Independent Bank Corp. Q2 2026 Earnings Call

Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, President and CEO, Brad Kessel. Please go ahead. Good morning.

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, Joel Rahn, Executive Vice President and Head of Commercial Banking. Before we begin today's call, I'd like to direct you to important information on page two of our presentations, 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, 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%, six 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 31st, 2026. A return on average assets and a return on average equity of 1.37% and 14.52%, respectively, for the quarter ended June 30th, 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 30th, 2026. The payment of our $0.28 per share quarterly dividend common stock on May 14th of 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, continued capital generation. Just as important, we achieved these results while maintaining strong asset quality, prudent liquidity, 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, 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 four years in a row. This also marks our sixth time overall that Independent has received this prestigious recognition.

During the quarter, we announced the creation of two 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 Daniel Plumert 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 business access financing through the U.S. Small Business Administration loan programs.

As a member of the SBA's Preferred Lender 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 outstanding contributions and support of Michigan small business community during fiscal year 2025. Moving to page five 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, saving 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 six, 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 would like to turn the presentation over to Joel Rahn to share a few comments on the success we are having in growing our loan portfolios and provide an update on our credit metrics. Joel? Yeah. Thanks, Brad. Good morning, everyone.

Page seven summarizes our loan activity for the quarter. We experienced strong second quarter loan growth of $105 million or 9.8% annualized. Commercial 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 eight experienced commercial bankers, bringing our total to 53 bankers, comprising eight commercial loan teams across our statewide footprint. Compared to a year ago, we've added a net of six experienced commercial bankers to our group.

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 eight 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 nine. 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 630 or excuse me, at 331. It's worth noting that approximately two-thirds of this total, one 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 331.

It's not reflected on this slide, but also worth noting that we realized net charge-offs of $633,000 or three basis points of average loans in the first two quarters of the year. This compares to $442,000 or two 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 six basis points from the first quarter of 2026. Average 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 2026 net interest margin was positively impacted by three factors. Change in earning asset mix contributed three basis points, an increase in earning asset yield contributed two basis points, and a decrease in funding cost contributed one 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 2026 and the first quarter of 2026 calculates the 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 a spot yield curve from the valuation date. The shock scenarios consider immediate permanent parallel rate changes. The base case model denied is slightly higher during the quarter due to $60 million of earning asset growth, five basis points of modeled margin expansion.

Earning asset expansion was centered in commercial loans. It was up $97 million. Runoff in lower yielding investments and overnight liquidity helped fund earning asset growth. Asset and liability yields were slightly higher during the quarter, with asset yields up eight basis points and liability costs three basis points higher. NII sensitivity to lower rates declined modestly, while the benefit to higher rates remained largely unchanged. Reduced exposure to lower rates is due to a $50 million notional of floor purchases, termination of $50 million of pay fixed swaps. The overall position is closely matched for smaller rate changes of 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 reprice in one month and 49.4% reprice 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 2026, 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 2026, 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. Advertising expense increased $0.3 million in the second quarter of 2026 compared to the prior year quarter, primarily 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 of this year. Our outlook estimated full year loan growth of 4.5%-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%-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 six basis points from a 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-$12.3 million. Second quarter '26 mortgage loan origination sales and gains totaled $145.4 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 B-2 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 stock repurchased in the second quarter or first six 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, and the 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, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Brendan Nosal with Hovde Group. Your line is open. Hey, good morning, everybody.

Hope you're doing well. Morning, Brendan.

Maybe just starting off here on the expense number. I get that you guys continue to add talent and producers, and you're investing. I guess if I look at the core expense base, it was just above the high end of the quarterly guidance range. Just curious how you think about the run rate as we move through the balance of the year, without considering Highpoint, just legacy Independent, versus that $36 million to $37 million range.

I think your analysis is accurate, Brendan. When I think about the core, and based on our forecast, what we didn't have captured in that was certainly the litigation of $400,000. The other thing that we had this quarter, we did have incentive accrual catch-up that added $400,000. That being said, I would call that part of core. 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. When I think about on a net net, I get back to that around $37 million or high end of our range going forward, to answer your question, 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 one credit. As we move that through the process, hopefully we can get that down, too.

