Independent Bank Corporation

Good day, and thank you for standing by. Welcome to the Independent Bank Corporation fourth quarter 2025 earnings call. At this time, all participants are on listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand as raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is pre-recorded. I would like to hand the conference over to your first speaker today, Brad Kessel, President and Chief Executive Officer. Please go ahead.

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 fourth quarter and full year 2025 results. I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, Executive Vice President and Chief Financial Officer, and Joel Rahn, EVP, Head of Commercial Banking. Before we begin today's call, I would like to direct you to the 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 the company's website, independentbank.com. The agenda for today's call will include prepared remarks followed by question and answer session, and then closing remarks. I'm pleased to report on our fourth quarter and full year 2025 results as we advance our mission of inspiring financial independence today with tomorrow in mind. Our vision is a future where people approach their finances with confidence, clarity, and the determination to succeed. Our core values of courage, drive, integrity, People-focused and teamwork are the blueprint our employees live by. We strive to be Michigan's most people-focused bank. Independent Bank Corporation reported fourth quarter 2025 net income of $18.6 million, or 89 cents per diluted share, versus net income of $18.5 million, or 87 cents per diluted share, in the prior year period. For the year ended December 31, 2025, the company reported net income of $68.5 million, or $3.27 per diluted share, compared to net income of $66.8 million, or $3.16 per diluted share in 2024. Highlights for the fourth quarter of 2025 include an increase in net interest income of $1 million. That's 2.2% over the third quarter of 2025. A net interest margin of 3.62%. That's eight basis points up on a linked quarter basis. A return on average assets and a return on average equity of 1.35% and 14.75% respectively. Net growth in loans of $78 million or 7.4% annualized. That's from September 30th, 2025. Net growth in total deposits, less brokered deposits, of $57.5 million, or 4.8% annualized. An increase in tangible common equity ratio to 8.65%, and the payment of a 26-cent per share dividend in common stock on November 14, 2025. Our fourth quarter performance marked the culmination of another remarkable year with our organization excelling on all fundamentals. Over the past year, we increased tangible book value by 13.3% and delivered near record earnings. Meanwhile, our dividend payout ratio was 32% for the year as we continued to recognize the value of returns for our shareholders. During the fourth quarter, we realized continued net interest margin expansion, strong loan growth, and increased non-interest income. In addition, our credit quality metrics remain positive with watch credits and non-performing assets below historic averages. In anticipation of continued strong earnings, we repurchased shares and executed a tax credit transfer agreement during the fourth quarter, which is expected to reduce tax obligations and enhance earnings per share. Looking ahead to 2026, our confidence is bolstered by a robust commercial loan pipeline, and our ongoing strategic initiative to attract and integrate talented bankers into our organization. Moving to page five of our presentation, deposits totaled $4.8 billion at December 31, 2025, an increase of $107.6 million from December 31, 2024. This increase is primarily due to growth in savings and interest-bearing checking, reciprocal, and time balances that were partially offset by decreases in non-interest-bearing and brokered time deposits. On a linked quarter basis, business deposits increased by $20.4 million, retail deposits increased by $64.1 million, offset by a $28.6 million decrease in municipal deposits. The deposit base is comprised of 47% retail, 37% commercial, and 16% municipal. All three portfolios are up on a year-over-year basis. On page six, we have included in our presentation a historical view of our cost of funds as compared to the Fed fund spot rate and the Fed effective rate. For the quarter, our total cost of funds decreased by 15 basis points to 1.67%. 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 and growing our loan portfolios, and provide an update on our credit metrics.

