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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to            

 

Commission file number: 001-36308

 

TALMER BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(248) 498-2802

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

The number of shares outstanding of the issuer’s Class A common stock, as of May 12, 2015 was 70,943,623.

 

 

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TABLE OF CONTENTS

 

		Page
Cautionary Note Regarding Forward-Looking Statements		1
PART I — FINANCIAL INFORMATION		2
ITEM 1.	Financial Statements (Unaudited)	2
	Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014	2
	Consolidated Statements of Income for the three months ended March 31, 2015 and 2014	3
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014	4
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and 2014	5
	Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014	6
	Notes to Consolidated Statements	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	61
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	100
ITEM 4.	Controls and Procedures	103
PART II — OTHER INFORMATION		104
ITEM 1.	Legal Proceedings	104
ITEM 1A.	Risk Factors	104
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	104
ITEM 3.	Defaults Upon Senior Securities	104
ITEM 4.	Mine Safety Disclosures	104
ITEM 5.	Other Information	104
ITEM 6.	Exhibits	104

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements included in this report that are not historical in nature are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended.  The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements.  These forward-looking statements include statements related to our projected growth, bank subsidiary consolidations, including the anticipated costs associated with such consolidations, anticipated future financial performance, and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from expected developments or events, or business and growth strategies, including anticipated internal growth and plans to establish or acquire banks or the assets of failed banks.

 

These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ materially from those anticipated in such statements.  Potential risks and uncertainties include the following:

 

·                  the reaction to the anticipated acquisition of the banks’ customers, employees and counterparties or difficulties related to the transition of services;

·                  the inability to obtain the requisite regulatory approvals for our anticipated bank subsidiary consolidation and meet other closing terms and conditions;

·                  general economic conditions (both generally and in our markets) may be less favorable than expected, which could result in, among other things, a deterioration in credit quality, a reduction in demand for credit and a decline in real estate values;

·                  the general decline in the real estate and lending markets, particularly in our market areas, may continue to negatively affect our financial results;

·                  our ability to raise additional capital may be impaired if current levels of market disruption and volatility continue or worsen;

·                  our inability to be reimbursed by the FDIC for any further losses on non-single family covered assets as our reimbursement rights expire over the next year;

·                  prior to termination of our loss share agreements, we may be unable to collect reimbursements on losses that we incur on our assets covered under loss share agreements with the FDIC as we anticipate;

·                  costs or difficulties related to the integration of the banks we acquired or may acquire, including Talmer West Bank, may be greater than expected;

·                  restrictions or conditions imposed by our regulators on our operations or the operations of banks we acquire, including the terms of the Talmer West Bank Consent Order with the FDIC and the Michigan Department of Insurance and Financial Services, may make it more difficult for us to achieve our goals;

·                  legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect us;

·                  competitive pressures among depository and other financial institutions may increase significantly;

·                  changes in the interest rate environment may reduce margins or the volumes or values of the loans we make or have acquired;

·                  other financial institutions have greater financial resources and may be able to develop or acquire products that enable them to compete more successfully than we can;

·                  our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;

·                  adverse changes may occur in the bond and equity markets;

·                  war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; and

·                  economic, governmental or other factors may prevent the projected population, residential and commercial growth in the markets in which we operate.

 

You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  See Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2014, for a description of some of the important factors that may affect actual outcomes.

 

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PART I

 

Item 1.  Financial Statements.

 

Talmer Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

 

