Talmer Bancorp (TLMR) 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

or

oTRANSITION 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)

Michigan	61-1511150
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2301 West Big Beaver Rd, Suite 525 Troy, Michigan	48084
(Address of principal executive offices)	(Zip Code)

(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.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x  (Do not check if a smaller reporting company)	Smaller reporting company o

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 November 12, 2014 was 70,503,920.

TABLE OF CONTENTS

		Page
Cautionary Note Regarding Forward-Looking Statements		1
PART I — FINANCIAL INFORMATION		2
ITEM 1.	Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	2
	Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013	3
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013	4
	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2014 and 2013	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	6
	Notes to Consolidated Statements	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	70
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	113
ITEM 4.	Controls and Procedures	116
PART II — OTHER INFORMATION		117
ITEM 1.	Legal Proceedings	117
ITEM 1A.	Risk Factors	117
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	117
ITEM 3.	Defaults Upon Senior Securities	117
ITEM 4.	Mine Safety Disclosures	117
ITEM 5.	Other Information	117
ITEM 6.	Exhibits	117

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,” “may” 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, proposed branch sales, branch 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 (including the pending acquisition of First of Huron Corporation) 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 acquisition 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 continued deterioration in credit quality, a further reduction in demand for credit and a further 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;

·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, 2013, for a description of some of the important factors that may affect actual outcomes.

1

PART I

Item 1.  Financial Statements.

Talmer Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

	September 30,			December 31,
(Dollars in thousands, except per share data)	2014			2013
Assets
Cash and due from banks	$	91,214		$	97,167
Interest-bearing deposits with other banks	121,952			206,160
Federal funds sold and other short-term investments	85,500			72,029
Total cash and cash equivalents	298,666			375,356
Securities available-for-sale	734,489			620,083
Federal Home Loan Bank stock	17,426			16,303
Loans held for sale	122,599			85,252
Loans:
Residential real estate (includes $17.9 million and $16.3 million respectively, measured at fair value) (1)	1,430,939			1,085,453
Commercial real estate	1,213,361			755,839
Commercial and industrial	790,867			446,644
Real estate construction (includes $1.4 million measured at fair value at December 31, 2013) (1)	102,920			176,226
Consumer	93,246			9,754
Total loans, excluding covered loans	3,631,333			2,473,916
Less: Allowance for loan losses - uncovered	(29,892		)	(17,746		)
Net loans - excluding covered loans	3,601,441			2,456,170
Covered loans	403,792			530,068
Less: Allowance for loan losses - covered	(25,768		)	(40,381		)
Net loans - covered	378,024			489,687
Net total loans	3,979,465			2,945,857
Premises and equipment	49,462			51,001
FDIC indemnification asset	82,441			131,861
Other real estate owned	44,940			29,955
Loan servicing rights	74,380			78,603
Core deposit intangible	13,696			13,205
FDIC receivable	12,873			7,783
Company-owned life insurance	96,605			39,500
Income tax benefit	181,318			126,200
Other assets	35,810			26,402
Total assets	$	5,744,170		$	4,547,361
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	908,343		$	779,379
Interest-bearing demand deposits	673,336			598,281
Money market and savings deposits	1,173,697			1,215,864
Time deposits	1,256,981			927,313
Other brokered funds	473,240			80,000
Total deposits	4,485,597			3,600,837
FDIC clawback liability	25,723			24,887
FDIC warrants payable	4,563			4,118
Short-term borrowings	150,573			71,876
Long-term debt	285,009			199,037
Other liabilities	46,053			29,591
Total liabilities	4,997,518			3,930,346
Shareholders’ equity
Preferred stock - $1.00 par value
Authorized - 20,000,000 shares at 9/30/2014 and 12/31/2013
Issued and outstanding - 0 shares at 9/30/2014 and 12/31/2013	—			—
Common stock:
Class A Voting Common Stock - $1.00 par value
Authorized - 198,000,000 shares at 9/30/2014 and 12/31/2013
Issued and outstanding - 70,503,920 shares at 9/30/2014 and 66,234,397 shares at 12/31/2013	70,504			66,234
Class B Non-Voting Common Stock - $1.00 par value
Authorized - 2,000,000 shares at 9/30/2014 and 12/31/2013
Issued and outstanding - 0 shares at 9/30/2014 and 12/31/2013	—			—
Additional paid-in-capital	404,068			366,428
Retained earnings	269,993			192,349
Accumulated other comprehensive income (loss), net of tax	2,087			(7,996		)
Total shareholders’ equity	746,652			617,015
Total liabilities and shareholders’ equity	$	5,744,170		$	4,547,361

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

2

Talmer Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands, except per share data)	2014			2013			2014			2013
Interest income
Interest and fees on loans	$	58,108		$	49,475		$	168,446		$	149,503
Interest on investments
Taxable	2,345			1,751			6,421			4,217
Tax-exempt	1,341			1,132			4,432			3,132
Total interest on securities	3,686			2,883			10,853			7,349
Interest on interest earning cash balances	158			97			546			588
Interest on federal funds and other short term investments	186			279			641			726
Dividends on FHLB stock	120			167			465			712
FDIC indemnification asset	(6,663		)	(6,032		)	(18,887		)	(21,088		)
Total interest income	55,595			46,869			162,064			137,790
Interest Expense
Interest-bearing demand deposits	190			174			630			500
Money market and savings deposits	487			447			1,473			1,459
Time deposits	1,611			1,408			4,534			4,614
Other brokered funds	288			38			352			110
Interest on short-term borrowings	122			26			330			81
Interest on long-term debt	701			775			1,902			2,313
Total interest expense	3,399			2,868			9,221			9,077
Net interest income	52,196			44,001			152,843			128,713
Provision for loan losses - uncovered	7,784			2,852			17,427			8,951
Benefit for loan losses - covered	(6,275		)	(727		)	(16,094		)	(7,103		)
Net interest income after provision for loan losses	50,687			41,876			151,510			126,865
Noninterest income
Deposit fee income	3,022			3,547			9,459			12,707
Mortgage banking and other loan fees	2,065			7,173			2,040			23,187
Net gain on sales of loans	4,083			4,835			12,796			37,789
Net gain on sale of branches	14,410			—			14,410			—
Bargain purchase gain	—			—			41,977			71,702
FDIC loss sharing income	(2,420		)	(4,846		)	(5,967		)	(7,059		)
Accelerated discount on acquired loans	3,663			4,345			14,455			10,558
Net gain (loss) on sales of securities	244			—			(2,066		)	100
Other income	4,928			2,930			14,518			8,597
Total noninterest income	29,995			17,984			101,622			157,581
Noninterest expenses
Salary and employee benefits	29,752			29,766			95,872			116,772
Occupancy and equipment expense	8,047			6,582			25,132			20,409
Data processing fees	1,610			3,539			5,610			7,099
Professional service fees	2,985			4,418			9,825			12,666
FDIC loss sharing expense	245			106			1,752			1,524
Bank acquisition and due diligence fees	239			171			2,218			7,874
Marketing expense	1,005			634			3,703			2,825
Other employee expense	663			943			2,163			2,648
Insurance expense	1,364			1,911			4,016			8,123
Other expense	5,353			5,303			20,491			17,865
Total noninterest expenses	51,263			53,373			170,782			197,805
Income before income taxes	29,419			6,487			82,350			86,641
Income tax provision (benefit)	9,904			(4,057		)	4,002			636
Net income	$	19,515		$	10,544		$	78,348		$	86,005
Earnings per common share:
Basic	$	0.28		$	0.16		$	1.13		$	1.30
Diluted	$	0.26		$	0.15		$	1.04		$	1.23
Average common shares outstanding - basic	70,092			66,229			69,414			66,229
Average common shares outstanding - diluted	75,752			69,853			74,948			69,792

See notes to Consolidated Financial Statements.

3

Talmer Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2014			2013			2014			2013
Net income	$	19,515		$	10,544		$	78,348		$	86,005
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale arising during the period	20			297			13,447			(14,181		)
Reclassification adjustment for (gains) losses on realized income (1)	(244		)	—			2,066			(100		)
Net unrealized gains (losses) on securities available-for-sale	(224		)	297			15,513			(14,281		)
Tax effect	78			(104		)	(5,430		)	4,998
Other comprehensive income (loss), net of tax	(146		)	193			10,083			(9,283		)
Total comprehensive income, net of tax	$	19,369		$	10,737		$	88,431		$	76,722

(1) Amounts are included in “Net gain (loss) on sales of securities” in the Consolidated Statements of Income within total noninterest income.  Income tax expense (benefit) associated with the reclassification adjustments for the three months ended September 30, 2014 and 2013 was $85 thousand and $0, respectively, and for the nine months ended September 30, 2014 and 2013 was ($723) thousand and $35 thousand, respectively, and are included in “Income tax provision (benefit)” in the Consolidated Statements of Income.

See notes to Consolidated Financial Statements.

4

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, 2012	66,229	$	66,229	$	356,836		$	93,760		$	3,918		$	520,743
Cumulative effect adjustment of change in accounting policy to beginning retained earnings	—	—		—			31			—			31
Net income	—	—		—			86,005			—			86,005
Other comprehensive loss	—	—		—			—			(9,283		)	(9,283		)
Stock based compensation expense	—	—		9,335			—			—			9,335
Balance at September 30, 2013	66,229	$	66,229	$	366,171		$	179,796		$	(5,365	)	$	606,831
Balance at December 31, 2013	66,234	$	66,234	$	366,428		$	192,349		$	(7,996	)	$	617,015
Net income	—	—		—			78,348			—			78,348
Other comprehensive income	—	—		—			—			10,083			10,083
Stock-based compensation expense	—	—		798			—			—			798
Issuance of common shares	3,892	3,892		37,220			—			—			41,112
Restricted stock awards	378	378		(378		)	—			—			—
Cash dividends paid on common stock ($0.01 per share)	—	—		—			(704		)	—			(704		)
Balance at September 30, 2014	70,504	$	70,504	$	404,068		$	269,993		$	2,087		$	746,652

See notes to Consolidated Financial Statements.

5

Talmer Bancorp, Inc.

Consolidated Statements of Cash Flow

(Unaudited)

	Nine Months Ended September 30,
(Dollars in thousands)	2014			2013
Cash flows from operating activities
Net income	$	78,348		$	86,005
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,781			6,365
Amortization of core deposit intangibles	2,140			2,019
Stock-based compensation expense	798			9,335
Provisions for loan losses	1,333			1,848
Originations of loans held for sale	(760,802		)	(2,093,887		)
Proceeds from sales of loans	692,560			2,150,541
Net gain from sales of loans	(12,796		)	(37,789		)
Net gain on sale of branches	(14,410		)	—
Net (gain)/loss on sales of securities	2,066			(100		)
Gain on acquisition	(41,977		)	(71,702		)
Valuation writedowns on other real estate	4,466			5,722
Valuation change in Company-owned life insurance	(1,886		)	(991		)
Valuation change in loan servicing rights	11,036			(3,997		)
Net additions to loan servicing rights	(6,046		)	(20,130		)
Net decrease in FDIC indemnification asset and receivable	44,330			82,500
Net gain on sales of other real estate owned	(6,660		)	(3,097		)
Net (increase)/decrease in accrued interest receivable and other assets	(15,980		)	6,667
Net increase in accrued expenses and other liabilities	13,222			2,992
Net securities premium amortization	3,846			5,905
Deferred income tax expense	19,193			4,088
Change in valuation allowance of deferred income tax asset	(10,127		)	(6,006		)
Other, net	520			(188		)
Net cash from (used in) operating activities	7,955			126,100
Cash flows from investing activities
Net increase in uncovered loans	(561,623		)	(210,823		)
Net decrease in covered loans	105,748			146,740
Purchases of loans	(53,556		)	—
Purchases of FHLB stock	(6,300		)	(490		)
Purchases of securities available-for-sale	(257,534		)	(405,897		)
Purchases of Company-owned life insurance	(55,219		)	—
Purchases of premises and equipment	(10,502		)	(2,192		)
Proceeds from:
Maturities and redemptions of securities available-for-sale	83,852			221,101
Redemption of FHLB stock	11,110			—
Sale of securities available-for-sale	82,496			7,500
Sale of loans	73,437			—
Sale of other real estate owned	36,965			26,385
Sale of premises and equipment	10,673			667
Sale of deposits	(389,476		)	—
Net cash provided from acquisition	209,831			394,805
Net cash from (used in) investing activities	(720,098		)	177,796
Cash flows from financing activities
Net increase (decrease) in deposits	430,394			(188,770		)
Net increase in short-term borrowings	113,679			99,735
Issuances of long-term FHLB advances	110,000			30,000
Repayments of long-term FHLB advances	(22,902		)	(113,979		)
Repayments on long-term sweep repurchase agreements	(1,226		)	(1,219		)
Repayments of senior unsecured line of credit	(35,000		)	—
Other changes in long-term debt	100			559
Proceeds from issuance of common stock	41,112			—
Cash dividends paid on common stock ($0.01 per share)	(704		)	—
Net cash from (used in) financing activities	635,453			(173,674		)
Net change in cash and cash equivalents	(76,690		)	130,222
Beginning cash and cash equivalents	375,356			362,771
Ending cash and cash equivalents	$	298,666		$	492,993
Supplemental disclosure of cash flow information:
Interest paid	$	9,450		$	8,637
Income taxes paid	5,808			15,795
Transfer from loans to other real estate owned	18,203			16,065
Loans securitized	—			10,359
Net transfer of loans held for investment to loans held for sale	21,266			—
Transfer from premises and equipment to other bank owned property	675			3,167
Non-cash transactions:
Increase in assets and liabilities in acquisitions:
Securities	13,619			139,764
FHLB stock	5,933			12,993
Loans held-for-sale	—			213,946
Uncovered loans	571,666			1,530,376
Premises and equipment	4,912			22,168
Loan servicing rights	767			41,967
Company-owned life insurance	—			38,172
Other real estate owned	30,878			18,448
Core deposit intangible	3,633			9,816
Other assets	62,542			128,278
Deposits	857,769			2,121,258
Short-term borrowings	18			21,892
Long-term debt	—			312,956
Other liabilities	4,017			22,925

See notes to Consolidated Financial Statements.

6

TALMER BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

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, 2013.

On February 11, 2014, the Securities and Exchange Commission declared effective the Company’s registration statement on Form S-1 registering the shares of the Company’s common stock as “TLMR” on the Nasdaq Capital Market.  On February 14, 2014, the Company completed the initial public offering of 15,555,555 shares of Class A common stock for $13 per share.  Of the 15,555,555 shares sold, 3,703,703 shares were sold by the Company and 11,851,852 shares were sold by certain selling shareholders.  In addition, on February 21, 2014, the selling shareholders sold an additional 2,333,333 shares of Class A common stock to cover the exercise of the underwriters’ over-allotment option.  The Company received net proceeds of approximately $42.0 million from the offering, after deducting the underwriting discounts and commissions and estimated offering expenses.  The Company did not receive any proceeds from the sale of shares by the selling shareholders.

On July 18, 2014, Talmer West Bank sold its single branch office in Albuquerque, New Mexico along with its $34.1 million of deposits and $23.7 million of loans to Grants State Bank, a unit of First Bancorp of Durango, Inc. The net impact to pre-tax income related to this transaction recorded in the third quarter of 2014 is a $1.6 million benefit, representing the gain on the sale of net assets acquired and liabilities assumed, partially offset by the write-off of related cored deposit intangible of $91 thousand and other costs associated with the transaction of approximately $170 thousand.  The benefit of $1.6 million is recorded in “Net gain on sale of branches” on the Consolidated Statements of Income.

On August 8, 2014 we sold our 10 branch offices located in Wisconsin to Town Bank, a wholly owned bank subsidiary of Wintrust Financial Corporation.  Town Bank assumed all of our deposits in Wisconsin totaling $354.8 million as of August 8, 2014.  Concurrent with the closing of this transaction, Town Bank will sell two of the branch locations and related deposits in Kenosha and Genoa City, Wisconsin to its affiliate, State Bank of the Lakes, a Wintrust community bank.  The net impact to pre-tax income related to this transaction recorded in the third quarter of 2014 is a $12.8 million benefit, representing the gain on the sale of net assets acquired and liabilities assumed, partially offset by the write-off of the related core deposit intangible of $911 thousand and other costs associated with the transaction of approximately $248 thousand.  The benefit of $12.8 million is recorded in “Net gain on sale of branches” on the Consolidated Statements of Income.

In August of 2014, the Company entered into an agreement to acquire First of Huron Corporation, the holding company for Signature Bank headquartered in Bad Axe, Michigan, for aggregate cash consideration of $13.4 million.  Signature Bank had total assets of $233.5 million as of September 30, 2014, including $172.9 million

7

of net total loans.  The Company will acquire and simultaneously retire certain outstanding subordinated debentures of First of Huron Corporation and assume its trust preferred securities.  The closing of the transaction is pending regulatory approval and customary closing conditions, including the approval by the shareholders of First of Huron Corporation.  The transaction is expected to close in the first quarter of 2015.

Customer Initiated Derivatives

In the first quarter of 2014, the Company began entering into interest rate derivatives to provide a service to certain qualifying customers to help facilitate their respective risk management strategies (“customer-initiated derivatives”).  Therefore, these derivatives are not used to manage interest rate risk in the Company’s assets or liabilities. The Company generally takes offsetting positions with dealer counterparties to mitigate the valuation risk of the customer-initiated derivatives.  Income primarily results from the spread between the customer derivatives and the offsetting dealer positions. The accounting for changes in the fair value (i.e. gains or losses) of a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship and, further by the type of hedging relationship.  The Company presents derivative instruments at fair value in the Consolidated Balance Sheets on a net basis when a right of offset exists, based on transactions with a single counterparty and any cash collateral paid to and/or received from that counterparty for derivative contracts that are subject to legally enforceable master netting arrangements.  The Company has no derivatives designated as qualifying accounting hedging instruments.  For derivative instruments not designated as hedging instruments, the gain or loss derived from changes in fair value are recognized in current earnings during the period of change.

Earnings Per Share

On June 10, 2014, the Company awarded restricted stock to certain employees and directors of the Company which qualify as participating securities. As such, beginning in June of 2014, the Company applies the two-class method of computing earnings per share.  Under this calculation, all outstanding unvested share-based payment awards that contain right to nonforfeitable dividends are considered participating securities and earnings per share is determined according to dividends declared, when applicable, and participating rights in undistributed earnings.

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period.  Distributed and undistributed earnings are allocated between common and participating security shareholders based on their respective rights and then are divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options and warrants.

Deferred Compensation Plan

As of June 26, 2014 the Company maintains a deferred compensation plan to certain key employees and members of the Board of Directors which allows participants to defer a portion of their compensation.  Participants have the ability to begin deferrals into the Deferred Compensation Plan beginning July 1, 2014.  While the Company maintains ownership of the deferred compensation asset, the participants are able to direct the investment of the assets into a pre-determined selection of investment options.  Company stock is not an investment option for the participants.  The assets are recorded at fair value in other assets on the Consolidated Balance Sheets.  A liability is established, in other liabilities on the Consolidated Balance Sheets, for the fair value of the obligation to the participants.  Any increase or decrease in the fair value of the deferred compensation plan assets is recorded in “Other noninterest income” on the Consolidated Statements of Income.  Any increase or decrease in the fair value of the deferred compensation obligation to participants is recorded as additional compensation expense or a reduction of compensation expense on the Consolidated Statements of Income.

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Recently Adopted and Issued Accounting Standards

In January of 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure” (“ASU 2014-04”), which clarifies the time at which a creditor is considered to have physical possession of residential real estate that is collateral for a residential mortgage loan.  The creditor is considered to have physical possession when legal title to the collateral or a deed in lieu of foreclosure or similar legal agreement is completed.  Consequently it should reclassify the loan to other real estate owned at that time.  ASU 2014-04 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, as such, the Company will adopt ASU 2014-04 as of January 1, 2015.  Under the provisions, the Company will have the option to adopt the amendments in the ASU using either a modified retrospective transition method or a prospective transition method.  The Company is currently evaluating the provisions of ASU 2014-04.

In April of 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation.  The ASU is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results and will permit companies to have continuing cash flows and significant continuing involvement with the disposed component.  ASU 2014-08 is effective for disposals (or classifications as held for sale) and acquired businesses or nonprofit activities that  are classified as held for sale upon acquisition that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years.  As such, the Company will evaluate the provisions of ASU 2014-08 as it relates to any potential disposals or acquisitions beginning on or after January 1, 2015.

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.

In June of 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures” (“ASU 2014-11”), which amends Accounting Standards Codification (“ASC”) 860 to require entities to account for repurchase-to-maturity transactions as secured borrowings, eliminate accounting guidance on linked repurchase financing transactions and expand disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings.  The disclosure requirements related to transactions accounted for as a sale and all of the accounting guidance within ASU 2014-11are effective for public companies for interim and annual periods beginning after December 15, 2014, and require the new guidance to be applied by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.  The disclosure requirements related to repurchase agreements, securities lending transactions and repurchase-to-maturity transactions accounted for as secured borrowings within ASU 2014-11 are effective for public companies for annual periods beginning after December 15, 2014 and for interim periods

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beginning after March 15, 2015.  As such, the Company will adopt the accounting guidance under ASU 2014-11 as of January 1, 2015.  The Company is currently evaluating the provisions of ASU 2014-11.

In August of 2014, the FASB issued ASU 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure” (“ASU 2014-14”), which addresses foreclosed mortgage loans that are fully or partially guaranteed under government programs to reduce diversity in practice of classification.  The update requires that upon foreclosure, a mortgage loan be derecognized and a separate other receivable be recognized if the loan has an inseparable guarantee before foreclosure, if the creditor has the intent to transfer the property to the guarantor and make a claim on the guarantee to recover under the claim, and if at foreclosure the claim determined is fixed, on the basis of fair value.  ASU 2014-14 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  As such, the Company will adopt the accounting guidance under ASU 2014-14 as of January 1, 2015.  Under the provision, the Company will have the option to adopt the guidance using either a prospective transition method or a modified retrospective transition method.  The Company is currently evaluating the provisions of ASU 2014-14.

In August of 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires entity management to perform interim and annual assessments of their ability to continue as a going concern within one year after the date that the financial statements are issued and requires disclosure if substantial doubt is raised.  Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The disclosure requirements in ASU 2014-15 closely align with those under current auditing literature.  Should substantial doubt be raised but alleviated as a result of management’s plans, the entity should disclose a statement that addresses the principal condition, management’s evaluation, and management’s plan which relieved such doubt.  If the substantial doubt is raised but not alleviated, the entity should disclose the principal condition, management’s evaluation, and management’s plan that are intended to mitigate such conditions.  ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim periods beginning after December 15, 2016, with early application permitted.  The Company has elected to adopt the provisions of ASU 2014-15 effective for the interim period ending September 30, 2014.  The adoption had no effect on the Company’s financial condition and results of operation or disclosures.

2.  BUSINESS COMBINATIONS

The Company has determined that the acquisitions of Talmer West Bank (formerly known as Michigan Commerce Bank) and First Place Bank constitute business combinations as defined by the 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 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.

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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.  For the three months ended September 30, 2014, the Company did not incur any acquisition expenses related to Talmer West Bank.  The Company incurred $1.8 million of acquisition related expenses during the nine months ended September 30, 2014, related to the acquisition of Talmer West Bank, included within “Bank acquisition and due diligence fees” in the Consolidated Statements of Income.  Twelve of the 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.  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 and changes in the determination on whether such loans are considered purchased credit impaired; (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 bargain purchase gain caused by the net effect of these adjustments.

(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

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The estimated fair values presented in the above table reflect additional information that the Company obtained following the acquisition of Talmer West Bank, which resulted in changes to certain fair value estimates made as of the acquisition date within the measurement period.  Material adjustments to the acquisition date estimated fair values are recorded in the period in which the acquisition occurred and, as a result, previously reported amounts changed.  The estimated fair value of the deferred tax assets included within “other assets”   and presented above, increased $1.8 million resulting in a net increase to the bargain purchase gain resulting from acquisition of $1.8 million to $42.0 million, which is recognized in the Consolidated Statement of Income for the nine months ended September 30, 2014.  The increase in the fair value of the deferred tax asset resulted from the finalization of the 2013 tax returns in the third quarter of 2014 when it was discovered that the consolidated net operating losses as of December 31, 2013 for Capital Bancorp, Ltd. were larger than expected by $10.8 million.  This change was primarily due to information that was provided by the FDIC related to seized banks that were part of the consolidated tax return of which Michigan Commerce Bank was a member.  Because these seized banks had larger than expected net operating losses, they received a larger allocation of cancellation of debt income that reduced the allocation of cancellation of debt income to Michigan Commerce Bank, which is now Talmer West Bank.  The resulting net operating losses attributable to Michigan Commerce Bank at acquisition increased by $5.2 million compared to previous estimates.  This adjustment increased the estimated fair value of the deferred tax asset by $1.8 million as of January 1, 2014, compared to previously reported levels.

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.

Loans acquired in the Talmer West Bank 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.

Purchased loans outside the scope of ASC 310-30 are accounted for under FASB ASC Subtopic 310-20, “Receivables - Nonrefundable Fees and Other 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.

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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.

The following unaudited pro forma financial information presents the consolidated results of operations of the Company and Talmer West Bank as if the acquisition had occurred as of January 1, 2013 with pro forma adjustments to give effect of any change in interest income due to the accretion of the discount (premium) associated with the fair value adjustments to acquired loans, any change in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired time deposits and borrowings and other debt and the amortization of the core deposit intangible that would have resulted had the deposits been acquired as of January 1, 2013.

	For the three months ended September 30,
(Dollars in thousands)	2014 (1)		2013
Net Interest and other income	$	82,191	$	71,588
Net Income	19,515		10,719
Earnings per common share:
Basic	$	0.28	$	0.16
Diluted	0.26		0.15

(1) As the business combination was effective January 1, 2014, there were no proforma adjustments for the three months ended September 30, 2014.

	For the nine months ended September 30,
(Dollars in thousands)	2014 (1)		2013
Net Interest and other income	$	254,465	$	319,968
Net Income	78,348		95,168
Earnings per common share:
Basic	$	1.13	$	1.44
Diluted	1.04		1.36

(1) As the business combination was effective January 1, 2014, there were no proforma adjustments for the nine months ended September 30, 2014.

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On January 1, 2013, the Company purchased substantially all of the assets of First Place Financial Corp. (FPFC) including all of the issued and outstanding shares of common stock of First Place Bank, a wholly-owned subsidiary of FPFC, headquartered in Warren, Ohio, in a transaction facilitated under Section 363 of the U.S. Bankruptcy Code, for cash consideration of $45.0 million.  Under the provisions of the asset purchase agreement, the Company assumed $60.0 million in subordinated notes issued to First Place Capital Trust, First Place Capital Trust II, and First Place Capital III, of which $45.0 million was immediately retired.  Following the acquisition, the Company contributed $179.0 million of additional capital in order to recapitalize First Place Bank with commitments to contribute additional capital if needed.  The Company incurred $171 thousand and $7.9 million of acquisition related expenses during the three and nine months ended September 30, 2013 primarily related to the acquisition of First Place Bank included within “Bank acquisition and due diligence fees” in the Consolidated Statements of Income.  First Place Bank was consolidated with and into Talmer Bank and Trust on February 10, 2014.

The following table presents a summary of the assets and liabilities purchased in the First Place Bank acquisition recorded at fair value.

(Dollars in thousands)
Consideration paid:
Cash	$	45,000
Fair Value of identifiable assets acquired:
Cash and cash equivalents	439,805
Investment securities	139,764
Federal Home Loan Bank stock	12,993
Loans held-for-sale	213,946
Loans	1,530,376
Premises and equipment	22,168
Loan servicing rights	41,967
Company-owned life insurance	38,172
Other real estate owned	18,448
Core deposit intangible	9,816
Other assets	128,278
Total identifiable assets acquired	2,595,733
Fair value of liabilities assumed:
Deposits	2,121,258
Short-term borrowings	21,892
Long-term debt	312,956
Other liabilities	22,925
Total liabilities assumed	2,479,031
Fair value of net identifiable assets acquired	116,702
Bargain purchase gain resulting from acquisition	$	71,702

The First Place Bank acquisition resulted in a pre-tax bargain purchase gain of $71.7 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.

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

Loans acquired in the First Place Bank acquisition were initially recorded at fair value with no separate allowance for loan losses.

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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	$	738,639
Contractual cash flows not expected to be collected (nonaccretable difference)	150,008
Expected cash flows	588,631
Interest component of expected cash flows (accretable yield)	158,221
Fair value at acquisition	$	430,410
Excluded from ASC 310-30 accounting:
Unpaid principal balance	$	1,094,223
Fair value premium	5,743
Fair value at acquisition	1,099,966
Total fair value at acquisition	$	1,530,376

First Place Bank’s results of operations have been included in the Company’s financial results since the January 1, 2013 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 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 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 value hierarchy in which the assets for liabilities are classified. Transfers of asset or liabilities between levels of the fair value hierarchy are recognized at the beginning of the reporting period, when applicable.

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Cash and cash equivalents: Due to the short-term nature, the carrying amount of these assets approximates the estimated fair value.  The Company classifies cash and due from banks as Level 1 and interest-bearing deposits with other banks and federal funds and other short-term investments as Level 2.

Securities available-for-sale:  Investment securities classified as available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available or the market is deemed to be inactive at the measurement date, fair values are measured utilizing independent valuation techniques of identical or similar investment securities. Third-party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities. Management reviews the methodologies and assumptions used by the third-party pricing services and evaluates the values provided, principally by comparison with other available market quotes for similar instruments and/or analysis based on internal models using available third-party market data.  Level 1 securities include equity securities traded on an active exchange, such as the New York Stock Exchange.  Level 2 securities include obligations issued by U.S. government-sponsored enterprises, state and municipal obligations, mortgage-backed securities issued by both U.S. government-sponsored enterprises and non-agency enterprises securities, corporate debt securities, Small Business Administration Pools and privately issued commercial mortgage-backed securities that have active markets at the measurement date. The fair value of Level 2 securities was determined using quoted prices of securities with similar characteristics or pricing models based on observable market data inputs, primarily interest rates, spreads and prepayment information.

Securities classified as Level 3, including an obligation of a political subdivision and a trust preferred security (included within “Corporate debt securities”) as of September 30, 2014, represent securities in less liquid markets requiring significant management assumptions when determining fair value. The fair values of these investment securities represent less than one percent of the total available-for-sale securities.  The Troubled Asset Relief Program preferred securities and the trust preferred security fair values are compiled by a third-party vendor through consideration of recent trades and/or auctions of comparable securities, where applicable and are presented without adjustment.  Comparable securities consider credit, structure, tenor, trade flows and cash flow characteristics.  Due to the limited sales of these types of securities, significant unobservable assumptions are included to determine comparable securities to be included in the analysis.  The fair value of the political subdivision obligation is determined using a discounted cash flow model prepared internally which includes a significant unobservable input related to the credit assumption of the security.  Since the purchase of this security, no credit related concerns have come to the Company’s attention, therefore no adjustment for credit loss assumptions were made.

Federal Home Loan Bank (“FHLB”) Stock: Restricted equity securities are not readily marketable and are recorded at cost and evaluated for impairment based on the ultimate recoverability of initial cost. No significant observable market data is available for these instruments. The Company considers the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of cost.  The Company believes its investments in FHLB stock are ultimately recoverable at cost.

Loans held for sale:  Loans held for sale are carried at fair value based on the Company’s election of the fair value option. These loans currently consist of one-to-four family residential real estate loans originated for sale to qualified third parties. The fair value is determined based on quoted market rates and other market conditions considered relevant. The Company classifies loans held for sale as recurring Level 2.

Loans measured at fair value:  During the normal course of business, loans originated with the initial intention to sell but are not ultimately sold, are transferred from held for sale to our portfolio of loans held for investment at fair value as the Company adopted the fair value option at origination.  The fair value of these loans is estimated using discounted cash flows, taking into consideration current market interest rates, loan repricing characteristics and expected loan prepayment speeds, while also taking into consideration other significant

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unobservable inputs such as the payment history and credit quality characteristic of each individual loan and an illiquidity discount reflecting the relative illiquidity of the market. Due to the adjustments made relating to unobservable inputs, the Company classifies the loans transferred from loans held for sale as recurring Level 3.

Loans:  The Company does not record loans at fair value on a recurring basis other than those discussed in “Loans measured at fair value” above. However, periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements. Loans, outside the scope of ASC 310-30, are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans, which include all nonaccrual loans and troubled debt restructurings, are disclosed as nonrecurring fair value measurements when an allowance is established based on the fair value of the underlying collateral.  Appraisals for collateral-dependent impaired loans are prepared by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties). These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area.  This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return.  This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments are routinely made in the appraisal process by the appraisers to account for differences between the comparable sales and income data available. These adjustments generally range from 0% to 40% depending on the property type, as well as various sales and property characteristics including but not limited to: date of sale, size and condition of facility, quality of construction and proximity to the subject property. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics to determine if additional downward adjustments should be made.  Property values are typically adjusted when management is aware of circumstances, economic changes or other conditions, since the date of the appraisal that would impact the expected selling price. Such adjustments are usually significant and result in a nonrecurring Level 3 classification.

