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 March 31, 2016

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 x	Accelerated filer o
Non-accelerated filer o  (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 May 4, 2016 was 67,086,519.

TABLE OF CONTENTS

		Page
Cautionary Note Regarding Forward-Looking Statements		1
PART I — FINANCIAL INFORMATION		2
ITEM 1.	Financial Statements (Unaudited)	2
	Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	3
	Consolidated Statements of Income for the three months ended March 31, 2016 and 2015	4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2016 and 2015	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	7
	Notes to Consolidated Statements	9
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	85
ITEM 4.	Controls and Procedures	87
PART II — OTHER INFORMATION		88
ITEM 1.	Legal Proceedings	88
ITEM 1A.	Risk Factors	89
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	89
ITEM 3.	Defaults Upon Senior Securities	89
ITEM 4.	Mine Safety Disclosures	89
ITEM 5.	Other Information	89
ITEM 6.	Exhibits	90

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 within the meaning of the federal securities laws. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements related to our proposed merger with Chemical Financial Corporation (“Chemical”), statements regarding managements expectations regarding tax credit carry forwards, the estimated life of core deposit intangibles, the impact of changes in interest rates on the fair value of loan servicing rights, anticipated losses related to letters of credit, as well as statements related to the anticipated effects on our results of operations and financial condition from expected developments or events, or business strategies, including anticipated internal growth.

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, but are not limited to, the following:

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

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

• the possibility that the previously announced merger with Chemical does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;

• the diversion of management time from core banking functions due to merger-related issues;

• potential difficulty in maintaining relationships with clients, employees or business partners as a result of our previously announced merger with Chemical;

• risks associated with income taxes including the potential for adverse adjustments and the inability to fully realize deferred tax benefits;

• fraud committed by third parties, including cybersecurity risks;

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

• costs or difficulties related to the integration of the banks we acquired may be greater than expected;

• restrictions or conditions imposed by our regulators on our operations 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, 2015, for a description of some of the important factors that may affect actual outcomes.

1

PART I

Item 1.  Financial Statements.

2

Talmer Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)	March 31, 2016			December 31, 2015
Assets
Cash and due from banks	$	88,727		$	74,734
Interest-bearing deposits with other banks	146,406			137,589
Federal funds sold and other short-term investments	128,682			175,000
Total cash and cash equivalents	363,815			387,323
Securities available-for-sale	946,543			890,770
Federal Home Loan Bank stock	29,621			29,621
Loans held for sale, at fair value	25,040			58,223
Loans:
Commercial real estate	1,616,801			1,568,097
Residential real estate (includes $24.4 million and $22.2 million respectively, measured at fair value) (1)	1,604,940			1,547,799
Commercial and industrial	1,279,402			1,257,406
Real estate construction	235,007			241,603
Consumer	187,586			191,795
Total loans	4,923,736			4,806,700
Less: Allowance for loan losses	(52,378		)	(53,953		)
Net total loans	4,871,358			4,752,747
Premises and equipment	42,446			43,570
Other real estate owned and repossessed assets	26,536			28,259
Loan servicing rights	51,348			58,113
Core deposit intangible	12,196			12,808
Goodwill	3,524			3,524
Company-owned life insurance	108,958			107,065
Income tax benefit	173,596			177,183
Other assets	58,708			46,684
Total assets	$	6,713,689		$	6,595,890
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	1,040,950		$	1,011,414
Interest-bearing demand deposits	896,179			849,599
Money market and savings deposits	1,274,534			1,314,909
Time deposits	1,719,111			1,609,895
Other brokered funds	222,024			228,764
Total deposits	5,152,798			5,014,581
Short-term borrowings	334,480			348,998
Long-term debt	399,476			464,057
Other liabilities	78,265			43,039
Total liabilities	5,965,019			5,870,675
Commitments and Contingencies (2)
Shareholders’ equity
Preferred stock - $1.00 par value
Authorized - 20,000,000 shares at 3/31/2016 and 12/31/2015
Issued and outstanding - 0 shares at 3/31/2016 and 12/31/2015	—			—
Common stock:
Class A Voting Common Stock - $1.00 par value
Authorized - 198,000,000 shares at 3/31/2016 and at 12/31/2015
Issued and outstanding - 66,844,244 shares at 3/31/2016 and 66,114,798 shares at 12/31/2015	66,844			66,115
Class B Non-Voting Common Stock - $1.00 par value
Authorized - 2,000,000 shares at 3/31/2016 and 12/31/2015
Issued and outstanding - 0 shares at 3/31/2016 and 12/31/2015	—			—
Additional paid-in-capital	319,207			316,571
Retained earnings	355,493			339,130
Accumulated other comprehensive income, net of tax	7,126			3,399
Total shareholders’ equity	748,670			725,215
Total liabilities and shareholders’ equity	$	6,713,689		$	6,595,890

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

(2) See Note 11.

See notes to Consolidated Financial Statements.

3

Talmer Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

	Three months ended March 31,
(Dollars in thousands, except per share data)	2016			2015
Interest income
Interest and fees on loans	$	56,360		$	59,938
Interest on investments
Taxable	3,240			2,323
Tax-exempt	1,991			1,615
Total interest on securities	5,231			3,938
Interest on interest-earning cash balances	184			86
Interest on federal funds and other short-term investments	468			165
Dividends on FHLB stock	312			245
FDIC indemnification asset	—			(9,250		)
Total interest income	62,555			55,122
Interest Expense
Interest-bearing demand deposits	401			290
Money market and savings deposits	667			471
Time deposits	3,114			1,827
Other brokered funds	618			623
Interest on short-term borrowings	657			79
Interest on long-term debt	1,000			800
Total interest expense	6,457			4,090
Net interest income	56,098			51,032
Provision (benefit) for loan losses	(1,111		)	1,993
Net interest income after provision for loan losses	57,209			49,039
Noninterest income
Deposit fee income	2,397			2,320
Mortgage banking and other loan fees	(3,880		)	(1,261		)
Net gain on sales of loans	5,238			8,618
Accelerated discount on acquired loans	5,052			8,198
Net gain (loss) on sales of securities	333			(107		)
Company-owned life insurance	750			740
FDIC loss share income	—			(1,068		)
Other income	3,734			3,990
Total noninterest income	13,624			21,430
Noninterest expense
Salary and employee benefits	25,813			29,212
Occupancy and equipment expense	6,007			7,666
Data processing fees	1,743			1,854
Professional service fees	3,290			3,543
Merger and acquisition expense	2,874			1,412
Marketing expense	1,529			1,095
Other employee expense	808			934
Insurance expense	1,550			1,530
FDIC loss share expense	—			949
Other expense	4,656			8,400
Total noninterest expense	48,270			56,595
Income before income taxes	22,563			13,874
Income tax provision	2,880			4,441
Net income	$	19,683		$	9,433
Earnings per common share:
Basic	$	0.30		$	0.13
Diluted	$	0.28		$	0.12
Average common shares outstanding - basic	65,636			70,216
Average common shares outstanding - diluted	69,706			75,103
Cash dividends declared on common stock	$	3,320		$	706
Cash dividends declared per common share	$	0.05		$	0.01

 See notes to Consolidated Financial Statements.

4

Talmer Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three months ended March 31,
(Dollars in thousands)	2016			2015
Net income	$	19,683		$	9,433
Other comprehensive income:
Unrealized holding gains on securities available-for-sale arising during the period	7,599			4,423
Reclassification adjustment for (gains) losses on realized income	(333		)	107
Tax effect	(2,543		)	(1,586		)
Net unrealized gains on securities available-for-sale, net of tax	4,723			2,944
Unrealized losses on interest rate swaps designated as cash flow hedges	(1,681		)	(325		)
Reclassification adjustment for losses included in net income	148			88
Tax effect	537			83
Net unrealized losses on interest rate swaps designated as cash flow hedges, net of tax	(996		)	(154		)
Other comprehensive income, net of tax	3,727			2,790
Total comprehensive income, net of tax	$	23,410		$	12,223

See notes to Consolidated Financial Statements.

5

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, 2014	70,532	$	70,532	$	405,436		$	281,789		$	3,850	$	761,607
Net income	—	—		—			9,433			—		9,433
Other comprehensive income	—	—		—			—			2,790		2,790
Stock-based compensation expense	—	—		351			—			—		351
Restricted stock awards	325	325		(325		)	—			—		—
Issuance of common shares, including tax benefit	81	81		185			—			—		266
Repurchase of warrants to purchase 2.5 million shares, at fair value	—	—		(19,892		)	—			—		(19,892		)
Cash dividends paid on common stock ($0.01 per share)	—	—		—			(706		)			(706		)
Balance at March 31, 2015	70,938	$	70,938	$	385,755		$	290,516		$	6,640	$	753,849
Balance at December 31, 2015	66,115	$	66,115	$	316,571		$	339,130		$	3,399	$	725,215
Net income	—	—		—			19,683			—		19,683
Other comprehensive income	—	—		—			—			3,727		3,727
Stock-based compensation expense	—	—		698			—			—		698
Restricted stock awards, including tax benefit	324	324		(324		)	—			—		—
Issuance of common shares, including tax benefit	405	405		2,262			—			—		2,667
Cash dividends paid on common stock ($0.05 per share)	—	—		—			(3,320		)	—		(3,320		)
Balance at March 31, 2016	66,844	$	66,844	$	319,207		$	355,493		$	7,126	$	748,670

See notes to Consolidated Financial Statements.

6

Talmer Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended March 31,
(Dollars in thousands)	2016			2015
Cash flows from operating activities
Net income	$	19,683		$	9,433
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,574			1,909
Amortization of core deposit intangibles	612			649
Stock-based compensation expense	698			351
Provision (benefit) for loan losses	(1,111		)	1,993
Originations of loans held for sale	(114,584		)	(293,643		)
Proceeds from sales of loans	150,640			325,939
Net gain from sales of loans	(5,238		)	(8,618		)
Net (gain) loss on sales of securities	(333		)	107
Valuation allowance and writedowns on other real estate and other repossessed assets	1,195			3,915
Valuation change in Company-owned life insurance	(779		)	(832		)
Valuation change in loan servicing rights	8,465			6,402
Additions to loan servicing rights	(1,700		)	(2,915		)
Net decrease in FDIC indemnification asset and receivable other than payments received	—			12,784
Net gain on sales of other real estate owned and repossessed assets	(1,491		)	(1,401		)
Net increase in accrued interest receivable and other assets	(5,985		)	(1,099		)
Net increase (decrease) in accrued expenses and other liabilities	33,693			(7,674		)
Net securities premium amortization	2,048			1,661
Deferred income tax benefit	(4,188		)	(5,315		)
Change in valuation allowance of deferred income tax asset	(270		)	—
Other, net	(475		)	(13		)
Net cash from operating activities	82,454			43,633
Cash flows from investing activities
Net increase in loans	(114,083		)	(38,238		)
Purchases of loans	(10,162		)	(30,793		)
Purchases of securities available-for-sale	(109,359		)	(30,928		)
New investments in Company-owned life insurance	(1,114		)	(591		)
Purchases of premises and equipment	(450		)	(1,130		)
Payments received from FDIC under loss sharing agreements	—			1,763
Proceeds from:
Maturities and redemptions of securities available-for-sale	44,160			53,523
Redemption of FHLB Stock	—			342
Sale of securities available-for-sale	14,977			24,615
Sale of loan servicing rights	—			12,702
Sale of loans	5,581			—
Sale of other real estate owned and repossessed assets	6,023			10,929
Sale of premises and equipment	—			1,145
Net cash provided from acquisition	—			810
Net cash from (used in) investing activities	(164,427		)	4,149
Cash flows from financing activities
Net increase in deposits	138,217			28,258
Draw on senior unsecured line of credit	7,500			20,000
Net increase in (repayment of) short-term borrowings	(22,018		)	61,004
Issuances of long-term FHLB advances	—			100,000
Repayments of long-term FHLB advances	(63,700		)	(35		)
Repayments on long-term sweep repurchase agreements	(412		)	(411		)
Repayments of subordinated debt	—			(3,500		)
Other changes in long-term debt	(469		)	(619		)
Repurchase of warrants to purchase 2.5 million shares, at fair value	—			(19,892		)
Issuance of common stock and restricted stock awards, including tax benefit	2,667			266
Cash dividends paid on common stock ($0.05 and $0.01 per share, respectively)	(3,320		)	(706		)
Net cash from financing activities	58,465			184,365
Net change in cash and cash equivalents	(23,508		)	232,147
Beginning cash and cash equivalents	387,323			253,736
Ending cash and cash equivalents	$	363,815		$	485,883
Supplemental disclosure of cash flow information:
Interest paid	$	6,717		$	4,038

7

Income taxes paid (received)	(172	)	5,662
Transfer from loans to other real estate owned and repossessed assets	4,134		6,191
Net transfer of loans held for sale to loans held for investment	(1,834	)	(3,219	)
Transfer from premises and equipment to other real estate owned	—		455
Non-cash transactions:
Increase in assets and liabilities of acquisitions:
Securities	—		34,022
FHLB stock	—		874
Uncovered loans	—		162,265
Premises and equipment	—		2,077
Company-owned life insurance	—		4,719
Other real estate owned and repossessed assets	—		1,260
Core deposit intangible	—		2,410
Other assets	—		6,462
Deposits	—		201,453
Long-term debt	—		13,086
Other liabilities	—		3,884

See notes to Consolidated Financial Statements.

8

TALMER BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

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 subsidiary 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, 2015.

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

In May 2014, the Financial Accounting Standards Board ("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.  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 GAAP and International Financial Reporting Standards and to streamline revenue recognition requirements in addition to expanding required revenue recognition disclosures. In March 2016, the FASB issued ASU 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)", ("ASU 2016-08"), which further clarifies ASU 2014-09 by providing implementation guidance on principal versus agent considerations. ASU 2016-08 does not change the core principal of ASU 2014-09, but is intended to improve the operations and understanding of principal versus agent considerations. In August 2015, the FASB issued ASU 2015-14, "Deferral of the Effective Date" ("ASU 2015-14"), which provides a one year deferral to the effective date, therefore, ASU 2014-09 is effective for public companies for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. As such, the Company will adopt ASU 2014-09 as of January 1, 2018. 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 January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which amends the accounting guidance related to the classification and measurement of financial instruments. While ASU 2016-01 retains many current requirements, it revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 requires entities to carry investments in equity securities at fair value through net income, with exceptions for investments that qualify for the equity method of accounting, investments resulting in investee consolidation, or investments in which the practicability exception to fair value measurement has been elected. The ASU also provides a new requirement to separately present in other comprehensive income the fair value change of instrument-specific credit risk, with exceptions to derivative liabilities which will continue to be presented in net income. ASU 2016-01 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. As such, the Company will adopt ASU 2016-01 as of January 1, 2018. Under the provision, the Company will be required to make a cumulative-effect adjustment to retained earnings as of the beginning of the year in which the guidance is effective. Exceptions exist for equity securities without readily determinable fair values and the use of the exit price to measure fair value for disclosure purposes, which will both be applied prospectively as of the date of adoption. The Company is currently evaluating the provisions of ASU 2016-01.

In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"), which improves the lease recognition process and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing agreements. In addition, the ASU defines a lease and simplifies a number of the requirements provided in the current lease model. ASU 2016-02 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As such, the Company will adopt ASU 2016-02 as of January 1, 2019. Under the provision, the Company will be required to recognize and measure leases at the

9

beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the provisions of ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which simplifies the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows. ASU 2016-09 is effective for public companies for annual periods, and interim periods within those annual periods beginning after December 15, 2016. As such, the Company will adopt ASU 2016-09 as of January 1, 2017. Under the provision, the Company is required to use varying transition methods for different amendments. Amendments relative to the timing of the recognition of excess tax benefits, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method as a cumulative-effect adjustment to retained earnings as of the date of adoption, while amendments that require excess tax benefits and tax deficiencies on the income statement should be applied prospectively. Amendments regarding the presentation of taxes paid on the statement of cash flows should be applied retrospectively, while entities may elect to apply amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective or retrospective transition method. The Company is currently evaluating the provision of ASU 2016-09.

Pending Merger: On January 26, 2016, the boards of directors of Chemical Financial Corporation (Nasdaq: CHFC), the holding company for Chemical Bank, and the Company announced the execution of a definitive agreement for Chemical Financial Corporation to partner with the Company in a cash and common stock merger transaction. Under the terms of the agreements, the Company will be merged with and into Chemical Financial Corporation, with Chemical Financial Corporation as the surviving corporation. The completion of the merger is subject to receipt of regulatory approvals and satisfaction of other customary closing conditions, including approval of both Chemical Financial Corporation's and the Company's shareholders.

2.  BUSINESS COMBINATIONS

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

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

The Company recorded $4.8 million in net deferred tax assets related to the acquisition.  Upon acquisition, FHC incurred an ownership change within the meaning of Section 382 of the Internal Revenue Code, but the acquisition did not result in built-in losses within the meaning of Section 382. At February 6, 2015, FHC had an estimated $1.7 million in gross federal net operating loss carry forwards expiring in 2030, 2032 and 2033 and $303 thousand in federal alternative minimum tax credits with an indefinite life.  As a result of the ownership change, the Company’s ability to benefit from the use of FHC’s pre-ownership change net operating loss and tax credit carry forwards will be limited to approximately $366 thousand per year.  No valuation allowance was established against the deferred tax assets associated with FHC’s pre-change net operating losses and tax credit carry forwards based on management’s estimate that none of the amounts will expire unused.

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

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(Dollars in thousands)
Consideration paid:
Cash	$	13,395
Fair value of identifiable assets acquired:
Cash and cash equivalents	14,205
Investment securities	34,022
Federal Home Loan Bank stock	874
Loans	162,265
Premises and equipment	2,077
Company-owned life insurance	4,719
Other real estate owned and repossessed assets	1,260
Core deposit intangible	2,410
Other assets	6,462
Total identifiable assets acquired	228,294
Fair value of liabilities assumed:
Deposits	201,453
Long-term debt	13,086
Other liabilities	3,884
Total liabilities assumed	218,423
Fair value of net identifiable assets acquired	9,871
Goodwill recognized in the acquisition	$	3,524

The FHC acquisition resulted in recognition of $3.5 million of goodwill which is the excess of the consideration paid over the fair value of net assets acquired, and is the result of expected operational synergies and other factors.

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

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

The Company accounts for purchased credit impaired loans in accordance with the provisions of ASC 310-30.  The cash flows expected to be collected on purchased loans are estimated based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments.  Purchased loans are considered purchased credit impaired loans 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.  Under ASC 310-30, interest income is recognized on purchased credit impaired loans through accretion of the difference between the carrying value of the loans and the expected cash flows.

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

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

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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	$	53,807
Contractual cash flows not expected to be collected (nonaccretable difference)	8,084
Expected cash flows	45,723
Interest component of expected cash flows (accretable yield)	5,268
Fair value at acquisition	$	40,455
Excluded from ASC 310-30 accounting:
Unpaid principal balance	$	124,538
Fair value discount	(2,728		)
Fair value at acquisition	121,810
Total fair value at acquisition	$	162,265

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

3.  FAIR VALUE

The fair value framework as detailed by FASB ASC Topic 820, “Fair Value Measurement” requires the categorization of assets and liabilities recorded at fair value into a three-level hierarchy based on the markets in which the assets and liabilities 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 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 assets and liabilities recorded at fair value, the description includes the level of the fair value hierarchy in which the assets or 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.

Investment securities:  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 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, 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.

