Independent Bank Corp (IBCP) Q3 2026 Earnings Call Transcript

Thank you for standing by. Welcome to the Independent Bank Corporation third quarter 2026 earning call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then need to hear an automated message advising your hand is raised. To withdraw your question, please Press Star 1-1 again. 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. I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore executive vice president and chief financial officer and you'll run 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 two 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 for a third quarter 2026 net income of seventeen point nine million dollars or eighty cents per diluted share versus net income of 17.5 million dollars or 84 cents 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 92 cents per diluted share highlights for the third quarter of 2026 include net loan growth of 116.6 million or 10.5 percent annualized from June 30th 2026 that excludes the loans of High Point Community Bank net growth and total deposits of a hundred and fifteen point eight million dollars or nine point four percent annualized from the second quarter also excluding high point deposits a tax equivalent net interest margin of three point eight two percent and eleven basis point increase from the linked quarter or three point seven six percent of five basis points excluding purchase accounting accretion another highlight was an increase in net interest income of seven point four million dollars or fifteen point four percent over the second quarter this is our 13th consecutive quarter of net interest income growth our pre-tax pre provision net revenue was twenty six point three million of thirteen point five percent from the prior year quarter a return on average assets and return on average equity of one point one four percent and twelve point one seven percent respectively or one point three two percent and fourteen point zero eight percent excluding merger related expenses a tangible common equity ratio of eight point two percent as of September 30th, 2026, and also a highlight of the payment of our $0.28 per share quarterly dividend in common stock on August 14th 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 focused deposit franchise. We saw strong organic momentum with commercial loan growth of nearly 21 percent 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 1st 2026 in 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 9th 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 of our new Grand Rapids headquarters, and we transitioned the broker-dealer partner of our wealth management business to Raymond James. Moving to page five of our presentation, deposits totaled $5.5 billion at September 30th, 2026, an increase of $659.3 million from the second quarter, which includes five hundred and forty three point five million of high point deposits excluding high point deposits through hundred fifteen point eight million or nine percent annualized non maturity deposits total four point seven seven billion dollars or eighty six point four percent of total deposits and increased five hundred and seventy one point four million during the quarter which includes high point with the liquidity high point brought we paid down other borrowings which declined to just four million dollars from 127 million at June 30th 2026 brokered deposits are just point five million dollars at the end of the third quarter the deposit base is comprised of 46% retail 39% commercial and 15 percent municipal. On page six, we have included in our presentation a historical view of our cost of funds as compared to the Fed Fund spot rate and Fed effective rate. For the quarter, our total cost of deposits increased by just two basis points to 1.55 percent, primarily reflecting modestly higher time deposit costs, while our cost of savings and interest-bearing checking accounts were unchanged at 1.6%. 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 addition of the High Point loan portfolio. Excluding High Point, commercial loan generation was very strong as Brad met with 123 million quarterly growth or nearly 21% annually. We continued our strategic investment in commercial banking talent to supplement our loan growth, adding three experienced bankers in the quarter. Year-to-date, we've added 11 experienced commercial bankers, bringing our total to 55 bankers, comprising eight commercial loan teams across our statewide footprint. Compared to a year ago, we've added a net of nine 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 630. 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 930, 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 eight provides detail on our commercial loan portfolio concentrations, which remain 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 outline 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 non-performing loan category. Total non-performing loans were 39.2 million or 80 basis points of total loans at quarter end up slightly from 74 basis points at 630. It's worth noting that 30 million of this total is commercial and two-thirds of the commercial non-performing loans continues to be one commercial development exposure that we've discussed in previous quarters. We continue to work through the challenges of this particular project and are appropriately reserved 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 three basis points, of average loans on an annualized basis in the first three quarters of the year. This compares to 1.2 million, or four 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 20.

