indicating external economic pressures on loan demand.
SUMMARY
Independent Bank Corp. (INDB +3.81%) reported record quarterly net income and earnings per share for the third quarter of 2026. Management reported growth in loans and deposits despite significant competition and a challenging economic environment. The company maintained its adjusted net interest margin while returning capital to shareholders through dividends and stock repurchases. Asset quality remained within historical performance ranges, although management identified stress in the office loan portfolio that required additional reserves. The company also announced a delay in its core system conversion to prioritize operational stability.
- The company postponed its planned core systems upgrade from Oct. 2026 to Feb. 2027. CEO Tengel stated, “you only get one chance to do this well and minimize customer impact, so we are laser-focused on getting it done right.”
- Management is consolidating its corporate headquarters into a single location in Rockland, Massachusetts. Beginning in Nov. 2026, nearly 400 employees will move from five separate buildings to improve collaboration and culture.
- Independent Bank has initiated internal beta testing of artificial intelligence applications. Tengel noted that the first use cases will be internally oriented to build operational experience before pursuing customer-facing applications.
- CFO Ruggiero indicated that the company expects to return at least 100% of profits to shareholders via common dividends and buybacks.
- The securities portfolio is expected to generate significant cash flow. Ruggiero stated, “You’re seeing really strong lift in the securities yields with over $500 million of cash flow expected over the next four to five quarters.”
- Management identified a path to a 4% net interest margin by the end of 2027, driven by the repricing of the loan and securities back books.
INDUSTRY GLOSSARY
- C&I: Commercial and industrial loans made to businesses for working capital or capital expenditures.
- CET1: Common Equity Tier 1 ratio, a measure of a bank’s core equity capital compared to its total risk-weighted assets.
- CRE: Commercial real estate loans secured by income-producing properties.
- FTE: Fully tax-equivalent, an adjustment to interest income to make tax-exempt assets comparable to taxable ones.
- LIHTC: Low-Income Housing Tax Credit, a federal program providing incentives for the development of affordable rental housing.
- NIM: Net interest margin, the difference between the interest income earned and the interest paid to lenders.
- OCI: Other comprehensive income, which includes revenues, expenses, gains, and losses that are excluded from net income.
- ROTCE: Return on average tangible common equity, a performance ratio measuring profits against the physical capital of the company.
- SNC: Shared National Credit, a loan or loan commitment of at least $100 million shared by three or more supervised institutions.
- SOFR: Secured Overnight Financing Rate, a benchmark interest rate for dollar-denominated derivatives and loans.
Full Conference Call Transcript
Operator: materially from these statements due to a number of factors, including those described in our earnings release and other SEC filings. We undertake no obligation to publicly update any such statements. In addition, some of our discussion today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures, including reconciliation to GAAP measures, may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the investor relations section of our website. Finally, please note that this event is being recorded. I would now like to turn the call over to Jeff Tengel, CEO. Please go ahead.
Jeff Tengel: Thank you. Good morning, and thanks for joining us today. I am accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. We are pleased with our third quarter results. We generated solid loan and deposit growth, maintained the core net interest margin despite heightened deposit competition, continued to aggressively buy back stock, managed our expenses tightly, and had very modest net charge-off activity. Our deposit franchise continued to differentiate itself, producing over $230 million of non-time deposits, representing 5.4% annualized growth. While up six basis points from last quarter, our 142 cost of deposits remains industry-leading.
These results were achieved in a very competitive environment, with growing expectations that the Federal Reserve will continue to move rates higher. On the lending front, we generated total loan growth of $158 million, or nearly 3.5% annualized. We experienced growth across a number of asset classes, including C&I, commercial real estate, home equity, and residential mortgage. Excluding the impact of the $11.5 million runoff from our dealer floor plan business, which has been fully exited, our C&I loans rose by $61 million, or a healthy 5% on an annualized basis.
While C&I growth was not as robust as in the second quarter, we have a very healthy pipeline heading into the fourth quarter and had several loan closings slip into October. Commercial real estate, including construction loans, grew by $31 million during the quarter, primarily reflecting increased construction draw activity and a reduced level of payoffs. We funded $202 million in new relationship-based commercial real estate loans in the third quarter. Loan payoffs and pay downs were down 27% from the second quarter, and our CRE concentration now stands at 278. On September 30th, our approved commercial loan pipeline totaled $574 million, up from $510 million on June 30th.
Our loan pipeline has benefited from strong origination activity, new hires across several business segments, and a pivot by the legacy Enterprise Bank relationship managers from defense to offense. Despite the competitive loan and deposit environment, the third quarter saw stability in our adjusted NIM. This reflects the favorable repricing of loan and bond cash flows, as well as pricing discipline across both our loan and deposit portfolios. Mark will elaborate on our NIM during his comments. As the environment continues to shift, we recognize the best use of our capital is to build deep, profitable customer relationships and not grow our balance sheet at thin, risk-adjusted spreads.
