TLMR Talmer Bancorp, Inc.

TROY, Mich., April 27, 2016 /PRNewswire/ -- Talmer Bancorp, Inc. (NASDAQ: TLMR) ("Talmer") today reported first quarter 2016 net income of $19.7 million, compared to $13.1 million for the fourth quarter of 2015 and $9.4 million for the first quarter of 2015.  Earnings per diluted common share were $0.28 for the first quarter of 2016, compared to $0.19 for the fourth quarter of 2015 and $0.12 for the first quarter of 2015.  Core earnings per diluted average share, a non-GAAP financial measurement, was $0.31 per diluted average common share for the first quarter of 2016, compared to $0.38 and $0.20 per diluted average common share for the fourth quarter of 2015 and the first quarter of 2015, respectively.  In addition, on April 27, 2016, the Board of Directors of Talmer declared a quarterly cash dividend on its Class A common stock of $0.05 per share.  The dividend will be paid on May 25, 2016, to our Class A common shareholders of record as of May 11, 2016.  Please see the section entitled "Reconciliation of Non-GAAP Financial Measures", for a discussion on the limitations of our core earnings per average diluted share and a reconciliation of this non-GAAP financial measure to the most comparable GAAP measure.

Quarterly Results Summary

First Quarter 2016 Compared to Fourth Quarter 2015

• Net income was $19.7 million, or $0.28 per diluted average common share, in the first quarter of 2016, compared to $13.1 million, or $0.19 per diluted average common share, for the fourth quarter of 2015. Core earnings per diluted average share, a non-GAAP financial measurement, was $0.31 per diluted average common share for the first quarter of 2016, compared to $0.38 for the fourth quarter of 2015. First quarter of 2016 net income was impacted by three non-core items: a $6.6 million detriment to earnings due to the change in fair value of our loan servicing rights, $2.9 million of transaction and integration related expenses and a $4.3 million benefit due to finalization of a settlement with the Internal Revenue Service discussed further below. Fourth quarter of 2015 net income was impacted by three non-core items: a $20.4 million charge resulting from the early termination of the Talmer Bank and Trust's FDIC loss share agreements and the FDIC's warrant, the $1.4 million benefit to earnings due to the change in fair value of our loan servicing rights and $328 thousand of transaction and integration costs. The net negative impact to our earnings per diluted common share for the first quarter of 2016 from these non-core items was approximately $0.03 per diluted share, compared to $0.19 per diluted common share for the fourth quarter of 2015. Please see the section entitled "Reconciliation of Non-GAAP Financial Measures", for a discussion on the limitations of our core earnings per average diluted share and a reconciliation of this non-GAAP financial measure to the most comparable GAAP measure.
• Net loans increased during the first quarter of 2016 by $118.6 million, driven by strong growth in commercial real estate and residential real estate lending, partially offset by acquired loan run-off.
• Total deposits increased $138.2 million, to $5.2 billion as of March 31, 2016, compared to December 31, 2015, primarily due to increases in time deposits and demand deposits, partially offset by a decline in money market and savings deposits.
• Net interest income decreased to $56.1 million in the first quarter of 2016, compared to $58.4 million in the fourth quarter of 2015. The decline in net interest income was primarily due to a $2.0 million decrease in interest on loans due significantly to the run-off of acquired, higher-yielding loans and the impact of one less day in the quarter. Our net interest margin decreased 16 basis points to 3.73% in the first quarter of 2016, compared to 3.89% in the fourth quarter of 2015, also primarily due to the run-off of acquired, higher-yielding loans.
• Noninterest income decreased $10.0 million to $13.6 million in the first quarter of 2016, compared to the fourth quarter of 2015. Noninterest income was impacted by a detriment to earnings of $6.6 million due to the change in the fair value of loan servicing rights, compared to a benefit to earnings of $1.4 million in the fourth quarter of 2015, which is a key component of the $7.7 million decrease in mortgage banking and other loan fees. In addition, accelerated discount on acquired loans decreased $2.5 million in the first quarter of 2016, compared to the fourth quarter of 2015.
• Noninterest expense decreased $20.3 million, to $48.3 million in the first quarter of 2016, compared to the fourth quarter of 2015, primarily due to $20.4 million of net loss on the early termination of Talmer Bank and Trust's FDIC loss share agreements and the FDIC's warrant recognized in the fourth quarter of 2015, in addition to overall declines in core operating expenses, partially offset by an increase of $2.5 million in merger and acquisition expense. Excluding non-core expenses, noninterest expense declined by $2.5 million.
• Total shareholder's equity of $748.7 million as of March 31, 2016, increased $23.5 million compared to December 31, 2015. The increase is primarily the result of net income of $19.7 million in the first quarter of 2016.
• The income tax provision for the first quarter of 2016 was $2.9 million resulting in an effective tax rate of 12.8%, which is approximately $4.6 million lower than an assumed 33% normalized tax rate. The lower effective tax rate in the first quarter of 2016, compared to previous quarters, is primarily due to the finalization of a settlement with the Internal Revenue Service regarding First Place Financial Corp.'s utilization of bad debt expense incurred prior to Talmer's acquisition of First Place Bank involving several tax years resulting in a benefit of $4.3 million. Talmer Bank and Trust, as successor to First Place Bank, was granted court approval to act as substitute agent for First Place Financial Corp. for the purpose of amending various returns, which ultimately impact the tax filings of Talmer Bank and Trust.

