Independent Bank Corporation (IBCP) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the Independent Bank Corporation Second Quarter 2026 Earnings Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker today, President and CEO, Brad Kessel. Please go ahead.

Good morning and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's results for the second quarter of 2026. I'm Brad Kessel, President and Chief Executive Officer. Joining me is Gavin Mohr, Executive Vice President and our Chief Financial Officer, and Joel Rahn, Executive Vice President of Independent Bank Corporation and Head of Commercial Banking. Before we begin today's call, I'd like to direct you to important information on page 2 of our presentation, specifically the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us today, you can access it at the company's website, independentbank.com. The agenda for today's call will include prepared remarks, followed by a question and answer session, and then closing remarks. Earlier this morning, Independent Bank Corporation reported second quarter 2026 net income of $18.8 million or $0.90 per diluted share versus net income of $16.9 million or $0.81 per diluted share in the prior year period. Highlights for the second quarter of 2026 include a net interest margin of 3.71%, a 6-basis-point increase from the linked quarter, an increase in net interest income of $1 million, or 2.2%, over the first quarter of 2026. An increase in tangible common equity per share of common stock of $0.86, or 14.8% annualized from March 31, 2026. Return on average assets and return on average equity of 1.37% and 14.52%, respectively, for the quarter ended June 30, 2026. Net growth in total deposits less brokered time of $38.2 million or 3.2% annualized. Net loan growth of $105.8 million or 9.8% annualized. An increase in tangible common equity to 8.9% at June 30, 2026. And the payment of our $0.28 per share quarterly dividend on common stock on May 14, 2026. Our second quarter performance demonstrates the strength of Independent Bank's community banking model and the continued benefits of disciplined balance sheet management, relationship-based lending, and a stable, locally focused deposit franchise. We saw broad-based momentum across the business with core customer activity, supporting loan growth, core deposit growth, improving earning asset yields, and continued capital generation. Just as important, we achieved these results while maintaining strong asset quality, prudent liquidity, and capital levels that position us well in the current operating environment. The quarter also reinforced the value of our strategy, serving attractive Michigan markets through local decision-making, deep customer relationships, and consistent credit discipline. We believe that approach continues to differentiate Independent Bank and supports durable performance through changing rate and economic cycles. We were pleased to complete our acquisition of HCB Financial Corp. on July 1, 2026. Integration work is underway with a targeted system conversion of November 9. We continue to believe the combination strengthens our presence in complementary markets and enhances our ability to serve customers, employees, communities, and our shareholders over the long term. A few other highlights during the second quarter included Independent Bank being named Michigan's Best-In-State Bank by Forbes for 2026. Independent Bank is the only bank in Michigan that has been recognized by Forbes 4 years in a row. This also marks our 6th time overall that Independent has received this prestigious recognition. During the quarter, we announced the creation of 2 new regional president roles within our commercial banking structure, reinforcing our commitment to strong local leadership, relationship-based growth, and continued service to customers and communities across Michigan. This new leadership structure reflects our intentional alignment of markets, teams, and strategic priorities as the organization continues to grow. In their new roles, Kyle Johns and Dan Plummer will lead market-level relationship development, strengthen community engagement, foster collaboration across business lines, and help ensure consistent execution of our strategic goals. I am also proud to share that Independent Bank remains a top lender and resource for small business owners and entrepreneurs with our experienced lending team available to help eligible businesses access financing through the U.S. Small Business Administration loan programs. As a member of the SBA's Preferred Lenders Program, Independent Bank has delegated authority to process and approve eligible SBA loan requests in-house, helping streamline the financing process for borrowers. Independent Bank was recently honored by the SBA Michigan District Office as a top 10 lender for its support of Michigan's small business community during fiscal year 2025. Moving to page 5 of our presentation, deposits total $4.9 billion at June 30, 2026, an increase of $100 million from the start of the year. This growth occurred in non-interest-bearing, savings, and interest-bearing checking, and reciprocal deposits offset by a small decline in time deposits and an $18 million reduction in brokered deposits. On a linked quarter basis, business deposits increased by $66 million, retail deposits increased by $15 million offset by a $45 million decrease in municipal deposits, primarily due to seasonality and usage of American Rescue Plan Act funds. The deposit base is comprised of 47% retail, 40% commercial, and 13% municipal. On page 6, we have included in our presentation a historical view of our cost of funds as compared to the Fed Funds spot rate and Fed Effective Rate. For the quarter, our total cost of funds decreased by 1 basis point to 1.53%. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the success we're having in growing our loan portfolios and provide an update on our credit metrics. Joel?

