Independent Bank Corporation (IBCP) Earnings Call Transcript & Summary

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

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 third quarter of 2026. The I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, Executive Vice President and Chief Financial Officer; and Joel Rahn, Executive Vice President, Head of Commercial Banking. Before we begin today's call, I'd like to direct you to the 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, the Independent Bank Corporation reported third quarter 2026 net income of $17.9 million or $0.80 per diluted share versus net income of $17.5 million or $0.84 per diluted share in the prior year period. Excluding $2.7 million of after-tax merger-related expenses, adjusted net income was $20.6 million or $0.92 per diluted share. Highlights for the third quarter of 2026 include net loan growth of $116.6 million or 10.5% annualized from June 30, 2026 that excludes the loans of High Point Community Bank. Net growth in total deposits of $115.8 million or 9.4% annualized from the second quarter also excluding High Point deposits. A tax Global had net interest margin of 3.82%, an 11 basis point increase from the linked quarter or 3.76% and up 5 basis points, excluding purchase accounting accretion. Another highlight was an increase in net interest income of $7.4 million or 15.4% over the second quarter. This is our 13th consecutive quarter of net interest income growth. Our pretax pre-provision net revenue was $26.3 million, up 13.5% from the prior year quarter. A return on average assets and return on average equity of 1.14% and 12.7%, respectively or 1.32% and 14.08%, excluding merger-related expenses. A tangible common equity ratio of 8.2% as of September 30, 2026 and also a highlight of the payment of our $0.28 per share quarterly dividend in common stock on August 14 of 2026. Our third 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 post deposit franchise. We saw strong organic momentum with commercial loan growth of nearly 21% annualized solid deposit growth from our business and municipal customers and improved earning asset yields. Net charge-offs remained very low and our liquidity and capital levels 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., the parent company of High Point Community Bank on July 1, 2026. And this quarter reflects our first results as a combined company. Integration work is well underway, and we remain on track for the High Point system conversion on November 9. We continue to believe the combination strengthens our presence in complementary markets and enhances our ability to serve customers, employees, communities and the shareholders and our shareholders over the long term. A few other highlights during the third quarter, we celebrated the grand opening number new Grand Rapids headquarters, and we transitioned the broker-dealer partner of our wealth management business to Raymond James. Moving to Page 5 of our presentation. Deposits totaled $5.5 billion at September 30, 2026, an increase of $659.3 million from the second quarter, which includes $543.5 million of PiePoint deposits. Excluding High Point, deposits grew $115.8 million or 9% annualized. Nonmaturity deposits totaled $4.77 billion, or 86.4% of total deposits and increased $571.4 million during the quarter, which includes High Point. With the liquidity High Point brought, we paid down other borrowings, which declined to just $4 million from $127 million at June 30, 2026. Brokered deposits are just $0.5 million at the end of the third quarter. The deposit base is comprised of 46% retail, 39% commercial and 15% initially. On Page 6, we included in our presentation a historical view of our cost of funds as compared to the Fed fund spot rate and effective rate. For the quarter, our total cost of deposits increased by just 2 basis points to 1.55% primarily reflecting modestly higher time deposit costs, while our cost of savings and interest-bearing checking accounts were unchanged at 1.6%. At this time, I'd like to turn the presentation over to Joel Ron to share a few comments on our loan growth and provide an update on our credit metrics.