This means we will continue to support our customers, be competitive for the right deals, and grow prudently. We also continue to maintain a proactive posture in returning excess capital to shareholders. Capital management will remain a key priority for the balance of the year. Regarding asset quality, while we continue to see movement in and out of our non-performing loans and criticized and classified loan buckets, the levels are consistent with our historical credit performance. Our net charge-offs were just 2 basis points for the third quarter and have averaged just 6 basis points over the last five quarters.
Our loan loss provision represented 14 basis points of average loans in the third quarter and has averaged 12 basis points over the last five quarters, excluding the impact of the Enterprise acquisition. Over the last 20 years, our loan loss provision and net charge-offs have had an average of 21 basis points and 16 basis points of average loans, respectively. The economic landscape continues to be challenged by higher interest rates, inflationary concerns, the Iran war, tariffs, among other things. Importantly, however, we have not seen any degradation of credit from these pressures. We have seen a few instances where higher rates have resulted in business owners pausing planned spending and/or projects, particularly in the commercial real estate space.
Excluding non-recurring core systems conversion costs, expenses were down compared to the second quarter. We remain vigilant regarding our expense levels. As we’ve stated in the past, given the investments we have made in people and technology over the past few years, we believe we have the scale to continue to grow without significant additions to our expense base. Of note, we have elected to move the timing of our planned systems upgrade from October to February to allow for additional preparation and ensure a smooth, well-managed implementation. The revised timeline provides additional flexibility to complete the necessary testing and readiness activities while minimizing potential disruption to our operations and customers.
We believe this measured approach positions us for a successful implementation and does not change our overall objectives for the upgrade, which include enhanced operational efficiencies and additional product capability. I continue to tell the team, you only get one chance to do this well and minimize customer impact, so we are laser-focused on getting it done right. We’ve started to beta test some early AI applications. The first use cases will be internally oriented and will not have any customer impact. As I have mentioned in the past, this will allow us to develop muscle memory and gain confidence in our ability to execute before we take on bigger, more impactful applications.
Beginning in November, we will consolidate our corporate headquarters into a single location at 1 Technology Place in Rockland, Mass, bringing nearly 400 employees together from five separate office buildings. In addition to the operational efficiencies, we expect this move to foster greater collaboration, strengthen teamwork, and further enhance our corporate culture. Our strategy remains straightforward: drive organic growth through new and existing relationships, maintain disciplined underwriting, generate positive operating leverage, and deploy our strong capital position to create long-term shareholder value. I want to thank all of the Rockland Trust employees for their tremendous efforts on a daily basis. Every measure of our success is a direct result of their commitment.
On that note, I will turn it over to Mark.
Mark Ruggiero: Thanks, Jeff. To summarize the quarter results, 2026 third quarter net income was $89.7 million, and diluted EPS was $1.90, representing a 12% increase over prior quarter EPS results. The quarter results reflect record earnings in EPS for the bank and showcase our continued growth and overall profitability. Return on assets for the quarter was 1.42%, and return on average tangible common equity was 15.4%. Both metrics already meeting profitability targets we set for the fourth quarter of this year. Our eyes are set on continuing to improve profitability from these levels. There are a lot of moving pieces, and as such, we will provide full year 2027 guidance with our fourth quarter results.
A key driver of the third quarter earnings increase was the overall increase in net interest income. With a strong rebound in overall deposit balances, including an increase in average deposits of over $630 million, the overall average balance sheet grew nicely with higher cash, securities, and decent loan growth fueling a $15 million increase in interest income versus the prior quarter. Countering the growth in interest income, total cost of deposits increased 6 basis points for the quarter. The net interest margin for the quarter of 3.89% increased 4 basis points from the prior quarter as a result of increased purchase accounting benefit. The adjusted core margin, excluding purchase accounting and other non-core items, was flat at 3.76%.
The average deposit increase that I just referenced was driven by growth across all segments, consumer, business, and municipal. However, due to typical seasonality, the quarter-end balances reflected solid growth in the business and consumer segments while municipal balances were down quarter-over-quarter. It’s no secret that deposit rate competition is very high. Our approach remains steadfast. Be competitive, grow prudently, and reward strong customer relationships. On the loan side, as Jeff alluded to, we are seeing really good progress in a very competitive environment. As we discussed last quarter, the improved pipelines and anticipated closing activity led to a modest increase in total CRE and construction balances, while C&I grew at a 4% annualized rate.
We did anticipate a slightly higher growth result in C&I. However, the activity remains very strong with approximately $40 million of anticipated Q3 fundings that got pushed into the first couple of weeks of October. On the consumer side, with long-term rates pushing up higher, home equity demand was very strong with approximately 12% annualized growth for the quarter, while residential mortgage activity remains challenged. Shifting gears a bit towards capital management, during the third quarter, we repurchased $57.4 million in capital, executing on our long-term goal of prudently returning excess capital to shareholders. As of September 30th, our CET1 ratio sits at 12.7%, and our tangible capital ratio is at 9.4%.
