Independent Bank Corporation Aktie

Good day, and thank you for standing by. Welcome to the Independent Bank Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

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 Mohr, Executive Vice President and our Chief Financial Officer; as well as Joel Rahn, Executive Vice President and Head of Commercial Banking for Independent.

Before we begin today's call, I would like to direct you to 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 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 or $0.81 per diluted share versus net income of $15.6 million or $0.74 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 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 was brokered time deposits of $80.4 million or 6.9% annualized from December 31, 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 13, 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 noninterest-bearing, savings 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 6, 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 Rahn 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.

Yes. Well, thank you, Brad, and good morning, everyone. On Page 7, 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 million and $17.5 million, respectively. Our strategic investment in commercial banking talent continues to supplement our loan growth. During the first quarter, we added 2 experienced commercial bankers in West Michigan, bringing our total to 50 bankers comprising 8 commercial loan teams across our statewide footprint. Compared to a year ago, we have added a net of 5 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 C&I lending versus investment real estate was 57% and 43%, respectively. And for our commercial portfolio, our mix is 68% C&I 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 C&I 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 9. We continue to demonstrate strong credit quality. Total nonperforming loans were $27.5 million or 64 basis points of total loans at quarter end, up slightly from 54 basis points at 12/31. 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 12/31/25. It's worth noting that $4 million of total delinquency was 1 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.

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 3 basis points from the fourth quarter of 2025.

Average interest-earning assets were $5.21 billion in the first quarter of 2026 compared to $5.09 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 in the net interest margin. On a linked quarter basis, our first quarter 2026 net interest margin was positively impacted by 2 factors: The change in interest-bearing liability mix added 1 basis point and a decrease in funding costs 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 5 rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies the 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 1 basis point of modeled margin expansion.

Earning asset expansion was centered in commercial loans of $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 remained largely unchanged. Reduced exposure to lower rates is due to $75 million of notional for purchases and the termination of $87 million of short-term pay fixed 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 1 month and 49.3% reprice in the next 12 months.

Moving on to Page 14. Noninterest 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 a higher volume of loan sales.

Mortgage loan servicing net was a gain of $1.6 million in the first quarter of 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 31, 2025.

As detailed on Page 15, our noninterest expense totaled $38.3 million in the first quarter of 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 January 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 prior periods.

We recorded merger expense -- merger-related expenses of $0.3 million in the first quarter of 2026. Nonrecurring noninterest expense items totaled approximately $1.9 million in the first quarter of 2026.

Turning to Page 16 is our update for our 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 of 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 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 was an expense of $0.4 million, which was below our forecasted range.

Moving on to Page 17. Noninterest 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 originations, sales and gains totaled $130.6 million, $84.1 million and $1.3 million, respectively. Mortgage loan servicing net generated a gain of $1.6 million in the first quarter of '26, which is above our forecasted range.

Noninterest expense was $38.3 million in the first quarter, above our forecasted range of $36 million to $37 million. Nonrecurring expense items included $1.5 million accrual and litigation expense and $0.4 million in retroactive new to deposit account opening incentives attributed to accounts opened 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 repurchased in the first quarter of 2026. That concludes my prepared remarks. 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, 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 Instructions] Our first question is going to come from the line of Brendan Nosal with Hovde Group.

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 2 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?

Not measurably, Brendan. That forecast holds.

Okay. Great. Maybe digging deeper on the deposit cost side of things. Just kind of curious like 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 market to market across the Midwest. So I would love to hear what you're seeing across Michigan.

Brendan, I think it continues to be very competitive. In the Michigan markets, we've got a heavy field of credit unions. So I think oftentimes, they can lead the pack. But I think it oftentimes depends if you look at the 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. Our focus continues to be led by that commercial effort. And 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 to that portfolio. And so I'm really pleased with that. But it is competitive, no doubt.

Okay. Okay. Good. I'm going to try and sneak one more in here. The world has changed geopolitically quite a lot over the past 3 months and there could be knock-on impacts to the domestic economy. So I guess when you look at the outlook you provided for 2026, are there any areas where you're feeling either better or worse today versus when we last spoke 3 months ago?

I think -- and I'll let Joel jump in here, too. But I think we continue to be very optimistic about how we expect 2026 to unfold. 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 very solid scores for the portfolio, not a lot of change in the various bands. Of course, we lend predominantly up in that 750-plus FICO area, 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.

Yes. 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 -- 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 -- it's such a fluid environment, Brendan. So we're just watching it carefully, and we'll react accordingly.

Our next question is going to come from the line of Adam Kroll with Piper Sandler.

I'm on for Nate Race. So maybe a question on expenses. I know there were some onetime items that kind of drove them higher in the first quarter. But if I strip those out, I get to a core number around $36.4 million. So I guess, do you still feel comfortable with the $36 million 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 nonrecurring.

Got it. And then how should we think about the cadence of cost saves associated with the deal?

Yes. So it was announced 50% phased in, in year 1 and fully phased in, in year 2. And just to point out, that's 50% half a year.

Got it. And maybe a last one for me is just, Gavin, I was wondering if you could provide us with some updated thoughts on how you're thinking about deploying some of the excess liquidity brought over from the HCB deal?

Yes, we're not going to -- we're not ready to give direction 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.

[Operator Instructions] 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.

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 in 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.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Good day, and thank you for standing by. Welcome to the Independent Bank Corporation acquisition of HCB Financial Corp. Conference Call [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Brad Kessel, President and CEO. Please go ahead.

Good morning, and thank you for joining us to discuss the merger of Independent Bank Corporation and HCB Financial Corp. Joining me today is our CFO, Gavin Mohr, our EVP of Commercial Banking, Joel Rahn, and we are very pleased to also have Mark Kolanowski, the CEO of HCB Financial Corp. with us as well. Before we begin today's call, please note the cautionary note regarding forward-looking statements and disclosures on Slide 2.

Turning to Slide 3, titled Michigan's most people focused Bank, this transaction represents a compelling cultural and strategic fit that reinforces our winning formula for growth in Michigan. From the time my discussions with Mark began it was clear how similar our institutions truly are. At Independent, we run a community banking model, focused on our customers, our communities and our employees. And in HCB, we found a partner that lives by the same blueprint and is deeply aligned from day 1. Strategically, I'm excited about this partnership as it builds scale in high-growth quarters with a high-quality nearly $600 million asset franchise that shares our D&A.

It supports our strategy to outlocal the competition by pairing Highpoint's deep community routes with Independent's sophisticated commercial lending capabilities. Beyond the cultural and strategic fit, another key attribute that makes this partnership so attractive is HCB's exceptional financial profile. They are a high-performing franchise characterized by strong profitability and significant liquidity.

HCB is coming to this partnership with a 67% loan-to-deposit ratio, which provides a meaningful runway to deploy capital into our robust commercial lending pipeline. A cornerstone of our winning formula has always been a stable, low-cost core deposit base. In partnering with HCB, we are bringing on low-cost core deposits that will serve as an additional funding source for our combined $6 billion organization.

Perhaps most importantly, HCB possesses an ultra clean credit profile that is truly a standout in today's environment. Their balance sheet is pristine featuring a negligible 0.0 or 3 basis point NPA to asset ratio and an incredible track record of 0 net charge-offs since 2020. This conservative credit culture is the bedrock of our combined organization and ensures it is -- this is a low-risk transaction for our shareholders. I would now like to turn the presentation over to Mark to share some remarks on HCB. Mark?

Well, good morning, and thank you, Brad, for introducing us, and welcoming us to the team. We really look forward to working with you and the entire team in the future. Turning to Slide 4. Let me start by sharing a little bit of information about HCB Financial for those of you who may not be familiar with us. Just like Independent, we're deeply rooted here in the state of Michigan. We're headquartered in Hastings, it's been our home since 1886.

We operate 7 retail branches across Barry, Calhoun, Allegan, Kent and now Ottawa Counties. And one of our primary competitive advantages is that we are a true employer of choice in our markets. People really love working on our team. One of the most exciting aspects of this partnership is that our employees and customers will continue to see the same faces that they know and trust. As we spend time with Brad and the entire Independent team over the past few months, it became clear that IBCP is essentially a mirror image of Highpoint from a cultural perspective.

