Talmer Bancorp, Inc. reports fourth quarter 2014 net income of $12.5 million, representing $0.16 of earnings per diluted average common share

TROY, Mich., Jan. 30, 2015 /PRNewswire/ -- Talmer Bancorp, Inc. (NASDAQ: TLMR) ("Talmer") today reported fourth quarter 2014 net income of $12.5 million, compared to $19.5 million for the third quarter of 2014 and $12.6 million for the fourth quarter of 2013.  Earnings per diluted common share were $0.16 for the fourth quarter of 2014, compared to $0.26 for the third quarter of 2014 and $0.18 for the fourth quarter of 2013. In addition, the Board of Directors of Talmer declared a cash dividend on its Class A common stock of $0.01 per share on January 29, 2015.  The dividend will be paid on February 20, 2015, to our Class A common shareholders of record as of February 9, 2015.

Talmer Bancorp President and CEO David Provost commented, "We are pleased at our consistent progress in substantially improving our core operating efficiency and sustaining strong organic loan growth.  Looking forward, our lending pipelines are strong, and we plan to make further incremental improvements in our operating efficiency in early 2015 given the anticipated first quarter completion of the First of Huron Corporation acquisition and the operational integration of Talmer West Bank.  During the fourth quarter we generated an annualized reported return on average assets of 85 basis points despite the earnings headwinds from a pre-tax $3.7 million charge related to a reduction in the fair value of our loan servicing rights due to lower market interest rates.  Our team remains optimistic about the substantial organic growth opportunities in our existing markets and continues to be well-prepared to pursue additional acquisitions."    

Quarterly Results Summary

Fourth Quarter 2014 Compared to Third Quarter 2014

• Net income was $12.5 million, or $0.16 per diluted average common share, in the fourth quarter of 2014, compared to $19.5 million, or $0.26 per diluted average common share, for the third quarter of 2014.  The decline in net income in the fourth quarter of 2014 was primarily due to the third quarter of 2014 benefit of $14.4 million in gain on sales of branches, partially offset by a $3.2 million decrease in total noninterest expense.  
• Net total loans increased during the fourth quarter of 2014 by $214.5 million.  During the fourth quarter of 2014, Talmer Bank and Trust's net total loans grew by $223.9 million, as a result of $276.8 million of net uncovered loan growth (loans not covered by loss share agreements with the FDIC) and $52.9 million of net covered loan run-off (loans covered by loss share agreements with the FDIC).  Talmer West Bank experienced net loan run-off of $9.4 million in the fourth quarter of 2014.
• Total deposits increased $63.3 million, to $4.5 billion as of December 31, 2014, compared to September 30, 2014.  Total deposit growth included other brokered funds of $169.0 million to fund continued loan growth, partially offset by declines in time deposits of $68.8 million, noninterest-bearing demand deposits of $20.8 million, interest-bearing demand deposits of $12.6 million and money market and savings deposits of $3.5 million. 
• Net interest income decreased slightly to $51.5 million in the fourth quarter of 2014, compared to $52.2 million in the third quarter of 2014.  Our net interest margin declined 16 basis points to 3.89% in the fourth quarter of 2014, compared to 4.05% in the third quarter of 2014, due in large part to the increased negative accretion of the FDIC indemnification asset.
• Noninterest income decreased $14.1 million to $15.8 million in the fourth quarter of 2014, compared to the third quarter of 2014.  The decrease is primarily the result of $14.4 million in gain on sales of branches recognized from the sales of our Wisconsin branches and our single branch located in New Mexico recognized in the third quarter of 2014.  Also impacting the decline was a fourth quarter decline of mortgage banking and other loan fees of $2.9 million, driven by a detriment to earnings of $3.7 million due to the change in the fair value of loan servicing rights, partially offset by a fourth quarter decrease of $2.2 million in the amounts due to the FDIC resulting from lower recoveries recognized included within "FDIC loss sharing income."  In the third quarter of 2014, the change in the fair value of loan servicing rights was a detriment of $176 thousand. The changes in the fair value of loan servicing rights were due mainly to movements in market interest rate during those periods.
• Noninterest expense decreased $3.2 million, or 6.2%, to $48.1 million in the fourth quarter of 2014, compared to the third quarter of 2014.  The decline in noninterest expense is significantly due to a decrease in salary and employee benefits of $4.2 million driven by lower salary and benefit related costs as a result of the sales of our Wisconsin and New Mexico branches during the third quarter. 