We do recognize the higher interest rate environment has already put some pressure on other comprehensive income within the capital stack. However, our strong overall capital and liquidity levels, combined with a close monitoring of both our available-for-sale and held-to-maturity securities portfolios, will continue to afford us the flexibility to stay aggressive with our buyback activity. Rounding out the overall financial position update, on the borrowing side, we paid off a maturing $100 million FHLB borrowing, and we paid down $100 million of our $125 million holding company line of credit, with the remaining $25 million balance converting into a term debt structure.
In addition, we executed on a new $125 million holding company three-year term loan with pricing at one month SOFR plus 170 basis points. I will switch gears now to asset quality, and we will highlight the following notable items for the third quarter. Total non-performing assets increased to $126.2 million or 0.5% of total assets. The increase is primarily driven by one office loan currently in workout status. This one loan has a newly established $6.5 million specific reserve. That reserve, along with some smaller moving pieces within the allowance model, drove a $6.5 million provision for loan loss for the quarter. Total criticized and classified loans remained relatively stable at 3.9% of total commercial loans.
While net charge-offs for the quarter remained low at only two basis points annualized, we remind folks that we have approximately $17 million of established specific reserves in the commercial book that we do anticipate will be charged off over the next couple of quarters. Lastly, the uptick in delinquencies is driven primarily by both the new-to-non-performing loan as well as previously impaired workout loans reaching maturity dates. Moving now to non-interest items. Fee income of $41.2 million was down approximately 3% from the prior quarter.
While deposit interchange and ATM fees all experienced increases, overall wealth management income decreased due primarily to elevated tax prep fees in the second quarter, while the higher interest rate environment softened demand in saleable mortgage banking and loan level swap activity. On the expense side, the quarterly results reflect prudent expense management across all major categories. I will highlight a few unique items in looking at quarter-over-quarter changes. First, within salaries and benefits, the third quarter results included a $1 million benefit relating to the fair valuation of life insurance split dollar benefits. The FDIC assessment expense decreased as a result of improved ratings driving a lower premium, and that does include an approximate $400,000 retroactive adjustment.
Within other non-interest expense, the prior quarter expense included approximately $900,000 of expense associated with annual director equity grants, with minimal related expense in the third quarter. As an update on our core conversion project, we incurred approximately $2.2 million of expenses associated with the project in the quarter, bringing the year-to-date total to $5.5 million. With the shift, as Jeff mentioned now, to a 2027 Q1 conversion date, we anticipate an additional $1.5 million to $2 million of one-time expenses to be incurred over the next couple of quarters, with the majority of that to be incurred in the fourth quarter. Lastly, as expected, the tax rate stayed relatively consistent at 23.3%.
With that, I will now finish up by providing fourth quarter 2026 guidance. Regarding loan growth, we estimate CRE and construction to increase at a low single-digit annualized percentage, while for C&I, we anticipate a mid-single digit annualized percentage increase. Regarding consumer real estate balances, we anticipate home equity to remain strong with high single-digit percentage annualized growth, while mortgage balances are anticipated to stay relatively flat to a low single-digit percentage increase. For deposits, we also anticipate some level of seasonality impacting period end balances, with point-in-time deposits likely staying relatively flat to a low single-digit annualized growth rate.
As more and more variables come into play regarding net interest income, we think it is appropriate to also guide net interest income dollars in addition to the margin. Regarding net interest income, we anticipate a modest increase versus third quarter results. As a reminder, the third quarter benefited from the slightly elevated loan accretion and large seasonal increases in deposits that drove a big increase in average earning assets for the third quarter. Regarding the margin, if we assume no further Federal Reserve action, we would anticipate the reported margin to land slightly north of 3.9% for the fourth quarter. A reminder, that does include an estimated 10 basis point benefit from loan accretion.
If the Fed increases again in the fourth quarter with no major changes on the longer end of the curve, we would anticipate a couple basis points reduction as a result. Our fee income is anticipated to grow in the low single-digit percentage range. On the expense side, we anticipate operating expenses, which excludes system conversion costs, to be up slightly over third quarter operating expenses. As I just mentioned, we anticipate approximately $1 million to $1.5 million of one-time expense related to the core conversion in the quarter. Lastly, we anticipate no material changes to the tax rate. That concludes my comments. With that, we will now open it up for questions.
Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimal sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Our first question is from the line of Feddie Strickland from Hovde Group. Your line is now open. Please go ahead.
Feddie Strickland: Hey, good morning, Jeff and Mark. If we just start on the credit side, can you provide any more detail on the office credit that entered non-accrual this quarter? Geography, types, and just expectations for the workout process there.