So by joining forces with Independent team, this isn't about changing who we are, it's about becoming a stronger community bank, which has always been our goal, now backed by a significant deeper toolkit of financial services for our customers. We've built an exceptional bank with a strong foundation of profitability and credit quality. Our $354 million loan portfolio is well diverse and our 67% loan-to-deposit ratio highlights the depth of our core deposit franchise and the significant liquidity we bring to this partnership. We take great pride in the value we bring to our clients, we believe we are strategically well positioned to align with Independent because of our similar cultures and most importantly, because of our commitment to the community banking model.

So with that, I'll turn the presentation back to you, Brad.

Thanks, Mark. On Slide 5, you can see the attractive Michigan markets this deal opens to us. Their newly opened Hudsonville location provides us a second location in Ottawa County, one of Michigan's fastest-growing counties. In 2025, we announced the successful recruitment of several talented individuals and the opening of an office in Kalamazoo County. Highpoint 7 branches effectively bridge the geographic gap between our primary hubs in Grand Rapids and Lansing and planned growth into Southwest Michigan allowing us to better serve the corridor stretching across Barry, Calhoun, Allegan, Kent and Ottawa Counties.

Slide 6 highlights Highpoint's low-cost core deposits and strong credit quality. HCB's deposit franchise compares very favorably to Michigan peers. HCB's cost of total deposits has remained consistently below peer banks across multiple cycles by a significant margin. This is driven by a deeply loyal relationship-driven customer base that has been built through HCB's 140-year legacy. On the credit side, Highpoint's cumulative net charge-offs since 2015 are just 33 basis points versus the 87 basis point average for Michigan banks.

Additionally, NPAs have been substantially below peer averages, underscoring HCB's conservative credit culture, which is well aligned with the Independent family. This announcement is the result of a very disciplined approach to M&A, building relationships with the right partners over time.

I'll turn it over to Gavin to walk through the transaction terms and assumptions. Gavin?

Thanks, Brad. As you have highlighted, the cultural fit is exceptional, supported by a shared emphasis on financial discipline and shareholder alignment that meaningfully underpins the transaction. This transaction materially adds to our balance sheet flexibility while enhancing earnings power.

Turning to the transaction metrics on Slide 8. Under the terms of the agreement, Independent will acquire 100% of HCB's outstanding shares for an aggregate value of approximately $70.2 million based on yesterday's closing price of $33.13. The specific terms include a fixed exchange ratio of 1.59 IBCP shares plus $17.51 in cash for each HCBN share. This represents a consideration mix of 75% stock and 25% cash, allowing us significant capital to improve our earnings profile in a franchise accretive manner.

The price reflects a 148% tangible book value and 11.5x 2025 earnings. On a pro forma basis, including fully phased-in synergies the multiple is very attractive, 6.6x 2027 estimated earnings. One HCB Director will join each of the Board of Directors of Independent Bank Corporation and Independent bank and we expect to put retention agreements in place for key Highpoint personnel. We expect to close in early third quarter of 2026.

Now let's cover the impact and assumptions on Slide 9. Our M&A experience and the partnership with HCB's team resulted in a detailed due diligence process and a strong plan to successfully execute this conservatively modeled transaction. To begin, we have taken a conservative approach on the pro forma balance sheet, HCB's balance sheet is very liquid with a 67% loan-to-deposit ratio. While we forecast a gradual move of their loan-to-deposit ratio to the low 70% range in 2027, our model intentionally excludes any redeployment of excess liquidity, preserving meaningful upside potential.

Additional key modeling assumptions are as follows: we expect cost savings equal to 40% of HCB's noninterest expense, which will be fully recognized in 2027. The cost savings primarily come from identified FTE overlap, while system efficiencies will provide some additional savings. We expect onetime pretax merger expenses of $8.8 million, which are fully realized in our pro forma tangible book value estimate at closing.

Credit assumptions are purposely conservative, and we have modeled a gross credit mark of $4 million or 1.1% of HCB's loans. I would highlight that our internal credit team did a review of over 50% of the commercial loan relationships that ended up reviewing over 36% of the entire loan portfolio. As Brad highlighted earlier, HCB has had a very strong track record of pristine credit quality, and we are comfortable with our estimated credit mark is prudent in today's environment.

Interest rate marks include a $9.2 million pretax loan write-down which will be accreted over 4 years. And on the fixed asset side, we estimate there will be a $2.4 million pretax write-up. Taking into account all the aforementioned transaction metrics and our conservative modeling assumptions, this combination produces highly compelling pro forma financial impacts for our shareholders. Specifically, we anticipate the transaction will be approximately 6% accretive to our 2027 earnings per share with fully phased-in cost saves.

This growth was achieved with a manageable 4% tangible book value dilution at closing. Consistent with our disciplined approach to capital management, we estimate a 3.4-year period to recover that dilution using the crossover method. Post transaction, we expect to maintain a strong 11.5% CET1 ratio, which ensures Independent remains well capitalized and maintains the flexibility to continue our organic growth and flexibility for opportunistic share repurchases.

Brad, I'll turn it back over to you to wrap it up.

Thanks, Gavin. We'll go to Slide 10. In summary, this is a low-risk transaction with highly compatible cultural DNA that benefits from our successful integration track record. It enhances our scale, delivers high-quality deposits and a clean credit profile and allows us to deploy HCB's excess liquidity through Independent's strong commercial loan pipeline. We are proud to welcome the Highpoint team to the family. This is a true backyard deal where customers win through continued local service and a shared commitment to our Michigan communities.

With that, we would like to open up the call for questions.

[Operator Instructions] And our first question comes from Brendan Nosal of Hovde Group.

I guess just starting off here, this is your first transaction since Traverse City, which was announced in late 2017. I guess there have been a lot of deals in Michigan in the intervening years. So I guess what was it about this specific transaction and partner that made you get off the sidelines after a pretty long absence in M&A? And I totally get all the strategic merits you pointed out, but just kind of curious, what was it about this deal that really piqued your interest?

Brendan, I would say you're correct. Our last deal was announced in 2017, closed 2018. And you referenced getting off the sidelines. I guess, yes, there have been a number of mergers announced over that time period and Independent has had the opportunity in quite a few instances to actually participate in those processes. Yet for either sticking to a disciplined pricing strategy or not getting comfortable with either the balance sheet or the culture, we were not able to, over that period, grow through acquisition, which really has resulted in our primary growth strategy of being organic, and it's worked really, really well for us over the years.

In this case, I've known Mark over the years and had a lot of respect for him and his leadership. We've been involved in trade association boards together, and he's a highly respected banker in the Michigan market. And we've watched his bank and its performance over the years. And obviously, it's, again, in our backyard, it's on the south side of the Grand Rapids footprint and running down the sort of the 131 corridor south of the I-96 corridor. And it really is just -- it's a nice fit.

And so if you go back, it's probably in 2024, I had a lunch with Mark, and we just sort of were talking about the industry and our banks. And it was really out of that conversation that we agreed to continue to stay in touch and maybe have further conversations, and those did take place through 2025. And the more we talked I think the more interested both parties became and in partnering. And eventually, we were able to reach an agreement that both banks could live with. And so that's sort of the summary of going back to the Traverse City deal and how we got to this deal, Brendan.

That's really helpful color. Maybe one more for Gavin. Just on kind of the liquidity deployment opportunity, as you noted, a lot of cash on the balance sheet. And it doesn't sound like you've modeled too much in the way of deployment in kind of the earnings accretion. So maybe, Gavin, just talk about how you think about deploying that liquidity over time. And to the extent that there is upside to the accretion number, maybe just kind of walk through how you see that playing out?

Yes, Brendan. So we did not model any liquidity deployment. Clearly, with their loan-to-deposit ratio the makeup of their securities portfolio, there's certainly opportunity there. We're going to continue to work the balance sheet like we do quarterly or have been quarterly and figure out what the best opportunity is at the time. And we -- ideally, on a longer-term basis, this will -- a lot of these -- this liquidity will flow into our commercial pipeline for funding. But again, we've intentionally modeled this conservatively and do not include that.

And our next question comes from Nathan Race of Piper Sandler.