Estimated fair values for loans accounted for under ASC 310-30 are based on a discounted cash flow methodology that considers factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of 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. Cash flows expected to be collected on these loans are estimated based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments. The Company classifies the estimated fair value of loans accounted for under ASC 310-30 as Level 3.

For loans excluded from ASC 310-30 accounting that are not individually evaluated for impairment, fair value is estimated using a discounted cash flow model. The cash flows take into consideration current portfolio interest rates and repricing characteristics as well as assumptions relating to prepayment speeds. The discount rates take into consideration the current market interest rate environment, a credit risk component based on the credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or illiquidity of the market. The Company classifies the estimated fair value of non-collateral dependent loans excluded from ASC 310-30 accounting as Level 3.

Premises and equipment:  Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.  Impaired premises and equipment at September 30, 2014 and December 31, 2013 were recorded at fair value based on a recent appraisal through a valuation allowance.  The Company classifies impaired premises and equipment as nonrecurring Level 2.

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FDIC indemnification asset: The fair value of the FDIC indemnification asset is estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. The Company re-estimates the expected indemnification asset cash flows in conjunction with the quarterly re-estimation of cash flows on covered loans accounted for under ASC 310-30. The expected cash flows are discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.  These cash flow evaluations are inherently subjective as they require material estimates, all of which may be subject to significant change.  The estimates used in calculating the value of the FDIC indemnification asset are reflective of the estimates utilized to determine the estimated fair value of loans accounted for under ASC 310-30. The Company classifies the estimated fair value of the FDIC indemnification asset as Level 3.

Other real estate owned: Other real estate owned represents property acquired by the Company as part of an acquisition, through the loan foreclosure or repossession process, or any other resolution activity that results in partial or total satisfaction of problem covered loans, or by closing of branches or operating facilities. Properties are initially recorded at fair value, less estimated costs to sell, establishing a new cost basis. Subsequently, the assets are valued at the lower of cost or fair value, less estimated costs to sell, based on periodic valuations performed. Fair value is based upon independent market prices, appraised value or management’s estimate of the value, using a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area.  This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return.  This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments are routinely made in the appraisal process by the appraisers to account for differences between the comparable sales and income data available. These adjustments generally range from 0% to 40% depending on the property type, as well as various sales and property characteristics including but not limited to: date of sale, size and condition of facility, quality of construction and proximity to the subject property.  Adjustments are typically significant and result in a Level 3 classification.

Loan servicing rights: Loan servicing rights are accounted for under the fair value measurement method.  A third party valuation model is used to determine the fair value at the end of each reporting period utilizing a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management.  Changes in fair value of loan servicing rights are recorded in “Mortgage banking and other loan fees”.  Because of the nature of the valuation inputs, the company classifies loan servicing rights as Level 3.  Refer to Note 10, “Loan Servicing Rights”, for assumptions included in the valuation of loan servicing rights.

FDIC receivable: The FDIC receivable represents claims submitted to the Federal Deposit Insurance Corporation (“FDIC”) for reimbursement for which the Company expects to receive payment within 90 days. Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value. The Company classifies the estimated fair value of FDIC receivable as Level 2.

Company-owned life insurance and deferred compensation plan liabilities: The Company holds life insurance policies on certain officers, both for investment purposes and for the Company’s deferred compensation plan. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement. As such, the Company classifies the estimated fair value of Company-owned life insurance as Level 2.  Deferred compensation plan liabilities represent the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.  Deferred compensation plan liabilities are recorded with “other liabilities” and are classified by the Company as Level 2.

Derivative instruments: The Company enters into interest rate lock commitments with prospective borrowers to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, which are carried at fair value on a recurring basis. The fair value of these commitments is

18

based on the fair value of related mortgage loans determined using observable market data.  Interest rate lock commitments are adjusted for expectations of exercise and funding.  This adjustment is not considered to be a material input.  The Company classifies derivatives as recurring Level 2.

Derivative instruments held or issued for customer-initiated activities are traded in over-the counter markets where quoted market prices are not readily available.  Fair value for over-the-counter derivative instruments is measured on a recurring basis using third party models that use primarily market observable inputs, such as yield curves and option volatilities.  The fair value for these derivatives may include a credit valuation adjustment that is determined by applying a credit spread for the counterparty or the Company, as appropriate, to the total expected exposure of the derivative after considering collateral and other master netting arrangements.  These adjustments, which are considered Level 3 inputs, are based on estimates of current credit spreads to evaluate the likelihood of default.  The Company assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and at September 30, 2014 it was determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives.  As a result, the company classifies its over-the-counter derivative valuations in Level 2 of the fair value hierarchy.

Accrued interest receivable and payable: Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value; therefore, the Company classifies the estimated fair value of accrued interest receivable and payable as Level 2.

Deposits: The estimated fair value of demand deposits (e.g., noninterest and interest-bearing demand, savings, other brokered funds and certain types of money market accounts) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are based on the discounted value of contractual cash flows at current interest rates. The estimated fair value of deposits does not take into account the value of the Company’s long-term relationships with depositors, commonly known as core deposit intangibles, which are not considered financial instruments.  The Company classifies the estimated fair value of deposits as Level 2.

Clawback liability: The CF Bancorp, First Banking Center and Peoples State Bank loss sharing agreements contain a provision where if losses do not exceed a calculated threshold, the Company is obligated to compensate the FDIC.  The carrying amount of these instruments approximates the estimated fair value.  The estimated fair value requires management’s assumption of what estimated losses will be, which is a significant component.  As such, the Company classifies the estimated fair value of the FDIC clawback liability as Level 3.

Short-term borrowings: Short-term borrowings represent federal funds purchased, a senior unsecured line of credit and certain short-term FHLB advances. Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value. The Company classifies the estimated fair value of short-term borrowings as Level 2.

Long-term debt: Long-term debt includes securities sold under agreements to repurchase, FHLB advances and subordinated notes related to trust preferred securities.  The estimated fair value is based on current rates for similar financing or market quotes to settle those liabilities.  The Company classifies the estimated fair value of long-term debt as Level 2.

FDIC warrants payable: FDIC warrants payable represent stock warrants that were issued to the FDIC in connection with the 2010 FDIC-assisted acquisition of CF Bancorp. These warrants are recorded at net present value based on management estimates used in a discounted pricing model. The inputs into the pricing model include management’s assumption of an annualized growth rate.  The carrying amount of these instruments approximates the estimated fair value.  The Company classifies the estimated fair value of FDIC warrants payable as Level 3.

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The following tables present the recorded amount of assets and liabilities measured at fair value, including financial assets and liabilities for which the Company has elected the fair value option, on a recurring basis:

(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2014
Securities available-for-sale:
U.S. government sponsored agency obligations	$	105,690	$	—	$	105,690	$	—
Obligations of state and political subdivisions:
Taxable	397		—		—		397
Tax-exempt	220,530		—		220,530		—
Small Business Administration (“SBA”) Pools	35,332		—		35,332		—
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	299,605		—		299,605		—
Privately issued	9,959		—		9,959		—
Privately issued commercial mortgage-backed securities	5,135		—		5,135		—
Corporate debt securities	57,841		—		57,406		435
Total securities available-for-sale	734,489		—		733,657		832
Loans measured at fair value:
Residential real estate	17,881		—		—		17,881
Loans held for sale	122,599		—		122,599		—
Loan servicing rights	74,380		—		—		74,380
Derivative assets	1,798		—		1,798		—
Total assets at fair value	$	951,147	$	—	$	858,054	$	93,093
Derivative liabilities	361		—		361		—
Total liabilities at fair value	$	361	$	—	$	361	$	—
December 31, 2013
Securities available-for-sale:
U.S. government sponsored agency obligations	$	98,237	$	—	$	98,237	$	—
Obligations of state and political subdivisions:
Taxable	396		—		—		396
Tax-exempt	182,000		—		182,000		—
Small Business Administration (“SBA”) Pools	42,426		—		42,426		—
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	218,922		—		218,922		—
Privately issued	4,446		—		4,446		—
Privately issued commercial mortgage-backed securities	5,147		—		5,147		—
Corporate debt securities	68,020		—		67,615		405
Equity securities	489		489		—		—
Total securities available-for-sale	620,083		489		618,793		801
Loans measured at fair value:
Residential real estate	16,334		—		—		16,334
Real estate construction	1,374		—		—		1,374
Loans held for sale	85,252		—		85,252		—
Loans servicing rights	78,603		—		—		78,603
Derivative assets	2,630		—		2,630		—
Total assets at fair value	$	804,276	$	489	$	706,675	$	97,112

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There were no transfers between levels within the fair value hierarchy during the three and nine months ended September 30, 2014 or 2013.

The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.

	Three months ended September 30, 2014
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions		Corporate Debt Securities		Loans held for investment			Loan servicing rights
Balance, beginning of period	$	397	$	433	$	18,521		$	74,104
Transfers from loans held for sale	—		—		280			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	—		1		—			—
Recorded in “Mortgage banking and other loan fees”	—		—		(93		)	(2,022		)
Recorded in OCI (pre-tax)	—		1		—			—
New originations	—		—		—			2,298
Repayments	—		—		(827		)	—
Balance, end of period	$	397	$	435	$	17,881		$	74,380

	Nine months ended September 30, 2014
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions		Corporate Debt Securities		Loans held for investment			Loan servicing rights
Balance, beginning of period	$	396	$	405	$	17,708		$	78,603
Additions due to acquisition	—		—		—			767
Transfers from loans held for sale	—		—		1,058			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	1		3		—			—
Recorded in “Mortgage banking and other loan fees”	—		—		320			(11,036		)
Recorded in OCI (pre-tax)	—		27		—			—
New originations	—		—		—			6,046
Repayments	—		—		(1,333		)	—
Draws on previously issued lines of credits	—		—		128			—
Balance, end of period	$	397	$	435	$	17,881		$	74,380

	Three months ended September 30, 2013
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions		Corporate Debt Securities			Loan servicing rights
Balance, beginning of period	$	396	$	14,006		$	65,187
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	—		47
Recorded in “Mortgage banking and other loan fees”	—		—			(69		)
Recorded in OCI (pre-tax)	—		(44		)	—
New originations	—		—			6,633
Sales/calls	—		(835		)	—
Balance, end of period	$	396	$	13,174		$	71,751

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	Nine months ended September 30, 2013
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions		Corporate debt securities			Loan servicing rights
Balance, beginning of period	$	396	$	15,250		$	—
Transfers based on new accounting policy election	—		—			5,657		(1)
Additions due to acquisition	—		—			41,967
Gains (losses):
Recorded in earnings (realized):
Recorded in “Net gain (loss) on sale of securities”	—		69			—
Recorded in “Interest on investments”	—		47			—
Recorded in “Mortgage banking and other loan fees”	—		—			3,997
Recorded in OCI (pre-tax)	—		189			—
Purchases	—		440			—
New originations	—		—			20,130
Sales/calls	—		(2,821		)	—
Balance, end of period	$	396	$	13,174		$	71,751

(1) The balance transferred includes $31 thousand of cumulative adjustment related to the change in accounting policy referenced in Note 1 to our audited financial statements included in our 2013 Annual Report.

The aggregate fair value, contractual balance (including accrued interest), and gain or loss position for loans held for investment measured and recorded at fair value was as follows:

(Dollars in thousands)	September 30, 2014		December 31, 2013
Aggregate fair value	$	17,881	$	17,708
Contractual balance	17,816		18,022
Fair market value gain (loss)	65		(314		)

There were no gains (losses) included in the fair value above that were associated with instrument specific credit risk. The aggregate fair value and contractual principal balance of loans held for investment measured and recorded at fair value that were 90 days or more past due as of September 30, 2014 was $155 thousand and $191 thousand, respectively.  Of the aggregate fair value of loans that were 90 days or more past due as of September 30, 2014, $155 thousand were on nonaccrual status.  The aggregate fair value and contractual principal balance of loans held for investment measured and recorded at fair value that were 90 days or more past due as of December 31, 2013 was $293 thousand and $301 thousand, respectively. Of the aggregate fair value of loans that were 90 days or more past due as of December 31, 2013, $252 thousand were on nonaccrual status.

Interest income is recorded based on the contractual terms of the loans in accordance with the Company’s policy on loans held for investment and is recorded in “Interest and fees on loans” in the Consolidated Statements of Income. For the three and nine months ended September 30, 2014, there was $164 thousand and $423 thousand, respectively, of interest income earned on loans transferred from loans held for sale to loans held for investment.

The Company has elected the fair value option for loans held for sale.  These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans in accordance with the Company policy on loans held for investment in “Interest and fees on loans” in the Consolidated Statements of Income. None of these loans are 90 days past due or on nonaccrual status as of September 30, 2014 or December 31, 2013.

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The aggregate fair value, contractual balance (including accrued interest), and gain or loss for loans held for sale carried at fair value was as follows:

(Dollars in thousands)	September 30, 2014		December 31, 2013
Aggregate fair value	$	122,599	$	85,252
Contractual balance	117,015		82,567
Unrealized gain	5,584		2,685

The total amount of gains (losses) from changes in fair value included in “Net gain on sales of loans” in the Consolidated Statements of Income were as follows:

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	2014			2013		2014		2013
Change in fair value	$	(1,935	)	$	12,652	$	2,899	$	944

Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. These include assets that are recorded at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.

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The following table presents the recorded amount of assets and liabilities measured at fair value on a non-recurring basis:

(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2014
Impaired loans:(1)
Uncovered
Residential real estate	$	2,773	$	—	$	—	$	2,773
Commercial real estate	3,220		—		—		3,220
Commercial and industrial	7,423		—		—		7,423
Consumer	15		—		—		15
Total uncovered impaired loans	13,431		—		—		13,431
Covered
Residential real estate	26		—		—		26
Commercial and industrial	867		—		—		867
Total covered impaired loans	893		—		—		893
Total impaired loans	14,324		—		—		14,324
Other real estate owned (uncovered)(2)	6,793		—		—		6,793
Other real estate owned (covered)(3)	2,062		—		—		2,062
Premises and equipment(4)	675		—		675		—
Total	$	23,854	$	—	$	675	$	23,179
December 31, 2013
Impaired loans:(1)
Uncovered
Residential real estate	$	1,569	$	—	$	—	$	1,569
Commercial and industrial	762		—		—		762
Total uncovered impaired loans	2,331		—		—		2,331
Covered
Commercial real estate	644		—		—		644
Total covered impaired loans	644		—		—		644
Total impaired loans	2,975		—		—		2,975
Other real estate owned (uncovered) (2)	2,216		—		—		2,216
Other real estate owned (covered) (3)	4,596		—		—		4,596
Premises and equipment(4)	105		—		105		—
Total	$	9,892	$	—	$	105	$	9,787

(1)Specific reserves of $2.8 million and $1.4 million were provided to reduce the fair value of these loans at September 30, 2014 and December 31, 2013, respectively, based on the estimated fair value of the underlying collateral.  In addition, charge-offs of $633 thousand and $36 thousand reduced the fair value of these loans in for the three months ended September 30, 2014 and 2013, respectively, and $1.3 million and $441 thousand for the nine months ended September 30, 2014 and 2013, respectively.

(2)The Company charged $1.4 million and $155 thousand through other non-interest expenses during the three months ended September 30, 2014 and 2013, respectively, and $2.9 million and $1.4 million during the nine months ended September 30, 2014 and 2013, respectively, to reduce the fair value of these properties.

(3)The Company charged $701 thousand and $2.0 million through other noninterest expenses during the three months ended September 30, 2014 and 2013, respectively, and $1.6 million and $4.3 million during the nine months ended September 30, 2014 and 2013, respectively, to reduce the fair value of these properties.  These expenses were partially offset by FDIC loss sharing income recorded due to the associated loss share coverage.

(4)The Company charged $185 thousand and $109 thousand through other noninterest expenses during both the three and nine months ended September 30, 2014 and 2013, respectively, to reduce the value of premises and equipment deemed impaired during the period.

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The Company typically holds the majority of its financial instruments until maturity and thus does not expect to realize many of the estimated fair value amounts disclosed.  The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments, but which have significant value.  These include such items as core deposit intangibles, the future earnings potential of significant customer relationships and the value of fee generating businesses.  The Company believes the imprecision of an estimate could be significant.

The following tables present the carrying amount and estimated fair values of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s Consolidated Balance Sheets.

			Estimated Fair Value
(Dollars in thousands)	Carrying Value		Total		Level 1		Level 2		Level 3
September 30, 2014
Financial assets:
Cash and cash equivalents	$	298,666	$	298,666	$	91,214	$	207,452	$	—
Federal Home Loan Bank stock	17,426		N/A
Net loans, excluding covered loans(1)	3,601,441		3,684,609		—		—		3,684,609
Net covered loans(2)	378,024		453,652		—		—		453,652
Accrued interest receivable	12,876		12,876		—		12,876		—
FDIC indemnification asset	82,441		52,145		—		—		52,145
FDIC receivable	12,873		12,873		—		12,873		—
Company-owned life insurance	96,605		96,605		—		96,605		—
Financial liabilities:
Deposits:
Savings and demand deposits	$	3,178,616	$	3,178,616	$	—	$	3,178,616	$	—
Time deposits(3)	1,306,981		1,306,427		—		1,306,427		—
Total deposits	4,485,597		4,485,043		—		4,485,043
FDIC clawback liability	25,723		25,723		—		—		25,723
Short term borrowings	150,573		150,573		—		150,573		—
Long-term debt	285,009		279,011		—		279,011		—
FDIC warrants payable	4,563		4,563		—		—		4,563
Accrued interest payable	694		694		—		694		—
Deferred compensation plan liabilities	218		218		—		218		—

(1) Included $13.4 million of impaired loans recorded at fair value on a nonrecurring basis and $17.9 million of loans recorded at fair value on a recurring basis.

(2) Included $893 thousand of impaired loans recorded at fair value on a nonrecurring basis.

(3) Includes $50.0 million of other brokered funds.

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			Estimated Fair Value
(Dollars in thousands)	Carrying Value		Total		Level 1		Level 2		Level 3
December 31, 2013
Financial assets:
Cash and cash equivalents	$	375,356	$	375,356	$	97,167	$	278,189	$	—
Federal Home Loan Bank stock	16,303		N/A
Net loans, excluding covered loans(1)	2,456,170		2,574,109		—		—		2,574,109
Net covered loans(2)	489,687		534,857		—		—		534,857
Accrued interest receivable	7,968		7,968		—		7,968		—
FDIC indemnification asset	131,861		84,010		—		—		84,010
FDIC receivable	7,783		7,783		—		7,783		—
Company-owned life insurance	39,500		39,500		—		39,500		—
Financial liabilities:
Deposits:
Savings and demand deposits	$	2,673,524	$	2,673,524	$	—	$	2,673,524	$	—
Time deposits	927,313		928,128		—		928,128		—
Total deposits	3,600,837		3,601,652		—		3,601,652		—
FDIC clawback liability	24,887		24,887		—		—		24,887
Short term borrowings	71,876		71,876		—		71,876		—
Long-term debt	199,037		190,420		—		190,420		—
FDIC warrants payable	4,118		4,118		—		—		4,118
Accrued interest payable	626		626		—		626		—

(1) Included $2.3 million of impaired loans recorded at fair value on a nonrecurring basis and $17.7 million of loans recorded at fair value on a recurring basis.

(2) Included $644 thousand of impaired loans recorded at fair value on a nonrecurring basis.

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4.   SECURITIES

A summary of the Company’s securities available-for-sale is as follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2014
U.S. government sponsored agency obligations	$	105,806	$	427	$	(543	)	$	105,690
Obligations of state and political subdivisions:
Taxable	397		—		—			397
Tax-exempt	217,671		3,724		(865		)	220,530
SBA Pools	35,346		162		(176		)	35,332
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	299,591		1,704		(1,690		)	299,605
Privately issued	9,984		5		(30		)	9,959
Privately issued commercial mortgage-backed securities	5,141		—		(6		)	5,135
Corporate debt securities	57,342		706		(207		)	57,841
Total securities available-for-sale	$	731,278	$	6,728	$	(3,517	)	$	734,489
December 31, 2013
U.S. government sponsored agency obligations	$	102,597	$	—	$	(4,360	)	$	98,237
Obligations of state and political subdivisions:
Taxable	396		—		—			396
Tax-exempt	184,351		2,102		(4,453		)	182,000
SBA Pools	42,956		162		(692		)	42,426
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	223,518		729		(5,325		)	218,922
Privately issued	4,453		22		(29		)	4,446
Privately issued commercial mortgage-backed securities	5,181		—		(34		)	5,147
Corporate debt securities	68,433		237		(650		)	68,020
Equity securities	500		—		(11		)	489
Total securities available-for-sale	$	632,385	$	3,252	$	(15,554	)	$	620,083

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Proceeds from sales of securities and the associated gains and losses recorded in earnings are listed below:

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	2014			2013		2014			2013
Proceeds	$	28,285		$	—	$	82,496		$	7,500
Gross gains	248			—		248			124
Gross losses	(4		)	—		(2,314		)	(24		)

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2014 are shown below. Contractual maturity is utilized for U.S. Government sponsored agency obligations, obligations of state and political subdivisions and corporate debt securities. Securities with multiple maturity dates are classified in the period of final maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2014
(Dollars in thousands)	Amortized Cost		Fair Value
Securities with contractual maturities:
Within one year	$	1,755	$	1,755
After one year through five years	84,416		85,581
After five years through ten years	169,417		170,787
After ten years	475,690		476,366
Total securities available-for-sale	$	731,278	$	734,489

Securities with a carrying value of $423.1 million and $264.6 million were pledged at September 30, 2014 and December 31, 2013, respectively, to secure borrowings and deposits.

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A summary of the Company’s investment securities available-for-sale in an unrealized loss position is as follows:

	Less than 12 Months					More than 12 Months					Total
(Dollars in thousands)	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses
September 30, 2014
U.S. government sponsored agency obligations	$	29,910	$	(83	)	$	49,531	$	(460	)	$	79,441	$	(543	)
Obligations of state and political subdivisions:
Tax-exempt	35,291		(209		)	41,912		(656		)	77,203		(865		)
SBA Pools	1,861		(10		)	18,191		(166		)	20,052		(176		)
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	89,613		(383		)	62,954		(1,307		)	152,567		(1,690		)
Privately issued	8,130		(30		)	56		—			8,186		(30		)
Privately issued commercial mortgage-backed securities	5,135		(6		)	—		—			5,135		(6		)
Corporate debt securities	12,879		(115		)	8,964		(92		)	21,843		(207		)
Total securities available-for-sale	$	182,819	$	(836	)	$	181,608	$	(2,681	)	$	364,427	$	(3,517	)
December 31, 2013
U.S. government sponsored agency obligations	$	98,237	$	(4,360	)	$	—	$	—		$	98,237	$	(4,360	)
Obligations of state and political subdivisions:
Tax-exempt	102,585		(4,159		)	5,794		(294		)	108,379		(4,453		)
SBA Pools	26,498		(692		)	—		—			26,498		(692		)
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	155,028		(4,952		)	18,846		(373		)	173,874		(5,325		)
Privately issued	557		(1		)	1,746		(28		)	2,303		(29		)
Privately issued commercial mortgage-backed securities	5,147		(34		)	—		—			5,147		(34		)
Corporate debt securities	34,487		(650		)	—		—			34,487		(650		)
Equity securities	489		(11		)	—		—			489		(11		)
Total securities available-for-sale	$	423,028	$	(14,859	)	$	26,386	$	(695	)	$	449,414	$	(15,554	)

As of September 30, 2014, the Company’s security portfolio consisted of 335 securities, 121 of which were in an unrealized loss position. The unrealized losses for these securities resulted primarily from changes in interest rates. The Company expects full collection of the carrying amount of these securities and does not intend to sell the securities in an unrealized loss position nor does it believe it will be required to sell securities in an unrealized loss position before the value is recovered.  The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2014.

The unrealized losses are spread across asset classes, primarily in those securities carrying fixed interest rates. At September 30, 2014, the combination of these security asset class holdings in an unrealized loss position had an estimated fair value of $364.4 million with gross unrealized losses of $3.5 million. Unrealized losses in these security holdings were mainly impacted by increases in benchmark U.S. Treasury rates and, to a lesser extent, widened liquidity spreads since their respective acquisition dates.

5.LOANS

Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30-year term, and in most cases, are extended to borrowers to

29

finance their primary residence with both fixed-rate and adjustable-rate terms. The majority of these loans originated by the Company conform to secondary market underwriting standards and are sold within a short timeframe to unaffiliated third parties. As such, the credit underwriting standards adhere to the underwriting standards and documentation requirements established by the respective investor or correspondent bank.  Residential real estate loans also include home equity loans and lines of credit that are secured by a first or second lien on the borrower’s residence.  Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.  Home equity lines of credit are generally governed by the same lending policies and subject to the same credit risk as described previously for residential real estate loans.

Commercial real estate loans consist of term loans secured by a mortgage lien on the real property such as apartment buildings, office and industrial buildings, retail shopping centers, and farmland. The credit underwriting for both owner-occupied and non-owner occupied commercial real estate loans includes detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, type of real estate and other analysis. Risk of loss is managed by adherence to standard loan policies that establish certain levels of performance prior to the extension of a loan to the borrower. Geographic diversification, as well as diversification across industries, are other means by which the risk of loss is managed by the Company.

Commercial and industrial loans include financing for commercial purposes in various lines of business, including manufacturing, agricultural, service industry and professional service areas.  The Company works with businesses to meet their short-term working capital needs while also providing long-term financing for their business plans. Credit risk is managed through standardized loan policies, established and authorized credit limits, centralized portfolio management and the diversification of market area and industries. The overall strength of the borrower is evaluated through the credit underwriting process and includes a variety of analytical activities including the review of historical and projected cash flows, historical financial performance, financial strength of the principals and guarantors, and collateral values, where applicable. Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners.

Real estate construction loans are term loans to individuals, companies or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property.  Generally, these loans are for construction projects that have been either presold, preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in the project.

Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans. Risk elements in the consumer loan portfolio are primarily focused on the borrower’s cash flow and credit history, key indicators of the ability to repay and borrower credit scores. A certain level of security is provided through liens on automobile or watercraft titles, where applicable. Economic conditions that affect consumers in the Company’s markets have a direct impact on the credit quality of these loans. Higher levels of unemployment, lower levels of income growth and weaker economic growth are factors that may adversely impact consumer loan credit quality.

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Loans at September 30, 2014 and December 31, 2013 were as follows:

	Covered loans						Uncovered loans
(Dollars in thousands)	Accounted for under ASC 310-30		Excluded from ASC 310-30 accounting		Total covered loans		Accounted for under ASC 310-30		Excluded from ASC 310-30 accounting		Total uncovered loans		Total
September 30, 2014
Residential real estate	$	90,763	$	22,465	$	113,228	$	250,527	$	1,180,412	$	1,430,939	$	1,544,167
Commercial real estate	197,194		22,302		219,496		207,006		1,006,355		1,213,361		1,432,857
Commercial and industrial	32,977		14,275		47,252		17,092		773,775		790,867		838,119
Real estate construction	12,531		1,203		13,734		8,717		94,203		102,920		116,654
Consumer	9,949		133		10,082		2,817		90,429		93,246		103,328
Total	$	343,414	$	60,378	$	403,792	$	486,159	$	3,145,174	$	3,631,333	$	4,035,125	(1)
December 31, 2013
Residential real estate	$	100,034	$	23,300	$	123,334	$	253,528	$	831,925	$	1,085,453	$	1,208,787
Commercial real estate	262,769		36,632		299,401		98,299		657,540		755,839		1,055,240
Commercial and industrial	51,407		27,030		78,437		5,985		440,659		446,644		525,081
Real estate construction	15,268		1,950		17,218		1,970		174,256		176,226		193,444
Consumer	11,508		170		11,678		2,907		6,847		9,754		21,432
Total	$	440,986	$	89,082	$	530,068	$	362,689	$	2,111,227	$	2,473,916	$	3,003,984	(1)

(1) Reported net of deferred fees and costs totaling $5.4 million and $9.8 million at September 30, 2014 and December 31, 2013, respectively.

Nonperforming Assets and Past Due Loans

Nonperforming assets consist of loans for which the accrual of interest has been discontinued, other real estate owned acquired through acquisitions and other real estate owned obtained through foreclosure.

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Loans outside of those accounted for under ASC 310-30 are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. The accrual of interest income is discontinued when a loan is placed in nonaccrual status and any payments received reduce the carrying value of the loan. A loan may be placed back on accrual status if all contractual payments have been received and collection of future principal and interest payments are no longer doubtful. Loans accounted for under ASC 310-30 are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the quarterly re-estimation of expected cash flows and is included in the resulting recognition of current period provision for loan losses or future yield adjustments.

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Information as to nonperforming assets was as follows:

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Uncovered nonperforming assets
Nonaccrual loans
Residential real estate	$	15,733	$	15,415
Commercial real estate	12,578		5,591
Commercial and industrial	14,474		2,681
Real estate construction	253		510
Consumer	245		100
Total nonaccrual loans	43,283		24,297
Other real estate owned (1)	32,022		17,046
Total uncovered nonperforming assets	75,305		41,343
Covered nonperforming assets
Nonaccrual loans
Residential real estate	1,737		988
Commercial real estate	5,457		8,124
Commercial and industrial	4,091		7,201
Real estate construction	1,055		1,372
Consumer	42		31
Total nonaccrual loans	12,382		17,716
Other real estate owned	11,766		11,571
Total covered nonperforming assets	24,148		29,287
Total nonperforming assets	$	99,453	$	70,630
Uncovered loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30
Residential real estate	282		539
Commercial real estate	139		—
Real estate construction	174		—
Total loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	595	$	539

(1) Excludes closed branches and operating facilities.

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Loan delinquency, excluding loans accounted for under ASC 310-30 was as follows:

	September 30, 2014
(Dollars in thousands)	30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total loans		90 days or more past due and still accruing
Uncovered loans, excluding loans accounted for under ASC 310-30
Residential real estate	$	3,808	$	1,939	$	8,400	$	14,147	$	1,166,265	$	1,180,412	$	282
Commercial real estate	3,545		3,447		9,515		16,507		989,848		1,006,355		139
Commercial and industrial	3,641		1,544		1,925		7,110		766,665		773,775		—
Real estate construction	418		—		348		766		93,437		94,203		174
Consumer	180		75		21		276		90,153		90,429		—
Total	$	11,592	$	7,005	$	20,209	$	38,806	$	3,106,368	$	3,145,174	$	595
Covered loans, excluding loans accounted for under ASC 310-30
Residential real estate	$	484	$	565	$	978	$	2,027	$	20,438	$	22,465	$	—
Commercial real estate	—		199		5,223		5,422		16,880		22,302		—
Commercial and industrial	163		114		3,494		3,771		10,504		14,275		—
Real estate construction	53		102		1,001		1,156		47		1,203		—
Consumer	3		—		30		33		100		133		—
Total	$	703	$	980	$	10,726	$	12,409	$	47,969	$	60,378	$	—

	December 31, 2013
(Dollars in thousands)	30-59 days past due		60-89 days past due		90 days or more  past due		Total past due		Current		Total loans		90 days or more past due and still accruing
Uncovered loans, excluding loans accounted for under ASC 310-30
Residential real estate	$	11,244	$	1,849	$	6,641	$	19,734	$	812,191	$	831,925	$	539
Commercial real estate	1,400		4,992		1,122		7,514		650,026		657,540		—
Commercial and industrial	136		25		560		721		439,938		440,659		—
Real estate construction	5,038		356		359		5,753		168,503		174,256		—
Consumer	207		38		4		249		6,598		6,847		—
Total	$	18,025	$	7,260	$	8,686	$	33,971	$	2,077,256	$	2,111,227	$	539
Covered loans, excluding loans accounted for under ASC 310-30
Residential real estate	$	827	$	260	$	224	$	1,311	$	21,989	$	23,300	$	—
Commercial real estate	324		558		5,681		6,563		30,069		36,632		—
Commercial and industrial	1,619		119		4,476		6,214		20,816		27,030		—
Real estate construction	—		—		1,365		1,365		585		1,950		—
Consumer	1		17		7		25		145		170		—
Total	$	2,771	$	954	$	11,753	$	15,478	$	73,604	$	89,082	$	—

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Impaired Loans

Information as to total impaired loans (both individually and collectively evaluated for impairment) is as follows:

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Uncovered
Nonaccrual loans	$	43,283	$	24,297
Performing troubled debt restructurings:
Residential real estate	1,802		328
Commercial real estate	2,961		1,637
Commercial and industrial	652		1,367
Real estate construction	92		90
Consumer	56		30
Total uncovered performing troubled debt restructurings	5,563		3,452
Total uncovered impaired loans	$	48,846	$	27,749
Covered
Nonaccrual loans	$	12,382	$	17,716
Performing troubled debt restructurings:
Residential real estate	2,860		2,691
Commercial real estate	14,915		14,391
Commercial and industrial	2,119		3,802
Real estate construction	108		163
Total covered performing troubled debt restructurings	20,002		21,047
Total covered impaired loans	$	32,384	$	38,763

Troubled Debt Restructurings

The Company assesses all loan modifications to determine whether a modification constitutes a troubled debt restructuring (“TDR”). For loans excluded from ASC 310-30 accounting, a modification is considered a TDR when a borrower is experiencing financial difficulties and the Company grants a concession to the borrower.  For loans accounted for individually under ASC 310-30, a modification is considered a TDR when a borrower is experiencing financial difficulties and the effective yield after the modification is less than the effective yield at the time the loan was acquired in association with consideration of qualitative factors included within ASC 310-40.  All TDRs are considered impaired loans.  The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of charge off and/or allowance for loan losses.