Income Statement

Net Interest Income and Net Interest Margin

Net interest income for the fourth quarter of 2014 was $51.5 million, compared to $52.2 million in the prior quarter.  Our net interest margin was 3.89% in the fourth quarter of 2014, a decrease of 16 basis points from 4.05% in the third quarter of 2014.  The decline in our net interest margin in the fourth quarter was due to a combination of several factors.  The largest factors affecting the change in our net interest margin were: (1) an increase in negative accretion of the FDIC indemnification asset as we continue to experience increases in cash flow expectations on covered loans as a result of our quarterly re-estimations, and (2) a decline in the yield on our uncovered purchased credit impaired loan portfolio due to the run-off of certain higher yielding uncovered purchased credit impaired 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 the fourth and third quarters of 2014, the yield on uncovered loans was 4.71% and 4.97%, respectively, while the yield generated using only the expected coupon would have been 4.25% and 4.51%, respectively.  For the fourth and third quarters of 2014, the yield on covered loans was 13.03% and 12.36%, respectively, while the yield generated using only the expected coupon would have been 6.25% and 5.93%, 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.  Our net interest margin is also adversely impacted by the negative yield on the FDIC indemnification asset.  Because our quarterly cash flow re-estimations have continuously resulted in improvements in the overall expected cash flows on covered loans, our expected payment from the FDIC under our loss share agreements has declined, resulting in a negative yield on the FDIC indemnification asset.  This negative yield on the FDIC indemnification asset partially offsets the benefits provided by the excess accretable yield.  This negative yield was $7.5 million, or 38.41%, for the fourth quarter of 2014 compared to $6.7 million, or 26.61%, for the third quarter of 2014.  The combination of the excess accretable yield on both covered and uncovered loans and negative yield on the FDIC indemnification asset benefitted net interest margin by 24 basis points and 35 basis points in the fourth and third quarters of 2014, respectively.  Therefore, excluding the benefit of excess accretable yield and negative yield on the FDIC indemnification asset, our net interest margin in the fourth quarter of 2014 was 3.65% compared to 3.69% in third quarter of 2014.

Noninterest Income

Noninterest income decreased $14.1 million to $15.8 million in the fourth quarter of 2014, compared to the third quarter of 2014.  The decrease is primarily the result of $14.4 million in gain on sales of branches recognized from the sales of our Wisconsin branches and our single branch located in New Mexico recognized in the third quarter of 2014.  Also impacting the decline was a fourth quarter decline of mortgage banking and other loan fees of $2.9 million, driven by a detriment to earnings of $3.7 million due to the change in the fair value of loan servicing rights, partially offset by a fourth quarter decrease of $2.2 million in the amounts due to the FDIC resulting from lower recoveries recognized included within "FDIC loss sharing income."  In the third quarter of 2014, the change in the fair value of loan servicing rights was a detriment of $176 thousand. The changes in the fair value of loan servicing rights were due mainly to movements in market interest rate during those periods.  Loan servicing rights totaled $70.6 million as of December 31, 2014, compared to $74.4 million as of September 30, 2014.   In January of 2015, we completed a sale of approximately $13.2 million of mortgage loan servicing rights, at a price that approximates the current fair value, which were substantially all of the servicing rights we had owned for mortgages located outside of our primarily target markets.  At this time, we do not have any intention to sell any additional mortgage servicing rights.

Noninterest Expense

Noninterest expense in the fourth quarter of 2014 declined $3.2 million to $48.1 million, compared to $51.3 million in the third quarter of 2014.  The decline in noninterest expense primarily reflects decreases in salary and employee benefits of $4.2 million, occupancy and equipment expense of $1.1 million and data processing fees of $821 thousand, primarily due to the full-quarter impact of the branch sales completed in the third quarter of 2014 and our continued efforts to improve operating efficiencies as we move to fully integrate and rationalize the operations of our acquired banks. 