Brad, I was wondering if you could just provide a little bit more background in terms of how this acquisition came together. It sounds like you and Mark have known each other over the years. And you mentioned in response to earlier question that there's been a number of opportunities on the M&A front over the years that didn't really fit your pricing box. So just curious, was this more of an auction or process that HCB ran and just kind of how you arrived at the pricing here?

Sure. So this was not an auction. This was the result of conversations between Mark and I. Mark shared with me sort of leadership succession plans that were in place at his bank and he's got a really talented team that we look forward to bringing over to the Independent team. Of course, also, he shared with me that where they were in terms of their technology and we shared where we were in our technology and related contracts and whatnot.

And so from a timing perspective, it made sense just to have conversations. And then ultimately, those conversations led to, okay, so getting into pricing, right? And I'll admit, I think this is a fully priced deal, but it's worthy of a full price. When you think about the proximity to the existing Independent branches, when you think about the balance sheet and it's lower risk profile as well as strong low-cost core deposit base. And so this is one that we felt it was important that we move forward on.

And fortunately, Mark and his Board felt the same. And so I think we're excited. A lot of times, when M&A deals take place and we've been on the other side of this, where in our marketplace large bank M&A takes place and they end up really disrupting the customer base and the employee base. And you actually give away a lot of the value of the franchise.

And I think we have a real opportunity here to not take that step back, rather preserve the value of the franchise and actually taken another number of steps forward. Mark and I have spoken about a number of relationships and/or businesses that are in their market today that they have not been able to serve simply because they don't have the capacity. And so we think there's some significant upside there. So Nathan, hopefully, that gives you a little more color on how we get to where we are.

Yes, absolutely. Very helpful. Maybe a question for Gavin on the pro forma margin outlook. I think based on the guidance that you guys provided in January, the margin should get up in the kind of 3.70% to 3.80% range by the back half of this year. I think you're picking up margin from HCB and kind of the 3.40% range more recently. So with some of the moving pieces and some of the liquidity redeployment to loan growth that you guys have just at the legacy independent franchise over the next couple of quarters, is the expectation that the margin impact from this deal should be pretty limited in terms of any dilution that you could see upon closing in the third quarter?

Yes. Well, yes. So we think from like 2027 fully phased in, Nathan, margin, maybe start to get a full year look. We're not modeling any impact. So we basically are flat. So does that give you what you need? I mean in the back end of this year, could be a little bit of compression, but I think we continue to grind higher.

Yes. Got it. And if I could just ask one more, not much impact to capital ratios from this acquisition just given kind of the digestible size of the asset base and franchise you're picking up. So just curious, maybe for Brad, what you're seeing in terms of additional M&A opportunities? Do you expect to see more activity in Michigan that could fit within your box either later this year or next year?

Well, I think at this point, I think there will be more M&A in Michigan as well as across the country. I mean that's just been the trend, 4% to 5% of the overall population of banks will continue to compress. But Independent, we're focused really on the execution of the integration of HCB at this point. We've got a lot of time and energy invested in this and more to come and so our focus will be on that as well as continuing the great momentum that we've got just with our organic growth. We continue to see the opportunity of adding talented bankers to our team. We've done a little bit more of that here in the first quarter of '26. And so that's going to be our focus at this point, Nathan.

And our next question comes from Matt Renck of KBW.

Filling in for Damon. My first question, just on HCB's loan portfolio, it says they have -- that other makes up 12% of the portfolio. And I was just kind of curious what comprises that?

Well, and, Matt, I don't...

It's the municipal.

It's the municipal book, Mark?

Yes. Yes. Yes.

So it's municipal financing.

Okay. Got it. And then just one question. I was just kind of hoping since this is -- you guys are commercial growth type of story. If we can get an update on how your clients are doing with regard to like the macro and specifically oil prices? Is it starting to affect like your outlook at all or if clients are starting to worry about it impacting their business, maybe starting to delay deals, anything like that?

That's a great question. Let's have -- Joel, you're here, why don't you share your thoughts on that.

Yes. It's a great question. The answer is not yet. There's not -- obviously, everyone is concerned with what's going on and how it could ripple through the economy. But no, it's too early to see any impact yet. So it just -- we're just watching it closely, stay close to our customers. But despite the world events, our business customers are performing well. So set that big storm cloud aside, our customers are performing well. The core economy is coming along and our pipeline is strong. So I can't predict what's going to happen in -- with global events, but we've not seen an impact yet.

Okay. Got it. Just kind of as a follow-up to that, do you think is there a time line where you would start to kind of worry more if it extends another month or another week? Or is it still too hard to tell?

Well, this is just my editorial view, but it's all about the energy prices. And it's about the -- that's the global economic shock in my opinion. And that's the call it, tax that could hit all of us consumers and businesses in energy costs one way or the other. So to me, that's the barometer. This morning was not particularly pleasant in terms of oil prices. So -- but it fluctuates on the daily news or the hourly news. So we just continue to watch it, but I'm just keeping a close eye on energy prices.

Our next question comes from Bonnie Gettys of Barry Community Foundation.

Hello and congratulations to Highpoint and to Independent Bank. My question comes from a community partner. And we are so thankful for our relationship with our local community bank, Highpoint Community Bank and Independent Bank. We hope that you will continue the tradition of really looking at deeply into your community and playing well in the sandbox with all of us.

Thank you for joining us on today's call, and I can commit to you that you're going to see more of the same that you experienced with Highpoint. That's how Independent operates across the 25 county footprint that we have today. And we have long understood that the bank can only be as strong as the communities in which we operate. So if you -- and I look forward to meeting you in person and I have probably some -- I have some material I can share with you that can show our track record where we are a terrific community partner.

Awesome because we have some data to share with you, too, about how we can strengthen those community relations. So thank you so, so much.

Thank you, Bonnie.

Thank you. This concludes our question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Independent Bank Corporation Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now 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 Mohr, 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 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. 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 current drive integrity, people focus 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 $0.89 per diluted share versus net income of $18.5 million or $0.87 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 '25 include an increase in net interest income of $1 million. That's 2.2% over the third quarter of '25, a net interest margin of 3.62%. That's 8 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 30, 2025. Net growth in total deposits, less broker deposits of $57.5 million or 4.8% annualized, an increase in tangible common equity ratio to 8.65% and the payment of a $0.26 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 continue 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 nonperforming 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 5 of our presentation. Deposits totaled $4.8 billion at December 31, 2025, an increase of $107.6 million from December 31, '24. 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 3 portfolios are up on a year-over-year basis.

On Page 6, we have included in our presentation an 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 for 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 continued 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 of $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've added -- we added an experienced banker in Metro Detroit. And in total, we have 49 bankers comprising 8 commercial loan teams across our statewide footprint. During the year, we added a net of 5 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 and are 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 9. 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 930. It's not reflected on the slide but worth noting that we realized net charge-offs of $1.6 million or 4 basis points of average loans for the year. This compares to $0.9 million or 2 basis points in 2025 -- 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 8 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 2 factors: change in interest-bearing liability mix added 9 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 negative 1 basis point.

On Page 13, we provide details on the institutions interest rate risk position. The comparative simulation analysis for the fourth quarter of '25 and third quarter of '25 calculates the change in net interest income over the next 12 months under 5 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 9 basis points of modeled margin expansion. The NIM benefited from mix 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 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, a 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 1 month and 49.2% reprice 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 of 2025 compared to $7.8 million in the prior year quarter. 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 31, 2025.

As detailed on Page 15, noninterest 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 onetime charges relating to special projects. Income tax expense 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 3 months 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 full 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 5 to 7 basis points in the first quarter 2026 with successive quarterly increases of 3 to 5 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 increased 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 noninterest 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, investing in and leveraging our technology while striving to be Michigan's most people focused bank.

At this point, I would now like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Brendan Nosal of Hovde Group.

Maybe just start off here kind of on 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 if you added 5 commercial bankers in 2025, like what would the ambition set look like for banker ads in '26?

Well, I'll take -- Brendan, this is Joel. Good question. I would think in terms of our talent acquisition expectation, it's similar. We'll have some departures with retirements, et cetera, that we have to cover. But I think a net add of 4 to 5 bankers this year would be reasonable to expect. And in terms of opportunity in Southeast Michigan, we do think there will be opportunity there.