Thanks, Brad, and good morning, everyone. Page 7 summarizes our loan activity for the quarter. Loans increased $483.1 million in the quarter, including the addition of the High Point loan portfolio. Excluding High Point, commercial loan generation was very strong as with [ $123 ] million of quarterly growth earning to 21% annually. We continued our strategic investment in commercial banking talent to supplement our loan growth, adding 3 experienced bankers in the quarter. Year-to-date, we've added 11 experienced commercial bankers bringing our total to 55 bankers comprising 8 commercial loan teams across our statewide footprint. Compared to a year ago, we've added a net of 9 experienced commercial bankers to the team. Looking forward, our pipeline remains strong, but given the significant production late in Q3, it's down from where it was at 6/30; However, we feel that we can continue to grow our loan portfolio at a low double-digit rate as market disruption is creating market share opportunity for us. Looking at commercial loan production through 9/30 and -- the mix of C&I lending versus investment real estate has been split evenly. And for our commercial portfolio, the mix is 66% C&I and 34% investment real estate including the addition of the $280 million High Point commercial loan portfolio. Page 8 provides detail on our commercial loan portfolio concentrations, which remained consistent with prior quarters. Our largest segment of the C&I category continues to be manufacturing at $222 million or 8% of the total portfolio. In the investment real estate segment of the portfolio, the largest concentration is industrial at $257 million or 9.3%. We outlined key credit quality metrics and trends on Page 9. Overall, we continue to demonstrate strong credit quality. However, we have experienced an increase in our nonperforming loan category. Total nonperforming loans were $39.2 million or 80 basis points of total loans at quarter end up slightly from 74 basis points at 6:30. It's worth noting that $30 million of this total is commercial and 2/3 of the commercial nonperforming loans continues to be on commercial development exposure that we've discussed in previous quarters. We continue to work through the challenges of this particular project and our appropriately reserve for any loss exposure. Past due loans totaled $6.1 million or 12 basis points, consistent with $630. it's not reflected on this slide, but worth noting that we've realized net charge-offs of $847,000 or 3 basis points of average loans on an annualized basis in the first 3 quarters of the year. This compares to $1.2 million or 4 basis points through Q3 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 [indiscernible] .