As of September 30, 2014, there were $14.2 million of nonperforming TDRs and $25.6 million of performing TDRs included in impaired loans.  As of December 31, 2013, there were $17.9 million of nonperforming TDRs and $24.5 million of performing TDRs included in impaired loans.  All TDRs are considered impaired loans in the calendar year of their restructuring.  In subsequent years, a restructured obligation modified at a market rate and compliant with its modified terms for a minimum period of six months is no longer reported as a TDR. A loan that has been modified at a rate other than market will return to performing status if it satisfies the six month performance requirement; however, it will continue to be reported as a TDR and considered impaired.

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The following tables present the recorded investment of loans modified in TDRs during the three and nine months ended September 30, 2014 and 2013 by type of concession granted.  In cases where more than one type of concession was granted, the loans were categorized based on the most significant concession.

	Concession type											Financial effects of modification
(Dollars in thousands)	Principal deferral		Principal reduction (1)		Interest rate		Forbearance agreement		Total number of loans	Total recorded investment at September 30, 2014		Net charge-offs (recoveries)			Provision (benefit) for loan losses (2)
For the three months ended September 30, 2014
Uncovered
Residential real estate	$	1	$	166	$	486	$	—	8	$	653	$	18		$	29
Commercial real estate	435		—		258		126		7	819		(18		)	(18		)
Commercial and industrial	—		—		35		—		2	35		—			(31		)
Consumer	27		—		—		—		1	27		—			—
Total uncovered	463		166		779		126		18	1,534		—			(20		)
Covered
Residential real estate	$	191	$	14	$	—	$	—	4	$	205	$	—		$	(1	)
Commercial and industrial	—		—		62		—		2	62		—			2
Total covered	191		14		62		—		6	267		—			1
Total loans	$	654	$	180	$	841	$	126	24	$	1,801	$	—		$	(19	)
For the nine months ended September 30, 2014
Uncovered
Residential real estate	$	144	$	384	$	714	$	135	23	$	1,377	$	65		$	216
Commercial real estate	435		—		979		1,159		12	2,573		(46		)	431
Commercial and industrial	36		—		93		112		12	241		—			—
Consumer	27		83		—		—		3	110		2			21
Total uncovered	642		467		1,786		1,406		50	4,301		21			668
Covered
Residential real estate	$	300	$	28	$	262	$	—	17	$	590	$	6		$	14
Commercial real estate	—		—		643		412		3	1,055		—			70
Commercial and industrial	—		—		253		92		10	345		—			8
Total covered	300		28		1,158		504		30	1,990		6			92
Total loans	$	942	$	495	$	2,944	$	1,910	80	$	6,291	$	27		$	760

(1) Loan forgiveness related to loans modified in TDRs for the three and nine months ended September 30, 2014 totaled $273 thousand and $677 thousand, respectively.

(2) The provision for loan losses for covered loans is partially offset by the build of an associated FDIC indemnification asset on covered loans.

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	Concession type											Financial effects of modification
(Dollars in thousands)	Principal deferral		Interest rate		Forbearance agreement		Principal Reduction		Total number of loans	Total recorded investment at September 30, 2013		Net charge-offs (1)		Provision (benefit) for loan losses (2)
For the three months ended September 30, 2013
Uncovered
Residential real estate	$	—	$	614	$	—	$	—	3	$	614	$	11	$	44
Commercial real estate	—		—		1,631		—		1	1,631		14		—
Consumer	—		30		—		—		1	30		—		1
Total uncovered	—		644		1,631		—		5	2,275		25		45
Covered
Residential real estate	$	131	$	169	$	—	$	28	6	$	328	$	16	$	16
Commercial real estate	160		607		—		—		3	767		—		(5		)
Consumer	7		—		—		—		1	7		—		—
Total covered	298		776		—		28		10	1,102		16		11
Total loans	$	298	$	1,420	$	1,631	$	28	15	$	3,377	$	41	$	56
For the nine months ended September 30, 2013
Uncovered
Residential real estate	$	4	$	1,170	$	—	$	—	10	$	1,174	$	11	$	48
Commercial real estate	1,795		1,355		1,650		—		10	4,800		155		—
Commercial and industrial	—		124		—		—		7	124		—		—
Consumer	—		30		—		—		1	30		—		1
Total uncovered	1,799		2,679		1,650		—		28	6,128		166		49
Covered
Residential real estate	$	905	$	182	$	—	$	28	19	$	1,115	$	16	$	16
Commercial real estate	232		2,489		—		—		16	2,721		937		553
Commercial and industrial	608		548		69		—		31	1,225		44		37
Real estate construction	730		7		—		—		3	737		—		—
Consumer	7		—		—		—		2	7		—		—
Total covered	2,482		3,226		69		28		71	5,805		997		606
Total loans	$	4,281	$	5,905	$	1,719	$	28	99	$	11,933	$	1,163	$	655

(1) Loan forgiveness related to loans modified in TDRs for the was $25 thousand for both the three and nine months ended September 30, 2013.

(2) The provision for loan losses for covered loans is partially offset by the build of an associated FDIC indemnification asset on covered loans.

When a modification qualifies as a TDR and was initially individually accounted for under ASC 310-30, the loan is required to be moved from ASC 310-30 accounting and accounted for under ASC 310-40.  In order to accomplish the transfer of the accounting for the TDR from ASC 310-30 to ASC 310-40, the loan is essentially retained in the ASC 310-30 accounting model and subject to the quarterly cash flow re-estimation process. Similar to loans accounted for under ASC 310-30, deterioration in expected cash flows result in the recognition of allowance for loan losses. However, unlike loans accounted for under ASC 310-30, improvements in estimated cash flows on these loans result only in recapturing previously recognized allowance for loan losses and the yield remains at the last yield recognized under ASC 310-30.

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On an ongoing basis, the Company monitors the performance of TDRs to their modified terms. The following table presents the number of loans modified in TDRs during the previous 12 months for which there was payment default during the three and nine months ended September 30, 2014 and 2013, including the recorded investment as of September 30, 2014 and 2013.  A payment on a TDR is considered to be in default once it is greater than 30 days past due.

	For the three months ended September 30, 2014					For the nine months ended September 30, 2014
(Dollars in thousands)	Total number of loans	Total recorded investment at period end		Charged off following a subsequent default		Total number of loans	Total recorded investment at period end		Charged off following a subsequent default
Uncovered
Residential real estate	11	$	700	$	8	21	$	1,345	$	119
Commercial real estate	6	1,739		—		8	3,013		323
Commercial and industrial	1	135		—		2	135		—
Total uncovered	18	2,574		8		31	4,493		442
Covered
Residential real estate	6	29		—		9	242		12
Commercial real estate	2	512		—		6	637		—
Commercial and industrial	3	101		4		10	235		6
Real estate construction	—	—		—		1	364		483
Total covered	11	642		4		26	1,478		501
Total loans	29	$	3,216	$	12	57	$	5,971	$	943

	For the three months ended September 30, 2013					For the nine months ended September 30, 2013
(Dollars in thousands)	Total number of loans	Total recorded investment at period end		Charged off following a subsequent default		Total number of loans	Total recorded investment at period end		Charged off following a subsequent default
Uncovered
Residential real estate	1	$	119	$	—	6	$	398	$	25
Commercial real estate	2	121		141		4	1,186		155
Commercial and industrial	—	—		—		2	439		—
Consumer	1	30		—		1	30		3
Total uncovered	4	270		141		13	2,053		183
Covered
Residential real estate	10	345		11		16	488		236
Commercial real estate	13	1,125		170		24	2,627		1,517
Commercial and industrial	21	767		317		27	1,020		678
Real estate construction	1	678		—		1	678		—
Consumer	4	19		20		5	19		21
Total covered	49	2,934		518		73	4,832		2,452
Total loans	53	$	3,204	$	659	86	$	6,885	$	2,635

At September 30, 2014, commitments to lend additional funds to borrowers whose terms have been modified in TDRs totaled $943 thousand.

The terms of certain other loans that were modified during the three and nine months ending September 30, 2014 and 2013 that did not meet the definition of a TDR generally involved a modification of the terms of a loan to borrowers who were not deemed to be experiencing financial difficulties or a loan accounted for under ASC 310-30 that did not result in a lower effective yield than at the date of acquisition after the modification in association with consideration of qualitative factors included within ASC 310-40. The evaluation of whether or not a borrower is

37

deemed to be experiencing financial difficulty is completed during loan committee meetings at the time of the loan approval.

Credit Quality Indicators

Credit risk monitoring and management is a continuous process to manage the quality of the loan portfolio.

The Company categorizes commercial and industrial, commercial real estate and real estate construction loans into risk categories based on relevant information about the ability of borrowers to service their debt including, current financial information, historical payment experience, credit documentation and current economic trends, among other factors.  The risk rating system is used as a tool to analyze and monitor loan portfolio quality.  Risk ratings meeting an internally specified exposure threshold are updated annually, or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan.  The following describes each risk category:

Pass:  Includes all loans without weaknesses or potential weaknesses identified in the categories of special mention, substandard or doubtful.

Special Mention:  Loans with potential credit weakness or credit deficiency, which, if not corrected, pose an unwarranted financial risk that could weaken the loan by adversely impacting the future repayment ability of the borrower.

Substandard:  Loans with a well-defined weakness, or weaknesses, such as loans to borrowers who may be experiencing losses from operations or inadequate liquidity of a degree and duration that jeopardizes the orderly repayment of the loan.  Substandard loans also are distinguished by the distinct possibility of loss in the future if these weaknesses are not corrected.

Doubtful:  Loans with all the characteristics of a loan classified as Substandard, with the added characteristic that credit weaknesses make collection in full highly questionable and improbable.

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Commercial and industrial, commercial real estate and real estate construction loans by credit risk category were as follows:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2014
Uncovered loans
Commercial real estate	$	1,058,783	$	60,705	$	81,295	$	12,578	$	1,213,361
Commercial and industrial	755,869		9,167		11,357		14,474		790,867
Real estate construction	96,037		1,435		5,195		253		102,920
Total	$	1,910,689	$	71,307	$	97,847	$	27,305	$	2,107,148
Covered loans
Commercial real estate	$	122,631	$	14,704	$	76,704	$	5,457	$	219,496
Commercial and industrial	27,002		3,066		13,093		4,091		47,252
Real estate construction	7,390		843		4,446		1,055		13,734
Total	$	157,023	$	18,613	$	94,243	$	10,603	$	280,482
December 31, 2013
Uncovered loans
Commercial real estate	$	645,276	$	43,597	$	61,375	$	5,591	$	755,839
Commercial and industrial	423,295		10,237		10,431		2,681		446,644
Real estate construction	164,466		19		11,231		510		176,226
Total	$	1,233,037	$	53,853	$	83,037	$	8,782	$	1,378,709
Covered loans
Commercial real estate	$	163,167	$	17,058	$	111,052	$	8,124	$	299,401
Commercial and industrial	43,917		6,951		20,368		7,201		78,437
Real estate construction	6,193		2,803		6,850		1,372		17,218
Total	$	213,277	$	26,812	$	138,270	$	16,697	$	395,056

For residential real estate loans and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. Residential real estate loans and consumer loans secured by a residence where the debt has been discharged but the borrower continues to make payments are considered nonperforming.

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The following table presents residential real estate and consumer loans by credit quality:

(Dollars in thousands)	Performing		Nonperforming		Total
September 30, 2014
Uncovered loans
Residential real estate	$	1,415,206	$	15,733	$	1,430,939
Consumer	93,001		245		93,246
Total	$	1,508,207	$	15,978	$	1,524,185
Covered loans
Residential real estate	$	111,491	$	1,737	$	113,228
Consumer	10,040		42		10,082
Total	$	121,531	$	1,779	$	123,310
December 31, 2013
Uncovered
Residential real estate	$	1,070,038	$	15,415	$	1,085,453
Consumer	9,654		100		9,754
Total	$	1,079,692	$	15,515	$	1,095,207
Covered loans
Residential real estate	$	122,346	$	988	$	123,334
Consumer	11,647		31		11,678
Total	$	133,993	$	1,019	$	135,012

6.  ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management’s assessment of probable, incurred credit losses in the loan portfolio. The allowance for loan losses consists of specific allowances, based on individual evaluation of certain loans, and allowances for homogeneous pools of loans with similar risk characteristics. Management’s evaluation in establishing the adequacy of the allowance includes evaluation of actual past loan loss experience, probable incurred losses in the portfolio, adverse situations that may affect a specific borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, and other pertinent factors, such as periodic internal and external evaluations of delinquent, nonaccrual, and classified loans. The evaluation is inherently subjective as it requires utilizing material estimates. The evaluation of these factors is the responsibility of certain senior officers from the credit administration, finance, and lending areas.

The Company established an allowance for loan losses associated with purchased credit impaired loans (accounted for under ASC 310-30) based on credit deterioration subsequent to the acquisition date. The Company re-estimates cash flows expected to be collected for purchased credit impaired loans on a quarterly basis, with any decline in expected cash flows recorded as provision for loan losses on a discounted basis during the period. For any increases in cash flows expected to be collected, the Company first reverses any previously recorded allowance for loan loss, then adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.

For loans not accounted for under ASC 310-30, the Company individually assesses for impairment all commercial real estate, commercial and industrial and real estate construction nonaccrual loans and TDRs greater than $250,000.  For residential real estate loans and consumer loans, the Company assesses all loans for impairment if on nonaccrual status or if the loan is a TDR.

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Information as to impaired loans individually evaluated for impairment is as follows:

(Dollars in thousands)	Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Contractual principal balance		Related allowance
September 30, 2014
Uncovered individually evaluated impaired loans
Residential real estate	$	12,861	$	4,114	$	16,975	$	21,148	$	1,078
Commercial real estate	5,963		4,430		10,393		13,949		723
Commercial and industrial	4,021		8,870		12,891		13,642		1,436
Consumer	111		188		299		385		81
Total uncovered individually evaluated impaired loans	$	22,956	$	17,602	$	40,558	$	49,124	$	3,318
Covered individually evaluated impaired loans
Residential real estate	$	2,307	$	2,215	$	4,522	$	5,768	$	351
Commercial real estate	16,589		654		17,243		21,458		63
Commercial and industrial	897		883		1,780		1,948		80
Real estate construction	412		364		776		2,691		224
Consumer	12		1		13		41		1
Total covered individually evaluated impaired loans	$	20,217	$	4,117	$	24,334	$	31,906	$	719
December 31, 2013
Uncovered individually evaluated impaired loans
Residential real estate	$	8,143	$	5,871	$	14,014	$	17,005	$	1,923
Commercial real estate	4,588		—		4,588		4,423		—
Commercial and industrial	1,817		1,065		2,882		3,548		284
Real estate construction	359		—		359		359		—
Consumer	3		30		33		33		1
Total uncovered individually evaluated impaired loans	$	14,910	$	6,966	$	21,876	$	25,368	$	2,208
Covered individually evaluated impaired loans
Residential real estate	$	1,141	$	1,537	$	2,678	$	3,389	$	360
Commercial real estate	17,138		924		18,062		21,814		230
Commercial and industrial	3,704		1,417		5,121		5,503		937
Real estate construction	1,138		—		1,138		2,672		—
Consumer	6		19		25		45		2
Total covered individually evaluated impaired loans	$	23,127	$	3,897	$	27,024	$	33,423	$	1,529

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	For the three months ended September 30, 2014				For the nine months ended September 30, 2014
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Uncovered individually evaluated impaired loans
Residential real estate	$	17,257	$	177	$	17,387	$	505
Commercial real estate	10,365		74		11,324		586
Commercial and industrial	13,130		124		13,452		497
Consumer	308		7		288		14
Total uncovered individually evaluated impaired loans	$	41,060	$	382	$	42,451	$	1,602
Covered individually evaluated impaired loans
Residential real estate	$	4,537	$	69	$	4,573	$	206
Commercial real estate	17,344		294		17,488		806
Commercial and industrial	1,789		18		1,795		51
Real estate construction	767		11		965		52
Consumer	14		1		19		3
Total covered individually evaluated impaired loans	$	24,451	$	393	$	24,840	$	1,118

	For the three months ended September 30, 2013				For the nine months ended September 30, 2013
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Uncovered individually evaluated impaired loans
Residential real estate	$	4,970	$	—	$	4,760	$	—
Commercial real estate	7,545		147		7,713		148
Commercial and industrial	1,280		19		1,387		68
Real estate construction	1,221		—		1,125		—
Total uncovered individually evaluated impaired loans	$	15,016	$	166	$	14,985	$	216
Covered individually evaluated impaired loans
Residential real estate	$	891	$	15	$	893	$	40
Commercial real estate	18,814		1,222		19,394		1,810
Commercial and industrial	6,330		37		6,545		153
Real estate construction	1,084		16		1,045		48
Consumer	18		1		19		2
Total covered individually evaluated impaired loans	$	27,137	$	1,291	$	27,896	$	2,053

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Uncovered Loans

Changes in the allowance for loan losses and the allocation of the allowance for uncovered loans were as follows:

(Dollars in thousands)	Residential real estate			Commercial real estate			Commercial and industrial			Real estate construction			Consumer			Total
For the three months ended September 30, 2014
Allowance for loan losses - uncovered:
Balance at beginning of period	$	9,750		$	7,846		$	5,140		$	1,398		$	226		$	24,360
Provision for loan losses	1,943			3,176			2,363			178			124			7,784
Gross charge-offs	(1,597		)	(1,783		)	(826		)	(210		)	(55		)	(4,471		)
Recoveries	800			1,017			79			—			323			2,219
Net (charge-offs) recoveries	(797		)	(766		)	(747		)	(210		)	268			(2,252		)
Ending allowance for loan losses	$	10,896		$	10,256		6,756			$	1,366		$	618		$	29,892
For the nine months ended September 30, 2014
Allowance for loan losses - uncovered:
Balance at beginning of period	$	7,708		$	4,267		$	3,404		$	2,027		$	340		$	17,746
Provision (benefit) for loan losses	5,502			9,100			4,124			(1,306		)	7			17,427
Gross charge-offs	(4,414		)	(6,612		)	(1,452		)	(319		)	(179		)	(12,976		)
Recoveries	2,100			3,501			680			964			450			7,695
Net (charge-offs) recoveries	(2,314		)	(3,111		)	(772		)	645			271			(5,281		)
Ending allowance for loan losses	$	10,896		$	10,256		$	6,756		$	1,366		$	618		$	29,892
As of September 30, 2014
Allowance for loan losses - uncovered:
Individually evaluated for impairment	$	1,078		$	723		$	1,436		$	—		$	81		$	3,318
Collectively evaluated for impairment	4,572			3,598			4,805			520			392			13,887
Accounted for under ASC 310-30	5,246			5,935			515			846			145			12,687
Allowance for loan losses - uncovered:	$	10,896		$	10,256		$	6,756		$	1,366		$	618		$	29,892
Balance of loans - uncovered:
Individually evaluated for impairment	$	16,975		$	10,393		$	12,891		$	—		$	299		$	40,558
Collectively evaluated for impairment	1,163,437			995,962			760,884			94,203			90,130			3,104,616
Accounted for under ASC 310-30	250,527			207,006			17,092			8,717			2,817			486,159
Total uncovered loans	$	1,430,939		$	1,213,361		$	790,867		$	102,920		$	93,246		$	3,631,333
For the three months ended September 30, 2013
Allowance for loan losses - uncovered:
Balance at beginning of peiod	$	3,258		$	4,771		$	3,608		$	1,862		$	475		$	13,974
Provision (benefit) for loan losses	2,904			(138		)	73			152			(139		)	2,852
Gross charge-offs	(2,314		)	(772		)	(623		)	(28		)	(266		)	(4,003		)
Recoveries	1,906			185			129			170			407			2,797
Net (charge-offs) recoveries	(408		)	(587		)	(494		)	142			141			(1,206		)
Ending allowance for loan losses	$	5,754		$	4,046		$	3,187		$	2,156		$	477		$	15,620
For the nine months ended September 30, 2013
Allowance for loan losses - uncovered:
Balance at beginning of period	$	2,059		$	4,265		$	4,162		$	268		$	191		$	10,945
Provision (benefit) for loan losses	6,380			772			(233		)	1,789			243			8,951
Gross charge-offs	(5,085		)	(1,561		)	(926		)	(96		)	(505		)	(8,173		)
Recoveries	2,400			570			184			195			548			3,897
Net (charge-offs) recoveries	(2,685		)	(991		)	(742		)	99			43			(4,276		)
Ending allowance for loan losses	$	5,754		$	4,046		$	3,187		$	2,156		$	477		$	15,620

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(Dollars in thousands)	Residential real estate		Commercial real estate		Commercial and industrial		Real estate construction		Consumer		Total
As of December 31, 2013
Allowance for loan losses - uncovered:
Individually evaluated for impairment	$	1,923	$	—	$	284	$	—	$	1	$	2,208
Collectively evaluated for impairment	2,697		2,862		2,959		2,025		224		10,767
Accounted for under ASC 310-30	3,088		1,405		161		2		115		4,771
Allowance for loan losses - uncovered:	$	7,708	$	4,267	$	3,404	$	2,027	$	340	$	17,746
Balance of loans - uncovered:
Individually evaluated for impairment	$	14,014	$	4,588	$	2,882	$	359	$	33	$	21,876
Collectively evaluated for impairment	817,911		652,952		437,777		173,897		6,814		2,089,351
Accounted for under ASC 310-30	253,528		98,299		5,985		1,970		2,907		362,689
Total uncovered loans	$	1,085,453	$	755,839	$	446,644	$	176,226	$	9,754	$	2,473,916

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Covered Loans

Changes in the allowance and the allocation of the allowance for covered loans were as follows:

(Dollars in thousands)	Residential real estate			Commercial real estate			Commercial and industrial			Real estate construction			Consumer			Total
For the three months ended September 30, 2014
Allowance for loan losses - covered:
Balance at beginning of period	$	5,312		$	21,275		$	4,540		$	1,519		$	97		$	32,743
Provision (benefit) for loan losses	(1,412		)	(3,191		)	(1,132		)	(500		)	(40		)	(6,275		)
Gross charge-offs	(371		)	(3,106		)	(565		)	(219		)	(71		)	(4,332		)
Recoveries	558			1,585			1,067			352			70			3,632
Net (charge-offs) recoveries	187			(1,521		)	502			133			(1		)	(700		)
Ending allowance for loan losses	$	4,087		$	16,563		$	3,910		$	1,152		$	56		$	25,768
For the nine months ended September 30, 2014
Allowance for loan losses - covered:
Balance at beginning of period	$	4,696		$	26,394		$	7,227		$	1,984		$	80		$	40,381
Provision (benefit) for loan losses	(629		)	(11,030		)	(3,633		)	(678		)	(124		)	(16,094		)
Gross charge-offs	(1,646		)	(6,301		)	(3,092		)	(1,223		)	(148		)	(12,410		)
Recoveries	1,666			7,500			3,408			1,069			248			13,891
Net (charge-offs) recoveries	20			1,199			316			(154		)	100			1,481
Ending allowance for loan losses	$	4,087		$	16,563		$	3,910		$	1,152		$	56		$	25,768
As of September 30, 2014
Allowance for loan losses- covered:
Individually evaluated for impairment	$	351		$	63		$	80		$	224		$	1		$	719
Collectively evaluated for impairment	133			158			517			14			1			823
Accounted for under ASC 310-30	3,603			16,342			3,313			914			54			24,226
Allowance for loan losses	$	4,087		$	16,563		$	3,910		$	1,152		$	56		$	25,768
Balance of covered loans:
Individually evaluated for impairment	$	4,522		$	17,243		$	1,780		$	776		$	13		$	24,334
Collectively evaluated for impairment	17,943			5,059			12,495			427			120			36,044
Accounted for under ASC 310-30	90,763			197,194			32,977			12,531			9,949			343,414
Total covered loans	$	113,228		$	219,496		$	47,252		$	13,734		$	10,082		$	403,792
For the three months ended September 30, 2013
Allowance for loan losses - covered:
Balance at beginning of period	$	4,951		$	27,387		$	10,512		$	3,359		$	103		$	46,312
Provision (benefit) for loan losses	274			(204		)	(268		)	(492		)	(37		)	(727		)
Gross charge-offs	(963		)	(2,451		)	(2,112		)	(803		)	(85		)	(6,414		)
Recoveries	373			1,804			569			543			113			3,402
Net (charge-offs) recoveries	(590		)	(647		)	(1,543		)	(260		)	28			(3,012		)
Ending allowance for loan losses	$	4,635		$	26,536		$	8,701		$	2,607		$	94		$	42,573
For the nine months ended September 30, 2013
Allowance for loan losses - covered:
Balance at beginning of period	$	5,716		$	30,150		$	10,915		$	4,509		$	183		$	51,473
Provision (benefit) for loan losses	—			(4,205		)	(1,178		)	(1,516		)	(204		)	(7,103		)
Gross charge-offs	(2,183		)	(8,291		)	(3,818		)	(1,613		)	(179		)	(16,084		)
Recoveries	1,102			8,882			2,782			1,227			294			14,287
Net (charge-offs) recoveries	(1,081		)	591			(1,036		)	(386		)	115			(1,797		)
Ending allowance for loan losses	$	4,635		$	26,536		$	8,701		$	2,607		$	94		$	42,573

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(Dollars in thousands)	Residential real estate		Commercial real estate		Commercial and industrial		Real estate construction		Consumer		Total
As of December 31, 2013
Allowance for loan losses- covered:
Individually evaluated for impairment	$	360	$	230	$	937	$	—	$	2	$	1,529
Collectively evaluated for impairment	192		3,010		471		108		1		3,782
Accounted for under ASC 310-30	4,144		23,154		5,819		1,876		77		35,070
Allowance for loan losses	$	4,696	$	26,394	$	7,227	$	1,984	$	80	$	40,381
Balance of covered loans:
Individually evaluated for impairment	$	2,678	$	18,062	$	5,121	$	1,138	$	25	$	27,024
Collectively evaluated for impairment	20,622		18,570		21,909		812		145		62,058
Accounted for under ASC 310-30	100,034		262,769		51,407		15,268		11,508		440,986
Total covered loans	$	123,334	$	299,401	$	78,437	$	17,218	$	11,678	$	530,068

7.  ACQUIRED LOANS AND LOSS SHARE ACCOUNTING

A significant amount of loans acquired in the CF Bancorp and First Banking Center acquisitions during the year 2010 and the Peoples State Bank and Community Central Bank acquisitions during the year 2011 are covered by loss sharing agreements with the FDIC, whereby the FDIC generally reimburses the Bank for the 80% of losses incurred.  The CF Bancorp, First Banking Center and Peoples State Bank loss share agreements also include provisions where a clawback payment, calculated using formulas included within the contracts, is to be made to the FDIC 10 years and 45 days following the acquisition in the event actual losses fail to reach stated levels.  The estimated FDIC clawback liability totaled $25.7 million ($21.5 million related to the CF Bancorp acquisition and $4.2 million related to the First Banking Center acquisition) at September 30, 2014 compared to $24.9 million ($21.0 million related to the CF Bancorp acquisition and $3.9 million related to the First Banking Center acquisition) at December 31, 2013.  No clawback liability was recorded in relation to Peoples State Bank as of both September 30, 2014 and December 31, 2013.

Acquired loans were recorded at fair value as of the acquisition date, which includes loans acquired in each FDIC-assisted acquisition and in the First Place Bank and Talmer West Bank acquisitions.  At the acquisition date, where a loan exhibits evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all principal and interest payments in accordance with the terms of the loan agreement, the Company accounts for the loan under ASC 310-30 and recognizes the expected shortfall of expected future cash flows, as compared to the contractual amount due, as a nonaccretable discount. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as the accretable discount, or accretable yield.  We recognize accretion of the accretable discount as interest income over the expected remaining life of the purchased loan.  Fair value discounts/premiums created on acquired loans accounted for outside the scope of ASC 310-30 are accounted for under ASC 310-20 and are accreted/amortized into interest income over the remaining term of the loan as an adjustment to the related loans yield.

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Changes in the carrying amount of accretable discount for purchased loans accounted for under ASC 310-30 were as follows:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2014			2013			2014			2013
Balance at beginning of period	$	305,592		$	325,724		$	302,287		$	216,970
Additions due to acquisitions	—			—			32,764			158,221
Discount accretion	(22,417		)	(24,023		)	(68,249		)	(75,582		)
Reclassifications from nonaccretable discount and other additions to accretable discount due to results of cash flow re-estimations	32,004			24,407			72,911			64,856
Other activity, net (1)	(14,584		)	(10,276		)	(39,118		)	(48,633		)
Balance at end of period	$	300,595		$	315,832		$	300,595		$	315,832

(1) Primarily includes changes in the accretable discount due to loan payoffs, foreclosures and charge-offs.

For loans accounted for under ASC 310-30, the Company remeasures expected cash flows on a quarterly basis.  For loans where the remeasurement process results in a decline in expected cash flows, impairment is recorded.  As a result of this impairment, the indemnification asset is increased to reflect anticipated future cash to be received from the FDIC.  Alternatively, when a loan’s remeasurement results in an increase in expected cash flows, the effective yield of the related loan is increased through an addition to the accretable discount.  As a result of the improved cash flows, the indemnification asset is first reduced by the writing off of any indemnification asset related to impairment previously recorded with any remaining indemnification asset accreting off over the shorter of the expected term of the loan or the remaining life of the related loss-sharing agreement.

The total identified improvement in the cash flow expectations resulting in yield adjustments on a prospective basis during the three months ended September 30, 2014 and 2013 for both covered and uncovered purchased credit impaired loans was $32.0 million and $24.4 million, respectively.  During the nine months ended September 30, 2014 and 2013, the total identified improvement in the cash flow expectations resulting in yield adjustments on a prospective basis was $72.9 million and $64.9 million, respectively.  The Company also identified declines in the cash flow expectations of certain loans.  A decline in the present value of current expected cash flows compared to the previously estimated expected cash flows, due in any part to change in credit, is referred to as credit impairment and recorded as provision for loan losses during the period.  Declines in the present value of expected cash flows only from the expected timing of such cash flows is referred to as timing impairment and recognized prospectively as a decrease in yield on the loan.

Below is the composition of the recorded investment for loans accounted for under ASC 310-30 at September 30, 2014 and December 31, 2013.

	September 30,			December 31,
(Dollars in thousands)	2014			2013
Contractual cash flows	$	1,397,034		$	1,357,070
Non-accretable difference	(266,866		)	(251,108		)
Accretable yield	(300,595		)	(302,287		)
Loans accounted for under ASC 310-30	$	829,573		$	803,675

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The following table details the components and impact of the provision for loan losses on covered loans and the related FDIC loss sharing income.

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2014			2013			2014			2013
Provision (benefit) for loan losses - covered:
Impairment (benefit) recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	$	(1,329	)	$	1,615		$	1,036		$	9,989
Additional benefit recorded, net of charge-offs, for covered loans	(4,946		)	(2,342		)	(17,130		)	(17,092		)
Total provision (benefit) for loan losses-covered	$	(6,275	)	$	(727	)	$	(16,094	)	$	(7,103	)
				��
Less: FDIC loss share income:
Income recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	176			875			3,680			4,481
Expense recorded, to offset provision (benefit), for covered loans	(2,978		)	(1,874		)	(10,445		)	(13,674		)
Total loss sharing expense due to provision for loan losses-covered	(2,802		)	(999		)	(6,765		)	(9,193		)
Net (increase) decrease to income before taxes:
Net (income) expense recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	(1,505		)	740			(2,644		)	5,508
Net (income) expense recorded, for covered loans including those accounted for under ASC 310-20 and ASC 310-40	(1,968		)	(468		)	(6,685		)	(3,418		)
Net (increase) decrease to income before taxes	$	(3,473	)	$	272		$	(9,329	)	$	2,090

(1)  The results of re-estimations also included cash flow improvements to be recognized prospectively as an adjustment to the accretable yield on the loan related to covered loans of $17.4 million and $6.8 million for the three months ended September 30, 2014 and 2013, respectively, and $33.9 million and $38.5 million for the nine months ended September 30, 2014, and 2013, respectively. 

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The following table summarizes the activity related to the FDIC indemnification asset and the FDIC receivable for the three and nine months ended September 30, 2014 and 2013.  For further detail on impairment and provision expense related to loans accounted for under ASC Topic 310-30, refer to Note 6 “Allowance for Loan Losses.”

