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 June 30, 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 August 4, 2016 was 67,190,600.

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 June 30, 2016 and December 31, 2015	3
	Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015	5
	Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2016 and 2015	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	7
	Notes to Consolidated Statements	9
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	59
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	96
ITEM 4.	Controls and Procedures	98
PART II — OTHER INFORMATION		99
ITEM 1.	Legal Proceedings	99
ITEM 1A.	Risk Factors	100
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	100
ITEM 3.	Defaults Upon Senior Securities	100
ITEM 4.	Mine Safety Disclosures	100
ITEM 5.	Other Information	100
ITEM 6.	Exhibits	101

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 our expectation to collect the full carrying amount of securities in an unrealized loss position, 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 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)	June 30, 2016			December 31, 2015
Assets
Cash and due from banks	$	86,571		$	74,734
Interest-bearing deposits with other banks	185,160			137,589
Federal funds sold and other short-term investments	188,503			175,000
Total cash and cash equivalents	460,234			387,323
Investment securities:
Securities available-for-sale	918,777			890,770
Held-to-maturity	1,655			1,678
Total investment securities	920,432			892,448
Federal Home Loan Bank stock	29,621			29,621
Loans held for sale, at fair value	38,770			58,223
Loans:
Commercial real estate	1,661,790			1,568,097
Residential real estate (includes $23.6 million and $22.2 million respectively, measured at fair value) (1)	1,674,615			1,547,799
Commercial and industrial	1,282,641			1,257,406
Real estate construction	257,111			241,603
Consumer	171,957			191,795
Total loans	5,048,114			4,806,700
Less: Allowance for loan losses	(51,586		)	(53,953		)
Net total loans	4,996,528			4,752,747
Premises and equipment	41,070			43,570
Other real estate owned and repossessed assets	20,563			28,259
Loan servicing rights	47,696			58,113
Core deposit intangible	11,593			12,808
Goodwill	3,524			3,524
Company-owned life insurance	109,984			107,065
Income tax benefit	165,948			177,183
Other assets	66,759			45,006
Total assets	$	6,912,722		$	6,595,890
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	1,148,558		$	1,011,414
Interest-bearing demand deposits	911,509			849,599
Money market and savings deposits	1,263,599			1,314,909
Time deposits	1,554,946			1,609,895
Other brokered funds	388,596			228,764
Total deposits	5,267,208			5,014,581
Short-term borrowings	525,960			348,998
Long-term debt	296,656			464,057
Other liabilities	53,923			43,039
Total liabilities	6,143,747			5,870,675
Commitments and Contingencies (2)
Shareholders’ equity
Preferred stock - $1.00 par value
Authorized - 20,000,000 shares at 6/30/2016 and 12/31/2015
Issued and outstanding - 0 shares at 6/30/2016 and 12/31/2015	—			—
Common stock:
Class A Voting Common Stock - $1.00 par value
Authorized - 198,000,000 shares at 6/30/2016 and at 12/31/2015
Issued and outstanding - 67,194,703 shares at 6/30/2016 and 66,114,798 shares at 12/31/2015	67,195			66,115
Class B Non-Voting Common Stock - $1.00 par value
Authorized - 2,000,000 shares at 6/30/2016 and 12/31/2015
Issued and outstanding - 0 shares at 6/30/2016 and 12/31/2015	—			—
Additional paid-in-capital	316,616			316,571
Retained earnings	373,762			339,130
Accumulated other comprehensive income, net of tax	11,402			3,399
Total shareholders’ equity	768,975			725,215
Total liabilities and shareholders’ equity	$	6,912,722		$	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 June 30,						Six months ended June 30,
(Dollars and shares in thousands, except per share data)	2016			2015			2016			2015
Interest income
Interest and fees on loans	$	57,915		$	58,319		$	114,275		$	118,257
Interest on investments
Taxable	3,414			2,375			6,654			4,698
Tax-exempt	2,053			1,658			4,044			3,273
Total interest on securities	5,467			4,033			10,698			7,971
Interest on interest-earning cash balances	82			117			266			203
Interest on federal funds and other short-term investments	600			269			1,068			434
Dividends on FHLB stock	312			224			624			469
FDIC indemnification asset	—			(8,548		)	—			(17,798		)
Total interest income	64,376			54,414			126,931			109,536
Interest Expense
Interest-bearing demand deposits	675			382			1,076			672
Money market and savings deposits	650			562			1,317			1,033
Time deposits	3,296			2,131			6,410			3,958
Other brokered funds	841			607			1,459			1,230
Interest on short-term borrowings	678			209			1,335			288
Interest on long-term debt	842			914			1,842			1,714
Total interest expense	6,982			4,805			13,439			8,895
Net interest income	57,394			49,609			113,492			100,641
Provision (benefit) for loan losses	3,208			(7,313		)	2,097			(5,320		)
Net interest income after provision for loan losses	54,186			56,922			111,395			105,961
Noninterest income
Deposit fee income	2,420			2,561			4,817			4,881
Mortgage banking and other loan fees	(2,365		)	4,698			(6,245		)	3,437
Net gain on sales of loans	7,588			8,748			12,826			17,366
Accelerated discount on acquired loans	5,076			7,444			10,128			15,642
Net gain (loss) on sales of securities	—			6			333			(101		)
Company-owned life insurance	795			856			1,545			1,596
FDIC loss share income	—			(5,928		)	—			(6,996		)
Other income	3,726			3,713			7,460			7,703
Total noninterest income	17,240			22,098			30,864			43,528
Noninterest expense
Salary and employee benefits	26,913			28,685			52,726			57,897
Occupancy and equipment expense	6,039			8,415			12,046			16,081
Data processing fees	1,909			1,805			3,652			3,659
Professional service fees	2,547			3,275			5,837			6,818
Merger and acquisition expense	312			419			3,186			1,831
Marketing expense	1,158			1,483			2,687			2,578
Other employee expense	579			826			1,387			1,760
Insurance expense	1,485			1,527			3,035			3,057
FDIC loss share expense	—			133			—			1,082
Other expense	4,987			6,725			9,643			15,125
Total noninterest expense	45,929			53,293			94,199			109,888
Income before income taxes	25,497			25,727			48,060			39,601
Income tax provision	5,344			8,179			6,752			12,620
Net income	$	20,153		$	17,548		$	41,308		$	26,981
Earnings per common share:
Basic	$	0.30		$	0.25		$	0.62		$	0.38
Diluted	$	0.28		$	0.23		$	0.58		$	0.36
Average common shares outstanding - basic	66,011			70,301			65,824			70,259
Average common shares outstanding - diluted	70,026			74,900			69,889			75,046
Cash dividends declared on common stock	$	3,356		$	709		$	6,676		$	1,415
Cash dividends declared per common share	$	0.05		$	0.01		$	0.10		$	0.02

 See notes to Consolidated Financial Statements.