Mark Ruggiero: Sure. It’s a local office loan. Basically, another single tenant that is looking to leave and is planning to vacate, so it’ll essentially convert into a fairly empty office building. We’re working with the sponsor. There is a potential plan to convert that facility to multifamily. That’s early stages in terms of that process. So right now, we thought it was appropriate to look at an appraisal and evaluation as an empty office building as well as a potential increased value as a multifamily conversion, and we reserve down to the average of those balances, which is the $6.5 million reserve.
Jeff Tengel: The other thing I would add is the sponsor has a history of supporting their projects. They’ve been supporting this one. We proactively put it on non-performing status, and they’re looking for a partner to help them with the transition to a multifamily property. So it’ll probably take a little while for it to work itself out, but we do feel like there’s a little bit of optimism based on the sponsorship.
Mark Ruggiero: That’s a good point. It had been performing up until September 30th. Just given the loss exposure and the likely resolution, we thought it was appropriate to put it on discretionary non-accrual.
Feddie Strickland: Got it. Thanks for the color. Just more broadly, I think you’ve got about $17 million or so in classified office coming due in the fourth quarter. Can you just give us a high level of kind of how you think about those as they come due?
Mark Ruggiero: Yeah. The good news there, Freddie, I guess, is that is one loan. That is one that actually went to non-accrual last quarter. We also have a $6 million reserve on that loan already established. It is being marketed for sale. We have seen some early interest, so we are hopeful for an early 2027 resolution on that. But that is one loan with a $6 million reserve on it.
Feddie Strickland: Got it. If I could just squeeze in one more on loan growth.
Mark Ruggiero: Sure.
Feddie Strickland: It seems like you have had some pretty solid momentum on the loan side, good pipeline building there. How should we think about the timeline for that getting deployed, and can you remind us on typical seasonality?
Jeff Tengel: Yeah. The C&I loan growth, I think, is not very seasonal, in part because a lot of the growth has been new client acquisition, and so that has not been very seasonal. So my expectations on the C&I side is we are going to continue to see kind of that mid-single digit growth that we just talked about through the fourth quarter and into 2027. The commercial real estate portfolio is a little bit different. Obviously, we grew a little bit this quarter, in part because of the construction loan draws and the lack of paydowns. If you recall, we had outsized paydowns in the second quarter, which really muted our loan growth in that asset class.
We did not see the same elevated level of payoffs in the third quarter. And while rising interest rates can make it a challenge for new projects, it also makes it more difficult to refinance into a lower rate. We think that the payoffs as we go forward, hopefully, will stay at a historical level, and we won’t see the elevated payoffs we saw in the second quarter. I don’t know, Mark, if you want to comment on the consumer portfolio.
Mark Ruggiero: Yeah. Similar to the third quarter results, I would expect you’ll see home equity demand continue to stay pretty strong. For the same reason Jeff just talked about some of the CRE dynamics, certainly the higher interest rates is challenging sellable mortgage volume. A lot of what we’re seeing now is it’s basically 80% purchase, 20% refi. Most of that purchase, if there’s an adjustable rate demand, we will portfolio that. So you may see a little bit of portfolio growth, but I would expect mortgage banking income to stay challenged.
Feddie Strickland: Got it. Thanks for the color. I’ll step back.
Mark Ruggiero: Thank you.
Operator: Your next question is from the line of Justin Crowley from Piper Sandler. Your line is now open. Please go ahead.
Justin Crowley: Hey, good morning, everyone.
Mark Ruggiero: Hi, Justin.
Justin Crowley: Wanted to start off on the NIM. Mark, do you have detail on just how the margin progressed through the quarter, where that ended the period, and then maybe just also the spot cost of deposits if you have it?
Mark Ruggiero: Sure. We did see a gradual increase into September. I will caveat, the spot NIM for September was 381, but you will start to see a little bit of noise there because the securities portfolio will print at a meaningfully higher yield as you see a little bit more of that OCI unrealized loss in that number. We can certainly, going forward, think about maybe giving that yield also on a kind of an adjusted book basis. But for now, you will see a little bit of elevated yields in the securities book just because of that loss piece embedded in it. And we did a better job of shifting some of that excess cash into the securities portfolio.
So just the mix of earning assets got better as the quarter progressed. That drove a bit of a lift in the margin over probably where July was, where we saw probably the biggest impact on the cost of deposits hitting the NIM. So if I think through to the fourth quarter, spot cost of deposits for September was 144, 1.44%, so I would expect to see a bit more deposit cost pressure heading into the fourth quarter. What you are not seeing in the third quarter margin results is the front end of the curve index-based loans getting the benefit on loan yields. So we will see a little bit of acceleration in loan yields out of the gate.
