Executive Summary / Key Takeaways

• Independent Bank Corp. (INDB) is navigating a complex environment marked by elevated credit costs in Q1 2025, primarily driven by proactive resolution and charge-offs on previously identified legacy problem loans, particularly within the commercial real estate portfolio.
• Despite the credit headwinds, core operational performance remains solid, characterized by net interest margin expansion, strong fee income growth, and disciplined expense management, contributing to positive operating leverage.
• The company is executing a strategic shift to diversify its loan portfolio, increasing exposure to Commercial & Industrial (C&I) and Small Business segments while intentionally reducing transactional Commercial Real Estate (CRE) concentration.
• INDB's robust deposit franchise, marked by strong growth in Q1 2025 and a stable, low-cost composition, serves as a critical funding advantage and is expected to reprice favorably in a declining rate environment.
• Looking ahead, the pending acquisition of Enterprise Bancorp (EBTC) and a planned core system technology upgrade are significant initiatives expected to drive future scale, efficiency, and market density, positioning INDB for long-term value creation despite macroeconomic uncertainties.

Independent Bank Corp., operating primarily through its subsidiary Rockland Trust Company, has built a long history as a community-oriented commercial bank in the competitive Northeast market. Established in 1985, the company's journey has included strategic acquisitions that have expanded its footprint and capabilities. This growth strategy, while generally successful, has also introduced legacy assets that require careful management, particularly within certain commercial real estate segments.

INDB operates within a competitive landscape populated by larger national institutions like Bank of America (BAC) and Citizens Financial Group (CFG), as well as regional peers such as Webster Financial Corporation (WBS). Against these rivals, INDB's core competitive strength lies in its deep-rooted community ties and a high-touch relationship-based banking model. This approach fosters strong customer loyalty, particularly among small-to-medium sized businesses and retail clients, contributing to a valuable and stable deposit base. While larger competitors often possess superior scale and more advanced existing digital platforms, offering advantages in processing speed and breadth of digital services, INDB's strategic focus is on leveraging technology to enhance its personalized service model. The company is actively investing in its technology infrastructure, with a significant planned upgrade to a new FIS (FIS) processing platform scheduled for May 2026. This initiative aims to modernize core systems, improve operational efficiency, streamline internal processes like treasury management and branch-to-back-office communication, and enhance overall customer interaction capabilities. While specific quantifiable benefits of existing technology are not detailed, the planned upgrade targets improved efficiency and enhanced product capabilities, positioning INDB to narrow the technological gap with larger peers and support future growth, including the integration of acquired entities.

The company's strategic direction is currently centered on two key pillars: proactive management of its loan portfolio and leveraging the strength of its funding sources. This involves a deliberate shift in loan mix, increasing exposure to Commercial & Industrial (C&I) and Small Business lending while reducing concentration in transactional Commercial Real Estate (CRE). This reorientation is evident in recent results, with C&I and Small Business loans showing annualized growth of 8.4% and 10.6% respectively in the first quarter of 2025, while CRE and Construction balances decreased. Management is actively hiring C&I bankers and cultivating a robust pipeline in these segments. Concurrently, the company is intentionally reducing transactional CRE exposure through natural amortization and strategic exits to free up capacity for supporting core, relationship-based CRE clients.

Financially, the first quarter of 2025 presented a mixed picture, primarily impacted by elevated credit costs. Net income was $44.4 million, or $1.04 per diluted share, down from $47.8 million, or $1.12 per diluted share, in the prior year quarter. This decline was largely attributable to a $15 million provision for credit losses, significantly higher than the $5 million provision in Q1 2024. This elevated provision was driven by increased charge-off activity and additional specific reserve allocations, predominantly related to a few previously identified commercial loans.

Despite the higher provision, core operating performance remained solid. Pre-provision net revenue (PPNR) on an operating basis stood at a healthy 1.52% of average assets, and the company demonstrated positive operating leverage. Net interest income increased by 5.8% year-over-year to $145.5 million, driving a 19 basis point expansion in the net interest margin (NIM) to 3.42%. The core NIM, excluding certain non-core items, also expanded by 6 basis points to 3.37%. This margin improvement was fueled by higher yields on interest-earning assets and decreased funding costs. Noninterest income saw robust growth, increasing by 8.7% to $32.5 million, primarily lifted by higher deposit account fees (including overdraft and cash management), a nearly 13% increase in investment management and advisory income (driven by higher assets under administration and commissions), and a significant rise in loan level derivative income. Noninterest expenses increased by 6.0% to $105.9 million, reflecting higher salaries and benefits (including equity compensation and medical costs), increased occupancy and equipment expenses (partially due to seasonal snow removal and utilities), and higher software and subscriptions costs related to technology investments. The quarter also included $1.2 million in merger and acquisition expenses. The effective tax rate for the quarter was 22.29%, lower than the prior year, benefiting from lower pre-tax income, a decrease in the state tax rate, and increased tax credits.