Level 3 included an obligation of a political subdivision as of March 31, 2016 and December 31, 2015, representative of a security in less liquid markets requiring significant management assumptions when determining fair value. The fair value of this investment security represents less than one percent of the total available-for-sale securities at both March 31, 2016 and December 31, 2015.  The fair value of the political subdivision obligation has been determined to be equal to the carrying cost since the securities were acquired.  The issuer has continued to pay their obligation without fail and the Company has not received any information to question future payments.  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.

Investment securities classified as held-to-maturity are carried at amortized cost.  Due to limited liquidity of these securities, held-to-maturity securities are classified as Level 3.  The fair value of the held-to-maturity security is determined to be equal to the carrying value.  No credit related concerns have come to the Company’s attention; therefore, no 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 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 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

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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.  As of March 31, 2016, there was no premises and equipment considered impaired. Impaired premises and equipment at December 31, 2015 was recorded at fair value based on a recent appraisal through a valuation allowance.  The Company classifies impaired premises and equipment as nonrecurring Level 3.

Other real estate owned and repossessed assets: Other real estate owned and repossessed assets represent 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 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, the income approach and existing offers. 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 based on accounting election.  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 9, “Loan Servicing Rights”, for assumptions included in the valuation of loan servicing rights.

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Company-owned life insurance and deferred compensation plan liabilities: The life insurance policies are held 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 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 interest rate lock commitments and forward contracts related to mortgage loans to be delivered for sale as recurring Level 2.

Derivative instruments held or issued for risk management or 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 both March 31, 2016 and December 31, 2015 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 risk management interest rate swaps designated as cash flow hedges and customer-initiated derivatives 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.

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.

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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)
March 31, 2016
Securities available-for-sale:
U.S. government sponsored agency obligations	$	69,951	$	—	$	69,951	$	—
Obligations of state and political subdivisions:
Taxable	1,362		—		1,044		318
Tax-exempt	304,331		—		304,331		—
Small Business Administration (“SBA”) Pools	26,729		—		26,729		—
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	309,692		—		309,692		—
Privately issued	97,451		—		97,451		—
Privately issued commercial mortgage-backed securities	22,384		—		22,384		—
Corporate debt securities	114,643		—		114,643		—
Total securities available-for-sale	946,543		—		946,225		318
Loans measured at fair value:
Residential real estate	24,377		—		—		24,377
Loans held for sale	25,040		—		25,040		—
Loan servicing rights	51,348		—		—		51,348
Derivative assets:
Interest rate lock commitments	2,908		—		2,908		—
Customer-initiated derivatives	9,761		—		9,761		—
Total derivatives	12,669		—		12,669		—
Total assets at fair value	$	1,059,977	$	—	$	983,934	$	76,043
Derivative liabilities:
Forward contracts related to mortgage loans to be delivered for sale	610		—		610		—
Customer-initiated derivatives	9,998		—		9,998		—
Risk management derivatives	1,825		—		1,825		—
Total derivatives	12,433		—		12,433		—
Total liabilities at fair value	$	12,433	$	—	$	12,433	$	—
December 31, 2015
Securities available-for-sale:
U.S. government sponsored agency obligations	$	60,022	$	—	$	60,022	$	—
Obligations of state and political subdivisions:
Taxable	1,321		—		1,003		318
Tax-exempt	287,208		—		287,208		—
SBA Pools	27,925		—		27,925		—
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	309,306		—		309,306		—
Privately issued	89,450		—		89,450		—
Privately issued commercial mortgage-backed securities	13,705		—		13,705		—
Corporate debt securities	101,833		—		101,833		—
Total securities available-for-sale	890,770		—		890,452		318
Loans measured at fair value:
Residential real estate	22,233		—		—		22,233
Loans held for sale	58,223		—		58,223		—
Loan servicing rights	58,113		—		—		58,113
Derivative assets:
Interest rate lock commitments	1,220		—		1,220		—
Customer-initiated derivatives	4,143		—		4,143		—
Risk management derivatives	105		—		105		—
Total derivatives	5,468		—		5,468		—
Total assets at fair value	$	1,034,807	$	—	$	954,143	$	80,664
Derivative liabilities:

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Forward contracts related to mortgage loans to be delivered for sale	38		—		38		—
Customer-initiated derivatives	4,144		—		4,144		—
Risk management derivatives	397		—		397		—
Total derivatives	4,579		—		4,579		—
Total liabilities at fair value	$	4,579	$	—	$	4,579	$	—

There were no transfers between levels within the fair value hierarchy during the three months endedMarch 31, 2016. During the three months endedMarch 31, 2015, a privately issued subordinated debt security (included within “Corporate debt securities”) was transferred from Level 3 in the fair value hierarchy to Level 2 due to the market for this security becoming active during the period. 

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

	Three months ended March 31, 2016
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions		Loans held for investment			Loan servicing rights
Balance, beginning of period	$	318	$	22,233		$	58,113
Transfers from loans held for sale	—		1,834			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Net gain on sales of loans”	—		82			—
Recorded in “Mortgage banking and other loan fees”	—		523			(8,465		)
New originations	—		—			1,700
Repayments	—		(295		)	—
Balance, end of period	$	318	$	24,377		$	51,348

	Three months ended March 31, 2015
	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	$	3,425		$	19,526		$	70,598
Transfer between levels within fair value hierarchy	—		(3,000		)	—			—
Transfers from loans held for sale	—		—			3,219			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	—		1			—			—
Recorded in “Net gain on sales of loans”	—		—			127			—
Recorded in “Mortgage banking and other loan fees”	—		—			108			(6,402		)
Recorded in OCI (pre-tax)	—		4			—			—
New originations	—		—			—			2,915
Reduction from servicing rights sold	—		—			—			(12,702		)
Repayments	—		—			(822		)	—
Balance, end of period	$	397	$	430		$	22,158		$	54,409

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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)	March 31, 2016		December 31, 2015
Aggregate fair value	$	24,377	$	22,233
Contractual balance	23,449		21,910
Fair market value gain	928		323

There were no gains (losses) included in the aggregate 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 March 31, 2016 was $152 thousand and $156 thousand, respectively, all of which 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, 2015 was $275 thousand and $364 thousand, respectively, all of which 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 months ended March 31, 2016 and 2015, there were $222 thousand and $205 thousand, respectively, of interest income earned on loans transferred from loans held for sale to loans held for investment.

The total amount of gains (losses) from changes in fair value of loans held for investment measured at fair value in the Consolidated Statements of Income were as follows:

	For the three months ended March 31,
(Dollars in thousands)	2016		2015
Change in fair value:
Included in “Net gain on sales of loans”	$	82	$	127
Included in “Mortgage banking and other loan fees”	523		108

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's policy on loans held for investment in “Interest and fees on loans” in the Consolidated Statements of Income. There were no loans held for sale that were 90 days past due and on accrual status as of March 31, 2016. The aggregated fair value of loans held for sale that were 90 days past due and on nonaccrual status as of December 31, 2015 was $7 thousand.

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)	March 31, 2016		December 31, 2015
Aggregate fair value	$	25,040	$	58,223
Contractual balance	23,880		55,911
Unrealized gain	1,160		2,312

The total amount of gains (losses) from loans held for sale included in the Consolidated Statements of Income were as follows:

	For the three months ended March 31,
(Dollars in thousands)	2016			2015
Interest income(1)	$	329		$	1,070
Change in fair value(2)	(1,152		)	(1,541		)
Total included in earnings	$	(823	)	$	(471	)

(1) Included in "Interest and fees on loans" in the Consolidated Statements of Income.

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(2) Included in "Net gain on sales of loans" in the Consolidated Statements of Income.

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.

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)
March 31, 2016
Impaired loans:(1)
Commercial real estate	$	395	$	—	$	—	$	395
Residential real estate	3,156		—		—		3,156
Commercial and industrial	10,136		—		—		10,136
Real estate construction	80		—		—		80
Consumer	42		—		—		42
Total impaired loans	13,809		—		—		13,809
Other real estate owned(2)	2,323		—		—		2,323
Repossessed assets(3)	5,238		—		—		5,238
Total	$	21,370	$	—	$	—	$	21,370
December 31, 2015
Impaired loans:(1)
Commercial real estate	$	2,960	$	—	$	—	$	2,960
Residential real estate	5,381		—		—		5,381
Commercial and industrial	11,522		—		—		11,522
Real estate construction	195		—		—		195
Consumer	18		—		—		18
Total impaired loans	20,076		—		—		20,076
Other real estate owned(2)	4,562		—		—		4,562
Repossessed assets(3)	5,038		—		—		5,038
Premises and equipment(4)	1,575		—		—		1,575
Total	$	31,251	$	—	$	—	$	31,251

(1) Specific reserves of $3.0 million and $4.4 million were provided to reduce the fair value of these loans at March 31, 2016 and December 31, 2015, respectively, based on the estimated fair value of the underlying collateral. In addition, net charge-offs of $93 thousand and $67 thousand reduced the fair value of these loans for the three months ended March 31, 2016 and 2015, respectively.

(2) The Company charged $884 thousand and $1.4 million through other noninterest expense during the three months ended March 31, 2016 and 2015, respectively, to reduce the fair value of these properties. There was no valuation allowance and $325 thousand of valuation allowance provided to reduce the fair value of these properties at March 31, 2016 and December 31, 2015, respectively, based on the estimated fair value as of each respective date.

(3) The Company charged $311 thousand and $194 thousand through other noninterest expense during the three months ended March 31, 2016 and 2015 to reduce the fair value of these assets.  A valuation allowance of $5.1 million was provided to reduce the fair value of these repossessed assets at both March 31, 2016 and December 31, 2015, based on the estimated fair value as of each respective date.

(4) There were no impairment charges on premises and equipment during the three months ended March 31, 2016 or March 31, 2015.

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

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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
March 31, 2016
Financial assets:
Cash and cash equivalents	$	363,815	$	363,815	$	88,727	$	275,088	$	—
Federal Home Loan Bank stock	29,621		N/A
Net loans(1)	4,871,358		4,968,228		—		—		4,968,228
Accrued interest receivable	16,550		16,550		—		16,550		—
Company-owned life insurance	108,958		108,958		—		108,958		—
Securities held-to-maturity	1,678		1,678		—		—		1,678
Financial liabilities:
Deposits:
Savings and demand deposits	$	3,372,466	$	3,372,466	$	—	$	3,372,466	$	—
Time deposits(2)	1,780,332		1,781,278		—		1,781,278		—
Total deposits	5,152,798		5,153,744		—		5,153,744		—
Short-term borrowings	334,480		334,480		—		334,480		—
Long-term debt	399,476		394,546		—		394,546		—
Accrued interest payable	3,308		3,308		—		3,308		—
Deferred compensation plan liabilities	3,116		3,116		—		3,116		—

(1) Included $13.8 million of impaired loans recorded at fair value on a nonrecurring basis and $24.4 million of loans recorded at fair value on a recurring basis.

(2) Includes $61.2 million of other brokered funds.

			Estimated Fair Value
(Dollars in thousands)	Carrying Value		Total		Level 1		Level 2		Level 3
December 31, 2015
Financial assets:
Cash and cash equivalents	$	387,323	$	387,323	$	74,734	$	312,589	$	—
Federal Home Loan Bank stock	29,621		N/A
Net loans(1)	4,752,747		4,827,556		—		—		4,827,556
Accrued interest receivable	15,646		15,646		—		15,646		—
Company-owned life insurance	107,065		107,065		—		107,065		—
Securities held-to-maturity	1,678		1,678		—		—		1,678
Financial liabilities:
Deposits:
Savings and demand deposits	$	3,343,478	$	3,343,478	$	—	$	3,343,478	$	—
Time deposits(2)	1,671,103		1,670,058		—		1,670,058		—
Total deposits	5,014,581		5,013,536		—		5,013,536		—
Short-term borrowings	348,998		348,998		—		348,998		—
Long-term debt	464,057		456,746		—		456,746		—
Accrued interest payable	3,568		3,568		—		3,568		—
Deferred compensation plan liabilities	1,982		1,982		—		1,982		—

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(1) Included $20.1 million of impaired loans recorded at fair value on a nonrecurring basis and $22.2 million of loans recorded at fair value on a recurring basis.

(2) Includes $61.2 million of other brokered funds.

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4.  SECURITIES

The following summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair  Value
March 31, 2016
Securities available-for-sale:
U.S. government sponsored agency obligations	$	69,398	$	553	$	—		$	69,951
Obligations of state and political subdivisions:
Taxable	1,318		44		—			1,362
Tax-exempt	297,098		7,674		(441		)	304,331
SBA Pools	26,286		446		(3		)	26,729
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	304,808		4,932		(48		)	309,692
Privately issued	97,468		235		(252		)	97,451
Privately issued commercial mortgage-backed securities	22,465		—		(81		)	22,384
Corporate debt securities	114,915		734		(1,006		)	114,643
Total securities available-for-sale	$	933,756	$	14,618	$	(1,831	)	$	946,543

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair  Value
Securities held-to-maturity	$	1,678	$	—	$	—	$	1,678

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair  Value
December 31, 2015
Securities available-for-sale:
U.S. government sponsored agency obligations	$	59,414	$	614	$	(6	)	$	60,022
Obligations of state and political subdivisions:
Taxable	1,318		3		—			1,321
Tax-exempt	282,366		5,312		(470		)	287,208
SBA Pools	27,561		368		(4		)	27,925
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	308,396		2,014		(1,104		)	309,306
Privately issued	90,084		—		(634		)	89,450
Privately issued commercial mortgage-backed securities	13,826		—		(121		)	13,705
Corporate debt securities	102,284		127		(578		)	101,833
Total securities available-for-sale	$	885,249	$	8,438	$	(2,917	)	$	890,770

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair  Value
Securities held-to-maturity	$	1,678	$	—	$	—	$	1,678

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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 March 31,
(Dollars in thousands)	2016		2015
Proceeds	$	14,977	$	24,615
Gross gains	333		3
Gross losses	—		(110		)

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2016 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.

	March 31, 2016
(Dollars in thousands)	Amortized Cost		Fair Value
Securities with contractual maturities:
Within one year	$	5,589	$	5,603
After one year through five years	146,712		148,537
After five years through ten years	217,841		221,816
After ten years	563,614		570,587
Total securities available-for-sale	$	933,756	$	946,543
Securities held-to-maturity:
After one year through five years	1,678		1,678
Total securities held-to-maturity	$	1,678	$	1,678

Securities with a carrying value of $421.0 million and $390.5 million were pledged at March 31, 2016 and December 31, 2015, respectively, to secure borrowings and deposits.

At March 31, 2016 and December 31, 2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

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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
March 31, 2016
Obligations of state and political subdivisions:
Tax-exempt	$	38,553	$	(211	)	$	16,537	$	(230	)	$	55,090	$	(441	)
SBA Pools	1,468		(3		)	—		—			1,468		(3		)
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	13,919		(48		)	—		—			13,919		(48		)
Privately issued	49,201		(252		)	—		—			49,201		(252		)
Privately issued commercial mortgage-backed securities	22,384		(81		)	—		—			22,384		(81		)
Corporate debt securities	32,649		(956		)	403		(50		)	33,052		(1,006		)
Total securities available-for-sale	$	158,174	$	(1,551	)	$	16,940	$	(280	)	$	175,114	$	(1,831	)
December 31, 2015
U.S. government sponsored agency obligations	$	9,994	$	(6	)	$	—	$	—		$	9,994	$	(6	)
Obligations of state and political subdivisions:
Tax-exempt	46,062		(357		)	6,957		(113		)	53,019		(470		)
SBA Pools	1,521		(4		)	—		—			1,521		(4		)
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	118,509		(1,104		)	—		—			118,509		(1,104		)
Privately issued	89,450		(634		)	—		—			89,450		(634		)
Privately issued commercial mortgage-backed securities	13,706		(121		)	—		—			13,706		(121		)
Corporate debt securities	74,494		(558		)	431		(20		)	74,925		(578		)
Total securities available-for-sale	$	353,736	$	(2,784	)	$	7,388	$	(133	)	$	361,124	$	(2,917	)

As of March 31, 2016, the Company’s security portfolio consisted of 337 securities, 65 of which were in an unrealized loss position. The unrealized losses for these securities resulted primarily from changes in benchmark U.S. Treasury interest rates and/or widening of fair value credit and liquidity spreads versus benchmark U.S. Treasury 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 March 31, 2016.

The unrealized losses are spread across asset classes, primarily in those securities carrying fixed interest rates. At March 31, 2016, the combination of these security asset class holdings in an unrealized loss position had an estimated fair value of $175.1 million with gross unrealized losses of $1.8 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

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.

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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. 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 and industrial loans include financing for commercial purposes in various lines of business, including manufacturing, service industry, professional service areas and agricultural.  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.

Loans at March 31, 2016 and December 31, 2015 were as follows:

(Dollars in thousands)	Accounted for under ASC 310-30		Excluded from ASC 310-30 accounting		Total loans
March 31, 2016
Commercial real estate	$	231,646	$	1,385,155	$	1,616,801
Residential real estate	257,795		1,347,145		1,604,940
Commercial and industrial	22,205		1,257,197		1,279,402
Real estate construction	9,283		225,724		235,007
Consumer	8,906		178,680		187,586
Total	$	529,835	$	4,393,901	$	4,923,736	(1)
December 31, 2015
Commercial real estate	$	250,497	$	1,317,600	$	1,568,097
Residential real estate	273,845		1,273,954		1,547,799
Commercial and industrial	24,724		1,232,682		1,257,406
Real estate construction	10,783		230,820		241,603
Consumer	9,417		182,378		191,795
Total	$	569,266	$	4,237,434	$	4,806,700	(1)

(1) Includes net deferred costs totaling $3.4 million and $1.9 million at March 31, 2016 and December 31, 2015, respectively.

Acquired loans were recorded at fair value as of the acquisition date, which includes loans acquired in the CF Bancorp, First Banking Center, Peoples State Bank, Community Central Bank, First Place Bank, Talmer West Bank and FHC

25

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, which we refer to as a purchased credit impaired loans, the Company accounts for these loans 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.  Acquired loans that are not purchased credit impaired loans are accounted for under ASC 310-20 and fair value discounts/premiums are accreted/amortized into interest income over the remaining term of the loan as an adjustment to the related loans yield.

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 March 31,
(Dollars in thousands)	2016			2015
Balance at beginning of period	$	223,214		$	277,058
Additions due to acquisitions	—			5,268
Discount accretion	(14,873		)	(20,964		)
Reclassifications from nonaccretable discount and other additions to accretable discount due to results of cash flow re-estimations	15,725			29,431
Other activity, net (1)	(12,599		)	(11,968		)
Balance at end of period	$	211,467		$	278,825

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

For purchased credit impaired 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.  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. 

The total identified improvement in the cash flow expectations resulting in yield adjustments on a prospective basis during the three months ended March 31, 2016 and 2015 for purchased credit impaired loans was $15.7 million and $29.4 million, respectively.  The Company also identified declines in the cash flow expectations of certain purchased credit impaired 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 the yield on the loan.

Below is the composition of the recorded investment for purchased credit impaired loans accounted for under ASC 310-30 at March 31, 2016 and December 31, 2015.

(Dollars in thousands)	March 31, 2016			December 31, 2015
Contractual cash flows	$	962,665		$	1,019,407
Non-accretable difference	(221,363		)	(226,927		)
Accretable yield	(211,467		)	(223,214		)
Loans accounted for under ASC 310-30	$	529,835		$	569,266

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, other real estate owned obtained through foreclosure and other repossessed assets.