		March 31,			December 31,
(Dollars in thousands, except per share data)		2015			2014
Assets
Cash and due from banks		$	77,957		$	86,185
Interest-bearing deposits with other banks		303,926			96,551
Federal funds sold and other short-term investments		104,000			71,000
Total cash and cash equivalents		485,883			253,736
Securities available-for-sale		730,393			740,819
Federal Home Loan Bank stock		20,744			20,212
Loans held for sale, at fair value		66,556			93,453
Loans:
Residential real estate (includes $21.7 million and $18.3 million respectively, measured at fair value) (1)		1,474,042			1,426,012
Commercial real estate		1,404,906			1,310,938
Commercial and industrial		947,735			869,477
Real estate construction (includes $431 thousand and $1.2 million respectively, measured at fair value) (1)		140,893			131,686
Consumer		188,508			164,524
Total loans, excluding covered loans		4,156,084			3,902,637
Less: Allowance for loan losses - uncovered		(34,477		)	(33,819		)
Net loans - excluding covered loans		4,121,607			3,868,818
Covered loans		317,593			346,490
Less: Allowance for loan losses - covered		(17,988		)	(21,353		)
Net loans - covered		299,605			325,137
Net total loans		4,421,212			4,193,955
Premises and equipment		48,150			48,389
FDIC indemnification asset		50,702			67,026
Other real estate owned and repossessed assets		42,921			48,743
Loan servicing rights		54,409			70,598
Core deposit intangible		14,796			13,035
Goodwill		2,926			—
FDIC receivable		7,839			6,062
Company-owned life insurance		103,924			97,782
Income tax benefit		182,223			177,472
Other assets		47,273			40,982
Total assets		$	6,279,951		$	5,872,264
Liabilities
Deposits:
Noninterest-bearing demand deposits		$	964,163		$	887,567
Interest-bearing demand deposits		784,001			660,697
Money market and savings deposits		1,257,919			1,170,236
Time deposits		1,312,992			1,188,178
Other brokered funds		459,499			642,185
Total deposits		4,778,574			4,548,863
FDIC clawback liability		27,881			26,905
FDIC warrants payable		4,472			4,633
Short-term borrowings		216,747			135,743
Long-term debt		462,252			353,972
Other liabilities		36,172			40,541
Total liabilities		5,526,098			5,110,657
Shareholders’ equity
Preferred stock - $1.00 par value
Authorized - 20,000,000 shares at 3/31/2015 and 12/31/2014
Issued and outstanding - 0 shares at 3/31/2015 and 12/31/2014		—			—
Common stock:
Class A Voting Common Stock - $1.00 par value
Authorized - 198,000,000 shares at 3/31/2015 and at 12/31/2014
Issued and outstanding -70,938,113 shares at 3/31/2015 and 70,532,122 shares at 12/31/2014		70,938			70,532
Class B Non-Voting Common Stock - $1.00 par value
Authorized - 2,000,000 shares at 3/31/2015 and 12/31/2014
Issued and outstanding - 0 shares at 3/31/2015 and 12/31/2014		—			—
Additional paid-in-capital		385,755			405,436
Retained earnings		290,520			281,789
Accumulated other comprehensive income, net of tax		6,640			3,850
Total shareholders’ equity		753,853			761,607
Total liabilities and shareholders’ equity		$	6,279,951		$	5,872,264

 

(1)  Amounts represent loans for which the Company has elected the fair value option.  See Note 3.

 

See notes to Consolidated Financial Statements.

 

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Talmer Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

 

		Three months ended March 31,
(Dollars in thousands, except per share data)		2015			2014
Interest income
Interest and fees on loans		$	59,944		$	53,501
Interest on investments
Taxable		2,323			1,866
Tax-exempt		1,615			1,965
Total interest on securities		3,938			3,831
Interest on interest-earning cash balances		86			216
Interest on federal funds and other short-term investments		165			140
Dividends on FHLB stock		245			222
FDIC indemnification asset		(9,250		)	(6,718		)
Total interest income		55,128			51,192
Interest Expense
Interest-bearing demand deposits		290			224
Money market and savings deposits		471			494
Time deposits		1,827			1,491
Other brokered funds		623			29
Interest on short-term borrowings		79			175
Interest on long-term debt		802			574
Total interest expense		4,092			2,987
Net interest income		51,036			48,205
Provision for loan losses - uncovered		3,412			6,424
Benefit for loan losses - covered		(1,419		)	(2,498		)
Net interest income after provision for loan losses		49,043			44,279
Noninterest income
Deposit fee income		2,320			3,298
Mortgage banking and other loan fees		(1,261		)	1,085
Net gain on sales of loans		8,618			3,044
Bargain purchase gain		—			41,977
FDIC loss sharing income		(1,068		)	(113		)
Accelerated discount on acquired loans		8,198			6,466
Net loss on sales of securities		(107		)	(2,310		)
Other income		4,730			4,293
Total noninterest income		21,430			57,740
Noninterest expense
Salary and employee benefits		29,212			35,851
Occupancy and equipment expense		7,666			9,043
Data processing fees		1,854			1,740
Professional service fees		3,543			4,037
FDIC loss sharing expense		949			524
Bank acquisition and due diligence fees		1,412			2,929
Marketing expense		1,095			1,091
Other employee expense		934			643
Insurance expense		1,530			1,831
Other expense		8,400			7,759
Total noninterest expense		56,595			65,448
Income before income taxes		13,878			36,571
Income tax provision (benefit)		4,441			(1,656		)
Net income		$	9,437		$	38,227
Earnings per common share:
Basic		$	0.13		$	0.56
Diluted		$	0.12		$	0.52
Average common shares outstanding - basic		70,216			68,121
Average common shares outstanding - diluted		75,103			73,377