	For the three months ended September 30, 2014						For the nine months ended September 30, 2014
(Dollars in thousands)	FDIC Indemnification Asset			FDIC Receivable			FDIC Indemnification Asset			FDIC Receivable
Balance at beginning of period	$	102,694		$	7,198		$	131,861		$	7,783
Accretion	(6,663		)	—			(18,887		)	—
Sales and write-downs of other real estate owned (covered)	(88		)	233			(841		)	(14		)
Net effect of change in allowance on covered assets (1)	(5,484		)	—			(13,639		)	—
Reimbursements requested from FDIC (reclassification to FDIC receivable)	(8,018		)	8,018			(16,053		)	16,053
Decrease due to recoveries net of additional claimable expenses incurred (2)	—			(269		)	—			(4,588		)
Claim payments received from the FDIC	—			(2,307		)	—			(6,361		)
Balance at end of period	$	82,441		$	12,873		$	82,441		$	12,873

(1) Primarily includes adjustments for fully claimed and exited loans and the results of remeasurement of expected cash flows under ASC 310-30 accounting.

(2) Includes expenses associated with maintaining the underlying properties and legal fees.

	For the three months ended September 30, 2013						For the nine months ended September 30, 2013
(Dollars in thousands)	FDIC Indemnification Asset			FDIC Receivable			FDIC Indemnification Asset			FDIC Receivable
Balance at beginning of period	$	171,956		$	17,573		$	226,356		$	17,999
Accretion	(6,032		)	—			(21,088		)	—
Sales and write-downs of other real estate owned (covered)	(1,070		)	861			(3,388		)	2,288
Net effect of change in allowance on covered assets (1)	(8,179		)	—			(29,052		)	—
Reimbursements requested from FDIC (reclassification to FDIC receivable)	(8,350		)	8,350			(24,503		)	24,503
Decrease due to additional claimable expenses incurred net of recoveries (2)	—			(2,713		)	—			(2,326		)
Claim payments received from the FDIC	—			(10,541		)	—			(28,934		)
Balance at end of period	$	148,325		$	13,530		$	148,325		$	13,530

(1) Primarily includes adjustments for fully claimed and exited loans and the results of remeasurement of expected cash flows under ASC 310-30 accounting.

(2) Includes expenses associated with maintaining the underlying properties and legal fees.

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8. OTHER REAL ESTATE OWNED

Changes in other real estate owned were as follows:

(Dollars in thousands)	Uncovered			Covered			Total
Balance at January 1, 2014	$	18,384		$	11,571		$	29,955
Additions due to acquisitions	30,878			—			30,878
Transferred to other real estate owned (1)	10,889			7,989			18,878
Disposals	(24,116		)	(6,189		)	(30,305		)
Write-downs	(2,861		)	(1,605		)	(4,466		)
Balance at September 30, 2014	$	33,174		$	11,766		$	44,940
Balance at January 1, 2013	$	869		$	23,834		$	24,703
Additions due to acquisitions	18,448			—			18,448
Transferred to other real estate owned (1)	8,598			10,634			19,232
Disposals	(9,995		)	(13,293		)	(23,288		)
Write-downs	(1,408		)	(4,314		)	(5,722		)
Balance at September 30, 2013	$	16,512		$	16,861		$	33,373

(1) Includes loans transferred to other real estate owned and transfers to other real estate owned due to branch or building operation closings/consolidations.

Income and expenses related to other real estate owned were as follows:

(Dollars in thousands)	Uncovered			Covered			Total
For the three months ended September 30, 2014
Net gain on sale	$	2,367		$	60		$	2,427
Write-downs	(1,361		)	(701		)	(2,062		)
Net operating expenses	(778		)	(60		)	(838		)
Total	$	228		$	(701	)	$	(473	)
For the nine months ended September 30, 2014
Net gain on sale	$	6,369		$	291		$	6,660
Write-downs	(2,861		)	(1,605		)	(4,466		)
Net operating expenses	(2,323		)	(133		)	(2,456		)
Total	$	1,185		$	(1,447	)	$	(262	)
For the three months ended September 30, 2013
Net gain on sale	$	43		$	510		$	553
Write-downs	(155		)	(2,008		)	(2,163		)
Net operating (expenses) income	(200		)	27			(173		)
Total	$	(312	)	$	(1,471	)	$	(1,783	)
For the nine months ended September 30, 2013
Net gain on sale	$	2,461		$	636		$	3,097
Write-downs	(1,408		)	(4,314		)	(5,722		)
Net operating (expenses) income	(937		)	118			(819		)
Total	$	116		$	(3,560	)	$	(3,444	)

Note that covered other real estate expenses and income are partially offset by the corresponding recording of FDIC loss share income or expense.

9.  CORE DEPOSIT INTANGIBLES

The Company recorded core deposit intangibles (CDIs) associated with the acquisitions of CF Bancorp, First Banking Center, Peoples State Bank, Community Central Bank, First Place Bank and Talmer West Bank. CDIs

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are amortized on an accelerated basis over their estimated useful lives and have an estimated remaining weighted-average useful life of 7.56 years as of September 30, 2014. The Company had no other intangible assets as of September 30, 2014 or December 31, 2013.

The table below presents the Company’s net carrying amount of CDIs.

	September 30,			December 31,
(Dollars in thousands)	2014			2013
Gross carrying amount	$	20,658		$	19,331
Accumulated amortization	(6,962		)	(6,126		)
Net carrying amount	$	13,696		$	13,205

Amortization expense recognized on CDIs was $680 thousand and $663 thousand for the three months ended September 30, 2014 and 2013, respectively, and $2.1 million and $2.0 million for the nine months ended September 30, 2014 and 2013, respectively, included as a component of “other expense” on the Consolidated Statements of Income.

In the third quarter of 2014 we sold our branch offices located in Wisconsin (acquired in our First Banking Center acquisition) and our single branch office in Albuquerque, New Mexico (acquired in our Talmer West Bank acquisition).  The branch sales included all of the deposits of the branches, resulting in the write-off of the related core deposit intangibles totaling $1.0 million.

10.  LOAN SERVICING RIGHTS

Loan servicing rights are created as a result of the Company’s mortgage banking origination activities, the purchase of mortgage servicing rights, the origination and purchase of agricultural servicing rights and the origination and purchase of commercial real estate servicing rights.  Loans serviced for others are not reported as assets in the Consolidated Balance Sheets.

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The Company elected as of January 1, 2013 to account for all loan servicing rights under the fair value method.  This change in accounting policy resulted in a cumulative adjustment to retained earnings as of January 1, 2013 in the amount of $31 thousand.  For further information on this election, refer to the Consolidated Financial Statements in the Company’s 2013 Annual Report.  The following table represents the activity for loan servicing rights and the related fair value changes.

	Commercial
(Dollars in thousands)	Real Estate			Agricultural			Mortgage			Total
For the three months ended September 30, 2014
Fair value, beginning of period	$	837		$	876		$	72,391		$	74,104
Additions from loans sold with servicing retained	—			2			2,296			2,298
Changes in fair value due to:
Reductions from loans paid off during the period	(57		)	(83		)	(1,706		)	(1,846		)
Changes due to valuation inputs or assumptions (1)	(18		)	(24		)	(134		)	(176		)
Fair value, end of period	$	762		$	771		$	72,847		$	74,380
For the nine months ended September 30, 2014
Fair value, beginning of period	$	368		$	962		$	77,273		$	78,603
Additions due to acquisition	767			—			—			767
Additions from loans sold with servicing retained	—			125			5,921			6,046
Changes in fair value due to:
Reductions from loans paid off during the period	(125		)	(220		)	(4,110		)	(4,455		)
Changes due to valuation inputs or assumptions (1)	(248		)	(96		)	(6,237		)	(6,581		)
Fair value, end of period	$	762		$	771		$	72,847		$	74,380
Principal balance of loans serviced	$	222,262		$	37,301		$	7,069,937		$	7,329,500
For the three months ended September 30, 2013
Fair value, beginning of period	$	438		$	1,099		$	63,650		$	65,187
Additions from loans sold with servicing retained	—			5			6,628			6,633
Changes in fair value due to:
Reductions from loans paid off during the period	(6		)	(74		)	(1,576		)	(1,656		)
Changes due to valuation inputs or assumptions (1)	(20		)	15			1,592			1,587
Fair value, end of period	$	412		$	1,045		$	70,294		$	71,751
For the nine months ended September 30, 2013
Fair value, beginning of period	$	518		$	1,456		$	3,683		$	5,657
Additions due to acquisition	—			—			41,967			41,967
Additions from loans sold with servicing retained	—			70			20,060			20,130
Changes in fair value due to:
Reductions from loans paid off during the period	(10		)	(397		)	(4,167		)	(4,574		)
Changes due to valuation inputs or assumptions (1)	(96		)	(84		)	8,751			8,571
Fair value, end of period	$	412		$	1,045		$	70,294		$	71,751
Principal balance of loans serviced	$	281,091		$	47,824		$	7,022,362		$	7,351,277

(1)  Represents estimated fair value changes primarily due to prepayment speeds and market-driven changes in interest rates.

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Expected and actual loan prepayment speeds are the most significant factors driving the fair value of loan servicing rights. The following table presents assumptions utilized in determining the fair value of loan servicing rights as of September 30, 2014 and December 31, 2013.

	Commercial
	Real Estate		Agricultural		Mortgage
As of September 30, 2014
Prepayment speed	6.37 - 50.00%		5.57 - 47.08%		3.77 - 44.78%
Weighted average (“WA”) discount rate	19.47%		15.00%		9.65%
WA cost to service/per year	$	470	$	200	$	57
WA Ancillary income/per year	N/A		N/A		36
WA float range	0.56%		0.56%		1.15 - 1.83%
As of December 31, 2013
Prepayment speed	8.50-50.00%		4.98-53.16%		3.55-44.49%
WA discount rate	20.00%		15.00%		10.17%
WA cost to service/per year	$	467	$	200	$	57
WA Ancillary income/per year	N/A		N/A		45
WA float range	0.56%		0.56%		0.73-1.54%

The Company realized total loan servicing fee income of $3.1 million and $4.8 million, for the three months ended September 30, 2014 and 2013, respectively, and $10.4 million and $13.4 million for the nine months ended September 30, 2014 and 2013, respectively, recorded as a component of “Mortgage banking and other loan fees” in the Consolidated Statements of Income.

11.  DERIVATIVE INSTRUMENTS

In the normal course of business, the Company enters into various transactions involving derivative instruments to manage exposure to fluctuations in interest rates and to meet the financing needs of customers (customer initiated derivatives).  These financial instruments involve, to varying degrees, elements of market and credit risk.  Market and credit risk are included in in the determination of fair value.

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans.

The Company additionally enters into interest rate derivatives to provide a service to certain qualifying customers to help facilitate their respective risk management strategies, customer-initiated derivatives, and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company generally takes offsetting positions with dealer counterparts to mitigate the inherent risk.  Income primarily results from the spread between the customer derivative and the offsetting dealer positions.

The Company has no derivatives designated as qualifying accounting hedging instruments.

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The following table reflects the amount and fair value of mortgage banking and customer-initiated derivatives.  Fair values of customer-initiated derivative instruments represent the net unrealized gains or losses on such contracts and are recorded in the Consolidated Balance Sheets.  Changes in fair value are recorded as a component of “Other noninterest income” in the Consolidated Statements of Income.

	September 30, 2014				December 31, 2013
(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in “Other assets”:
Forward contracts related to mortgage loans to be delivered for sale	$	—	$	—	$	168,746	$	1,484
Interest rate lock commitments	77,078		1,429		67,685		1,146
Customer initiated derivatives	16,387		369		—		—
Total included in “Other assets”	$	93,465	$	1,798	$	236,431	$	2,630
Included in “Other liabilities”:
Forward contracts related to mortgage loans to be delivered for sale	$	167,795	$	166	$	—	$	—
Customer initiated derivatives	13,764		195		—		—
Total included in “Other liabilities”	$	181,559	$	361	$	—	$	—

In the normal course of business, the Company may decide to settle a forward contract rather than fulfill the contract.  Cash received or paid in this settlement manner is included in “Net gain on sales of loans” in the Consolidated Statements of Income and is considered a cost of executing a forward contract.

The following table reflects the net gains (losses) relating to derivative instruments related to the changes in fair value.

		For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	Location of Gain (Loss)	2014			2013			2014			2013
Forward contracts related to mortgage loans to be delivered for sale	Net gain on sale of loans	$	(463	)	$	(3,741	)	$	(10,372	)	$	22,386
Interest rate lock commitments	Net gain on sale of loans	(853		)	5,162			284			(3,672		)
Customer-inititated derivatives	Other noninterest income	4			—			23			—
Total gain (loss) recognized in income		$	(1,312	)	$	1,421		$	(10,065	)	$	18,714

Methods and assumptions used by the Company in estimating the fair value of its forward contracts, interest rate lock commitments and customer-initiated derivatives are discussed in Note 3, “Fair Value”.

12.  COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments

In the normal course of business, the Company offers a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit.

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The Company’s exposure to credit loss, in the event of nonperformance by the counterparty to the financial instrument, is represented by the contractual amounts of those instruments. The credit policies used in making commitments and conditional obligations are the same as those used for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. The collateral held varies, but may include securities, real estate, inventory, plant, or equipment. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are included in commitments to extend credit. These lines of credit are generally uncollateralized, usually do not contain a specified maturity date and may be drawn upon only to the total extent to which the Company is committed.

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to the Company arises from its obligation to make payment in the event of the customers’ contractual default to produce the contracted good or service to a third party.

The allowance for credit losses on lending-related commitments included $498 thousand and $1.0 million at September 30, 2014 and December 31, 2013, respectively, for probable credit losses inherent in the Company’s unused commitments and was recorded in “Other liabilities” in the Consolidated Balance Sheets.

A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk is as follows:

	September 30, 2014						December 31, 2013
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	591,410	$	542,898	$	1,134,308	$	523,666	$	216,473	$	740,139
Standby letters of credit	69,169		4,037		73,206		68,452		561		69,013
Total commitments	$	660,579	$	546,935	$	1,207,514	$	592,118	$	217,034	$	809,152

Contingencies and Guarantees

The Company has originated and sold certain loans for which the buyer has limited recourse to us in the event the loans do not perform as specified in the agreements.  These loans had an outstanding balance of $65.3 million and $79.5 million at September 30, 2014 and December 31, 2013, respectively. The maximum potential amount of undiscounted future payments that we could be required to make in the event of nonperformance by the borrower totaled $33.4 million and $42.9 million, at September 30, 2014 and December 31, 2013, respectively.  In the event of nonperformance, we have rights to the underlying collateral securing the loans.  As of September 30, 2014 and December 31, 2013, we had recorded a liability of $275 thousand and $567 thousand, respectively, in connection with the recourse agreements, recorded in “Other liabilities” in the Consolidated Balance Sheets.

We issue standby letters of credit for commercial customers to third parties to guarantee the performance of those customers to the third parties.  If the customer fails to perform, we perform in their place and record the funds advanced as an interest-bearing loan.  These letters of credit are underwritten using the same policies and criteria applied to commercial loans.  Therefore, they represent the same risk to us as a loan to that commercial loan customer.  At September 30, 2014 and December 31, 2013, our standby letters of credit totaled $73.2 million and $69.0 million, respectively.

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Representations and Warranties

In connection with our mortgage banking loan sales, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards.  We may be required to repurchase individual loans and/or indemnify the purchaser against losses if the loan fails to meet established criteria.  At September 30, 2014 and December 31, 2013, our liability recorded in connection with these representations and warranties totaled $4.0 million and $4.8 million, respectively.

Legal Proceedings

The Company and certain of its subsidiaries are subject to various pending or threatened legal proceedings arising out of the normal course of business. Some of these claims are against entities or assets of which the Company has acquired in business acquisitions, and certain of these claims, or future claims, will be covered by loss sharing agreements with the FDIC.

The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in its consolidated financial statements. While the ultimate liability with respect to these litigation matters and claims cannot be determined at this time, in the opinion of management, any liabilities arising from pending legal proceedings would not have a material adverse effect on the Company’s financial statements.

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13.  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

The following table presents the components of the Company’s short-term borrowings and long-term debt.

	September 30, 2014				December 31, 2013
(Dollars in thousands)	Amount		Weighted Average Rate (1)		Amount		Weighted Average Rate (1)
Short-term borrowings:
Securities sold under agreements to repurchase: 0.10%-0.28% floating-rate notes	$	80,573	0.21	%	$	36,876	0.20	%
FHLB advances: 0.31% fixed-rate notes	50,000		0.31	%	—		—
FHLB advances: 0.07% floating-rate	20,000		0.07	%	—		—
Holding company line of credit: floating-rate based on one-month LIBOR plus 2.85%	—		—		35,000		3.17	%
Total short-term borrowings	150,573		0.22	%	71,876		1.64	%
Long-term debt:
FHLB advances: 0.19% - 7.44% fixed-rate notes due April 2015 to 2027 (2)	217,466		1.99	%	130,368		3.28	%
Securities sold under agreements to repurchase: 4.11%-4.30% fixed-rate notes due 2016 to 2037 (3)	56,853		4.19	%	58,079		4.19	%
Subordinated notes related to trust preferred securities: floating-rate based on three-month LIBOR plus 1.45-2.85% due 2034 to 2035 (4)	10,690		2.48	%	10,590		2.49	%
Total long-term debt	285,009		2.45	%	199,037		3.50	%
Total short-term borrowings and long-term debt:	$	435,582	1.68	%	$	270,913	3.01	%

(1) Weighted average rate presented is the contractual rate which excludes premiums and discounts related to purchase accounting.

(2) The September 30, 2014 balance includes advances payable of $210.2 million and purchase accounting premiums of $7.3 million. The December 31, 2013 balance includes advances payable of $121.2 million and purchase accounting premiums of $9.2 million.

(3) The September 30, 2014 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $6.9 million. The December 31, 2013 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $8.1 million.

(4) The September 30, 2014 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.3 million.  The December 31, 2013 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.4 million.

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Selected financial information pertaining to the components of our short-term borrowings is as follows:

	For the three months ended			For the nine months ended
(Dollars in thousands)	September 30, 2014			September 30, 2014
Securities sold under agreement to repurchase:
Average daily balance	$	136,707		$	97,156
Average interest rate during the period	0.14		%	0.12		%
Maximum month-end balance	$	166,925		$	166,925
FHLB advances:
Average daily balance	$	82,935		$	40,966
Average interest rate during the period	0.19		%	0.80		%
Maximum month-end balance	$	70,000		$	90,000
Federal funds purchased:
Average daily balance	$	217		$	1,568
Average interest rate during the period	0.31		%	0.27		%
Interest rate at period end	N/A		(1)	N/A		(1)
Maximum month-end balance	$	—		$	—
FHLB overnight repurchase agreements:
Average daily balance	$	—		$	2,931
Average interest rate during the period	0.00		%	0.10		%
Interest rate at period end	N/A		(1)	N/A		(1)
Maximum month-end balance	$	—		$	—
Holding company line of credit:
Average daily balance	$	—		$	7,436
Average interest rate during the period	0.00		%	0.00		%
Interest rate at period end	N/A		(1)	N/A		(1)
Maximum month-end balance	$	—		$	35,000

(1) Federal funds purchased, FHLB overnight repurchase agreements and the holding company line of credit did not have oustanding balances at September 30, 2014. 

Securities sold under agreements to repurchase are typically held by an independent third party when they are for retail customers (short-term borrowings) and are delivered to the counterparty when they are wholesale borrowings with brokerage firms (long-term debt).  At maturity, the securities underlying the agreements are returned to the banks.  Securities sold under agreements to repurchase are secured by mortgage-backed securities and bonds with a carrying value of $423.1 million at September 30, 2014.

Our subsidiary banks are members of the FHLB, which provides short- and long-term funding collateralized by mortgage-related assets to its members.  Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances.  At September 30, 2014, FHLB advances were collateralized by $1.7 billion of commercial and mortgage loans, with $1.1 billion in the form of a blanket lien arrangement and $541.5 million under specific lien arrangements.  Based on this collateral, the Company is eligible to borrow up to an additional $1.0 billion at September 30, 2014.

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14.  INCOME TAXES

The current and deferred components of the provision for income taxes were as follows:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2014			2013			2014			2013
Current income tax expense (benefit)
Federal	$	11,344		$	4,409		$	(4,680	)	$	3,168
State	32			40			(384		)	(614		)
Total current income tax expense (benefit)	11,376			4,449			(5,064		)	2,554
Deferred income tax expense (benefit)
Federal	(2,215		)	(2,390		)	17,313			3,153
State	743			(110		)	1,880			935
Total deferred income tax expense (benefit)	(1,472		)	(2,500		)	19,193			4,088
Change in valuation allowance	—			(6,006		)	(10,127		)	(6,006		)
Income tax provision (benefit)	$	9,904		$	(4,057	)	$	4,002		$	636

Provision for income taxes is computed by applying an estimated annual effective tax rate, based on a forecast of annual income from continuing operations, to year-to-date pre-tax income from continuing operations, and then adjusting for any additional tax effects required to be recorded discretely in the quarter to which they relate.

A reconciliation of expected income tax expense (benefit) at the federal statutory rate to the Company’s provision for income taxes and effective tax rate follows.

	For the three months ended September 30,										For the nine months ended September 30,
	2014					2013					2014					2013
(Dollars in thousands)	Amount			Rate		Amount			Rate		Amount			Rate		Amount			Rate
Tax based on federal statutory rate	$	10,297		35.0	%	$	2,270		35.0	%	$	28,823		35.0	%	$	30,324		35.0	%
Effect of:
Tax exempt income	(521		)	(1.8	)	(405		)	(6.3	)	(1,723		)	(2.1	)	(1,284		)	(1.5	)
State taxes, net of federal benefit	666			2.3		(46		)	(0.7	)	1,135			1.4		208			0.2
Change in valuation allowance	—			—		(6,006		)	(92.6	)	(10,127		)	(12.3	)	(6,006		)	(6.9	)
Bargain purchase gain	—			—		—			—		(14,692		)	(17.8	)	(25,096		)	(29.0	)
Transaction costs	—			—		—			—		454			0.5		2,581			3.0
Other, net	(538		)	(1.8	)	130			2.1		132			0.2		(91		)	(0.1	)
Income tax expense (benefit)	$	9,904		33.7	%	$	(4,057	)	(62.5	)%	$	4,002		4.9	%	$	636		0.7	%

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The significant components of the deferred tax assets and liabilities at September 30, 2014 and December 31, 2013 were as follows:

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Deferred tax assets:
Allowance for loan losses	$	50,512	$	51,527
Other real estate losses	6,797		3,702
Organizational costs	282		311
Accrued stock-based compensation	5,764		5,926
Accrued expenses	478		—
Loss and tax credit carry forwards	32,345		19,298
Other reserves	2,076		1,988
Goodwill and other intangibles	1,348		1,494
Nonaccrual interest	10,389		10,150
Business combination adjustments	60,940		41,742
Net unrealized loss on available for sale securities	—		4,306
Other	543		—
Total deferred tax assets	171,474		140,444
Deferred tax liabilities:
Depreciation	2,154		3,996
FHLB stock dividends	260		1,541
Deferred loan fees	484		1,229
Prepaid expenses	—		799
Net unrealized gain on available for sale securities	1,124		—
Loan servicing rights	26,392		27,334
Other	—		247
Total deferred tax liabilities	30,414		35,146
Net deferred tax asset before valuation allowance	141,060		105,298
Valuation allowance	—		(10,127		)
Net deferred tax asset	$	141,060	$	95,171

On January 1, 2014, the Company acquired Talmer West Bank and recorded $60.4 million in deferred tax assets at acquisition.  Upon acquisition, Talmer West Bank incurred an ownership change within the meaning of Section 382 of the Internal Revenue Code.  As such, the Company’s ability to benefit from the use of Talmer West Bank’s pre-ownership change net operating loss carry forwards, as well as the deductibility of certain of its built-in losses if realized during a five-year recognition period (one year with respect to bad debt deductions), will be limited to approximately $3.0 million per year, putting at risk the utilization of associated deferred tax assets before they expire.  No valuation allowance was established against the deferred tax assets associated with Talmer West Bank’s pre-change losses based on management’s estimate of the amount and timing of built-in losses more likely than not to be realized over the Section 382 recognition period, and the impact on the Company’s utilization of pre-ownership change net operating loss carry forwards.  In determining its estimate of built-in losses more likely than not to be realized within the Section 382 recognition period, management focused primarily on tax losses embedded in Talmer West Bank’s loan portfolio and other real estate owned. To a lesser extent management focused on tax losses embedded in fixed assets, investments in partnerships and certain accrued expenses, and anticipated when these losses might create actual tax deductions, either through bad debt deductions, depreciation, amortization, payment, or disposition of the assets in question.

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At January 1, 2014, Talmer West Bank had an estimated $28.7 million in gross federal loss carry forwards expiring in 2032 and 2033.  The exact amount of pre-ownership change carry forwards cannot be determined until the finalization of Capitol Bancorp, Ltd.’s consolidated tax return (Talmer West Bank’s former parent) for the year ended December 31, 2014, at which time final allocations will be made from that return to the entity acquired by the Company.

The valuation allowance of $10.1 million against the Company’s deferred tax asset at December 31, 2013 was related to Section 382 ownership changes incurred by First Place Bank, upon its acquisition by the Company on January 1, 2013. The allowance was based on management’s calculation of the annual Section 382 limitation and its estimate of the amount and timing of built-in losses more likely than not to be realized over the Section 382 recognition period, and the impact on the Company’s utilization of pre-ownership change operating loss and tax credit carry forwards.

At December 31, 2013, the Company, including First Place Bank and its related acquired affiliates, had the following loss and tax credit carry forwards:  $28.8 million in gross federal loss carry forwards, $856 thousand in tax credits expiring between 2027 and 2032, and $3.8 million in federal alternative minimum tax credits with an indefinite life. At December 31, 2013, the Company estimated the use of $24.8 million in estimated gross federal loss carry forwards and $856 thousand in tax credits related to First Place Bank and its acquired affiliates, expiring between 2027 and 2032 would be limited to $1.7 million annually due to an ownership change, within the meaning of Section 382 incurred at January 1, 2013.  In the second quarter of 2014, the Company, with the assistance of a legal and tax accounting external experts, reached a conclusion regarding the calculation of the annual Section 382 limitation related to the ownership change of First Place Bank which resulted in an increase of the annual Section 382 limitation from $1.7 million to $6.6 million.  This increase eliminated the need for a valuation allowance on the deferred tax assets acquired in the First Place Bank acquisition.

The use of $3.7 million of gross federal loss carry forwards, expiring between 2027 and 2029, is limited to $145 thousand annually due to a Section 382 ownership change incurred in November 2009. The carrying value was previously reduced to reflect that $1.4 million will expire unused. Upon the completion of the Company’s 2010 Internal Revenue Service (“IRS”) audit, it was determined that there was an additional $323 thousand of net operating losses available from its Lakeshore acquisition, expiring in 2030.

Outside of the Section 382-limited deferred tax assets acquired in both the Talmer West Bank and First Place Bank acquisitions, management concluded that no valuation allowance was necessary on the remainder of the Company’s net deferred tax assets at either September 30, 2014 or December 31, 2013.  This determination was based on the Company’s history of pre-tax and taxable income over the prior three years, as well as management’s expectations for sustainable profitability in the future.  Management monitors deferred tax assets quarterly for changes affecting realizability and the valuation allowance could be adjusted in future periods.

Actual outcomes could vary from the Company’s current estimates, resulting in future increases or decreases in the valuation allowance and corresponding future tax expense or benefit.

At September 30, 2014, Talmer Bank and Trust had approximately $36.0 million of bad debt reserve in equity for which no provision for federal income taxes was recorded. This amount represents First Place Bank’s qualifying thrift bad debt reserve at December 31, 1987, which is only required to be recaptured into taxable income if certain events occur. At September 30, 2014, the potential tax on the above amount was approximately $13.0 million. The Company does not intend to take any action that would result in a recapture of any portion of its bad debt reserve.

In the ordinary course of business, the Company enters into certain transactions that have tax consequences.  From time to time, the IRS and state taxing authorities may review and/or challenge specific interpretive tax

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positions taken by the Company with respect to those transactions.  The Company believes that its tax returns, as well as First Place Bank and Talmer West Bank’s tax returns for periods prior to the acquisitions, were filed based upon applicable statutes, regulations and case law in effect at the time of the transactions.  The IRS, various state and other jurisdictions, if presented with the transactions, could disagree with the Company’s interpretation of the tax law.

First Place Bank had received notice that the IRS had denied refund claims in amended tax returns filed by First Place Bank on a consolidated basis with its former parent company, First Place Financial Corp., for fiscal years ended June 30, 2009, 2008, 2007, 2006 and 2005.  The Company disagrees with the IRS position and is working with First Place Financial Corp. to appeal the examination-level decision.  Though not anticipated, an adverse result on appeal could impact the $11.7 million refund receivable recorded by the Company upon acquisition of First Place Bank.  In the second quarter of 2014, the IRS commenced an examination of the consolidated federal tax returns of First Place Bank’s former parent for the fiscal years ended June 30, 2013, 2012, 2011, which returns included First Place Bank through January 1, 2013.  The results of this examination concluded with no changes.  First Place Bank’s federal tax return for the fiscal year ended June 30, 2010 is currently subject to potential examination as well.  There are several years of returns that are still open to examination by various taxing authorities for Talmer West Bank.

During the first quarter 2014, the Company closed an examination by the IRS of Talmer Bancorp, Inc. and subsidiaries’ federal returns for the years ended December 31, 2011 and 2010, with no significant tax changes. The Company’s federal tax return for the years ended December 31, 2012 to present are open to potential examination.  The Company’s most significant states of operation, Michigan and Ohio, do not impose income-based taxes on financial institutions. The Company and/or its subsidiaries are subject to minor amounts of income tax in various other states, with varying years open to potential examination.  The Company is not aware of any pending income tax examinations by any state jurisdiction.

The Company had no unrecognized tax benefits at September 30, 2014 or 2013 and does not expect to record unrecognized tax benefits of any significance during the next twelve months.  The Company recognizes interest and/or penalties related to income tax matters in income tax expense, when applicable.  There are no liabilities accrued for interest or penalties at September 30, 2014 or 2013.

15.  STOCK-BASED COMPENSATION

The Company’s 2009 Equity Incentive Plan (the “Plan”), along with amendments made to the Plan, limits the number of shares issued or issuable to employees, directors and certain consultants at 9.8 million shares of common stock.

Stock Options

Options are granted with an exercise price equal to or greater than the fair market price of the Company’s common stock at the date of grant.  The vesting and terms of option awards are determined by the Company’s Compensation Committee of the Board of Directors.  During the nine months ended September 30, 2014 and 2013, the Company granted 35 thousand and 3.6 million stock options, respectively, that were fully vested upon issuance and will expire 10 years after the grant date.  As of September 30, 2014, 1.6 million option shares were available to be granted.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the table below.  Given the relatively short history of Company stock being publicly traded during the nine months ended September 30, 2014, post our public offering in February of 2014, and minimal trading in the Company’s stock during the nine months ended September 30, 2013, it was not practicable for the Company to estimate volatility of its share price.  For the nine months ended September 30, 2014

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the Company used the average volatility of comparable public Bank holding companies as an input to the valuation model.  For the nine months ended September 30, 2013 the Company used the volatility of an appropriate industry index (the ABA NASDAQ Community Bank Index) as an input in the valuation model. Since limited historical data is available, the expected term of options granted was estimated to be six years for both the nine months ended September 30, 2014 and 2013 based on expected lives used by a sample of other Midwest banks.  The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant corresponding with the expected life of the options. All shares granted are expected to vest and the Company intends to issue already authorized shares to satisfy options upon exercise.

The fair value of options granted during the nine months ended September 30, 2014 and 2013 were determined using the following weighted-average assumptions as of the grant date.

	For the nine months ended September 30,
	2014			2013
Fair value of options granted	$	4.77		$	2.13
Expected volatility	30.02		%	24.37		%
Risk-free interest rate	1.98		%	0.97		%
Expected life (in years)	6.00			6.00

Activity in the Plan during the nine months ended September 30, 2014 is summarized below:

			Weighted Average
	Number of Shares (in thousands)		Exercise Price per Share		Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2014	8,441		$	6.88
Granted	35		14.44
Exercised (1)	(453	)	5.92
Forfeited or expired	(2	)	7.25
Outstanding at September 30, 2014	8,021		6.96		6.96	55,107
Options fully vested and expected to vest	8,021		6.96		6.96	55,107
Exercisable at September 30, 2014	7,950		6.96		6.96	54,619

(1) Options exercised during the nine months ended September 30, 2014 had a weighted average fair value of $13.74, at respective exercise dates.  In the nine months ended September 30, 2014, there were 163 thousand shares issued under the net-settlement option.  Total cash received from option exercises during the nine months ended September 30, 2014 was $143 thousand resulting in the issuance of 25 thousand shares. 

The total intrinsic value of stock options exercised was $3.5 million for the nine months ended September 30, 2014.  There were no option exercises during the nine months ended September 30, 2013.

Total compensation expense for stock options, included in “Salary and employee benefits” in the Consolidated Statements of Income, was $42 thousand and $245 thousand for the three months ended September 30, 2014 and 2013, respectively, and $429 thousand and $9.3 million for the nine months ended September 30, 2014 and 2013, respectively.