Thanks, Joel, and good morning, everyone. I'm starting on Page 10 of our presentation. Page 10 highlights our strong rotor capital position. The change in capital ratios on a linked quarter basis is primarily due to the acquisition of ATB Financial Corp. on July 1, 2026. And -- at September 30, 2026, our consolidated Tier 1 leverage ratio was 9.9%. Our common equity Tier 1 ratio is 11.1 and our total risk-based capital ratio is 13.1%. Our tangible common equity ratio was 8.2% or 9.2%, excluding accumulated other comprehensive loss. Tangible book value per share was $23.10 compared to $24.24 at June 30, primarily reflecting $39.1 million of goodwill and other intangibles recorded in the acquisition. Turning to Page 11. Net interest income increased $9.9 million or 21.8% from the year ago period and $7.4 million from the second quarter. Our tax equivalent net interest margin was 3.82% during the third quarter of 2026 compared to 3.54% in the third quarter of 2025 and up 11 basis points from the second quarter of 2026, excluding purchase accounting accretion, our margin was 3.76%, up 5 basis points from the linked quarter. Average interest-earning assets were $5.82 billion in the third quarter of 2026, compared to $5.16 billion in the year ago quarter and $5.22 billion in the second quarter of 2026. High Point added approximately $557 million of average earning assets. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and the net interest margin. Our linked quarter -- on a linked-quarter basis, our third quarter net interest margin was positively impacted by 3 factors: purchase accounting discount accretion added 6 basis points, an increase in earning asset yield added 5 basis points and the change in the earning asset mix added 2 basis points. These were partially offset by an interest charge-off on a commercial loan equated to 1 basis point and higher funding costs that equated to 1 basis point I would note that the accretion this quarter was $932,000 on loans and securities. Page 13 is a new slide that shows the contractual cash flows from our fixed rate loans and securities over the next 6 quarters. Over that period, approximately $737 million of loans and securities are scheduled to mature or reprice at a weighted average yield of 4.74% that includes $197 million of securities at 2.84% and $539 million in loans at 5.44% with new commercial and mortgage loan production coming in at yields above 6.5%, this repricing provides a meaningful tailwind to our asset yields. On Page 14, we provide details on the institution's interest rate risk position, the comparative simulation analysis for the second -- for the third quarter, 26% in the second quarter of '26 calculates a change in net interest income over the next 12 months under 5 rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies the spot yield curve from the valuation date, the shock scenarios consider immediate permanent parallel rate changes. Base case modeled net interest income increased to $233.8 million from $204.2 million at June 30, with $23.3 million of the increase attributable to High Point along with improvement in the model margin. Our position remains modestly asset-sensitive. A 100 basis point increase in rates would increase net interest income by 1.97%, while a 100 basis point decline would reduce it by 0.64%. We continue to manage exposure to lower rates through $50 million notional for purchases and the termination of a $25 million pay fixed swap. Currently, 37% of assets repriced in 1 month and 48.5% reprice in the next 12 months. Moving on to Page 15. Noninterest income totaled $15.8 million in the third quarter of 2026 compared to $11.9 million in the year ago quarter and $15.3 million in the second quarter 2026. Third quarter 26 net gains on mortgage loans totaled $1 million compared to $1.5 million in the prior year quarter. The decrease is primarily due to unfavorable fair value adjustments, reflecting higher interest rates at quarter end, including a mark on a construction to permanent loans transferred to our portfolio. Mortgage on servicing net was a gain of $4.1 million in third quarter '26 compared to a gain of $0.1 million in the prior year quarter. The change due to price was a gain of $3.4 million or $0.12 per diluted share after tax in the third quarter of '26 compared to a loss of $0.6 million or $0.02 per diluted share after tax in the prior year quarter. As detailed on Page 16, our noninterest expense totaled $44.8 million in the third quarter of 2026 compared to $34.1 million in the year ago quarter and $37.8 million in the second quarter of 2026. The increase reflects the addition of High Point's operating expenses and $3.5 million of merger-related expenses. Compensation employee benefits increased $3.4 million from the prior year quarter, primarily due to the addition of High Point staff and salary increases effective January 1, 2026 as well as higher performance-based compensation. This was partially offset by lower health insurance costs. Data processing expense increased $1 million and amortization of intangible assets was $0.9 million compared to $0.1 million in the second quarter, reflecting the core deposit intangible recorded in the High Point acquisition. Our efficiency ratio was 61.3%. Turning to Page 17. This is our update for our 2026 outlook, showing our actual performance during the third quarter compared to the original outlook we provided in January 2026. As a reminder, that outlook did not include High Point. Our outlook estimates full year loan growth of 4.5% to 5.5%, excluding High Point, loans increased $116.6 million in the third quarter or 10.5% annualized, which is above our forecasted range. Commercial loans increased $124.1 million, and mortgage loans increased $1.1 million, while installment loans decreased [indiscernible] million. Third quarter 2026 net interest income increased by 21.8% over 2025 or 8.7%, excluding Hyon, which is above our forecasted range of 7% to 8% and I would highlight that this is our 13th consecutive quarter of increasing net interest income. The net interest margin was 3.82% for the current quarter and 3.54% from the prior year quarter and up 11 basis points from the linked quarter. The third quarter 2026 provision for credit losses was an expense of $4.8 million or approximately 0.4% of loans annualized, which was above our forecasted range of 0.2% to 0.25%. That's primarily due to a specific reserve on the 1 commercial relationship Joel discussed. The initial allowance on the acquired High Point loans was established through the purchase accounting rather than through the provision. Moving on to Page 18. Noninterest income totaled $15.8 million in third quarter 2026 or $15.2 million, excluding High Point, which is above our forecasted range of $11.3 million to $12.3 million. Third quarter 2026 mortgage loan originations, sales and gains totaled $136 million, $102.3 million and $1 million, respectively. Mortgage loan servicing net generated a gain of $4.1 million in 2026 -- third quarter of 2026, which is above our forecasted target. Noninterest expense was $44.8 million in the third quarter, including $3.5 million in merger-related costs. Excluding High Point, our merger-related costs, noninterest expense was $37.3 million, slightly above our forecasted range of $36 million to $37 million. Our effective income tax rate was 17% for the third quarter of 2026. Additionally, we repurchased 119425 shares of common stock for $4.2 million during the first 9 months of 2026. This was related to the liquidation of a high point Community Bank's ESOP program. Looking to the fourth quarter, we expect our net interest margin to continue to benefit from asset repricing in the September Fed rate increase that partially offset by competitive deposit pricing. Following November 9 conversion, we expect to begin to realize the cost savings from the High Point combination with savings largely reflected in our 2027 expense run rate. We expect remaining merger and conversion-related expenses or approximately $3 million, primarily realized in the fourth quarter of 2026. We continue to expect our provision for credit losses to track loan growth and credit migration. Year-to-date provision is about 0.23% of average loans annualized, which is within our forecasted range. That concludes my prepared remarks. I would now like to 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 remainder of 2026, our focus will be continuing to invest in our team, investing in and leveraging our technology and completing the successful integration in November 9 conversion of Five Point Community Bank while always working to be Michigan's most people focused bank. At this point, we'd now like to turn the line over to the operator to open up the call for questions.

[Operator Instructions] And our first question comes from Brandon Nasal at Homeday Group.