 

See notes to Consolidated Financial Statements.

 

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Talmer Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

		Three months ended March 31,
(Dollars in thousands)		2015			2014
Net income		$	9,437		$	38,227
Other comprehensive income:
Unrealized holding gains on securities available-for-sale arising during the period		4,423			6,277
Reclassification adjustment for losses on realized income		107			2,310
Tax effect		(1,586		)	(3,006		)
Net unrealized gains on securities available-for-sale, net of tax		2,944			5,581
Unrealized losses on cash flow hedges		(325		)	—
Reclassification adjustment for losses included in net income		88			—
Tax effect		83			—
Net unrealized losses on cash flow hedges, net of tax		(154		)	—
Other comprehensive income, net of tax		2,790			5,581
Total comprehensive income, net of tax		$	12,227		$	43,808

 

See notes to Consolidated Financial Statements.

 

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Talmer Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

							Additional						Accumulated Other			Total
		Common Stock					Paid in			Retained			Comprehensive			Shareholders’
(In thousands)		Shares		Amount			Capital			Earnings			Income (Loss)			Equity
Balance at December 31, 2013		66,234		$	66,234		$	366,428		$	192,349		$	(7,996	)	$	617,015
Net income		—		—			—			38,227			—			38,227
Other comprehensive income		—		—			—			—			5,581			5,581
Stock-based compensation expense		—		—			180			—			—			180
Issuance of common shares, including tax benefit		3,728		3,728			38,297			—			—			42,025
Balance at March 31, 2014		69,962		$	69,962		$	404,905		$	230,576		$	(2,415	)	$	703,028
Balance at December 31, 2014		70,532		$	70,532		$	405,436		$	281,789		$	3,850		$	761,607
Net income		—		—			—			9,437			—			9,437
Other comprehensive income		—		—			—			—			2,790			2,790
Stock-based compensation expense		—		—			351			—			—			351
Restricted stock awards		325		325			(325		)	—			—			—
Issuance of common shares, including tax benefit		81		81			185			—			—			266
Repurchase of warrants to repurchase 2.5 million shares, at fair value		—		—			(19,892		)	—			—			(19,892		)
Cash dividends paid on common stock ($0.01 per share)		—		—			—			(706		)	—			(706		)
Balance at March 31, 2015		70,938		$	70,938		$	385,755		$	290,520		$	6,640		$	753,853

 

See notes to Consolidated Financial Statements.

 