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

26

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. 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 provision for loan losses or future yield adjustments.

Information as to nonperforming assets was as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Nonperforming assets
Nonaccrual loans
Commercial real estate	$	15,262	$	16,798
Residential real estate	16,939		18,390
Commercial and industrial	20,506		21,668
Real estate construction	232		413
Consumer	160		206
Total nonaccrual loans	53,099		57,475
Other real estate owned and repossessed assets (1)	26,434		28,157
Total nonperforming assets	79,533		85,632
Loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30
Residential real estate	$	141	$	58
Commercial and industrial	13		14
Consumer	230		225
Total loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	384	$	297

(1) Excludes closed branches and operating facilities.

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

	March 31, 2016
(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
Loans, excluding loans accounted for under ASC 310-30
Commercial real estate	$	2,764	$	1,874	$	11,354	$	15,992	$	1,369,163	$	1,385,155	$	—
Residential real estate	8,308		1,016		7,517		16,841		1,330,304		1,347,145		141
Commercial and industrial	3,663		2,069		13,250		18,982		1,238,215		1,257,197		13
Real estate construction	729		—		65		794		224,930		225,724		—
Consumer	678		265		240		1,183		177,497		178,680		230
Total	$	16,142	$	5,224	$	32,426	$	53,792	$	4,340,109	$	4,393,901	$	384

	December 31, 2015
(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
Loans, excluding loans accounted for under ASC 310-30
Commercial real estate	$	2,662	$	1,378	$	13,520	$	17,560	$	1,300,040	$	1,317,600	$	—
Residential real estate	10,582		2,539		7,377		20,498		1,253,456		1,273,954		58
Commercial and industrial	9,079		2,099		4,955		16,133		1,216,549		1,232,682		14
Real estate construction	2,046		—		304		2,350		228,470		230,820		—
Consumer	1,287		402		287		1,976		180,402		182,378		225
Total	$	25,656	$	6,418	$	26,443	$	58,517	$	4,178,917	$	4,237,434	$	297

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Impaired Loans

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts    due according to the contractual terms of the loan agreement. Impaired loans included nonperforming loans (including nonperforming troubled debt restructurings (TDRs)) and performing TDRs. Impaired loans are accounted for at the lower of the present value of expected cash flows or the estimated fair value of the collateral. When the present value of expected cash flows or the fair value of the collateral of an impaired loan not accounted for under ASC 310-30 is less than the amount of unpaid principal outstanding on the loan, the recorded principal balance of the loan is reduced to its carrying value through either a specific allowance for loan loss or a partial charge-off of the loan balance. Information as to total impaired loans is as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Nonaccrual loans	$	53,099	$	57,475
Performing troubled debt restructurings:
Commercial real estate	16,350		15,340
Residential real estate	7,240		5,749
Commercial and industrial	3,777		3,438
Real estate construction	420		420
Consumer	250		242
Total performing troubled debt restructurings	28,037		25,189
Total impaired loans	$	81,136	$	82,664

Troubled Debt Restructurings (TDRs)

The Company assesses all loan modifications to determine whether a modification constitutes a 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 purchased credit impaired 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, “Receivables — Troubled Debt Restructurings by Creditors” (“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 March 31, 2016, there were $14.5 million of nonperforming TDRs and $28.0 million of performing TDRs included in impaired loans.  As of December 31, 2015, there were $14.5 million of nonperforming TDRs and $25.2 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 will be considered impaired. If a TDR is subsequently restructured under current market terms, no cumulative concession has been granted to the borrower and the borrower is not experiencing financial difficulties, which is documented by a current credit evaluation, the loan is no longer required to be reported as a TDR.

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The following tables present the recorded investment of loans modified in TDRs during the three months ended March 31, 2016 and 2015 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 March 31, 2016		Net charge-offs (recoveries)		Provision (benefit) for loan losses
For the three months ended March 31, 2016
Commercial real estate	$	—	$	—	$	435	$	—	5	$	435	$	—	$	(2	)
Residential real estate	229		123		663		52		14	1,067		55		48
Commercial and industrial	2,627		—		107		862		9	3,596		—		(164		)
Consumer	7		—		—		—		1	7		2		—
Total loans	$	2,863	$	123	$	1,205	$	914	29	$	5,105	$	57	$	(118	)

(1) Loan forgiveness related to loans modified in TDRs for the three months ended March 31, 2016 totaled $142 thousand.

	Concession type (1)									Financial effects of modification
(Dollars in thousands)	Principal deferral		Interest rate		Forbearance agreement		Total  number of loans	Total recorded investment at March 31, 2015		Net  charge-offs (recoveries)			Provision for loan losses
For the three months ended March 31, 2015
Commercial real estate	$	—	$	350	$	1,090	5	$	1,440	$	(37	)	$	208
Residential real estate	949		688		—		13	1,637		(1		)	40
Commercial and industrial	340		857		26		9	1,223		—			182
Real estate construction	—		—		147		1	147		—			—
Consumer	15		—		—		1	15		—			—
Total loans	$	1,304	$	1,895	$	1,263	29	$	4,462	$	(38	)	$	430

(1) There was no loan forgiveness related to loans modified in TDRs for the three months ended March 31, 2015.

When a modification qualifies as a TDR and the loan was initially a purchased credit impaired loan 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.

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 months ended March 31, 2016 and 2015, including the recorded investment as of March 31, 2016 and 2015.  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 March 31, 2016					For the three months ended March 31, 2015
(Dollars in thousands)	Total number of loans	Total recorded investment at March 31, 2016		Charged off following a subsequent default		Total number of loans	Total recorded investment at March 31, 2015		Charged off following a subsequent default
Commercial real estate	5	$	986	$	—	12	$	2,324	$	471
Residential real estate	6	379		—		26	1,931		29
Commercial and industrial	4	219		—		8	220		—
Consumer	1	—		3		1	78		—
Total loans	16	$	1,584	$	3	47	$	4,553	$	500

At March 31, 2016, commitments to lend additional funds to borrowers whose terms have been modified in TDRs totaled $184 thousand.

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The terms of certain other loans that were modified during the three months ended March 31, 2016 and 2015 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 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.

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
March 31, 2016
Commercial real estate	$	1,454,921	$	74,382	$	87,498	$	—	$	1,616,801
Commercial and industrial	1,182,486		44,424		52,492		—		1,279,402
Real estate construction	229,576		834		4,597		—		235,007
Total	$	2,866,983	$	119,640	$	144,587	$	—	$	3,131,210
December 31, 2015
Commercial real estate	$	1,408,238	$	60,130	$	99,343	$	386	$	1,568,097
Commercial and industrial	1,177,354		24,129		55,923		—		1,257,406
Real estate construction	235,479		259		5,865		—		241,603
Total	$	2,821,071	$	84,518	$	161,131	$	386	$	3,067,106

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

(Dollars in thousands)	Performing		Nonperforming		Total
March 31, 2016
Residential real estate	$	1,588,001	$	16,939	$	1,604,940
Consumer	187,426		160		187,586
Total	$	1,775,427	$	17,099	$	1,792,526
December 31, 2015
Residential real estate	$	1,529,409	$	18,390	$	1,547,799
Consumer	191,589		206		191,795
Total	$	1,720,998	$	18,596	$	1,739,594

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 nonaccrual loans and TDRs.

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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
March 31, 2016
Loans individually evaluated for impairment
Commercial real estate	$	16,128	$	15,484	$	31,612	$	44,811	$	2,334
Residential real estate	16,617		7,562		24,179		29,961		1,948
Commercial and industrial	13,505		10,778		24,283		26,711		1,985
Real estate construction	422		230		652		881		129
Consumer	311		99		410		622		42
Total loans individually evaluated for impairment	$	46,983	$	34,153	$	81,136	$	102,986	$	6,438
December 31, 2015
Loans individually evaluated for impairment
Commercial real estate	$	12,506	$	19,632	$	32,138	$	46,099	$	2,647
Residential real estate	13,304		10,835		24,139		30,409		2,729
Commercial and industrial	11,661		13,445		25,106		27,883		2,577
Real estate construction	402		431		833		1,369		158
Consumer	319		129		448		789		36
Total loans individually evaluated for impairment	$	38,192	$	44,472	$	82,664	$	106,549	$	8,147

	For the three months ended March 31, 2016				For the three months ended March 31, 2015
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Loans individually evaluated for impairment
Commercial real estate	$	32,306	$	547	$	42,397	$	1,256
Residential real estate	24,643		309		25,194		248
Commercial and industrial	24,880		192		8,283		212
Real estate construction	658		14		1,221		18
Consumer	436		9		591		20
Total loans individually evaluated for impairment	$	82,923	$	1,071	$	77,686	$	1,754

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

Loans accounted for under ASC 310-30

(Dollars in thousands)	Commercial real estate			Residential real estate			Commercial and industrial			Real estate construction			Consumer			Total
For the three months ended March 31, 2016
Allowance for loan losses - loans accounted for under ASC 310-30:
Balance at beginning of period	$	11,030		$	7,947		$	1,487		$	1,678		$	124		$	22,266
Transfer to loans excluded from ASC 310-30 accounting (1)	(83		)	(58		)	(24		)	(227		)	—			(392		)
Benefit for loan losses	(1,257		)	(1,513		)	(36		)	(381		)	(36		)	(3,223		)
Gross charge-offs	(1,764		)	(735		)	(734		)	(73		)	(6		)	(3,312		)
Recoveries	426			1,612			385			68			19			2,510
Net (charge-offs) recoveries	(1,338		)	877			(349		)	(5		)	13			(802		)
Ending allowance for loan losses	$	8,352		$	7,253		$	1,078		$	1,065		$	101		$	17,849
For the three months ended March 31, 2015
Allowance for loan losses - loans accounted for under ASC 310-30:
Balance at beginning of period	$	17,558		$	9,674		$	3,264		$	2,030		$	206		$	32,732
Transfer to loans excluded from ASC 310-30 accounting (1)	(30		)	(48		)	—			—			—			(78		)
Provision (benefit) for loan losses	(2,547		)	950			168			231			118			(1,080		)
Gross charge-offs	(4,271		)	(1,564		)	(678		)	(531		)	(195		)	(7,239		)
Recoveries	3,571			248			365			502			39			4,725
Net charge-offs	(700		)	(1,316		)	(313		)	(29		)	(156		)	(2,514		)
Ending allowance for loan losses	$	14,281		$	9,260		$	3,119		$	2,232		$	168		$	29,060

(1) Primarily due to loans restructured that qualify as TDRs.

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Loans excluded from ASC 310-30 accounting

(Dollars in thousands)	Commercial real estate			Residential real estate			Commercial and industrial			Real estate construction			Consumer			Total
For the three months ended March 31, 2016
Allowance for loan losses - loans excluded from ASC 310-30 accounting:
Balance at beginning of period	$	8,388		$	6,485		$	14,831		$	1,021		$	962		$	31,687
Transfer in (1)	83			58			24			227			—			392
Provision (benefit) for loan losses	527			(331		)	1,673			(210		)	453			2,112
Gross charge-offs	(410		)	(555		)	(244		)	(27		)	(504		)	(1,740		)
Recoveries	964			632			218			199			65			2,078
Net (charge-offs) recoveries	554			77			(26		)	172			(439		)	338
Ending allowance for loan losses	$	9,552		$	6,289		$	16,502		$	1,210		$	976		$	34,529
For the three months ended March 31, 2015
Allowance for loan losses - loans excluded from ASC 310-30 accounting:
Balance at beginning of period	$	7,234		$	6,498		$	7,149		$	655		$	904		$	22,440
Transfer in (1)	30			48			—			—			—			78
Provision (benefit) for loan losses	5			(259		)	3,043			(147		)	431			3,073
Gross charge-offs	(1,158		)	(897		)	(1,406		)	(12		)	(286		)	(3,759		)
Recoveries	673			387			382			32			99			1,573
Net (charge-offs) recoveries	(485		)	(510		)	(1,024		)	20			(187		)	(2,186		)
Ending allowance for loan losses	$	6,784		$	5,777		$	9,168		$	528		$	1,148		$	23,405

(1) Primarily due to loans restructured that qualify as TDRs.

Total loans

(Dollars in thousands)	Commercial real estate		Residential real estate		Commercial and industrial		Real estate construction		Consumer		Total
As of March 31, 2016
Allowance for loan losses:
Individually evaluated for impairment	$	2,334	$	1,948	$	1,985	$	129	$	42	$	6,438
Collectively evaluated for impairment	7,218		4,341		14,517		1,081		934		28,091
Accounted for under ASC 310-30	8,352		7,253		1,078		1,065		101		17,849
Total allowance for loan losses	$	17,904	$	13,542	$	17,580	$	2,275	$	1,077	$	52,378
Balance of loans:
Individually evaluated for impairment	$	31,612	$	24,179	$	24,283	$	652	$	410	$	81,136
Collectively evaluated for impairment	1,353,543		1,322,966		1,232,914		225,072		178,270		4,312,765
Accounted for under ASC 310-30	231,646		257,795		22,205		9,283		8,906		529,835
Total loans	$	1,616,801	$	1,604,940	$	1,279,402	$	235,007	$	187,586	$	4,923,736
As of December 31, 2015
Allowance for loan losses:
Individually evaluated for impairment	$	2,647	$	2,729	$	2,577	$	158	$	36	$	8,147
Collectively evaluated for impairment	5,741		3,756		12,254		863		926		23,540
Accounted for under ASC 310-30	11,030		7,947		1,487		1,678		124		22,266
Total allowance for loan losses	$	19,418	$	14,432	$	16,318	$	2,699	$	1,086	$	53,953
Balance of loans:
Individually evaluated for impairment	$	32,138	$	24,139	$	25,106	$	833	$	448	$	82,664
Collectively evaluated for impairment	1,285,462		1,249,815		1,207,576		229,987		181,930		4,154,770
Accounted for under ASC 310-30	250,497		273,845		24,724		10,783		9,417		569,266
Total loans	$	1,568,097	$	1,547,799	$	1,257,406	$	241,603	$	191,795	$	4,806,700

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7. OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

Changes in other real estate owned and repossessed assets were as follows:

(Dollars in thousands)	Other real estate  owned			Repossessed assets
Balance at January 1, 2016	$	22,930		$	5,329
Transfers in (1)	3,342			792
Capitalized expenditures	—			229
Payments received	—			(359		)
Disposals	(4,145		)	(387		)
Write-downs	(1,209		)	(311		)
Change in valuation allowance	325			—
Balance at March 31, 2016	$	21,243		$	5,293
Balance at January 1, 2015	$	38,908		$	9,835
Additions due to acquisitions	1,260			—
Additions due to the adoption of ASU 2014-04 (2)	540			—
Transfers in (1)	5,709			397
Capitalized expenditures	—			1,116
Payments received	—			(1,401		)
Disposals	(9,351		)	(177		)
Write-downs	(1,362		)	(194		)
Change in valuation allowance	—			(2,359		)
Balance at March 31, 2015	$	35,704		$	7,217

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

(2) The Company adopted the provisions of FASB ASU No. 2014-04, “Reclassification of Residential Real Estate Collaterized Consumer Mortgage Loans Upon Foreclosure” (“ASU 2014-04”) utilizing the prospective transition method.

At March 31, 2016 and December 31, 2015, the Company had $374 thousand and $951 thousand, respectively, of other real estate owned and repossessed assets as a result of obtaining physical possession in accordance with ASU 2014-04. In addition, there are $7.9 million of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process, as of March 31, 2016.

Activity in the valuation allowance for other real estate owned and repossessed assets during the three months ended March 31, 2016 and 2015 is summarized below. 

	Valuation allowance
(Dollars in thousands)	Other real estate owned			Repossessed assets
For the three months ended March 31, 2016
Beginning balance	$	325		$	5,104
Write-downs	(325		)	—
Ending Balance	$	—		$	5,104
For the three months ended March 31, 2015
Beginning balance	$	—		$	460
Provision for valuation allowance	—			2,359
Ending Balance	$	—		$	2,819

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Income and expenses related to other real estate owned and repossessed assets, recorded as a component of “Other expense” in the Consolidated Statements of Income, were as follows:

(Dollars in thousands)	Other real estate  owned			Repossessed assets
For the three months ended March 31, 2016
Net gain (loss) on sale	$	1,555		$	(64	)
Write-downs	(1,209		)	(311		)
Relief of valuation allowance	325			—
Net operating expenses	(376		)	(84		)
Total	$	295		$	(459	)
For the three months ended March 31, 2015
Net gain (loss) on sale	$	1,415		$	(14	)
Write-downs	(1,362		)	(194		)
Provision for valuation allowance	—			(2,359		)
Net operating expenses	(295		)	(25		)
Total	$	(242	)	$	(2,592	)

8.  INTANGIBLE ASSETS

Core Deposit Intangibles

The Company recorded core deposit intangibles (CDIs) associated with each of its acquisitions. CDIs are amortized on an accelerated basis over their estimated useful lives and have an estimated remaining weighted-average useful life of 6.4 years as of March 31, 2016.

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

(Dollars in thousands)	March 31, 2016			December 31, 2015
Gross carrying amount	$	23,068		$	23,068
Accumulated amortization	(10,872		)	(10,260		)
Net carrying amount	$	12,196		$	12,808

Amortization expense recognized on CDIs was $612 thousand and $649 thousand for the three months endedMarch 31, 2016 and 2015, respectively, included as a component of “other expense” in the Consolidated Statements of Income.

Goodwill

The Company recorded goodwill in the amount of $3.5 million associated with the acquisition of FHC completed on February 6, 2015. Goodwill is deemed to have an indefinite life and is not amortized but instead is subject to an annual review for impairment.

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9.  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 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.

The following table represents the activity for loan servicing rights and the related fair value changes.

(Dollars in thousands)	Commercial Real Estate			Mortgage			Total
For the three months ended March 31, 2016
Fair value, beginning of period	$	475		$	57,638		$	58,113
Additions from loans sold with servicing retained	—			1,700			1,700
Changes in fair value due to:
Reductions from loans paid off during the period	(14		)	(1,826		)	(1,840		)
Changes due to valuation inputs or assumptions(1)	(30		)	(6,595		)	(6,625		)
Fair value, end of period	$	431		$	50,917		$	51,348
Principal balance of loans serviced	$	94,442		$	5,750,783		$	5,845,225
For the three months ended March 31, 2015
Fair value, beginning of period	$	691		$	69,907		$	70,598
Additions from loans sold with servicing retained	—			2,915			2,915
Reduction from loans sold and servicing rights sold(2)	—			(12,702		)	(12,702		)
Changes in fair value due to:
Reductions from loans paid off during the period	(29		)	(2,289		)	(2,318		)
Changes due to valuation inputs or assumptions(1)	(41		)	(4,043		)	(4,084		)
Fair value, end of period	$	621		$	53,788		$	54,409
Principal balance of loans serviced	$	203,491		$	5,799,055		$	6,002,546

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

(2) $12.7 million of servicing rights were sold during the three months ended March 31, 2015 in connection with the sale of $1.2 billion of principal balance of loans serviced.

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 March 31, 2016 and December 31, 2015.

