TLMR Talmer Bancorp, Inc.

TROY, Mich., July 27, 2016 /PRNewswire/ -- Talmer Bancorp, Inc. (NASDAQ: TLMR) ("Talmer") today reported second quarter 2016 net income of $20.2 million, compared to $21.2 million for the first quarter of 2016 and $17.5 million for the second quarter of 2015.  Earnings per diluted average common share were $0.28 for the second quarter of 2016, compared to $0.30 for the first quarter of 2016 and $0.23 for the second quarter of 2015.  Core earnings per diluted average common share, a non-GAAP financial measurement, were $0.28 for the second quarter of 2016, compared to $0.31 and $0.28 for the first quarter of 2016 and the second quarter of 2015, respectively.  Please see the section entitled "Reconciliation of Non-GAAP Financial Measures", for a discussion on the limitations of our core earnings per diluted average common share and a reconciliation of this non-GAAP financial measure to the most comparable GAAP measure.

Quarterly Results Summary

Second Quarter 2016 Compared to First Quarter 2016

• Net income was $20.2 million, or $0.28 per diluted average common share, in the second quarter of 2016, compared to $21.2 million, or $0.30 per diluted average common share, for the first quarter of 2016. Pre-tax, pre-provision for loan losses income of $28.7 million in the second quarter of 2016, increased by $7.3 million compared to the first quarter of 2016 significantly as a result of higher net interest income, higher fee income and operating efficiency improvements. The improvement in pre-tax, pre-provision for loan losses net income was more than offset by increases in provision for loan losses and income tax provision resulting in lower reported net income in the second quarter of 2016 compared to the prior quarter.
• Core earnings per diluted average common share, a non-GAAP financial measurement, were $0.28 for the second quarter of 2016, compared to $0.31 for the first quarter of 2016. Second quarter of 2016 net income was impacted by three non-core items: a $3.5 million detriment to earnings due to the change in fair value of our loan servicing rights and $312 thousand of transaction and integration related expenses, offset by $2.6 million of excess tax benefit related to stock options exercised. First quarter of 2016 net income was impacted by four non-core items: a $6.6 million detriment to earnings due to the change in fair value of our loan servicing rights and $2.9 million of transaction and integration costs, partially offset by a $4.3 million benefit due to finalization of a settlement with the Internal Revenue Service and $1.5 million of excess tax benefit related to stock options exercised. There was no net impact to our earnings per diluted average common share for the second quarter of 2016 from these non-core items, compared to a net negative impact of $0.01 per diluted average common share for the first quarter of 2016. Please see the section entitled "Reconciliation of Non-GAAP Financial Measures," for a discussion on the limitations of our core earnings per diluted average common share and a reconciliation of this non-GAAP financial measure to the most comparable GAAP measure.
• Net loans increased during the second quarter of 2016 by $125.2 million, driven by strong growth in residential real estate and commercial real estate lending, partially offset by acquired loan run-off.
• Total deposits increased $114.4 million, to $5.3 billion as of June 30, 2016, compared to March 31, 2016, primarily driven by strong growth in core, demand deposit accounts. Reported brokered deposits grew during the second quarter of 2016 due primarily to a reclassification of certain time deposits that previously had not been classified as brokered deposits.
• Net interest income increased $1.3 million to $57.4 million in the second quarter of 2016, compared to $56.1 million in the first quarter of 2016. The increase in net interest income was primarily due to a $1.6 million increase in interest on loans resulting from loan growth experienced during the first and second quarters of 2016. Our net interest margin was unchanged at 3.73% in both the second and first quarter of 2016.
• Noninterest income increased $3.6 million to $17.2 million in the second quarter of 2016, compared to the first quarter of 2016. Net gain on sales of loans increased $2.4 million in the second quarter of 2016, compared to the first quarter of 2016 primarily due to an increase in loan production and improved margin on loan sales. In addition, noninterest income was impacted by a detriment to earnings of $3.5 million due to the change in the fair value of loan servicing rights, compared to a detriment to earnings of $6.6 million in the first quarter of 2016, which is a key component of the $1.5 million increase in mortgage banking and other loan fees.
• Noninterest expense decreased $2.3 million, to $45.9 million in the second quarter of 2016, compared to the first quarter of 2016, primarily due to a decrease of $2.6 million in merger and acquisition expense.
• Total shareholder's equity of $769.0 million as of June 30, 2016, increased $20.3 million compared to March 31, 2016. The increase is primarily the result of net income of $20.2 million in the second quarter of 2016.
• Due to the early adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09") during the second quarter of 2016, all excess tax benefits or detriments realized during the year are recorded directly into "Income tax provision" whereas they were previously recorded directly into "Additional paid-in-capital" as a component of equity. The early adoption of ASU 2016-09 resulted in excess tax benefits recognized in the second and first quarter of 2016 of $2.6 million and $1.5 million, respectively. The effective tax rate, excluding the impact of excess tax benefits, for the second and first quarter of 2016 was 31.2% and 12.8%, respectively. First quarter of 2016 income tax expense also benefited from 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. Excluding the tax benefits from the early adoption of ASU 2016-09 and the benefits from the finalization of the First Place Bank tax matter, the effective tax rate would have been 31.8% for the first quarter of 2016.

Income Statement

Net Interest Income and Net Interest Margin

Net interest income for the second quarter of 2016 was $57.4 million, compared to $56.1 million in the prior quarter.  Our net interest margin was 3.73% in the second quarter of 2016, unchanged compared to the first quarter of 2016. The increase in net interest income was significantly due to an increase in interest on loans resulting from the higher average balance of loans.  The detrimental impact to the net interest margin from the run-off of higher-yielding acquired loans was offset by the benefit provided by lower levels of nonaccrual loans and other yield increases on originated loans.

