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Independent Bank Corporation delivered strong Q1 2026 results with net income of $16.9 million ($0.81 per share) and a healthy net interest margin of 3.65%. Performance was characterized by robust commercial loan growth of 9.9% annualized and a decrease in total cost of funds to 1.54%. While total loan growth of 3% was slightly below the full-year target of 4.5% to 5.5%, management remains optimistic due to a strong commercial pipeline and the pending acquisition of HCB Financial Corp. Non-interest expenses of $38.3 million were elevated by $1.9 million in one-time litigation and incentive costs, but core expenses remained within expectations. Credit quality is sound, with a slight uptick in nonperforming loans primarily linked to a single, well-monitored commercial development project. Management's outlook for 2026 remains positive, focusing on Michigan-based growth and leveraging the HCB merger to deploy excess liquidity. Despite competitive deposit markets and geopolitical uncertainties, the bank's capital position remains strong, and it continues to provide steady shareholder returns through dividends and disciplined growth.

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Full Earnings Call Transcript — Q1 • 2026-04-23

Operator: Good day, and thank you for standing by. Welcome to the Independent Bank Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brad Kessel, President and CEO. Sir, please go ahead.
William Kessel: 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 first quarter of 2026. I am Brad Kessel, President and Chief Executive Officer, and joining me this morning is Gavin Mohr, Executive Vice President and our Chief Financial Officer; as well as Joel Rahn, Executive Vice President and Head of Commercial Banking for Independent. Before we begin today's call, I would 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 our website, independentbank.com. The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks. Independent Bank Corporation reported first quarter 2026 net income of $16.9 million or $0.81 per diluted share versus net income of $15.6 million or $0.74 per diluted share in the prior year period. Highlights for our first quarter include a net interest margin of 3.65%, which is a 3 basis point increase on a linked-quarter basis; an increase in net interest income of $500,000 or 1.1% over the fourth quarter of 2025; an increase in tangible common equity per share of common stock at $0.33 or 5.9% annualized from December 31, 2025; a return on average assets and return on average equity of 1.24% and 13.43%, respectively; net growth in total deposits was brokered time deposits of $80.4 million or 6.9% annualized from December 31, 2025; net growth in loans of $31.8 million or 3% annualized from December 31, 2025; an increase in tangible common equity ratio to 8.7%; and finally, the payment of a $0.28 per share quarterly dividend on our common stock on February 13, 2026. Our first quarter results reflect the strength of our core fundamentals, including growth in net interest income, expansion in net interest margin, continued growth in both loans and core deposits. Our balance sheet growth remained disciplined with $80.4 million in core deposit growth and just under $32 million in total loan growth, including $53.8 million  or 9.9% annualized in commercial loans, reflecting continued execution of our strategic plan. Credit quality remains sound, while geopolitical uncertainty has increased, we have not seen a direct impact on our customers yet, and we continue to monitor conditions closely. Profitability remains strong, again, with a return on average assets of 1.24% and return on average equity of 13.43%. We remain encouraged by our momentum and are optimistic about our opportunities and confident in the benefits of our recently announced merger with HCB Financial Corp., which will provide enhanced shareholder value. Moving to Page 5 of our presentation. Deposits totaled $4.9 billion at March 31, 2026, an increase of $80.4 million from year-end. This growth occurred in noninterest-bearing, savings and interest-bearing checking and reciprocal, offset by a small decline in time deposits. On a linked-quarter basis, business deposits increased by $94 million, retail deposits increased by $28 million. These were offset by a $42 million decrease in municipal deposits, primarily due to seasonality. The deposit base is comprised of 47% retail; 38% commercial; and 15% municipal. On Page 6, we've included in our presentation a historical view of cost of funds as compared to the Fed fund spot rate and Fed effective rate. For the first quarter, our total cost of funds decreased by 13 basis points to 1.54%. 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 as well as a brief update on our credit metrics.
Joel Rahn: Yes. Well, thank you, Brad, and good morning, everyone. On Page 7, we share an update on loan activity for the quarter. We started the year with loan growth of $32 million or 3% on an annualized basis. Commercial loan generation was solid with approximately $54 million of quarterly growth or 9.9% annualized. During the quarter, our residential mortgage and consumer installment loan portfolios declined by $4.5 million and $17.5 million, respectively. Our strategic investment in commercial banking talent continues to supplement our loan growth. During the first quarter, we added 2 experienced commercial bankers in West Michigan, bringing our total to 50 bankers comprising 8 commercial loan teams across our statewide footprint. Compared to a year ago, we have added a net of 5 experienced commercial bankers to our team. Looking ahead, based on a strong pipeline, we believe we will continue low double-digit growth of our commercial loan portfolio in 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 activity for the quarter, the mix of C&I lending versus investment real estate was 57% and 43%, respectively. And for our commercial portfolio, our mix is 68% C&I and 32% investment real estate. Page 8 provides detail on our commercial loan portfolio concentrations. There's not been any shift -- significant shift in our portfolio over the past year with the portfolio remaining very well diversified. Our largest segment of the C&I category is manufacturing at $191 million or 8.4% of the total portfolio. In the investment real estate segment of the portfolio, the largest concentration is industrial at $212 million or 8.8%. We outlined key credit quality metrics and trends on Page 9. We continue to demonstrate strong credit quality. Total nonperforming loans were $27.5 million or 64 basis points of total loans at quarter end, up slightly from 54 basis points at 12/31. It's worth noting that $20 million of this total is one commercial development exposure that we 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 $8.2 million or 19 basis points, basically unchanged from 12/31/25. It's worth noting that $4 million of total delinquency was 1 commercial loan that was in process of renewal and was completed after quarter end. It's not reflected on this slide, but also worth noting that we realized net charge-offs of $266,000 or 2 basis points of average loans for the quarter. This compares to $68,000 or 1 basis point in Q1 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.