Yes, thanks, Brad. Good morning, everyone. Page 7 summarizes our loan activity for the quarter. We experienced strong second quarter loan growth of $105 million, or 9.8% annualized. The residential loan generation was very strong, with $92.6 million of quarterly growth, or 16% annualized. During the quarter, our residential mortgage and consumer installment loan portfolios increased $12.9 million and $0.2 million, respectively. Year-to-date, we've grown loans $138 million led by strong commercial loan growth of $146 million, representing 13% annualized growth. Our strategic investment in commercial banking talent continues to supplement our loan growth. Year to date, we've added 8 experienced commercial bankers, bringing our total to 53 bankers, comprising 8 commercial loan teams across our statewide footprint. Compared to a year ago, we've added a net of 6 experienced commercial bankers. Looking ahead, based on a strong pipeline, we believe we will continue low double-digit growth of our commercial loan portfolio for 2026. We continue to see market share opportunities from regional banks in both talent and customer acquisition and are seeing steady organic growth from existing customers. Looking at the commercial loan production for the first half of the year, the mix of C&I lending versus investment real estate was 58% and 42%, respectively. For our commercial portfolio, the mix is 67% C&I and 33% investment real estate. Page 8 provides detail on our commercial loan portfolio concentrations. And there hasn't been any significant shift in our portfolio over the past year, with the portfolio remaining very well diversified. Our largest segment of the C&I category continues to be manufacturing at $194 million, or 8.2% of the total portfolio. In the investment real estate segment of the portfolio, the largest concentration is industrial at $219 million or 9.3%. We outline key credit quality metrics on page 9. Overall, we continue to demonstrate, as Brad said, strong credit quality. Total non-performing loans were $32.8 million, or 74 basis points of total loans at quarter-end, up slightly from 64 basis points at March 31. It's worth noting that approximately 2/3 of the total 1 commercial development exposure that we've discussed in prior quarters. We continue to work through the challenges of this particular project and are appropriately reserved for any loss exposure. Past due loans totaled $5.6 million or 13 basis points, down from $8.2 million or 19 basis points at March 31. It's not reflected on this slide, but also worth noting that we realized net charge-offs of $633,000, or 3 basis points of average loans, in the first 2 quarters of the year. This compares to $442,000, or 2 basis points in the first half of 2025. At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of 2026.

Thanks, Joel, and good morning, everyone. I'm starting at page 10 of our presentation. Page 10 highlights our strong regulatory capital position. I would highlight the increase in our tangible common equity ratio to 8.9%. Turning on to page 11, net interest income increased $3.3 million from the year ago period. Our tax equivalent net interest margin was 3.71% during the second quarter of 2026 compared to 3.58% in the second quarter of 2025, and up 6 basis points from the first quarter of 2025. Average Interest Earning Assets were $5.33 billion in the second quarter of 2026 compared to $5.11 billion in the year-ago quarter and $5.23 billion in the first quarter of this year. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and the net interest margin. On a linked quarter basis, our second quarter '26 net interest margin was positively impacted by three factors. Change in earning asset mix contributed 3 basis points. An increase in earning asset yield contributed 2 basis points and a decrease in funding cost contributed 1 basis point. On page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for the second quarter of '26 and the first quarter of '26 calculates the change in net interest income over the next 12 months under 5 rate scenarios. Scenarios assume a static balance sheet. The base rate scenario applies a spot yield curve from the valuation date. The shock scenarios consider immediate, permanent, parallel rate changes. The base case modeled in NII is slightly higher during the quarter due to $60 million of earning asset growth. 5 basis points of modeled margin expansion. Earning asset expansion was centered in commercial loans. It was up $97 million. Runoff and lower yielding investments and overnight liquidity helped fund earning asset growth. Asset and liability yields were slightly higher during the quarter. With that, asset yields up 8 basis points and liability costs increased 3 basis points higher. NII sensitivity to lower rates declined modestly, while the benefit to higher rates remain largely unchanged. Reduced exposure to lower rates is due to a $50 million notional floor purchases, termination of $50 million of pay-fixed swaps. The overall position is closer match for smaller rate changes or plus or minus 100 basis points. The bank has modest exposure to larger rate declines and benefits from larger rate increases. Currently 37.9% of assets repriced in 1 month and 49.4% repriced in the next 12 months. Moving on to page 14, non-interest income totaled $15.3 million in the second quarter of 2026 as compared to $11.3 million in the year-ago quarter and $12 million in the first quarter of 2026. Second quarter 2026 net gains on mortgage loans totaled $1.7 million compared to $1.6 million in the prior year quarter. The increase is primarily due to higher volume of mortgage loans sold that were partially offset by lower profit margins. Mortgage loan servicing net was a gain of $2.5 million in the second quarter of '26 compared to a gain of $0.5 million in the prior year quarter. The change due to price was a gain of $1.8 million or $0.07 per diluted share after tax in the second quarter of '26 compared to a loss of $2 million or $0.01 per diluted share after tax in the prior year period. As detailed on page 15, our non-interest expense totaled $37.8 million in the second quarter of 2026 compared to $33.8 million in the year-ago quarter and $38.3 million in the first quarter of 2026. Compensation and employee benefits expense increased $1.4 million primarily due to salary increases that were effective on January 1, 2026, and higher health insurance-related costs. Litigation expense is $0.4 million attributed to an accrual established for losses we consider probable as a result of all of our outstanding litigation matters in aggregate. Pricing expense increased $0.3 million in the second quarter of 2026 compared to the prior year quarter due to new deposit account opening incentives. We recorded merger related expenses of $4.4 million in the second quarter of 2026. Turning to page 16 is our update for our 2026 outlook to see how our actual performance during the second quarter compared to the original outlook that we provided in January this year. Our outlook estimated full year loan growth of 4.5% to 5.5%. Loans increased $105.8 million in the second quarter of 2026, or 9.8% annualized, which is above our forecasted range. Commercial loans increased $92.6 million, and mortgage loans increased $12.9 million while installment loans were flat for the second quarter. Second quarter 2026 net interest income increased by 7.4% over 2025, which is within our forecasted range of 7% to 8%. I would highlight this is the 12th consecutive quarter of increasing net interest income. The net interest margin was 3.71% for the current quarter and 3.58% for the prior year quarter. And up 6 basis points from our linked quarter perspective. The second quarter 2026 provision for credit losses was an expense of $2.7 million which is at the high end of our forecasted range. Moving on to page 17, non-interest income totaled $15.3 million in the second quarter of 2026, which was above our forecasted range of $11.3 million to $12.3 million. Second quarter '26 mortgage loan origination sales and gains totaled $145 million, $35.4 million, $97.1 million, and $1.3 million, respectively. Mortgage loan servicing net generated a gain of $2.5 million in the second quarter of '26, which is above our forecasted target. Positively impacting the second quarter results was a gain on equity securities of $1.6 million, this is related to the exchange of Visa B2 shares to Visa Class C shares in the quarter. Non-interest expense was $37.8 million in the second quarter, above our forecasted range of $36 million to $37 million. We recorded litigation expense of $4.4 million in the quarter, as well as $0.4 million in merger-related costs. Our effective income tax rate was 17.2% for the second quarter of 2026. Lastly, there were no shares of common stocks repurchased in the second quarter or first 6 months of 2026. That concludes my prepared remarks and I would like to now turn the call back over to Brad.