4

Talmer Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
Net income	$	20,153		$	17,548		$	41,308		$	26,981
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale arising during the period	7,332			(7,431		)	14,931			(3,008		)
Reclassification adjustment for (gains) losses on realized income	—			(6		)	(333		)	101
Tax effect	(2,566		)	2,603			(5,109		)	1,017
Net unrealized gains (losses) on securities available-for-sale, net of tax	4,766			(4,834		)	9,489			(1,890		)
Unrealized gains (losses) on interest rate swaps designated as cash flow hedges	(900		)	558			(2,581		)	233
Reclassification adjustment for losses included in net income	147			104			295			192
Tax effect	263			(232		)	800			(149		)
Net unrealized gains (losses) on interest rate swaps designated as cash flow hedges, net of tax	(490		)	430			(1,486		)	276
Other comprehensive income (loss), net of tax	4,276			(4,404		)	8,003			(1,614		)
Total comprehensive income, net of tax	$	24,429		$	13,144		$	49,311		$	25,367

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	—	—		—			26,981			—			26,981
Other comprehensive loss	—	—		—			—			(1,614		)	(1,614		)
Stock-based compensation expense	—	—		866			—			—			866
Restricted stock awards, including tax benefit	352	352		(336		)	—			—			16
Issuance of common shares, including tax benefit, net of stock option exercises	245	245		(388		)	—			—			(143		)
Repurchase of warrants to purchase 2.5 million shares, at fair value	—	—		(19,892		)	—			—			(19,892		)
Cash dividends paid on common stock ($0.02 per share)	—	—		—			(1,415		)				(1,415		)
Balance at June 30, 2015	71,129	$	71,129	$	385,686		$	307,355		$	2,236		$	766,406
Balance at December 31, 2015	66,115	$	66,115	$	316,571		$	339,130		$	3,399		$	725,215
Net income	—	—		—			41,308			—			41,308
Other comprehensive income	—	—		—			—			8,003			8,003
Stock-based compensation expense	—	—		1,543			—			—			1,543
Restricted stock awards	303	303		(303		)	—			—			—
Issuance of common shares, net of stock option exercises	777	777		(1,195		)	—			—			(418		)
Cash dividends paid on common stock ($0.10 per share)	—	—		—			(6,676		)	—			(6,676		)
Balance at June 30, 2016	67,195	$	67,195	$	316,616		$	373,762		$	11,402		$	768,975

See notes to Consolidated Financial Statements.

6

Talmer Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Six months ended June 30,
(Dollars in thousands)	2016			2015
Cash flows from operating activities
Net income	$	41,308		$	26,981
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,119			3,730
Amortization of core deposit intangibles	1,215			1,314
Stock-based compensation expense	1,543			866
Provision (benefit) for loan losses	2,097			(5,320		)
Originations of loans held for sale	(340,088		)	(664,111		)
Proceeds from sales of loans	369,940			653,291
Net gain from sales of loans	(12,826		)	(17,366		)
Net (gain) loss on sales of securities	(333		)	101
Valuation allowance and writedowns on other real estate and other repossessed assets	2,246			5,017
Valuation change in Company-owned life insurance	(1,584		)	(1,596		)
Valuation change in loan servicing rights	14,592			4,850
Additions to loan servicing rights	(4,175		)	(5,848		)
Net decrease in FDIC indemnification asset and receivable other than payments received	—			27,428
Net gain on sales of other real estate owned and repossessed assets	(2,534		)	(2,780		)
Net (increase) decrease in accrued interest receivable and other assets	(12,555		)	2,399
Net increase (decrease) in accrued expenses and other liabilities	8,598			(1,286		)
Net securities premium amortization	4,058			3,535
Deferred income tax benefit	(1,754		)	(8,543		)
Change in valuation allowance of deferred income tax asset	(495		)	—
Other, net	325			2,333
Net cash from operating activities	72,697			24,995
Cash flows from investing activities
Net increase in loans	(245,031		)	(143,829		)
Purchases of loans	(10,162		)	(30,793		)
Purchases of FHLB stock	—			(6,716		)
Purchases of securities available-for-sale	(156,046		)	(187,009		)
New investments in Company-owned life insurance	(1,335		)	(875		)
Purchases of premises and equipment	(978		)	(1,907		)
Payments received from FDIC under loss sharing agreements	—			3,120
Proceeds from:
Maturities and redemptions of securities available-for-sale	123,935			85,238
Redemption of FHLB Stock	—			2,384
Sale of securities available-for-sale	14,977			24,750
Sale of loan servicing rights	—			12,702
Sale of loans	5,581			49,839
Sale of other real estate owned and repossessed assets	14,179			20,428
Sale of premises and equipment	—			2,737
Net cash provided from acquisition	—			810
Net cash from (used in) investing activities	(254,880		)	(169,121		)
Cash flows from financing activities
Net increase in deposits	252,627			157,757
Draw on senior unsecured line of credit	7,500			30,000
Net increase in short-term borrowings	169,462			88,202
Issuances of long-term FHLB advances	—			200,000
Repayments of long-term FHLB advances	(165,700		)	(147,870		)
Repayments of subordinated debt	—			(3,500		)
Other changes in long-term debt	(1,701		)	(741		)
Repurchase of warrants to purchase 2.5 million shares, at fair value	—			(19,892		)
Issuance of common stock and restricted stock awards	1,727			574
Cash paid for payroll taxes upon exercise of stock options	(2,145		)	(2,167		)
Cash dividends paid on common stock ($0.10 and $0.02 per share, respectively)	(6,676		)	(1,415		)
Net cash from financing activities	255,094			300,948
Net change in cash and cash equivalents	72,911			156,822
Beginning cash and cash equivalents	387,323			253,736
Ending cash and cash equivalents	$	460,234		$	410,558

7

Supplemental disclosure of cash flow information:
Interest paid	$	13,368		$	8,292
Income taxes paid (received)	(172		)	16,745
Transfer from loans to other real estate owned and repossessed assets	6,667			18,753
Net transfer of loans held for sale to loans held for investment	(1,896		)	(3,983		)
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

June 30, 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.