Thank you, Brad, and good morning, everyone. On page 7, we share an update of loan activity for the quarter. We continue to experience solid loan growth in the fourth quarter, with total loans growing by $78 million, or 7.4% annualized, as Brad just referenced. For the year, we increased our loan portfolio $237 million, or 5.9%. Our commercial portfolio led the way with $276 million or 14.2% growth. Commercial loan generation continued its strong trend in Q4 with $88 million in quarterly growth or 16% annualized. Our residential mortgage portfolio grew by $7.2 million, and our installment loan portfolio decreased $17 million for the quarter. Our strategic investment in commercial banking talent continues to supplement our loan growth. During the fourth quarter, we added an experienced banker in Metro Detroit, and in total, we have 49 bankers comprising eight commercial loan teams across our statewide footprint. During the year, we added a net of five experienced bankers to the team. Looking ahead, we believe we will continue low double-digit growth of our commercial loan portfolio in 2026. Our pipeline remains solid, comparable to January of 25. We continue to see market opportunities from regional banks in both talent and customer acquisition. They're seeing steady organic growth from existing customers. Looking at the commercial loan production activity on a year-to-date basis, the mix of C&I lending versus investment real estate was 57% and 43% respectively. And for our commercial portfolio, our mix is 67% C&I and 33% investment real estate. Page 8. provides detail on our commercial loan portfolio concentrations. There's not 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 is manufacturing at $183 million, or 8.3% of the portfolio. In the investment real estate segment of the portfolio, the largest concentration is industrial at $202 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 23.1 million or 54 basis points of total loans at quarter end, up slightly from 48 basis points at 930. It's worth noting that 16.5 million of this total is one commercial development exposure that we discussed last quarter. We continue to work through the challenges of this particular project and are appropriately reserved for any loss exposure. Past due loans totaled 7.8 million or 18 basis points, up slightly from 12 basis points at 9.30. It's not reflected on the slide, but worth noting that we realized net charge-offs of 1.6 million or four basis points of average loans for the year. This compares to 0.9 million or two basis points in 2025. or 2024, excuse me. At this time, I would like to turn the presentation over to Gavin for his comments, including the outlook for 2026.

Thanks, Joel, and good morning, everyone. I'm going to start on page 10 of our presentation. Page 10 highlights our strong regulatory capital position. I'd like to note our tangible common equity ratio has moved back into our targeted range of 8.5% to 9.5%. Additionally, 407,113 shares of common stock were repurchased for an aggregate purchase price of $12.4 million in the year 2025. Turning to page 11, net interest income increased $3.5 million from the year-ago period. Our tax-equivalent net interest margin was 3.62% during the fourth quarter of 2025, compared to 3.45% in the fourth quarter of 2024, and up eight basis points from the third quarter of 2025. Average interest earning assets were $5.16 billion in the fourth quarter of 2025 compared to $5.01 billion in the year-ago quarter and $5.16 billion in the third 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 fourth quarter 25 net interest margin was positively impacted by two factors. Change in interest-bearing liability mix added nine basis points, and a decrease in funding costs added 13 basis points. These were offset by a change in earning asset yield and mix of 13 basis points, as well as interest charged off on a commercial loan that was a negative one basis point. On page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for the fourth quarter of 2005 and third quarter of 25 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 the spot yield curve from the valuation date. Shock scenarios consider immediate, permanent, and parallel rate changes. The base case modeled NII is slightly higher during the quarter due to nine basis points of modeled margin expansion. The NIM benefited from mixed shifts in both assets and liabilities. On the asset side, solid commercial loan growth was funded by runoff in overnight liquidity, investments in lower-yielding retail loans. Funding costs benefited from growth in non-maturity deposits and a decline in wholesale funding. The NIM further benefited from a reversal of excess liquidity in the fourth quarter of 2025. The NII sensitivity position is largely unchanged for rate changes of plus and minus 200 basis points. The bank has slightly more exposure to larger rate declines, minus 3 and 400, and larger benefit from larger rate increases, plus 300 or 400. The shift in sensitivity for larger rate moves is due to shifts in non-maturity deposit modeling, primarily caused by 50 basis points of Fed cuts during the quarter. Currently, 38.3% of assets repriced in one month and 49.2% repriced in the next 12 months. Moving on to page 14, non-interest income totaled $12 million in the fourth quarter of 2025 compared to $19.1 million in the year-ago quarter and $11.9 million in the third quarter of 2025. Fourth quarter 2025 net gains on mortgage loans totaled $1.4 million compared to $1.7 million in the fourth quarter 2024. The decrease is due to lower profit margins and lower volume of loan sales. Mortgage loan servicing net was $0.9 million in the fourth quarter 2025 compared to $7.8 million in the prior year quarter 2020. The change due to price was a gain of $0.2 million or $0.01 per diluted share after tax in the fourth quarter of 2025 compared to a gain of $6.5 million or $0.24 per diluted share after tax in the year-ago quarter. The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $931 million of mortgage servicing rights on January 31st of 2025. As detailed on page 15, non-interest expense totaled $36.1 million in the fourth quarter of 2025 as compared to $37 million in the year-ago quarter and $34.1 million in the third quarter of 2025. Compensation expense decreased $0.3 million primarily due to lower performance-based compensation expense, lower medical-related costs, and lower payroll tax expense and higher deferred loan origination costs due to higher commercial loan production. That was partially offset by higher salary expense. Data processing costs decreased by $0.3 million from the prior year period, primarily due in part to a reimbursement from the core provider for billing overages and other credits received. That was partially offset by smaller increases in several other solutions and one-time charges relating to special projects. Income tax expense decreased. included a $1.8 million benefit or $0.09 per share resulting from the execution of a tax credit transfer agreement related to the purchase of $22.9 million of energy tax credits during the three-month and full year ended December 31, 2025. That's compared to no such benefit in the prior year. We're going to move on to page 18. This will summarize our initial outlook for 2026. The first column is loan growth. We anticipate loan growth in the mid-single-digit range and are targeting a four-year growth rate of 4.5% to 5.5%. We expect to see growth in commercial, with mortgage loans remaining flat and installment loans declining. This outlook assumes a stable Michigan economy. Next is net interest income, where we are forecasting growth of 7% to 8% over full-year 2025. We expect the net interest margin expansion of five to seven basis points in the first quarter of 2026 with successive quarterly increases of three to five basis points, primarily due to decreasing yields on interest-bearing liabilities that's partially offset by a decrease in earning asset yields. This forecast assumes a 0.25% cuts in March of 2026 and August of 2026. While long-term interest rates increase slightly, from year-end 2025 levels. A full year 2026 provision expense for allowance for credit losses of approximately 20 to 25 basis points of average portfolio loans would not be unreasonable. Moving to page 19, related to non-interest income, we estimate a range of 11.3 million to 12.3 million quarterly. We estimate total for the year to increase 3% to 4% as compared to 2025. We expect mortgage loan origination volumes to decrease 6% to 7% and net gain on sale to be down 14% to 16% compared to the full year 2025 results. Our outlook for non-interest expense is a quarterly range of $36 million to $37 million with the total for the year 5% to 6% higher than 2025 actuals. The primary driver is an increase in compensation and employee benefits, data processing, loan and collections, and occupancy. Our outlook for income taxes is an effective rate of approximately 17%, assuming the statutory federal corporate income tax rate does not change during 2026. Lastly, the Board of Directors authorized share repurchases of approximately 5% in 2026. Currently, we are not modeling any share repurchases in 2026. That concludes my prepared remarks, and I would now like to 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 2026, our focus will be continuing to invest in our team and investing in and leveraging our technology while striving to be Michigan's most people-focused bank. At this point, we would now like to open up the call for questions.