Thanks, Gavin. We've built a strong community bank franchise which positions us well to effectively manage through a variety of economic environments and continue delivering strong and consistent results for our shareholders. As we move through the second half of 2026, our focus will be continuing to invest in our team, investing in and leveraging our technology, successful integration of the HCB franchise while always working to be Michigan's most people-focused bank. At this point we'd like to open up the call for questions.

Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from Brendan Nosal with Hovde Group. Your line is open.

I'm just starting off here on the expense number. I get that you guys continue to add talent and producers in your investing. I guess if I look at the core expense base, it was just above the high end of kind of the quarterly guidance range. I was kind of curious how you think about the run rate through the balance of the year, you know, without considering high points, just kind of legacy independent versus kind of that $36 million to $37 million range.

Yes, so I think your analysis is accurate, Brendan. When I think about the core, based on our forecast what wasn't comprehensive, what we didn't have was certainly the litigation of $400,000. The other thing that we had this quarter, we did have an incentive accrual catch-up that added $400,000. That being said, I would call that part of core. And then we also had some elevated advertising expense that's related to deposit promotional. That's a deposit promotion that has been terminated, but there's still some earn-out taking place there. So when I think about on like a net net, I get back to that, you know, around $37 million or high end of our range going forward.

To answer your question, yes. Yes, I agree with that, Gavin. I would add also, loan and collection right now is running a little bit higher. It relates predominantly to the 1 credit. So as we move that through the process, I'm hopeful we can get that down too.

Okay, fantastic. Thanks for the color there. Maybe pivoting to kind of what you're doing with the balance sheet in terms of the complexion and the margin. You've been on this journey of remixing the asset base into higher yielding commercial loans for some time now, and that's generated quite a bit of margin expansion, irrespective of the rate and I mean, I guess without asking specifically about the longer term margin expectation, I guess my question is whether the commercial remixing opportunity is exhausted by the end of this year or do you think there's still more work to do in the future?

Yes, the commercial, to make sure to define your question correctly, so correct me if I don't, if I get it wrong. So commercial-wise, in terms of repricing, the commercial book is approaching market due to the short duration. That being said, the securities portfolio and the mortgage portfolio that we intend to continue, certainly on the mortgage side, continue to redeploy into the short term the commercial pipeline has room to run. And I would say we've been doing some analysis internally. It all held the same and we're seeing some favorability in the positive shape of the yield curve, Brendan. Continuing to grind higher for the next 12 months between, you know, flat to where we're at today at 6 basis points a quarter is not unreasonable. I think 6 basis points is outsized, but anywhere from 2 to 4 basis points a quarter going forward would not be unreasonable in terms of the margin expansion.

Fantastic, Gavin. Thank you for answering the question.

One moment for our next question. Our next question comes from Nathan Race with Piper Sandler.

Going to expenses on the HCB deal with the deal closing earlier this month, can you kind of walk through the cost savings cadence from here? And do you kind of expect the savings to build gradually each quarter? Or does the bulk of them kind of come through after the systems conversion in November?

Yes, that'll be the latter, Nick. So for various reasons, we chose to run the banks as separate subsidiaries through conversion, as Brad highlighted on November 9. So, you know, running 2 individual banks, it did slow down some of those cost saves, but our team is focused on achieving that number very early in '27 at the latest.

Fully implemented and realized. I think that number was 40%. It was 40%, yep, of...