Subsequent Event

On July 29, 2016, Talmer Bank and Trust, the wholly-owned subsidiary of Talmer Bancorp, Inc., entered into an agreement to sell its single branch office in Chicago, Illinois to Old Second National Bank, a wholly owned subsidiary of Old Second Bancorp, Inc. Old Second National Bank is expected to assume approximately $82.0 million of deposits and purchase approximately $238.0 million of loans, and will pay a $6.5 million premium in the transaction. The acquisition is expected to close in the fourth quarter of 2016, subject to regulatory approval, the completion of Talmer Bancorp's pending merger with Chemical Financial Corporation and other customary closing conditions.

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.

Adopted Accounting Pronouncements

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. Early adoption is permitted for any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company has elected to early adopt ASU 2016-09 during the second quarter of 2016.

Prior to adoption of ASU 2016-09, all excess tax benefits resulting from the exercise or settlement of share-based payment transactions were recognized in additional paid-in-capital (APIC) and accumulated in an APIC pool, while tax deficiencies were either offset against the APIC pool or recognized in the income statement if no APIC pool was available. The new guidance eliminates the APIC pool and all excess tax benefits and deficiencies are recognized as an income tax benefit or expense in the income statement prospectively. Accordingly, periods prior to January 1, 2016 have not been adjusted. During the three and six months ended June 30, 2016, $2.6 million and $4.1 million of excess tax benefits were recognized as income tax benefit, respectively.

ASU 2016-09 amends existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based compensation expense include an estimate of forfeitures. The Company has made a policy election to continue to estimate forfeitures.

Pending Accounting Pronouncements

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

9

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. In April 2016, the FASB issued ASU 2016-10, "Identifying Performance Obligations and Licensing", ("ASU 2016-10"), which provides additional clarification of ASU 2014-09 by amending guidance related to the identification of performance obligations and licensing implementation. ASU 2016-08 and ASU 2016-10 do not change the core principal of ASU 2014-09, but are intended to improve the operations and understanding of principal versus agent considerations, performance obligation identification and licensing implementation. In May 2016, the FASB issued ASU 2016-12 "Narrow-Scope Improvements and Practical Expedients", ("ASU 2016-12"), which amends certain aspects of ASU 2014-09, which include collectibility, presentation of sales taxes and other taxes collected from customers, noncash consideration and transition technical corrections. ASU 2016-12 completes the FASB deliberations of clarifications to ASU 2014-09 that have been conducted over the last year. 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 beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the provisions of ASU 2016-02.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which amends the accounting guidance on the impairment of financial instruments. ASU 2016-13 adds to GAAP a current expected credit loss (CECL) impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is believed by the FASB to result in more timely recognition of such losses. ASU 2016-13 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. As such, the Company will adopt ASU 2016-13 as of January 1, 2020. 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 related to most debt instruments. The Company is currently evaluating the provisions of ASU 2016-13.

Pending Merger with Chemical Financial Corporation

On January 26, 2016, the board 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 merger has been approved by both Chemical Financial Corporation and the Company's

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shareholders. The completion of the merger remains subject to receipt of regulatory approvals and satisfaction of other customary closing conditions.

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2.  BUSINESS COMBINATIONS

The Company has determined that the acquisition of First of Huron Corp. (“First Huron”), 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 First Huron for aggregate cash consideration of $13.4 million. In connection with the merger, First Huron 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 First Huron, 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 First Huron 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 First Huron’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 First Huron. The Company incurred $144 thousand and $1.2 million of acquisition related expenses during the three and six months ended June 30, 2015, related to the acquisition of First Huron, 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, First Huron 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, First Huron 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 First Huron’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 First Huron’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 First Huron 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 First Huron 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 First Huron 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

First Huron’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 assets 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 securities included an obligation of a political subdivision as of June 30, 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 June 30, 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

15

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 June 30, 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: 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 June 30, 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)
June 30, 2016
Securities available-for-sale:
U.S. government sponsored agency obligations	$	52,072	$	—	$	52,072	$	—
Obligations of state and political subdivisions:
Taxable	4,385		—		4,146		239
Tax-exempt	310,798		—		310,798		—
Small Business Administration (“SBA”) Pools	25,729		—		25,729		—
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	298,861		—		298,861		—
Privately issued	90,369		—		90,369		—
Privately issued commercial mortgage-backed securities	23,852		—		23,852		—
Corporate debt securities	112,711		—		112,711		—
Total securities available-for-sale	918,777		—		918,538		239
Loans measured at fair value:
Residential real estate	23,648		—		—		23,648
Loans held for sale	38,770		—		38,770		—
Loan servicing rights	47,696		—		—		47,696
Derivative assets:
Interest rate lock commitments	3,482		—		3,482		—
Customer-initiated derivatives	13,310		—		13,310		—
Total derivatives	16,792		—		16,792		—
Total assets at fair value	$	1,045,683	$	—	$	974,100	$	71,583
Derivative liabilities:
Forward contracts related to mortgage loans to be delivered for sale	1,303		—		1,303		—
Customer-initiated derivatives	13,845		—		13,845		—
Risk management derivatives	2,578		—		2,578		—
Total derivatives	17,726		—		17,726		—
Total liabilities at fair value	$	17,726	$	—	$	17,726	$	—
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 six months endedJune 30, 2016. During the six months endedJune 30, 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 June 30, 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		$	24,377		$	51,348
Transfers from loans held for sale	—			62			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	1			—			—
Recorded in “Net gain on sales of loans”	—			1			—
Recorded in “Mortgage banking and other loan fees”	—			(100		)	(6,127		)
New originations	—			—			2,475
Repayments	(80		)	(692		)	—
Balance, end of period	$	239		$	23,648		$	47,696

	Three months ended June 30, 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		$	430	$	22,158		$	54,409
Transfers from loans held for sale	—			—		764			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	1			1		—			—
Recorded in “Net gain on sales of loans”	—			—		12			—
Recorded in “Mortgage banking and other loan fees”	—			—		(347		)	1,552
Recorded in OCI (pre-tax)	—			17		—			—
New originations	—			—		—			2,933
Repayments	(80		)	—		(1,680		)	—
Balance, end of period	$	318		$	448	$	20,907		$	58,894

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	Six months ended June 30, 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	—			1,896			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	1			—			—
Recorded in “Net gain on sales of loans”	—			83			—
Recorded in “Mortgage banking and other loan fees”	—			423			(14,592		)
New originations	—			—			4,175
Repayments	(80		)	(987		)	—
Balance, end of period	$	239		$	23,648		$	47,696

	Six months ended June 30, 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	—			—			3,983			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	1			2			—			—
Recorded in “Net gain on sales of loans”	—			—			139			—
Recorded in “Mortgage banking and other loan fees”	—			—			(239		)	(4,850		)
Recorded in OCI (pre-tax)	—			21			—			—
New originations	—			—			—			5,848
Reduction from servicing rights sold	—			—			—			(12,702		)
Repayments	(80		)	—			(2,502		)	—
Balance, end of period	$	318		$	448		$	20,907		$	58,894

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)	June 30, 2016		December 31, 2015
Aggregate fair value	$	23,648	$	22,233
Contractual balance	22,819		21,910
Fair value gain	829		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 June 30, 2016 was $151 thousand and $206 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.