Thanks, Joel. Good morning, everyone. I'm starting on page 10 of our presentation. Page 10 highlights our strong regulatory capital position. The change in capital ratios on a linked quarter basis is primarily due to the acquisition of ACB Financial Corp on July 1, 2026. As September 30, 2026, our consolidated Tier 1 leverage ratio is 9.9%. Our common equity tier one ratio is 11.1%. 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 percent from the year ago period and $7.4 million from the second quarter. Our tax equivalent net interest margin was 3.82 percent during the third quarter of 2026 compared to 3.54 percent 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 five 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 a 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 link quarter increase in net interest income and the net interest margin. Our link quarter, on a link quarter basis, our third quarter 26 net interest margin was positively impacted by three factors. Purchase accounting discount accretion added six basis points. An increase in earning asset yield added five basis points and the change in the earning asset mix added two basis points. These were partially offset by an interest charge off on a commercial loan equated to one basis point and higher funding costs that equated to one 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 six quarters. Over that period, approximately $737 million dollars in loans and securities are scheduled to mature or reprice at a weighted average yield of 4.74 percent. That includes 197 million dollars securities at 2.84 percent and 539 million dollars in loans at 5.44 percent. With new commercial and mortgage loan production coming in at yields above six and a half percent, 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 third quarter, 26, and the second quarter, 26, calculates a change in net interest income over the next 12 months under five rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies the spot yield curve from the valuation date. The shock scenario is considered immediate, permanent and parallel rate changes. Base case modeled net interest income increased to $233.8 million from $204.2 million at June 30th with $23.3 million of the increase attributable to high point along with improvement in the modeled margin. Our position remains modestly asset sensitive. A 100 basis point increase in rates would increase net interest income by 1.97 percent while a 100 basis point decline would reduce it by 0.64%. We continue to manage exposure to lower rates through $50 million notional floor purchases and the termination of a $25 million pay-fix swap. Currently, 37% of assets repriced in one month and 48.5% repriced in the next 12 months. Moving on to page 15, non-interest 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 of 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 loan 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 12 cents per diluted share after tax in the third quarter 26 compared to a loss 0.6 million or 2 cents per diluted share after-tax in the prior year quarter. As detailed on page 16, our non-interest 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 points 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 estimated full-year loan growth of four and a half to five and a half percent excluding high point loans increased 116.6 million dollars in the third quarter or 10 and a half percent annualized which is above our forecasted range commercial loans increased 124.1 million dollars and mortgage loans increased 1.1 million dollars while installment loans decreased 8.6 million dollars third quarter 2026 net interest income increased by 21.8 percent over 2025 or 8.7 percent excluding high point which is above our forecasted range of seven to eight percent. I would highlight that this is our thirteenth consecutive quarter of increasing net interest income. The net interest margin was 3.82 percent for the current quarter and 3.54 percent from the prior year quarter and up 11 basis points from the linked order. The third quarter 2026 provision for credit losses was an expense of $4.8 million or approximately 0.4 percent of loans annualized, which was above our forecasted range of 0.2 to 0.25 percent. That's primarily due to a specific reserve on the one 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, non-interest 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 third quarter of 2026, which is above our forecasted target. Non-interest expense was $44.8 million in the third quarter, including $3.5 million in merger-related costs. Excluding High Point, our merger-related costs, non-interest expense was $37.3 million, slightly above our forecasted range at $36 to $37 million. Our effective income tax rate was 17% for the third quarter of 2026. Additionally, we repurchased 119, 425 shares of common stock for $4.2 million during the first nine months of 2026. This was related to the liquidation of the 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, partially offset by competitive deposit pricing. Following November 9th 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 for approximately $3 million, dollars, 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 and November 9th conversion of High 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.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the question and answers. And our first question comes from Brandon Nozzle at Hovde Group.

Hey, good morning, folks. Hey, good morning, folks. Thanks for taking the question. Maybe starting off here on asset quality, can you just update us on that large non-performing waterfront condo non-accrual in Western Michigan? Just kind of remind us what the balance is, where you are in the resolution process, and where specific reserves stand on the credit.

Yeah, frustratingly, the balances are still the same as they were a prior quarter. It is still wrapped up in the bankruptcy court, and the borrower has until a plan of reorganization. And that is right around $30 million. dollars, but then you net out about approximately, these are round numbers, but about $8 million that is backed with government guarantees, USDA. So, net exposure on that is about $21 million, and I don't think that we've specifically disclosed the amount that we have reserved, but we feel like we're fully reserved for any potential.

Thanks, Joel. Maybe just kind of keeping on the the theme of of credit um if i look at problem assets i think they're up for like 10 quarters in a row and then granted like the increases have been small uh you close the deal this quarter and then there's kind of that large chunky one that's in that that balance as well but just kind of given the trend over the past two and a half years is there a point at which you kind of look at that and say like you need to either like work the book a little bit or kind of change how you think about um kind of the commercial underwriting process or is this just kind of normal-ish churn, in your view.

And that's a very fair question. We all got very used to and liked when we had no non-accrual assets. So I do think that we're, as we've migrated up, we look hard at our own portfolio constantly and feel very confident to say there's no systemic issue here we have four credits that the biggest one that we just discussed excuse me three credits that that are really driving that and in one that we added this quarter is included in that three and in so I you know I won't disclose particular details about that one but the one that we added this quarter, we basically fully reserved, you know, from a very conservative standpoint, basically reserved 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 people come out of that Chapter 11, but yet watch category.

That's a really helpful color, Joel. Thanks for taking the questions.

Thank you. Our next question comes from Adam Kroll from Piper Sandler. Your line is now open.

Hey, I'm on for Nate Race. Good morning, and thanks for taking my questions.

Good morning, Adam.

Yeah, so maybe a question for Gavin to start. Really appreciate this slide in the deck with the loan and 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 into commercial and maybe just unpack how you're thinking about deposit data through the hiking cycle yeah adam so starting with kind of the margin.

I have 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. We've provided that slide 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, you know, we think about beta, if we can manage in that 35 to 40% range through the cycle, Adam, we'd be really, really happy. And that's where we're really targeting.

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

Correct. Yeah. 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?

Yeah, so the fourth quarter will close on November 9th. That weekend we'll convert the organization, but much of the expense will run through December. One of the things here, Adam, that 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 9th 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 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, you know, the fourth quarter or 2027 forecast, and that run rate will include the fully loaded HCB normalized and normalized expense. So I don't have a number for you today. We're in the process of the second round of the 27 budget, but it gives you kind of the timing.