Income Statement

Net Interest Income and Net Interest Margin

Net interest income for the first quarter of 2016 was $56.1 million, compared to $58.4 million in the prior quarter.  Our net interest margin was 3.73% in the first quarter of 2016, a decline of 16 basis points from 3.89% in the fourth quarter of 2015. The decreases in net interest income and net interest margin in the first quarter were due significantly to the run-off of acquired, higher-yielding loans.  The decrease in net interest income was also impacted by one less day in the quarter.

Our net interest margin benefits from discount accretion on our purchased credit impaired loan portfolio, a component of the accretable yield.  The accretable yield for purchased credit impaired loans includes both the expected coupon of the loan and the discount accretion, and is recognized as interest income over the expected remaining life of the loans.  For the first quarter of 2016 and the fourth quarter of 2015, the yield on loans was 4.66% and 4.83%, respectively, while the yield generated using only the expected coupon would have been 4.06% and 4.17%, respectively.  The difference between the actual yield earned on total loans and the yield generated based on the contractual coupon (not including any interest income for loans in nonaccrual status) represents excess accretable yield. The excess accretable yield benefited net interest margin by 48 basis points in the first quarter of 2016 compared to 52 basis points in the fourth quarter of 2015.  Therefore, excluding the benefit of excess accretable yield, our net interest margin in the first quarter of 2016 was 3.25% compared to 3.37% in the fourth quarter of 2015.

Noninterest Income

Noninterest income decreased $10.0 million to $13.6 million in the first quarter of 2016, compared to the fourth quarter of 2015.  The most significant contributor to this decline was a decrease in mortgage banking and other loan fees of $7.7 million.  The decrease in mortgage banking and other loan fees was impacted by a detriment to earnings of $6.6 million due to the change in the fair value of loan servicing rights compared to a benefit of $1.4 million in the fourth quarter of 2015. The change in the fair value of loan servicing rights in the first quarter of 2016 was due mainly to downward movements in market interest rates during the period compared to the rising rate environment in the fourth quarter of 2015.  First quarter of 2016 noninterest income was also impacted by a decrease in accelerated discount on acquired loans.  Accelerated discount on acquired loans results from the accelerated recognition of a portion of the loan discount that would have been recognized over the expected life of the loan and occurs when a loan is paid in full or otherwise settled.

As we have noted in prior quarters, we have chosen not to hedge our loan servicing rights, though we may choose to do so in future periods.  Since our loan servicing rights are accounted for under the fair value measurement method, decreases in interest rates generally result in a detriment to earnings due to an anticipated increase in prepayments speeds, whereas increases in interest rates generally result in a benefit to earnings due to the opposite effect.  The cumulative acquisition-to-date detriment to pre-tax earnings due to the changes in fair value has been $6.0 million since the majority of our servicing rights were acquired on January 1, 2013.

Noninterest Expense

Noninterest expense in the first quarter of 2016 decreased $20.3 million, to $48.3 million, compared to the fourth quarter of 2015.  The decrease in noninterest expense is primarily due to the $20.4 million net loss on the early termination of Talmer Bank and Trust's FDIC loss share agreements and the FDIC's warrant recognized in the fourth quarter of 2015, in addition to other declines in core operating expenses, partially offset by an increase of $2.5 million in merger and acquisition expense.

The efficiency ratio is a measure of noninterest expense as a percentage of net interest income and noninterest income. Our efficiency ratio was 69.23% in the first quarter of 2016, compared to 83.71% in the fourth quarter of 2015. Our core efficiency ratio was 59.46% and 59.51%, for the first quarter of 2016 and fourth quarter of 2015, respectively.  The core efficiency ratio begins with the efficiency ratio and then excludes certain items deemed by management to not be related to regular operations.  The core efficiency ratio for the first quarter of 2016 excludes the detriment received from the fair value adjustment to our loan servicing rights of $6.6 million and transaction and integration related costs of $2.9 million.  The core efficiency ratio for the fourth quarter of 2015 excludes the $20.4 million charge we took to terminate Talmer Bank and Trust's FDIC loss share agreements and the FDIC's warrant, the benefit received from the fair value adjustment to our loan servicing rights of $1.4 million and transaction and integration related costs of $328 thousand.

Credit Quality

The first quarter of 2016 resulted in a benefit for loan losses of $1.1 million, compared to a benefit for loan losses of $4.6 million in the fourth quarter of 2015.  The decrease in the benefit for loan losses was primarily due to a decrease in net credit recoveries on loans.  At March 31, 2016, the allowance for loan losses was $52.4 million, or 1.06% of total loans, compared to $54.0 million, or 1.12% of total loans, at December 31, 2015.  The decrease in both the allowance for loan losses and the allowance as a percentage of total loans for the quarter was primarily due to credit recoveries on acquired loans that were paid off, payments received on loans previously carrying an allowance for loan loss, continued reductions in the percentage of nonperforming loans to total loans, and to a lesser extent, increases in collateral and cash flow expectations on loans individually evaluated for impairment.