	Commercial Real Estate			Mortgage
As of March 31, 2016
Prepayment speed	0.00 - 50.00%			0.00 - 38.10%
Weighted average (“WA”) discount rate	19.23		%	9.13		%
WA cost to service/per year	$	472		$	61
WA ancillary income/per year	N/A			36
WA float range	0.56		%	1.05 - 1.55%
As of December 31, 2015
Prepayment speed	0.00 - 50.00%			0.00 - 34.56%
WA discount rate	19.18		%	9.13		%
WA cost to service/per year	$	472		$	61
WA ancillary income/per year	N/A			36
WA float range	0.56		%	0.56 - 1.68%

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The Company realized total loan servicing fee income of $2.7 million and $2.6 million for the three months ended March 31, 2016 and 2015, respectively, recorded as a component of “Mortgage banking and other loan fees” in the Consolidated Statements of Income.

10.  DERIVATIVE INSTRUMENTS AND BALANCE SHEET OFFSETTING

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 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 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 for interest rate risk management purposes. 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 additionally utilizes interest rate swaps designated as cash flow hedges for risk management purposes to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  These interest rate swaps designated as cash flow hedges are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings and/or deposits.  The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative instrument with the changes in cash flows of the designated hedged transactions.  The interest rate swaps designated as cash flow hedges were determined to be fully effective during all periods presented.  As such, no amount of ineffectiveness has been included in net income.  Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss).  The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedge no longer be considered effective.  The Company expects the hedges to remain fully effective and does not expect any amounts to be reclassified from accumulated other comprehensive income due to ineffectiveness during the remaining terms of the swaps.

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The following table presents the notional amount and fair value of the Company’s derivative instruments held or issued for risk management purposes or in connection with customer-initiated and mortgage banking activities. 

	March 31, 2016						December 31, 2015
			Fair Value						Fair Value
(Dollars in thousands)	Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)		Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)
Risk management purposes:
Derivatives designated as hedging instruments:
Interest rate swaps	$	37,000	$	—	$	1,825	$	37,000	$	105	$	397
Total risk management purposes	37,000		—		1,825		37,000		105		397
Customer-initiated and mortgage banking activities:
Forward contracts related to mortgage loans to be delivered for sale	115,533		—		610		105,711		—		38
Interest rate lock commitments	114,546		2,908		—		62,081		1,220		—
Customer-initiated derivatives	417,491		9,761		9,998		354,699		4,143		4,144
Total customer-initiated and mortgage banking activities	647,570		12,669		10,608		522,491		5,363		4,182
Total gross derivatives	$	684,570	$	12,669	$	12,433	$	559,491	$	5,468	$	4,579

(1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement.  These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the Consolidated Balance Sheets.

(2) Derivative assets are included within “Other assets”  and derivative liabilities are included within “Other liabilities” on the Consolidated Balance Sheets.  Included in the fair value of the derivative assets are credit valuation adjustments for counterparty credit risk totaling $460 thousand at March 31, 2016 and $208 thousand at December 31, 2015.

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 presents the net gains (losses) related to derivative instruments reflecting the changes in fair value.

		For the three months ended March 31,
(Dollars in thousands)	Location of Gain (Loss)	2016			2015
Forward contracts related to mortgage loans to be delivered for sale	Net gain on sale of loans	$	(1,975	)	$	(1,144	)
Interest rate lock commitments	Net gain on sale of loans	1,688			2,162
Customer-initiated derivatives	Other noninterest income	(236		)	84
Total gain (loss) recognized in income		$	(523	)	$	1,102

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The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to interest rate swaps designated as cash flow hedges for the three months ended March 31, 2016 and 2015.

(Dollars in thousands)	Amount of gain (loss) recognized in other comprehensive income (Effective portion)			Amount of gain (loss) reclassified from other comprehensive income to interest income or expense (Effective portion)		Amount of gain  (loss) recognized in  other non interest income (Ineffective portion)
For the three months ended March 31, 2016
Interest rate swaps designated as cash flow hedges	$	(1,681	)	$	148	$	—
For the three months ended March 31, 2015
Interest rate swaps designated as cash flow hedges	$	(325	)	$	88	$	—

At March 31, 2016, the Company expected $536 thousand of unrealized losses to be reclassified as an increase to interest expense during the following 12 months.

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

Balance Sheet Offsetting

Certain financial instruments, including derivatives (interest rate swaps designated as cash flow hedges and customer-initiated derivatives), may be eligible for offset in the Consolidated Balance Sheet and/or subject to master netting arrangements or similar agreements.  The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.  The tables below present information about the Company’s financial instruments that are eligible for offset.

							Gross amounts not offset in the statement of financial position
(Dollars in thousands)	Gross amounts recognized		Gross amounts offset in the statement of financial condition		Net amounts presented in the statement of financial position		Financial instruments			Collateral (received)/posted		Net Amount
March 31, 2016
Offsetting derivative assets
Derivative assets	$	9,761	$	—	$	9,761	$	(9,761	)	$	9,018	$	9,018
Offsetting derivative liabilities
Derivative liabilities	11,823		—		11,823		(9,761		)	2,062		—
December 31, 2015
Offsetting derivative assets
Derivative assets	$	4,248	$	—	$	4,248	$	(4,248	)	$	5,887	$	5,887
Offsetting derivative liabilities
Derivative liabilities	4,541		—		4,541		(4,248		)	293		—

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11.  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.

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, accounts receivable, 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 $856 thousand and $622 thousand at March 31, 2016 and December 31, 2015, 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:

	March 31, 2016						December 31, 2015
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	663,579	$	615,156	$	1,278,735	$	658,268	$	489,102	$	1,147,370
Standby letters of credit	61,926		4,002		65,928		61,300		4,801		66,101
Total commitments	$	725,505	$	619,158	$	1,344,663	$	719,568	$	493,903	$	1,213,471

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 $19.3 million and $25.2 million at March 31, 2016 and December 31, 2015, 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 $18.0 million and $19.4 million at March 31, 2016 and December 31, 2015, respectively.  In the event of nonperformance, we have rights to the underlying collateral securing the loans.  As of March 31, 2016 and December 31, 2015, we had recorded a liability of $100 thousand and $125 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 March 31, 2016 and December 31, 2015, our standby letters of credit totaled $65.9 million and $66.1 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 both March 31, 2016 and December 31, 2015, our liability recorded in connection with these representations and warranties totaled $1.3 million.

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 and pending shareholder litigation related to the merger with Chemical Financial Corporation that is publicly available and further discussed in Part II, Item 1. Legal Proceedings of this Quarterly Report on Form 10-Q. 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.

12.  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

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

	March 31, 2016				December 31, 2015
(Dollars in thousands)	Amount		Weighted Average Rate (1)		Amount		Weighted Average Rate (1)
Short-term borrowings:
FHLB advances: 0.68% - 0.81% fixed-rate notes	$	225,000	0.72	%	$	300,000	0.58	%
FHLB advances: 0.75% variable-rate notes	50,000		0.75		—		—
Securities sold under agreements to repurchase: 0.10% variable-rate notes	21,980		0.10		18,998		0.10
Holding company line of credit: floating-rate based on one-month LIBOR plus 1.75%	37,500		2.19		30,000		2.18
Total short-term borrowings	334,480		0.85		348,998		0.69
Long-term debt:
FHLB advances: 0.50% - 7.44% fixed-rate notes due 2016 to 2027 (2)	329,639		1.33		393,851		1.34
Securities sold under agreements to repurchase: 4.11% - 4.30% fixed-rate notes due 2016 to 2037 (3)	54,388		4.19		54,800		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)	10,902		2.86		10,865		2.65
Subordinated notes related to trust preferred securities: floating-rate based on three-month LIBOR plus 3.25% due in 2032 (5)	4,547		3.88		4,541		3.58
Total long-term debt	399,476		1.79		464,057		1.73
Total short-term borrowings and long-term debt	$	733,956	1.36	%	$	813,055	1.28	%

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

(2) The March 31, 2016 balance includes advances payable of $325.8 million and purchase accounting premiums of $3.8 million. The December 31, 2015 balance includes advances payable of $389.6 million and purchase accounting premiums of $4.3 million.

(3) The March 31, 2016 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $4.4 million. The December 31, 2015 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $4.8 million.

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(4) The March 31, 2016 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.1 million.  The December 31, 2015 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.1 million.

(5) The March 31, 2016 balance includes subordinated notes related to trust preferred securities of $5.0 million and purchase accounting discounts of $453 thousand. The December 31, 2015 balance includes subordinated notes related to trust preferred securities of $5.0 million and purchase accounting discounts of $459 thousand.

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

	For the three months ended March 31,
(Dollars in thousands)	2016			2015
FHLB advances:
Average daily balance	$	295,879		$	18,444
Average interest rate during the period	0.75		%	0.29		%
Maximum month-end balance	$	350,000		$	50,000
Securities sold under agreement to repurchase:
Average daily balance	$	19,885		$	20,439
Average interest rate during the period	0.10		%	0.10		%
Maximum month-end balance	$	21,980		$	22,454
Federal funds purchased:
Average daily balance	$	—		$	1,400
Average interest rate during the period	N/A			0.31		%
Maximum month-end balance	$	—		$	126,000
Holding company line of credit:
Average daily balance	$	30,165		$	9,556
Average interest rate during the period	2.18		%	3.17		%
Maximum month-end balance	$	37,500		$	20,000

Securities sold under agreements to repurchase represent funds deposited with banks by retail customers (short-term borrowings). Securities sold under agreements to repurchase are typically 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 additionally collateralized by residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government sponsored enterprises with a carrying value of $56.8 million at March 31, 2016 which are not covered by FDIC insurance. The Company's securities sold under agreements to repurchase do not qualify as sales for accounting purposes. The remaining contract maturity, excluding purchase accounting adjustments, of securities sold under agreement to repurchase, both long-term and short-term, is as follows:

	March 31, 2016
	Remaining Contractual Maturities of the Agreements
(Dollars in thousands)	Overnight and continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
Securities sold under agreements to repurchase	$	21,980	$	—	$	—	$	50,000	$	71,980
Total borrowings	$	21,980	$	—	$	—	$	50,000	$	71,980
Amounts related to securities sold under agreements to repurchase not included in offsetting disclosure in Footnote 10									$	71,980

Talmer Bank is a member 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 March 31, 2016, FHLB advances were collateralized by $1.9 billion of commercial and mortgage loans, with $1.2 billion in the form of a blanket lien arrangement and $706.4 million under specific lien arrangements.  Based on this collateral, the Company is eligible to borrow up to an additional $626.6 million at March 31, 2016; however, due to resolutions adopted by the Company's board of directors, this amount is limited to an additional $453.0 million.

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13. INCOME TAXES

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

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

	For the three months ended March 31,
	2016					2015
(Dollars in thousands)	Amount			Rate		Amount			Rate
Tax based on federal statutory rate	$	7,897		35.0	%	$	4,856		35.0	%
Effect of:
Tax exempt income	(762		)	(3.4	)	(631		)	(4.5	)
State taxes, net of federal benefit	180			0.8		266			1.9
Change in valuation allowance	(270		)	(1.2	)	—			—
Tax settlement with the Internal Revenue Service	(4,306		)	(19.1	)	—			—
Transaction costs	266			1.2		—			—
Deferred tax benefit	—			—		29			0.2
Other, net	(125		)	(0.6	)	(79		)	(0.6	)
Income tax expense	$	2,880		12.7	%	$	4,441		32.0	%

During the period ended March 31, 2016, the Company finalized a settlement with the Internal Revenue Service regarding First Place Financial Corp.'s deduction of bad debt expense incurred prior to the Company's acquisition of First Place Bank which resulted in a tax benefit of $4.3 million. Talmer Bank, as successor to First Place Bank, was granted court approval to act as substitute agent for the First Place Financial Corp. for the purposes of amending various returns, which ultimately favorably impacted the tax filings of Talmer Bank.

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14.  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.  As of March 31, 2016, 1.1 million shares were available to be awarded under the Plan.

Stock Options

Options are granted with an exercise price equal to or greater than the fair market price of the Company’s Class A 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.  For the three months endedMarch 31, 2016 and 2015, there were no stock options granted.

Activity in the Plan during the three months endedMarch 31, 2016 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, 2016	7,235		$	6.97
Exercised (1)	(551	)	6.60
Outstanding at March 31, 2016	6,684		7.00		5.49	$	74,130
Options fully vested	6,684		7.00		5.49	74,130
Exercisable at March 31, 2016	6,684		7.00		5.49	74,130

(1) Options exercised during the three months endedMarch 31, 2016 had a weighted average fair value of $16.18, at respective exercise dates.

The total intrinsic value of stock options exercised was $5.3 million and $1.1 million for the three months endedMarch 31, 2016 and 2015, respectively .

Total cash received from option exercises during the three months endedMarch 31, 2016 and 2015 was $1.6 million and $210 thousand, respectively, resulting in the issuance of 245 thousand shares and 35 thousand shares, respectively.  During the three months endedMarch 31, 2016 and 2015, there were 160 thousand shares and 46 thousand shares, respectively, issued under the net-settlement option.  The tax benefit realized from option exercises during the three months endedMarch 31, 2016 and 2015 was $1.5 million and $292 thousand, respectively.

All of the Company’s stock options were fully vested prior to January 1, 2015 and there was no unrecognized compensation cost related to nonvested stock options granted under the Plan.

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 to employees either vest in their entirety following a five-year service period or in one-third increments over a three-year service period. Restricted stock awards granted to directors vest over a one-year service period and additionally contain performance-based vesting conditions. 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, with certain exceptions

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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, 2016	726		$	14.82
Granted	326		16.65
Forfeited	(2	)	15.77
Nonvested at March 31, 2016	1,050		$	15.38

Total expense for restricted stock awards totaled $698 thousand for the three months ended March 31, 2016, of which $627 thousand related to employees was included in “Salary and employee benefits” and $71 thousand related to directors was included in “Professional fees” in the Consolidated Statements of Income. For the three months ended March 31, 2015, total expense for restricted stock awards totaled $351 thousand, of which $298 thousand related to employees was included in "Salary and employee benefits" and $53 thousand related to directors was included in "Professional fees" in the Consolidated Statements of Income. As of March 31, 2016, the total compensation costs related to nonvested restricted stock that has not yet been recognized totaled $13.3 million and the weighted-average period over which these costs are expected to be recognized is 3.4 years. With respect to restricted stock awards with a five-year vesting term, in the event a change in control occurs, vesting of these restricted stock awards would be accelerated to the earlier of the one-year anniversary of the change in control event or the date the individual is terminated without cause by the Company or Talmer Bank (or any of their successors), or the date the individual terminates his or her employment for good reason, during the one-year period following the change in control. With respect to restricted stock awards with a three-year vesting term, vesting of these restricted stock awards would be accelerated if the individual was terminated by the Company or Talmer Bank (or any of their successors) without cause.

15. 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. Failure to meet capital requirements can initiate regulatory action. Management believes as of March 31, 2016, the Company and its subsidiary bank 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.

Effective January 1, 2015, the Company adopted the new Basel III regulatory capital framework as approved by federal banking agencies, which are subject to a multi-year phase-in period.  The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. In addition, Basel III establishes a new capital conservation buffer of 2.5% of risk-weighted assets, which is phased-in over a four-year period beginning January 1, 2016. The capital conservation buffer for 2016 is 0.625%. We have elected to opt-out of including capital in accumulated other comprehensive income in common equity tier 1 capital.

At March 31, 2016 and December 31, 2015, 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.

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The following is a summary of actual and required capital amounts and ratios in accordance with current regulatory standards:

	Actual				For Capital Adequacy Purposes				For Capital Adequacy Purposes Plus Capital Conservation Buffer				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2016
Total capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	$	730,134	13.1	%	$	444,723	8.0	%	$	479,467	8.6	%	N/A		N/A
Talmer Bank and Trust	756,388		13.7		442,723		8.0		475,928		8.6		$	553,404	10.0	%
Common equity tier 1 capital
Talmer Bancorp, Inc. (Consolidated)	675,500		12.2		250,157		4.5		284,901		5.1		N/A		N/A
Talmer Bank and Trust	701,754		12.7		249,032		4.5		282,236		5.1		359,713		6.5
Tier 1 capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	675,500		12.2		333,542		6.0		368,286		6.6		N/A		N/A
Talmer Bank and Trust	701,754		12.7		332,042		6.0		365,247		6.6		442,723		8.0
Tier 1 leverage ratio
Talmer Bancorp, Inc. (Consolidated)	675,500		10.3		262,349		4.0		262,349		4.0		N/A		N/A
Talmer Bank and Trust	701,754		10.7		263,103		4.0		263,103		4.0		328,879		5.0
December 31, 2015
Total capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	$	718,666	13.0	%	$	442,170	8.0	%	N/A		N/A		N/A		N/A
Talmer Bank and Trust	740,338		13.5		439,255		8.0		N/A		N/A		$	549,068	10.0	%
Common equity tier 1 capital
Talmer Bancorp, Inc. (Consolidated)	662,668		12.0		248,721		4.5		N/A		N/A		N/A		N/A
Talmer Bank and Trust	684,340		12.5		247,081		4.5		N/A		N/A		356,894		6.5
Tier 1 capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	662,668		12.0		331,628		6.0		N/A		N/A		N/A		N/A
Talmer Bank and Trust	684,340		12.5		329,441		6.0		N/A		N/A		439,255		8.0
Tier 1 leverage ratio
Talmer Bancorp, Inc. (Consolidated)	662,668		10.2		259,694		4.0		N/A		N/A		N/A		N/A
Talmer Bank and Trust	684,340		10.5		259,784		4.0		N/A		N/A		324,730		5.0

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

No dividends were paid during the three months ended March 31, 2016. For the three months ended March 31, 2015, dividends of $15.0 million were paid to the Company by a subsidiary bank.

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On April 27, 2016, a cash dividend on the Company’s Class A common stock of $0.05 per share was declared.  The dividend will be paid on May 25, 2016, to the Company’s Class A common shareholders of record as of May 11, 2016.

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16.  PARENT COMPANY FINANCIAL STATEMENTS

Balance Sheets - Parent Company

(Dollars in thousands)	March 31, 2016		December 31, 2015
Assets
Cash and cash equivalents	$	13,643	$	12,581
Investment in subsidiary	778,322		750,713
Income tax benefit	10,006		8,504
Other assets	891		994
Total assets	$	802,862	$	772,792
Liabilities
Short-term borrowings	$	37,500	$	30,000
Long-term debt	15,448		15,406
Accrued expenses and other liabilities	1,244		2,171
Total liabilities	54,192		47,577
Shareholders’ equity	748,670		725,215
Total liabilities and shareholders’ equity	$	802,862	$	772,792

Statements of Income and Comprehensive Income - Parent Company

	For the three months ended March 31,
(Dollars in thousands)	2016			2015
Income
Dividend income from subsidiary	$	—		$	15,000
Other noninterest income	5			5
Total income	5			15,005
Expenses
Salary and employee benefits	1,688			1,221
Merger and acquisition expense	2,874			996
Professional service fees	515			377
Insurance expense	115			80
Marketing expense	15			14
Interest on short-term borrowings	167			74
Interest on long-term debt	198			162
Other	53			114
Total expenses	5,625			3,038
Income (loss) before income taxes and equity in undistributed net earnings of subsidiaries	(5,620		)	11,967
Income tax benefit	1,814			653
Equity in (over) under distributed earnings of subsidiaries	23,489			(3,187		)
Net income	$	19,683		$	9,433
Total comprehensive income, net of tax	$	23,410		$	12,223

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Statements of Cash Flows - Parent Company

	For the three months ended March 31,
(Dollars in thousands)	2016			2015
Cash flows from operating activities
Net income	$	19,683		$	9,433
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in over (under) distributed earnings of subsidiaries	(23,489		)	3,187
Stock-based compensation expense	305			143
Increase in income tax benefit	(1,502		)	(736		)
Decrease in other assets, net	103			100
Decrease in accrued expenses and other liabilities, net	(885		)	(2,633		)
Net cash from operating activities	(5,785		)	9,494
Cash flows from investing activities
Cash used in acquisitions	—			(13,323		)
Refund of investment	—			2,225
Net cash used in investing activities	—			(11,098		)
Cash flows from financing activities
Issuance of common stock and restricted stock awards, including tax benefit	2,667			266
Repurchase of warrants to repurchase 2.5 million shares, at fair value	—			(19,892		)
Cash dividends paid on common stock(1)	(3,320		)	(706		)
Draw on senior unsecured line of credit	7,500			20,000
Repayment of long-term debt	—			(3,500		)
Net cash from financing activities	6,847			(3,832		)
Net increase (decrease) in cash and cash equivalents	1,062			(5,436		)
Beginning cash and cash equivalents	12,581			9,497
Ending cash and cash equivalents	$	13,643		$	4,061

(1) $0.05 per share and $0.01 per share for the three months endedMarch 31, 2016 and 2015, respectively.