Gavin Mohr: Thanks, Joel, and good morning, everyone. I'm starting at Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. Turning to Page 11. Net interest income increased $3.2 million from the year ago period. Our tax equivalent net interest margin was 3.65% during the first quarter of 2026 compared to 3.49% in the first quarter of 2025 and up 3 basis points from the fourth quarter of 2025. Average interest-earning assets were $5.21 billion in the first quarter of 2026 compared to $5.09 billion in the year ago quarter and $5.16 billion in the fourth quarter of 2025. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income in the net interest margin. On a linked quarter basis, our first quarter 2026 net interest margin was positively impacted by 2 factors: The change in interest-bearing liability mix added 1 basis point and a decrease in funding costs added 10 basis points. These were offset by a change in earning asset mix and yield of 6 basis points and interest charged off on a commercial loan of 2 basis points. On Page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for first quarter 2026 and fourth quarter 2025 calculates the 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 and parallel rate changes. The base case modeled NII is slightly higher during the quarter due to $70 million of earning asset growth and 1 basis point of modeled margin expansion. Earning asset expansion was centered in commercial loans of $54 million and overnight liquidity up $40 million. Runoff and lower-yielding investments in consumer loans helped fund earning asset growth. Asset and liability yields were stable during the quarter with asset yields up 2 basis points and liability costs 1 basis point higher. The NII sensitivity to lower rates declined modestly, while the benefit to higher rates remained largely unchanged. Reduced exposure to lower rates is due to $75 million of notional for purchases and the termination of $87 million of short-term pay fixed swaps and a slight shortening in the maturity structure of time deposits. The overall position is closely matched for smaller rate changes of plus or minus 100 basis points. The bank has modest exposure to large rate declines and benefits from larger rate increases. Currently, 38.2% of assets repriced in 1 month and 49.3% reprice in the next 12 months. Moving on to Page 14. Noninterest income totaled $12 million in the first quarter of 2026 compared to $10.4 million in the year ago quarter and $12 million in the fourth quarter of 2025. First quarter 2026 net gains on mortgage loans totaled $1.3 million compared to $2.3 million in the first quarter of 2025. The decrease is due to lower profit margins. It was partially offset by a higher volume of loan sales. Mortgage loan servicing net was a gain of $1.6 million in the first quarter of 2026 compared to a loss of $0.6 million in the prior year quarter. The change due to price was a gain of $0.9 million or $0.04 per diluted share after tax in the first quarter of 2026 compared to a loss of $1.5 million or $0.06 per diluted share after tax in the prior year quarter. The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $930 million of mortgage servicing rights on January 31, 2025. As detailed on Page 15, our noninterest expense totaled $38.3 million in the first quarter of 2026 as compared to $34.3 million in the year ago quarter and $36.1 million in the fourth quarter of 2025. Compensation expense increased $1.4 million, primarily due to salary increases that were predominantly effective on January 1, 2026. Litigation expense was $1.5 million in the quarter attributed to an accrual established for losses we consider probable as a result of all of our outstanding litigation matters in aggregate. Advertising expense increased $0.3 million in the first quarter of 2026 compared to prior year quarter, primarily due to a retroactive new deposit account opening incentives attributed to accounts opened in prior periods. We recorded merger expense -- merger-related expenses of $0.3 million in the first quarter of 2026. Nonrecurring noninterest expense items totaled approximately $1.9 million in the first quarter of 2026. Turning to Page 16 is our update for our 2026 outlook to see how our actual performance during the first quarter compared to the original outlook that we provided in January of this year. Our outlook estimated full year loan growth of 4.5% to 5.5%. Loans increased $31.8 million in the first quarter of 2026 or 3% annualized, which is below our forecasted range. Commercial loans increased $53.8 million in the first quarter, while mortgage and installment loans decreased. First quarter 2026 net interest income increased 7.3% over 2025, which is within our forecasted range of 7% to 8%. The net interest margin was 3.65% for the quarter and 3.49% for the prior year quarter and up 3 basis points from a linked-quarter basis. The first quarter 2026 provision for credit losses was an expense of $0.4 million, which was below our forecasted range. Moving on to Page 17. Noninterest income totaled $12 million in the first quarter of 2026, which was within our forecasted range of $11.3 million to $12.3 million in the first quarter. First quarter '26 mortgage loan originations, sales and gains totaled $130.6 million, $84.1 million and $1.3 million, respectively. Mortgage loan servicing net generated a gain of $1.6 million in the first quarter of '26, which is above our forecasted range. Noninterest expense was $38.3 million in the first quarter, above our forecasted range of $36 million to $37 million. Nonrecurring expense items included $1.5 million accrual and litigation expense and $0.4 million in retroactive new to deposit account opening incentives attributed to accounts opened in prior periods. Our effective income tax rate was 16.6% for the first quarter of 2026. Lastly, there were no shares of common stock repurchased in the first quarter of 2026. That concludes my prepared remarks. I would now like to turn the call back over to Brad.