All -- maybe starting off here on asset quality. Can you just update us on that large nonperforming waterfront condo nonaccrual in Western Michigan. Just kind of remind us what the balance is where you are in the elution process and where reserves specific reserves stand on the credit?

Yes. The frustratingly, the balances are still the same as they were prior quarter. It is still wrapped up in the bankruptcy court and the borrower has until 12/31 to file their plan of reorganization. And that total credit is right around $30 million but then you net out about approximately -- these are round numbers. We have about $8 million that is backed with government guarantees USDA. So it's net exposure on that is about $21 million. And I don't think that we specifically disclosed the amount that we have reserved, but we feel like we're fully reserved for any potential loss exposure there. .

Okay. Maybe just kind of keeping on theme of credit. I look at problem assets, I think you're up for like 10 quarters in a row. And then granted like the increases have been small. You closed the deal this quarter and then there's kind of that large chunky 1 that's in that balance as well. But just kind of given the trend over the past 2.5 years, is there a point at which you kind of look at that and say the work to book a little bit or kind of change how you think about kind of the commercial underwriting process? Or is this just kind of normal churn in your view?

And that's a very fair question. It's -- we all got very used to and like when we had no nonaccrual assets. So I do think that we're -- as we've migrated up, we look hard at our own portfolio constantly. And I feel very confident to say there's no systemic issue here. We have 4 credits that the biggest 1 that we just discussed, excuse me, 3 credits that are really driving that. And 1 that we added this quarter is included in that -- and so I won't disclose particular details about that one, but the 1 that we added this quarter, we basically fully reserve from a very conservative standpoint basically reserve the entire loan amount because it involved bankruptcy. And it was primarily a cash flow-related loan. . We still think there's reason to be optimistic that the borrower will come out of that hard but yet to be determined, and we have to err on the side of caution with our reserves. So that's what we did this quarter. So we're just watching very closely. Economically, though, we don't see a lot of signs of stress in the portfolio. Our overall watch list percentages are very flat, which is a good sign. So it's not that we continue to migrate a lot of things into the watch category. It's just been a migration of those few credits within the watch category to nonaccrual.

Our next question comes from Adam Kroll from Piper Sandler. .

I'm on for Nate Race Yes. So maybe a question for Gavin to start. Really appreciate the slide in the deck with the loan security repricing data and obviously some tailwinds still to come there. But would just be curious how you're thinking about the margin trajectory from here, particularly as you continue to remix the loan portfolio in the commercial and maybe just unpack how you're thinking about deposit betas through the hiking cycle.

Yes,. So starting with kind of the margin I am not have any change to what we've communicated in prior quarters in terms of the margin and the continual grind higher, all else assuming there's no macro level shock in the system. So we've provided that slide for -- to give you guys more clarity into what's driving that momentum. So I anticipate the coming quarters to the trend to continue in terms of margin expansion. In terms of beta, we think about beta, if we can manage in that 35 to 40 percent range through the cycle. Adam, we'd be really happy, and that's where we're really targeting. .

And Gavin, that's on a total deposit beta or interest-bearing?

Yes, cost of funds, yes. .

Okay. Got it. And then I believe the conversions targeted for early November. So maybe, Gavin, just curious if you could update us on operating expense expectations for the fourth quarter and maybe just the cadence of cost saves there and as you head into '27?

Yes. So the fourth quarter will close on November ninth that weekend will convert the organization. But much of the expense will run through December, 1 of the things here, Adam, that we -- the cost saves have not come as fast as I had originally modeled because we've chosen to run the banks fully staffed in terms of support through this period between July 1 and November 9 for just because we believe that's the right thing to do for customers and for the execution of the overall integration. So the fourth quarter, I think you'll see, as I mentioned, we're estimating about $3 million of additional merger-related costs coming in the fourth quarter. And then we'll provide there following the fourth quarter 2027 forecast, and that will -- that run rate will include the fully loaded HCB normalized expense. So I don't have a number for you today. We're in the process of second round of the '27 budget, but it gives you kind of timing.

Yes, we had in the original pro forma of about 40% cost saves like we're we are targeting for that...

Yes, it's just we had communicated we would get 50% in '26 for half a year. We're not quite there. We're not there. So -- but yes . .

Got it. I appreciate all the color there. And then last 1 for me. A question for Brad. I know you're probably still focused on the integration, but I would appreciate to hear your thoughts on potential for additional M&A and any additional opportunities you're seeing across your footprint?