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17.  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. The factors used in the earnings per share computation follow: 

	For the three months ended March 31,
(In thousands, except per share data)	2016			2015
Net income	$	19,683		$	9,433
Net income allocated to participating securities	249			53
Net income allocated to common shareholders (1)	$	19,434		$	9,380
Weighted average common shares - issued	66,502			70,619
Average unvested restricted share awards	(866		)	(403		)
Weighted average common shares outstanding - basic	65,636			70,216
Effect of dilutive securities
Employee and director stock options	4,054			3,962
Warrants	16			925
Weighted average common shares outstanding - diluted	69,706			75,103
EPS available to common shareholders
Basic	$	0.30		$	0.13
Diluted	$	0.28		$	0.12

(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 $16.89 per share and $14.07 per share for the three months ended March 31, 2016 and 2015, respectively.

The following average shares related to outstanding options to purchase shares of common stock were not included in the computation of diluted net income available to common shareholders because they were antidilutive.  There were no outstanding antidilutive options or warrants during the three months endedMarch 31, 2016 and no outstanding antidilutive warrants during the three months ended March 31, 2015.

(Shares in thousands)	For the three months ended March 31, 2015
Average outstanding options	35
Outstanding exercise prices:
Low end	$	14.44
High end	$	14.44

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18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows:

(Dollars in thousands)	Unrealized gains (losses) on securities available-for-sale, net of tax				Unrealized gains (losses) on cash flow hedges, net of tax				Total unrealized gains (losses), net of tax
For the three months ended March 31, 2016
Beginning balance	$	3,589			$	(190	)		$	3,399
Other comprehensive income (loss) before reclassifications	4,939				(1,092		)		3,847
Amounts reclassified from accumulated other comprehensive income	(216		)	(1)	96			(2)	(120		)
Net current period other comprehensive income (loss)	4,723				(996		)		3,727
Ending balance	$	8,312			$	(1,186	)		$	7,126
For the three months ended March 31, 2015
Beginning balance	$	3,995			$	(145	)		$	3,850
Other comprehensive income (loss) before reclassifications	2,875				(211		)		2,664
Amounts reclassified from accumulated other comprehensive income	69			(1)	57			(2)	126
Net current period other comprehensive income (loss)	2,944				(154		)		2,790
Ending balance	$	6,939			$	(299	)		$	6,640

(1) Amounts are included in “Net gain (loss) on sales of securities” in the Consolidated Statements of Income within total noninterest income, and were $333 thousand and $(107) thousand for the three months ended March 31, 2016 and 2015, respectively. Income tax expense (benefit) associated with the reclassification adjustments for the three months ended March 31, 2016 and 2015 was $(117) thousand and $38 thousand, respectively, and are included in “Income tax provision” in the Consolidated Statements of Income.

(2) Amounts are included in “Other brokered funds” in the Consolidated Statements of Income within total interest expense and were $148 thousand and $88 thousand for the three months ended March 31, 2016 and 2015, respectively. Income tax expense associated with the reclassification adjustment for the three months ended ended March 31, 2016 and 2015 was $52 thousand and $31 thousand, respectively, and were included in “Income tax provision” in the Consolidated Statements of Income.

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

The following discussion describes our results of operations for the three months ended March 31, 2016 and March 31, 2015 and also analyzes our financial condition as of March 31, 2016 as compared to December 31, 2015. 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 2015 Annual Report on Form 10-K.

In this report, unless the context suggests otherwise, references to “Talmer Bancorp, Inc.,” “Company,” “we,” “us,” and “our” mean the combined business of Talmer Bancorp, Inc. and its subsidiary bank, Talmer Bank and Trust (“Talmer Bank”). However, if the discussion relates to a period after our acquisition of Talmer West Bank on January 1, 2014, but before Talmer West Bank was merged with and into Talmer Bank on August 21, 2015, 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.

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Business Overview

Talmer Bancorp, Inc. is a bank holding company headquartered in Troy, Michigan.  Between April 30, 2010 and March 31, 2016, we successfully completed eight acquisitions totaling $6.0 billion in assets and $6.1 billion in liabilities.  Through our wholly-owned subsidiary bank, Talmer 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 Ohio, Chicago, Illinois, Northern Indiana, 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 Talmer 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 through a combination of organic growth and 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;

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

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

On December 15, 2011, we closed on the acquisition of Lake Shore Wisconsin Corporation, which divested its subsidiary, Hiawatha National Bank, to its shareholders prior to closing.  Lake Shore Wisconsin Corporation’s

remaining assets consisted of approximately $26.0 million in cash and cash equivalents, which we acquired in the transaction.

On January 1, 2013, we closed on the acquisition of First Place Bank acquiring $2.6 billion in assets at fair value, including $1.5 billion in loans, net of unearned income, $139.8 million in investment securities, $42.0 million in loan servicing rights, and $18.4 million of other real estate owned. We also acquired $2.5 billion of liabilities at fair value, including $2.1 billion of retail deposits with a core deposit intangible of $9.8 million, and $334.8 million of debt.  First Place Bank was merged into Talmer Bank on February 10, 2014.

On January 1, 2014, we closed on the acquisition of Talmer West Bank, formerly Michigan Commerce Bank, acquiring $910.3 million in assets at a 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 acquired $861.8 million of liabilities at fair value, including $857.8 million of retail deposits with a core deposit intangible of $3.6 million.  Talmer West Bank was merged into Talmer Bank August 21, 2015.

On February 6, 2015, we closed on the acquisition of First of Huron Corp. acquiring $228.3 million in assets at fair value, including $162.3 million in loans, net of unearned income and $34.0 million in investment securities.  We also acquired $218.4 million of liabilities at fair value, including $201.5 million of retail deposits and $13.1 million of debt. 

Pending Merger

On January 25, 2016, the Company and entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Chemical Financial Corporation ("Chemical"), a Michigan corporation. The Merger Agreement was approved by the boards of directors of the Company and Chemical, and is subject to shareholder and regulatory approval and other customary closing conditions.

The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, the Company will be merged with and into Chemical, with Chemical as the surviving corporation (the “Merger”). After

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completion of the Merger, Chemical intends to consolidate Talmer Bank with and into Chemical Bank, Chemical's wholly-owned subsidiary bank, with Chemical Bank as the surviving institution (the "Bank Merger").

Subject to the terms and conditions of the Merger Agreement, in the Merger, each of our shareholders will receive 0.4725 shares of Chemical common stock and $1.61 in cash for each share of our common stock owned by the shareholder. Each stock option to purchase shares of our common stock that remains outstanding at the effective time of the Merger will be assumed by Chemical and will be converted into a stock option with respect to Chemical's common stock (excluding certain of our stock options that may be cancelled and cashed out as provided in the Merger Agreement), at the conversion rate set forth in the Merger Agreement. All of our restricted stock awards that are unvested and remain outstanding at the effective time of the Merger will be converted into restricted stock awards of Chemical, on the same terms and conditions as were applicable to our restricted stock awards.

The completion of the merger is subject to receipt of regulatory approvals and satisfaction of other customary closing conditions, including approval of both Chemical's and the Company's shareholders.

Financial Overview

As of March 31, 2016, our total assets were $6.7 billion, our net total loans were $4.9 billion, our total deposits were $5.2 billion and our total shareholder’s equity was $748.7 million.

As of March 31, 2016, we had $4.9 billion in total loans, compared to $4.8 billion at December 31, 2015.  Approximately 73.0% of our total loans at March 31, 2016 were generated through non-acquisition growth, compared to 70.3% of our total loans at December 31, 2015 and 59.1% of our total loans at March 31, 2015.  Of the $4.9 billion in total loans at March 31, 2016, $1.3 billion, or 27.0%, 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 $19.7 million for three months endedMarch 31, 2016, compared to $9.4 million for the three months endedMarch 31, 2015.  During the three months endedMarch 31, 2016 we incurred $2.9 million of transaction and integration related expenses related to the pending merger with Chemical.  Net income for the three months endedMarch 31, 2015, included $3.3 million of transaction and integration related expenses primarily related to the acquisition of First of Huron Corporation.  We completed the operational integrations of both Talmer West Bank and First of Huron Corp. in February 2015 and we completed the charter consolidation of Talmer West Bank into Talmer Bank in August 2015.

In this report, we refer to our eight completed acquisitions collectively as the “acquisitions.” We refer to our loans acquired in our acquisitions as “acquired loans.”

Economic Overview

Gross Domestic Product (“GDP”) growth in the fourth quarter 2015 increased 1.4% compared to 2.0% growth in the third quarter of 2015 and growth of 2.1% in the fourth quarter of 2014, 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 4.9% as of February 29, 2016, down from 5.0% as of December 31, 2015 and 5.6% as of December 31, 2014.

Total existing home sales in the U.S., as indicated by the National Association of Realtors, showed mixed signs with existing home sales at a seasonally adjusted 4.8 million units for the rolling twelve months ended January 31, 2016, up 6.9% from the rolling twelve month total of 4.5 million units as of January 31, 2015. Inventory levels were at a 3.9 months’ supply, or 1.6 million units, as of January 31, 2016, compared to a 4.4 months’ supply as of January 31, 2015. New home sales were up to a seasonally adjusted annual rate of 540 thousand units as of January 31, 2016, up 9.1% from 495 thousand as of January 31, 2015. Inventory for new homes increased to a 5.2 months’ supply as of January 31, 2016 versus a 5.1 month supply as of January 31, 2015, while the median sales price of new homes decreased 1.7% to $297 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 5.6% from January 2015 to January 2016. The pace of increasing values has increased from the January 2015 year-over-year increase of 4.5%.

Bankruptcy filings, per the U.S. Court Statistics, also improved with total filings down 9.9% for the 12 months ending December 31, 2015, compared to the 12 months ending December 31, 2014, with business filings down 8.3% and personal filings down 9.9% for the period. It should be noted that the pace of reduction has slowed, and that business filings in Northern Illinois were up 0.7% and Ohio was up 0.3%.

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According to McGraw-Hill Financials compilation of Residential Real Estate Statistics, overall mortgage industry performance saw improvement with prime mortgage delinquency falling to 2.8% as of December 31, 2015 versus 3.3% as of December 31, 2014 and 3.5% as of December 31, 2013, according to the Mortgage Bankers Association. New foreclosures on prime loans were relatively flat at 0.2% as of December 31, 2015, compared to 0.3% as of December 31, 2014, but down from 0.4% as of December 31, 2013. According to S&P Indices, first mortgages in default were also flat at 0.8% as of February 29, 2016, compared to December 31, 2015, and down from 1.0% as of December 31, 2014. The continued improvements are supported by a decrease in the affordability index (the ratio between mortgage payments and average income), which decreased 5.0% to 162.5 as of January 31, 2016 from 171.0 at January 31, 2015. In addition, the overall consumer confidence index, ending January 31, 2016 was at 96.3, up 4.0% from the December 31, 2015 level of 92.6 and up 3.4% from 93.1 as of January 31, 2015. It should be noted however, that the January 31, 2016 index of 96.3 is down 7.2% from the February 28, 2015 index high of 103.8.

According to the Beige Book published by the Federal Reserve Board in March 2016, overall economic activity was improved. The Fourth (Cleveland) Federal Reserve District and the Seventh (Chicago) Federal Reserve District reported modest growth and the twelfth (San Francisco) Federal Reserve District reported moderate growth. 

According to the Beige Book published by the Federal Reserve Board in March 2016, the economy in the Cleveland District grew at a modest pace since December 2015. Manufacturing output continued to trend slowly higher on balance. The housing market improved, with higher unit sales and higher prices. Nonresidential contractors reported favorable results for 2015, and they expect these will carry through 2016. Results for the post-holiday shopping period at general merchandise retailers were mixed; auto dealers saw higher unit volume on a year-over-year basis. The demand for credit moved slowly higher. Oil and gas extraction and coal production declined. Freight volume trended lower. Payrolls expanded on balance during the first two months of 2016, especially in the manufacturing, construction, and banking sectors. Reports indicated an ongoing tightening in labor markets. Job churning and wage pressure were most evident in the lower-skilled and service technician segments. Staffing firms reported an increase in the number of job openings and placements, primarily in healthcare and manufacturing. Overall, input and finished-goods prices were steady other than adjustments made for commodity price fluctuations.

According to the Beige Book published by the Federal Reserve Board in March 2016, growth in economic activity in the Chicago District continued to increase at a modest pace in January and February 2016. Consumer and business spending, construction, and real estate activity all rose at modest rates, while manufacturing production grew at a moderate pace. Financial conditions tightened some. The turmoil in financial markets also led business owners to express greater uncertainty and more pessimism about the pace of growth over the next 6 to 12 months. Both price and wage pressures remained subdued. Crop farmers continued to cut capacity after a year of low incomes. Growth in consumer spending remained modest, and the pace of growth slowed some over the reporting period. Sales in the general merchandise, hobby, and jewelry sectors were stronger while sales in the apparel and food and beverage sectors were weaker. Business owners expressed disappointment in the extent to which lower gas prices and improvements in the labor market were translating into sales growth. Growth in business spending remained modest in early 2016. Most retailers indicated that inventories were at comfortable levels, though some auto dealers reported shortages of popular models, and inventories of heavy trucks were higher than desired. Steel service center inventories declined some but remained elevated. Business owners expect steel inventories to return to normal levels sometime in the second quarter of 2016.

According to the Beige Book published by the Federal Reserve Board in March 2016, economic activity in the San Francisco District grew at a moderate pace during the reporting period of January and February 2016. Overall price inflation was minimal, although upward wage pressures increased further. Retail sales expanded moderately, and demand for business services grew modestly. Manufacturing output was flat. On balance, activity in the agriculture sector was flat. Activity in residential and commercial real estate markets expanded further. Lending activity grew at a modest pace. Demand for consumer and business services continued to expand at a modest pace. The tourism industry saw further gains, with hotel profitability picking up further and new restaurants continuing to open in parts of the District.

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, fell to 4.8% as of February 29, 2016, down from 5.1% as of December 31, 2015 and 6.4% as of December 31, 2014. Other improvements included a 7.5% decline in total bankruptcies, per the U.S. Court Statistics, during the 12 months ending December 31, 2015 compared to the 12 months ending December 31, 2014.

As of March 31, 2016, $1.6 billion, or 32.5% of our total loans are to businesses and consumers in the Detroit-Warren-Dearborn 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- Dearborn MSA, as indicated by the U.S. Bureau of Labor Statistics, was flat at 5.4% as of February 29, 2016, from 5.4% as of December 31, 2015, but down from 6.5% at

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December 31, 2014. The Detroit MSA showed an increase in home prices as reported in the Case-Shiller index (seasonally adjusted) of 7.1% for the rolling twelve months ending January 31, 2016 from 2.9% for the 12 months ending January 31, 2015. As of March 31, 2016, approximately $65.4 million, or less than two percent, of our loan portfolio were loans to borrowers located in the city of Detroit.

The Ohio economy also showed mixed signs of recovery. Unemployment, as indicated by the U.S. Bureau of Labor Statistics, was up slightly at 4.9% as of February 29, 2016, compared to 4.8% as of December 31, 2015, but down from 5.1% as of December 31, 2014. The Cleveland MSA showed unemployment of 5.7% as of February 29, 2016, up from 4.0% as of December 31, 2015 and from 5.2% as of December 31, 2014. Bankruptcies in Ohio, per the U.S. Court Statistics, were down 6.2% during the 12 months ending December 31, 2015 when compared to the 12 months ending December 31, 2014. However, new business bankruptcies increased 0.3% during the same period. The Case-Shiller index for the Cleveland market indicates housing prices were up 2.9% for the twelve month period ending January 31, 2016, versus 1.6% increase for the 12 months ending January 31, 2015.

The Illinois economy also showed mixed signs of recovery. Unemployment, as indicated by the U.S. Bureau of Labor Statistics, was up at 6.4% as of February 29, 2016, compared to 6.1% as of December 31, 2015 and 6.2% as of December 31, 2014. Unemployment in the Chicago MSA increased to 6.8% as of February 29, 2016, compared to 5.7% as of both December 31, 2015 and December 31, 2014. Bankruptcies in the Northern Illinois region were down 6.1% for the 12 months ending December 31, 2015 compared to the 12 months ending December 31, 2014. However, business filings were up 0.7% for the same period. Home values, as indicated by the Case-Shiller index for the Chicago MSA were up 1.9% for the twelve-month period ending January 31, 2016, compared to 2.5% increase for the 12 months ending January 31, 2015.

The Indiana economy continued to who signs of recovery. According to the U.S. Bureau of Labor Statistics, the unemployment rate was up slightly at 4.7% as of February 29, 2016, compared to 4.6% as of December 31, 2015, but down from 5.9% as of December 31, 2014. Unemployment in the Elkhart MSA was up at 4.2% as of February 29, 2016 compared to 3.6% as of December 31, 2015, but down from 5.1% as of December 31, 2014. In addition, personal and business bankruptcy filings in Northern Indiana, per the U.S. Court Statistics, for the 12 months ending December 31, 2015 was down 7.1% compared to the 12 months ending December 31, 2014. Indiana real estate values have improved according to statistics from Zillow with prices increasing 3.2% for the twelve months ending January 31, 2016.

The Nevada economy also showed signs of gradual recovery. Unemployment, as indicated by the U.S. Bureau of Labor Statistics,was down at 5.9% as of February 29, 2016 compared to 6.3% as of December 31, 2015 and down from 7.0% as of December 31, 2014. This is Nevada’s lowest rate since March 2008. Unemployment in the Las Vegas MSA was also down at its lowest rate since 2008 at 5.6% as of February 29, 2016 versus 6.2% as of December 31, 2015, and 7.0% as of December 31, 2014. Bankruptcies in the Nevada region, according to Department of Justice reports, were down 16.0% for the 12 months ending December 31, 2015 compared to the 12 months ending December 31, 2014. Home values, as indicated by the Case-Shiller index for the Las Vegas market were up 5.9% for the 12 months ending January 31, 2016, unchanged from increase in the 12 months ending January 31, 2015.