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Talmer Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		Three months ended March 31,
(Dollars in thousands)		2015			2014
Cash flows from operating activities
Net income		$	9,437		$	38,227
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,909			1,198
Amortization of core deposit intangibles		649			736
Stock-based compensation expense		351			180
Provision for loan losses		1,993			3,926
Originations of loans held for sale		(293,643		)	(239,275		)
Proceeds from sales of loans		325,939			251,823
Net gain from sales of loans		(8,618		)	(3,044		)
Net loss on sales of securities		107			2,310
Gain on acquisition		—			(41,977		)
Valuation allowance and writedowns on other real estate and other repossessed assets		3,915			1,046
Valuation change in Company-owned life insurance		(1,423		)	(314		)
Valuation change in loan servicing rights		6,402			3,067
Additions to loan servicing rights		(2,915		)	(1,589		)
Net decrease in FDIC indemnification asset and receivable		12,784			10,293
Net gain on sales of other real estate owned and repossessed assets		(1,401		)	(1,140		)
Net (increase)/decrease in accrued interest receivable and other assets		(751		)	591
Net increase/(decrease) in accrued expenses and other liabilities		(7,675		)	4,876
Net securities premium amortization		1,661			748
Deferred income tax benefit		(5,663		)	(3,585		)
Change in valuation allowance of deferred income tax asset		—			(34		)
Other, net		(13		)	117
Net cash from operating activities		43,045			28,180
Cash flows from investing activities
Net increase in uncovered loans		(61,841		)	(108,052		)
Net decrease in covered loans		23,598			30,202
Purchases of loans		(30,793		)	—
Purchases of FHLB stock		—			(1,000		)
Purchases of securities available-for-sale		(30,928		)	(61,288		)
Purchases of premises and equipment		(1,130		)	(4,263		)
Payments received from FDIC under loss sharing agreements		1,763			2,176
Proceeds from:
Maturities and redemptions of securities available-for-sale		53,523			14,014
Redemption of FHLB Stock		342			10,901
Sale of securities available-for-sale		24,615			54,458
Sale of loan servicing rights		12,702			—
Sale of loans		—			3,034
Sale of other real estate owned and repossessed assets		10,929			9,534
Sale of premises and equipment		1,145			1,618
Net cash provided from acquisition		810			209,831
Net cash from (used in) investing activities		4,735			161,165
Cash flows from financing activities
Net increase/(decrease) in deposits		28,258			(72,302		)
Draw on senior unsecured line of credit		20,000			—
Repayments of senior unsecured line of credit		—			(35,000		)
Issuances of federal funds purchased		126,000			—
Net increase/(decrease) in other short-term borrowings		(64,996		)	52,668
Issuances of long-term FHLB advances		100,000			—
Repayments of long-term FHLB advances		(8,469		)	(21,179		)
Repayments on long-term sweep repurchase agreements		(411		)	(408		)
Repayments of subordinated debt		3,500			—
Other changes in long-term debt		817			33
Repurchase of warrants to repurchase 2.5 million shares, at fair value		(19,892		)	—
Proceeds from issuance of common stock, including tax benefit		266			42,025
Cash dividends paid on common stock ($0.01 per share)		(706		)	—
Net cash from (used in) financing activities		184,367			(34,163		)
Net change in cash and cash equivalents		232,147			155,182
Beginning cash and cash equivalents		253,736			375,356
Ending cash and cash equivalents		$	485,883		$	530,538
Supplemental disclosure of cash flow information:
Interest paid		$	4,040		$	3,312
Income taxes paid		5,662			2,226
Transfer from loans to other real estate owned and repossessed assets		6,191			5,817
Net transfer of loans held for sale to loans held for investment		(3,219		)	(236		)
Transfer from premises and equipment to other real estate owned		455			275
Non-cash transactions:
Increase in assets and liabilities in acquisitions:
Securities		34,022			13,619
FHLB stock		874			5,933
Uncovered loans		162,951			571,666
Premises and equipment		2,077			4,912
Loan servicing rights		—			767
Company-owned life insurance		4,719			—
Other real estate owned and repossessed assets		1,260			30,878
Core deposit intangible		2,410			3,633
Other assets		6,131			62,542
Deposits		201,453			857,769
Short-term borrowings		—			18
Long-term debt		12,843			—
Other liabilities		3,884			4,017

 

See notes to Consolidated Financial Statements.

 

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TALMER BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

 

1. BASIS OF PRESENTATION AND RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS

 

The accompanying unaudited consolidated financial statements of Talmer Bancorp, Inc. (“the Company”), and its wholly-owned subsidiaries have been prepared in accordance with United States (U.S.) generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Consolidated Financial Statements, primarily consisting of normal recurring adjustments, have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or for any other interim period. Certain items in prior periods were reclassified to conform to the current presentation.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s consolidated financial statements and footnotes included in the Annual Report of Talmer Bancorp, Inc. on Form 10-K for the year ended December 31, 2014.

 

On February 6, 2015, the Company acquired First of Huron Corp. which resulted in the recognition of goodwill on the Consolidated Balance Sheets. For further information, refer to Note 2, “Business Combinations”.  Goodwill is initially recorded as the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination.  Goodwill is required to be tested annually for impairment or whenever events occur that may indicate that the recoverability of the carrying amount is not probable.  In the event of impairment, the amount by which the carrying amount exceeds the fair value is charged to earnings.