It's just beginning. And so there's typically the [indiscernible] that window opens first and it can be some time before the customer feels the impact. But we we're watching it closely and feel that it will be accretive for us.

Maybe one more for me 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 is a high single-digit organic grower. So I guess just given the market opportunities you see what was pushing that range down to the mid-single-digit area? And is there upside if payoffs behave a little more rationally in '26.

Brendon, this is Brad. I'll jump in there, and I'd 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 and where we've been investing in talent has been in Joel's group as the commercial banking team. And that has driven what I'd 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 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 double-digit growth in commercial, but the lower level of net growth in mortgage and consumer get us to that somewhere mid-single-digit overall loan growth projected for 2026. Does that make sense?

Yes. That's a helpful framework to view it through. I guess I'll sneak in one more on a 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?

Yes. So we've got about $120 million of forecasted runoff in securities for 2026, and that will fund loan growth. So we, again, intend to continue to remix that asset mix into next year -- through next year.

Our next question comes from the line of Damon DelMonte of KBW.

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 in the forthcoming quarters after that? And then what were some of the drivers behind the optimism for a rising margin?

Yes. So we're looking at 5 to 7 basis points of expansion in Q1 and then Q2, 3 and 4, we're forecasting 3 to 5 basis points of expansion each quarter. That gets you to the overall forecast of 18 to 23 basis points on a year-over-year full year basis. What's going on there is a couple of things.

One, just the benefit of -- we have 2 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 5 to 7-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 to the continue in of below-market assets as we go into 2026.

Does that make sense, Damon?

It does. Yes. 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 give -- wondering what your appetite is for buybacks? And then also, 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.

I'll start with capital and then hand it over to Brad. I would just say that we are really excited about the capital build and outlook for the organization. And 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%, the Board approved, 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 really excited about the capital position today.

Yes, very good, Gavin. And in regards to the M&A and M&A in the Michigan market. Of course, you've got the Fifth Third, Comerica, which while 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.

Across the state, today, we have 80 plus or minus independent Michigan-based community banks. I think we'll see consolidation at a similar pace to what we've seen historically in Michigan, and that's probably somewhere between 4% and 6%, who they are, I'm not sure. Our appetite, we would be very interested depending on the specifics. And so that would include sort of strategically or geographically, how does it fit the footprint the overall size and not wanting to maybe -- well, I 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 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 is it could very well happen but it's not a requirement for us to continue the success that we've experienced historically over the years.

Our next question comes from the line of Nate Race of Piper Sandler.

Gavin, just going back to the margin discussion, could you update us just in terms of how much cash flow are coming off the bond portfolio each quarter and what the magnitude of or the amount of loans that you have that are big that are repricing higher and what that amount looks like in terms of that yield pickup?

Yes, give me 1 sec. So the bonds is -- 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...

Maybe ask another question while you dig that up, Gavin. Maybe, Brad, just thinking more holistically about the balance sheet composition. Just curious what the appetite is to maybe trade some of your excess capital. And obviously, you guys are going to be building capital at a pretty strong clip just given the profitability profile this year. But I just wanted 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?

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

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

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

We didn't.

Well, we said the provision in 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, recent history has been really, really well. 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 may be a little bit higher, could be modeled on a go-forward basis.

I agree with that.

Nathan, I have your -- the details of 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 speeds CPRs.

Okay. And that's like -- on the commercial book or just overall, Gavin?

That's fully -- I mean 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, $228 million. My totals were off. Let me...

Don't worry about it Gavin. I appreciate it.

Yes, yes, you're good. It's -- total commercial -- around $220 million for the year to $563 million. So yes.

[Operator Instructions] and our next question comes from the line of John Rodis of Janney.

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, 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, or...

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

Yes. So we haven't met 12% to 14% of total assets is still a target for us in terms of triggering investment purchases. So that's still the strategy there John.

Brad, maybe just a follow-up on the M&A question. And you guys talked about through the normal course of business sort of adding a handful of bankers each year. I mean, would you be open to 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?

Yes. 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?

Yes. I'm certainly open to it. That doesn't happen very often it's fairly rare. And we've just -- we've had really good success in just going after 1 banker at a time. And so I think I would expect that's where the majority of our ads will continue to go.

Sort of 1 bank and then building 19.

I'm showing 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 does conclude the program. You may now disconnect.

Hello, everyone, and welcome to the Independent Bank Corporation Reports 2025 Third Quarter Results. My name is Ezra, and I will be your coordinator today. [Operator Instructions] I will now hand you over to Brad Kessel, President and CEO, to begin. 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 third quarter 2025 results. I am Brad Kessel, President and Chief Executive Officer. Joining me this morning is Gavin Mohr, EVP and Chief Financial Officer; and Joel Rahn, Executive Vice President and Head of our 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 can be accessed 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.

I am pleased to report on our third quarter 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.

Today, Independent Bank Corporation reported third quarter 2025 net income of $17.5 million or $0.84 per diluted share versus net income of $13.8 million or $0.65 per diluted share in the prior year period. I am proud of our team's performance and pleased to report continued momentum for most of our key metrics.

Loan balances grew at an annualized rate of 3.2% and total deposits less brokered time deposits increased by 13% annualized. We achieved growth in our net interest income, both sequentially and year-over-year. In fact, this is the ninth consecutive quarter we have increased our net interest income. Our net interest margin displayed a small decline on a linked quarter basis primarily due to the acceleration of unamortized issuance costs on sub debt we redeemed in the third quarter. I would characterize the NIM is stable when adjusting for this event.

Expense management remains a strength as reflected in our third quarter efficiency ratio of 58.86%, which demonstrates the effectiveness of our recent investments. These solid fundamentals supported a 10.2% year-over-year increase in tangible common equity per share and strong returns, including a return on average assets of 1.27% and a return on average equity of 14.57% for the quarter. Despite market uncertainty, our credit quality remains strong with large credits at low levels.

Nonperforming assets increased from 0.16% of total assets to 0.38% on a quarter-over-quarter basis, primarily as a result of one commercial relationship where the borrower is experiencing financial difficulties. Our annualized net charge-offs continue at historically low levels, 4 basis points through the first 3 quarters of 2025. The allowance for credit also stands at 1.49% of total loans. I am optimistic, we'll finish 2025 strong and I'm excited about our prospects to grow our customer base and earnings in 2026.

Moving to Page 5 of our presentation. Total deposits as of September 30, 2025, we're now $4.9 billion. Overall, core deposits increased $148.2 million during the third quarter of 2025. On a linked quarter basis, business deposits increased by $67.5 million. Municipal deposits increased by $82.5 million. These were offset by a small decrease in retail deposits.

The deposit base today is comprised of 46% retail, 37% commercial and 17% municipal. All three portfolios are up on a year-over-year basis.

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 the Fed effective rate. For the quarter, our total cost of funds increased by just 6 basis points to 1.82%.

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.

Well, thanks, Brad, and good morning, everyone. On Page 7, we share an update of the loan activity for the quarter. We had another solid quarter of commercial loan growth with that portfolio increasing $57 million. Total loans grew $33.9 million as both the mortgage and consumer loan portfolio is contracted in the quarter. This is attributable to seasonality as well as disciplined underwriting. .

Year-to-date, we've grown the commercial loan portfolio of $188 million, representing 12.9% annualized growth. Our ongoing strategic investment in commercial banking talent continues to supplement our growth. We added three experienced commercial bankers in the third quarter, bringing our team to 50 bankers across our statewide footprint.

As noted in previous quarters, our new loan production in each segment continues to come on at yields above the respective portfolio yield.

Within the commercial loan activity, the mix of C&I lending versus Investment Real Estate for the quarter was 58% and 42%, respectively. Looking ahead, our commercial pipeline remains robust, so we expect strong loan origination in the fourth quarter.

Page 8 provides detail on our commercial loan portfolio. There's not been any significant shift in our portfolio concentrations with the portfolio remaining very well diversified. C&I lending continues to be our primary focus. And as noted on the graph, that category comprises 70% of our overall commercial portfolio at 9/30. Our largest segment of the C&I category is retail, which includes a variety of truck equipment and marine dealerships and is performing well. Another significant C&I category is manufacturing which contains $142 million or 6.7% of the portfolio of automotive industry exposure that we continue to monitor closely for any tariff-related impact.