Summary of Acquisition 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 Financial Accounting Standards Board (“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 are 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 acquisitions of First Banking Center and Peoples State Bank approximately 60% of the acquired loan portfolios were specifically reviewed for each of these acquisitions. For our acquisitions of CF Bancorp and Talmer West Bank approximately 50% of the acquired loan portfolio was specifically reviewed. For our acquisitions of First of Huron Corp. and First Place Bank approximately 35% and 30% of the acquired loan portfolio was specifically reviewed, respectively.

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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, approximately 40% of the loans acquired in our acquisition of Talmer West Bank and approximately 25% of the loans acquired in our acquisition of First of Huron Corp. 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. 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.

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

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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 were covered loans, any remaining FDIC indemnification asset no longer expected to be received was also written off through “Accelerated discount on acquired loans” in our consolidated statements of income in the corresponding period.

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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 Significant Accounting Policies,” in our 2015 Annual Report on 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. The most critical of these significant accounting policies are the policies related to the allowance for loan losses, fair valuation methodologies, purchased loans, and income taxes. These policies were reviewed with the Audit Committee of the Board of Directors and are discussed more fully on pages 56 through 59 in our 2015 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 of categories of the critical accounting policies or estimates and assumptions from those discussed in our 2015 Annual Report on Form 10-K.

Financial Results

We had net income for the three months ended March 31, 2016 of $19.7 million, or $0.28 per average diluted share, compared to $9.4 million, or $0.12 per average diluted share, for the same period ended March 31, 2015. The increase in net income of $10.3 million for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, primarily reflects a decrease in noninterest expense of $8.3 million and an increase in net interest income of $5.1 million, partially offset by a decrease in noninterest income of $7.8 million.

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 months ended March 31, 2016 and 2015. 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 months ended March 31, 2016 and 2015.

We had net interest income of $56.1 million for the three months ended March 31, 2016, an increase of $5.1 million from $51.0 million for the same period in 2015. The increase in net interest income in the three months ended March 31, 2016, compared to the same period in 2015, was primarily due to a decrease of $9.3 million in negative accretion on the FDIC indemnification asset, partially offset by a decrease of $3.6 million in interest and fees on loans. The decrease in negative accretion on the FDIC indemnification asset was due to the early termination of our FDIC loss share agreements resulting in no further negative accretion beginning in the fourth quarter of 2015. The decrease in interest and fees on loans is primarily due to the run-off of acquired, higher-yielding loans. Our net interest margin (FTE) for the three months ended March 31, 2016 decreased 7 basis points to 3.73% from 3.80% for the comparable period in 2015. The decrease in net interest margin was primarily due to the decline in the benefit provided by our higher yielding acquired loans as the balances continue to run-off, partially offset by the elimination of negative accretion on the FDIC indemnification asset.

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 March 31, 2016 and 2015, the yield on total loans was 4.66% and 5.49%, respectively, while the yield on total loans generated using only the expected coupon (with respect to purchased credit impaired loans) would have been 4.06% and 4.59%, respectively. The difference between the actual yield earned on total loans and the yield generated based on the contractual coupon (not including any interest income for loans in nonaccrual status) represents excess accretable yield. The decline in our loan total loan yield excluding the excess accretable yield was driven by the run-off of higher yielding acquired loans being replaced with new loans with lower, current market-competitive rates.

Prior to our early termination of the FDIC loss share agreements in the fourth quarter of 2015, our net interest margin was also adversely impacted by the negative yield on the FDIC indemnification asset. Because our quarterly cash flow re-estimations continuously resulted in improvements in overall expected cash flows on FDIC covered loans, our expected payments from the FDIC under our loss share agreements declined, resulting in a negative yield on the FDIC indemnification asset, which partially offset the benefits provided by the excess accretable yield discussed above. The negative yield on the FDIC indemnification asset was 60.03% for the three months ended March 31, 2015. The combination of the excess accretable

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yield and the negative yield on the FDIC indemnification asset benefited net interest margin by four basis points for the three months ended March 31, 2015.

The following table sets 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.

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Analysis of Net Interest Income — Fully Taxable Equivalent

	For the three months ended March 31,
	2016							2015
(Dollars in thousands)	Average Balance			Interest (1)		Average Rate (2)		Average Balance			Interest (1)			Average Rate (2)
Earning assets:
Interest-earning balances	$	143,092		$	184	0.52	%	$	156,828		$	86		0.22	%
Federal funds sold and other short-term investments	186,516			468		1.01		97,419			165			0.69
Investment securities (3):
Taxable	606,907			3,240		2.15		494,079			2,323			1.91
Tax-exempt	283,325			1,991		3.71		236,469			1,615			3.69
Federal Home Loan Bank stock	29,621			312		4.24		20,681			245			4.81
Gross loans (4)	4,864,600			56,360		4.66		4,430,342			59,938			5.49
FDIC indemnification asset	—			—		—		62,485			(9,250		)	(60.03	)
Total earning assets	6,114,061			62,555		4.16	%	5,498,303			55,122			4.11	%
Non-earning assets:
Cash and due from banks	87,674							91,194
Allowance for loan losses	(54,878		)					(53,268		)
Premises and equipment	43,262							48,376
Core deposit intangible	12,519							14,201
Goodwill	3,524							2,075
Other real estate owned and repossessed assets	27,268							48,562
Loan servicing rights	56,202							60,185
FDIC receivable	—							5,473
Company-owned life insurance	107,627							100,923
Other non-earning assets	242,344							234,697
Total assets	$	6,639,603						$	6,050,721
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	854,954		$	401	0.19	%	$	772,181		$	290		0.15	%
Money market and savings deposits	1,294,281			667		0.21		1,211,958			471			0.16
Time deposits	1,609,640			3,114		0.78		1,264,103			1,827			0.59
Other brokered funds	296,551			618		0.84		589,239			623			0.43
Short-term borrowings	345,929			657		0.76		49,839			79			0.65
Long-term debt	417,212			1,000		0.96		402,023			800			0.81
Total interest-bearing liabilities	4,818,567			6,457		0.54	%	4,289,343			4,090			0.39	%
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits	1,026,597							921,359
FDIC clawback liability	—							27,107
Other liabilities	58,060							53,547
Shareholders’ equity	736,379							759,365
Total liabilities and shareholders’ equity	$	6,639,603						$	6,050,721
Net interest income				$	56,098						$	51,032
Interest spread						3.62	%							3.72	%
Net interest margin as a percentage of interest earning assets						3.69	%							3.76	%
Tax equivalent effect						0.04	%							0.04	%
Net interest margin on a fully tax equivalent basis						3.73	%							3.80	%

(1) Interest income is shown on an 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 $619 thousand and $534 thousand on tax-exempt securities for the three months ended March 31, 2016 and 2015, 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

The table below presents the effect of volume and rate changes on interest income and expense.  Changes in volume are changes in the average balance multiplied by the previous year’s average rate.  Changes in rate are changes in the average rate multiplied by the average balance from the previous year.  The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

	For the three months ended March 31, 2016 vs. 2015
	Increase (Decrease) Due to:						Net Increase
(Dollars in thousands)	Rate			Volume			(Decrease)
Interest-earning assets
Interest-earning balances	$	106		$	(8	)	$	98
Federal funds sold and other short-term investments	104			199			303
Investment securities:
Taxable	341			576			917
Tax-exempt	48			328			376
FHLB stock	(30		)	97			67
Gross loans	(9,111		)	5,533			(3,578		)
FDIC indemnification asset (1)	—			9,250			9,250
Total interest income	(8,542		)	15,975			7,433
Interest-bearing liabilities
Interest-bearing demand deposits	78			33			111
Money market and savings deposits	162			34			196
Time deposits	712			575			1,287
Other brokered funds	406			(411		)	(5		)
Short-term borrowings	19			559			578
Long-term debt	169			31			200
Total interest expense	1,546			821			2,367
Change in net interest income	$	(10,088	)	$	15,154		$	5,066

(1) On December 28, 2015, we entered into an early termination agreement with the FDIC that terminated our loss share agreements and, therefore eliminating the remaining balance on our FDIC indemnification asset and any further negative accretion on such asset.

Provision (Benefit) for Loan Losses

We establish an allowance for loan losses through a provision (benefit) 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, 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 acquired 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 purchased credit impaired loans.  We record a provision for loan losses during the period for any decline in expected cash flows on such loans. 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.

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 The net benefit for loan losses was $1.1 million for the three months ended March 31, 2016, compared to a net provision for loan losses of $2.0 million for the three months ended March 31, 2015. The allowance for loan losses was $52.4 million, or 1.06% of total loans at March 31, 2016, compared to $54.0 million, or 1.12% of total loans at December 31, 2015. The net benefit for loan losses on total loans for the three months ended March 31, 2016 primarily reflects impairment relief recorded as a result of our re-estimation of cash flows for purchased credit impaired loans, credit recoveries on acquired loans that were paid off, payments received on loans previously carrying an allowance for loan loss, partially offset by additional provisions for organic loan growth. The $2.0 million provision for loan losses for the three months ended March 31, 2015 primarily reflects impairment recorded as a result of our re-estimation of cash flows for purchased credit impaired loans, an increase in provisions for impaired loans individually evaluated and additional provisions for loan growth outside of the First of Huron Corp. acquisition. The decrease in the allowance for loan losses in the three months ended March 31, 2016 was primarily due to credit recoveries on acquired loans that were paid off, payments received on loans previously carrying an allowance for loan loss, reductions in the percentage of nonperforming loans to total loans, and to a lesser extent, increases in collateral and cash flow expectations on loans individually evaluated for impairment.

We recorded a net impairment relief related to re-estimations of cash flows on purchased credit impaired loans of $963 thousand for the three months ended March 31, 2016 and impairment of $2.7 million for the three months ended March 31, 2015. Because we acquired First of Huron Corp. on February 6, 2015, we did not perform a re-estimation of the purchased credit impaired loans acquired in the first quarter of 2015. The re-estimations also resulted in improvements in gross cash flow expectations on purchased credit impaired loans of $15.7 million and $29.4 million for the three months ended March 31, 2016 and 2015, 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 purchased credit impaired loan.

Noninterest Income

The following table presents noninterest income for the three months ended March 31, 2016 and 2015.

	For the three months ended  March 31,
(Dollars in thousands)	2016			2015
Noninterest income
Deposit fee income	$	2,397		$	2,320
Mortgage banking and other loan fees:
Changes in loan servicing rights fair value due to valuation inputs or assumptions (1)	(6,625		)	(4,084		)
Other	2,745			2,823
Total mortgage banking and other loans fees	(3,880		)	(1,261		)
Net gain on sales of loans	5,238			8,618
Accelerated discount on acquired loans	5,052			8,198
Net gain (loss) on sales of securities	333			(107		)
Company-owned life insurance	750			740
FDIC loss share income (2)	—			(1,068		)
Other income	3,734			3,990
Total noninterest income	$	13,624		$	21,430

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

(2) On December 28, 2015, we entered into an early termination agreement with the FDIC that terminated our loss share agreementsand, therefore eliminating any further loss share income.

Noninterest income decreased $7.8 million to $13.6 million for the three months ended March 31, 2016, from the same period of 2015. The decrease in noninterest income for the three months ended March 31, 2016, compared to 2015, was primarily due to decreases in net gain on sales of loans of $3.4 million, accelerated discount on acquired loans of $3.1 million and mortgage banking and other loan fees of $2.6 million. The decrease in net gain on sales of loans reflects the reduced levels of residential mortgage loans originated for sale. The decrease in accelerated discount on acquired loans is primarily due to a decrease in cash payments received outside of expected terms. The decrease in mortgage banking and other loan fees primarily reflects the change in the fair value of loan servicing rights due to interest rate fluctuations that impacted assumed prepayment speeds which decreased earnings by $6.6 million in the three months ended March 31, 2016, compared to a decrease of $4.1

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million for the same period in 2015. Changes in the fair value of loan servicing rights due to reductions in servicing rights from loans paid off during the period were a detriment to earnings of $1.8 million for the three months ended March 31, 2016 and $2.3 million for the same period in 2015.    

Noninterest Expenses

The following table presents noninterest expenses for the three months ended March 31, 2016 and 2015.

	For the three months ended  March 31,
(Dollars in thousands)	2016		2015
Noninterest expense
Salary and employee benefits	$	25,813	$	29,212
Occupancy and equipment expense	6,007		7,666
Data processing fees	1,743		1,854
Professional service fees	3,290		3,543
Merger and acquisition expense	2,874		1,412
Marketing expense	1,529		1,095
Other employee expense	808		934
Insurance expense	1,550		1,530
FDIC loss share expense (1)	—		949
Other expense	4,656		8,400
Total noninterest expense	$	48,270	$	56,595

(1) On December 28, 2015, we entered into an early termination agreement with the FDIC that terminated our loss share agreements and, therefore eliminating any further loss share expense.

Noninterest expenses decreased $8.3 million to $48.3 million for the three months ended March 31, 2016, compared to the same period in 2015. The decrease in noninterest expense was primarily due to decreases of $3.4 million in salary and employee benefits expense, $1.7 million in occupancy and equipment expense and other declines in operating expenses, partially offset by an increase of $1.5 million in merger and acquisition expense. The decreases in salary and employee benefits and in occupancy and equipment expense were primarily due to the rationalization of staff levels and consolidation of branches following the operational integrations of both Talmer West Bank and First of Huron Corp. in February 2015 and the charter consolidation of Talmer West Bank into Talmer Bank in August 2015.

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We had transaction and integration related expenses of $2.9 million for the three months ended March 31, 2016 related to our pending merger with Chemical. We had transaction and integration related expenses of $3.3 million for the three months ended March 31, 2015, which included anticipated and paid severance payments for reductions in the work force following the acquisition and integration of First of Huron Corp., the operational integration of Talmer West Bank, system conversion expenses and merger and acquisition expense.

Our transaction and integration related expenses for the three months ended March 31, 2016 and 2015 are detailed in the tables below.

	For the three months ended March 31, 2016
(Dollars in thousands)	Actual		Transaction and integration related expenses		Excluding transaction and integration related expenses
Noninterest expense
Salary and employee benefits	$	25,813	$	—	$	25,813
Occupancy and equipment expense	6,007		—		6,007
Data processing fees	1,743		—		1,743
Professional service fees	3,290		—		3,290
Merger and acquisition expense	2,874		2,874		—
Marketing expense	1,529		—		1,529
Other employee expense	808		—		808
Insurance expense	1,550		—		1,550
Other expense	4,656		—		4,656
Total noninterest expense	$	48,270	$	2,874	$	45,396

	For the three months ended March 31, 2015
(Dollars in thousands)	Actual		Transaction and integration related expenses		Excluding transaction and integration related expenses
Noninterest expense
Salary and employee benefits	$	29,212	$	972	$	28,240
Occupancy and equipment expense	7,666		—		7,666
Data processing fees	1,854		875		979
Professional service fees	3,543		88		3,455
FDIC loss share expense	949		—		949
Merger and acquisition expense	1,412		1,412		—
Marketing expense	1,095		—		1,095
Other employee expense	934		—		934
Insurance expense	1,530		—		1,530
Other expense	8,400		—		8,400
Total noninterest expense	$	56,595	$	3,347	$	53,248

The efficiency ratio is a measure of noninterest expense as a percentage of net interest income and noninterest income. Our efficiency ratio was 69.2% for the three months ended March 31, 2016, compared to 78.1% for the three months ended March 31, 2015. Our core operating efficiency ratio, a non-GAAP financial measure, improved to 59.5% for the three months ended March 31, 2016, compared to 71.1% for the three months ended March 31, 2015. Our core efficiency ratio begins with the efficiency ratio and then excludes certain items deemed by management to not be related to regular operations including the fair value adjustment to our loan servicing rights, transaction and integration related costs and FDIC loss sharing income. Please see the section entitled "Reconciliation of Non-GAAP Financial Measure" for a discussion of the limitations of our core operating efficiency and a reconciliation of this non-GAAP financial measure to the most comparable GAAP measure.

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Income Taxes and Tax-Related Items

We recognized income tax expense of $2.9 million on $22.6 million of pre-tax income for the three months ended March 31, 2016, resulting in an effective tax rate of 12.8%, compared to income tax expense of $4.4 million on $13.9 million of pre-tax income for the three months ended March 31, 2015, resulting in an effective tax rate of 32.0%. The lower effective tax rate for the three months ended March 31, 2016was primarily due to the finalization of a settlement with the Internal Revenue Service regarding First Place Financial Corp.'s deduction of bad debt expense incurred prior to our acquisition of First Place Bank resulting in a tax benefit of $4.3 million. Talmer Bank, as successor to First Place Bank, was granted court approval to act as substitute agent for the First Place Financial Corp.'s consolidated group for the purposes of amending various returns, which ultimately favorably impacted the tax filings of Talmer Bank.

Financial Condition

Balance Sheet

Total assets were $6.7 billion at March 31, 2016, an increase of $117.8 million compared to $6.6 billion at December 31, 2015. The increase in total assets of $117.8 million was primarily due to increases of $118.6 million in net total loans and $55.8 million in securities available-for-sale. These increases were partially offset by decreases in loans held for sale of $33.2 million and cash and cash equivalents of $23.5 million. The increase in net total loans was primarily driven by growth in residential real estate and commercial real estate lending. The increase in securities available-for-sale reflects management's decision to invest in liquid assets while retaining accessibility to the funds for potential liquidity needs.

Total liabilities were $6.0 billion at March 31, 2016, compared to $5.9 billion at December 31, 2015. The $94.3 million increase in liabilities for the three months ended March 31, 2016, was primarily due to increases in total deposits of $138.2 million and other liabilities of $35.2 million, partially offset by decreases in long-term debt of $64.6 million and short-term borrowings of $14.5 million. The $138.2 million growth in total deposits includes growth in time deposits of $109.2 million, interest-bearing demand deposits of $46.6 million and noninterest-bearing demand deposits of $29.5 million. These increases were partially offset by declines in money market and savings deposits of $40.4 million and other brokered funds of $6.7 million. The strong growth in core deposit balances reflects management’s drive to increase core deposit growth achieved through deposit initiative programs. The decreases in both short-term borrowings and long-term debt are primarily due to repayments of Federal Home Loan Bank advances.

Total shareholders’ equity at March 31, 2016 was $748.7 million, an increase of $23.5 million compared to $725.2 million at December 31, 2015. The increase was primarily the result of our net income for the three months ended March 31, 2016 of $19.7 million.

Loans

Our loan portfolio represents a broad range of borrowers primarily in our 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. 

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.

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 and industrial loans include financing for commercial purposes in various lines of businesses, including manufacturing, service industry, professional service areas and agricultural.  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. 

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Generally, these loans are for construction projects that have been either pre-sold, pre-leased, 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 loan portfolio is managed to a risk-appropriate level as to not create a collateral, industry or geographic concentration. As of March 31, 2016, we do not have any significant concentrations to any one particular industry or borrower. Our largest geographic concentration of loans is in the Detroit-Warren-Dearborn 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-Dearborn MSA totaled $1.6 billion, or approximately 32.5% of total loans, at March 31, 2016. 

The following tables detail our loan portfolio by loan type and geographic location as of March 31, 2016 and December 31, 2015. Geographic location is primarily determined by the domicile of the borrower and branch of origination, and in some instances, the location of the collateral.