20

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 June 30, 2016 and 2015, there was $220 thousand and $208 thousand, respectively, and $442 thousand and $413 thousand for the six months ended June 30, 2016 and 2015, 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 June 30,						For the six months ended June 30,
(Dollars in thousands)	2016			2015			2016		2015
Change in fair value:
Included in “Net gain on sales of loans”	$	1		$	12		$	83	$	139
Included in “Mortgage banking and other loan fees”	(100		)	(347		)	423		(239		)

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 June 30, 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)	June 30, 2016		December 31, 2015
Aggregate fair value	$	38,770	$	58,223
Contractual balance	36,796		55,911
Unrealized gain	1,974		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 June 30,				For the six months ended June 30,
(Dollars in thousands)	2016		2015		2016			2015
Interest income(1)	$	341	$	878	$	670		$	1,948
Change in fair value(2)	814		417		(338		)	(1,124		)
Total included in earnings	$	1,155	$	1,295	$	332		$	824

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

(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.

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

(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2016
Impaired loans:(1)
Commercial real estate	$	2,549	$	—	$	—	$	2,549
Residential real estate	4,009		—		—		4,009
Commercial and industrial	1,456		—		—		1,456
Real estate construction	80		—		—		80
Consumer	61		—		—		61
Total impaired loans	8,155		—		—		8,155
Other real estate owned(2)	3,652		—		—		3,652
Repossessed assets(3)	4,751		—		—		4,751
Total	$	16,558	$	—	$	—	$	16,558
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 $1.7 million and $4.4 million were provided to reduce the fair value of these loans at June 30, 2016 and December 31, 2015, respectively, based on the estimated fair value of the underlying collateral. In addition, net charge-offs of $6 thousand and $31 thousand reduced the fair value of these loans for the three months ended June 30, 2016 and 2015, respectively and $325 thousand and $67 thousand for the six months ended June 30, 2016 and 2015, respectively.

(2) The Company charged $755 thousand and $585 million through other noninterest expense during the three months ended June 30, 2016 and 2015, respectively, and $2.0 million and $1.9 million during the six months ended June 30, 2016 and 2015, respectively, to reduce the fair value of these properties. There was no valuation allowance at June 30, 2016 and $325 thousand of valuation allowance was provided to reduce the fair value of these properties and December 31, 2015, based on the estimated fair value as of each respective date.

(3) The Company charged $296 thousand and $274 thousand through other noninterest expense during the three months ended June 30, 2016 and 2015, respectively, and $607 thousand and $468 thousand during the six months ended June 30, 2016 and 2015, respectively, 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 June 30, 2016 and December 31, 2015, based on the estimated fair value as of each respective date.

(4) There was no impairment charges on premises and equipment during the three and six months ended June 30, 2016. The Company charged $1.1 million through other noninterest expense during both the three and six months ended June 30, 2015 to reduce the value of premises and equipment deemed impaired during the period.

The Company typically holds the majority of its financial instruments until maturity and thus does not expect to realize many of the estimated fair value amounts disclosed.  The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments, but which have significant value.  These include such items as core

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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
June 30, 2016
Financial assets:
Cash and cash equivalents	$	460,234	$	460,234	$	86,571	$	373,663	$	—
Federal Home Loan Bank stock	29,621		N/A
Net loans(1)	4,996,528		5,097,843		—		—		5,097,843
Accrued interest receivable	16,651		16,651		—		16,651		—
Company-owned life insurance	109,984		109,984		—		109,984		—
Securities held-to-maturity	1,655		1,655		—		—		1,655
Financial liabilities:
Deposits:
Savings and demand deposits	$	3,483,838	$	3,483,838	$	—	$	3,483,838	$	—
Time deposits(2)	1,783,370		1,785,208		—		1,785,208		—
Total deposits	5,267,208		5,269,046		—		5,269,046		—
Short-term borrowings	525,960		525,960		—		525,960		—
Long-term debt	296,656		293,157		—		293,157		—
Accrued interest payable	3,639		3,639		—		3,639		—
Deferred compensation plan liabilities	3,442		3,442		—		3,442		—

(1) Included $8.2 million of impaired loans recorded at fair value on a nonrecurring basis and $23.6 million of loans recorded at fair value on a recurring basis.

(2) Includes $228.4 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
June 30, 2016
Securities available-for-sale:
U.S. government sponsored agency obligations	$	51,867	$	205	$	—		$	52,072
Obligations of state and political subdivisions:
Taxable	4,279		106		—			4,385
Tax-exempt	299,292		11,835		(329		)	310,798
SBA Pools	25,262		467		—			25,729
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	292,618		6,250		(7		)	298,861
Privately issued	89,942		509		(82		)	90,369
Privately issued commercial mortgage-backed securities	23,840		35		(23		)	23,852
Corporate debt securities	111,558		1,482		(329		)	112,711
Total securities available-for-sale	$	898,658	$	20,889	$	(770	)	$	918,777

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair  Value
Securities held-to-maturity	$	1,655	$	—	$	—	$	1,655

	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 June 30,				For the six months ended June 30,
(Dollars in thousands)	2016		2015		2016		2015
Proceeds	$	—	$	135	$	14,977	$	24,750
Gross gains	—		6		333		9
Gross losses	—		—		—		(110		)

The amortized cost and fair value of debt securities by contractual maturity at June 30, 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.

	June 30, 2016
(Dollars in thousands)	Amortized Cost		Fair Value
Securities with contractual maturities:
Within one year	$	3,383	$	3,392
After one year through five years	165,956		168,557
After five years through ten years	186,887		192,193
After ten years	542,432		554,635
Total securities available-for-sale	$	898,658	$	918,777
Securities held-to-maturity:
After one year through five years	1,655		1,655
Total securities held-to-maturity	$	1,655	$	1,655

Securities with a carrying value of $430.8 million and $390.5 million were pledged at June 30, 2016 and December 31, 2015, respectively, to secure borrowings and deposits.