We will still have the repricing benefit affecting both loans and securities. So I do expect the asset yields to improve nicely. I will expect deposit costs to go up a little bit. But I do think we will be able to increase the adjusted core margin by a few basis points here. Does that make sense? There is a lot of moving pieces there. Hopefully, I gave a little bit of color on each component.
Justin Crowley: Yeah, no, that is super helpful. I appreciate that. I guess any early read on how you think that margin could behave as we get into next year with maybe a couple more hikes on the table, and maybe just more thematically, as I know you will get into formal outlook.
Mark Ruggiero: Yes
Justin Crowley: come January. You’ve got that constant debate between defending NIM or tolerating some pressure to grow NII. Just kind of curious how you’re thinking about that moving forward.
Mark Ruggiero: Yeah. I know in a number of conversations over the last quarter or two, we’ve been asked, is there a realistic expectation for a 4% NIM? I think the answer there is still yes, particularly because of that back book repricing benefit with rates continuing to inch up a bit higher. You’re seeing really strong lift in the securities yields with over $500 million of cash flow expected over the next four to five quarters. That alone can drive upwards of 7 basis points of expansion in the margin.
Assuming we can equalize any Fed action with loan yields and deposit costs, that back book repricing would still drive some pretty good margin expansion over the next four or five quarters. I do think there is a path to end of 2027, looking at a 4% margin.
Justin Crowley: Okay. Got it. If I could just squeeze maybe one last one. Just on the buyback, you’ve got at least the optics of OCI moving against you. What’s the overall thinking there, and could you look to get even more active, just given how the stock and really the whole group’s traded over the past couple of months?
Mark Ruggiero: It’s a fair question. I would reaffirm certainly that expectation of 100% of profits being returned via common dividend and buyback is still the expectation. Right now, I don’t know if we’ll get much more aggressive than that. I’ve always talked about just balancing the funding of that and continuing to fund through bank profits is important. We certainly have the capacity, I think, and the appetite to do a little bit more. I’d say a minimum level of 100% of profits inclusive of the dividend.
Justin Crowley: Perfect. Great. I will leave it there. I appreciate it.
Mark Ruggiero: No problem.
Operator: Your next question comes from the line of Laurie Hunsicker from Seaport Research Partners. Your line is now open. Please go ahead.
Laurie Hunsicker: Yeah. Hi, good morning, Jeff and Mark. Thanks for taking my questions. Just wanted to circle back to credit here. I know the jump in non-performers, it looks like, as you said, was all office. But I just wanted to get the actual dollar amount. Was that a $22 million loan then, or do you have a better number?
Mark Ruggiero: Yes. Sorry, we didn’t make that clear. It is a $22 million loan, $22.4 million.
Laurie Hunsicker: 22.4. Okay, great. If I’m just looking at the breakdown of the $62 million in office non-performers. So $22.4 million is the new non-performer. You still have that $22 million SNC or is there a better balance on that loan?
Mark Ruggiero: Yep. That’s paid down a little bit, Laurie. That’s basically 22 even now, 21.9, 22, right around there.
Laurie Hunsicker: Okay. Is there still a thought that one might come current in the fourth quarter? What’s the latest?
Mark Ruggiero: Yes. I think it will be January of 2027, if I understand sort of the six-month performance period. I think it is going to be a Q1 event. Yes, it is still-
Laurie Hunsicker: Okay
Mark Ruggiero: on track returning to accrual.
Laurie Hunsicker: That is great. Okay. The $17 million that you have in life sciences non-performers, is that your only non-performer in life sciences?
Jeff Tengel: Yes.
Jeff Tengel: I think so.
Mark Ruggiero: Yes. It is about a $100 million portfolio, and I am pretty certain that is the only non-performer. Just a reminder on that one, Laurie Hunsicker, we also have a $6 million reserve on that. That is the other $17 million with a large reserve.
Laurie Hunsicker: Okay. Great. Any thought on when we might see movement on that one?
Mark Ruggiero: Yeah, I am hoping if we could get that resolved by calendar year, that would be great. It could spill over into the first quarter. That is a little of my prepared comments. Just a reminder between the new non-performer and this loan, there is $12 million plus of reserves. There is another $1.6 million on another office property that is a much longer. I think it is a 2030 maturity date. But there is a little over $14 million in reserves, two of which we hope to resolve in the next couple of quarters. So you will see those charge-offs come through when they get resolved.
But as I mentioned, the good news is the loss has been taken for the most part, so it should not result in much more needed provision levels.
Jeff Tengel: Yeah. Laurie Hunsicker, because we have a lot of conversations going on now with a handful of the larger office loans, and we feel pretty good about the quality of the dialogue and moving forward resolving them. As Mark Ruggiero suggested, there is some loss content in some of those. But we are aggressively moving them off the balance sheet and, for the most part, have been working with cooperative sponsors in order to do that.