(Dollars in thousands)	Michigan		Ohio		Illinois		Indiana		Wisconsin		Nevada		Maryland		New Mexico		Other		Total
March 31, 2016
Commercial real estate (1)(2)	$	892,958	$	314,803	$	167,403	$	43,871	$	41,839	$	49,486	$	4,658	$	3,101	$	98,682	$	1,616,801
Residential real estate (3)(4)	787,418		477,494		46,430		94,174		29,093		10,647		35,674		43		123,967		1,604,940
Commercial and industrial (5)	440,004		193,334		189,103		28,170		26,254		14,031		3,275		293		384,938		1,279,402
Real estate construction	133,020		60,161		18,117		1,821		10,726		2,196		184		407		8,375		235,007
Consumer	18,945		3,775		3,352		2,342		932		2,571		6,054		296		149,319		187,586
Total loans	$	2,272,345	$	1,049,567	$	424,405	$	170,378	$	108,844	$	78,931	$	49,845	$	4,140	$	765,281	$	4,923,736

______________________________________________________________________________

(1) Commercial real estate loans to borrowers in the Detroit-Warren-Dearborn MSA totaled $631.4 million. The Detroit-Warren-Dearborn MSA includes borrowers located in Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the State of Michigan.

(2) Commercial real estate loans to borrowers in the Cleveland-Elyria-Mentor metropolitan statistical area (Cleveland MSA) totaled $176.3 million.  The Cleveland MSA includes borrowers located in Cuyahoga, Geauga Lake, Lorain, and Medina counties in the State of Ohio.

(3) Residential real estate loans to borrowers in the Detroit-Warren-Dearborn MSA totaled $578.9 million.

(4) Residential real estate loans to borrowers in the Cleveland MSA totaled $112.6 million.

(5) Commercial and industrial loans to borrowers in the Detroit-Warren-Dearborn MSA totaled $281.2 million. 

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(Dollars in thousands)	Michigan		Ohio		Illinois		Indiana		Wisconsin		Nevada		Maryland		New Mexico		Other		Total
December 31, 2015
Commercial real estate (1)(2)	$	859,483	$	280,605	$	157,979	$	46,452	$	44,365	$	55,933	$	4,685	$	3,057	$	115,538	$	1,568,097
Residential real estate (3)(4)	743,817		470,892		46,208		91,559		31,046		10,594		37,551		42		116,090		1,547,799
Commercial and industrial (5)	423,212		196,839		192,360		27,587		26,959		14,665		3,318		381		372,085		1,257,406
Real estate construction	136,685		59,545		16,787		7,164		11,353		2,358		185		395		7,131		241,603
Consumer	17,024		4,117		3,605		2,588		1,011		2,751		6,761		307		153,631		191,795
Total loans	$	2,180,221	$	1,011,998	$	416,939	$	175,350	$	114,734	$	86,301	$	52,500	$	4,182	$	764,475	$	4,806,700

______________________________________________________________________________

(1) Commercial real estate loans to borrowers in the Detroit-Warren-Dearborn MSA totaled $595.3 million. The Detroit-Warren-Dearborn MSA includes borrowers located in Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the State of Michigan.

(2) Commercial real estate loans to borrowers in the Cleveland-Elyria-Mentor metropolitan statistical area (Cleveland MSA) totaled $156.5 million.  The Cleveland MSA includes borrowers located in Cuyahoga, Geauga Lake, Lorain, and Medina counties in the State of Ohio.

(3) Residential real estate loans to borrowers in the Detroit-Warren-Dearborn MSA totaled $532.0 million.

(4) Residential real estate loans to borrowers in the Cleveland MSA totaled $114.5 million.

(5) Commercial and industrial loans to borrowers in the Detroit-Warren-Dearborn MSA totaled $269.3 million.

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

(Dollars in thousands)	March 31, 2016		December 31, 2015
Commercial real estate
Non-owner occupied	$	1,056,937	$	1,039,305
Owner-occupied	534,903		503,814
Farmland	24,961		24,978
Total commercial real estate	1,616,801		1,568,097
Residential real estate	1,604,940		1,547,799
Commercial and industrial	1,279,402		1,257,406
Real estate construction	235,007		241,603
Consumer	187,586		191,795
Total loans	$	4,923,736	$	4,806,700

Total loans were $4.9 billion at March 31, 2016, an increase of $117.0 million from December 31, 2015. The increase in total loans of $117.0 million resulted from increases in residential real estate loans of $57.1 million, commercial real estate loans of $48.7 million and commercial and industrial loans of $22.0 million, partially offset by decreases in real estate construction loans of $6.6 million and consumer loans of $4.2 million.

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 March 31, 2016.

Residential real estate loans totaled $1.6 billion at March 31, 2016, of which $16.9 million were on nonaccrual status. Included in residential real estate loans are $199.5 million of home equity loans and lines of credit of which $76.8 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 March 31, 2016. Also included in residential real estate loans are $293.8 million of jumbo adjustable rate mortgages and $9.2 million of loans with balloon payment terms, of which $470 thousand were on nonaccrual status as of March 31, 2016.

Real estate construction loans totaled $235.0 million at March 31, 2016, of which $232 thousand were on nonaccrual status. Included in real estate construction loans are $24.4 million of jumbo adjustable rate mortgages and $1.6 million of loans with balloon payment terms, of which $167 thousand were on nonaccrual status as of March 31, 2016.

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Loan Maturity/Rate Sensitivity

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

	Loans Maturing
(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
March 31, 2016
Loans:
Commercial real estate	$	239,284	$	937,738	$	439,779	$	1,616,801
Residential real estate	53,255		176,597		1,375,088		1,604,940
Commercial and industrial	324,142		800,326		154,934		1,279,402
Real estate construction	75,448		79,081		80,478		235,007
Consumer	3,252		82,554		101,780		187,586
Total loans	$	695,381	$	2,076,296	$	2,152,059	$	4,923,736
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			1,319,838		919,996
Floating interest rates			756,458		1,232,063
Total			$	2,076,296	$	2,152,059

	Loans Maturing
(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
December 31, 2015
Loans:
Commercial real estate	$	227,709	$	932,991	$	407,397	$	1,568,097
Residential real estate	55,876		186,409		1,305,514		1,547,799
Commercial and industrial	307,476		763,476		186,454		1,257,406
Real estate construction	77,434		69,485		94,684		241,603
Consumer	2,749		87,104		101,942		191,795
Total loans	$	671,244	$	2,039,465	$	2,095,991	$	4,806,700
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			1,359,329		931,350
Floating interest rates			680,136		1,164,641
Total			$	2,039,465	$	2,095,991

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.

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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 a provision for loan losses. Impairment on purchased credit impaired loans is measured as the excess of the recorded investment in the 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 on such loans, we first reverse only previously recorded allowance for loan losses, then adjust the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.  These quarterly cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.

For purchased non-credit impaired loans acquired in our acquisitions of First Place Bank and Talmer West Bank that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by First Place Bank or Talmer West Bank, as applicable, or Talmer Bank, following each respective bank's merger with Talmer Bank, 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, discussed below.

Originated loans

The allowance for loan losses on originated loans 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 realizable 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.

For loans not accounted for under ASC 310-30, we individually assess for impairment all nonaccrual loans and TDRs.

Loans that do not meet the criteria to be evaluated individually are evaluated in homogeneous pools with similar 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 on a combination of actual historical loss experienced by our peer banks in Michigan, Ohio, Illinois and Nevada and our own historical losses. 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, Illinois and Nevada, 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 on a combination of historical loss rates experienced in the respective loan classes by our peer banks in Michigan, Ohio, Illinois and Nevada and our own historical losses. This estimate is also adjusted to give

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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.

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

Analysis of the Allowance for Loan Losses — Loans accounted for under ASC 310-30

	For the three months ended March 31,
(Dollars in thousands)	2016			2015
Balance at beginning of period	$	22,266		$	32,732
Transfer to loans not accounted for under ASC 310-30 (1)	(392		)	(78		)
Loan charge-offs:
Commercial real estate	(1,764		)	(4,271		)
Residential real estate	(735		)	(1,564		)
Commercial and industrial	(734		)	(678		)
Real estate construction	(73		)	(531		)
Consumer	(6		)	(195		)
Total loan charge-offs	(3,312		)	(7,239		)
Recoveries of loans previously charged-off:
Commercial real estate	426			3,571
Residential real estate	1,612			248
Commercial and industrial	385			365
Real estate construction	68			502
Consumer	19			39
Total loan recoveries	2,510			4,725
Net (charge-offs) recoveries	(802		)	(2,514		)
Benefit for loan losses	(3,223		)	(1,080		)
Balance at end of period	$	17,849		$	29,060
Allowance for loan losses as a percentage of total ASC 310-30 loans at period end	3.37		%	3.96		%

(1) Primarily due to loans restructured that qualify as TDRs.

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Analysis of the Allowance for Loan Losses — Loans excluded from ASC 310-30 accounting

	For the three months ended March 31,
(Dollars in thousands)	2016			2015
Balance at beginning of period	$	31,687		$	22,440
Transfer in (1)	392			78
Loan charge-offs:
Commercial real estate	(410		)	(1,158		)
Residential real estate	(555		)	(897		)
Commercial and industrial	(244		)	(1,406		)
Real estate construction	(27		)	(12		)
Consumer	(504		)	(286		)
Total loan charge-offs	(1,740		)	(3,759		)
Recoveries of loans previously charged-off:
Commercial real estate	964			673
Residential real estate	632			387
Commercial and industrial	218			382
Real estate construction	199			32
Consumer	65			99
Total loan recoveries	2,078			1,573
Net (charge-offs) recoveries	338			(2,186		)
Provision for loan losses	2,112			3,073
Balance at end of period	$	34,529		$	23,405
Allowance for loan losses as a percentage of total loans excluded from ASC 310-30 accounting at period end	0.79		%	0.63		%

(1) Primarily due to loans restructured that qualify as TDRs.

Our total allowance for loan losses was $52.4 million, or 1.06% of total loans, at March 31, 2016, compared to $54.0 million, or 1.12% of total loans, at December 31, 2015. The $1.6 million decrease in the allowance for loan losses during the three months ended March 31, 2016 was primarily due to credit recoveries on acquired loans that were paid off, payments received on loans previously carrying an allowance for loan loss, continued reductions in the percentage of nonperforming loans to total loans, and to a lesser extent, increases in collateral and cash flow expectations on loans individually evaluated for impairment, partially offset by the impact of organic loan growth.

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

 Allocation of the Allowance for Loan Losses

	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
March 31, 2016
Balance at end of period applicable to:
Commercial real estate	$	8,352	3.61	%	43.7	%	$	9,552	0.69	%	31.5	%
Residential real estate	7,253		2.81		48.6		6,289		0.47		30.7
Commercial and industrial	1,078		4.85		4.2		16,502		1.31		28.6
Real estate construction	1,065		11.47		1.8		1,210		0.54		5.1
Consumer	101		1.13		1.7		976		0.55		4.1
Total loans	$	17,849	3.37	%	100.0	%	$	34,529	0.79	%	100.0	%
December 31, 2015
Balance at end of period applicable to:
Commercial real estate	$	11,030	4.40	%	44.0	%	$	8,388	0.64	%	31.1	%
Residential real estate	7,947		2.90		48.1		6,485		0.51		30.1
Commercial and industrial	1,487		6.01		4.3		14,831		1.20		29.1
Real estate construction	1,678		15.56		1.9		1,021		0.44		5.4
Consumer	124		1.32		1.7		962		0.53		4.3
Total loans	$	22,266	3.91	%	100.0	%	$	31,687	0.75	%	100.0	%

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

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Summary of Impaired Assets and Past Due Loans

(Dollars in thousands)	March 31, 2016		December 31, 2015
Nonperforming troubled debt restructurings
Commercial real estate	$	5,763	$	7,485
Residential real estate	4,548		5,485
Commercial and industrial	3,900		1,167
Real estate construction	175		187
Consumer	103		127
Total nonperforming troubled debt restructurings	14,489		14,451
Nonaccrual loans other than nonperforming troubled debt restructurings
Commercial real estate	$	9,499	$	9,313
Residential real estate	12,391		12,905
Commercial and industrial	16,606		20,501
Real estate construction	57		226
Consumer	57		79
Total nonaccrual loans other than nonperforming troubled debt restructurings	38,610		43,024
Total nonaccrual loans	53,099		57,475
Other real estate and repossessed assets (1)	26,434		28,157
Total nonperforming assets	79,533		85,632
Performing troubled debt restructurings
Commercial real estate	16,350		15,340
Residential real estate	7,240		5,749
Commercial and industrial	3,777		3,438
Real estate construction	420		420
Consumer	250		242
Total performing troubled debt restructurings	28,037		25,189
Total impaired assets	$	107,570	$	110,821
Loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	384	$	297

(1) Excludes closed branches and operating facilities.

Nonperforming assets consist of nonaccrual loans, other real estate owned, excluding closed branches and operating facilities, and repossessed assets. 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 loan loss provision or future period yield adjustments.

Total nonperforming assets were $79.5 million as of March 31, 2016, compared to $85.6 million as of December 31, 2015.

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Investment Securities

	March 31,		December 31,
(Dollars in thousands)	2016		2015
Securities available-for-sale:
U.S. government sponsored agency obligations	$	69,951	$	60,022
Obligations of state and political subdivisions:
Taxable	1,362		1,321
Tax exempt	304,331		287,208
Small Business Administration (SBA) Pools	26,729		27,925
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	309,692		309,306
Privately issued	97,451		89,450
Privately issued commercial mortgage backed securities	22,384		13,705
Corporate debt securities:
Senior debt	84,774		71,365
Subordinated debt	29,869		30,468
Total securities available-for-sale	$	946,543	$	890,770
Securities held-to-maturity (1)	1,678		1,678
Total investment securities	$	948,221	$	892,448

(1) Included within “Other assets” in the Consolidated Balance Sheet.

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for both normal operations and merger-related expenses 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 March 31, 2016, total investment securities were $948.2 million, or 14.1% of total assets, compared to $892.4 million, or 13.5% of total assets, at December 31, 2015. The increase from December 31, 2015 to March 31, 2016, primarily reflected increases in a diverse mix of tax exempt obligations of state and political subdivisions, corporate debt securities, U.S. government sponsored agency obligations, privately issued commercial mortgage backed securities and privately issued residential mortgage-backed securities reflecting management's decision to invest liquid assets while retaining accessibility to the funds for potential liquidity needs. Securities with a carrying value of $421.0 million and $390.5 million were pledged at March 31, 2016 and December 31, 2015, respectively, to secure borrowings and deposits.

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 The following tables show maturities and yields for the investment securities portfolio at March 31, 2016 and December 31, 2015.

	Maturity as of March 31, 2016
	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)	$	—	—	%	$	24,864	1.65	%	$	44,534	1.86	%	$	—	—	%
Obligations of state and political subdivisions:
Taxable	—		—		318		6.19		1,000		3.27		—		—
Tax exempt (2)	2,575		4.39		43,375		3.87		133,283		4.08		117,865		4.32
SBA Pools (3) (4)	—		—		1,303		1.70		24,983		1.11		—		—
Residential mortgage-backed securities (3):
Issued and/or guaranteed by U.S. government agencies or sponsored enterprises	907		1.80		263,212		2.37		40,689		2.58		—		—
Privately issued (1)	—		—		97,468		2.67		—		—		—		—
Commercial mortgage-backed securities (3)	17,408		2.07		5,057		2.19		—		—		—		—
Corporate debt securities (5)	3,014		1.61		70,023		2.10		29,903		4.21		11,975		2.68
Total securities available-for-sale	23,904		2.25		505,620		2.48		274,392		3.24		129,840		4.17
Securities held-to-maturity	—		—		1,678		—		—		—		—		—
Total investment securities	$	23,904	2.25	%	$	507,298	2.47	%	$	274,392	3.24	%	$	129,840	4.17	%

(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 mortgage-backed securities. $35.0 million of U.S. government sponsored agency obligations maturing beyond five 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 by 88 basis points, or resulting in average yield of 2.74%.

(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 March 31, 2016 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 $8.2 million and $12.0 million, respectively, of floating rate holdings indexed to 3-month LIBOR, in which the current March 31, 2016 indexed coupon rates are assumed to remain constant until maturity.

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	Maturity as of December 31, 2015
	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)	$	—	—	%	$	29,896	1.81	%	$	29,518	1.99	%	$	—	—	%
Obligations of state and political subdivisions:
Taxable	—		—		318		6.19		1,000		3.27		—		—
Tax exempt (2)	3,216		4.27		51,201		3.79		126,575		4.20		101,374		4.43
SBA Pools (3) (4)	—		—		1,352		1.36		26,209		0.86		—		—
Residential mortgage-backed securities (3):
Issued and/or guaranteed by U.S. government agencies or sponsored enterprises	1,681		2.13		195,465		2.40		111,250		2.66		—		—
Privately issued (1)	—		—		73,631		2.70		16,453		2.50		—		—
Commercial mortgage-backed securities (3)	8,755		1.62		5,071		2.20		—		—		—		—
Corporate debt securities (5)	3,032		1.60		55,079		2.14		32,236		4.07		11,937		2.35
Total securities available-for-sale	16,684		2.18		412,013		2.55		343,241		3.16		113,311		4.21
Securities held-to-maturity	—		—		1,678		—		—		—		—		—
Total investment securities	$	16,684	2.18	%	$	413,691	2.54	%	$	343,241	3.16	%	$	113,311	4.21	%

(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 mortgage-backed securities. $20.0 million of U.S. government sponsored agency obligations maturing beyond five 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 by 98 basis points, or resulting in an average yield of 2.97%.

(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 December 31, 2015 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, five-to-ten year maturity bucket, and after ten year maturity bucket includes yields on $5.9 million, $2.3 million and $11.9 million, respectively, of floating rate holdings indexed to 3-month LIBOR, in which the current December 31, 2015 indexed coupon rates are assumed to remain constant until maturity.

Loan servicing rights

Loan servicing rights are created as a result of our mortgage banking origination activities, the purchase of mortgage 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 March 31, 2016, we serviced loans for others with an aggregate outstanding principal balance of $5.8 billion.

Total loan servicing rights were $51.3 million as of March 31, 2016, compared to $58.1 million as of December 31, 2015. The $6.8 million decrease was due to a $8.5 million decline in the fair value of loan servicing rights from December 31, 2015 to March 31, 2016 due to a combination of changes in market interest rates and reduced fair value due to loans paid off, partially offset by $1.7 million of loan servicing rights added to the portfolio. Management has made the strategic decision not to hedge loan servicing assets at this point. Therefore, any future declines in interest rates would likely cause further decreases in the fair value of the loan servicing rights, and a corresponding detriment to earnings, whereas increases in interest rates

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would result in increases in fair value, and a corresponding benefit to earnings. Management may choose to hedge the loan servicing assets in the future.

Deposits

(Dollars in thousands)	March 31, 2016		December 31, 2015
Noninterest-bearing demand deposits	$	1,040,950	$	1,011,414
Interest-bearing demand deposits	896,179		849,599
Money market and savings deposits	1,274,534		1,314,909
Time deposits	1,719,111		1,609,895
Other brokered funds	222,024		228,764
Total deposits	$	5,152,798	$	5,014,581

Total deposits were $5.2 billion at March 31, 2016 and $5.0 billion at December 31, 2015, representing 86.4% and 85.4% of total liabilities at each period end, respectively. The $138.2 million increase in total deposits includes growth in time deposits of $109.2 million, interest-bearing demand deposits of $46.6 million and noninterest-bearing demand deposits of $29.5 million. These increases were partially offset by declines in money market and savings deposits of $40.4 million and other brokered funds of $6.7 million. Our interest-bearing deposit costs were 48 basis points and 34 basis points for the three months ended March 31, 2016 and 2015, 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 for the periods presented.