Our core efficiency ratio for the fourth quarter of 2014 was 67.09%, exceeding our goal of achieving a 70% or better core efficiency ratio by the fourth quarter of 2014, compared to 70.81% for the third quarter.  The efficiency ratio is a measure of noninterest expense as a percent of net interest income and noninterest income.  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 fourth quarter of 2014 core efficiency ratio excludes the fair value adjustment to our loan servicing rights of $3.7 million, transaction and integration related costs of $329 thousand and the FDIC loss sharing income which was a detriment of $244 thousand.  The third quarter of 2014 core efficiency ratio excludes the gain on sales of branches of $14.4 million, FDIC loss sharing income which was a detriment of $2.4 million, the fair value adjustment to our loan servicing rights of $176 thousand, and transaction and integration related costs of $1.4 million.

Credit Quality

The total net provision for loan losses in the fourth quarter of 2014 increased $1.5 million to $3.0 million, compared to $1.5 million in the third quarter of 2014.  The increase in the net provision for loan losses was primarily due to an increase in loan loss provisions resulting from our quarterly cash flow re-estimations on purchased credit impaired loans, and to a lesser extent, additional specific allowances based on individual evaluation of certain loans.

The provision for loan losses on uncovered loans in the fourth quarter of 2014 decreased $2.1 million to $5.7 million, compared to $7.8 million in the third quarter of 2014.  At December 31, 2014, the allowance for loan losses on uncovered loans was $33.8 million, or 0.87% of total uncovered loans, compared to $29.9 million, or 0.82% of total uncovered loans, at September 30, 2014.  The increase in allowance for loan losses on uncovered loans for the quarter was primarily due to the impact of organic loan growth and impairment resulting from our quarterly re-estimation of cash flows for our uncovered purchased credit impaired loans.  At December 31, 2014, uncovered nonperforming loans were $35.1 million, compared to $43.3 million at September 30, 2014.  During the fourth quarter of 2014, we repossessed the underlying assets of a set of interrelated loans previously included within uncovered nonperforming loans, which had a net carrying value of approximately $10.5 million at September 30, 2014.  At December 31, 2014, the related assets are included in "Other real estate owned and repossessed assets" at a net carrying value of approximately $9.7 million, net of charge offs and payments applied.  These assets resulted in approximately $900 thousand of credit-related charges during the fourth quarter.  

The net benefit for loan losses on covered loans in the fourth quarter of 2014 decreased $3.6 million to a benefit of $2.7 million, compared to a benefit of $6.3 million in the third quarter of 2014.  At December 31, 2014, the allowance for loan losses on covered loans was $21.4 million, or 6.16% of total covered loans, compared to $25.8 million, or 6.38% of total covered loans at September 30, 2014.  The decrease in allowance for loan losses on covered loans primarily reflects the relief of allowance resulting from unanticipated payments received on loans.

During the fourth quarter of 2014, we completed re-estimations of cash flow expectations for purchased credit impaired loans acquired in each of our acquisitions.  For the re-estimations, loans with changes in cash flow expectations resulted in net additional loan loss provisions of $3.0 million ($2.6 million uncovered and $456 thousand covered).  The re-estimations also resulted in a $24.5 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.  The improvement in cash flows on covered loans will be partially offset by a continued reduction in the FDIC indemnification asset, which will impact future earnings through negative accretion.  For loans with cash flow expectation improvements, any previously recorded impairment is reversed with any additional increase in cash flows recognized prospectively as an increase in the accretable yield.

All of our acquired loan portfolios are continuing to perform significantly better than initially anticipated.  We believe improvements in performance are primarily due to improvements in the economy and the efforts made by our Special Assets team that manages our acquired loan portfolios.  Similar to the fourth quarter 2014 re-estimations, the prior re-estimations of cash flows have indicated better overall expected performance than originally anticipated at acquisition.

Balance Sheet and Capital Management

Total assets increased $126.6 million to $5.9 billion at December 31, 2014 compared to September 30, 2014.  The primary drivers of the increase in assets in the quarter ended December 31, 2014 were an increase in net total loans of $214.5 million, partially offset by decreases of $44.9 million in cash and cash equivalents, $29.1 million in loans held for sale and $15.4 million in the FDIC indemnification asset.  The decrease in the FDIC indemnification asset primarily reflects the impact of $7.5 million of indemnification asset negative accretion, $5.6 million of indemnification write-off due to settlements and the results of our quarterly re-estimations of cash flow expectations for covered purchased credit impaired loans and $1.7 million of claims filed for losses on covered loans.  