Thank you. At this time, we'll conduct a question and answer session. As a reminder to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To retry your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from the line of . Your line is now open.

Hey, good morning, everybody. Hope you're doing well. Good morning. Let me just start off here kind of on, you know, market outlook here in Michigan. Can you just kick it off by offering your latest thoughts on the opportunity set you're seeing, particularly in southeast Michigan, given the M&A dislocation? And I guess, you know, if you added five commercial bankers in 2025, like what would the ambition set look like for banker ads in 26?

Well, I'll take it. Brendan, this is Joel. Good question. I would think in terms of our account acquisition expectation, it's similar. You know, we'll have some departures with retirements, et cetera, that we have to cover. But I think a net add of four to five bankers this year would be reasonable to expect. And in terms of opportunity in Southeast Michigan, we do think there will be, you know, opportunity there. It's just beginning. And so there's, you know, typically the talent side window opens first, and it can be some time before, you know, the customer feels the impact. But we're watching it closely and feel that it will be a creative force.

Okay, thanks, Joel. Maybe one more from you before I step back. Just on the loan growth outlook for, I guess, 5% at the midpoint, I guess, like, typically I think of your bank as a high single-digit organic grower. So I guess just given the market opportunities you see, what's pushing that range down to the mid-single-digit area? And is there upside if payoffs behave a little more rationally in 26th?

You know, Brandon, this is Brad. I'll jump in there, and I'll just say that so over the last few years, we've actually reshaped the balance sheet, and particularly with the loan portfolios and our strategic emphasis. So, of course, we've got the rundown in the investment portfolio, which has been funding our loan growth. But within the loan portfolios, the largest emphasis where we've been investing in talent has been in Joel's group. That's the commercial banking team. And that has driven what I call the outsized growth rate for our company for that line of business. At the same time, we still have a very strong and robust lending talent and teams in the consumer and mortgage banking groups. Yet we're just putting less on in those categories on our balance sheet. And in fact, we forecast in 26 some shrinkage in the consumer portfolio. And that's not so much coming out of the branch channel, The shrinkage is really coming off of less originations from our indirect lending group, which, as we've shared in the past, has really two focuses. One is marine, and the second is an RV. And we really have just not seen the same volume that we saw several years ago coming through the RV channel. The marine is still pretty good, but So when you add that all up, what ends up happening is you have, you know, double-digit growth in commercial, but the lower level of net growth in mortgage and consumer get us to that, you know, somewhere mid-single-digit overall loan growth projected for 2020-2026. Does that make sense?