William Kessel: 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 2026, our focus will be continuing to invest in our team, investing in and leveraging our technology while striving to be Michigan's most people-focused bank. At this point, we'd now like to open up the call for questions.
Operator: [Operator Instructions] Our first question is going to come from the line of Brendan Nosal with Hovde Group.
Brendan Nosal: Maybe just starting off here on the net interest margin. I think when you offered your initial margin outlook for '26 a couple of months back, you embedded 2 rate cuts in that outlook. Just kind of curious if we don't get any rate cuts over the course of this year, does that change the margin calculus versus your initial outlook one way or the other?
Gavin Mohr: Not measurably, Brendan. That forecast holds.
Brendan Nosal: Okay. Great. Maybe digging deeper on the deposit cost side of things. Just kind of curious like what the competitive environment for core funding is like across your markets. And I'm asking because I'm getting very different answers to this question based on market to market across the Midwest. So I would love to hear what you're seeing across Michigan.
William Kessel: Brendan, I think it continues to be very competitive. In the Michigan markets, we've got a heavy field of credit unions. So I think oftentimes, they can lead the pack. But I think it oftentimes depends if you look at the competitor and sort of their balance sheet profile, you can sort of see who's maybe fighting a little bit higher -- harder with higher pricing than others. Our focus continues to be led by that commercial effort. And our goal is to have the operating accounts for our business clients and then also for our municipal clients. And we continue to hold, retain but add to that portfolio. And so I'm really pleased with that. But it is competitive, no doubt.
Brendan Nosal: Okay. Okay. Good. I'm going to try and sneak one more in here. The world has changed geopolitically quite a lot over the past 3 months and there could be knock-on impacts to the domestic economy. So I guess when you look at the outlook you provided for 2026, are there any areas where you're feeling either better or worse today versus when we last spoke 3 months ago?
William Kessel: I think -- and I'll let Joel jump in here, too. But I think we continue to be very optimistic about how we expect 2026 to unfold. One of the things that we do at Independent is rescore the entire retail portfolio for their credit scores twice a year. And we recently got the results from that rescore. And I continue to be very pleased in seeing very solid scores for the portfolio, not a lot of change in the various bands. Of course, we lend predominantly up in that 750-plus FICO area, at least north of 700, and those bands continue to be strong. So I'll let Joel maybe comment a little bit on the commercial side.
Joel Rahn: Yes. It just -- it so much is dependent on how long the conflict lasts and what it does to prolong high energy prices. And it's probably the same thing I said maybe a quarter ago. It's just -- the duration of this, the high energy prices could be a drag on the economy and to state the obvious. And if that happens, you could see loan growth muted, I suppose, but we've not seen that yet. And business owner confidence is still unchanged, relatively high. So we have businesses that are making the decision to expand and construct new facilities, et cetera, despite the news headlines of the day. So only time will tell if that's a smart move on their part or not, but it's just -- it's such a fluid environment, Brendan. So we're just watching it carefully, and we'll react accordingly.
Operator: Our next question is going to come from the line of Adam Kroll with Piper Sandler.
Adam Kroll: I'm on for Nate Race. So maybe a question on expenses. I know there were some onetime items that kind of drove them higher in the first quarter. But if I strip those out, I get to a core number around $36.4 million. So I guess, do you still feel comfortable with the $36 million to $37 million run rate guide excluding the deal? Or do you expect those to trend higher?
Gavin Mohr: No, we feel good about that, excluding the deal and the nonrecurring.
Adam Kroll: Got it. And then how should we think about the cadence of cost saves associated with the deal?
Gavin Mohr: Yes. So it was announced 50% phased in, in year 1 and fully phased in, in year 2. And just to point out, that's 50% half a year.
Adam Kroll: Got it. And maybe a last one for me is just, Gavin, I was wondering if you could provide us with some updated thoughts on how you're thinking about deploying some of the excess liquidity brought over from the HCB deal?
Gavin Mohr: Yes, we're not going to -- we're not ready to give direction specifically on that, Adam. I would say that -- as we think about how the banks come together, clearly, our first choice would be to deploy it through the commercial bank. And then from there, we would just move down asset classes in terms of yield. We're going to have opportunity to address maybe wholesale funding if we don't have a pipeline to absorb it as well as potential securities purchases. But that's still all very much in the analysis phase.
Operator: [Operator Instructions] I'm showing no further questions at this time. And I would like to turn the conference back over to Brad Kessel for any further remarks.
William Kessel: 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 of our associates. I 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 customers to be Independent. Finally, I'd like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. Have a great day.
Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.