During the first quarter of 2016, we completed re-estimations of cash flow expectations for purchased credit impaired loans acquired in each of our acquisitions.  For the re-estimations, changes in cash flow expectations on loans resulted in net relief of loan loss provisions of $963 thousand.  The re-estimations also resulted in a $15.7 million improvement in the gross cash flow expectations for purchased credit impaired loans, which will be recognized prospectively as an increase in the accretable yield.

All of our acquired loan portfolios are continuing to perform significantly better than initially anticipated.

Balance Sheet and Capital Management

Total assets increased $117.8 million to $6.7 billion at March 31, 2016 compared to $6.6 billion at December 31, 2015.  The primary drivers of the increase in assets in the quarter ended March 31, 2016 were increases in net total loans of $118.6 million and securities available-for-sale of $55.8 million, partially offset by decreases in loans held for sale of $33.2 million and cash and cash equivalents of $23.5 million.

Net total loans at March 31, 2016 increased $118.6 million to $4.9 billion, compared to December 31, 2015.  Loan growth was primarily driven by growth in commercial real estate and residential real estate lending. We continue to be focused on sourcing quality loan growth to overcome the run-off of higher-yielding acquired loans.  Acquired loans totaled $1.3 billion, or 27.0% of total loans, $1.4 billion, or 29.7% of total loans, and $1.8 billion, or 40.9% of total loans at March 31, 2016, December 31, 2015 and March 31, 2015, respectively.  Acquired loans are reported on the balance sheet at the contractual balance, net of remaining discount resulting from acquisition accounting and charge-offs taken since acquisition.

Total liabilities were $6.0 billion at March 31, 2016, compared to $5.9 billion at December 31, 2015.  The $94.3 million increase in liabilities in the quarter ended March 31, 2016 was primarily due to an increase in total deposits of $138.2 million, partially offset by a decrease in long-term debt of $64.6 million.  The increase in total deposits was due to increases in time deposits of $109.2 million and demand deposits of $76.1 million, partially offset by declines in money market and savings deposits of $40.4 million and other brokered funds of $6.7 million.

Total shareholders' equity of $748.7 million as of March 31, 2016 increased $23.5 million compared to December 31, 2015.  The increase is primarily the result of our net income of $19.7 million.  Our Tier 1 leverage ratio was estimated to be 10.30% at March 31, 2016, compared to 10.21% at December 31, 2015. 

Pending Merger

On January 26, 2016, the boards of directors of Chemical Financial Corporation (Nasdaq: CHFC), the holding company for Chemical Bank, and Talmer announced the execution of a definitive agreement for Chemical Financial Corporation to partner with Talmer in a cash and common stock merger transaction.  The completion of the merger is subject to receipt of regulatory approvals and satisfaction of other customary closing conditions, including approval of both Chemical Financial Corporation and Talmer shareholders.

Due to the pending merger and Chemical Financial Corporation's filed registration statement on Form S-4 with the Securities and Exchange Commission, Talmer will not be holding a conference webcast to review the first quarter 2016 financial results.

About Talmer Bancorp, Inc.

Headquartered in Troy, Michigan, Talmer Bancorp, Inc. is the holding company for Talmer Bank and Trust.  Talmer Bank and Trust operates branches and lending offices in Michigan, Ohio, Illinois, Indiana, Maryland and Nevada and offers a full suite of commercial and retail banking, mortgage banking, wealth management and trust services to small and medium-sized businesses and individuals.

This press release contains both financial measures based on accounting principles generally accepted in the United States (GAAP) and non-GAAP based financial measures, which are used where management believes it to be helpful in understanding Talmer Bancorp Inc.'s results of operations or financial position.  Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as reconciliation to the comparable GAAP financial measure, can be found in this press release. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Forward-looking Statements

Some of the statements in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as:  "intend," "plan," "seek," "believe," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods.  Examples of forward-looking statements, include, among others, statements regarding the proposed merger with Chemical Financial Corporation and statements regarding our continued focus on sourcing quality loan growth to overcome the run-off of higher-yielding acquired loans.  Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.  Because forward-looking statements relate to the future, they are subject to risks, uncertainties and other factors, such as the inability to complete the merger transaction with Chemical Financial Corporation due to the failure to satisfy each party's respective conditions to completion, including the receipt of required regulatory approvals and receipt of required shareholder approvals, the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement with Chemical Financial Corporation, a downturn in the economy, unanticipated losses related to the integration of, and accounting for, our acquisition transactions, access to funding sources, greater than expected noninterest expenses, volatile credit and financial markets both domestic and foreign, potential deterioration in real estate values, regulatory changes, and excessive loan losses, as well as additional risks and uncertainties contained in the "Risk Factors" and the forward-looking statement disclosure contained in our Annual Report on Form 10-K for the most recently ended fiscal year, any of which could cause actual results to differ materially from future results expressed or implied by those forward-looking statements.  All forward-looking statements speak only as of the date on which it is made.  We undertake no obligation to update or revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.