Yeah, that's a helpful framework to view it through. I guess I'll speak in one more related topic then. Just given how much of the loan growth has been funded by securities cash flows in the recent past, what is the outlook for that dynamic this year?

Thanks. Yeah, so we've got about $120 million of forecasted runoff in securities for 2026, and that will fund loan growth. So we can continue to intend to continue to remix that asset mix into next year, through next year. Fantastic. Thank you for taking my questions. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of David DeMonte of KVW. Your line is now open.

Hey, good morning, guys. Hope everybody's doing well today. And thanks for taking my questions here. First one, just on the margin and the guidance provided around that, Gavin, just wondering if you could kind of walk through the cadence again for kind of what you expect here in the first quarter and then in the forthcoming quarters after that. And then what were some of the drivers behind that optimism for a rising margin?

Yeah, so we're looking at five to seven basis points of expansion in Q1, and then Q2, Q3, and Q4, we're forecasting three to five basis points of expansion each quarter. And that gets you to the overall forecast of, you know, 18 to 23 basis points on a year-over-year, four-year basis. What's going on there is a couple things. One, just the benefit of we have two rate cuts in the forecast of March and August. We feel really good about our ability to see that 40% plus beta on the repricing down of deposits. The yield curve shape right now, in terms of the forward yield curve is beneficial. The mid, the five to seven point of the curve is actually drifting a little bit higher. So we're creating, we're getting some more slope in that respect. And then also it's the continued repricing of below market assets as we go into 2026. Does that make sense, Damon?

It does. Yep. I appreciate that color. And then kind of just broader on capital management, just kind of given where capital levels are and you do have a buyback in place, just kind of wondering, I know it's not in your guidance and your forecast, but just kind of wondering what your appetite is for buybacks. And then also, you know, how do you view the M&A landscape right now? Is there any interest in trying to pursue a merger with another company? So just kind of curious on your thoughts around that. Thanks.

I'll start with capital and then hand it over to Brad. I would just say that we're really excited about the capital build and outlook for the organization. And, you know, that provides us with a tremendous amount of flexibility, and that's really what we're focused on. Obviously, the dividend is very important. We just announced a significant increase, over 7.5% of the board approved dividends. and we want to continue to have a stable and growing dividend. But with that capital build, it's going to allow us the flexibility to do share repurchases when we think the price makes sense. So I just really am really excited about the capital position today. For Brad?

Yeah, very good, Gavin. And in regards to the M&A and M&A in the Michigan market – You know, of course, you've got the Fifth Third Coamerica, which, well, that's not directly impacting us indirectly, as it goes back to Joel's remarks. We think there's an opportunity for talent and customer acquisition. You know, across the state, you know, today we have 80 plus or minus, you know, independent Michigan-based community banks. Um, I think we'll see, you know, consolidation at a similar pace to what we've seen historically in Michigan. And that's probably somewhere between four and 6%, um, who, who they are. Um, I, I, I'm not sure, um, our appetite, we, we would be very interested, um, depending on, you know, the specifics. And so that would include sort of strategically or geographically, how does it fit the footprint, the overall size, you know, and not wanting to maybe, well, want to be cognizant of all the other good work we've got going on organically. So I think the culture obviously would be very important. And the the metrics need to work and we need to materially add to EPS and at the same time, we're very respectful of not wanting to dilute our existing shareholders. So I would just step back and just say M&A for independent could very well happen. but it's not a requirement for us to continue the success that we've experienced historically over the years.

Great. That's an excellent caller. I appreciate that. That's all that I had. Thank you very much. Thanks, Damon.

One moment for next question. And our next question comes from the line of Nathan Reese of Piper Sandler. Your line is now open.

Hey, guys. Good morning. Thanks for taking the questions. David, just going back to the margin discussion, could you update us just in terms of how much cash flow you have coming off the bond portfolio each quarter and what the magnitude of or the amount of loans that you have that are fixed that are repricing higher and what that amount looks like in terms of that yield pickup?

Yeah, give me one sec. So the bonds is the run for The run rate for 2026 is $120 million, and that's – I think it's fair. You could model that as pro forma to the – or split it up equally per quarter. On the loan side – let me get through my notes here.