Laurie Hunsicker: Okay. And then just sort of last question here on credit. So within that $62 million bucket of office non-performers, that leaves, I don’t know, $5 million or $6 million. What is that?
Mark Ruggiero: Bear with me here. There is the tw-
Laurie Hunsicker: Oops, did I get disconnected?
Operator: Ladies and gentlemen, we are currently experiencing technical difficulties. Please stand by as we resolve the issue.
Mark Ruggiero: Yeah, until I left off, Laurie. Apologize for that. Do we have Laurie still in the queue? John, are you there?
Operator: Our next question comes from the line of Steve Moss from Raymond James. Your line is now open. Please go ahead.
Steve Moss: Hey, good morning, guys. Mark, just to answer your question on what you were trying to say to Laurie, it cut off before you started speaking, at least on my end.
Mark Ruggiero: All right. I appreciate that. Laurie, you can obviously come back into the queue, but it’s three loans that are on NPA. There’s a $22.2 million, which is the new one. There’s the $22 million, which is the SNC, and then there’s the $17.7 million. So those make up 60 of the 62. There’s one other small office loan on NPA, but it’s primarily three loans. All right. Thank you, Steve. I appreciate that.
Steve Moss: Absolutely. Maybe just a quick follow-up on office here. Just curious, what are the total reserves for the office portfolio here?
Mark Ruggiero: Specific reserves, we have a little over $14 million, which as a reminder, does not include the $8 million we already charged off on the SNC. So there’s essentially $22 million of actual charge-off and/or reserve. Then on top of that would be your standard, call it 1%-1.25% reserve on kind of the general methodology.
Steve Moss: Okay, great. Appreciate that. Then maybe going back to the margin here, I guess two things. Curious as to what types of securities and yields you’re purchasing these days, especially as we look at. Also just thoughts on the book going forward. Then the second thing, just where are loan origination yields these days, and how much should we expect in terms of cash flows from the loan portfolio over the next 12 months?
Mark Ruggiero: Sure. So the first question on security yields purchasing. For the quarter, we were basically weighted average yield of around 5%. That started to uptick obviously north of that in September. So today, if we’re purchasing a security, I’d say there’s a good chance that’s nearing 6%. We’re staying pretty plain vanilla there, Steve. Mortgage backs, agency-backed mortgage securities. We still find good value in low coupon, deep discounted securities where it gives us some downside protection, likely less prepayment risk. So we’re basically primarily buying that type of bond, and that’s giving us the nice lift.
If anything, it probably suggests it could move a bit higher over what’s coming due, which as I mentioned, is a little over $500 million in 2027. That’s at about a 2.5% rate. So you’re talking probably a good 300-plus basis points of spread on that $500-plus million churn in the securities book. On the loan side, it is still less scientific on a number, but think of it as an on average 7 or 8-year duration. So you are seeing likely $1.5 billion to $2 billion of either repricing or cash flow happening on an annual basis. Similarly, you still have a lot of older fixed rate loans in the portfolio that are coming off around 5% yields.
New pricing on the commercial side is averaging around 6.5%, at least in the third quarter. That is potential to move higher with rates continuing to move a bit higher in the fourth quarter. Home equity is pretty much in the same range as that is tied off of prime. I would say the resi was maybe a tick lower than that in the third quarter, though we will probably move to mid-sixes as well in the fourth quarter.
Steve Moss: Okay. That is really helpful there. Then, in terms of just kind of expenses here, with the systems conversion getting pushed into the first quarter, I appreciate the color on the guidance for the fourth quarter. Just kind of curious how you are thinking about maybe an early thought process on total expenses for 2027.
Mark Ruggiero: Yeah. Not ready to give full year 2027 guidance, but I would just reiterate Jeff’s opening comments around we believe we have the ability to quote, unquote, “hold the line on expenses.” That does not mean we will not invest in this company. There is certainly technology enhancements. There is AI development. There is a lot we want to get done. We think the core conversion is a big step in continuing to enhance our technology and get more efficient. But we will look to invest in those by really being disciplined in other areas of discretionary spend.
So, without giving specific guidance, I think what you are seeing in 2026 would be the goal to kind of move forward into 2027. There will be merit increases, there will be inflationary impact, I am sure, on some of our larger contracts. But I think just in terms of overall spend, we are really trying to stay disciplined there.
Steve Moss: Great. Appreciate all the color here and a nice quarter.
Mark Ruggiero: Thanks, Steve.
Operator: Your next call is from the line of Laurie Hunsicker from Seaport Research Partners. Your line is now open. Please go ahead.
Laurie Hunsicker: Oh, yeah. Hi. Thanks. Yeah, good morning again. Just wanted to circle back one thing on expenses. Is there any one-time charges you’re taking with the consolidation of the headquarters, or has that already been baked in?