A deep dive into credit quality reveals the impact of addressing legacy issues. The $15 million provision in Q1 2025 was largely a consequence of charging off $41.4 million in loans, primarily related to three previously classified commercial credits that had been reserved for in prior periods. This included a $24.9 million charge-off on the largest nonperforming office loan ($54 million), which is expected to be resolved via a property sale in Q2 2025. A $30 million syndicated office loan in Downtown Boston migrated to non-performing status, resulting in an $8.1 million charge-off based on appraised value, though resolution via modification is being explored. An office loan marketed for sale saw a $7 million charge-off, equal to its prior specific reserve. These actions led to a decrease in total nonperforming loans to $89.5 million (0.62% of gross loans) from $101.5 million (0.70%) and nonperforming assets to $89.5 million (0.45% of total assets) from $101.5 million (0.52%). The allowance for credit losses decreased to $144.1 million, representing 0.99% of total loans, down from 1.17% at year-end 2024. While the absolute dollar amount of the allowance decreased, the ratio of allowance to nonperforming loans remained relatively strong at 161.01%. Management utilizes the CECL methodology, incorporating economic forecasts (currently Moodys (MCO) Baseline) and qualitative adjustments, to estimate expected losses. They emphasize that they have identified and reserved for the highest-risk loans and anticipate future provision to be driven by new loss emergence rather than these specific, known issues.

The balance sheet remains a source of strength. Total loans were relatively flat quarter-over-quarter at $14.49 billion, reflecting the intentional mix shift. Deposits, however, showed robust growth, increasing by $370 million (2.4% Q/Q, 9.8% annualized) to $15.68 billion, driven by non-maturity categories. The deposit mix remains favorable, with noninterest-bearing demand deposits comprising 28.1% of the total, contributing to a competitive cost of deposits (1.56% in Q1 2025). The company leverages the IntraFi Network ($1.1 billion) for enhanced FDIC insurance and manages uninsured deposits ($5.3 billion, with $917.9 million collateralized). Borrowings increased by $158.5 million to $859.9 million, primarily due to the successful issuance of $300 million in fixed-to-floating subordinated notes (7.25% fixed through April 2030, maturing 2035).

The proceeds are intended for general corporate purposes, including potentially redeeming Enterprise's subordinated debt post-merger. Liquidity remains within policy limits, supported by core deposits and available borrowing capacity from the FHLB and Federal Reserve. Capital levels comfortably exceed minimum regulatory requirements, with a Common Equity Tier 1 ratio of 14.52% and a Total Risk-Based Capital ratio of 17.91% at March 31, 2025. Tangible book value per share grew by $0.85 in the quarter and 7.8% year-over-year, reflecting solid earnings retention and OCI benefit.

The company also increased its quarterly cash dividend by 3.5% to $0.59 per share.

Looking ahead, management has pulled specific provision guidance due to economic uncertainty but expects future provision to be tied to new loss emergence and loan growth. They reaffirmed expectations for mid-single-digit growth in noninterest income and expense (excluding M&A). Standalone NIM is expected to expand by 3-4 basis points per quarter before the impact of the subordinated debt raise, which will reduce the standalone NIM by approximately 11 basis points. While near-term Fed rate cuts may cause a slight drag due to deposit repricing lags, the balance sheet is positioned for longer-term margin expansion as assets reprice and deposit costs adjust.

The most significant near-term strategic initiative is the pending acquisition of Enterprise Bancorp, valued at approximately $562 million, expected to close in Q3 2025, subject to regulatory approvals. This transaction is anticipated to add density, expand the market footprint, and bring approximately $1.5 billion in additional assets under administration. Management is confident in the strategic and financial merits, noting high retention rates among Enterprise's customer-facing staff, including commercial bankers. The acquisition is expected to result in a pro forma CRE concentration slightly north of 300%, which the subordinated debt raise helps to support from a capital perspective. The planned FIS core system upgrade in 2026 is another key initiative, expected to cost $3M-$4M in one-time non-capitalized expenses in 2025, but is viewed as essential for future efficiency and growth.

Key risks include potential further deterioration in credit quality, particularly within the office CRE portfolio, although management believes the highest-risk loans are identified and reserved for. Interest rate risk remains a factor, though the balance sheet positioning aims for relative neutrality on the short end and asset sensitivity on the longer end. Operational risks, including those related to technology and the upcoming core system conversion, and integration risks associated with the Enterprise acquisition are also pertinent. Macroeconomic conditions, including tariffs and policy uncertainties, could impact loan demand and credit performance.

Conclusion

Independent Bank Corp. is navigating a dynamic environment by leaning into its core strengths: a robust deposit franchise, a relationship-focused community banking model, and a strong capital base. While the first quarter of 2025 saw elevated credit costs as the company proactively addressed legacy problem loans, the underlying operational performance demonstrated resilience with expanding margins and growing fee income. The strategic pivot towards C&I lending and away from transactional CRE is a key initiative aimed at diversifying the loan portfolio and enhancing long-term asset quality. Looking ahead, the successful integration of Enterprise Bancorp and the execution of the core system technology upgrade are critical milestones expected to drive future scale, efficiency, and market leadership. Despite ongoing macroeconomic uncertainties and the potential for further credit noise, INDB appears fundamentally sound and strategically positioned to leverage its regional advantages and operational improvements for continued value creation. Investors should monitor the resolution of remaining problem loans, the progress of the Enterprise integration, and the impact of the core system upgrade as key indicators of the company's trajectory.