I'm happy to ask another question while you dig that up, Kevin. Great. Maybe, Brad, just thinking, you know, more realistically about the balance sheet composition, you know, just curious, you know, what the appetite is to maybe, you know, trade some of your excess capital. And obviously, you guys are going to be building capital at pretty strong clips just given the profitability profile this year. But just what the appetite is to maybe trade some regulatory capital to maybe reposition the securities book, whether it's on the AFS or HTM side of things.

You know, so that's a good question, Nathan. And, you know, we revisit that strategy regularly. Historically, we've sort of nibbled at selective, you know, investment sales and generally where we can earn it back within a reasonable timeframe. But You know, we've had the book, it's running off, and I'm not sure you're really going to see independent needing to accelerate that, taking losses, and that's not really in the strategy at this point.

Okay. That's helpful. I appreciate that. Maybe one more from me. Just in terms of what you're seeing or expecting from a charge-off perspective, I appreciate the provision guide and, you know, charge-offs have been really well-behaved over the last several quarters now, but just any thoughts, maybe Joel, in terms of, you know, any normalized expectations around a charge-off range going forward?

Yeah, we don't see, we see it being very similar to the past, you know, the past few years. We really don't see any, you know, big change in that profile. And I can't recall, Gavin, in your guidance, if you had any specific range there.

Well, we said the provision would be 20 to 25 basis points. And that provision is going to be a function of more loan growth than anything. But I think the charge-off history, you know, recent history has been really, really low. And I think it probably is unrealistic to expect that indefinitely. The charge-offs really to date have been in the consumer loan portfolio. And the biggest driver has been quite frankly, due to a customer passing away and then getting the collateral back and then disposing of it. But I think somewhere in our recent history, maybe a little bit higher, could be modeled on a going forward basis.

I agree with that. Nathan, I have the details for your question on cash flow repricing. Average for the quarterly for 2026 is going to be about $105 million at an exit rate of on average of $550. So at current speed, CPRs.

Okay. And that's on the commercial look or just overall, Kevin?

That's the entirety of our fixed rate portfolio. So that includes mortgage, commercial, is going to run about, let's see, for the year, it's about $80 million. I'm sorry. Excuse me there. It's $228 million. My totals are off. Let me... Don't worry about it. Yeah, we're good. I appreciate it. Yeah, you're good. It's $228 Total commercial is around $220 million for the year at a 563. So, yeah.

Okay. Quite substantial then. That's all I had. I appreciate all the color, guys. Thank you.

Thanks, Nathan.

Thank you. One moment for our next question. Again, as a reminder to ask a question, you'll need to press star 1-1 on your telephone. And our next question comes from the line of John Rodas of JANI. Your line is now open.

Hey, good morning, guys. Gavin, just following up on the securities portfolio, you said runoff of roughly $120 million. Does that all – I mean, are you looking to reinvest any – into the securities portfolio at this time? Or I think looking at my prior notes, I think you said sort of targeting securities portfolio, you know, 12 to 15% of assets. Is that still sort of the thought process?

That is, John. And we, I don't, I think we'll get through 2026 without doing any securities purchases.

Okay. Okay. But if you look, I know 2027 is a long way away, but Could you maybe hit a bottom then, I guess?

Yeah. Yeah, I anticipate it in 2027. Don't make me give you a month in 2027, but within 2027, we'll have floored out and we'll start to reinvest.

Yeah, so, you know, we have that 12% or 14% of total assets is still a target for us in terms of triggering – Correct. Investment purchases. So that's still the strategy there, John. Yeah. Okay.

Thanks, Brad. Brad, maybe just a follow-up on the M&A question. And, you know, you guys talked about, you know, through the normal course of business, sort of adding a handful of bankers each year. I mean, would you be open to, you know, picking up a team of lenders or anything like that? I know it gets a little bit tougher when you add teams as far as culture and stuff like that, but what are your thoughts?

Yeah, I mean, that has not been the pattern historically, but I would say we'd be open to that. Joel, what are your thoughts on that?

Yeah, I am certainly open to it. That doesn't happen regularly. very often. It's fairly rare. And we've had really good success in just going after one banker at a time. And so I think I would expect that's where the majority of our ads will continue to come.

Sort of one banker at a time and then building a team. Correct.

Yeah.

Okay. Thanks, guys. You're sort of breaking up a little bit, but I think I get the picture. Thank you.

Thanks, John.

Thank you. No further questions at this time. I'll now turn it back to Brad Kessel for closing remarks.

In closing, I would 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 toward our common goal of guiding customers to be independent. Finally, I would 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 for your participation in today's conference. This concludes the program. You may now disconnect.