(Dollars in thousands)	March 31, 2016		December 31, 2015
Maturing in
3 months or less	$	351,928	$	374,424
3 months to 6 months	305,974		250,006
6 months to 1 year	324,318		326,232
1 year or greater	210,300		138,936
Total	$	1,192,520	$	1,089,598

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Borrowings

(Dollars in thousands)	March 30, 2016		December 31, 2015
Short-term borrowings:
FHLB advances	$	275,000	$	300,000
Securities sold under agreements to repurchase	21,980		18,998
Holding company line of credit	37,500		30,000
Total short-term borrowings	334,480		348,998
Long-term debt:
FHLB advances (1)	329,639		393,851
Securities sold under agreements to repurchase (2)	54,388		54,800
Subordinated notes related to trust preferred securities (3)	15,449		15,406
Total long-term debt	399,476		464,057
Total short-term borrowings and long-term debt:	$	733,956	$	813,055

(1) The March 31, 2016 balance includes advances payable of $325.8 million and purchase accounting premiums of $3.8 million. The December 31, 2015 balance includes advances payable of $389.6 million and purchase accounting premiums of $4.3 million.

(2) The March 31, 2016 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $4.4 million. The December 31, 2015 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $4.8 million.

(3) The March 31, 2016 and December 31, 2015 balances each include subordinated notes related to trust preferred securities of $20.0 million and purchase accounting discounts of $4.6 million. 

Total short-term borrowings and long-term debt outstanding at March 31, 2016 was $734.0 million, a decrease of $79.1 million from $813.1 million at December 31, 2015. The decrease in total borrowings was primarily due to a decrease of $89.2 million in total FHLB advances.

Total debt was collateralized by $2.0 billion of commercial and mortgage loans, mortgage-backed securities and bonds at March 31, 2016, compared to $2.2 billion of commercial and mortgage loans, mortgage-backed securities and bonds at December 31, 2015. See the “Contractual Obligations” section of this financial review for maturity information.

Capital Resources

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

	For the three months ended March 31,
(Dollars in thousands)	2016			2015
Balance at beginning of period	$	725,215		$	761,607
Net income	19,683			9,433
Other comprehensive income	3,727			2,790
Stock-based compensation expense	698			351
Issuance of common shares, including tax benefit	2,667			266
Repurchase of warrants to purchase 2.5 million shares, at fair value	—			(19,892		)
Cash dividends paid on common stock (1)	(3,320		)	(706		)
Balance at end of period	$	748,670		$	753,849

(1) The Company declared common stock cash dividends of $0.05 per share and $0.01 per share for the three months endedMarch 31, 2016 and 2015, respectively.

On February 17, 2015, we repurchased an aggregate of 2,529,416 warrants to repurchase shares of our Class A common stock issued to WLR Recovery Fund IV, L.P. and WLR IV Parallel ESC, L.P. (the “WL Ross Funds”). The purchase

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price for the warrants, determined utilizing the closing price of our stock on the date of repurchase, was $19.9 million and was funded by a draw on our line of credit.

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

At March 31, 2016, the most recent regulatory notifications categorized Talmer Bank as well capitalized under the regulatory framework for prompt corrective action.

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. During the first quarter of 2015, we adopted the new Basel III regulatory capital framework as approved by federal banking agencies, which are subject to a multi-year phase-in period. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. In addition, Basel III establishes a new capital conservation buffer of 2.5% of risk-weighted assets, which is phased-in over a four-year period beginning January 1, 2015. The capital conservation buffer for 2016 is 0.625%. Our capital ratios exceeded the current well capitalized regulatory requirements as follows:

	Well Capitalized Regulatory Requirement		Actual Capital Ratio
March 31, 2016
Total risk-based capital
Consolidated	N/A		13.1	%
Talmer Bank and Trust	10.0	%	13.7
Common equity tier 1 capital
Consolidated	N/A		12.2
Talmer Bank and Trust	6.5		12.7
Tier 1 risk-based capital
Consolidated	N/A		12.2
Talmer Bank and Trust	8.0		12.7
Tier 1 leverage ratio
Consolidated	N/A		10.3
Talmer Bank and Trust	5.0		10.7
December 31, 2015
Total risk-based capital
Consolidated	N/A		13.0	%
Talmer Bank and Trust	10.0	%	13.5
Common equity tier 1 capital
Consolidated	N/A		12.0
Talmer Bank and Trust	6.5		12.5
Tier 1 risk-based capital
Consolidated	N/A		12.0
Talmer Bank and Trust	8.0		12.5
Tier 1 leverage ratio
Consolidated	N/A		10.2
Talmer Bank and Trust	5.0		10.5

We declared a cash dividend on our Class A common stock of $0.05 per share on April 27, 2016. The dividend will be paid out on May 25, 2016, to our Class A common shareholders of record as of May 11, 2016.

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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 March 31, 2016 and December 31, 2015, the allowance for off-balance sheet risk was $856 thousand and $622 thousand, 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.

	March 31, 2016						December 31, 2015
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	663,579	$	615,156	$	1,278,735	$	658,268	$	489,102	$	1,147,370
Standby letters of credit	61,926		4,002		65,928		61,300		4,801		66,101
Total commitments	$	725,505	$	619,158	$	1,344,663	$	719,568	$	493,903	$	1,213,471

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 also enter into interest rate derivatives to provide a service to certain qualifying customers to help facilitate their respective risk management strategies (“customer-initiated derivatives”).  These derivatives are not used to manage interest rate risk in our assets or liabilities.  We generally take offsetting positions with dealer counterparts to mitigate the inherent risk in these derivatives.

We additionally utilize interest rate swaps designated as cash flow hedges for risk management purposes to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  These interest rate swaps designated as cash flow hedges are used to manage differences in the amount, timing and duration of our known or expected cash receipts and our known or expected cash payments principally related to certain variable rate borrowings and/or deposits.

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 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

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positions and we would be required to settle our obligations under the agreements. As of March 31, 2016, 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 $12.4 million.

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

	March 31, 2016						December 31, 2015
			Fair Value						Fair Value
(Dollars in thousands)	Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)		Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)
Risk management purposes:
Derivatives designated as hedging instruments:
Interest rate swaps	$	37,000	$	—	$	1,825	$	37,000	$	105	$	397
Total risk management purposes	37,000		—		1,825		37,000		105		397
Customer-initiated and mortgage banking activities:
Forward contracts related to mortgage loans to be delivered for sale	115,533		—		610		105,711		—		38
Interest rate lock commitments	114,546		2,908		—		62,081		1,220		—
Customer-initiated derivatives	417,491		9,761		9,998		354,699		4,143		4,144
Total customer-initiated and mortgage banking activities	647,570		12,669		10,608		522,491		5,363		4,182
Total gross derivatives	$	684,570	$	12,669	$	12,433	$	559,491	$	5,468	$	4,579

(1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement.  These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in our Consolidated Balance Sheets.

(2) Derivative assets are included within “Other assets” and derivative liabilities are included within “Other liabilities” on our Consolidated Balance Sheets.  Included in the fair value of the derivative assets are credit valuation adjustments for counterparty credit risk totaling $460 thousand at March 31, 2016 and $208 thousand at December 31, 2015.

Note 10, “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.  The following table represents the activity related to our liability recorded in connection with these representations and warranties.

	For the three months ended March 31,
(Dollars in thousands)	2016		2015
Reserve balance at beginning of period	$	1,300	$	4,000
Provision	—		(624		)
Charge-offs	—		(1,176		)
Ending reserve balance	$	1,300	$	2,200
Reserve balance	March 31, 2016		December 31, 2015
Liability for specific claims	$	318	$	380
General allowance	982		920
Total reserve balance	$	1,300	$	1,300

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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.

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 March 31, 2016, exclusive of purchase accounting premiums.

(Dollars in thousands)	Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years
Time deposits(1)	$	1,780,332	$	1,372,300	$	317,752	$	83,942	$	6,338
FHLB borrowings	600,850		527,000		62,850		1,000		10,000
Securities sold under agreements to repurchase	71,980		61,980		—		—		10,000
Holding company line of credit	37,500		37,500		—		—		—
Subordinated notes related to trust preferred securities	20,000		—		—		—		20,000
Future minimum lease payments(2)	30,093		6,165		10,385		7,956		5,587
Total	$	2,540,755	$	2,004,945	$	390,987	$	92,898	$	51,925

(1) At March 31, 2016, the total includes $61.2 million of time deposits included within “Other brokered funds.”

(2) Future minimum lease payments are reduced by $194 thousand related to sublease income to be received in the

following periods: $115 thousand (less than one year); $72 thousand (1-3 years); and $7 thousand (3-5 years).

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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, enterprise 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 March 31, 2016, we had liquidity on hand of $889.4 million, compared to $887.6 million at December 31, 2015. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered securities available-for-sale.

Talmer Bank is a member 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. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of March 31, 2016, we had $600.8 million of outstanding borrowings from the FHLB with remaining maturities ranging from the years 2016 to 2027. We also maintain relationships with correspondent banks which could provide funds on short notice, if needed. Talmer Bank also has the ability to borrow from the Federal Reserve Board's discount window, which would be required to be secured by collateral approved by the Federal Reserve Board, to meet short-term liquidity requirements. As of March 31, 2016, Talmer Bank had an unused borrowing capacity of approximately $421 million under the Federal Reserve Board's discount window based upon collateral pledged. In addition, because Talmer Bank is “well capitalized,” it can accept wholesale funding up to approximately $2.1 billion based on current policy limits. Management believes that we had adequate resources to fund all of our commitments as of March 31, 2016.

The following liquidity ratios compare certain assets and liabilities to total deposits or total assets.

	March 31, 2016		December 31, 2015
Investment securities available-for-sale to total deposits	18.37	%	17.76	%
Loans (net of unearned income) to total deposits	95.55		95.85
Interest-earning assets to total assets	92.35		92.45
Interest-bearing deposits to total deposits	79.80		79.83

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Reconciliation of Non-GAAP Financial Measure

Our efficiency ratio is a measure of noninterest expense as a percentage of net interest income and noninterest income. Our core efficiency ratio begins with the efficiency ratio and then excludes certain items deemed by management to not be related to regular operations, including the fair value adjustment to our loan servicing rights, transaction and integration related costs and FDIC loss share income. Management believes this non-GAAP financial measure provides useful information to both management and investors that is supplementary to our financial condition and results of operations in accordance with GAAP; however, we acknowledge that this non-GAAP financial measures has a number of limitations. As such, your should not view our disclosure of our core efficiency ratio as a substitute for results determined in accordance with GAAP, and our core efficiency ratio is not necessarily comparable to non-GAAP financial measures that other companies use.

The following table presents a reconciliation of the core efficiency ratio to the efficiency ratio, the most directly comparable GAAP measure.

(Dollars in thousands, except per share data)	For the three months ended March 31,
	2016			2015
Core efficiency ratio:
Net interest income	$	56,098		$	51,032
Noninterest income	13,624			21,430
Total revenue	69,722			72,462
Less:
Expense due to change in the fair value of loan servicing rights due to valuation inputs or assumptions	(6,625		)	(4,084		)
FDIC loss share income	—			(1,068		)
Total core revenue	$	76,347		$	77,614
Total noninterest expense	$	48,270		$	56,595
Less:
Transaction and integration related costs	2,874			1,412
Total core noninterest expense	$	45,396		$	55,183
Efficiency ratio	69.23		%	78.10		%
Core efficiency ratio	59.46			71.10

 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 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

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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.

Our interest-rate risk position is measured and monitored using net interest income simulation models and an economic value of equity sensitivity analysis that captures both short-term and long-term interest-rate risk exposure. In addition, a periodic Earnings at Risk analysis incorporates 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 March 31, 2016 and December 31, 2015, assuming immediate parallel moves in interest rates is presented in the table below.

	March 31, 2016				December 31, 2015
	Following 12  months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	1.3	%	3.1	%	(2.3	)%	(1.4	)%
+300 basis points	0.8		2.3		(2.0	)	(1.2	)
+200 basis points	0.6		1.8		(1.5	)	(0.8	)
+100 basis points	0.4		1.1		(0.8	)	(0.3	)
-100 basis points	(3.2	)	(3.9	)	(1.9	)	(2.1	)
-200 basis points	(6.7	)	(8.2	)	(5.5	)	(6.6	)
-300 basis points	(9.1	)	(10.7	)	(7.7	)	(9.0	)
-400 basis points	(10.2	)	(12.0	)	(8.7	)	(10.1	)

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 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.

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The table below presents the change in our economic value of equity as of March 31, 2016 and December 31, 2015 assuming immediate parallel shifts in interest rates.

	March 31, 2016		December 31, 2015
+400 basis points	(22.7	)%	(21.6	)%
+300 basis points	(16.3	)	(16.1	)
+200 basis points	(9.9	)	(10.4	)
+100 basis points	(4.1	)	(5.0	)
-100 basis points	(2.2	)	(0.6	)
-200 basis points	(5.2	)	(4.7	)
-300 basis points	(4.1	)	(6.4	)
-400 basis points	(3.2	)	(5.4	)

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.

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 March 31, 2016, 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.

On February 22, 2016, two complaints were filed in the Circuit Court for Oakland County, Michigan by alleged shareholders of the Company against the Company, the following members of the Company’s Board of Directors: Gary Torgow, David Provost, Gary Collins, Max Berlin, Jennifer Granholm, Paul Hodges III, Ronald Klein, Barbara Mahone, Robert Naftaly, Albert Papa, Thomas Schellenberg, and Arthur Weiss (collectively “individual defendants”), and Chemical Financial Corporation (“Chemical”). These complaints are styled Regina Gertel Lee v. Chemical Financial Corporation, et. al., Case No. 2016-151642-CB and City of Livonia Employees’ Retirement System v. Chemical Financial Corporation et. al., Case No. 2016-151641-CB. These complaints purport to assert claims derivatively on behalf of the Company against the individual defendants, and individually and on behalf of all others similarly situated against the individual defendants and Chemical. The putative class in both complaints consists of all shareholders of the Company who are not related to or affiliated with any defendant. Each of the complaints relate to the Company’s merger agreement with Chemical and allege, among other things, that the directors of the Company breached their fiduciary duties to the Company’s shareholders in connection with the merger by approving a transaction pursuant to an allegedly inadequate process that undervalues the Company and includes preclusive deal protection provisions. The City of Livonia Employees’ Retirement System’s complaint also alleges that Chemical aided and abetted the Company’s directors in breaching their duties to the Company’s shareholders. The complaints also allege that the individual defendants have been unjustly enriched. The complaints request that the court declare that the defendants have breached their fiduciary duties and have been unjustly enriched, enjoin the merger from being consummated in accordance with its agreed-upon terms, direct the Company’s directors to exercise their fiduciary duties, rescind the merger agreement to the extent that it is already implemented, award the plaintiff all costs and disbursements in each respective action (including reasonable attorneys’ and experts’ fees), and grant such further relief as the court deems just and proper. The City of Livonia plaintiff amended its complaint on April 21, 2016 to add additional factual allegations, including but not limited to allegations that Keefe Bruyette & Woods, Inc. served as a financial advisor for the proposed merger despite an alleged conflict of interest, that the Company’s board acted under actual or potential conflicts of interest, and that the defendants omitted and/or misrepresented material information about the proposed merger in the Form S-4 Registration Statement relating to the proposed merger.

On March 22, 2016, a putative class action and derivative complaint was filed in the Circuit Court for Oakland County, Michigan by an individual purporting to be a shareholder of the Company, styled Stephen Bushansky v. Gary Torgow et. al. Case No. 2016-152112-CB. The defendants named in this lawsuit were the same as those named in the Lee and City of Livonia complaints. The allegations and relief sought in this action were also substantially similar to the Lee and City of Livonia complaints. On April 14, 2016, the City of Livonia filed a motion to consolidate the three cases pending in state court and appoint the City of Livonia as lead plaintiff. The Bushansky complaint was voluntarily dismissed on April 18, 2016.

Three actions were filed in the United States District Court for the Eastern District of Michigan by alleged shareholders of the Company against the Company, the following members of the Company’s Board of Directors: Gary Torgow, David Provost, Gary Collins, Max Berlin, Jennifer Granholm, Paul Hodges III, Ronald Klein, Barbara Mahone, Robert Naftaly, Albert Papa, Thomas Schellenberg, and Arthur Weiss (collectively “individual defendants”), and Chemical. The first action was filed on April 6, 2016, styled as Matthew Sciabacucchi v. Gary Torgow, et. al., Case No. 1:16-cv-11261-TLL-PTM. This complaint purports to bring an individual claim for violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against the Company and the individual defendants, and an individual claim for violation of Section 20(a) of the Exchange Act against Chemical and the individual defendants. The second action was filed on April 25, 2016, styled as Kevin Nicholl v. Gary Torgow, et. al., Case No. 1:16-cv-11482-TLL-PTM. This complaint purports to assert claims derivatively on behalf of the Company and individually on behalf of a putative class consisting of all shareholders of the Company who are not related to or affiliated with any defendant. This action alleges violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against the individual defendants; violations of Section 20(a) of the Exchange Act against the individual defendants; violations of the individual defendants’ fiduciary duties, asserted both derivatively and on behalf of the class; and a class action claim against Chemical for aiding and abetting. The third action was filed was filed on April 27, 2016, styled as Stephen Bushansky v. Talmer Bancorp, Inc., et. al., Case No. 2:16-cv-11511-AJT-RSW. This is a putative class action complaint, purportedly brought on behalf of all shareholders of the Company who are not related to or affiliated with any defendant. This complaint alleges violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against all defendants, and violations of Section 20(a) of the Exchange Act against the individual defendants. Each of these three complaints relate to the Company’s merger agreement with Chemical and the Company’s and Chemical’s Registration Statement on Form S-4. The complaints allege, among other things, that the directors of the Company and its Board of Directors approved a transaction pursuant to an allegedly inadequate process that undervalues the Company and includes preclusive deal protection provisions. The complaints also allege that the Registration Statement omits or misrepresents material information about the proposed merger. Each of the complaints requests various forms of remedies,

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including among other things, that the court enjoin the merger from being consummated, rescind the merger agreement to the extent it has already been implemented, declare violations of federal law, award the plaintiff all costs and disbursements in each respective action (including reasonable attorneys’ and experts’ fees), and grant such further relief as the court deems just and proper.

Defendants believe that the claims asserted against them are without merit and intend to vigorously defend against these lawsuits. At this stage, it is not possible to predict whether any additional lawsuits will be filed and, if one is, the outcome of any such proceeding or its impact on the Company or the merger.

In addition, from time to time, we are a party to various litigation matters incidental to the conduct of our business.

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, 2015.

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.

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Item 6.  Exhibits.

Exhibit No.	Description of Exhibit
2.1	Agreement and Plan of Merger between Chemical Financial Corporation and Talmer Bancorp, Inc. dated January 25, 2016 (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed on January 26, 2016)†
3.1	Fourth Amended and Restated Bylaws of Talmer Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on January 26, 2016)
10.1	Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.27 of our Annual Report on Form 10-K filed on February 29, 2016)
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 March 31, 2016, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Income for the three months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements.

_______________________________________________________________________________

† Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish supplementally a copy of any omitted schedules or similar attachment to the SEC upon request.

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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.
May 6, 2016	By:	/s/ David T. Provost
		David T. Provost
		Chief Executive Officer
		(Principal Executive Officer)
May 6, 2016	By:	/s/ Dennis Klaeser
		Dennis Klaeser
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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