Net total loans at December 31, 2014 increased $214.5 million to $4.2 billion, compared to $4.0 billion at September 30, 2014.  During the fourth quarter of 2014, Talmer Bank and Trust's net total loans grew by $223.9 million resulting from $276.8 million of net uncovered loan growth, partially offset by $52.9 million of net covered loan run-off.  Talmer West Bank experienced net loan run-off of $9.4 million in the fourth quarter of 2014.  We continue to be focused on sourcing quality loan growth to overcome the run-off of higher-yielding acquired loans.  Our covered loan portfolio has now declined to $346.5 million, or 8.2%, of total loans, which are covered by loss sharing agreements entered into with the FDIC.  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 $5.1 billion at December 31, 2014 compared to $5.0 billion at September 30, 2014.  The $111.7 million increase in liabilities in the quarter ended December 31, 2014 was primarily due to increases in long-term debt of $69.0 million and in total deposits of $63.3 million, partially offset by a decrease in short-term borrowings of $14.8 million.  The increase in long-term debt primarily reflects additional Federal Home Loan Bank ("FHLB") advances entered into during the period.  Total deposit growth included other brokered funds of $169.0 million, partially offset by declines in time deposits of $68.8 million, noninterest-bearing demand deposits of $20.8 million, interest-bearing demand deposits of $12.6 million and money market and savings deposits of $3.5 million.  The decrease in short-term borrowings primarily reflects decreases in outstanding securities sold under agreements to repurchase of $51.9 million, partially offset by additional short-term FHLB borrowings of $40.0 million. 

Total shareholders' equity increased $15.0 million, or 2.0%, to $761.6 million at December 31, 2014, compared to September 30, 2014.  The increase in shareholders' equity primarily reflects our fourth quarter 2014 net income of $12.5 million.

Our Tier 1 leverage ratio improved to 11.56% at December 31, 2014 compared to 11.45% at September 30, 2014.  We anticipate that the implementation of new Basel III capital rules during the first quarter of 2015 will have a modestly positive impact to our regulatory capital ratios.

Key Performance Goals

Our near-term focus continues to be on driving quality loan and core deposit growth and realizing significant operating synergies as we move toward fully integrating our acquired banks.  This includes the consolidation of back office processes, personnel and facilities and the wind-down of third party expenses associated with meeting regulatory compliance and system enhancements.  Recent increases in the level of merger activity in our market area offer the potential for additional opportunities to further leverage our capital position; however, we strive to remain disciplined in our evaluation of the risks and challenges in each and every deal.  The effective integration of operations and culture from previous acquisitions and the ongoing investment in core growth provide momentum in our pursuit of delivering a sustainable 1%+ core return on assets.

Conference Call and Webcast

Talmer Bancorp, Inc. will host a live conference webcast to review fourth quarter 2014 financial results at 10:00 a.m. ET on Monday, February 2, 2015. The webcast may be accessed through Talmer's Investor Relations page at www.talmerbank.com where a link will be provided. Interested parties may also access the conference call by calling (888) 317-6003 (event ID No. 6379006) or internationally at (412) 317-6061.  A replay of the webcast will be available for approximately 90 days after the event on Talmer's Investor Relations page at www.talmerbank.com.

About Talmer Bancorp, Inc.

Headquartered in Troy, Michigan, Talmer Bancorp, Inc. is the holding company for Talmer Bank and Trust and Talmer West Bank.  These banks, operating through branches and lending offices in Michigan, Ohio, Illinois, Indiana, and Nevada, offer 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 related to our future expectations, including all statements under the heading entitled "Key Performance Goals," statements about our strong lending pipelines, further incremental improvements in our operating efficiencies in 2015, the anticipated completion of the First of Huron Corp. acquisition and operational integration of Talmer West Bank, expectations related to growth opportunities in our markets, including our ability to pursue additional acquisitions, our ability to drive strong earning asset and fee income growth, our anticipated implementation of the new Basel III capital rules, and our strategic plan.  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 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, excessive loan losses, and, with respect to the proposed acquisition of First of Huron Corp., the inability to meet certain closing terms and conditions, 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.

Logo - http://photos.prnewswire.com/prnh/20120227/CL59542LOGO

SOURCE Talmer Bancorp, Inc.

Related Links

http://www.talmerbank.com