Mark Ruggiero: Yeah, that’s a great question. We have not yet. There will be, and we’ll give that as part of our 2027 guidance. So, it won’t be real significant dollars, but there’ll be a couple of facilities that have leases out into 2028 that we would look to be accelerating the remaining rent expense on that. Accounting rules are a little tighter there. You have to basically be out of that space. So I think from a timing standpoint, those will likely be 2027 numbers, Laurie. But I’ll give that as part of the full year guide next quarter.
Laurie Hunsicker: Great. Thanks. I’ll leave it there.
Mark Ruggiero: Okay.
Operator: Your next question is from the line of Jared Shaw from Barclays. Your line is now open. Please go ahead.
Jared Shaw: Hey, good morning.
Mark Ruggiero: Hey, Jared.
Jared Shaw: Hey. Could you just give us some context around what drove the decision to move the core conversion out to February? I guess, what changed since the September investment deck? When we think about the earnings impact, Mark, I think you pointed out an additional or incremental cost for fourth quarter. Is that just maintaining both systems in the fourth quarter, and we should just think about the delay just sort of pushing the efficiency benefits out past February? Or is that an incremental cost for running additional testing?
Jeff Tengel: Yeah, I’ll take the first part of that, Jared. It really was not a lot more than what I shared in my prepared remarks. We just didn’t feel like we were ready. There’s a lot of reasons for that. Not all of it was on us, I’ll say that. As we were getting more clarity around kind of the lift that we thought we would need in order to get it done in October, the stress we were putting on our employees to try and get that done, and then the risk of it not going well.
We just felt like it was prudent to delay it until February, make sure that, as I said, we have all of our ducks in a row and feel very confident that we’ll get it done in the way that we would expect to get it done with minimal customer disruption. It’s not a significant incremental cost to do to push it out. So that also gave us comfort that it was something that we probably should do and had really nothing more than that, just feeling like we weren’t quite ready. As I also mentioned in my prepared remarks, you get one chance to get this right, and if you don’t, then you’ll have customer implications for a while.
So I really felt like we needed to make sure that we get it right so that we don’t have any negative customer effects.
Mark Ruggiero: May I’ll add the second part of that question, Jared. The one-time expense I would think of as really outside third-party consulting. We’re not quote unquote running parallel, so there isn’t core run rate expenses going through the P&L. But the good news, just as a reminder, is we expect the upgrade new system to be pretty much the same run rate as what we’re paying today. So we’ve been able to negotiate a pretty good contract there. The one-time cost you’re seeing are outside third-party consulting help, and that’s what will hit in the fourth quarter as we just get through to the finish line.
Jared Shaw: Okay. All right. Thanks. For my follow-up, shifting back over to margin. If we look at that sort of milepost of 4% at the end of 2027 based on no Fed moves, what happens if we get one to two hikes sort of mid-year? I think you said if we get a hike in fourth quarter, that could be a couple of basis points. How should we think about margin with a couple hikes next year?
Mark Ruggiero: Yeah. I think the slope of the curve is still really important. I just want to preface my answer here with if we really just focus on the short end of the curve and what would likely happen with a Fed hike, the non-CD book, I would say is running around a 25%-30% beta inclusive of the DDA. So I would expect to see cost of deposits go up, call it four to five basis points on the non-CD book. On the loan side, we have about 25% of the loan book that’s tied to the same short end of the curve. So I think you’d get pretty much equal and offsetting impact on loan yields versus cost of deposits.
Where I think you get a little bit of that timing lag is whether you start to see CD costs go up as well. I do think we’re going to get to a point where that’s going to be a little bit more driven by kind of one to two-year money as we’ll look to sort of lock up longer-term rates. If you see a level of increase in the cost of deposits related to the CDs, I think that’s where you get a little bit of additional funding cost, a couple basis points over and above what we’ll get on the loan side, if you follow me. That’s just what’s happening on the short end of the curve.
Just a reminder, you still have that back book repricing benefit to help negate some of that.
Jared Shaw: Yeah. Okay. On the CD side, where are you sort of putting your focus today? Are you extending duration? Is there uptake in the longer duration CDs today, or are people staying pretty short?
Mark Ruggiero: Yeah. We are shifting the pricing of it to be much more in line with the slope of the curve today. I think through 2026, a lot of our strategy was to keep a lot of our promotional pricing short-term, and that attracted a lot of interest into the CD book. But I think as we are getting a bit more clarity over what feels like a revert back to a normal slope, we will look to entice longer CDs from a pricing standpoint and get back to kind of a normal shaped pricing curve, if that makes sense.
Jared Shaw: Yeah. Okay. Thank you.
Mark Ruggiero: Thank you.
Operator: Your next question is from the line of Matthew Breese from Stephens Inc. Your line is now open. Please go ahead.
Matthew Breese: Good morning, everybody.
Mark Ruggiero: Matt.