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A summary of changes in the Company’s nonvested shares for the nine months ended September 30, 2014 follows:

Nonvested Shares	Shares (in thousands)	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2014	348	$	2.24
Granted	35
Vested	310
Forfeited	2
Nonvested at September 30, 2014	71	$	2.21

As of September 30, 2014, there was $32 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan.  The cost is expected to be recognized during the year ended December 31, 2014.

Restricted Stock Awards

Under the Plan, the Company can grant restricted stock awards that vest upon completion of future service requirements or specified performance criteria.  The fair value of these awards is equal to the market price of the common stock at the date of grant.  The Company recognizes stock-based compensation expense for these awards over the vesting period, using the straight-line method, based upon the number of shares of restricted stock ultimately expected to vest.  Restricted stock awards granted in June of 2014 vest in their entirety following a five year service period for employees and over a one year service period for directors.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  If an individual awarded restricted stock awards terminates employment prior to the end of the vesting period, the unvested portion of the stock award is forfeited.

The following table provides information regarding nonvested restricted stock awards:

Nonvested Restricted Stock Awards	Shares (in thousands)	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2014	—
Granted	377,800	14.44
Nonvested at September 30, 2014	377,800	$	14.44

Total expense for restricted stock awards totaled $302 thousand for the three months of September 30, 2014, of which $227 thousand was included in “Salary and employee benefits” related to employees and $75 thousand was included in “Professional fees” related to directors in the Consolidated Statements of Income.  For the nine months ended September 30, 2014, total expense for restricted stock awards totaled $369 thousand, of which $277 thousand was included in “Salary and employee benefits” related to employees and $92 thousand was included in “Professional fees” related to directors in the Consolidated Statements of Income.  There were no restricted stock awards outstanding prior to June of 2014.  As of September 30, 2014, the total compensation costs related to nonvested restricted stock that has not yet been recognized totaled $5.1 million and the weighted-average period over which these costs are expected to be recognized is 4.5 years.

16. REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators.

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Failure to meet capital requirements can initiate regulatory action. Management believes as of September 30, 2014, the Company and its subsidiary banks met all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

Talmer Bank and Trust was required to maintain Tier 1 common equity to total assets ratio of at least 10% under the FDIC’s Statement of Policy on Qualifications for Failed Bank Acquisitions for a period of three years following the Company’s most recent failed bank acquisition, and thereafter must maintain a capital level sufficient to be well capitalized under regulatory standards during the remaining period of ownership of the investors covered by the FDIC’s Statement of Policy. Talmer Bank and Trust’s last failed bank acquisition closed on April 29, 2011 and, therefore, remained subject to the heightened capital requirement through April 29, 2014.  At September 30, 2014 and December 31, 2013, the most recent regulatory notifications categorized Talmer Bank and Trust as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

The capital ratios of Talmer West Bank at September 30, 2014 exceed the total capital (to risk-weighted assets) ratio of at least 12.0% and a Tier 1 capital (to adjusted total assets) ratio of at least 9.0% as prescribed in the Consent Order by the FDIC and the Michigan Department of Insurance and Financial Services on April 5, 2010.  Notwithstanding its capital levels, Talmer West Bank will not be categorized as well capitalized while it is subject to the Consent Order.

Consent Order

On April 5, 2010, Michigan Commerce Bank consented to the issuance of the Consent Order by the FDIC and the Michigan Department of Insurance and Financial Services, which remains in effect following our acquisition of Talmer West Bank, as the surviving bank in the merger, on January 1, 2014.  The Consent Order represents an agreement to take certain actions, including, among other things: assessing and retaining qualified management; achieving and maintaining specified capital ratios; reducing certain classified assets, including the charge-off of loans classified ‘‘loss;’’ reviewing the allowance for loan and lease losses policy; implementing a comprehensive profit plan and budget; implementing a plan to manage concentrations of credit; and revising the bank’s policies governing interest rate risk.

The Consent Order also prohibits Talmer West Bank, without prior regulatory approval, from paying dividends, retaining new directors or senior executive officers, or entering into any material transaction.

Cease and Desist Order

On July 13, 2011, First Place Bank consented to a Cease and Desist Order which replaced the separate supervisory agreement entered into with the OTS on March 1, 2011. The Cease and Desist Order represents an agreement to take certain actions, including the submission of capital and business plans to, among other things, preserve and enhance the capital of First Place Bank and strengthen and improve its earnings and profitability.  On January 28, 2014, the FDIC approved the consolidation of First Place Bank with and into Talmer Bank and Trust.  Effective February 10, 2014, First Place Bank was merged with Talmer Bank and Trust and the Cease and Desist Order has no further force or effect.

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The following is a summary of actual and required capital amounts and ratios:

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2014
Total capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	$	695,380	16.8	%	$	331,998	8.0	%	N/A		N/A
Talmer Bank and Trust	602,480		16.7		289,526		8.0		$	361,907	10.0	%
Talmer West Bank (1)	97,123		18.5		41,930		8.0		N/A		N/A
Tier 1 capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	645,796		15.6		165,999		4.0		N/A		N/A
Talmer Bank and Trust	557,105		15.4		144,763		4.0		217,144		6.0
Talmer West Bank (1)	92,949		17.7		20,965		4.0		N/A		N/A
Tier 1 leverage ratio
Talmer Bancorp, Inc. (Consolidated)	645,796		11.5		225,513		4.0		N/A		N/A
Talmer Bank and Trust	557,105		11.5		193,575		4.0		241,969		5.0
Talmer West Bank (1)	92,949		11.6		32,116		4.0		N/A		N/A
December 31, 2013
Total capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	$	583,370	19.2	%	$	242,885	8.0	%	N/A		N/A
Talmer Bank and Trust	253,044		18.4		110,123		8.0		$	137,654	10.0	%
First Place Bank (2)	263,297		15.9		132,207		8.0		N/A		N/A
Tier 1 capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	555,350		18.3		121,443		4.0		N/A		N/A
Talmer Bank and Trust	235,448		17.1		55,062		4.0		82,593		6.0
First Place Bank (2)	252,873		15.3		66,104		4.0		N/A		N/A
Tier 1 leverage ratio
Talmer Bancorp, Inc. (Consolidated)	555,350		12.2		182,221		4.0		N/A		N/A
Talmer Bank and Trust	235,448		10.3		91,363		4.0		114,204		5.0
First Place Bank (2)	252,873		11.7		86,521		4.0		N/A		N/A

(1) Notwithstanding its capital levels, Talmer West Bank will not be categorized as well capitalized while it is subject to the Consent Order.

(2) Notwithstanding its capital levels, First Place Bank was not categorized as well capitalized while it was subject to the Cease and Desist Order.  On February 10, 2014, First Place Bank was merged with and into Talmer Bank and Trust and the Cease and Desist Order had no further force or effect. 

The Company’s principal source of funds for dividend payments is dividends received from its subsidiary banks. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Talmer Bank and Trust cannot declare or pay a cash dividend or dividend in kind unless Talmer Bank and Trust will have a surplus amounting to not less than 20% of its capital after payment of the dividend.  In addition, Talmer Bank and Trust may pay dividends only out of net income then on hand, after deducting its losses and bad debts.  Further, Talmer Bank and Trust may not declare or pay a dividend until cumulative dividends on preferred stock, if any, are paid in full.  These limitations can affect Talmer Bank and Trust’s ability to pay dividends.

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Under FDIC regulations, limitations are imposed on all of Talmer West Bank’s capital distributions, including cash dividends.  As of September 30, 2014, Talmer West Bank was not able to pay any dividends without prior regulatory approval.

On November 4, 2014, a cash dividend on the Company’s Class A common stock of $0.01 per share was declared.  The dividend will be paid on November 28, 2014, to the Company’s Class A common shareholders of record as of November 17, 2014.

17.  PARENT COMPANY FINANCIAL STATEMENTS

Balance Sheets - Parent Co.

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Assets
Cash and cash equivalents	$	11,414	$	98,411
Investment in banking subsidiaries	741,496		562,381
Income tax benefit	5,393		5,404
Other assets	1,232		1,783
Total assets	$	759,535	$	667,979
Liabilities
Short-term borrowings	$	—	$	35,000
Long-term debt	10,690		10,590
Accrued expenses and other liabilities	2,193		5,374
Total liabilities	12,883		50,964
Shareholders’ equity	746,652		617,015
Total liabilities and shareholders’ equity	$	759,535	$	667,979

Statements of Income and Comprehensive Income - Parent Co.

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2014			2013			2014		2013
Income
Dividend income from subsidiary	$	—		$	—		$	25,000	$	55,000
Bargain purchase gain	—			—			41,977		71,702
Other noninterest income	3			3			8		10
Total income	3			3			66,985		126,712
Expenses
Salaries and employee benefits	1,040			73			6,995		18,433
Bank acquisition and due diligence fees	238			111			2,212		7,702
Professional services	455			241			1,541		1,175
Marketing expense	31			3			222		1,027
Interest on long-term debt	128			128			380		424
Other	250			105			765		343
Total expenses	2,142			661			12,266		29,104
Income (loss) before income taxes and equity in undistributed net earnings of subsidiaries	(2,139		)	(658		)	54,719		97,608
Income tax benefit	533			202			2,990		7,570
Equity in (over)/under distributed earnings of subsidiaries	21,121			11,000			20,639		(19,173		)
Net income	$	19,515		$	10,544		$	78,348	$	86,005
Total comprehensive income, net of tax	$	19,515		$	10,544		$	78,348	$	86,005

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Statements of Cash Flows - Parent Co.

	For the nine months ended September 30,
(Dollars in thousands)	2014			2013
Cash flows from operating activities
Net income	$	78,348		$	86,005
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in (over)/under distributed earnings of subsidiaries	(45,639		)	(35,827		)
Gain on acquisition	(41,977		)	(71,702		)
Stock-based compensation expense	382			8,314
Decrease in income tax benefit	11			2,331
Decrease in other assets, net	551			9,934
Increase (decrease) in accrued expenses and other liabilities, net	(3,081		)	2,617
Net cash from (used in) operating activities	(11,405		)	1,672
Cash flows from investing activities
Cash (used in) proceeds from acquisitions	(6,500		)	(45,000		)
Capital contributions to subsidiaries	(99,500		)	(179,000		)
Dividends received from subsidiaries	25,000			55,000
Net cash used in investing activities	(81,000		)	(169,000		)
Cash flows from financing activities
Issuance of common stock	41,112			—
Repayment of senior unsecured line of credit	(35,000		)	—
Cash dividends paid on common stock ($.01 per share)	(704		)	—
Net cash from financing activities	5,408			—
Net decrease in cash and cash equivalents	(86,997		)	(167,328		)
Beginning cash and cash equivalents	98,411			211,849
Ending cash and cash equivalents	$	11,414		$	44,521

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18.  EARNINGS PER COMMON SHARE

The two-class method is used in the calculation of basic and diluted earnings per share.  Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings.  Common shares outstanding include common stock and vested restricted stock awards, when applicable.  On June 10, 2014 the Company awarded restricted stock to certain employees and directors of the Company which qualify as participating securities.  The factors used in the earnings per share computation follow:

	For the three months ended September 30,					For the nine months ended September 30,
(In thousands, except per share data)	2014			2013		2014			2013
Net income	$	19,515		$	10,544	$	78,348		$	86,005
Net income allocated to participating securities	105			—		178			—
Net income allocated to common shareholders (1)	$	19,410		$	10,544	$	78,170		$	86,005
Weighted average common shares - issued	70,470			66,229		69,570			66,229
Average unvested restricted share awards	(378		)	—		(156		)	—
Weighted average common shares outstanding - basic	70,092			66,229		69,414			66,229
Effect of dilutive securities -
Employee and director stock options	4,102			2,637		4,034			2,576
Warrants	1,558			987		1,500			987
Weighted average common shares outstanding - diluted	75,752			69,853		74,948			69,792
EPS available to common shareholders
Basic	$	0.28		$	0.16	$	1.13		$	1.30
Diluted	$	0.26		$	0.15	$	1.04		$	1.23

(1) Net income allocated to common shareholders for basic and diluted earnings per share may differ under the two-class method as a result of adding common share equivalents for options and warrants to dilutive shares outstanding, which alters the ratio used to allocate net income to common shareholders and participating securities for the purposes of calculating diluted earnings per share.

For the effect of dilutive securities, the average stock valuation is $14.08 per share and assumed to be $10.00 per share for the three months ended September 30, 2014 and 2013, respectively, and the assumed average stock valuation is $13.52 per share and $10.00 per share for the nine months ended September 30, 2014 and 2013 respectively.

The following average shares related to outstanding options and warrants to purchase shares of common stock were not included in the computation of diluted net income available to common shareholders for the three and nine months ended September 30, 2014 and 2013 respectively, because they were antidilutive.  There were no outstanding antidilutive warrants during the three and nine months ended September 30, 2014.

	For the three months ended September 30,				For the nine months ended September 30,
(Shares in thousands)	2014		2013		2014		2013
Average outstanding options	35		75		14		29
Outstanding exercise prices:
Low end	$	14.44	$	10.00	$	14.44	$	10.00
High end	$	14.44	$	10.00	$	14.44	$	10.00
Average outstanding warrants	—		39		—		39
Outstanding exercise prices:
Low end			$	10.00			$	10.00
High end			$	10.00			$	10.00

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion describes our results of operations for the three and nine months ended September 30, 2014 and 2013 and also analyzes our financial condition as of September 30, 2014 as compared to December 31, 2013. This discussion should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes and disclosures in our 2013 Annual Report on Form 10-K.

In this report, unless the context suggests otherwise, references to “Talmer Bancorp, Inc.,” “the Company,” “we,” “us,” and “our” mean the combined business of Talmer Bancorp, Inc. and its subsidiary banks, Talmer Bank and Trust (“Talmer Bank”) and Talmer West Bank.  However, if the discussion relates to a period before our acquisition of First Place Bank on January 1, 2013, the terms refer to Talmer Bancorp, Inc. and Talmer Bank; if the discussion relates to a period before our acquisition of Talmer West Bank on January 1, 2014, the terms refer to Talmer Bancorp, Inc., Talmer Bank and First Place Bank; and if the discussion relates to a period following the merger of First Place Bank with and into Talmer Bank on February 10, 2014, the terms refer to Talmer Bancorp, Inc., Talmer Bank and Talmer West Bank.

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters.  Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” beginning on page 1 of this report.

Business Overview

Talmer Bancorp, Inc. is a bank holding company headquartered in Troy, Michigan.  Between April 30, 2010 and September 30, 2014, we successfully completed six bank acquisitions totaling $5.9 billion in assets and $5.8 billion in liabilities.  Through our wholly-owned subsidiary banks, Talmer Bank and Talmer West Bank, we are a full service community bank offering a full suite of commercial banking, retail banking, mortgage banking, wealth management and trust services to small and medium-sized businesses and individuals primarily within Southeastern Michigan, Western Michigan and in smaller communities in Northeastern Michigan, as well as Northeastern and Eastern Ohio, Northern Indiana, Chicago, Illinois and Las Vegas, Nevada.

Given our strong capital position, local market knowledge and experienced leadership team, management believes we have a competitive advantage in the markets that we serve.  We have retained a seasoned community bank management team with executive management experience in community banks located in our Midwest markets. With a well-managed, financially sound and well-capitalized bank, management believes it has significant opportunities to expand in the current market environment through organic growth and strategic acquisitions of banking franchises in our concentrated markets of Michigan, Ohio and Indiana, as well as the Chicago Metropolitan area of Illinois.

Our product line includes loans to small and medium-sized businesses, residential mortgage loans, commercial real estate loans, residential and commercial construction and development loans, farmland and agricultural production loans, home equity loans, consumer loans and a variety of commercial and consumer demand, savings and time deposit products.  We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.

We have grown substantially since our operations began in August of 2007, with much of the growth occurring through acquisitions.  Since April 30, 2010, Talmer Bank has acquired the following four banks from the FDIC, as receiver, all of which have been fully integrated into our operations:

·CF Bancorp, Port Huron, Michigan on April 30, 2010;

·First Banking Center, Burlington, Wisconsin on November 19, 2010;

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·Peoples State Bank, Hamtramck, Michigan on February 11, 2011; and

·Community Central Bank, Mount Clemens, Michigan on April 29, 2011.

In addition, on January 1, 2013, we closed on the acquisition of First Place Bank, and on January 1, 2014, we closed on the acquisition of Talmer West Bank, formerly Michigan Commerce Bank.  First Place Bank was merged into Talmer Bank on February 10, 2014.  Additionally, at the time of our acquisition of Talmer West Bank on January 1, 2014, Talmer West Bank was subject to a Consent Order with its regulators, which remains in effect.  For a further discussion of the Consent Order, see “Talmer West Bank Consent Order with the FDIC and Michigan Department of Insurance and Financial Services” in “Supervision and Regulation” of our 2013 Annual Report on Form 10-K.

As of September 30, 2014, we had $4.0 billion in total loans, compared to $3.0 billion at December 31, 2013.  Of the $4.0 billion in total loans at September 30, 2014, $2.0 billion, or 50.1%, consisted of loans we acquired in transactions discussed above (all of which were adjusted to their estimated fair values at the time of acquisition).

We had net income of $78.3 million for the nine months ended September 30, 2014 compared to $86.0 million for the nine months ended September 30, 2013. Net income for the nine months ended September 30, 2014, included a bargain purchase gain of $42.0 million resulting from our acquisition of Talmer West Bank. We also incurred $13.1 million of transaction and integration related expenses during the nine months ended September 30, 2014, including severance expense, bank acquisition and due diligence fees, bonus payments related to our successful acquisition of Talmer West Bank, the merger of First Place Bank and Talmer Bank and the completion of our initial public offering, as well as expenses incurred related to termination of certain software contracts.  These transaction and integration related expenses are detailed in the table below.

	Nine months ended September 30, 2014
(Dollars in thousands)	Actual		Transaction and integration related expenses		Excluding transaction and integration related expenses
Noninterest expenses
Salary and employee benefits	$	95,872	$	6,110	$	89,762
Occupancy and equipment expense	25,132		3,594		21,538
Data processing fees	5,610		—		5,610
Professional service fees	9,825		400		9,425
FDIC loss sharing expense	1,752		—		1,752
Bank acquisition and due diligence fees	2,218		2,218		—
Marketing expense	3,703		449		3,254
Other employee expense	2,163		—		2,163
Insurance expense	4,016		—		4,016
Other expense	20,491		341		20,150
Total noninterest expenses	$	170,782	$	13,112	$	157,670

While we continue to explore additional acquisition opportunities, there is no certainty that bargain purchase gains of any amount will be recognized as a result of any future closed transactions.  In addition, we seek to realize operating efficiencies from our recently completed acquisitions by utilizing technology to streamline our operations.  We continue to centralize the back-office functions of our acquired banks, as well as realize cost savings through the use of third party vendors and technology, in order to take advantage of economies of scale as we continue to grow.  We place our focus on initiatives that we believe will provide opportunities to enhance earnings, including the continued rationalization of our retail banking footprint through the evaluation of possible branch consolidations or opportunities to sell branches.

As of September 30, 2014, our total assets were $5.7 billion, our net total loans were $4.0 billion, our total

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deposits were $4.5 billion and our total shareholders’ equity was $746.7 million.

In this report, we refer to our six completed acquisitions collectively as the “acquisitions.” In addition, we refer to loans subject to loss share agreements with the FDIC as “covered loans” and loans that are not subject to loss share agreements with the FDIC as “uncovered loans.” All of the loans and other real estate covered under the loss share agreements with the FDIC are referred to as “covered assets.” We refer to our loans acquired in our acquisitions as “acquired loans,” regardless of whether they are covered under loss share agreements with the FDIC.

Recent Developments

Acquisition of Talmer West Bank (formerly Michigan Commerce Bank)

On January 1, 2014, we purchased 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.  The purchase price consisted of 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 Capitol 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 us.

Immediately prior to our 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.  In connection with the acquisition, we contributed $79.5 million of additional capital to Talmer West Bank in order to recapitalize the bank.  In order to support the acquisition and recapitalization of Talmer West Bank, Talmer Bancorp, Inc. borrowed $35.0 million under a senior unsecured line of credit, which was paid off in the second quarter of 2014, and received $25.0 million in dividend capital from Talmer Bank.  Following the acquisition, an additional $20.0 million of capital was infused into Talmer West Bank to ensure capital requirements were met at September 30, 2014.  References to Talmer West Bank refer to Talmer West Bank as the surviving bank in the merger of Indiana Community Bank, Bank of Las Vegas and Sunrise Bank of Albuquerque with and into Michigan Commerce Bank.

We accounted for this acquisition under the acquisition method of accounting and have recorded the purchased assets and assumed liabilities at their respective acquisition date fair values.  Because the fair value of assets acquired and core deposit intangible asset created exceeded the fair value of liabilities assumed and consideration paid in the acquisition, on January 1, 2014, we recorded a bargain purchase gain of $42.0 million in our consolidated statements of income.

We acquired $910.3 million in assets at fair value, including $571.7 million in loans, net of unearned income, $13.6 million in investment securities, $30.9 million in other real estate owned and $767 thousand in loan servicing rights.  We also assumed $861.8 million of liabilities at fair value, including $857.8 million of retail deposits with a core deposit intangible asset value of $3.6 million.

Approximately 40% of the fair value of loans acquired in the acquisition was accounted for as purchased credit impaired loans. On the January 1, 2014 acquisition date, the contractual cash flows for the purchased credit impaired loans acquired in the acquisition of Talmer West Bank were $331.5 million and the estimated fair value of the loans was $212.4 million. The estimated total cash flow from these loans was $245.1 million. The difference between the total estimated cash flows and the fair market value created an accretable discount in the amount of $32.7 million, which represents the undiscounted cash flows expected to be collected in excess of the estimated fair value of the purchased credit impaired loans.  This accretable discount is accreted into interest income on a method that approximates level yield over the estimated life of the related loans. Adjustments created when the loans were recorded at fair value at the date of acquisition are amortized or accreted over the remaining term of the loan as an adjustment to the related loan’s yield.

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The acquired non-purchased credit impaired loans were recorded at their fair value of $359.3 million on the acquisition date, which included the recording of a $3.5 million discount primarily reflecting estimated credit marks over the life of the non-purchase credit impaired loans.

Pending Acquisition of First of Huron Corporation

On August 6, 2014, we entered into an agreement to acquire First of Huron Corporation, the holding company for Signature Bank headquartered in Bad Axe, Michigan, for aggregate cash consideration of $13.4 million.  Signature Bank had total assets of $233.5 million as of September 30, 2014, including $172.9 million of net total loans.  We will acquire and simultaneously retire certain outstanding subordinated debentures of First of Huron Corporation and assume its trust preferred securities.  The closing of the transaction is subject to regulatory approval and customary closing conditions, including the approval by the shareholders of First of Huron Corporation, and is expected to close in the first quarter of 2015.

Branch Sales

On July 18, 2014, we sold our single branch office located in Albuquerque, New Mexico along with its $34.1 million of deposits and $23.7 million of loans to Grants State Bank, a unit of First Bancorp of Durango, Inc. The net impact to pre-tax income related to this transaction recorded in the third quarter of 2014 is a $1.6 million benefit, representing the gain on the sale of net assets acquired and liabilities assumed, partially offset by the write-off of related core deposit intangible of $91 thousand and other costs associated with the transaction of approximately $170 thousand.  The benefit of $1.6 million is recorded in “Net gain on sale of branches” on our consolidated statements of income.

Additionally, on August 8, 2014, we sold our ten branch offices located in Wisconsin to Town Bank, a wholly owned bank subsidiary of Wintrust Financial Corporation.  Town Bank assumed all of our deposits in Wisconsin totaling $354.8 million as of August 8, 2014.  Concurrent with the closing of this transaction, Town Bank sold two of the branch locations and related deposits in Kenosha and Genoa City, Wisconsin to its affiliate, State Bank of the Lakes, a Wintrust community bank.  The net impact to pre-tax income related to this transaction recorded in the third quarter of 2014 is a $12.8 million benefit, representing the gain on the sale of net assets acquired and liabilities assumed, partially offset by the write-off of the related core deposit intangible of $911 thousand and other costs associated with the transaction of approximately $248 thousand.  The benefit of $12.8 million is recorded in “Net gain on sale of branches” on our consolidated statements of income.

Finally, in the second quarter of 2014, we made the decision to consolidate our four branches located in Las Vegas, Nevada into one branch.  We recognized $490 thousand in severance related expenses associated with consolidation in the second quarter of 2014, and $794 thousand in occupancy related expenses and $171 thousand in miscellaneous operating expenses associated with the consolidation in the third quarter of 2014.  The consolidation was completed in September 2014.

Economic Overview

Gross Domestic Product (“GDP”) growth in the second quarter of 2014 resumed the trend of increases after the first quarter’s weather related decline of 2.1%.  Over the past thirteen quarters, GDP growth has increased twelve times.  GDP for the second quarter of 2014 increased at an annualized rate of 4.6%, more than offsetting the previous quarter’s decline, as indicated by the Bureau of Economic Analysis report published by the U.S. Department of Commerce.

According to the U.S. Bureau Labor Statistics, the unemployment rate (seasonally adjusted) continued to fall to 5.9% as of September 30, 2014, down from 6.1% as of June 30, 2014 and 6.7% as of December 31, 2013.  This is the first time unemployment fell below 6.0% since July 2008.

Total home sales in the U.S., as indicated by the National Association of Realtors, showed signs of weakening with existing home sales at a seasonally adjusted 4.5 million units for the rolling twelve months ended August 31, 2014, down 4.9% from the rolling twelve month total of 4.7 million units as of August 31, 2013.  Inventory levels are up at a 5.5 months’ supply, or 2.1 million units, as of August 31, 2014, up 10.0% from a 5.0 months’ supply of 2.0 million units as of August 31, 2013.  New home sales were up with a seasonally adjusted

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annual rate of 504 thousand units as of August 31, 2014, up 33.0% from 379 thousand as of August 31, 2013.  Inventory for new homes fell to a 4.8 months’ supply as of August 31, 2014 versus a 5.5 month supply as of August 31 2013, while the median sales price of new homes increased 8.0% to $276 thousand for the same period.  Home values of existing homes, as indicated by the Case-Shiller 20 city index (seasonally adjusted), showed an increase of 6.75% from July 2013 to July 2014.

Bankruptcy filings, per the U.S. Court Statistics, also improved with total filings down 12.1% for the twelve months ending June 30, 2014, compared to the same period in 2013, with business filings down 16.5% and personal filings down 12.0% for the period.  Bankruptcy filings fell across all regions where we have branches in the twelve months ending June 30, 2014, compared to the prior year.

According to the Beige Book published by the Federal Reserve Board in September 2014, overall economic activity was improved with all of the twelve districts, reporting modest or moderate growth. The Fourth (Cleveland) Federal Reserve District, the Seventh (Chicago) Federal Reserve District and the Twelfth (San Francisco) District all reported moderate growth.

In the Cleveland District, manufacturers reported accelerating business activity.  Demand for nonresidential construction services strengthened, while purchases of new and existing homes leveled off.  New motor vehicle sales grew at a robust pace as consumer demand for auto loans remained strong.  Retailers and operators of hospitality venues saw higher year-over-year revenues.  Energy, particularly coal production and shale gas activity, remained largely unchanged.  Freight volume grew at a moderate to strong rate, and the demand for business credit moved higher.  Payrolls, on a net basis, showed a moderate increase.  Many companies noted that they are looking to expand their payrolls but are having difficulty in hiring qualified labor.

Growth in economic activity in the Cleveland District remained moderate in July and August, and contacts maintained their optimistic outlook for the rest of the year. Consumer and business spending, manufacturing production, and construction and real estate activity all increased moderately. Credit conditions continued to improve. Cost pressures increased some, but remained modest. Growth in consumer spending and business spending were both characterized as moderate.  Business spending including capital outlays and increased spending plans were noted as businesses scale capacity, particularly in automotive and construction.  Facility spending has increased while equipment spending has maintained its level.  Demand for skilled workers remains high but contacts reported difficulty in filling vacancies. Corn, soybean, hog, and cattle prices were lower, while milk prices were higher.  Recent dry and cool conditions have delayed crop maturities in the north region of the District and may be impacted by early frosts.  Due to lowering prices, farmers have been exploring storage and feed options for their crops.

Economic activity in the San Francisco District continued to improve moderately during the reporting period. Overall price inflation remained quite modest, and wage pressures were well contained on net. Indications suggest that retail sales growth ticked up. Demand for business and consumer services increased moderately. Manufacturing activity was mixed. Agricultural conditions were good in the District overall. Activity in real estate markets advanced, although growth in the residential sector slowed somewhat. Loan demand increased moderately.  Advance bookings for the fall appear somewhat stronger than a year ago. Visitor volume in the first half of 2014 in Las Vegas was up over the same period a year earlier noting strength in convention attendance as opposed to tourism.

The economy in the state of Michigan noted slow improvements during the period.  The unemployment rate, as indicated by the U.S. Bureau of Labor Statistics, improved to 7.4% as of August 31, 2014, down from 8.3% as of December 31, 2013 and 8.9% as of December 31, 2012.  Wage growth was up 4.0% for the twelve months ending June 30, 2014.  Other improvements included a 15.0% decline in total bankruptcies, per the U.S. Court Statistics, during the 12 months ending June 30, 2014 compared the same period in 2013.

As of September 30, 2014, $1.4 billion, or 34.6% of our total loans are to businesses and consumers in the Detroit-Warren-Livonia metropolitan statistical area (“MSA”), which includes Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the state of Michigan.  Unemployment in the Detroit-Warren-Livonia MSA, as indicated by the U.S. Bureau of Labor Statistics, was 7.9% as of August 31, 2014, down slightly from 8.0% at December 31, 2013.  The Detroit-Warren-Livonia MSA has been experiencing a recovery in the housing

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market and showed an increase in home prices as reported in the Case-Shiller index (seasonally adjusted) of 8.4% for the rolling twelve months ending July 31, 2014.  On July 18, 2013, the city of Detroit filed for Chapter 9 bankruptcy protection in federal court. We do not expect the bankruptcy to have a material impact on our loan portfolio or future business as much of the city’s debt consists of underfunded pension liabilities and other post-retirement benefits. We do not have direct exposure to bonds, debt or any other financial instrument issued by the city of Detroit and we do not have a concentration of loans to borrowers located in the city of Detroit. As of September 30, 2014, approximately $51.8 million, or 1.3%, of our loan portfolio were loans to borrowers located in the city of Detroit, and of this amount, $7.1 million, or 13.8% of the total loans to borrowers located in the city of Detroit, were covered by loss share agreements with the FDIC.

The Ohio economy showed mixed signs of recovery.  Unemployment was down at 5.7% as of August 31, 2014, compared to 7.1% as of December 31, 2013, but up from 5.5% as of May 31, 2014. The Cleveland MSA showed lower unemployment of 6.6% as of August 31, 2014, when compared to the state rate. Wage growth for the twelve months ending June 30, 2014 was up 3.9%%.  Bankruptcies in Ohio, per the U.S. Court Statistics, were down 12.3% during the 12 months ending June 30, 2014, from the same period in 2013.  The Case-Shiller index for the Cleveland market indicates housing prices increases have cooled and were up only 0.9% for the twelve-month period ending July 31, 2014.

The Illinois economy also showed signs of recovering.  Unemployment was down at 6.7% as of August 31, 2014, compared to 8.9% as of December 31, 2013, and 9.2% as of August 31, 2013.  Wage growth for the 12 months ending June 30, 2014 was 3.1%.  Bankruptcies in the Northern Illinois region were down 8.2% for the 12 months ending June 30, 2014.  Home values, as indicated by the Case-Shiller index for the Chicago MSA, were up 4.0% as of July 31, 2014 versus July 31, 2013.

The Indiana economy continued to recover.  The unemployment rate decreased to 5.8% as of August 31, 2014, down from 6.8% as of December 31, 2013, but up slightly from the 5.7% rate as of May 31, 2014.  Wage growth for the twelve months ending June 30, 2014 was up 1.9% from the same period in 2013.  In addition, personal and business bankruptcy filings in Northern Indiana, per the U.S. Court Statistics, for the 12 months ending June 30, 2014 decreased 12.7% from the same period in 2013.  Real estate values have improved according to statistics from Zillow, with prices increasing 5.4% for the twelve months ending July 31, 2014.

The Nevada economy also showed signs of recovering.  Unemployment was down at 7.6% as of August 31, 2014, compared to 9.0% as of December 31, 2013, and 9.8% as of August 31, 2013.  Wage growth for the 12 months ending June 30, 2014 was 3.9%.  Bankruptcies in the Nevada region, according to Department of Justice reports, were down 21.5% for the 12 months ending June 30, 2014.  Home values, as indicated by the Case-Shiller index for the Las Vegas MSA, were up 12.8% as of July 31, 2014 versus July 31, 2013.

