Independent Bank Reports Q1 2026 Results: Full Earnings Call Transcript

Independent Bank (NASDAQ:IBCP) released first-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below. This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation. The full earnings call is available at https://edge.media-server.com/mmc/p/989vrdc9/ Summary Independent Bank reported a first quarter 2026 net income of $16.9 million, an increase from $15.6 million in the previous year. The company achieved a net interest margin of 3.65%, with a $500,000 increase in net interest income over the previous quarter. Total deposits grew by $80.4 million, and loans increased by $31.8 million, reflecting strong balance sheet growth. The company announced a $0.28 per share dividend and highlighted a beneficial merger with HCB Financial Corp. Management emphasized optimism for 2026, citing strong credit quality, commercial loan growth, and competitive deposit markets. Full Transcript OPERATOR Good day and thank you for standing by. Welcome to the Independent Bank Corporation first quarter 2026 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during this session you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised to withdraw your question, please press Star one one again. 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. Brad Kessel (President and Chief Executive Officer) 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 Moore, Executive Vice President and our Chief Financial Officer, as well as Joel Ron, Executive Vice President and Head of Commercial Banking for Independent Bank. Before we begin today's call, I would like to direct you to 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 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 $1.01 per diluted share versus net income of $15.6 million or 7.74 cents 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 from 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 less brokered time deposits of $80.4 million or 6.9% annualized from December 31st, 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 13th of 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 non interest bearing saving 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 six 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 Ron 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 Ron (Executive Vice President and Head of Commercial Banking) Yeah, well, thank you Brad and good morning everyone. On page seven 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 and 17.5 million respectively. Our strategic investment in commercial banking talent continues to supplement our loan growth. During the first quarter we added two experienced commercial bankers in West Michigan, bringing our total to 50 bankers comprising eight commercial loan teams across our statewide footprint compared to a year ago, we've added a net of five 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 CNI lending versus investment real estate was 57% and 43% respectively. And for our commercial portfolio our mix is 68% CNI 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 CNI 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 nine we continue to demonstrate strong credit quality. Total non Performing loans were 27.5 million or 64 basis points of total loans at quarter end, up slightly from 54 basis points at 1231. 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 1231. 25. It's worth noting that 4 million of total delinquency was one 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 Moore (Executive Vice President and Chief Financial Officer) 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 three basis points from the fourth quarter of 2025. Average interest earning assets were $5.21 billion in the first quarter of 2026 compared To 5.0 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 and the net interest margin on a linked quarter basis. Our first quarter 2026 net interest margin was positively impacted by two factors. The change in interest bearing liability mix added 1 basis point and a decrease in funding cost 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 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 and parallel rate changes. The base case modeled NII is slightly higher during the quarter due to $70 million of earning asset growth and one basis point of modeled margin expansion. Earning asset expansion was centered in commercial loans up 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 remain largely unchanged. Reduced exposure to lower rates is due to 75 million of notional floor purchases and the termination of 87 million of short term pay fix 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 one month and 49.3% repriced in the next 12 months. Moving on to page 14 non interest 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 higher volume of loan sales. Mortgage loan servicing net was a gain of $1.6 million in the first quarter 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 31st, 2025. As detailed on page 15, our non interest expense totaled $38.3 million in the first quarter 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 1-1-2026. 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 priority periods. We recorded merger expense Merger related expenses of 0.3 million in the first quarter of 2026. Non reoccurring non interest expense items totaled approximately 1.9 million in the first quarter of 20 26. Turning to page 16 is our update for 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 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 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 with an expense of $0.4 million which was below our forecasted range. Moving to page 17, non interest 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 origination sales and gains totaled 130.6 million, 84.1 million and 1.3 million, respectively. Mortgage loan servicing that generated a gain of 1.6 million in 1Q26, which is above our forecasted range. Non interest expense was 38.3 million in the first quarter, above our forecasted range of 36 to 37 million dollars. Non recurring expense items included 1.5 million accrual and litigation expense and 0.4 million dollars in retroactive new deposit account opening incentives attributed to accounts open 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 repurchase in the first quarter of 2026. That concludes my prepared remarks and I would now like to turn the call back over to Brad. Brad Kessel (President and Chief Executive Officer) 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 Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment. While we compile our Q and A roster, Our first question is going to come from the line of Brandon Nozzle with Hovedi Group. Your line is open. Please go ahead. Brandon Nozzle Hey, good morning, everybody. Hope you're doing well. Morning. Morning. 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 two 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 Moore (Executive Vice President and Chief Financial Officer) Not measurably, Brandon, that that forecast holds. Brandon Nozzle Okay, great. Maybe, you know, digging deeper on the deposit cost side of things, just kind of curiously 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, you know, market to market across the Midwest. So I would love to hear what you're seeing across Michigan, Brad Kessel (President and Chief Executive Officer) Brendan? I think it continues to be very competitive in the Michigan markets. You know, we've got a heavy field of credit unions, so I think oftentimes they can lead the pack. But I think, you know, it oftentimes depends. If you look at each 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. You know, our focus continues to be, you know, led by that commercial effort. And you know, 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, add to that portfolio. And so I'm really pleased with that. But it is, it is competitive, no doubt. Brandon Nozzle Okay. Okay, good. I'm going to try and sneak one more in here. You know, the world has changed geopolitically quite a lot over the past three months and there could be knock on impacts to the domestic economy. So I guess, you know, when you look at the outlook you provided for 2026, are there any areas where you're feeling either better or worse today versus, you know, when we last spoke three months ago? Brad Kessel (President and Chief Executive Officer) You know, I think I'll let Joel jump in here too, but I think we continue to be very optimistic about how we expect 2026 to unfold. Joel Ron (Executive Vice President and Head of Commercial Banking) 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, you know, very solid scores for the portfolio. Not a lot of change in the various bands. You know, of course we land predominantly up in that, you know, seven 50 plus FICO area, you know, 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. Yeah, 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, yeah, 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 such a fluid environment, Brandon. So we're just watching it carefully and we'll react accordingly. Brandon Nozzle Yeah. Okay, perfect. Thanks for the thoughtful commentary. OPERATOR Thank you. And one moment for our next question. Our next question is going to come from the line of Adam Kroll with Piper Sandler. Your line is open. Please go ahead. Gavin Moore (Executive Vice President and Chief Financial Officer) Hi, good morning. I'm on for nay race and thanks for taking my questions. Good morning. Morning. Yeah, so maybe a question on expenses. You know, I know there were some one time items that kind of drove them higher in the first quarter, but if I strip those out, I get to core number around 36.4 million. So I guess do you still feel comfortable with the, the 36 to 37 million run rate guide excluding the deal or do you expect those to trend higher? No, we feel good about that excluding the deal and the non recurring. Adam Kroll Got it. And then, you know, how should we think about the cadence of cost saves associated with the deal? Gavin Moore (Executive Vice President and Chief Financial Officer) Yeah, so it was announced 50% phased in in year one and fully phased in in year two. And just to point out that's. That's 50% of half a year. Adam Kroll Got it. And maybe a last one for me is just. Gavin was wondering if you could provide us with some updated thoughts on, you know, how you're thinking about deploying some of the excess liquidity brought over from the HCB deal. Gavin Moore (Executive Vice President and Chief Financial Officer) Yeah, we're not going to. We're not ready to give directions 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. Got it. Thanks for taking my questions. Thank you. OPERATOR Thank you. And as a reminder, if you would like to ask a question, please press star 11 on your telephone. 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. Brad Kessel (President and Chief Executive Officer) 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 and 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. Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.