 

On February 17, 2015, the Company repurchased an aggregate of 2,529,416 warrants to repurchase shares of Class A common stock including 1,623,162 of warrants issued on April 30, 2010, 109,122 of warrants issued on February 21, 2012 and 797,132 of warrants issued on December 27, 2012.  The purchase price was based upon the fair value of the warrants on February 17, 2015, determined utilizing the closing price of our stock on the date of repurchase, and resulted in an aggregate purchase price of $19.9 million.

 

Recently Adopted and Issued Accounting Standards:  The following provides a description of recently adopted or newly issued not yet effective accounting standards that had or could have a material effect on our financial statements.

 

In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including revenue recognition guidance.  The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is intended to clarify and converge the revenue recognition principles under U.S. GAAP and International Financial Reporting Standards and to streamline revenue recognition requirements in addition to expanding required revenue recognition disclosures.  ASU 2014-09 is effective for public companies for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016.  As such, the Company will adopt ASU 2014-09 as of January 1, 2017.  Under the provision, the Company will have the option to adopt the guidance using either a full retrospective method or a modified transition approach.  The Company is currently evaluating the provisions of ASU 2014-09.

 

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2.  BUSINESS COMBINATIONS

 

The Company has determined that the acquisitions of First of Huron Corp. (“FHC”), and its subsidiary bank, Signature Bank, and Talmer West Bank (formerly known as Michigan Commerce Bank) constitute business combinations as defined by FASB ASC Topic 805, “Business Combinations.”  Accordingly, the assets acquired and liabilities assumed were recorded at their fair values on the date of acquisition, as required. Fair values were determined based on the requirements of FASB ASC Topic 820, “Fair Value Measurement.” In many cases the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change.

 

On February 6, 2015, the Company acquired FHC for aggregate cash consideration of $13.4 million. In connection with the merger, FHC merged with Talmer Bancorp, Inc., with Talmer Bancorp, Inc. as the surviving company in the merger.  Immediately following the merger, Signature Bank, a Michigan state-chartered bank and wholly owned subsidiary of FHC, merged with and into Talmer Bank and Trust, with Talmer Bank and Trust as the surviving bank.  The Company assumed $3.5 million in subordinated notes issued to FHC and $1.4 million of related interest. The subordinated debt was immediately retired and the interest was paid in full in accordance with the provision of the purchase agreement. The Company also received FHC’s common securities issued by trust preferred issuers and assumed $876 thousand of outstanding interest. The outstanding interest on the trust preferred securities was immediately paid off in accordance with the provisions of the purchase agreement. The Company received certain tax assets and all cash and cash equivalents held by FHC. The Company incurred $1.0 million of acquisition related expenses during the three months ended March 31, 2015, related to the acquisition of FHC, included within “Bank acquisition and diligence fees” in the Consolidated Statements of Income. All of the branches acquired fit squarely within the Company’s target market areas.

 

The acquisition resulted in a recorded $4.5 million in net deferred tax assets at acquisition.  Upon acquisition, FHC incurred an ownership change within the meaning of Section 382 of the Internal Revenue Code, but the acquisition did not result in built-in losses within the meaning of Section 382. At February 6, 2015, FHC had an estimated $1.7 million in gross federal net operating loss carry forwards expiring in 2030, 2032 and 2033 and $303 thousand in federal alternative minimum tax credits with an indefinite life.  As a result of the ownership change, the Company’s ability to benefit from the use of FHC’s pre-ownership change net operating loss and tax credit carry forwards will be limited to approximately $366 thousand per year.  No valuation allowance was established against the deferred tax assets associated with FHC’s pre-change net operating losses and tax credit carry forwards based on management’s estimate that none of the amounts will expire unused.

 

The assets and liabilities associated with the acquisition of FHC were recorded in the Consolidated Balance Sheets at estimated fair value as of the acquisition date. The following allocation is based on the information that was available to make preliminary estimates of the fair value and may change as additional information becomes available and additional analyses are completed. While the Company believes that information provided a reasonable basis for estimating the fair values, it expects that it could obtain additional information and evidence during the measurement period that may result in changes to the estimated fair value amounts. This measurement period ends on the earlier of one year after the acquisition date or the date we receive the information about the facts and circumstances that existed at the acquisition date. Subsequent adjustments are, and if necessary, will be retrospectively reflected in future filings. These refinements include: (1) changes in the estimated fair value of loans acquired; (2) changes in the estimated fair value of certain premises and equipment acquired; (3) changes in deferred tax assets related to fair value estimates and a change in the expected realization of items considered to be built in losses and (4) a change in the goodwill caused by the net effect of these adjustments.