Summary of Acquisition and Loss Share Accounting

We determined the fair value of our acquired assets and liabilities in accordance with accounting requirements for fair value measurement and acquisition transactions as promulgated in FASB Accounting Standards Codification (“ASC”) Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), ASC Topic 805, “Business Combinations” (“ASC 805”), and ASC Topic 820, “Fair Value Measurements and Disclosures.” The determination of the initial fair values on loans and other real estate purchased in an acquisition and the related FDIC indemnification asset require significant judgment and complexity.

At the time of each respective acquisition, we determine the fair value of our acquired loans on a loan by loan basis by dividing the loans into two categories: (1) specifically reviewed loans — loans where the future cash flows are estimated based on a specific review of the loan, and (2) non-specifically reviewed loans — loans where the future cash flows for each loan is estimated using an automated cash flow calculation model.  For specifically reviewed loans, a designated group of credit officers, specialized in loan workouts and credit quality assessment, work with personnel from the acquired institution to review borrower cash payment activity, current appraisals, loan write ups, and watch list reports (including the current past due status and risk ratings assigned) to estimate future cash flows on the acquired loans. The estimated future cash flows are then discounted to determine initial fair value.  For our acquisition of CF Bancorp, the specifically reviewed loan population included all loans with credit quality indicators of special mention or worse, all loans that had an outstanding balance of $2.0 million or more, and all loans with a matured status as of the April 30, 2010 acquisition date, resulting in approximately 50% of the acquired

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loan portfolio being specifically reviewed loans.  For our acquisitions of First Banking Center and Peoples State Bank, the specifically reviewed loan population included all loans with a principal balance of $350 thousand or more, and for our acquisition of Community Central Bank, the specifically reviewed loan population included all loans with a principal balance of $475 thousand or more, resulting in approximately 60% of the acquired loan portfolios being specifically reviewed loans for each of these acquisitions. For our acquisition of First Place Bank, the specifically reviewed loan population included all commercial loans with an outstanding balance of $750 thousand or more, all residential mortgage loans with an outstanding balance of $1.0 million or more, and all impaired loans with a balance of $250 thousand or more as of the January 1, 2013 acquisition date, resulting in approximately 30% of the acquired loan portfolio being specifically reviewed.  For our acquisition of Talmer West Bank, the specifically reviewed loan population included all loans with an outstanding balance of $500 thousand or more and a substantial portion of impaired loans with a balance of $250 thousand or more as of the January 1, 2014 acquisition date, resulting in approximately 50% of the acquired loan portfolio being specifically reviewed.

Non-specifically reviewed loans are categorized by risk profile and processed through an automated cash flow calculation model to generate expected cash flows on a loan by loan basis using contractual loan payment information such as coupon, payment type and amounts, and remaining maturity, along with assumptions that are assigned to each individual loan based on risk cohorts. Risk profiles are determined based on loan type, risk rating, delinquency history, current delinquency status, vintage, and collateral type. For our non-specifically reviewed loans, we apply life of loan default and loss assumptions, defined at a cohort level, to estimate future cash-flows. The assumptions are based on credit migration (migration of risk rating and past due status) combined with default, severity and prepayment data indicative of the market based upon market experience and benchmarking analysis of similar loans and/or portfolio sales and valuation. This information is captured through observation of comparable market transactions. Estimated future cash flows are discounted for each loan to determine initial fair value.

Where a loan exhibits evidence of credit deterioration since origination and it is probable at the acquisition date that we will not collect all principal and interest payments in accordance with the terms of the loan agreement, we account for the loan under ASC 310-30, as a purchased credit impaired loan.  At the date of acquisition, the majority of loans acquired in the CF Bancorp, First Banking Center, People State Bank and Community Central Bank acquisitions, as well as approximately 30% of the loans acquired in our acquisition of First Place Bank and 40% of the loans acquired in our acquisition of Talmer West Bank were accounted for under ASC 310-30 as purchased credit impaired loans. We account for all purchased credit impaired loans on a loan by loan basis.  We recognize the expected shortfall of expected future cash flows on these loans, as compared to the contractual amount due, as a nonaccretable discount. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as accretable yield. The accretable yield includes both the expected coupon of the loan and the discount accretion. We recognize accretable discount as interest income over the expected remaining life of the purchased credit impaired loan using a method that approximates the level yield method.

Fair value premiums and discounts established on acquired loans accounted for outside the scope of ASC 310-30 fall under FASB ASC Subtopic 310-20, “Receivables - Nonrefundable Fees and Other Costs” (“ASC 310-20”) and are accreted or amortized into interest income over the remaining term of the loan as an adjustment to the related loan’s yield.

Because we record all acquired loans at fair value, we do not record an allowance for loan losses related to acquired loans on the acquisition date. We re-estimate expected cash flows on our purchased credit impaired loans on a quarterly basis. This re-estimation process is performed on a loan by loan basis and replicates the methods used in determining the initial fair value at the acquisition date. We aim to segment the purchased credit impaired loan portfolio between those that are specifically reviewed and those that are non-specifically reviewed loans to maintain similar or greater coverage as at the acquisition date in the specifically reviewed loan population.

Any decline in expected cash flows identified during the quarterly re-estimation process results in impairment which is measured based on the present value of the new expected cash flows, discounted using the pre-impairment accounting yield of the loan, compared to the recorded investment in the loan. An impairment that is due to a decline in expected cash flows is known as credit impairment, while an impairment that is due to a change in the expected timing of such cash flows is known as timing impairment. If any portion of the impairment is due to credit impairment, we record all of the impairment as provision for loan losses during the period.  However, if the impairment is only related to a change in the expected timing of the cash flows, the impairment is recognized prospectively as a decrease in yield on the loan.  Declines in cash flow expectations on covered loans which are

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due to credit impairment also result in an increase to the FDIC indemnification asset which is recorded as noninterest income in “FDIC loss sharing income” in our consolidated statements of income in the period. Any improvements in expected cash flows and the effect of changes in expected timing in the receipt of the expected cash flows, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the accretable yield on the loan. Improvements in cash flows on loans covered by a loss share agreement result in a decline in the expected indemnification cash flows which are reflected as a downward yield adjustment on the FDIC indemnification assets.

We modify loans in the normal course of business and assess all loan modifications to determine whether a modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASC 310-40, “Receivables — Troubled Debt Restructurings by Creditors” (“ASC 310-40”).  For non-purchased credit impaired loans excluded from ASC 310-30 accounting, a modification is considered a TDR when a borrower is experiencing difficulties and we have granted a concession to the borrower that we would not normally consider and we conclude the concession results in an inability to collect all amounts due, including interest accrued at the original contractual terms. The concessions granted may include: principal deferral, interest rate concession, forbearance, principal reduction or A/B note restructure (where the original loan is restructured into two notes where, one reflects the portion of the modified loan which is expected to be collected, and one that is fully charged off). None of the modifications to date were due to partial satisfaction of the loan.

For purchased credit impaired loans accounted for individually under ASC 310-30 (which is all of our purchased credit impaired loans), a modification is considered a TDR when a borrower is experiencing financial difficulties and the effective yield after the modification is less than the effective yield at the time of the purchase in association with consideration of qualitative factors included within ASC 310-40.  When a modification qualifies as a TDR and was initially individually accounted for under ASC 310-30, the loan is required to be moved from ASC 310-30 accounting and accounted for under ASC 310-40. In order to accomplish the transfer of the accounting for the TDR from ASC 310-30 to ASC 310-40, the loan is essentially retained in the ASC 310-30 accounting model and subject to the periodic cash flow re-estimation process.  Similar to loans accounted for under ASC 310-30, deterioration in expected cash flows results in the recognition of impairment and an allowance for loan loss.  However, unlike loans accounted for under ASC 310-30, improvements in estimated cash flows on these loans result only in recapturing previously recognized allowance for loan losses and the yield remains at the last yield recognized under ASC 310-30.

Acquired loans that are paid in full or are otherwise settled results in accelerated recognition of any remaining loan discount through “Accelerated discount on acquired loans” in our consolidated statements of income in the period. If such loans are covered loans, any remaining FDIC indemnification asset no longer expected to be received is also written off through “Accelerated discount on acquired loans” in our consolidated statements of income in the corresponding period.

The loss share agreements from our FDIC-assisted acquisitions and the purchase accounting impact from our acquisitions create volatility in our cash flows and operating results. The effects of the loss share agreements and purchase accounting, primarily on purchased credit impaired loans, on cash flows and operating results following an acquisition can create volatility as we work with borrowers to determine appropriate repayment terms or alternate resolutions. The effects will depend primarily on the ability of borrowers to make required payments over an extended period of time.  At acquisition, management believes sufficient inherent discounts representing the expected losses compared to their acquired contractual payment amounts, were established.  As a result, our operating results would only be adversely affected by losses to the extent that those losses exceed the expected losses reflected in the fair value at the acquisition date.  In addition, as the loss share agreements cover up to a 10-year period (five years for loans other than single family residential mortgage loans), changing economic conditions will likely affect the timing of future charge-offs and the resulting reimbursements from the FDIC.  Management believes that any recapture of interest income and recognition of cash flows from borrowers or amounts received from the FDIC as part of the FDIC indemnification asset may be incurred unevenly over this period, as we exhaust our collection efforts under our normal practices.

Critical Accounting Policies

Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States, the most significant of which are described in Note 1, “Summary of

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Significant Accounting Policies,” in our 2013 Annual Report on Form 10-K. These policies require the reliance on estimates and assumptions, which may prove inaccurate or are subject to variations. Changes in underlying factors, assumptions, or estimates could have a material impact on our future financial condition and results of operations. At December 31, 2013, the most critical of these significant accounting policies are the policies related to the allowance for loan losses, fair valuation methodologies, purchased loans, the FDIC indemnification asset and income taxes. These policies were reviewed with the Audit Committee of the Board of Directors and are discussed more fully on pages 87 through 91 in our 2013 Annual Report on Form 10-K. As of the date of this report, we did not believe there were any material changes in the nature or categories of the critical accounting policies or estimates and assumptions from those discussed in our 2013 Annual Report on Form 10-K.

Financial Results

The three months ended September 30, 2014 includes the operations of Talmer West Bank, which we acquired on January 1, 2014.  We had net income for the three months ended September 30, 2014 of $19.5 million, or $0.26 per average diluted common share, compared to $10.5 million, or $0.15 per average diluted common share, for the three months ended September 30, 2013.  These results reflect the increased revenues and expenses related to the acquisition of Talmer West Bank, which are discussed below, and include the $1.6 million gain recognized on the sale of the Albuquerque, New Mexico branch office, in addition to the $12.8 million gain recognized on the sale of our Wisconsin branches in the third quarter.  In addition, the increase in net income reflects changes outside of the inclusion of Talmer West Bank, including a decrease in total noninterest expenses of $11.5 million, an increase in income tax expense of $12.3 million and decreases in mortgage banking and other loan fees of $5.1 million and accelerated discount on acquired loans of $2.9 million. The decline in noninterest expenses was primarily due to overall operating efficiencies we have created through the merger of First Place Bank into Talmer Bank including a reduction in employee headcount as we have eliminated duplicative positions and streamlined operations with the merger of First Place Bank into Talmer Bank. The decline in mortgage banking and other loans fees primarily reflects lower levels of both mortgage origination volume and mortgage banking revenue due to both fluctuations in mortgage interest rates and our closure of our wholesale mortgage lending division in the fourth quarter of 2013.  Accelerated discounts on acquired loans result from the accelerated recognition of a portion of the loan discount that would have been recognized over the expected life of the loan, and occur when a loan is paid in full or otherwise settled. The third quarter of 2013 included an income tax benefit of $4.1 million, primarily resulting from a $6.0 million reduction in the valuation allowance established against the deferred tax assets associated with First Place Bank’s pre-tax losses.

For the nine months ended September 30, 2014 we had net income of $78.3 million, or $1.04 per average diluted common share, compared to $86.0 million, or $1.23 per average diluted share, for the comparative period ended September 30, 2013.  These results reflect the increased revenues and expenses related to the acquisition of Talmer West Bank which are discussed below, including a $42.0 million bargain purchase gain.  The results for the nine months ended September 30, 2013 included a $71.7 million bargain purchase gain as a result of our acquisition of First Place Bank on January 1, 2013.  Excluding the operating results of Talmer West Bank, which includes the $1.6 million recognized on the sale of the Albuquerque, New Mexico branch office, and the bargain purchase gains recognized in each period, net income for the nine months ended September 30, 2014 increased $18.1 million, compared to the same period in 2013.  This increase primarily reflects a decrease in noninterest expenses of $59.0 million and $12.8 million recognized on the sale of our Wisconsin branches in the third quarter, partially offset by decreases in net gain on sales of loans of $25.0 million, and mortgage banking and other loan fees of $21.2 million.  The decline in noninterest expenses was primarily due to overall operating efficiencies we have created through the merger of First Place Bank into Talmer Bank, including a reduction in employee headcount as we have eliminated duplicative positions and streamlined operations with the merger of First Place Bank into Talmer Bank.  The decrease in net gain on sales of loans for the nine months ended September 30, 2014, compared to the same period in 2013, was primarily due to reduced levels of residential mortgage loans originated for sale. The decline in mortgage banking and other loans fees primarily reflects the change in the fair value of loan servicing rights due to adjustments to fair value assumptions driven by interest rate fluctuations which impact assumed prepayment speeds, which was a detriment to earnings of $6.6 million for the nine months ended September 30, 2014, compared to a benefit of $8.6 million for the same period in 2013.  Additionally, lower levels of both mortgage origination volume and mortgage banking revenue due to both fluctuations in mortgage interest rates and our closure of our

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wholesale mortgage lending division in the fourth quarter of 2013, adversely impacted mortgage banking and other loan fees in the nine months ended September 30, 2014.

Net Interest Income

Net interest income is the difference between interest income and yield-related fees earned on assets and interest expense paid on liabilities. Adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis. The “Analysis of Net Interest Income-Fully Taxable Equivalent” tables within this financial review provide an analysis of net interest income for the three and nine month periods ended September 30, 2014 and 2013.  The “Rate/Volume Analysis” tables describe the extent to which changes in interest rates and changes in volume of earning assets and interest-bearing liabilities have affected our net interest income on a fully taxable equivalent (“FTE”) basis for the three and nine month periods ended September 30, 2014 and 2013.

We had net interest income of $52.2 million for the three months ended September 30, 2014, an increase of $8.2 million from $44.0 million for the same period in 2013.  The increase in net interest income in the third quarter of 2014 was primarily the result of the addition of $9.8 million of net interest income related to our acquisition of Talmer West Bank and its inclusion into our operations beginning January 1, 2014.

We had net interest income of $152.8 million for the nine months ended September 30, 2014, an increase of $24.1 million, from $128.7 million for the same period in 2013.  The increase in net interest income for the nine months ended September 30, 2014 was primarily the result of the addition of $28.7 million of net interest income related to our acquisition of Talmer West Bank and its inclusion into our operations beginning January 1, 2014.

Our net interest margin was 4.04% for the three months ended September 30, 2014, compared to 4.11% for the same period in 2013.  The decrease of 7 basis points was due to a combination of several factors, the largest being a decrease in the benefit received from discount accretion on our purchased credit impaired loan portfolios resulting from the significant run-off of covered loans, partially offset by the benefit of a shift in our loan composition to a larger percentage of commercial and industrial and commercial real estate loans due in part to the acquisition of Talmer West Bank, which, on average, have a higher yield than residential real estate loans.

For the nine months ended September 30, 2014, our net interest margin was 4.10%, compared to 3.96%, for the nine months ended September 30, 2013.  The increase of 14 basis points was primarily due to an increase in the benefit received from discount accretion on our purchased credit impaired loan portfolios resulting from the run-off of certain loans that significantly benefitted the second quarter of 2014 net interest margin and by the benefit of a shift in our loan composition to a larger percentage of commercial and industrial and commercial real estate loans due in part to the acquisition of Talmer West Bank, which, on average, have a higher yield than residential real estate loans.

Our net interest margin benefits from discount accretion on our purchased credit impaired loan portfolios, a component of our accretable yield. The accretable yield represents the excess of the net present value of expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion.  The accretable yield is recognized as interest income over the expected remaining life of the purchased credit impaired loan.  For the three months ended September 30, 2014 and 2013, the yield on total loans was 5.78% and 6.30%, respectively, while the yield generated using only the expected coupon would have been 4.66% and 4.57%, respectively.  For the nine months ended September 30, 2014 and 2013, the yield on total loans was 5.90% and 6.43% respectively, while the yield generated using only the expected coupon would have been 4.79% and 4.87%, 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 overall expected cash flows on covered loans, our expected payment from the FDIC under our loss share agreements have declined, resulting in a negative yield on the FDIC indemnification asset, which partially offsets the benefits provided by the excess accretable yield discussed above.  The negative yield on the FDIC indemnification asset was 26.61% and 22.11% for the three and nine months ended September 30, 2014, respectively, compared to 14.32% and 14.52% for

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the three and nine months ended September 30, 2013, respectively.  The combination of the excess accretable yield and the negative yield on the FDIC indemnification asset benefited net interest margin by 35 basis points and 70 basis points for the three and nine months ended September 30, 2014, compared to 33 basis points and 46 basis points for the three and nine months ended September 30, 2013.

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The following tables set forth information related to our average balance sheet, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated.

Analysis of Net Interest Income — Fully Taxable Equivalent

	For the three months ended September 30,
	2014								2013
(Dollars in thousands)	Average Balance			Interest (1)			Average Rate (2)		Average Balance			Interest (1)			Average Rate (2)
Earning assets:
Interest earning balances	$	264,108		$	158		0.24	%	$	182,539		$	97		0.21	%
Federal funds sold and other short-term investments	76,724			186			0.97		127,526			279			0.87
Investment securities (3):
Taxable	539,119			2,345			1.73		478,417			1,751			1.45
Tax-exempt	181,598			1,341			3.96		192,049			1,132			3.16
Federal Home Loan Bank Stock	17,333			120			2.74		16,303			167			4.06
Gross uncovered loans (4)	3,548,152			44,424			4.97		2,534,604			29,441			4.61
Gross covered loans (4)	439,366			13,684			12.36		583,385			20,034			13.62
FDIC indemnification asset	99,335			(6,663		)	(26.61	)	167,103			(6,032		)	(14.32	)
Total earning assets	5,165,735			55,595			4.31		4,281,926			46,869			4.38
Non-earning assets:
Cash and due from banks	114,081								118,178
Allowance for loan losses	(55,579		)						(57,884		)
Premises and equipment	51,636								56,555
Core deposit intangible	14,398								14,193
Other real estate owned	49,368								35,413
Loan servicing rights	73,996								68,795
FDIC receivable	5,886								9,672
Company-owned life insurance	95,930								39,005
Other non-earning assets	231,372								140,578
Total assets	$	5,746,823							$	4,706,431
Interest bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	657,107		$	190		0.11	%	$	557,750		$	174		0.12	%
Money market and savings deposits	1,237,984			487			0.16		1,239,927			447			0.14
Time deposits	1,236,286			1,611			0.52		995,623			1,408			0.56
Other brokered funds	361,929			288			0.32		93,043			38			0.16
Short-term borrowings	219,859			122			0.22		59,361			26			0.17
Long-term debt	280,054			701			0.99		259,197			775			1.19
Total interest bearing liabilities	3,993,219			3,399			0.34		3,204,901			2,868			0.35
Noninterest bearing liabilities and shareholders’ equity:
Non-interest bearing demand deposits	961,558								828,797
FDIC clawback liability	26,493								24,167
Other liabilities	26,683								76,223
Shareholders’ equity	738,870								572,343
Total liabilities and shareholders’ equity	$	5,746,823							$	4,706,431
Net interest income				$	52,196							$	44,001
Interest spread							3.97	%							4.03	%
Net interest margin as a percentage of interest earning assets							4.01	%							4.07	%
Tax equivalent effect							0.03	%							0.04	%
Net interest margin on a fully tax equivalent basis							4.04	%							4.11	%

(1) Interest income is shown on actual basis and does not include taxable equivalent adjustments.

(2) Average rates are presented on an annual basis and include a taxable equivalent adjustment to interest income of $469 thousand and $396 thousand on tax-exempt securities for the three months ended September 30, 2014 and 2013, respectively, using the statutory tax rate of 35%.

(3) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(4) Includes nonaccrual loans.

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	For the nine months ended September 30,
	2014								2013
(Dollars in thousands)	Average Balance			Interest (1)			Average Rate (2)		Average Balance			Interest (1)			Average Rate (2)
Earning assets:
Interest earning balances	$	304,413		$	546		0.24	%	$	317,077		$	588		0.25	%
Federal funds sold and other short-term investments	74,651			641			1.15		114,012			726			0.85
Investment securities (3):
Taxable	501,122			6,421			1.71		451,534			4,217			1.25
Tax-exempt	189,117			4,432			4.23		176,507			3,132			3.20
Federal Home Loan Bank Stock	17,561			465			3.54		16,115			712			5.91
Gross uncovered loans (4)	3,341,423			125,376			5.02		2,407,837			87,502			4.86
Gross covered loans (4)	476,465			43,070			12.09		700,344			62,001			11.84
FDIC indemnification asset	114,190			(18,887		)	(22.11	)	194,175			(21,088		)	(14.52	)
Total earning assets	5,018,942			162,064			4.36		4,377,601			137,790			4.24
Non-earning assets:
Cash and due from banks	99,858								106,678
Allowance for loan losses	(57,202		)						(59,800		)
Premises and equipment	54,677								58,238
Core deposit intangible	15,635								14,859
Other real estate owned	54,964								39,761
Loan servicing rights	76,809								57,860
FDIC receivable	6,440								13,237
Company-owned life insurance	75,908								38,677
Other non-earning assets	222,938								111,570
Total assets	$	5,568,969							$	4,758,681
Interest bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	693,346		$	630		0.12	%	$	554,029		$	500		0.12	%
Money market and savings deposits	1,328,229			1,473			0.15		1,233,017			1,459			0.16
Time deposits	1,257,393			4,534			0.48		1,131,464			4,614			0.55
Other brokered funds	175,169			352			0.27		74,832			110			0.20
Short-term borrowings	150,057			330			0.29		52,618			81			0.21
Long-term debt	234,087			1,902			1.09		263,324			2,313			1.17
Total interest bearing liabilities	3,838,281			9,221			0.32		3,309,284			9,077			0.37
Noninterest bearing liabilities and shareholders’ equity:
Non-interest bearing demand deposits	949,516								747,619
FDIC clawback liability	25,790								22,986
Other liabilities	37,239								82,906
Shareholders’ equity	718,143								595,886
Total liabilities and shareholders’ equity	$	5,568,969							$	4,758,681
Net interest income				$	152,843							$	128,713
Interest spread							4.04	%							3.87	%
Net interest margin as a percentage of interest earning assets							4.07	%							3.93	%
Tax equivalent effect							0.03	%							0.03	%
Net interest margin on a fully tax equivalent basis							4.10	%							3.96	%

(1) Interest income is shown on actual basis and does not include taxable equivalent adjustments.

(2) Average rates are presented on an annual basis and include a taxable equivalent adjustment to interest income of $1.6 million and $1.1 million on tax-exempt securities for the nine months ended September 30, 2014 and 2013, respectively, using the statutory tax rate of 35%.

(3) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(4) Includes nonaccrual loans.

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Rate-Volume Analysis

	For the three months ended September 30, 2014 vs. 2013
	Increase (Decrease) Due to:
(Dollars in thousands)	Rate			Volume			Net Increase (Decrease)
Interest earning assets
Interest earning balances	$	13		$	48		$	61
Federal funds sold and other short-term investments	28			(121		)	(93		)
Investment securities:
Taxable	355			239			594
Tax-exempt	273			(64		)	209
FHLB stock	(57		)	10			(47		)
Gross uncovered loans	2,443			12,540			14,983
Gross covered loans	(1,739		)	(4,611		)	(6,350		)
FDIC indemnification asset	(3,751		)	3,120			(631		)
Total interest income	(2,435		)	11,161			8,726
Interest-bearing liabilities
Interest-bearing demand deposits	(13		)	29			16
Money market and savings deposits	41			(1		)	40
Time deposits	(117		)	320			203
Other brokered funds	62			188			250
Short-term borrowings	9			87			96
Long-term debt	(133		)	59			(74		)
Total interest expense	(151		)	682			531
Change in net interest income	$	(2,284	)	$	10,479		$	8,195

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	For the nine months ended September 30, 2014 vs. 2013
	Increase (Decrease) Due to:
(Dollars in thousands)	Rate			Volume			Net Increase (Decrease)
Interest earning assets
Interest earning balances	$	(19	)	$	(23	)	$	(42	)
Federal funds sold and other short-term investments	209			(294		)	(85		)
Investment securities:
Taxable	1,702			502			2,204
Tax-exempt	1,063			237			1,300
FHLB stock	(306		)	59			(247		)
Gross uncovered loans	2,930			34,944			37,874
Gross covered loans	1,281			(20,212		)	(18,931		)
FDIC indemnification asset	(8,487		)	10,688			2,201
Total interest income	(1,627		)	25,901			24,274
Interest-bearing liabilities
Interest-bearing demand deposits	3			127			130
Money market and savings deposits	(95		)	109			14
Time deposits	(564		)	484			(80		)
Other brokered funds	52			190			242
Short-term borrowings	47			202			249
Long-term debt	(166		)	(245		)	(411		)
Total interest expense	(723		)	867			144
Change in net interest income	$	(904	)	$	25,034		$	24,130

Provision for Loan Losses

We established an allowance for loan losses on both covered and uncovered loans through a provision for loan losses charged as an expense in our consolidated statements of income.  Management reviews our loan portfolio, consisting of originated loans and purchased loans that are not covered by loss sharing agreements with the FDIC, on a quarterly basis to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.

We did not record an allowance for loan losses at acquisition for purchased uncovered or covered loans as these loans were recorded at fair value, based on a discounted cash flow methodology, at the date of each respective acquisition.  We re-estimate expected cash flows on a quarterly basis for all loans purchased with credit impairment.  We record a provision for loan losses during the period for any decline in expected cash flows. Conversely, any improvement in expected cash flows is recognized prospectively as an adjustment to the yield on the loan once any previously recorded impairment is recaptured.

The provision for credit losses on off balance sheet items, a component of “other expense” in our consolidated statements of income, reflects management’s assessment of the adequacy of the allowance for credit losses on lending-related commitments.

For a further discussion of the allowance for loan losses, refer to the “Allowance for Loan Losses” section of this financial review.

Uncovered loans

The provision for loan losses on uncovered loans was $7.8 million for the three months ended September 30, 2014, compared to $2.9 million for the three months ended September 30, 2013.  The provision for loan losses on uncovered loans was $17.4 million for the nine months ended September 30, 2014, compared to $9.0 million for the nine months ended September 30, 2013.  Our allowance for loan losses was $29.9 million, or 0.82% of uncovered loans at September 30, 2014, compared to $17.7 million, or 0.72% of uncovered loans, at December 31,

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2013. The provision for loan losses on uncovered loans for both the three and nine months ended September 30, 2014 and 2013 reflects impairment recorded as a result of our re-estimation of cash flows for uncovered purchased credit impaired loans along with additional provisions for organic loan growth, partially offset by the impact of improvements in historical loss factors.  We recorded impairment related to re-estimations of cash flows for uncovered purchased credit impaired loans of $3.4 million and $11.6 million for the three and nine months ended September 30, 2014, respectively, and $4.2 million and $5.9 million for the three and nine months ended September 30, 2013, respectively.  The re-estimations also resulted in improvements in gross cash flow expectations on uncovered purchased credit impaired loans of $14.6 million and $39.0 million for the three and nine months ended September 30, 2014, respectively, and $17.6 million and $26.3 million for the three and nine months ended September 30, 2013, respectively, which will be recognized prospectively as an increase in the accretable yield and accreted into interest income over the expected remaining life of the related uncovered purchased credit impaired loan.

Covered loans

For the three months ended September 30, 2014, we had a provision benefit for covered loan losses of $6.3 million, compared to $727 thousand of provision benefit for covered loan losses for the three months ended September 30, 2013.  The provision benefit for covered loan losses for both the three months ended September 30, 2014 and 2013 primarily reflects the relief of allowance for loan losses due to payments received on covered loans previously carrying an allowance for loan loss.  The three months ended September 30, 2014 additionally includes net impairment relief of $1.3 million resulting from our re-estimation of cash flows for covered purchased credit impaired loans as the relief of previously built impairment for loans where there was estimated cash flow improvement more than offset the additional impairment built for those loans with expected cash flow declines.  The three months ended September 30, 2013 includes net impairment build of $1.6 million resulting from our re-estimation of cash flows for covered purchased credit impaired loans. The results of our re-estimation of cash flows for covered purchased impaired loans additionally resulted in increases of $176 thousand and $875 thousand, respectively, in the FDIC indemnification asset recorded in FDIC loss sharing income on our consolidated statements of income for the three months ended September 30, 2014 and 2013, respectively.  The re-estimations completed in the three months ended September 30, 2014 and 2013 also resulted in $17.4 million and $6.8 million, respectively, of improvements in gross cash flow expectations on covered purchased credit impaired loans, which will be recognized prospectively as an increase in the accretable yield and accreted into interest income over the expected remaining life of the related covered purchased credit impaired loan.

For the nine months ended September 30, 2014, we had a provision benefit for covered loan losses of $16.1 million, compared to $7.1 million of provision benefit for covered loan losses for the nine months ended September 30, 2013.  The provision benefit for covered loan losses for the nine months ended September 30, 2014 and 2013 primarily reflects the relief of allowance for loan losses due to payments received on covered loans previously carrying an allowance for loan loss, partially offset by impairment of $1.0 million and $10.0 million in the nine months ended September 30, 2014 and 2013, respectively, resulting from our re-estimation of cash flows for covered purchased credit impaired loans. The impairment recorded in the nine months ended September 30, 2014 and 2013 was partially offset by increases of $3.7 million and $4.5 million, respectively, in the FDIC indemnification asset recorded in FDIC loss sharing income on our consolidated statements of income.  The re-estimations completed in the nine months ended September 30, 2014 and 2013 also resulted in $33.9 million and $38.5 million, respectively, of improvements in gross cash flow expectations on covered purchased credit impaired loans, which will be recognized prospectively as an increase in the accretable yield and accreted into interest income over the expected remaining life of the related covered purchased credit impaired loan.

Many of our covered loans were originated prior to or during the recession and these loans typically have weak credit metrics such as high loan to value ratios and low debt service coverage ratios. Therefore, the ultimate credit outcome for the covered loans can be volatile. As the economy has begun to stabilize, we have started to see many of these covered loans perform better than expected, while some are performing worse than expected.

A substantial portion of the provision or benefit for loan loss on covered loans is offset by FDIC loss sharing income. An analysis of the changes in the allowance for loan losses, including charge-offs and recoveries by loan category, is provided in the “Analysis of the Allowance for Loan Losses — Uncovered” and the “Analysis of the Allowance for Loan Losses — Covered” tables in this financial review.

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The following table details the components of the provision for loan losses on covered loans and the impact to net income.

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2014			2013			2014			2013
Provision (benefit) for loan losses - covered:
Impairment (benefit) recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	$	(1,329	)	$	1,615		$	1,036		$	9,989
Additional benefit recorded, net of charge-offs, for covered loans	(4,946		)	(2,342		)	(17,130		)	(17,092		)
Total provision (benefit) for loan losses-covered	$	(6,275	)	$	(727	)	$	(16,094	)	$	(7,103	)
Less: FDIC loss share income:
Income recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	176			875			3,680			4,481
Expense recorded, to offset provision (benefit), for covered loans	(2,978		)	(1,874		)	(10,445		)	(13,674		)
Total loss sharing expense due to provision for loan losses-covered	(2,802		)	(999		)	(6,765		)	(9,193		)
Net (increase) decrease to income before taxes:
Net (income) expense recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	(1,505		)	740			(2,644		)	5,508
Net (income) expense recorded, for covered loans including those accounted for under ASC 310-20 and ASC 310-40	(1,968		)	(468		)	(6,685		)	(3,418		)
Net (increase) decrease to income before taxes	$	(3,473	)	$	272		$	(9,329	)	$	2,090

(1)  The results of re-estimations also included cash flow improvements to be recognized prospectively as an adjustment to the accretable yield on the loan related to covered loans of $17.4 million and $6.8 million for the three months ended September 30, 2014 and 2013, respectively, and $33.9 million and $38.5 million for the nine months ended September 30, 2014, and 2013, respectively.

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Noninterest Income

The following table presents noninterest income for the three and nine months ended September 30, 2014 and 2013.

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2014			2013			2014			2013
Noninterest income
Deposit fee income	$	3,022		$	3,547		$	9,459		$	12,707
Mortgage banking and other loan fees	2,065			7,173			2,040			23,187
Net gain on sales of loans	4,083			4,835			12,796			37,789
Net gain on sale of branches	14,410			—			14,410			—
Bargain purchase gain	—			—			41,977			71,702
FDIC loss sharing income	(2,420		)	(4,846		)	(5,967		)	(7,059		)
Accelerated discount on acquired loans	3,663			4,345			14,455			10,558
Net gain (loss) on sales of securities	244			—			(2,066		)	100
Other income	4,928			2,930			14,518			8,597
Total noninterest income	$	29,995		$	17,984		$	101,622		$	157,581

Noninterest income increased $12.0 million to $30.0 million for the three months ended September 30, 2014, compared to $18.0 million for the same period of 2013.  The increase in noninterest income for the three months ended September 30, 2014, compared to 2013, was primarily due to net gain on sale of branches of $14.4 million recognized in the third quarter of 2014 on our sales of our ten branch offices located in Wisconsin and our single branch office in Albuquerque, New Mexico, partially offset by a decrease in mortgage banking and other loan fees of $5.1 million.  The decline in mortgage banking and other loans fees primarily reflects lower levels of both mortgage origination volume and mortgage banking revenue due to both fluctuations in mortgage interest rates and our closure of our wholesale mortgage lending division in the fourth quarter of 2013.