At June 30, 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
June 30, 2016
Obligations of state and political subdivisions:
Tax-exempt	$	13,221	$	(95	)	$	17,148	$	(234	)	$	30,369	$	(329	)
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	3,520		(7		)	—		—			3,520		(7		)
Privately issued	11,197		(82		)	—		—			11,197		(82		)
Privately issued commercial mortgage-backed securities	4,418		(16		)	776		(7		)	5,194		(23		)
Corporate debt securities	11,382		(310		)	435		(19		)	11,817		(329		)
Total securities available-for-sale	$	43,738	$	(510	)	$	18,359	$	(260	)	$	62,097	$	(770	)
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 June 30, 2016, the Company’s security portfolio consisted of 335 securities, 40 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 June 30, 2016.

The unrealized losses are spread across asset classes, primarily in those securities carrying fixed interest rates. At June 30, 2016, the combination of these security asset class holdings in an unrealized loss position had an estimated fair value of $62.1 million with gross unrealized losses of $770 thousand. 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 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. 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 June 30, 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
June 30, 2016
Commercial real estate	$	213,727	$	1,448,063	$	1,661,790
Residential real estate	242,025		1,432,590		1,674,615
Commercial and industrial	20,809		1,261,832		1,282,641
Real estate construction	7,879		249,232		257,111
Consumer	8,279		163,678		171,957
Total	$	492,719	$	4,555,395	$	5,048,114	(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 $5.6 million and $1.9 million at June 30, 2016 and December 31, 2015, respectively.

We recorded our acquired loans at fair value as of the acquisition date, which includes loans we acquired in our acquisitions of CF Bancorp, First Banking Center, Peoples State Bank, Community Central Bank, First Place Bank, Talmer West Bank and First Huron.  At the acquisition date, where a loan exhibits evidence of credit deterioration since origination and

28

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 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 credit impaired 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 June 30,						For the six months ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
Balance at beginning of period	$	211,467		$	278,825		$	223,214		$	277,058
Additions due to acquisitions	—			—			—			5,268
Discount accretion	(14,281		)	(19,242		)	(29,154		)	(40,206		)
Reclassifications from nonaccretable discount and other additions to accretable discount due to results of cash flow re-estimations	9,645			21,642			25,370			51,073
Other activity, net (1)	(10,023		)	(21,161		)	(22,622		)	(33,129		)
Balance at end of period	$	196,808		$	260,064		$	196,808		$	260,064

(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 June 30, 2016 and 2015 for purchased credit impaired loans was $9.6 million and $21.6 million, respectively.  During the six months ended June 30, 2016 and 2015, the total identified improvement in cash flow expectations was $25.4 million and $51.1 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 June 30, 2016 and December 31, 2015.

(Dollars in thousands)	June 30, 2016			December 31, 2015
Contractual cash flows	$	911,735		$	1,019,407
Non-accretable difference	(222,208		)	(226,927		)
Accretable yield	(196,808		)	(223,214		)
Loans accounted for under ASC 310-30	$	492,719		$	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

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of those accounted for under ASC 310-30 are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. The accrual of interest income is discontinued when a loan is placed in nonaccrual status and any payments received reduce the carrying value of the loan. A loan may be placed back on accrual status if all contractual payments have been received and collection of future principal and interest payments are no longer doubtful. 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)	June 30, 2016		December 31, 2015
Nonperforming assets
Nonaccrual loans
Commercial real estate	$	12,525	$	16,798
Residential real estate	15,846		18,390
Commercial and industrial	17,282		21,668
Real estate construction	203		413
Consumer	98		206
Total nonaccrual loans	45,954		57,475
Other real estate owned and repossessed assets (1)	20,461		28,157
Total nonperforming assets	66,415		85,632
Loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30
Commercial real estate	$	686	$	—
Residential real estate	63		58
Commercial and industrial	—		14
Consumer	74		225
Total loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	823	$	297

(1) Excludes closed branches and operating facilities.

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

	June 30, 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	$	2,717	$	704	$	9,803	$	13,224	$	1,434,839	$	1,448,063	$	686
Residential real estate	3,781		1,710		5,697		11,188		1,421,402		1,432,590		63
Commercial and industrial	1,182		85		10,852		12,119		1,249,713		1,261,832		—
Real estate construction	—		—		37		37		249,195		249,232		—
Consumer	1,128		317		103		1,548		162,130		163,678		74
Total	$	8,808	$	2,816	$	26,492	$	38,116	$	4,517,279	$	4,555,395	$	823

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	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

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)	June 30, 2016		December 31, 2015
Nonaccrual loans	$	45,954	$	57,475
Performing troubled debt restructurings:
Commercial real estate	19,102		15,340
Residential real estate	8,468		5,749
Commercial and industrial	3,319		3,438
Real estate construction	266		420
Consumer	318		242
Total performing troubled debt restructurings	31,473		25,189
Total impaired loans	$	77,427	$	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 June 30, 2016, there were $13.7 million of nonperforming TDRs and $31.5 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 and six months ended June 30, 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 June 30, 2016		Net charge-offs (recoveries)		Provision (benefit) for loan losses
For the three months ended June 30, 2016
Commercial real estate	$	1,178	$	—	$	1,129	$	1,596	11	$	3,903	$	—	$	(12	)
Residential real estate	566		521		1,248		202		25	2,537		2		46
Commercial and industrial	83		—		62		69		5	214		—		1
Consumer	18		—		—		—		1	18		—		—
Total loans	$	1,845	$	521	$	2,439	$	1,867	42	$	6,672	$	2	$	35
For the six months ended June 30, 2016
Commercial real estate	$	1,178	$	—	$	1,552	$	1,596	16	$	4,326	$	—	$	(199	)
Residential real estate	790		642		1,902		254		39	3,588		57		137
Commercial and industrial	2,400		—		166		475		14	3,041		—		(140		)
Consumer	24		—		—		—		2	24		—		—
Total loans	$	4,392	$	642	$	3,620	$	2,325	71	$	10,979	$	57	$	(202	)

(1) Loan forgiveness related to loans modified in TDRs for the three and six months ended June 30, 2016 totaled $608 thousand and $750 thousand, respectively.