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 both the second and first quarters of 2016, the yield on loans was 4.66%, while the yield generated using only the expected coupon would have been 4.09% and 4.06%, for the second and first quarters of 2016, 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 45 basis points in the second quarter of 2016 compared to 48 basis points in the first quarter of 2016.  Therefore, excluding the benefit of excess accretable yield, our net interest margin in the second quarter of 2016 improved three basis points to 3.28% compared to 3.25% in the first quarter of 2016.

Noninterest Income

Noninterest income increased $3.6 million to $17.2 million in the second quarter of 2016, compared to the first quarter of 2016.  Noninterest income benefited from increases in net gain on sales of loans of $2.4 million and mortgage banking and other loan fees of $1.5 million in the second quarter of 2016, compared to the first quarter of 2016.  The increase in net gain on sales of loans was primarily due to an increase in loan production and improved margin on loan sales.  The increase in mortgage banking and other loan fees was impacted by a smaller detriment to earnings of $3.5 million due to the change in the fair value of loan servicing rights in the second quarter of 2016 compared to a detriment of $6.6 million in the first quarter of 2016. The change in the fair value of loan servicing rights in both the second and first quarters of 2016 was due mainly to downward movements in market interest rates during the period.

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 $9.5 million since the majority of our servicing rights were acquired on January 1, 2013.

Noninterest Expense

Noninterest expense in the second quarter of 2016 decreased $2.3 million, to $45.9 million, compared to the first quarter of 2016.  The decrease in noninterest expense is primarily due to the decrease of $2.6 million in merger and acquisition expense.  Noninterest expense, excluding the decrease of $2.6 million in merger and acquisition expense, increased $221 thousand in the second quarter of 2016 primarily due to an increase in salary and employee benefits of $1.1 million resulting from an increase in commissions due to higher volumes of mortgage loan production during the second quarter of 2016, partially offset by declines in professional service fees, marketing expense and other employee expenses. 

The efficiency ratio is a measure of noninterest expense as a percentage of net interest income and noninterest income. Our efficiency ratio was 61.54% in the second quarter of 2016, compared to 69.23% in the first quarter of 2016. Our core efficiency ratio improved to 58.38% in the second quarter of 2016, compared to 59.46%, for the first quarter of 2016, primarily due to an increase in total revenue.  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 second quarter of 2016 excludes the detriment received from the fair value adjustment to our loan servicing rights of $3.5 million and transaction and integration related costs of $312 thousand.  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.  Please see the section entitled "Reconciliation of Non-GAAP Financial Measures." for a discussion on the limitations of our core efficiency ratio and a reconciliation of this non-GAAP financial measure to the most comparable GAAP measure.

Credit Quality

The second quarter of 2016 resulted in a provision for loan losses of $3.2 million, compared to a benefit for loan losses of $1.1 million in the first quarter of 2016.  The increase in the provision for loan losses was primarily due to a reduction in credit recoveries on loans and an increase in provision expense related to the quarterly re-estimation of cash flow expectations for purchased credit impaired loans.  At June 30, 2016, the allowance for loan losses was $51.6 million, or 1.02% of total loans, compared to $52.4 million, or 1.06% of total loans, at March 31, 2016.  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 a reduction in the percentage of nonperforming loans to total loans, increases in collateral and cash flow expectations on loans individually evaluated for impairment and credit recoveries on acquired loans that were paid off, partially offset by a shift in the current economic outlook.

During both the second and 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 loan loss provisions of $522 thousand for the second quarter of 2016 and net relief of loan loss provisions of $963 thousand for the first quarter of 2016.  The re-estimations also resulted in a $9.6 million improvement in the gross cash flow expectations for purchased credit impaired loans during the second quarter of 2016, 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 $199.0 million to $6.9 billion at June 30, 2016 compared to $6.7 billion at March 31, 2016.  The primary drivers of the increase in assets in the quarter ended June 30, 2016 were increases in net total loans of $125.2 million and cash and cash equivalents of $96.4 million, partially offset by a decrease in investment securities of $27.8 million. 

Net total loans at June 30, 2016 increased $125.2 million to $5.0 billion, compared to March 31, 2016.  Loan growth was primarily driven by growth in residential real estate and commercial 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 $1.2 billion, or 24.7% of total loans, $1.3 billion, or 27.0% of total loans, and $1.6 billion, or 36.4% of total loans at June 30, 2016, March 31, 2016 and June 30, 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 $6.1 billion at June 30, 2016, compared to $6.0 billion at March 31, 2016.  The $178.7 million increase in liabilities in the quarter ended June 30, 2016 was primarily due to increases in total deposits of $114.4 million and borrowings of $88.7 million.  The increase in total deposits was due to strong growth in demand deposits of $122.9 million.  The reported growth in brokered deposits of $166.6 million was significantly due to a reclassification of certain deposits that were previously reported as time deposits.

Total shareholders' equity of $769.0 million as of June 30, 2016 increased $20.3 million compared to March 31, 2016.  The increase is primarily the result of our net income of $20.2 million.  Our Tier 1 leverage ratio was estimated to be 10.55% at June 30, 2016, compared to 10.30% at March 31, 2016. 

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 merger has been approved by both Chemical Financial Corporation and Talmer shareholders.  The completion of the merger remains subject to receipt of regulatory approvals and satisfaction of other customary closing conditions.

Due to the pending merger, Talmer will not be holding a conference webcast to review the second 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 , 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.