Key credit quality metrics and trends are outlined on Page 9. Overall, credit quality continues to be very good, as Brad alluded to a moment ago. Total nonperforming loans were $20.4 million or 48 basis points of total loans at quarter end, up from 20 basis points at 6/30. This is primarily due to one investment real estate commercial relationship as transit is in workout. Past due loans totaled $5.1 million or 12 basis points, down slightly from 16 basis points at 6/30. It's not reflected on this slide, but worth noting that our net charge-offs are $1.2 million year-to-date or 4 basis points on an annualized basis.

At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of the year.

Thanks, Joel, and good morning, everyone. I'm starting on Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. The reduction in our total risk-based capital ratio for the quarter was primarily due to the payoff of $40 million of subordinated debt during the quarter.

Turning to Page 11. Net interest income increased $3.5 million from the year ago period. Our tax equivalent net interest margin was 3.54% during the third quarter of 2025, compared to 3.37% in the third quarter of 2024 and down 4 basis points from the second quarter of 2025. The decrease in net interest margin on a linked quarter basis is primarily due to the acceleration of unamortized issuance costs on the subordinated debt we redeemed in the third quarter.

Average interest-earning assets were $5.16 billion in the third quarter of 2025 compared to $4.99 billion in the year ago quarter and $5.04 billion in the second quarter of 2025.

Page 12 contains a more detailed analysis of the linked quarter decrease in net interest -- or increase in net interest income and the net interest margin. On a linked quarter basis, our third quarter '25 net interest margin was positively impacted by two factors: the change in Earning Asset Mix was 2 basis points and an increase in Earning Asset Yield was 1 basis points. These were offset by a change in funding cost of 4 basis points and the acceleration of unamortized issuance cost on the subordinated debt we redeemed in the third quarter of 3 basis points.

On Page 13, we provide details on the institution's interest rate risk position, the comparative simulation analysis for the third quarter '25 and the second 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. The shocks in areas consider immediate permanent and parallel rate changes. The base case modeled NII slightly higher during the quarter given earning asset growth and slight margin expansion.

Asset yields were augmented by a shift in asset mix with good commercial loan growth partially funded by runoff of lower-yielding investments, mortgages and consumer loans, an increase in overnight liquidity offset some of this mix benefit. Funding costs benefited from the retirement of the holding company subordinated debt issuance.

The NII sensitivity position shows slightly more exposure to declining rate environment. Asset repricing increased due to strong growth in variable rate commercial loans, HELOCs and overnight liquidity. Some of the increase in asset repricing was offset by purchase floors, currently 38.4% of the assets repriced in 1 month and 49.8% reprice in the next 12 months.

Moving on to Page 14, and Noninterest income totaled $11.9 million in the third quarter of 2025 as compared to $9.5 million in the year ago quarter and $11.3 million in the second quarter of 2025. Third quarter net gains on mortgage loans totaled $1.5 million compared to $2.2 million in the third quarter of '24. The decrease is due to lower profit margins and a lower volume of loan sales.

Positively impacting noninterest income was $0.1 million gain on mortgage loan servicing net. This comprised of $0.6 million or $0.02 per diluted share after tax loss due to change in price $0.9 million decrease due to paydowns and a $0.1 million loss on sale of originated servicing rights that was offset by $1.6 million of servicing revenue for the third quarter 2025. 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 31, 2025.

As detailed on Page 15, our noninterest expense totaled $34.1 million in the third quarter of 2025 as compared to $32.6 million in the year-ago quarter and $33.8 million in the second quarter of 2025. Compensation expense increased $1.1 million, primarily due to higher salary costs and higher medical costs that were partially offset by lower incentive-based compensation expense and higher deferred loan origination costs due to higher commercial and mortgage on production.

Data processing costs increased by $0.4 million from the prior year period, primarily due to core data processor annual asset growth and CPI-related cost increases as well as the annual increases and other software solutions.

Page 16 is our update for our 2025 outlook to see how our actual performance during the third quarter compared to the original outlook that we provided in January 2025. Our outlook estimated loan growth in the mid single digits. Loans increased $33.9 million in the third quarter, a 2025 or 3.2% annualized, which is below our forecasted range.

Commercial loans increased in the third quarter of 2025, while mortgage and installment loans decreased. Year-to-date loan growth is $159.5 million or 5.3% annualized, which is within our forecasted range. Third quarter 2025 net interest income increased 8.4% over 2024, which is within our forecasted range of 8% to 9%. The net interest margin was 3.54% for the current quarter and 3.37% for the prior year quarter and down 4 basis points from a linked quarter.

The third quarter 2025 provision for credit losses was an expense of $2 million, which is been our forecasted range.

Moving on to Page 17. Noninterest income totaled $11.9 million in the third quarter of 2025, which was below our forecasted range of $12 million to $13 million in the third quarter. Third quarter 2025 mortgage loan originations, sales and gains totaled $145.6 million, $101.6 million and $1.5 million, respectively, Mortgage loan servicing net generated a gain of $0.1 million in the third quarter of 2025, which is below our forecasted target.

Noninterest expense was $34.1 million in the third quarter, below our forecasted range of $34.5 million to $35.5 million. Our effective income tax rate was 17.3% for the third quarter of 2025. Lastly, there were 13,732 shares of common stock repurchased for an aggregate purchase price, $0.4 million in the third quarter.

That concludes my prepared remarks. 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 the last quarter of 2025 and head into 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 would like to now open up the call for questions.

[Operator Instructions] Our first question comes from Brendan Nosal with Hovde.

Just starting out here on this quarter's commercial banking hires, I think you said that there were three new hires this quarter. Can you just offer some color on what the area of expertise is within commercial specifically, what markets they were added? And what sort of institutions did they come from?

Yes, Brendan, this is Joel. I'll take that one. The -- all three of them, very experienced at a minimum level of experience was years, and two of them are over 20 years in Commercial Banking, all in Southeast Michigan. And -- which is one of the areas that we look at strategically, no surprise, is continuing our growth. It's the largest MSA that our bank operates in. And two came from very large regional and one came from a small regional.

Okay. Fantastic. Maybe just to piggyback off that. Can you just talk about the continued opportunity set from market dislocation just given another large deal in the state of Michigan, whether it's on the client side or opportunities for additional banker ads?

Sure. That recipe has worked really well for us, Brendan, being an attractive culture for bankers that find themselves part of a larger organization, primarily that want to get back to more of a community banking organization. That has worked well for us. We continue to look for those opportunities. And it looks like the market is going to provide more of those as the industry continues to consolidate. So we think there is ongoing opportunity for us to garner talent. And strategically commercial banking relationships as well.

Okay. Perfect. I'm going to sneak one more in here. Just looking at funding costs for the quarter, a couple of basis points of an uptick, which I've certainly seen from a handful of others, if not many others this quarter. Maybe just talk about how competitive the environment for core funding is in your markets and how you think you and the market at large in your state will respond to additional Fed cuts?

Well, I'll let -- our growth for the quarter -- Brendan, this is Gavin. Thanks for the question. Our growth for the quarter came in municipal and commercial. So I'll let Joel maybe talk high level how his treasury management team is viewing that and then I can maybe fill in if I have something to add.

It's no surprise. It's quite competitive. And we just continue to focus our we can't control the overall market. We've got to be competitive to win those relationships. But our team is just focused on comprehensive relationships to really grow both sides of our balance sheet. So the commercial team, including our country management group is very focused, and we continue to make good inroads in the market. So -- but yes, it's competitive, and we're not seeing that landscape changing.

I would add, Brendan, for the 6 basis point increase for that had to do with change in mix. And then two of it was just where deposits were landing in the tiers. So we saw a very, very healthy deposit growth. A lot of those were municipal funds tax collection for the quarter, and they were -- they're slotting in those deposits at the higher rate tiers within the product offering.

Our next question comes from Nathan Race with Piper Sandler.

Yes. So maybe a question for Gavin to start just starting on the margin. If we strip out the impact from the sub debt, the margin was roughly stable and I think last quarter, you mentioned one or two cuts in the back half wouldn't have a significant impact on the margin. So I guess do you still feel the margin can remain roughly stable even with an additional cut in December and just how you're thinking about the margin in 2026?