	Concession type (1)											Financial effects of modification
(Dollars in thousands)	Principal deferral		Principal reduction (1)		Interest rate		Forbearance agreement		Total  number of loans	Total recorded investment at June 30, 2015		Net  charge-offs (recoveries)			Provision (benefit) for loan losses
For the three months ended June 30, 2015
Commercial real estate	$	93	$	—	$	3,746	$	532	17	$	4,371	$	—		$	2
Residential real estate	1,150		114		336		—		23	1,600		—			167
Commercial and industrial	231		—		542		152		14	925		192			232
Real estate construction	90		—		148		—		4	238		30			30
Consumer	17		—		—		—		1	17		—			—
Total loans	$	1,581	$	114	$	4,772	$	684	59	$	7,151	$	222		$	431
For the six months ended June 30, 2015
Commercial real estate	$	93	$	—	$	4,096	$	1,639	22	$	5,828	$	37		$	210
Residential real estate	2,098		114		972		—		35	3,184		6			269
Commercial and industrial	567		—		1,349		178		23	2,094		192			372
Real estate construction	90		—		148		130		5	368		(8		)	(8		)
Consumer	32		—		—		—		2	32		—			—
Total loans	$	2,880	$	114	$	6,565	$	1,947	87	$	11,506	$	227		$	843

(1) Loan forgiveness related to loans modified in TDRs for both the three and six months ended June 30, 2015 totaled $187 thousand.

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

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three and six months ended June 30, 2016 and 2015, including the recorded investment as of June 30, 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 June 30, 2016					For the six months ended June 30, 2016
(Dollars in thousands)	Total number of loans	Total recorded investment at June 30, 2016		Charged off following a subsequent default		Total number of loans	Total recorded investment at June 30, 2016		Charged off following a subsequent default
Commercial real estate	4	$	202	$	—	5	$	520	$	—
Residential real estate	9	920		2		11	952		2
Commercial and industrial	2	219		—		2	219		—
Consumer	3	29		—		3	29		3
Total loans	18	$	1,370	$	2	21	$	1,720	$	5

	For the three months ended June 30, 2015					For the six months ended June 30, 2015
(Dollars in thousands)	Total number of loans	Total recorded investment at June 30, 2015		Charged off following a subsequent default		Total number of loans	Total recorded investment at June 30, 2015		Charged off following a subsequent default
Commercial real estate	12	$	2,942	$	144	12	$	2,942	$	218
Residential real estate	17	1,812		—		21	1,986		29
Commercial and industrial	4	125		—		4	125		—
Total loans	33	$	4,879	$	144	37	$	5,053	$	247

At June 30, 2016, commitments to lend additional funds to borrowers whose terms have been modified in TDRs totaled $172 thousand.

The terms of certain other loans that were modified during the three months ended June 30, 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.

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

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2016
Commercial real estate	$	1,523,429	$	67,230	$	71,131	$	—	$	1,661,790
Commercial and industrial	1,183,709		47,053		51,879		—		1,282,641
Real estate construction	253,944		367		2,800		—		257,111
Total	$	2,961,082	$	114,650	$	125,810	$	—	$	3,201,542
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

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
June 30, 2016
Residential real estate	$	1,658,769	$	15,846	$	1,674,615
Consumer	171,859		98		171,957
Total	$	1,830,628	$	15,944	$	1,846,572
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
June 30, 2016
Loans individually evaluated for impairment
Commercial real estate	$	9,930	$	21,697	$	31,627	$	48,806	$	2,595
Residential real estate	13,984		10,330		24,314		31,474		2,168
Commercial and industrial	16,890		3,711		20,601		28,840		554
Real estate construction	180		289		469		1,140		68
Consumer	258		158		416		655		63
Total loans individually evaluated for impairment	$	41,242	$	36,185	$	77,427	$	110,915	$	5,448
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 June 30, 2016				For the six months ended June 30, 2016
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Loans individually evaluated for impairment
Commercial real estate	$	33,145	$	842	$	34,228	$	1,541
Residential real estate	24,775		326		25,220		663
Commercial and industrial	22,502		350		23,528		537
Real estate construction	474		9		552		18
Consumer	427		10		439		20
Total loans individually evaluated for impairment	$	81,323	$	1,537	$	83,967	$	2,779

	For the three months ended June 30, 2015				For the six months ended June 30, 2015
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Loans individually evaluated for impairment
Commercial real estate	$	38,208	$	1,067	$	38,774	$	1,779
Residential real estate	28,903		400		29,080		674
Commercial and industrial	9,036		182		10,117		443
Real estate construction	1,422		76		1,474		104
Consumer	597		11		617		22
Total loans individually evaluated for impairment	$	78,166	$	1,736	$	80,062	$	3,022

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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 June 30, 2016
Allowance for loan losses - loans accounted for under ASC 310-30:
Balance at beginning of period	$	8,352		$	7,253		$	1,078		$	1,065		$	101		$	17,849
Transfer to loans excluded from ASC 310-30 accounting (1)	(459		)	(8		)	(3		)	(98		)	—			(568		)
Provision (benefit) for loan losses	(834		)	152			90			(208		)	(44		)	(844		)
Gross charge-offs	(655		)	(875		)	(668		)	(246		)	(5		)	(2,449		)
Recoveries	1,117			393			463			116			15			2,104
Net (charge-offs) recoveries	462			(482		)	(205		)	(130		)	10			(345		)
Ending allowance for loan losses	$	7,521		$	6,915		$	960		$	629		$	67		$	16,092
For the six months ended June 30, 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)	(542		)	(66		)	(27		)	(325		)	—			(960		)
Provision (benefit) for loan losses	(2,091		)	(1,361		)	54			(589		)	(80		)	(4,067		)
Gross charge-offs	(2,419		)	(1,610		)	(1,402		)	(319		)	(11		)	(5,761		)
Recoveries	1,543			2,005			848			184			34			4,614
Net (charge-offs) recoveries	(876		)	395			(554		)	(135		)	23			(1,147		)
Ending allowance for loan losses	$	7,521		$	6,915		$	960		$	629		$	67		$	16,092
For the three months ended June 30, 2015
Allowance for loan losses - loans accounted for under ASC 310-30:
Balance at beginning of period	$	14,281		$	9,260		$	3,119		$	2,232		$	168		$	29,060
Transfer to loans excluded from ASC 310-30 accounting (1)	(295		)	(68		)	(215		)	—			—			(578		)
Provision (benefit) for loan losses	(1,924		)	(660		)	(2,296		)	80			(54		)	(4,854		)
Gross charge-offs	(3,241		)	(593		)	(723		)	(695		)	(19		)	(5,271		)
Recoveries	3,937			660			2,616			134			50			7,397
Net (charge-offs) recoveries	696			67			1,893			(561		)	31			2,126
Ending allowance for loan losses	$	12,758		$	8,599		$	2,501		$	1,751		$	145		$	25,754
For the six months ended June 30, 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)	(325		)	(116		)	(215		)	—			—			(656		)
Provision (benefit) for loan losses	(4,471		)	290			(2,128		)	311			64			(5,934		)
Gross charge-offs	(7,512		)	(2,157		)	(1,401		)	(1,226		)	(214		)	(12,510		)
Recoveries	7,508			908			2,981			636			89			12,122
Net (charge-offs) recoveries	(4		)	(1,249		)	1,580			(590		)	(125		)	(388		)
Ending allowance for loan losses	$	12,758		$	8,599		$	2,501		$	1,751		$	145		$	25,754