 

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(Dollars in thousands)
Consideration paid:
Cash		$	13,395
Fair value of identifiable assets acquired:
Cash and cash equivalents		14,205
Investment securities		34,022
Federal Home Loan Bank stock		874
Loans		162,951
Premises and equipment		2,077
Company-owned life insurance		4,719
Other real estate owned and repossessed assets		1,260
Core deposit intangible		2,410
Other assets		6,131
Total identifiable assets acquired		228,649
Fair value of liabilities assumed:
Deposits		201,453
Long-term debt		12,843
Other liabilities		3,884
Total liabilities assumed		218,180
Fair value of net identifiable assets acquired		10,469
Goodwill recognized in the acquisiton		$	2,926

 

The FHC acquisition resulted in recognition of $2.9 million of goodwill which is the excess of the consideration paid over the fair value of net assets acquired, and is the result of expected operational synergies and other factors.

 

Loans acquired in the FHC acquisition were initially recorded at fair value with no separate allowance for loan losses.  The Company reviewed the loans at acquisition to determine which should be considered purchased credit impaired loans (i.e. loans accounted for under FASB ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”)) defining impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonperforming loans at the acquisition date.

 

Fair values for purchased loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of the loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates.  Larger purchased loans are individually evaluated while smaller purchased loans are grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

 

The Company accounts for purchased credit impaired loans in accordance with the provisions of ASC 310-30.  The cash flows expected to be collected on purchased loans are estimated based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments.  Purchased loans are considered credit impaired if there is evidence of credit deterioration at the date of purchase and if it is probable that not all contractually required payments will be collected.  Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows is recognized on the acquired loans accounted for under ASC 310-30.

 

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Purchased loans outside the scope of ASC 310-30 are accounted for under FASB ASC Subtopic 310-20, “Receivables - Nonrefundable Fees and Costs” (ASC 310-20).  Premiums and discounts created when the loans were recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan’s yield.

 

The core deposit intangible is being amortized on an accelerated basis over the estimated life, currently expected to be 10 years.

 

Information regarding acquired loans accounted for under ASC 310-30 as well as those excluded from ASC 310-30 accounting at acquisition date is as follows:

 

(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows		$	53,807
Contractual cash flows not expected to be collected (nonaccretable difference)		7,387
Expected cash flows		46,420
Interest component of expected cash flows (accretable yield)		5,279
Fair value at acquisition		$	41,141
Excluded from ASC 310-30 accounting:
Unpaid principal balance		$	124,538
Fair value discount		(2,728		)
Fair value at acquisition		121,810
Total fair value at acquisition		$	162,951

 

FHC’s results of operations have been included in the Company’s financial results since the February 6, 2015 acquisition date. The acquisition was not considered material to the Company’s financial statements; therefore pro forma financial data and related disclosures are not included.

 

On January 1, 2014, the Company purchased 100% of the capital stock of Financial Commerce Corporation’s wholly-owned subsidiary banks, Michigan Commerce Bank, a Michigan state-chartered bank, Indiana Community Bank, an Indiana state-chartered bank, Bank of Las Vegas, a Nevada state-chartered bank and Sunrise Bank of Albuquerque, a New Mexico state-chartered bank, and certain other bank-related assets from Financial Commerce Corporation and its parent holding company, Capitol Bancorp Ltd., in a transaction facilitated under Section 363 of the U.S. Bankruptcy Code, for cash consideration of $4.0 million and a separate $2.5 million payment to fund an escrow account to pay the post-petition administrative fees and expenses of the professionals in the bankruptcy cases of Financial Commerce Corporation and Capital Bancorp, Ltd., each of which filed voluntary bankruptcy petitions under Chapter 11 of the U.S. Bankruptcy Code on August 9, 2012, with any unused escrowed funds to be refunded to the Company.