Yes, I do. So A couple of comments on the quarter. We had -- we disclosed the 3 basis points relative to the cost associated with the sub debt issuance. And the other piece, we were a little heavier in liquidity than we maybe would target. So if I said we had excess liquidity of $50 million. That had another 3 basis points of impact on the margin for the quarter. So going in here to the year-end with the forecasted cuts, I do anticipate to expect the margin to be fairly stable or in this -- around where we're at today.

For the 2026, just on a longer-term horizon, we still have benefits of the remixing coming from just lower yielding assets. and then the repricing effect of lower-yielding assets. So the there's still tailwind there that we're really optimistic about.

And could you remind us how much you have in terms of securities or lower-yielding fixed-rate loans repricing over maybe the next 12 months?

Yes. So the security portfolio is about $138 million at 3%. And then if I look at fixed rate loans, I'll just give you -- I don't really have it broken out in the strata by yield, but fixed rate loans will be -- in total, there'll be $438 million repricing in the next year. With an exit rate of 5.59%. So we're calculating that's about 120 basis points of pickup.

Got it. That's super helpful. Maybe just switching to credit. I was wondering if you could expand on the one investment real estate commercial relationship you called out that migrated to nonaccrual during the quarter, maybe just what industry, how large is the exposure? And if there was a specific reserve allocated during the quarter? And just any color there?

Nathan, this is Brad. I'll jump in on that. So first off, I'd say that we've had -- the portfolio has been so clean for so many quarters, year after year. That this one stands out. And so it -- we are probably going to be somewhat, I'd say not sharing a lot on the details other than -- we feel like we are more than adequately reserved on the credit, and we are working with the borrower to get from point A to point B. And and we're optimistic we can get through this. So I think we'll limit our comments to that.

Our next question comes from Peter Winter with D.A. Davidson.

I wanted to just follow up on credit. It really has garnered quite a bit of attention this quarter that we had a few profile loans that went bad, but the question is, are you starting to see any signs of credit weakness in commercial borrowers are as you approve loans during loan committee. I mean if I think about economic growth, it's slowing job growth has been weakening, just credit in general, please.

Yes. Peter, that's a great -- I'm going to let Joel take the first shot of that and what you just share what you're seeing.

Yes. Peter, I appreciate the question. And as Brad said, we've got to -- and we were very straightforward to say it's one primary borrower that has popped up this quarter. If I look at the rest -- or as I look at the rest of our customer base, performance at the individual business level still continues to be solid. I don't have any sort of systemic industry-specific issues that we're watching. And our watch list, absent the one credit that we've highlighted, our watch list overall percentage is still extremely low by historical standards. So we're just -- we're not seeing it. And which I'm pleased about.

But yes, the economy in Michigan is still -- I would characterize it as stable. We watched the automotive industry very carefully, especially in the early part of this year. That actually has held up quite well. Our team was just updated with an automotive industry analyst comments last week at a team meeting. And there's some turmoil within the supply base in terms of EV versus internal combustion. So if someone had all their eggs in the EV basket, they might be feeling strained. We've not seen that in our customer base. It's pretty well diversified. And so the Michigan economy, I would characterize is still very stable.

Yes. And I think it's really good to all. And I would just put in context, so the loan book today is $4.2 billion. What Joel was referencing was 50% of that is commercial. And then the other, the balance, 36% is mortgage, and then we have 13% installment.

An exercise that we do several times per year is rescore the credit scores and the entire portfolio of retail, so mortgage and installment. And in the rescores, we're not seeing really a significant decline in our borrowers' payment performance. So we feel good about that. So we like the diversity. And we are -- continue to be very bullish about Michigan and in our outlook as we go forward.

Great. That's great color. If I could follow up. You guys have done a really nice job managing expenses. I mean it's well on track to come in below guidance that you outlined in January. Can you maybe talk about expense management because expenses have been coming in below the low end of the quarterly range each quarter, and then secondly, I realize it's early, but maybe Gavin, any color you could provide in terms of expense growth next year?

Yes. So I'll start with the second question. We are right in the middle of getting the budget. We're in the second round of drafts for the budget of next year. So things are still moving around. So I'm hesitant to comment there at this point in time.

But I will say that, as you're aware, a big portion of our compensation expense is based on incentive compensation. And so we've seen this year -- at this point in time this year, if you're comparing us to last year, the expected payout is coming in lower than we were at this point in time last year. So that's having an impact on it for 2025.

The other thing I would just say is we continue to try to manage the technology spend is as good as well as we can. We are continuing to invest in technology. And then with that, we're finding the efficiencies and usually through not replacing individuals through attrition. So yes, I think we're spending a lot of time in that area, and we hope to continue to be able to contain it.

Got it. And then just one last question, just a quick question. Just -- Gavin, would you a chance to have the spot rate on interest-bearing deposits?

I do. So as of 9/30, the spot rates on total interest-bearing was $217 in total for -- does that help?

Thank you very much. That concludes the Q&A session. I will now hand back over to Brad for any closing remarks.

Thanks, Ezra. In closing, I would like to thank our Board of Directors and our senior management for their support and leadership. Also I want to thank all our associates and continue to be so proud of the job being done by each member of our team each member -- each team member again, his or her own way continues to do their part toward our common goal of guiding our 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 very much, Brad, and thank you to Gavin and Joel, for being speakers on today's line. Thank you, everyone, for joining. You may now disconnect your lines.

Hello, everyone, and welcome to the Independent Bank Corporation Reports 2025 Second Quarter Results. My name is Ezra, and I will be your coordinator for today. [Operator Instructions] I will now hand over to our host, Brad Kessel, President and CEO, to begin. 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 second quarter 2025 results. I am Brad Kessel, President and Chief Executive Officer; and joining me is Gavin Mohr, EVP and Chief Financial Officer; and Joel Rahn, EVP, 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.

I am pleased to report our solid second quarter 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.

Today, Independent Bank Corporation reported second quarter 2025 net income of $16.9 million or $0.81 per diluted share versus net income of $18.5 million or $0.88 per diluted share in the prior year period.

Significant items impacting comparable second quarter '25 and '24 results include the following: Changes in the fair value due to price of capitalized mortgage loan servicing rights was a loss of $0.2 million or $0.01 per diluted share after tax for the 3 months ending June 30, '25, as compared to $0.9 million or $0.03 per diluted share after tax gain for the 3-month period June 30, 2024. Also, a gain on equity securities at fair value of $2.7 million or $0.10 per diluted share after tax in the second quarter of June 30, '24, attributable to the exchange of our Visa Class B-1 common stock. No gain or loss in equity securities at fair value was recorded in the second quarter of '25.

I'm very proud of our team and pleased to see us continue our positive trends with our second quarter '25 results. Overall, loans increased by 9% annualized, while core deposits were down 1.4% annualized due to seasonality.

We generated net interest income growth on both a linked-quarter basis and a year-over-year quarterly basis, producing 9 basis points of margin expansion from the prior quarter.

Our expenses are well managed, and we continue to see improved operational scale from strategic investments made in recent years. The fundamentals -- these fundamentals drove positive growth in tangible common equity per share of common stock 10.8% compared to the prior year quarter, along with very healthy performance returns, a return on average assets of 1.27% and a return on average equity of 14.66%.

Despite heightened uncertainty in the markets during the quarter, our credit metrics remained strong with low levels of watch credits, 16 basis points of nonperforming assets to total assets, and 2 basis points in net charge-offs to average loans of the quarter annualized. The allowance for credit losses was 1.47% of total loans.

Our team has been effective in many areas during the first half of '25, including business development from the existing customer base and onboarding new relationships, which have enhanced the geographic and product line diversification of our business. We continue to succeed in recruiting talented bankers to join the Independent Bank team.

During the second quarter, we rolled out several new technologies to make banking easier for both our customers and associates serving our customers. For all these reasons, I am optimistic about our prospects for growth in -- for the balance of '25 and into '26.

Moving to Page 5 of our presentation. Total deposits as of June 30, '25, were $4.7 billion. Overall, core deposits decreased $15.7 million during the second quarter of '25. On a linked-quarter basis, retail deposits were down $13.8 million, business deposits were up by $60.5 million and municipal deposits decreased by $64 million. Our sales team continues to bring in new relationships well below our wholesale cost of funds.