Yeah, and we had in the original pro forma of about a 40% cost save.

We feel like we're on target for that. Yeah, it's just that 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.

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

Yeah, you know, like you said, we're focused on what's right in front of us. I'm very optimistic about how well this has gone up to this point and how well it will go through conversion weekend. And, you know, part of my outcomes there is for the bank to have a good reputation and being a good partner as we go forward and so I do believe there will be other opportunities having said that as we've said quarter after quarter year after year the primary growth vehicle for independent bank will be organic growth and that's worked out really really well for us. Each one of these individual talent additions, I would call sort of a mini merger, if you will, and that's worked out really well for us. So that'll be the path for us.

Got it. I appreciate the color there, and thanks for taking my questions. Thank you.

Thank you. Our next question comes from Damon Del Monte from KBW. Your line is now open.

Hi, good morning, guys. Hope everybody's doing well, and thanks for taking my questions. First question is on loan growth. Just curious, do you guys have any expectations of, like, attrition or targeted exits on some of the acquired credits, which could kind of damper the growth outlook in the next couple quarters?

No. High Point has a really solid loan portfolio, and their underwriting and their risk appetite mirrors ours. So nothing that we're looking at to say that we're not comfortable with or want to migrate out of. It's very straightforward and blends in very well with our portfolio, Dan.

Great. Joel, can you just remind us kind of your overall outlook for growth, just kind of given the pipelines and some of the investments that you made?

Yeah, I think we said at the beginning of the year we want to grow at a low double-digit rate on the commercial side. We're doing that, and I fully expect that we can continue to do that into 27.

Okay, great. And then I guess one for Gavin here. As far as the projected fair value accretion in the coming quarters, I think this quarter, I think you noted it was like $900,000-ish or so. I think that was a little higher than we had been modeling. So do you have kind of a schedule of what you expect over the coming quarters?

Yeah, so great question. That was an estimate, Damon, based off of the modeling from the third-party fair value evaluation. So it all connects, but next quarter we will see at the loan level detail what the accretion is. I think it's reasonable, but as you know, that will move up and down just based on prepayment speeds. So it's in the ballpark, yeah.

Okay, okay, great. And then I guess lastly on fee income, you know, obviously the mortgage market remains pretty challenging right now. Just kind of curious how the pipelines are heading into the end of the year, and if you expect a similar level to what you saw in the third quarter, or do you think the combo of seasonality and the challenging market would kind of take that number down?

Yeah, so production app-wise, we did see a slowdown late in the quarter just due to the sharp increase. Specifically when the conforming went over 7%, apps pulled back. So I want to make it, you know, there's a lot going on this quarter. The fee income area did come, was a mess. But when I look at the margin, what we're modeling is margin gain on sale. The margin was strong where the gains on mortgages got hit was in the fair value marks. And so we had some loans that were originated as saleable, ended up on our portfolio. That mark was about $300,000 negative and working against the gain on sale. So just to say there's some things going on there. But overall, when we think about going forward, if rates stay elevated, production will come down, yes.

Great.

That's all that I had. Thank you.

Thank you. And our next question comes from Peter Winter from DA Davidson. Your line is now open.

Can you hear me?

Yes.

Okay. Good morning. You guys have had a lot of success recruiting bankers. I'm just wondering, can you talk about the recruitment pipeline?

We continue to recruit, Peter, and still feel there's opportunity out there for us, primarily with talent coming from the larger organizations. And so we continue to be active, and we're having ongoing conversations.

And then, Gavin, you talked about the continued expansion on the margin grinding higher. Last quarter, you talked about maybe two to four basis points per quarter over the next 12 months. I'm just wondering if that outlook changed at all, maybe a little bit more towards the higher end, just given the rate environment is different?

Yeah, I think that certainly is a benefit, Peter. I think that forecast, though, is still very reasonable. And maybe it does move us to the higher end, but I wouldn't change the range today.

Got it. And then just my last question. And you have the decline in capital ratios from the acquisition, but, you know, they're still strong. Just curious, Brad, what your thoughts are on buying back stocks. You know, you had the buyback this quarter, but that was more for the high points ESOP. Just thoughts on buybacks.

You know, I would say this. you know, when we think about capital, number one is supporting the organic growth. Number two, having a consistent and upward trending dividend. Number three would be considering for share repurchases. But a lot of that depends on items one and two, and also where we're trading at. And then number four, of course, having the capability if some other merger opportunity became available. So that priority list remains the same. And I would say when I look at where we are today the current markets and where we see it going forward I am very optimistic about the direction for for IDC so yeah I think we're in a good spot thanks Brad this concludes the question and answer session I would now like to turn it back to Brad Kessel for closing remarks in closing I'd like to thank our board of directors and our senior management for their support and leadership. I also want to thank all our associates and I want to continue to welcome our new colleagues from High Point Community Bank. We continue to be so proud of the job being done by each member of our team. Each team member in his or her own way continues to do their part towards our common goal of guiding our customers to be independent. Finally, I'd like to thank each of you for your interest in IBC and joining us on today's call. Have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.