Matthew Breese: Hello. Just thinking about the commercial pipeline. It’s grown for three straight quarters. It’s now at $574 million, but obviously realized loan growth has been much more modest. Knowing that prepay and payoff activity is a big driver, if you were to kind of circle or look at the prepays and payoffs individually, how much of that would you chalk up to being really unusual and outsized? With that kind of production activity, the $575 million pipeline, what’s kind of a normalized pace of growth?
Jeff Tengel: Well, so keep in mind that the pipeline that we talk about are commitments. They’re not outstanding. That would be one just point of clarification. In the real estate book where we’ve seen most of the payoffs and pay downs, other than just normal amortization, the outsized payoffs we’ve seen especially in the second quarter, were kind of one-off and we had a couple of larger relationships that in particular were loans that were paid off, and I think that drove a lot of the pressure on loan growth there. So if I’m understanding your question correctly, we think that the C&I business is going to continue to grow.
The real estate business, one of the unique aspects of that is to the extent we’re growing, and we have seen a little bit more construction loan activity, including in the LIHTC space. Those homes don’t fund up right away. It’ll take 12 or 15 months before we start to see any funding on them. I think we’re still, again, assuming normal levels of payoffs and amortization, we’re expecting low single-digit growth in the commercial real estate portfolio going forward.
Mark Ruggiero: Just one quick add to that. To give that a little perspective, Matt. On average, call it, because heading into the third quarter, there was a slightly higher than $500 million pipeline. That resulted in about $400 million in funding. I think that same ratio would probably apply, right? So a $550 million pipeline probably leads to a little over $400 million in actual fundings out of the gate. To Jeff’s point, some of that being unused lines. I think that funding would be leveraging historical the last couple of quarters. We’re seeing pay-downs and amortization probably in that $300 million range, call it. So that’s the potential for a net growth of $100 million or so.
I think the second quarter you saw payoffs in the $500 million range. So that kind of covers back to how much of this is unusual. Certainly $100 million to $150 million of unusual payoffs is enough to challenge net growth with the numbers I just gave you. If you don’t see those unusual payoffs, it suggests that sort of low single-digit rate we’ve been talking.
Matthew Breese: Got it. Okay. Last quarter, we talked a little bit about the disruption in Connecticut, that area as something potentially being something you consider for new growth. Any updates there, team hires or geography-wise areas you’re interested in?
Jeff Tengel: Yeah. We haven’t hired anybody in Connecticut, or New Hampshire for that matter. I mean, new people in New Hampshire, in some of the markets where we’re not. I’m thinking of principally like Manchester or Portsmouth in New Hampshire. But we’re having active dialogue with a number of people in both of those markets. I was commenting just yesterday to our board about an event I was at a couple of weeks ago in Providence. It was a client event, and we don’t have any branches in Providence. It was started as a kind of a LPO probably 10 or 15 years ago. The quality of the clientele that we have in that market is really incredible.
I know we can do it because we’ve done it before, and it’s just a matter of finding the right people and feeling like there’s opportunity for us to win. So that’s what we’re exploring right now, both with people and just understanding what the landscape is like. Don’t have anything to report today, but it is something that we’re continuing to push at.
Matthew Breese: Great. Just last one from me. In light of the shape of the curve, higher rates, when do you start contemplating applying higher cap rates for commercial real estate deals? Along those lines, should we start contemplating higher reserves or higher provisioning tied to that book on the back of higher cap rates? How quickly does that happen?
Mark Ruggiero: From an allowance standpoint, there’ll be a combination there. To be practical, there’ll be a combination of actual data that will drive the starting point. I think as you know, Matt, there’s obviously room for judgment and qualitative adjustments to appreciate maybe what might be shifting in the environment. So I think if we start to see, call it like a CRE index, a CRE valuation index start to move, that’ll already start to inform potentially higher reserves. Then as a management team, if we feel that data supporting the math is not necessarily indicative of the risk, then we have the ability to tweak that through Q factors. So it’s a fair point, something we’re very cognizant of.
We’ll provide some transparency if we start to see reserve increases as a result. I think also to your question, it’s the types of conversations we’re having just in terms of looking at opportunities and thinking about the existing pipeline. I think the good news is the pipeline is strong. We think there’s certainly room for near-term growth. I think we’d be naive to suggest that if it stays higher for longer or even creeps up a bit more north, that it wouldn’t have an impact on demand as some of these projects may be much more challenged in penciling out from a debt service perspective.
Matthew Breese: Great. I appreciate you taking all my questions. I will leave it there. Thank you.
Mark Ruggiero: Thanks, Matt.
Operator: There are no further questions at this time. I will now turn the call back over to Jeff Tengel for closing remarks.
Jeff Tengel: Thanks everybody for joining us this morning, and we appreciate your interest in INDB, and have a great day.
Operator: This concludes today’s call. Thank you for attending. You may now disconnect.