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 funds declined by 4 basis points to 1.76%.

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 in growing our loan portfolios and provide an update on our credit metrics. Joel?

Yes. Thanks, Brad, and good morning, everyone. On Page 7, we share an update on loan activity for the quarter. We continued to experience solid loan growth in the second quarter with total loans growing by $91.7 million or 9% annualized. Commercial loan generation was strong, resulting in $75.8 million of quarterly growth, 15.3% on an annualized basis. Our residential mortgage portfolio grew by $15.6 million, and our installment loan portfolio was up slightly for the quarter.

Our continued strategic investment in commercial banking talent continues to supplement our loan growth. We added 3 experienced commercial bankers in the second quarter, bringing our team to 50 bankers across our statewide footprint. Our staff additions include launching a new LPO in Kalamazoo. We're very excited to have a commercial presence in that market.

Looking ahead, we believe we will continue low double-digit growth of our commercial loan portfolio in the second half of the year based upon a strong pipeline. We continue to see market share opportunities from regional banks and are seeing some uptick in organic growth from our existing customers.

As noted in previous quarters, our new loan production in all categories continues to come on at yields well above the respective portfolio yield.

Looking at the commercial loan production activity on a year-to-date basis, the mix of C&I lending versus investment real estate is 59% and 41%, respectively. For our commercial portfolio, our mix is 70% C&I and 30% IRE.

Page 8 provides detail on our commercial loan portfolio concentrations. There's not been any significant shift in our portfolio and the portfolio continues to be very well diversified. Our largest segment of the C&I category is manufacturing at $184 million or 8.9% of the total portfolio. It's worth noting that within the manufacturing segment is $157 million of automotive industry exposure that we're monitoring closely for any tariff-related impact. To date, the impact has been nominal.

Key credit quality metrics and trends are outlined on Page 9. Overall, credit quality continues to be excellent, as Brad said. Total nonperforming loans were $8.2 million or 20 basis points of total loans at quarter end, up slightly from 17 basis points at 3/31. Past due loans totaled $6.6 million or 16 basis points, also up slightly from 10 basis points at 3/31.

It's not reflected on the slide, and Brad mentioned it just a moment ago, but it's worth noting that our year-to-date charge-offs are $442,000 or 2 basis points of average loans on an annualized basis.

At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of the year.

Thanks, Joel, and good morning, everyone. I'm starting on Page 10 of our presentation. Page 10 highlights our strong regulatory capital position.

Turning to Page 11. Net interest income increased $3.3 million from the year ago period. Our tax equivalent net interest margin was 3.58% during the second quarter of 2025, compared to 3.40% in the second quarter of 2024, and up 9 basis points from the first quarter of 2025. Average interest-earning assets were $5.04 billion in the second quarter of 2025, compared to $4.89 billion in the year ago quarter, and $5.08 billion in the first 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 second quarter 2025 net interest margin was positively impacted by three factors, a decrease in funding costs contributed 3 basis points, change in earning asset yield and mix contributed 6 basis points, and a loan prepayment fee that contributed 1 basis point. These were partially offset by a change in funding mix that negatively impacted the margin by 1 basis point.

On Page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for second quarter '25 and first quarter '25 calculates the change in net interest income over the next 12 months under 5 rate scenarios. All scenarios assume a static balance sheet.

The base rate scenario applies the 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 given earning asset growth and slight margin expansion. Asset yields were augmented by a shift in asset mix with good commercial loan growth partially funded by runoff of lower-yielding investments. Also, assets continued to reprice higher. This benefit was partially offset by an adverse shift in funding mix with an increase in wholesale funding to finance earning asset growth and a modest core deposit runoff.

The NII sensitivity position shows slightly more exposure to a declining rate environment. Asset repricing increased due to strong growth in variable rate commercial loans and HELOCs. Some of the increase in asset repricing was offset by purchased floors and faster liability repricing given an increase in short duration wholesale funding. Currently 37.1% of assets reprice in 1 month and 49.2% reprice in the next 12 months.

Moving on to Page 14. Noninterest income totaled $11.3 million in the second quarter of 2025, compared to $15.2 million in the year ago quarter, and $10.4 million in the first quarter of 2025. Second quarter '25 net gains on mortgage loans totaled $1.6 million compared to $1.3 million in the second quarter of 2024. The increase is due to higher profit margins and higher volume of loan sales. No gain or loss on equity securities at fair value is recorded for the second quarter of 2025 compared to $2.7 million gain in the prior year's quarter due to the exchange of Visa Class B-1 common stock.

Positively impacting noninterest income was $0.5 million gain on mortgage loan servicing net. This is comprised of $0.2 million or $0.01 per diluted share after-tax loss due to change in price, $0.9 million decrease due to paydowns and a $0.1 million loss on sale of originated servicing rights that was offset by $1.6 million of servicing revenue in the second quarter of 2025. 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 31, 2025.

As detailed on Page 15, our noninterest expense totaled $33.8 million in the second quarter of 2025, as compared to $33.3 million in the year ago quarter, and $34.3 million in the first quarter of '25. Compensation expense decreased $0.1 million, primarily due to lower incentive-based compensation expense, lower health benefits-related costs and higher deferred loan origination costs due to higher commercial and mortgage loan production. Data processing costs increased by $0.6 million from the prior year period, primarily due to core data processor annual asset growth and CPI-related cost increases and increases in other software solutions.

Page 16 is our update for our 2025 outlook to see how our actual performance during the second quarter compared to the original outlook that we provided in January 2025. Our outlook estimated loan growth in the mid-single digits. Loans increased $91.7 million in the second quarter of 2025 or 9% annualized, which is above our forecasted range. Commercial mortgage and installment loans increased in the second quarter of '25.

Second quarter 2025 net interest income increased by 7.9% over 2024, which is slightly below our forecast of a high single-digit growth. The net interest margin was 3.58% for the current quarter, 3.4% for the prior year quarter and up 9 basis points from a linked-quarter perspective.

The second quarter 2025 provision for credit losses was an expense of $1.5 million, which was within our forecasted range.

Moving on to 17 -- Page 17. Noninterest income totaled $11.3 million in the second quarter of 2025, which was within our forecasted range of $11 million to $12 million in the second quarter.

Second quarter 2025 mortgage loan origination sales and gains totaled $147.8 million, $95.4 million and $1.6 million, respectively. Mortgage loan servicing net generated a gain of $0.5 million in the second quarter of 2025, which is below our forecasted target.

Noninterest expense was $33.8 million in the second quarter, below our forecasted range of $34.5 million to $35.5 million.

Our effective income tax rate was 18.4% in the second quarter of 2025.

Lastly, there were 251,183 shares of common stock repurchased for an aggregate purchase price of $7.3 million in the second quarter of 2025.

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 2025, our focus will be continuing to invest in our team, leveraging our technology and supporting our communities. At this point, we'd like to open up the call for questions. Ezra?

Our first question comes from Peter Winter with D.A. Davidson.

You guys had really nice strong margin expansion this quarter. And I was just wondering, could you talk about maybe the outlook for the margin in the second half of the year, especially if we get maybe 2 rate cuts based on the forward curve?

Yes, Peter, I would -- this is Gavin. Thanks for joining today. So the margin forecast that we provided is -- we're still very confident in that we provided in January. The 2 basis point cuts is factored into that forecast. I would share that given the current positioning for our -- the balance sheet, the cut of 25 to 50 basis points does not have a significant impact in the margin, 1 or 2 basis points specifically.

Okay. That's helpful. You guys also have done a nice job matching deposit costs lower. Do you still see room to lower deposit costs absent -- if there are no rate cuts? And if so, kind of what are some of the drivers?

I think that right now, where we're at in the deposit costs, we're probably seeing a plateau, Peter. The longer we stay or the longer they hold flat and as asset growth continues, you can kind of feel the pressure build. If I look at where we're currently seeing our CDs reprice and where we're issuing new, those are at the same level. So I don't see, if we stay here, a lot of opportunity to reprice down from here.