Noninterest income decreased $56.0 million to $101.6 million for the nine months ended September 30, 2014, from $157.6 million for the same period of 2013.  The decrease in noninterest income for the nine months ended September 30, 2014, compared to 2013, was primarily due to the recognition of $42.0 million of bargain purchase gain in the nine months ended September 30, 2014, compared to $71.7 million of bargain purchase gain recognized during the nine months ended September 30, 2013.  In addition, the nine months ended September 30, 2014, compared to the same period in 2013, included decreases in net gain on sales of loans of $25.0 million and mortgage banking and other loan fees of $21.1 million, partially offset by the $14.4 million of net gain on sale of branches recognized in the nine months ended September 30, 2014 on the sales of our Wisconsin and New Mexico branch offices.  The bargain purchase gain recognized in the first quarter of 2014 increased $1.8 million from the previously reported level due to an adjustment to the acquisition date fair value of the deferred income tax benefit related to our acquisition of Talmer West Bank within the measurement period.  The decrease in net gain on sales of loans in the nine months ended September 30, 2014, compared to the same period in 2013, was primarily due to reduced levels of residential mortgage loans originated for sale. The decline in mortgage banking and other loan fees primarily reflects the change in the fair value of loan servicing rights due to adjustments to fair value assumptions driven by interest rate fluctuations that impacted assumed prepayment speeds, which was a detriment to earnings of $6.6 million for the nine months ended September 30, 2014, compared to a benefit of $8.6 million for the same period in 2013, in addition to lower levels of both mortgage origination volume and mortgage banking revenue due to both fluctuations in mortgage interest rates and the closure of our wholesale mortgage lending division in the fourth quarter of 2013.

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Noninterest Expenses

The following table presents noninterest expenses for the three and nine month periods ended September 30, 2014 and 2013.

	For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	2014		2013		2014		2013
Noninterest expenses
Salary and employee benefits	$	29,752	$	29,766	$	95,872	$	116,772
Occupancy and equipment expense	8,047		6,582		25,132		20,409
Data processing fees	1,610		3,539		5,610		7,099
Professional service fees	2,985		4,418		9,825		12,666
FDIC loss sharing expense	245		106		1,752		1,524
Bank acquisition and due diligence fees	239		171		2,218		7,874
Marketing expense	1,005		634		3,703		2,825
Other employee expense	663		943		2,163		2,648
Insurance expense	1,364		1,911		4,016		8,123
Other expense	5,353		5,303		20,491		17,865
Total noninterest expenses	$	51,263	$	53,373	$	170,782	$	197,805

Noninterest expenses decreased $2.1 million to $51.3 million for the three months ended September 30, 2014, from $53.4 million for the same period in 2013.  Total noninterest expenses for the three months ended September 30, 2014 reflect the inclusion of Talmer West Bank into our operations beginning January 1, 2014, which added approximately $9.4 million of operating costs.  The decline in noninterest expenses was primarily due to overall operating efficiencies we have created through the merger of First Place Bank into Talmer Bank, including a reduction in employee headcount as we have eliminated duplicative positions and streamlined operations with the merger of First Place Bank into Talmer Bank.

Noninterest expenses decreased $27.0 million to $170.8 million for the nine months ended September 30, 2014, from $197.8 million for the same period of 2013.  Total noninterest expenses for the nine months ended September 30, 2014 reflect the inclusion of Talmer West Bank into our operations beginning January 1, 2014, which added approximately $31.9 million of operating costs.  The decrease in noninterest expense for the nine months ended September 30, 2014, compared to 2013, was primarily due to decreases of $20.9 million in salary and employee benefits, $5.7 million in bank acquisition and due diligence fees and $4.1 million in insurance expense, partially offset by an increase of $4.7 million in occupancy and equipment expense.  Salary and employee benefits in the nine months ended September 30, 2014 included $6.1 million of transaction and integration related expenses including severance expense and bonus payments related to our successful acquisition of Talmer West Bank, the merger of First Place Bank with and into Talmer Bank and the completion of our initial public offering, while the nine months ended September 30, 2013, included $11.6 million of transaction and integration related expenses, including First Place Bank acquisition related bonuses, stock options issued and the accrual of anticipated severance payments for planned reductions in the work force.  The remaining decline in salary and employee benefits for the nine months ended September 30, 2014, compared to the same period in 2013, relates significantly to the reduction in employee headcount as we have eliminated duplicative positions and streamlined operations with the merger of First Place Bank into Talmer Bank.

Income Taxes and Tax-Related Items

During the three months ended September 30, 2014, we recognized income tax expense of $9.9 million on $29.4 million of pre-tax income resulting in an effective tax rate of 33.7%, compared to the three months ended September 30, 2013, in which we recognized an income tax benefit of $4.1 million on $6.5 million of pre-tax income, resulting in an effective tax rate of a negative 62.5%.  The benefit in the third quarter of 2013 was primarily driven by a $6.0 million reduction in the valuation allowance established against the deferred tax assets associated with First Place Bank pre-tax losses.  The decrease in the deferred tax asset valuation allowance during the quarter

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ended September 30, 2013 was largely due to a post-acquisition date reduction in our original estimates of projected realized built-in losses on loans (i.e., bad debt deductions) occurring in the one year period following the acquisition date of First Place Bank.  Without the benefit from the reversal of the $6.0 million reduction in the valuation allowance, our income tax expense in the third quarter of 2013 would have been $2.0 million, or an effective tax rate of 30.0%.

During the nine months ended September 30, 2014, we recognized income tax expense of $4.0 million on $82.4 million of pre-tax income, an effective tax rate of 4.9%, compared to an income tax expense of $636 thousand on $86.6 million of pre-tax income, an effective tax rate of 0.73%, for the nine months ended September 30, 2013.  Low effective tax rates for the nine months ended September 30, 2014 and 2013, resulted primarily from treating the $42.0 million bargain purchase gain resulting from our acquisition of Talmer West Bank on January 1, 2014 and the $71.7 million bargain purchase gain resulting from our acquisition of First Place Bank on January 1, 2013 as non-taxable, based on the tax structure of the acquisitions. The low effective tax rate for the nine months ended September 30, 2014 was also impacted by the elimination of a $9.7 million valuation allowance on the deferred tax assets acquired in our acquisition of First Place Bank on January 1, 2013 resulting from a conclusion reached in the second quarter of 2014, with the assistance of legal and tax accounting experts, regarding the calculation of the annual Section 382 of the Internal Revenue Code limitation related to the ownership change of First Place Bank.  The low effective tax rate for the nine months ended September 30, 2013 was also impacted by a $6.0 million reduction in the valuation allowance established against the deferred tax assets associated with First Place Bank pre-tax losses discussed above.

Further information on income taxes is presented in Note 14, “Income Taxes,” of our consolidated financial statements.

Financial Condition

Balance Sheet

Total assets were $5.7 billion at September 30, 2014, compared to $4.5 billion at December 31, 2013.   Of the $1.2 billion increase, $910.3 million was related to the acquisition date fair value of assets acquired in our acquisition of Talmer West Bank.  The increase in total assets of $286.5 million, setting aside the fair value of assets acquired in our acquisition of Talmer West Bank, was primarily due to an increase in net uncovered loans of $573.6 million, securities available-for-sale of $100.8 million, company-owned life insurance of $57.1 million and loans held for sale of $37.3 million, partially offset by decreases in net covered loans of $111.7 million, cash and cash equivalents of $293.0 million and the FDIC indemnification asset of $49.4 million.  The increase in net uncovered loans reflects $668.5 million of net uncovered loan growth in Talmer Bank’s portfolio, partially offset by $94.9 million of net loan run-off in Talmer West Bank’s loan portfolio subsequent to acquisition.  The increases in securities available-for-sale and company-owned life insurance primarily reflect management’s plan to more fully deploy excess liquidity.  The increase in loans held for sale is primarily the result of an increase in new residential mortgage loan originations and the timing of when the loans are originated and when the loan sale is completed.  The decrease in net covered loans reflects the run-off of $126.3 million in covered loans partially offset by a reduction in the allowance for covered loan losses of $14.6 million. The decrease in the FDIC indemnification asset is primarily the result of the negative accretion on the indemnification asset resulting from improvements in expected cash flows on covered loans, new claims filed with the FDIC for losses incurred on covered loans and the write-off of our FDIC indemnification asset due to pay downs on covered loans.

Total liabilities were $5.0 billion at September 30, 2014, compared to $3.9 billion at December 31, 2013.  The acquisition date fair value of liabilities assumed in our acquisition of Talmer West Bank increased liabilities by $861.8 million.  The $1.1 billion increase in liabilities in the nine months ended September 30, 2014 was primarily due to increases in total deposits of $884.8 million, long-term debt of $86.0 million and short-term borrowings of $78.7 million.  The $884.8 million increase in total deposits primarily reflects the acquisition date fair value of deposits assumed of $857.8 million related to our acquisition of Talmer West Bank and Talmer Bank deposit growth driven largely by an increase in other brokered funds, partially offset by $389.5 million of deposits sold in our Wisconsin and New Mexico branch office sales and Talmer West Bank deposit run-off during the nine months ended September 30, 2014.  The increases in long-term debt and short-term borrowings primarily reflect Federal Home Loan Bank advances and additional securities sold under agreements to repurchase added in the nine months

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ending September 30, 2014, partially offset by the repayment of our $35.0 million Holding company line of credit related to our acquisition of Talmer West Bank.

Total shareholders’ equity at September 30, 2014 was $746.7 million, an increase of $129.7 million from $617.0 million at December 31, 2013.  The increase primarily reflects net income of $78.3 for the nine months ended September 30, 2014 and our initial public offering completed in February 2014 that raised $42.0 million of capital, after deducting underwriting discounts and commissions and offering expenses.

Loans

Our loan portfolio represents a broad range of borrowers primarily in the Michigan, Ohio, Illinois, Indiana, Wisconsin and Nevada markets, comprised of residential real estate, commercial real estate, commercial and industrial, real estate construction and consumer financing loans.  All loans acquired in the CF Bancorp acquisition and all loans (except consumer loans) acquired in the First Banking Center, Peoples State Bank and Community Central Bank acquisitions were acquired under loss share agreements with the FDIC that call for the FDIC to reimburse us for a portion of our losses incurred on such loans, and we present covered loans separately from uncovered loans due to these loss share agreements.

Residential real estate loans represent loans to consumers for the purchase or refinance of a residence.  These loans are generally financed over a 15- to 30-year term and, in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms.  Residential real estate loans also include home equity loans and lines of credit that are secured by a first- or second-lien on the borrower’s residence.  Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.

Commercial real estate loans consist of term loans secured by a mortgage lien on the real estate properties, such as apartment buildings, office and industrial buildings, retail shopping centers and farmland.

Commercial and industrial loans include financing for commercial purposes in various lines of businesses, including the manufacturing industry, agricultural, service industry and professional service areas.  Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners.

Real estate construction loans are term loans to individuals, companies or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property.  Generally, these loans are for construction projects that have been either presold, preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in the project.

Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans.

Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries or certain geographic regions. Credit risk associated with these concentrations could arise when a significant amount of loans or other financial instruments, related by similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment or other type of settlement to be adversely affected. Our uncovered loan portfolio is managed to a risk-appropriate level as to not create a collateral, industry or geographic concentration. As of September 30, 2014, we do not have any significant concentrations to any one industry or borrower. Our largest geographic concentration of loans is in the Detroit-Warren-Livonia metropolitan statistical area (“MSA”), which includes borrowers located in Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the state of Michigan.  Loans to borrowers in the Detroit-Warren-Livonia MSA totaled $1.4 billion, or approximately 34.6% of total loans, at September 30, 2014, of which approximately $282.5 million, or 20.3% of the total Detroit-Warren-Livonia MSA loans, were covered by loss share agreements with the FDIC.

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The following tables detail our loan portfolio by loan type and geographic location as of September 30, 2014 and December 31, 2013. Geographic location is primarily determined by the domicile of the borrower and in some instances, the location of the collateral.

(Dollars in thousands)	Michigan		Ohio		Wisconsin		Illinois		Indiana		Nevada		Other		Total
September 30, 2014
Uncovered loans
Residential real estate (1)(2)	$	581,738	$	567,151	$	11,438	$	42,252	$	113,512	$	9,226	$	105,622	$	1,430,939
Commercial real estate (3)(4)	631,627		272,328		64,334		91,442		37,850		96,634		19,146		1,213,361
Commercial and industrial (5)	393,376		97,196		15,728		137,528		27,157		10,099		109,783		790,867
Real estate construction	49,293		16,555		8,644		10,423		11,748		4,369		1,888		102,920
Consumer	35,671		3,373		1,163		2,361		1,197		2,726		46,755		93,246
Total uncovered loans	1,691,705		956,603		101,307		284,006		191,464		123,054		283,194		3,631,333
Covered loans
Residential real estate (1)	85,768		279		24,225		1,337		1,449		170		—		113,228
Commercial real estate (3)	175,904		—		40,314		2,724		74		—		480		219,496
Commercial and industrial (5)	24,993		86		21,029		848		—		—		296		47,252
Real estate construction	7,394		—		4,892		946		—		—		502		13,734
Consumer	10,002		55		10		4		11		—		—		10,082
Total covered loans	304,061		420		90,470		5,859		1,534		170		1,278		403,792
Total loans	$	1,995,766	$	957,023	$	191,777	$	289,865	$	192,998	$	123,224	$	284,472	$	4,035,125

(1) Residential real estate loans to borrowers in the Detroit-Warren-Livonia MSA totaled $412.1 million of uncovered loans and $79.0 million of covered loans.  The Detroit-Warren-Livonia MSA includes borrowers located in Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the State of Michigan.

(2) Residential real estate loans to borrowers in the Cleveland-Elyria-Mentor metropolitan statistical area (Cleveland MSA) totaled $135.0 million of uncovered loans.  The Cleveland MSA includes borrowers located in Cuyahoga, Geauga, Lake, Lorain, and Medina counties in the State of Ohio.

(3) Commercial real estate loans to borrowers in the Detroit-Warren-Livonia MSA totaled $383.7 million of uncovered loans and $165.7 million of covered loans.

(4) Commercial real estate loans to borrowers in the Cleveland MSA totaled $173.0 million of uncovered loans.

(5) Commercial and industrial loans to borrowers in the Detroit-Warren-Livonia MSA totaled $246.7 million of uncovered loans and $23.0 million of covered loans.

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(Dollars in thousands)	Michigan		Ohio		Wisconsin		Illinois		Indiana		Other		Total
December 31, 2013
Uncovered loans
Residential real estate (1)(2)	$	411,176	$	500,407	$	11,825	$	33,670	$	59,808	$	68,567	$	1,085,453
Commercial real estate (3)(4)	348,950		244,788		62,330		71,267		5,338		23,166		755,839
Commercial and industrial (5)	295,456		53,268		20,263		75,802		731		1,124		446,644
Real estate construction	49,950		82,774		2,425		1,086		35,098		4,893		176,226
Consumer	5,693		3,175		703		94		—		89		9,754
Total uncovered loans	1,111,225		884,412		97,546		181,919		100,975		97,839		2,473,916
Covered loans
Residential real estate (1)	95,658		344		24,472		1,263		1,597		—		123,334
Commercial real estate (3)	221,020		—		71,412		6,896		73		—		299,401
Commercial and industrial (5)	41,579		106		34,575		2,177		—		—		78,437
Real estate construction	8,866		—		7,237		990		125		—		17,218
Consumer	11,582		57		23		5		11		—		11,678
Total covered loans	378,705		507		137,719		11,331		1,806		—		530,068
Total loans	$	1,489,930	$	884,919	$	235,265	$	193,250	$	102,781	$	97,839	$	3,003,984

(1) Residential real estate loans to borrowers in the Detroit-Warren-Livonia MSA totaled $290.1 million of uncovered loans and $88.2 million of covered loans.  The Detroit-Warren-Livonia MSA includes borrowers located in Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the State of Michigan.

(2) Residential real estate loans to borrowers in the Cleveland-Elyria-Mentor metropolitan statistical area (Cleveland MSA) totaled $137.7 million of uncovered loans.  The Cleveland MSA includes borrowers located in Cuyahoga, Geauga, Lake, Lorain, and Medina counties in the State of Ohio.

(3) Commercial real estate loans to borrowers in the Detroit-Warren-Livonia MSA totaled $257.1 million of uncovered loans and $208.4 million of covered loans.

(4) Commercial real estate loans to borrowers in the Cleveland MSA totaled $148.7 million of uncovered loans.

(5) Commercial and industrial loans to borrowers in the Detroit-Warren-Livonia MSA totaled $266.7 million of uncovered loans and $38.9 million of covered loans.

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The following table details our loan portfolio by loan type for the periods presented.

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Uncovered loans
Residential real estate	$	1,430,939	$	1,085,453
Commercial real estate
Non-owner occupied	814,179		581,651
Owner-occupied	379,964		148,545
Farmland	19,218		25,643
Total commercial real estate	1,213,361		755,839
Commercial and industrial	790,867		446,644
Real estate construction	102,920		176,226
Consumer	93,246		9,754
Total uncovered loans	3,631,333		2,473,916
Covered loans
Residential real estate	113,228		123,334
Commercial real estate
Non-owner occupied	121,491		154,951
Owner-occupied	80,990		115,435
Farmland	17,015		29,015
Total commercial real estate	219,496		299,401
Commercial and industrial	47,252		78,437
Real estate construction	13,734		17,218
Consumer	10,082		11,678
Total covered loans	403,792		530,068
Total loans	$	4,035,125	$	3,003,984

Total loans were $4.0 billion at September 30, 2014, an increase of $1.0 billion from December 31, 2013, resulting from the acquisition of $571.7 million of loans at fair value in our acquisition of Talmer West Bank on January 1, 2014 and $585.8 million of net uncovered loan growth outside of the acquisition, partially offset by $126.3 million in covered loan run-off.  The $585.8 million of uncovered loan growth is the result of $676.6 million of uncovered loan growth in Talmer Bank’s loan portfolio, partially offset by $90.8 million of loan run-off in Talmer West Bank’s loan portfolio. The loan run-off in Talmer West Bank’s loan portfolio includes $23.7 million of portfolio loans sold in the Albuquerque branch sale completed July 18, 2014. The total increase in uncovered loans of $1.2 billion at September 30, 2014, compared to December 31, 2013, includes loans acquired in our acquisition of Talmer West Bank, represented by increases in commercial real estate loans of $457.5 million, residential real estate loans of $345.5 million, commercial and industrial loans of $344.2 million and consumer loans of $83.5 million, partially offset by a decline in real estate construction loans of $73.3 million.  The covered loan run-off for the nine months ended September 30, 2014 resulted from decreases in commercial real estate loans of $79.9 million, or 26.69%, commercial and industrial loans of $31.2 million, or 39.76%, residential real estate loans of $10.1 million, or 8.19%, real estate construction loans of $3.5 million, or 20.23% and consumer loans of $1.6 million, or 13.67%.  Long term, we expect to increase our concentration in commercial and industrial and owner-occupied commercial real estate while decreasing our concentration in residential real estate and non-owner occupied commercial real estate, with a goal of our overall loan portfolio mix to be approximately one-third commercial and industrial loans, less than one-third commercial real estate loans, and the remaining to be a mix of residential real estate and consumer loans.

We originate both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, home equity loans and lines of credit that are secured by first or junior liens, and a limited amount of other secured high credit quality jumbo loans.  We have not originated or purchased a material amount of high-risk products, such as subprime, option adjustable rate or Alternative A-paper mortgage loans as of September 30, 2014.

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Residential real estate loans totaled $1.5 billion at September 30, 2014, of which $1.4 billion were uncovered and $113.2 million were covered.  Of the $1.5 billion of residential real estate loans outstanding at September 30, 2014, $17.5 million (consisting of $15.8 million of uncovered loans and $1.7 million of covered loans) were on nonaccrual status.  Included in residential real estate loans are $251.0 million of home equity loans and lines of credit (consisting of $194.6 million of uncovered loans and $56.4 million of covered loans) of which $71.8 million have interest only payment terms.  These loans are generally secured by junior liens and represent interest only residential real estate loans that we held as of September 30, 2014.  Also included in residential real estate loans are $101.6 million of uncovered jumbo adjustable rate mortgages and $53.2 million of residential real estate loans with balloon payment terms (consisting of $45.7 million of uncovered loans and $7.5 million of covered loans) of which $740 thousand were on nonaccrual status as of September 30, 2014.

Real estate construction loans totaled $116.7 million at September 30, 2014, of which $103.0 million were uncovered loans and $13.7 million were covered loans.  Of the $116.7 million of real estate construction loans outstanding at September 30, 2014, $1.3 million (consisting of $253 thousand of uncovered loans and $1.1 million of covered loans) were on nonaccrual status. Included in real estate construction loans are $16.7 million of loans with balloon payment terms (consisting of $14.9 million of uncovered loans and $1.8 million of covered loans), of which only $174 thousand were on nonaccrual status as of September 30, 2014.

Loan Maturity/Rate Sensitivity

The following tables show the contractual maturities of our uncovered and covered loans for the periods presented.

	Loans Maturing
(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
September 30, 2014
Uncovered loans:
Residential real estate	$	84,958	$	101,849	$	1,244,132	$	1,430,939
Commercial real estate	221,376		770,703		221,282		1,213,361
Commercial and industrial	200,507		424,576		165,784		790,867
Real estate construction	22,913		27,273		52,734		102,920
Consumer	2,943		25,712		64,591		93,246
Total uncovered loans	$	532,697	$	1,350,113	$	1,748,523	$	3,631,333
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			906,159		977,383
Floating interest rates			443,954		771,140
Total			$	1,350,113	$	1,748,523
Covered loans:
Residential real estate	$	9,554	$	46,734	$	56,940	$	113,228
Commercial real estate	134,018		72,724		12,754		219,496
Commercial and industrial	32,384		12,645		2,223		47,252
Real estate construction	11,217		1,891		626		13,734
Consumer	211		931		8,940		10,082
Total covered loans	$	187,384	$	134,925	$	81,483	$	403,792
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			125,865		37,134
Floating interest rates			9,060		44,349
Total			$	134,925	$	81,483

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	Loans Maturing
(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
December 31, 2013
Uncovered loans:
Residential real estate	$	23,500	$	48,930	$	1,013,023	$	1,085,453
Commercial real estate	100,614		490,468		164,757		755,839
Commercial and industrial	155,673		201,290		89,681		446,644
Real estate construction	6,657		11,799		157,770		176,226
Consumer	2,663		4,495		2,596		9,754
Total uncovered loans	$	289,107	$	756,982	$	1,427,827	$	2,473,916
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			556,077		807,531
Floating interest rates			200,905		620,296
Total			$	756,982	$	1,427,827
Covered loans:
Residential real estate	$	11,053	$	46,271	$	66,010	$	123,334
Commercial real estate	158,912		122,596		17,893		299,401
Commercial and industrial	48,970		25,211		4,256		78,437
Real estate construction	12,944		3,651		623		17,218
Consumer	331		906		10,441		11,678
Total covered loans	$	232,210	$	198,635	$	99,223	$	530,068
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			186,643		47,250
Floating interest rates			11,992		51,973
Total			$	198,635	$	99,223

Allowance for Loan Losses

We maintain the allowance for loan losses at a level we believe is sufficient to absorb probable incurred losses in our loan portfolio given the conditions at the time. Management determines the adequacy of the allowance based on periodic evaluations of the loan portfolio and other factors. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries or previous amounts charged-off.

Purchased Loans

We maintain an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date.  In accordance with the accounting guidance for business combinations, there was no allowance brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date.  For purchased credit impaired loans, accounted for under FASB Topic ASC 310-30 “Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”) and troubled debt restructurings previously individually accounted for under ASC 310-30, management establishes an allowance for credit deterioration subsequent to the date of acquisition by re-estimating expected cash flows on a quarterly basis with any decline in expected cash flows recorded as provision for loan losses. Impairment is measured as the excess of the recorded investment in a loan over the present value of expected future cash flows discounted at the pre-impairment accounting yield of the loan.  For any increases in cash flows expected to be collected, we first reverse only previously recorded allowance for loan loss, then adjust the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.  These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. For non-purchased credit impaired loans acquired in our acquisitions of First Place Bank and Talmer West Bank that are

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accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by First Place Bank or by Talmer West Bank, as applicable, for loans with similar characteristics as those acquired other than purchased credit impaired loans.  We record an allowance for loan losses only when the calculated amount exceeds the estimated credit mark at acquisition that was established for the similar period covered in the allowance for loan loss calculation. For all other purchased loans accounted for under ASC 310-20 or under ASC 310-40, the allowance is calculated in accordance with the methods used to calculate the allowance for loan losses for originated loans.

Originated loans

The allowance for loan losses represents management’s assessment of probable, incurred credit losses inherent in the loan portfolio. The allowance for loan losses consists of specific allowances, based on individual evaluation of certain loans, and allowances for homogeneous pools of loans with similar risk characteristics.

Impaired loans include loans placed on nonaccrual status and troubled debt restructurings. Loans are considered impaired when based on current information and events it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. When determining if we will be unable to collect all principal and interest payments due in accordance with the original contractual terms of the loan agreement, we consider the borrower’s overall financial condition, resources and payment record, support from guarantors, and the realized value of any collateral.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impaired loans are identified to be individually evaluated for impairment based on a defined dollar threshold for commercial real estate, commercial and industrial and real estate construction loans, while all residential real estate and consumer impaired loans are individually evaluated for impairment.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the discounted expected future cash flows or at the fair value of collateral if repayment is collateral dependent. Impaired loans which do not meet the criteria to be evaluated individually are evaluated in homogeneous pools of loans with similar risk characteristics.

The allowance for our business loans, which includes commercial and industrial, commercial real estate and real estate construction loans, that are not individually evaluated for impairment begins with a process of estimating the probable incurred losses in the portfolio. These estimates are established based on our internal credit risk ratings and historical loss data. Internal credit risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by senior management, at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan. As our operating history is limited and we are growing rapidly, the historical loss estimates for loans are based primarily on the actual historical loss experienced by all banks in our markets of Michigan, Ohio, Indiana and Wisconsin combined with a small factor representing our own loss history from the same time period.  These estimates are established by loan type including commercial and industrial, commercial real estate and real estate construction, and further segregated by region, including Michigan, Ohio, Indiana and Wisconsin, where applicable. In addition, consideration is given to borrower rating migration experience and trends, industry concentrations and conditions, changes in collateral values of properties securing loans and trends with respect to past due and nonaccrual amounts. Given our limited operating history, the estimate of losses for single family residential and consumer loans which are not individually evaluated is also based primarily on historical loss rates experienced in the respective loan classes by all banks in Michigan, Ohio, Indiana and Wisconsin. This estimate is also adjusted to give consideration to borrower rating migration experience and trends, changes in collateral values of properties securing loans and trends with respect to past due and nonaccrual amounts.

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The following tables present, by loan type, the changes in the allowance for loan losses on both uncovered and covered loans for the periods presented.

Analysis of the Allowance for Loan Losses — Uncovered

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2014			2013			2014			2013
Balance at beginning of period	$	24,360		$	13,974		$	17,746		$	10,945
Loan charge-offs:
Residential real estate	(1,597		)	(2,314		)	(4,414		)	(5,085		)
Commercial real estate	(1,783		)	(772		)	(6,612		)	(1,561		)
Commercial and industrial	(826		)	(623		)	(1,452		)	(926		)
Real estate construction	(210		)	(28		)	(319		)	(96		)
Consumer	(55		)	(266		)	(179		)	(505		)
Total loan charge-offs	(4,471		)	(4,003		)	(12,976		)	(8,173		)
Recoveries of loans previously charged-off:
Residential real estate	800			1,906			2,100			2,400
Commercial real estate	1,017			185			3,501			570
Commercial and industrial	79			129			680			184
Real estate construction	—			170			964			195
Consumer	323			407			450			548
Total loan recoveries	2,219			2,797			7,695			3,897
Net charge-offs	(2,252		)	(1,206		)	(5,281		)	(4,276		)
Provision for loan losses	7,784			2,852			17,427			8,951
Balance at end of period	$	29,892		$	15,620		$	29,892		$	15,620
Allowance for loan losses as a percentage of total uncovered loans at period end	0.82		%	0.67		%	0.82		%	0.67		%
Net loan charge-offs on noncovered loans as a percentage of average uncovered loans	0.26		%	0.21		%	0.22		%	0.27		%

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Analysis of the Allowance for Loan Losses — Covered

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2014			2013			2014			2013
Balance at beginning of period	$	32,743		$	46,312		$	40,381		$	51,473
Loan charge-offs:
Residential real estate	(371		)	(963		)	(1,646		)	(2,183		)
Commercial real estate	(3,106		)	(2,451		)	(6,301		)	(8,291		)
Commercial and industrial	(565		)	(2,112		)	(3,092		)	(3,818		)
Real estate construction	(219		)	(803		)	(1,223		)	(1,613		)
Consumer	(71		)	(85		)	(148		)	(179		)
Total loan charge-offs	(4,332		)	(6,414		)	(12,410		)	(16,084		)
Recoveries of loans previously charged-off:
Residential real estate	558			373			1,666			1,102
Commercial real estate	1,585			1,804			7,500			8,882
Commercial and industrial	1,067			569			3,408			2,782
Real estate construction	352			543			1,069			1,227
Consumer	70			113			248			294
Total loan recoveries	3,632			3,402			13,891			14,287
Net (charge-offs) recoveries	(700		)	(3,012		)	1,481			(1,797		)
Provision (benefit) for loan losses	(6,275		)	(727		)	(16,094		)	(7,103		)
Balance at end of period	$	25,768		$	42,573		$	25,768		$	42,573
Allowance for loan losses as a percentage of total covered loans at period end	6.38		%	7.62		%	6.38		%	7.62		%
Net loan charge-offs (recoveries) on covered loans as a percentage of average covered loans	0.64		%	2.07		%	-0.41		%	0.34		%

Our uncovered allowance for loan losses was $29.9 million, or 0.82% of uncovered loans, at September 30, 2014, compared to $17.7 million, or 0.72% of uncovered loans, at December 31, 2013.  The $12.2 million increase in the uncovered allowance for loan losses during the nine months ended September 30, 2014 was primarily due to additional provision for organic loan growth along with allowance resulting from our quarterly re-estimation of expected cash flows for our uncovered purchased credit impaired loans, partially offset by an improvement in historical loss factors.

The covered allowance for loan losses was $25.8 million, or 6.38% of covered loans, at September 30, 2014, compared to $40.4 million, or 7.62% of total covered loans, at December 31, 2013.  The $14.6 million decrease from December 31, 2013 to September 30, 2014 was primarily driven by payments received on covered loans previously carrying an allowance for loan loss, partially offset by the additional allowance resulting from our quarterly re-estimation of expected cash flows for certain of our covered purchased credit impaired loans.

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The following tables present, by loan type, the allocation of the allowance for loan losses on both uncovered and covered loans for the periods presented.

Allocation of the Allowance for Loan Losses — Uncovered

	September 30, 2014
	Accounted for under ASC 310-30						Excluded from ASC 310-30 accounting
(Dollars in thousands)	Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans		Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans
Balance at end of period applicable to:
Residential real estate	$	5,246	2.09	%	51.5	%	$	5,650	0.48	%	37.5	%
Commercial real estate	5,935		2.87		42.6		4,321		0.43		32.0
Commercial and industrial	515		3.01		3.5		6,241		0.81		24.6
Real estate construction	846		9.71		1.8		520		0.55		3.0
Consumer	145		5.15		0.6		473		0.52		2.9
Total uncovered loans	$	12,687	2.61	%	100.0	%	$	17,205	0.55	%	100.0	%

(1) Allocated allowance as a percentage of related loans outstanding.

	December 31, 2013
	Accounted for under ASC 310-30						Excluded from ASC 310-30 accounting
(Dollars in thousands)	Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans		Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans
Balance at end of period applicable to:
Residential real estate	$	3,088	1.22	%	69.9	%	$	4,620	0.56	%	39.4	%
Commercial real estate	1,405		1.43		27.1		2,862		0.44		31.1
Commercial and industrial	161		2.69		1.7		3,243		0.74		20.9
Real estate construction	2		0.10		0.5		2,025		1.16		8.3
Consumer	115		3.96		0.8		225		3.29		0.3
Total uncovered loans	$	4,771	1.32	%	100.0	%	$	12,975	0.61	%	100.0	%

(1) Allocated allowance as a percentage of related loans outstanding.