 

Immediately prior to consummation of the acquisition, Capitol Bancorp Ltd. merged Indiana Community Bank, Bank of Las Vegas and Sunrise Bank of Albuquerque with and into Michigan Commerce Bank, with Michigan Commerce Bank as the surviving bank in the merger.  Simultaneously with the merger, Michigan Commerce Bank changed its name to Talmer West Bank.  The Company contributed $99.5 million of additional capital during the three months ended March 31, 2014 to Talmer West Bank in order to recapitalize the bank.  In order to support the acquisition and recapitalization of Talmer West Bank, the Company borrowed $35.0 million under a senior unsecured line of credit. The Company used a portion of the net proceeds from the initial public offering that closed on February 14, 2014 to repay the $35.0 million during the first quarter of 2014.  The Company incurred $378 thousand and $1.8 million of acquisition related expenses related to the acquisition of Talmer West Bank during the three months ended March 31, 2015 and 2014, respectively.  These acquisition related expenses are included within “Bank acquisition and due diligence fees” in the Consolidated Statements of Income.  Twelve of the

 

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branches acquired, or 70% of the total number of branches acquired in the acquisition, fit squarely within the Company’s target market areas.

 

The assets and liabilities associated with the acquisition of Talmer West Bank were recorded in the Consolidated Balance Sheets at estimated fair value as of the acquisition date as presented in the following table.

 

(Dollars in thousands)
Consideration paid:
Cash		$	6,500
Fair value of identifiable assets acquired:
Cash and cash equivalents		216,331
Investment securities		13,619
Federal Home Loan Bank stock		5,933
Loans		571,666
Premises and equipment		4,912
Loan servicing rights		767
Other real estate owned		30,878
Core deposit intangible		3,633
Other assets		62,542
Total identifiable assets acquired		910,281
Fair value of liabilities assumed:
Deposits		857,769
Other liabilities		4,035
Total liabilities assumed		861,804
Fair value of net identifiable assets acquired		48,477
Bargain purchase gain resulting from acquisition		$	41,977

 

The Talmer West Bank acquisition resulted in a pre-tax bargain purchase gain of $42.0 million as the estimated fair value of assets acquired exceeded the estimated fair value of liabilities assumed and consideration paid.  The gain was included within “Bargain purchase gain” in the Consolidated Statements of Income.

 

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Loans acquired in the Talmer West Bank acquisition were initially recorded at fair value with no separate allowance for loan losses.  Information regarding acquired loans accounted for under ASC 310-30 as well as those excluded from ASC 310-30 accounting at acquisition date is as follows:

 

(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows		$	331,523
Contractual cash flows not expected to be collected (nonaccretable difference)		86,410
Expected cash flows		245,113
Interest component of expected cash flows (accretable yield)		32,764
Fair value at acquisition		$	212,349
Excluded from ASC 310-30 accounting:
Unpaid principal balance		$	362,782
Fair value discount		(3,465		)
Fair value at acquisition		359,317
Total fair value at acquisition		$	571,666

 

Talmer West Bank’s results of operations have been included in the Company’s financial results since the January 1, 2014 acquisition date.

 

3.  FAIR VALUE

 

The fair value framework as detailed by FASB ASC Topic 820, “Fair Value Measurement” requires the categorization of assets and liabilities into a three-level hierarchy based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. A brief description of each level follows.

 

Level 1 — Valuation is based upon quoted prices (unadjusted) for identical instruments in active markets.

 

Level 2 — Valuation is based upon quoted prices for identical or similar instruments in markets that are not active; quoted prices for similar instruments in active markets; or model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

 

Level 3 — Valuation is measured through utilization of model-based techniques that rely on at least one significant assumption not observable in the market. Any necessary unobservable assumptions used reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques.

 

Fair value estimates are based on existing financial instruments and, in accordance with U.S. GAAP, do not attempt to estimate the value of anticipated future business or the value of assets and liabilities that are not considered financial instruments. In addition, tax ramifications related to the recognition of unrealized gains and losses, such as those within the investment securities portfolio, can have a significant effect on estimated fair values and, in accordance with U.S. GAAP, have not been considered in the estimates. For these reasons, the aggregate fair value should not be considered an indication of the value of the Company.

 

Following is a description of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and any significant assumptions used to estimate fair value disclosures for financial assets and liabilities not recorded at fair value in their entirety on a recurring basis. For financial assets and liabilities recorded at fair value, the description includes the level of the fair

 

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