Okay, fantastic. Thanks for the color there. Maybe pivoting to 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 environment. 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 whether you think there's still more work to do in the future.

To make sure to define your question correctly. Correct me if I get it wrong. 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 commercial pipeline has room to run. 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 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. Your line is open. Hey, good morning, everyone.

This is Nick Branton on for Nate Race. Thanks for taking my questions this morning.

Sure, Nick. Just going to expenses on the HCB deal with the deal closing earlier this month, can you walk through the cost savings cadence from here?

Do you expect the savings to build gradually each quarter, or does the bulk of them come through after the systems conversion in November?

Yeah, it'll be the latter, Nick. For various reasons, we chose to run the banks as separate subsidiaries through conversion, as Brad highlighted, on November 9th. Running two individual banks, it did slow down some of those cost saves. Our team is focused on achieving that number very early in 2027 at the latest to have 2027 as fully implemented and realized.

I think that number was 40%.

It was 40%, yep, of half a year.

Then maybe switching to loan growth. How does the commercial pipeline look heading into the third quarter? Did any of the quarter's growth pull forward from the back half?

Yeah. Nick, this is Joel. The pipeline is holding up well. We had a really strong second quarter of production. Despite that, pipeline is strong. There's always some seasonality to it. Third quarter, just historically, is a little softer for loan production. Not bad, but typically a little bit softer just because the early part of the quarter, a lot of people are on vacation. Business owners like to enjoy the summer. Then we always see the fourth quarter usually be quite strong. I think that sort of a cyclical or seasonality pattern will hold this year. No, our pipeline, just in terms of the dollar, where it's at today versus a year ago, very comparable, and we continue to see really good opportunity out in the marketplace.

Great. That's everything for me. Thanks, guys. Thank you. One moment for our next question.

Our next question comes from Matt Rick with KBW. Your line is open. Hey, guys.

Hope everybody's doing well this morning. My first question was a follow-up to one of the earlier questions about commercial new origination yields. It looks like they were up two basis points, and you said the portfolio is approaching market. Do you think market yields have peaked at this point? I'm just kind of curious how you guys weigh profitability with market share gain, given the commercial opportunity in front of you.

I'll start, but Joel, I think the question maybe for you out of the gate is, how do you feel about the market pricing in terms of raw yield? Are we kind of at the It's obviously going to follow the industry market.

In terms of spread, I'll just refer to it that way. In terms of spread, we've been holding quite consistent. There's a lot of competition, but that's nothing new. I think we're in a pretty stable environment. Always healthy competition. That's just a part of our daily life. In terms of our spread, we've been holding ground, and I don't see it growing, but I also don't see that we're losing ground on our spread. Again, it's all based on, predicated on market movement, too. We're looking at likely increased Fed funds here in the near future, and the treasury market continues to tick up. That's the best insight I can provide you on that.

And again, we grew the portfolio, the commercial portfolio, by $93 million- for the quarter.

The average new origination rate was 641, and the portfolio yield is a 606.

Yeah. You're right. I mean, as Gavin said, we're getting real close to market. We're kind of par on the commercial portfolio now because of the turnover.

Okay. Got it. Just one follow-up on credit. I appreciate the color from earlier on about the two-thirds of it being one commercial loan. Is there any insight into the timeline on resolution there? Just generally, looking across the portfolio, any areas you're keeping an eye on or you're seeing early signs of stressing?

Well, yeah, can't predict the timeline of that large one. It's a legal process, it just always moves slower than we want it to move. We do feel like we're gradually making headway. In terms of other areas, no. There's not an industry concern at this point. The one other loan of any significance that we moved to non-accrual during the quarter on the commercial side, it's a management issue. That's what we're seeing, is just the poor operators. Eventually it catches up with them. No industry concern from a commercial standpoint at this point.

Okay, great. Thanks for taking my questions.

Thank you. I'm not showing any further questions at this time.

I'd like to turn the call back over to Brad.

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. 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 our 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. Thank you, ladies and gentlemen.

That is concluded today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.