(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 June 30, 2016
Allowance for loan losses - loans excluded from ASC 310-30 accounting:
Balance at beginning of period	$	9,552		$	6,289		$	16,502		$	1,210		$	976		$	34,529
Transfer in (1)	459			8			3			98			—			568
Provision (benefit) for loan losses	2,305			2,702			(2,871		)	418			1,498			4,052
Gross charge-offs	(1,738		)	(759		)	(2,399		)	(171		)	(380		)	(5,447		)
Recoveries	680			781			245			30			56			1,792
Net (charge-offs) recoveries	(1,058		)	22			(2,154		)	(141		)	(324		)	(3,655		)
Ending allowance for loan losses	$	11,258		$	9,021		$	11,480		$	1,585		$	2,150		$	35,494
For the six months ended June 30, 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)	542			66			27			325			—			960
Provision (benefit) for loan losses	2,832			2,371			(1,198		)	208			1,951			6,164
Gross charge-offs	(2,148		)	(1,314		)	(2,643		)	(198		)	(884		)	(7,187		)
Recoveries	1,644			1,413			463			229			121			3,870
Net (charge-offs) recoveries	(504		)	99			(2,180		)	31			(763		)	(3,317		)
Ending allowance for loan losses	$	11,258		$	9,021		$	11,480		$	1,585		$	2,150		$	35,494
For the three months ended June 30, 2015
Allowance for loan losses - loans excluded from ASC 310-30 accounting:
Balance at beginning of period	$	6,784		$	5,777		$	9,168		$	528		$	1,148		$	23,405
Transfer in (1)	295			68			215			—			—			578
Provision (benefit) for loan losses	(4,192		)	782			894			34			23			(2,459		)
Gross charge-offs	(462		)	(642		)	(1,287		)	(31		)	(244		)	(2,666		)
Recoveries	6,165			600			1,347			120			62			8,294
Net (charge-offs) recoveries	5,703			(42		)	60			89			(182		)	5,628
Ending allowance for loan losses	$	8,590		$	6,585		$	10,337		$	651		$	989		$	27,152
For the six months ended June 30, 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)	325			116			215			—			—			656
Provision (benefit) for loan losses	(4,187		)	523			3,937			(113		)	454			614
Gross charge-offs	(1,620		)	(1,539		)	(2,693		)	(43		)	(530		)	(6,425		)
Recoveries	6,838			987			1,729			152			161			9,867
Net (charge-offs) recoveries	5,218			(552		)	(964		)	109			(369		)	3,442
Ending allowance for loan losses	$	8,590		$	6,585		$	10,337		$	651		$	989		$	27,152

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

37

Total loans

(Dollars in thousands)	Commercial real estate		Residential real estate		Commercial and industrial		Real estate construction		Consumer		Total
As of June 30, 2016
Allowance for loan losses:
Individually evaluated for impairment	$	2,595	$	2,168	$	554	$	68	$	63	$	5,448
Collectively evaluated for impairment	8,663		6,853		10,926		1,517		2,087		30,046
Accounted for under ASC 310-30	7,521		6,915		960		629		67		16,092
Total allowance for loan losses	$	18,779	$	15,936	$	12,440	$	2,214	$	2,217	$	51,586
Balance of loans:
Individually evaluated for impairment	$	31,627	$	24,314	$	20,601	$	469	$	416	$	77,427
Collectively evaluated for impairment	1,416,436		1,408,276		1,241,231		248,763		163,262		4,477,968
Accounted for under ASC 310-30	213,727		242,025		20,809		7,879		8,279		492,719
Total loans	$	1,661,790	$	1,674,615	$	1,282,641	$	257,111	$	171,957	$	5,048,114
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)	5,148			1,519
Capitalized expenditures	—			229
Payments received	—			(701		)
Disposals	(10,774		)	(871		)
Write-downs	(1,964		)	(607		)
Change in valuation allowance	325			—
Balance at June 30, 2016	$	15,665		$	4,898
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)	17,821			847
Capitalized expenditures	—			2,681
Payments received	—			(2,854		)
Disposals	(17,330		)	(318		)
Write-downs	(1,947		)	(468		)
Change in valuation allowance	—			(2,602		)
Balance at June 30, 2015	$	39,252		$	7,121

(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 June 30, 2016 and December 31, 2015, the Company had $465 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 $6.9 million of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process, as of June 30, 2016.

39

Activity in the valuation allowance for other real estate owned and repossessed assets during the three and six months ended June 30, 2016 and 2015 is summarized below. 

	Valuation allowance
(Dollars in thousands)	Other real estate owned			Repossessed assets
For the three months ended June 30, 2016
Beginning balance	$	—		$	5,104
Write-downs	—			—
Ending Balance	$	—		$	5,104
For the six months ended June 30, 2016
Beginning balance	$	325		$	5,104
Write-downs	(325		)	—
Ending Balance	$	—		$	5,104
For the three months ended June 30, 2015
Beginning balance	$	—		$	2,819
Provision for valuation allowance	—			243
Ending Balance	$	—		$	3,062
For the six months ended June 30, 2015
Beginning balance	$	—		$	460
Provision for valuation allowance	—			2,602
Ending Balance	$	—		$	3,062

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 June 30, 2016
Net gain (loss) on sale	$	1,132		$	(89	)
Write-downs	(755		)	(296		)
Net operating expenses	(276		)	(72		)
Total	$	101		$	(457	)
For the six months ended June 30, 2016
Net gain (loss) on sale	$	2,687		$	(153	)
Write-downs	(1,964		)	(607		)
Relief of valuation allowance	325			—
Net operating expenses	(652		)	(156		)
Total	$	396		$	(916	)
For the three months ended June 30, 2015
Net gain (loss) on sale	$	1,405		$	(26	)
Write-downs	(585		)	(274		)
Provision for valuation allowance	—			(243		)
Net operating expenses	(713		)	(38		)
Total	$	107		$	(581	)
For the six months ended June 30, 2015
Net gain (loss) on sale	$	2,820		$	(40	)
Write-downs	(1,947		)	(468		)
Provision for valuation allowance	—			(2,602		)
Net operating expenses	$	(1,008	)	$	(63	)
Total	$	(135	)	$	(3,173	)

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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 6.1 years as of June 30, 2016.

