INDEPENDENT BANK CORP /MI/ Q3 FY2026 earnings call

• Acquisition Integration: Completed the acquisition of HCB Financial Corp. (High Point Community Bank) on July 1, 2026. System conversion is scheduled for November 9, 2026. Integration is on track, though cost savings have been slower than initially modeled due to maintaining full staffing through the transition to ensure customer service and execution quality.
• Loan Growth & Strategy: Excluding High Point, commercial loan growth was strong at nearly 21% annualized ($123 million quarterly growth). The firm added 11 experienced commercial bankers year-to-date, bringing the total to 55. The pipeline remains strong despite a late-Q3 dip, with management targeting low double-digit growth rates.
• Deposit Franchise: Total deposits reached $5.5 billion. Excluding High Point, organic deposit growth was $115.8 million (9.4% annualized). Non-maturity deposits constitute 86.4% of the total. Brokered deposits are minimal at $0.5 million, and other borrowings were significantly reduced to $4 million.
• Credit Quality: Overall credit quality remains strong with low net charge-offs (3 basis points annualized). However, non-performing loans increased slightly to 80 basis points, driven largely by one specific commercial development exposure (~$30 million gross, ~$21 million net exposure after government guarantees) currently in bankruptcy proceedings. Management states it is fully reserved for this exposure.
• Operational Efficiency: Efficiency ratio stood at 61.3%. Non-interest expense increased to $44.8 million due to High Point’s operating costs and $3.5 million in merger-related expenses. Management expects significant cost synergies to be reflected in the 2027 expense run rate following the November conversion.

• Net Income: $17.9 million ($0.80 diluted EPS), compared to $17.5 million ($0.84 diluted EPS) in the prior year period.
• Adjusted Net Income (excluding $2.7 million after-tax merger expenses): $20.6 million ($0.92 diluted EPS).
• Net Interest Income: Increased by $7.4 million (15.4%) from Q2 2026, marking the 13th consecutive quarter of growth.
• Pre-tax, Pre-provision Net Revenue: $26.3 million, up 13.5% from the prior year quarter.
• Return on Average Assets (ROAA): 1.14% (1.32% excluding merger expenses).
• Return on Average Equity (ROAE): 12.7% (14.08% excluding merger expenses).

• Net Interest Margin (NIM): Expects NIM to continue benefiting from asset repricing following the September Fed rate increase, partially offset by competitive deposit pricing. No specific numerical target provided for Q4, but the trend of gradual margin expansion continues.
• Expense Run Rate: Fourth-quarter non-interest expense includes approximately $3 million in remaining merger/conversion costs. Full-year 2026 expense is slightly above the original forecast range of $36–$37 million (excluding High Point) due to these costs. Management anticipates realizing cost savings largely in the 2027 run rate.
• Provision for Credit Losses: Expects provision to track loan growth and credit migration. Year-to-date provision is ~0.23% of average loans annualized, within the forecasted range. Q3 provision was higher ($4.8 million) due to specific reserves on the single large commercial exposure.
• Organic Loan Growth: Management reaffirms the ability to grow the loan portfolio at a low double-digit rate, outperforming the initial full-year forecast of 4.5%–5.5% for 2026.
• M&A: Primary growth vehicle remains organic. While open to future opportunities, no immediate M&A plans are prioritized over integration execution.

• Concentrated Credit Exposure: A single commercial development project (~$30 million gross) is in bankruptcy court, contributing significantly to the rise in non-performing assets. While fully reserved, resolution timing is uncertain pending the borrower's reorganization plan filing deadline of December 31.
• Integration Execution Risk: The High Point Community Bank integration involves system conversion and operational merging. Delays or failures in this process could impact customer retention and realized cost synergies.
• Interest Rate Sensitivity: The bank is modestly asset-sensitive. A 100 basis point decline in rates would reduce net interest income by 0.64%, while a 100 basis point increase would raise it by 1.97%. Management uses floor purchases and swap terminations to manage lower-rate exposure.
• Mortgage Market Volatility: Unfavorable fair value adjustments on mortgage loans sold/transferred impacted third-quarter gains. Continued high interest rates may suppress mortgage production volumes.

Q: Analyst asked for an update on the large non-performing waterfront condo loan, including balance, resolution status, and reserve levels. / A: Joel Rahn confirmed the balance remains ~$30 million, with ~$8 million backed by USDA guarantees, leaving ~$21 million net exposure. The loan is still in bankruptcy court with a December 31 deadline for the reorganization plan. Management stated they feel fully reserved for any potential loss exposure on this credit.

Q: Analyst questioned whether the 10-quarter trend of increasing problem assets indicated a systemic underwriting issue requiring process changes. / A: Joel Rahn attributed the increase to just three specific credits, not systemic churn. He highlighted that one new addition this quarter was fully reserved due to bankruptcy involvement. He noted that watch-list percentages remain flat, indicating stability, and the bank is closely monitoring these few credits rather than changing its broader underwriting philosophy.

Q: Analyst requested details on the margin trajectory given recent repricing data and how deposit betas are evolving in the hiking cycle. / A: Gavin Mohr reiterated the expectation for a continual grind higher in margins, citing tailwinds from asset repricing. He did not provide a specific numerical forecast change but emphasized that the model assumes a static balance sheet and reflects current rate scenarios. He noted that competitive deposit pricing will partially offset the asset-side benefits.

Q: Analyst asked about fourth-quarter expense expectations and the cadence of costs heading into 2027, specifically regarding integration savings. / A: Gavin Mohr explained that expenses remained higher than modeled because the bank kept support staff fully employed through the transition to ensure execution quality. He estimated ~$3 million in additional merger costs for Q4. Full cost synergies (targeting ~40% savings) will be reflected in the normalized 2027 expense run rate, which management is currently budgeting.

Q: Analyst inquired about the priority of share repurchases versus other capital allocation strategies given the current market environment. / A: Brad Kessel outlined a clear hierarchy: first, supporting organic growth; second, maintaining an upward-trending dividend; third, considering buybacks based on valuation; and fourth, preserving capital for potential M&A. He expressed optimism about the bank's direction and current trading levels, suggesting the bank is in a good spot for future capital decisions.