And then, Brad, if I can ask just a question. Treasury Secretary, Scott Bessent, he seems very focused on bank regulation, trying to kind of level the playing field for the commercial banks. So the question is, have you seen anything that benefits you from a competitive standpoint against credit unions?

That's a -- Peter, that's a great question. No, not with specifically credit unions. I do think that since the change in the administration, there were quite a few rules that were under review, including like CRA, Dodd-Frank Section 1071, small business data collection and so on.

And those have sort of been paused or set aside. So that's significant for banks, for community banks because it would have been, I think, costly to move forward as those regulations were being proposed.

So -- and then saying on top of that, I think we are still looking for further relief and excited to see Fed Governor Miki Bowman, who's, I think, a friend of community banks in her role in charge of the compliance side. So I think there's still more to come. But again, back to your original question that fair and equitable playing field with the nonbanks, there's been no change.

Our next question comes from Brendan Nosal with Hovde Group.

Maybe just starting off here, kind of curious at a top-level walking through your local economies. Can you just kind of take us through your markets region by region and where you're seeing pockets of strength? And where, when you look at the footprint now, you see the biggest long-term opportunity?

Yes. Brendan, this is Joel. So I would just focus on the two largest MSAs in our footprint, and that's West Michigan and then the Metro Detroit market. And they're both very similar in many respects. So the manufacturing base is pretty much the same.

And there's maybe -- there's certainly diversity to it, but it's still heavily automotive dependent. And that's why earlier in my comments, I specifically commented on automotive. We have a relatively small exposure to the automotive industry from a supply base and they're holding up very well.

We were really concerned when things first were announced back in early April, what does this mean? And maybe you could argue that all the full impact hasn't been felt yet. So we -- I think that's a point that has credibility. So we just continue to stay really close. But so far, I think our economy has held up very well. I'd like to tell people, if I don't read the news headlines, I'd tell you, just based on customer feedback, the economy is fine.

Homebuilding is still pretty strong, especially in West Michigan. And like I said, manufacturing is holding up okay. And then in our Northern Michigan offices, there's a lot of -- it's a very strong tourist economy and the consumers are still spending money. So that's just some kind of high-level thoughts to your question.

That's super helpful color. Maybe moving on just to the competitive landscape. I'm just kind of curious how it's evolved over the past couple of months. I'm certainly hearing that some larger regionals are stepping back into certain asset classes like commercial real estate. So just kind of wondering how that's been impacting you and how you're seeing that on the ground?

Yes. I guess I'll take that one as well, and Brad can chime in. But it really hasn't changed. Our -- a lot of our market share lift still comes from the larger banks. We -- as a community bank, we sell very well against the larger bank. And so that hasn't changed.

Interestingly, we're seeing some opportunity. I agree with your comment that the large banks have -- they're very, very careful and maybe just not interested at all in commercial real estate right now. And that's not just the obvious office segment. That's just kind of any commercial real estate.

So we have continued to put good investment real estate in our portfolio. We keep it in balance. As I mentioned earlier, we like our mix of 70% C&I and 30% investment real estate overall in our portfolio. But we continue to write deals.

I was going to say the one interesting thing, Brendan, is we've actually seen deal opportunity coming off of CMBS maturities and especially like in the medical office space, we pick our spots, but medical office, we've had good success with rewriting deals that are coming off of CMBS because that market is not as robust and not as aggressive as it once was.

So yes, a variety of places. But overall, the mix or where our opportunities are coming from really hasn't shifted much.

Yes, Joel, I think that was excellent. I would just add, I mean, we were on a call with a prospect last week, whereby sort of that dollar size between $10 million and $20 million, which I'd say is sort of a sweet spot for us, was considered too small by the entity's incumbent bank. And so that is a terrific opportunity for us. So we're in a good spot. Great question, Brendan.

That's really great color. I'm going to sneak one more in here. Maybe just turning to capital M&A activity. It certainly feels like deals have picked up not only across the country, but in the Midwest specifically. So just kind of curious how you're viewing the M&A landscape at the moment, whether you're seeing signs of pickup in activity on your end and just updated thoughts on your own appetite for any inorganic opportunities right now.

Well, I think that we've seen several very nice deals here in Michigan this year. And so there's definitely activity going on and there's discussions being held.

And here in Michigan, we have, plus or minus, about 80 chartered banks still left. And so for Independent, I would say that, and this is not new, organic growth will continue to be the primary driver of our overall growth. But we would be interested in acquired growth where it makes sense.

And so where it makes sense gets down to -- obviously, it starts with culture and there's size and there's geography, and there's also price. And so I'm hopeful that as we move forward, we'll be able to complement the organic growth with some intelligent acquired growth, too.

Our next question comes from Adam Kroll with Piper Sandler.

This is Adam Kroll on for Nathan Race. Yes. So maybe just a question for Gavin, going back to the margin. If the Fed were to remain on hold through the remainder of the year, do you think the margin can just grind higher with new loans still coming on at a higher rate than the portfolio yield?

And maybe could you remind us how much cash flow is coming off the bond book and maybe in terms of what your fixed rate loan repricing looks like over the next couple of quarters?

Yes. So to answer your first question, yes. I do believe that I'm confident that if rates stay where they're at, we would continue to grind higher in the margin, barring any type of disruption in the funding market. We have -- in the next 12 months, we have about $110 million of securities forecasted to reprice. And the -- I'm just looking here on your -- I have your question here on the fixed rate loans repricing. Give me 1 second. Hold on.

In the next -- I don't have it broken down by quarter, Adam, but I can tell you, in the next 12 months, we have fixed rate loans repricing at $121 million with an exit rate of [ 6.15 ] in total. So...

Okay. That's super helpful. And then maybe switching to fees. You had really solid mortgage loan volume during the quarter. And obviously, the loan sale margin saw a drop with all the rate volatility during the quarter. But I was just wondering if you have any visibility on how you see mortgage trending so far this quarter?

Yes. The gain on sale margin was -- did come in lower than what we had anticipated. A couple of things going on there. One, just the competitiveness of the market continues to be very, very competitive. And so rates were not -- the gains were not as high as what we thought they would be there.

There's also some nuance going on in certain sectors of the salable market where we were -- the industry was paying a much higher premium into the secondary, the GSE specifically, that premium has pulled back pretty significantly. We didn't see that coming out of our control. So that's had an impact as well.

And then we also annually go through a review of the cost of origination. And so that was higher this year, and so that pulled down the margin as well. So there's a number of moving pieces there. But I would share the main driver is just the competitiveness of the mortgage space today.

Our next question comes from Damon DelMonte with KBW.

It's Matt Renck filling in for Damon. My first question is just a follow-up to the capital management. As you guys look for that inorganic opportunity, do you think you'll still be active with buybacks? Or should we expect you guys to kind of put those on pause in the meantime?

Yes. This is Gavin, Matt. We are -- we evaluate it daily. And as we've explained in the past, we do model the buybacks like we would a M&A opportunity, and we believe it needs to be in a price range that has a reasonable earnback for our shareholders. The current range is outside or the current price is outside of that kind of that range of earnback that we're comfortable with.

That being said, as we continue to go forward and build capital, we reserve the right to change those parameters. But I would say here in more of the short term, if the stock continues to trade in the current ranges, the buybacks will be limited.

Okay. Great. And then last one for me. You guys mentioned you implemented some new technologies to help customers and associates. Just kind of curious what those technologies are and if you have any other planned investments coming up.

Yes, that's a great question. So in the second quarter, we put in sort of an AI chat function on our website and within the banking platform that's getting a lot of use from our customer base. So that's essentially customers being able to maybe more quickly get answers to their questions.

We're using probably several dozen AI use cases around the company that is helping our staff maybe more quickly respond to customers when we've got them, say, on the line within our call center.

We are leveraging some AI use cases to identify next best product opportunities with our customers. We've also leveraged technology just in terms of maybe in the loan processing underwriting area that -- to significantly reduce time. So those are a handful, but really excited about sort of where we've been, where we're at and even where we can go, continuing to leverage our technology.

Thank you very much. We currently have no more questions. So I will hand back over to Brad for any closing remarks.

Thanks, Ezra. 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 toward our common goal of guiding our 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 very much, Brad, and thank you to all our speakers on today's call. We appreciate everyone for joining. You may now disconnect your lines.