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Allocation of the Allowance for Loan Losses — Covered

	September 30, 2014						December 31, 2013
(Dollars in thousands)	Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans		Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans
Balance at end of period applicable to:
Residential real estate	$	4,087	3.61	%	28.0	%	$	4,696	3.81	%	23.3	%
Commercial real estate	16,563		7.55		54.4		26,394		8.82		56.5
Commercial and industrial	3,910		8.27		11.7		7,227		9.21		14.8
Real estate construction	1,152		8.39		3.4		1,984		11.52		3.2
Consumer	56		0.56		2.5		80		0.69		2.2
Total uncovered loans	$	25,768	6.38	%	100.0	%	$	40,381	7.62	%	100.0	%

(1) Allocated allowance as a percentage of related loans outstanding.

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Summary of Impaired Assets and Past Due Loans

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Uncovered
Nonperforming troubled debt restructurings
Residential real estate	$	2,284	$	2,469
Commercial real estate	3,122		3,581
Commercial and industrial	135		415
Consumer	84		3
Total nonperforming troubled debt restructurings	5,625		6,468
Nonaccrual loans other than nonperforming troubled debt restructurings
Residential real estate	$	13,449	$	12,946
Commercial real estate	9,456		2,010
Commercial and industrial	14,339		2,266
Real estate construction	253		510
Consumer	161		97
Total nonaccrual loans other than nonperforming troubled debt restructurings	37,658		17,829
Total nonaccrual loans	43,283		24,297
Other real estate (1)	32,022		17,046
Total nonperforming assets	75,305		41,343
Performing troubled debt restructurings
Residential real estate	1,802		328
Commercial real estate	2,961		1,637
Commercial and industrial	652		1,367
Real estate construction	92		90
Consumer	56		30
Total performing troubled debt restructurings	5,563		3,452
Total uncovered impaired assets	$	80,868	$	44,795
Loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	595	$	539

(1) Excludes closed branches and operating facilities.

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	September 30,		December 31,
(Dollars in thousands)	2014		2013
Covered
Nonperforming troubled debt restructurings
Residential real estate	$	1,304	$	900
Commercial real estate	4,144		6,561
Commercial and industrial	2,438		3,052
Real estate construction	614		926
Consumer	42		25
Total nonperforming troubled debt restructurings	8,542		11,464
Nonaccrual loans other than nonperforming troubled debt restructurings
Residential real estate	$	433	$	88
Commercial real estate	1,313		1,563
Commercial and industrial	1,653		4,149
Real estate construction	441		446
Consumer	—		6
Total nonaccrual loans other than nonperforming troubled debt restructurings	3,840		6,252
Total nonaccrual loans	12,382		17,716
Other real estate	11,766		11,571
Total nonperforming assets	24,148		29,287
Performing troubled debt restructurings
Residential real estate	2,860		2,691
Commercial real estate	14,915		14,391
Commercial and industrial	2,119		3,802
Real estate construction	108		163
Total performing troubled debt restructurings	20,002		21,047
Total covered impaired assets	$	44,150	$	50,334
Loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	—	$	—

Nonperforming assets consist of nonaccrual loans and other real estate owned excluding closed branches and operating facilities. We do not consider performing TDRs to be nonperforming assets. The level of nonaccrual loans is an important element in assessing asset quality. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. Generally, loans are placed on nonaccrual status due to the continued failure by the borrower to adhere to contractual payment terms coupled with other pertinent factors, such as insufficient collateral value.

Purchased credit impaired loans accounted for under ASC 310-30 are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the quarterly re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments.

Total nonperforming assets were $99.5 million as of September 30, 2014, compared to $70.6 million as of December 31, 2013.  The $28.9 million increase was primarily due to an increase in uncovered nonaccrual loans of $18.9 million and a net increase in uncovered other real estate of $15.0 million, which included the January 1, 2014 addition of $30.9 million of uncovered other real estate owned related to our acquisition of Talmer West Bank on January 1, 2014.  The increase in uncovered nonaccrual loans was primarily due to a set of interrelated loans totaling $12.0 million that were moved to nonaccrual status due to doubtful collection of full principal and interest.

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FDIC Indemnification Asset and Receivable

In connection with our FDIC-assisted acquisitions, we entered into loss share agreements with the FDIC.  At each acquisition date, we account for amounts receivable from the FDIC under the loss share agreements as an indemnification asset. Subsequent to initial recognition, the FDIC indemnification asset is reviewed quarterly and adjusted for any changes in expected cash flows. These adjustments are measured on the same basis as the related covered assets.  A decline in expected cash flows on covered loans is referred to as impairment and recorded as provision for loan losses, resulting in an increase to the allowance for loan losses on covered loans. Estimated reimbursements due from the FDIC under loss share agreements related to any declines in expected cash flows are recorded as noninterest income in “FDIC loss sharing income” in our consolidated statements of income and result in an increase to the FDIC indemnification asset in the same period.  An improvement in expected cash flows on covered loans, once any previously recorded impairment is recaptured, is recognized prospectively as an upward adjustment to the yield on the related loan and a downward adjustment to the yield on the FDIC indemnification asset. As such, overall improvements in expected cash flows on covered loans can result in a negative yield on the FDIC indemnification asset, which is recorded in “interest income” in our consolidated statements of income, while increases to the FDIC indemnification asset are recorded as adjustments to noninterest income in “FDIC loss sharing income” in our consolidated statements of income.  When covered loans payoff sooner than expected, any remaining FDIC indemnification asset is reviewed and may result in a direct write off as an adjustment to noninterest income in “Accelerated discount on acquired loans” in our consolidated statements of income. The FDIC indemnification asset is also reduced for claims submitted to the FDIC for reimbursement.  We have established a FDIC receivable which represents claims submitted to the FDIC for reimbursement for which we expect to receive payment within 90 days.

Our loss share agreements for CF Bancorp, First Banking Center and Peoples State Bank include provisions where a clawback payment, calculated using formulas included within the agreements, is to be made to the FDIC ten years and 45 days following the acquisition in the event actual losses fail to reach stated levels.  As of September 30, 2014, the estimated FDIC clawback liability totaled $25.7 million, including $21.5 million and $4.2 million related to the CF Bancorp and First Banking Center acquisitions, respectively.

The following table summarizes the activity related to the FDIC indemnification asset and the FDIC receivable for the periods indicated.

	For the three months ended September 30, 2014						For the nine months ended September 30, 2014
(Dollars in thousands)	FDIC Indemnification Asset			FDIC Receivable			FDIC Indemnification Asset			FDIC Receivable
Balance at beginning of period	$	102,694		$	7,198		$	131,861		$	7,783
Accretion	(6,663		)	—			(18,887		)	—
Sales and write-downs of other real estate owned (covered)	(88		)	233			(841		)	(14		)
Net effect of change in allowance on covered assets (1)	(5,484		)	—			(13,639		)	—
Reimbursements requested from FDIC (reclassification to FDIC receivable)	(8,018		)	8,018			(16,053		)	16,053
Decrease due to recoveries net of additional claimable expenses incurred (2)	—			(269		)	—			(4,588		)
Claim payments received from the FDIC	—			(2,307		)	—			(6,361		)
Balance at end of period	$	82,441		$	12,873		$	82,441		$	12,873

(1) Primarily includes adjustments for fully claimed and exited loans and the results of remeasurement of expected cash flows under ASC 310-30 accounting.

(2) Includes expenses associated with maintaining the underlying properties and legal fees.

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	For the three months ended September 30, 2013						For the nine months ended September 30, 2013
(Dollars in thousands)	FDIC Indemnification Asset			FDIC Receivable			FDIC Indemnification Asset			FDIC Receivable
Balance at beginning of period	$	171,956		$	17,573		$	226,356		$	17,999
Accretion	(6,032		)	—			(21,088		)	—
Sales and write-downs of other real estate owned (covered)	(1,070		)	861			(3,388		)	2,288
Net effect of change in allowance on covered assets (1)	(8,179		)	—			(29,052		)	—
Reimbursements requested from FDIC (reclassification to FDIC receivable)	(8,350		)	8,350			(24,503		)	24,503
Decrease due to additional claimable expenses incurred net of recoveries (2)	—			(2,713		)	—			(2,326		)
Claim payments received from the FDIC	—			(10,541		)	—			(28,934		)
Balance at end of period	$	148,325		$	13,530		$	148,325		$	13,530

(1) Primarily includes adjustments for fully claimed and exited loans and the results of remeasurement of expected cash flows under ASC 310-30 accounting.

(2) Includes expenses associated with maintaining the underlying properties and legal fees.

Securities Available-for-Sale

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Securities available-for-sale:
U.S. government sponsored agency obligations	$	105,690	$	98,237
Obligations of state and political subdivisions:
Taxable	397		396
Tax exempt	220,530		182,000
Small Business Administration (SBA) Pools	35,332		42,426
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	299,605		218,922
Privately issued	9,959		4,446
Privately issued commercial mortgage backed securities	5,135		5,147
Corporate debt securities:
Senior debt	39,613		43,845
Subordinated debt	18,228		24,175
Equity securities	—		489
Total securities available-for-sale	$	734,489	$	620,083

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for both normal operations and potential acquisitions while providing an additional source of revenue.  The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral. At September 30, 2014, total securities available-for-sale were $734.5 million, or 12.79% of total assets, compared to $620.1 million, or 13.64% of total assets, at December 31, 2013.  The $114.4 million increase from December 31, 2013 to September 30, 2014, primarily reflected increases in a diverse mix of investments including residential mortgage-backed securities, obligations of state and political subdivisions and U.S. government sponsored agency obligations which reflect management’s plan to more fully

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deploy excess liquidity, partially offset by a decrease in corporate debt securities.  Securities with a carrying value of $423.1 million and $264.6 million were pledged at September 30, 2014 and December 31, 2013, respectively, to secure borrowings and deposits.

The following tables show contractual maturities and yields for the securities available-for-sale portfolio at September 30, 2014 and December 31, 2013.

	Maturity as of September 30, 2014
	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
(Dollars in thousands)	Cost		Yield (1)		Cost		Yield (1)		Cost		Yield (1)		Cost		Yield (1)
Securities available-for-sale:
U.S. government sponsored agency obligations (1)	$	—	—	%	$	10,000	1.65	%	$	39,071	2.13	%	$	56,735	1.19	%
Obligations of state and political subdivisions:
Taxable	—		—		397		6.19		—		—		—		—
Tax exempt (2)	77		2.28		36,996		3.98		122,640		4.34		57,958		4.79
SBA Pools (3) (4)	—		—		1,715		0.92		33,631		0.86		—		—
Residential mortgage-backed securities (3):
Issued and/or guaranteed by U.S. government agencies or sponsored enterprises	7,682		2.92		230,970		2.43		60,939		2.42		—		—
Privately issued (1)	798		4.43		1,026		1.51		8,160		3.16		—		—
Commercial mortgage-backed securities (3)	—		—		5,141		2.19		—		—		—		—
Corporate debt securities (5)	1,755		1.54		36,837		1.90		4,000		4.28		14,750		2.95
Total securities available-for-sale	$	10,312	2.80	%	$	323,082	2.52	%	$	268,441	3.11	%	$	129,443	3.00	%

(1) Average yields assume a yield to call approach where embedded call options exist, such as in certain callable U.S. government sponsored agency obligations and non-agency CMO’s. $66.7 million of U.S. government sponsored agency obligations maturing beyond 5 years contain step-up coupon structures which, if were not to be called prior to stated maturities, would positively impact average yields for balances maturing in the five-to-ten years bucket and after ten years bucket by 29 basis points and 204 basis points, respectively, or resulting in average yields of 2.41% and 3.22%, respectively.

(2) Average yields on tax-exempt obligations have been computed on a tax equivalent basis, based on a 35% federal tax rate.

(3) Maturity distributions for SBA pools, residential mortgage-backed securities and commercial mortgage backed securities are based on estimated average lives.

(4) All indicated balances in the one-to-five years bucket and five-to-ten years bucket encompass floating rate holdings indexed to Prime, which are contractually adjustable on a quarterly basis, in which the current September 30, 2014 indexed coupon rates are assumed to remain constant until maturity.

(5) Average yields on corporate debt securities in the one-to-five year maturity bucket and after ten year maturity bucket includes yields on $5.9 million and $11.8 million, respectively, of floating rate holdings indexed to 3-month LIBOR, in which the current September 30, 2014 indexed coupon rates are assumed to remain constant until maturity.

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	Maturity as of December 31, 2013
	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
(Dollars in thousands)	Cost		Yield (1)		Cost		Yield (1)		Cost		Yield (1)		Cost		Yield (1)
Securities available-for-sale (2):
U.S. government sponsored agency obligations (1)	$	—	—	%	$	—	—	%	$	62,606	1.40	%	$	39,991	1.09	%
Obligations of state and political subdivisions:
Taxable (1)	—		—		—		—		397		6.19		—		—
Tax-exempt (1) (3)	2,823		2.78		20,500		3.54		116,682		3.63		44,345		3.59
SBA Pools (4)(5)	—		—		—		—		42,956		1.09		—		—
Residential mortgage-backed securities (5):
Issued and/or guaranteed by U.S. government agencies or sponsored enterprises	7,356		3.10		134,132		2.23		82,030		2.18		—		—
Privately issued (1)	2,905		3.25		1,548		3.93		—		—		—		—
Commercial mortgage-backed securities (4)	—		—		5,181		2.19		—		—		—		—
Corporate debt securities (6)	—		—		42,635		1.52		14,158		2.29		11,640		2.24
Total securities available-for-sale	$	13,084	3.06	%	$	203,996	2.20	%	$	318,829	2.42	%	$	95,976	2.39	%

(1)  Average yields assume a yield to worst call approach where embedded call options exist, such as in certain callable U.S. government sponsored agency obligations, obligations of state and political subdivisions and non-agency CMO’s.  $77.8 million of U.S. government sponsored agency obligations maturing beyond 5 years contain step-up coupon structures which, if were not to be called prior to stated maturities, would positively impact average yields for balances maturing in the five-to-ten years bucket and after ten years bucket by 126 basis points and 201 basis points, respectively, or resulting in average yields of 2.66% and 3.10%, respectively.

(2) This table excludes a mutual fund holding in the CRA Fund.

(3) Average yields on tax-exempt obligations have been computed on a tax equivalent basis, based on a 35% federal tax rate.

(4) Maturity distributions for SBA pools, residential mortgage-backed securities and commercial mortgage-backed securities are based on estimated average lives.  

(5) $35.0 million of the balances in the five-to-ten years bucket encompass floating rate holdings indexed to Prime, which are contractually adjustable on a quarterly basis, in which the current December 31, 2013 indexed coupon rates are assumed to remain constant until maturity.

(6) Average yields on corporate debt securities in the one-to-five year maturity bucket and after ten year maturity bucket includes yields on $20.7 million and $11.6 million, respectively, of floating rate holdings indexed to 3-month LIBOR, in which the current December 31, 2013 indexed coupon rates are assumed to remain constant until maturity.

Loan servicing rights

Loan servicing rights are created as a result of the purchase of mortgage servicing rights and our mortgage banking origination activities, the purchase and origination of agricultural servicing rights and the origination and purchase of commercial real estate servicing rights. Loans serviced for others are not reported as assets in our consolidated balance sheets.  As of September 30, 2014, we serviced loans with an aggregate outstanding principal balance of $7.3 billion.

Total loan servicing rights were $74.4 million as of September 30, 2014, compared to $78.6 million as of December 31, 2013.  The $4.2 million decrease was due to a $6.5 million change in the fair value of loan servicing rights from December 31, 2013 to September 30, 2014 and $4.5 million of reduced fair value due to loans paid off during the period, partially offset by $6.8 million of loan servicing rights added to the portfolio during the nine months ended September 30, 2014.

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Deposits

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Noninterest-bearing demand deposits	$	908,343	$	779,379
Interest-bearing demand deposits	673,336		598,281
Money market and savings deposits	1,173,697		1,215,864
Time deposits	1,256,981		927,313
Other brokered funds	473,240		80,000
Total deposits	$	4,485,597	$	3,600,837

Total deposits were $4.5 billion at September 30, 2014 and $3.6 billion at December 31, 2013, representing 89.76% and 91.62% of total liabilities at each period end, respectively.  The fair value of deposits acquired in our acquisition of Talmer West Bank totaled $857.8 million consisting of time deposits of $407.2 million, noninterest-bearing deposits of $175.1 million, money market and savings deposits of $166.0 million, and interest-bearing deposits of $109.5 million.  Since the acquisition of Talmer West Bank, there has been $416.4 million of deposit growth, partially offset by $389.5 million of deposits sold in our Wisconsin and New Mexico branch office sales.  The growth in deposits is primarily due to increases of $393.2 million in other brokered funds, $52.5 million in interest —bearing demand deposits and $39.3 million in noninterest-bearing demand deposits, partially offset by a decrease in money market and savings deposits of $66.1 million.  Our interest-bearing deposit costs were 27 basis points and 30 basis points for the nine months ended September 30, 2014 and 2013, respectively.

The following table shows the contractual maturity of time deposits, including CDARs and IRA deposits and other brokered funds, of $100 thousand and over that were outstanding at September 30, 2014 and December 31, 2013.

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Maturing in
3 months or less	$	236,540	$	103,297
3 months to 6 months	114,882		88,492
6 months to 1 year	213,591		82,517
1 year or greater	157,660		115,508
Total	$	722,673	$	389,814

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Borrowings

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Short-term borrowings:
Securities sold under agreements to repurchase	$	80,573	$	36,876
FHLB advances	70,000		—
Holding company line of credit	—		35,000
Total short-term borrowings	150,573		71,876
Long-term debt:
FHLB advances (1)	217,466		130,368
Securities sold under agreements to repurchase (2)	56,853		58,079
Subordinated notes related to trust preferred securities (3)	10,690		10,590
Total long-term debt	285,009		199,037
Total short-term borrowings and long-term debt:	$	435,582	$	270,913

(1) The September 30, 2014 balance includes advances payable of $210.2 million and purchase accounting premiums of $7.3 million. The December 31, 2013 balance includes advances payable of $121.2 million and purchase accounting premiums of $9.2 million.

(2) The September 30, 2014 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $6.9 million. The December 31, 2013 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $8.1 million.

(3) The September 30, 2014 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.3 million, respectively.  The December 31, 2013 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.4 million, respectively.

Total short-term borrowings and long-term debt outstanding at September 30, 2014 was $435.6 million, an increase of $164.7 million from $270.9 million at December 31, 2013.  The increase in total borrowings was primarily due to the net additions of $157.2 million in FHLB advances and $42.5 million in securities sold under agreements to repurchase, partially offset by the repayment of our $35.0 million Holding company line of credit.

Total debt was collateralized by $2.1 billion of commercial and mortgage loans, mortgage-backed securities and bonds at September 30, 2014, compared to $949.6 million of commercial and mortgage loans, mortgage-backed securities and bonds at December 31, 2013.  See the “Contractual Obligations” section of this financial review for maturity information.

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Capital Resources

The following table summarizes the changes in our shareholders’ equity for the periods indicated:

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	2014			2013		2014			2013
Balance at beginning of period	$	727,945		$	595,849	$	617,015		$	520,743
Cumulative effect adjustment of change in accounting policy to beginning retained earnings	—			—		—			31
Net income	19,515			10,544		78,348			86,005
Other comprehensive income (loss)	(146		)	193		10,083			(9,283		)
Stock based compensation expense	343			245		798			9,335
Issuance of common shares	(301		)	—		41,112			—
Cash dividends paid on common stock ($0.01 per share)	(704		)	—		(704		)	—
Balance at end of period	$	746,652		$	606,831	$	746,652		$	606,831

On January 1, 2014, we purchased 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.  The purchase price consisted of 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 Capitol 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 us.

Immediately prior to our 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.  In connection with the acquisition, we contributed approximately $79.5 million of additional capital to Talmer West Bank in order to recapitalize the bank.  Following the acquisition, an additional $20.0 million of capital was infused into Talmer West Bank to ensure capital requirements continued to be met.  In order to support the acquisition and recapitalization of Talmer West Bank, Talmer Bancorp, Inc. borrowed $35.0 million under a senior unsecured line of credit. We used a portion of the net proceeds from our initial public offering that closed on February 14, 2014, to repay the $35.0 million senior unsecured line of credit, including accrued and unpaid interest.

On February 14, 2014, we completed the initial public offering of 15,555,555 shares of Class A common stock for $13 per share.  Of the 15,555,555 shares sold, 3,703,703 shares were sold by the Company and 11,851,852 shares were sold by certain selling shareholders.  In addition, on February 21, 2014, the selling shareholders sold an additional 2,333,333 shares of Class A common stock to cover the exercise of the underwriters’ over-allotment option.  We received net proceeds of $42.0 million from the offering, after deducting the underwriting discounts and commissions and estimated offering expenses.  The Company did not receive any proceeds from the sale of shares by the selling shareholders.

We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize shareholder value. We assess capital adequacy against the risk inherent in our

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balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.

The capital ratios of Talmer West Bank at September 30, 2014 exceed the total capital (to risk-weighted assets) ratio of at least 12.0% and a Tier 1 capital (to adjusted total assets) ratio of at least 9.0% as prescribed in the Consent Order issued by the FDIC and the Michigan Department of Insurance and Financial Services on April 5, 2010.  Notwithstanding its capital levels, Talmer West Bank will not be categorized as well capitalized while it is subject to the Consent Order.

Our capital ratios exceeded the well capitalized regulatory requirements as follows:

	Well Capitalized Regulatory Requirement	Capital Ratio
September 30, 2014
Total risk-based capital
Consolidated	N/A	16.8	%
Talmer Bank and Trust	10.0	16.7
Talmer West Bank (1)	N/A	18.5
Tier 1 risk-based capital
Consolidated	N/A	15.6
Talmer Bank and Trust	6.0	15.4
Talmer West Bank (1)	N/A	17.7
Tier 1 leverage ratio
Consolidated	N/A	11.5
Talmer Bank and Trust	5.0	11.5
Talmer West Bank (1)	N/A	11.6
December 31, 2013
Total risk-based capital
Consolidated	N/A	19.2
Talmer Bank and Trust	10.0	18.4
First Place Bank (2)	N/A	15.9
Tier 1 risk-based capital
Consolidated	N/A	18.3
Talmer Bank and Trust	6.0	17.1
First Place Bank (2)	N/A	15.3
Tier 1 leverage ratio
Consolidated	N/A	12.2
Talmer Bank and Trust	5.0	10.3
First Place Bank (2)	N/A	11.7

(1) Notwithstanding its capital levels, Talmer West Bank will not be categorized as well capitalized while it is subject to the Consent Order.

(2) Notwithstanding its capital levels, First Place Bank was not categorized as well capitalized while it was subject to the Cease and Desist Order.  On February 10, 2014, First Place Bank was merged with and into Talmer Bank and Trust and the Cease and Desist Order had no further force or effect. 

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A cash dividend on our Class A common stock of $0.01 per share was declared on November 4, 2014.  The dividend will be paid on November 28, 2014, to our Class A common shareholders of record as of November 17, 2014.

Off-Balance Sheet Arrangements

In the normal course of business, we offer a variety of financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit.

Our exposure to credit loss, in the event of nonperformance by the counterparty to the financial instrument, is represented by the contractual amounts of those instruments. The same credit policies are used in making commitments and conditional obligations as are used for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on management’s credit evaluation of the counterparty. The collateral held varies, but may include securities, real estate, inventory, plant, or equipment. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are included in commitments to extend credit. These lines of credit are generally uncollateralized, usually do not contain a specified maturity date and may be drawn upon only to the total extent to which we are committed.

Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Our portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to us arises from our obligation to make payment in the event of the customers’ contractual default to produce the contracted good or service to a third party. Management conducts regular reviews of these instruments on an individual customer basis and does not anticipate any material losses as a result of these letters of credit.

We maintain an allowance to cover probable losses inherent in our financial instruments with off-balance sheet risk.  At September 30, 2014 and December 31, 2013, the allowance for off-balance sheet risk was $498 thousand and $1.0 million, respectively, and included in “Other liabilities” on our consolidated balance sheets.

A summary of the contractual amounts of our exposure to off-balance sheet risk is as follows.

	September 30, 2014						December 31, 2013
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	591,410	$	542,898	$	1,134,308	$	523,666	$	216,473	$	740,139
Standby letters of credit	69,169		4,037		73,206		68,452		561		69,013
Total commitments	$	660,579	$	546,935	$	1,207,514	$	592,118	$	217,034	$	809,152

We enter into forward commitments for the future delivery of mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitments to fund the loans.  These commitments to fund mortgage loans (interest rate lock commitments) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.

We additionally enter into interest rate derivatives to provide a service to certain qualifying customers to help facilitate their respective risk management strategies (“customer-initiated derivatives”) and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.  We generally take offsetting positions with dealer counterparts to mitigate the inherent risk.  The agreements with our derivative counterparties contain a provision where if we default on any of our indebtedness, then we could also be declared in default on our derivative

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obligations.  In addition, these agreements contain a provision where if we fail to maintain our status as a well-capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements.  As of September 30, 2014 the fair value of derivatives in a net liability position, which includes accrued interest, but excludes any adjustment for nonperformance risk, related to these agreements was $195 thousand.

The following table reflects the amount and fair value of our derivatives.

	September 30, 2014				December 31, 2013
(Dollars in thousands)	Notional Amount		Fair  Value		Notional Amount		Fair  Value
Included in “Other assets”:
Forward contracts related to mortgage loans to be delivered for sale	$	—	$	—	$	168,746	$	1,484
Interest rate lock commitments	77,078		1,429		67,685		1,146
Customer initiated derivatives	16,387		369		—		—
Total included in “Other assets”	$	93,465	$	1,798	$	236,431	$	2,630
Included in “Other liabilities”:
Forward contracts related to mortgage loans to be delivered for sale	$	167,795	$	166	$	—	$	—
Customer initiated derivatives	13,764		195		—		—
Total included in “Other liabilities”	$	181,559	$	361	$	—	$	—

Note 11, “Derivative Instruments,” to our consolidated financial statements includes additional information about these derivative contracts.

In connection with our mortgage banking loan sales, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards.  We may be required to repurchase individual loans and/or indemnify the purchaser against losses if the loan fails to meet established criteria.  Our estimated liability recorded in connection with these representations and warranties was $4.0 million and $4.8 million at September 30, 2014 and December 31, 2013, respectively.  The reserve at September 30, 2014 included $1.9 million for general allowances and $2.1 million for specific claims.  The liability for specific claims includes liability for the estimated likelihood of payment of the claims while the general allowance is developed using a model to estimate the unknown liability including inputs such as the loans sold by year, the number and dollar amount of claims to-date by year, the rate of claims being rescinded and the estimate of the amount of the loss as a percent of the loan balance.  During the three months ended September 30, 2014 and 2013, we paid $309 thousand and $1.2 million, respectively, in claims and recorded $309 thousand of provision expense and $192 thousand of provision benefit, respectively, to provide for a sufficient reserve in connection with these mortgage banking loan sales representations and warranties. During the nine months ended September 30, 2014 and 2013, we paid $2.0 million and $4.0 million, respectively, in claims and expensed $1.3 million and $1.7 million, respectively, to provide for a sufficient reserve in connection with these mortgage banking loan sales representations and warranties.

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Contractual Obligations

In the normal course of business, we have various outstanding contractual obligations that will require future cash outflows.  The following table represents the largest contractual obligations as of September 30, 2014.

(Dollars in thousands)	Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years
Future minimum lease payments (1)	$	36,380	$	6,664	$	11,036	$	8,659	$	10,021
FHLB borrowings	280,145		70,000		188,295		11,350		10,500
Securities sold under agreements to repurchase	130,573		80,573		40,000		—		10,000
Subordinated notes related to trust preferred securities	15,000		—		—		—		15,000
Total	$	462,098	$	157,237	$	239,331	$	20,009	$	45,521

(1) Contractual obligations include a reduction for sublease income totaling $734 thousand expected to be received in the following periods: $451 thousand (less than one year); $240 thousand (1-3 years); and $43 thousand (3-5 years).

Liquidity

Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures.  Liquidity is monitored and closely managed by our Asset and Liability Committee (“ALCO”), a group of senior officers from the finance, risk management, treasury, and lending areas.  It is ALCO’s responsibility to ensure we have the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for, quickly identified, and management has plans in place to respond. ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources.  In addition, we have implemented modeling software that projects cash flows from the balance sheet under a broad range of potential scenarios, including severe changes in the interest rate environment.

At September 30, 2014, we had liquidity on hand of $610.1 million, compared to $694.5 million at December 31, 2013.  Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered securities available-for-sale.

Each of our subsidiary banks are members of the FHLB, which provide short- and long-term funding to its members through advances collateralized by real estate-related assets and other select collateral, most typically in the form of U.S. government issued debt securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB.  As of September 30, 2014, we had $280.2 million of outstanding borrowings from the FHLB with remaining maturities ranging from the years 2014 to 2027.  We also maintain relationships with correspondent banks which could provide funds on short notice, if needed.  In addition, because Talmer Bank is “well capitalized,” it can accept wholesale deposits up to approximately $1.5 billion based on current policy limits. Management believes that we had adequate resources to fund all of our commitments as of September 30, 2014.

Item 3.  Quantitative And Qualitative Disclosures About Market Risk.

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates.  Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of our interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates.  ALCO oversees market risk management, monitoring risk

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measures, limits, and policy guidelines for managing the amount of interest-rate risk and its effect on net interest income and capital. Our Board of Directors approves policy limits with respect to interest rate risk.

Interest Rate Risk

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.

Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk.  Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact our assets and liabilities.  Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.

We regularly review our exposure to changes in interest rates.  Among the factors we consider are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods.  ALCO reviews, on at least a quarterly basis, our interest rate risk position.

The interest-rate risk position is measured and monitored at each bank subsidiary using net interest income simulation models and economic value of equity sensitivity analysis that capture both short-term and long-term interest-rate risk exposure. In addition, periodic Earnings at Risk analyses incorporate the expected change in the value of loan servicing rights and the net interest income simulation results.

Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.

The estimated impact on our net interest income as of September 30, 2014 and December 31, 2013, assuming immediate parallel moves in interest rates is presented in the table below. Simulation results for September 30, 2014 reflect the addition of Talmer West Bank.

	September 30, 2014				December 31, 2013
	Following 12 months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	2.3	%	4.6	%	4.7	%	24.4	%
+300 basis points	1.6		3.4		3.3		18.3
+200 basis points	0.9		2.3		2.1		12.3
+100 basis points	0.4		1.2		0.8		6.2
-100 basis points	(4.1	)	(5.3	)	(3.3	)	(5.5	)
-200 basis points	(9.3	)	(11.9	)	(7.2	)	(10.5	)
-300 basis points	(11.4	)	(14.2	)	(8.6	)	(12.2	)
-400 basis points	(12.2	)	(15.0	)	(9.2	)	(12.8	)

Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of our loan portfolio, investment portfolio, loan servicing rights, any hedge or derivative instruments, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The model includes the effects of off-balance sheet instruments such as interest rate swap derivatives. Due to the current low interest rate

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environment, we assumed that market interest rates would not fall below 0% for the scenarios that used the down 100, 200, 300 and 400 basis point parallel shifts in market interest rates. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of our equity.

Management strategies may impact future reporting periods, as our actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience, and the characteristics assumed, as well as changes in market conditions. Market based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.

We use economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Deposit premiums are based on external industry studies and utilizing historical experience.

The table below presents the change in our economic value of equity as of September 30, 2014 and December 31, 2013 assuming immediate parallel shifts in interest rates.  Simulation results for September 30, 2014 reflect the addition of Talmer West Bank in addition to a model adjustment based upon our own historical model which resulted in longer lives of our non-core deposits.

	September 30, 2014		December 31, 2013
+400 basis points	(21.4	)%	(33.8	)%
+300 basis points	(15.3	)	(24.2	)
+200 basis points	(8.8	)	(14.7	)
+100 basis points	(3.8	)	(6.4	)
-100 basis points	(0.1	)	2.6
-200 basis points	(0.2	)	7.1
-300 basis points	0.5		9.3
-400 basis points	1.1		9.4

Operational Risk

Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls, enterprise risk management, operating processes and employee awareness to assess the impact on earnings and capital and to improve the oversight of our operational risk.

Compliance Risk

Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from our failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice. Activities which may expose us to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the expansion of our banking center network and employment and tax matters.

Strategic and/or Reputation Risk

Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements that represent strategic and/or reputation risk is achieved through initiatives to help us better understand and report on various risks, including those related to the development of new products and business initiatives.

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Item 4.  Controls and Procedures.

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of September 30, 2014, the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during the period to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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PART II

Item 1.  Legal Proceedings.

From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

Item 1A.  Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

None.

Item 6.  Exhibits.

Exhibit No.	Description of Exhibit
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.1	Section 1350 Certifications
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2014 and 2013, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (vi) Notes to Consolidate Financial Statements.(1)

(1)Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TALMER BANCORP, INC.
November 14, 2014	By:	/s/ David T. Provost
		David T. Provost
		Chief Executive Officer
		(Principal Executive Officer)
November 14, 2014	By:	/s/ Dennis Klaeser
		Dennis Klaeser
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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