Independent Bank Corp. 2026 Q3 Earnings Call

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 Mohr, Executive Vice President and Chief Financial Officer, and Joel Rahn, Executive Vice President, Head of Commercial Banking. Before we begin today's call, I would 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, 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 Highpoint Community Bank. Net growth in total deposits of $115.8 million, or 9.4% annualized from the second quarter, also excluding Highpoint deposits.

A tax equivalent net interest margin of 3.82%, an 11 basis point increase from the linked quarter, or 3.76%, 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 pre-tax, 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 12.17% respectively, or 1.32% and 14.08% excluding merger-related expenses.

A tangible common equity ratio of 8.2% 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% 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 Highpoint Community Bank, on July 1st, 2026, and this quarter reflects our first results as a combined company. Integration work is well underway, and we remain on track for the Highpoint 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 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 5 of our presentation, deposits totaled $5.5 billion at September 30th, 2026, an increase of $659.3 million from the second quarter, which includes $543.5 million of Highpoint deposits. Excluding Highpoint, deposits grew $115.8 million or 9% annualized. Non-maturity deposits totaled $4.77 billion, or 86.4% of total deposits. And increased $571.4 million during the quarter, which includes Highpoint. With the liquidity Highpoint brought, we paid down other borrowings, which declined to just $4 million from $127 million at June 30th, 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% municipal. On page 6, 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 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 Rahn 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 Highpoint loan portfolio. Excluding Highpoint, commercial loan generation was very strong, as Brad mentioned, with $123 million of quarterly growth or nearly 21% annualized. 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 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, the mix of C&I lending versus investment real estate has been split evenly. For our commercial portfolio, the mix is 66% C&I and 34% investment real estate, including the addition of the $280 million Highpoint commercial loan portfolio. Page 8 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 6/30. 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 6/30. 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 2026.

Well, thanks, Joel, and good morning, everyone. I am 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 HCB Financial Corp on July 1, 2026. As of September 30, 2026, our consolidated Tier 1 leverage ratio is 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 on 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 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 the year ago quarter and $5.22 billion in the second quarter of 2026. Highpoint added approximately $557 million of average earning assets. 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 third quarter 2026 net interest margin was positively impacted by three factors.