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

(Dollars in thousands)	June 30, 2016			December 31, 2015
Gross carrying amount	$	23,068		$	23,068
Accumulated amortization	(11,475		)	(10,260		)
Net carrying amount	$	11,593		$	12,808

Amortization expense recognized on CDIs was $603 thousand and $665 thousand for the three months ended June 30, 2016 and 2015, respectively, and $1.2 million and $1.3 million for the six months endedJune 30, 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 First Huron 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. The Company concluded that there was no impairment in the review completed during the year ended 2015. The next annual review for impairment will be completed in the fourth quarter of 2016.

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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 June 30, 2016
Fair value, beginning of period	$	431		$	50,917		$	51,348
Additions from loans sold with servicing retained	4			2,471			2,475
Changes in fair value due to:
Reductions from loans paid off during the period	(11		)	(2,617		)	(2,628		)
Changes due to valuation inputs or assumptions(1)	(30		)	(3,469		)	(3,499		)
Fair value, end of period	$	394		$	47,302		$	47,696
For the six months June 30, 2016
Fair value, beginning of period	$	475		$	57,638		$	58,113
Additions from loans sold with servicing retained	4			4,171			4,175
Changes in fair value due to:
Reductions from loans paid off during the period	(25		)	(4,443		)	(4,468		)
Changes due to valuation inputs or assumptions (1)	(60		)	(10,064		)	(10,124		)
Fair value, end of period	$	394		$	47,302		$	47,696
Principal balance of loans serviced	$	93,162		$	5,636,916		$	5,730,078
For the three months ended June 30, 2015
Fair value, beginning of period	$	621		$	53,788		$	54,409
Additions from loans sold with servicing retained	—			2,933			2,933
Changes in fair value due to:
Reductions from loans paid off during the period	(24		)	(1,570		)	(1,594		)
Changes due to valuation inputs or assumptions(1)	(17		)	3,163			3,146
Fair value, end of period	$	580		$	58,314		$	58,894
For the six months ended June 30, 2015
Fair value, beginning of period	$	691		$	69,907		$	70,598
Additions from loans sold with servicing retained	—			5,848			5,848
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	(53		)	(3,859		)	(3,912		)
Changes due to valuation inputs or assumptions (1)	(58		)	(880		)	(938		)
Fair value, end of period	$	580		$	58,314		$	58,894
Principal balance of loans serviced	$	187,948		$	5,835,932		$	6,023,880

(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 six months ended June 30, 2015 in connection with the sale of $1.2 billion of principal balance of loans serviced.

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Expected and actual loan prepayment speeds are the most significant factors driving the fair value of loan servicing rights. The following table presents assumptions utilized in determining the fair value of loan servicing rights as of June 30, 2016 and December 31, 2015.

	Commercial Real Estate			Mortgage
As of June 30, 2016
Prepayment speed	0.00 - 50.00%			0.00-40.30%
Weighted average (“WA”) discount rate	18.48		%	9.13		%
WA cost to service/per year	$	477		$	61
WA ancillary income/per year	N/A			36
WA float range	0.56		%	0.56-1.01%
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%

The Company realized total loan servicing fee income of $2.7 million and $2.5 million for the three months ended June 30, 2016 and 2015, respectively, and $5.4 million and $5.1 million for the six months ended June 30, 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.

43

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. 

	June 30, 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	$	—	$	2,578	$	37,000	$	105	$	397
Total risk management purposes	37,000		—		2,578		37,000		105		397
Customer-initiated and mortgage banking activities:
Forward contracts related to mortgage loans to be delivered for sale	135,027		—		1,303		105,711		—		38
Interest rate lock commitments	121,893		3,482		—		62,081		1,220		—
Customer-initiated derivatives	492,834		13,310		13,845		354,699		4,143		4,144
Total customer-initiated and mortgage banking activities	749,754		16,792		15,148		522,491		5,363		4,182
Total gross derivatives	$	786,754	$	16,792	$	17,726	$	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 $758 thousand at June 30, 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 June 30,						For the the six months ended June 30,
(Dollars in thousands)	Location of Gain (Loss)	2016			2015			2016			2015
Forward contracts related to mortgage loans to be delivered for sale	Net gain on sale of loans	$	(693	)	$	1,473		$	(1,265	)	$	1,666
Interest rate lock commitments	Net gain on sale of loans	574			(1,620		)	2,262			542
Customer-initiated derivatives	Other noninterest income	(298		)	(122		)	(534		)	(38		)
Total gain (loss) recognized in income		$	(417	)	$	(269	)	$	463		$	2,170

44

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 and six months ended June 30, 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 June 30, 2016
Interest rate swaps designated as cash flow hedges	$	(900	)	$	(147	)	$	—
For the three months ended June 30, 2015
Interest rate swaps designated as cash flow hedges	$	558		$	(104	)	$	—
For the six months ended June 30, 2016
Interest rate swaps designated as cash flow hedges	$	(2,581	)	$	(295	)	$	—
For the six months ended June 30, 2015
Interest rate swaps designated as cash flow hedges	$	233		$	(192	)	$	—

At June 30, 2016, the Company expected $569 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
June 30, 2016
Offsetting derivative assets
Derivative assets	$	13,310	$	—	$	13,310	$	(13,310	)	$	13,467	$	13,467
Offsetting derivative liabilities
Derivative liabilities	16,423		—		16,423		(13,310		)	3,113		—
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		—

45

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 $673 thousand and $622 thousand at June 30, 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:

	June 30, 2016						December 31, 2015
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	595,921	$	750,086	$	1,346,007	$	658,268	$	489,102	$	1,147,370
Standby letters of credit	61,423		3,969		65,392		61,300		4,801		66,101
Total commitments	$	657,344	$	754,055	$	1,411,399	$	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 $21.7 million and $25.2 million at June 30, 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 $20.5 million and $19.4 million at June 30, 2016 and December 31, 2015, respectively.  In the event of nonperformance, we have rights to the underlying collateral securing the loans.  As of June 30, 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 June 30, 2016 and December 31, 2015, our standby letters of credit totaled $65.4 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 June 30, 2016 and December 31, 2015, our liability recorded in connection with these representations and warranties totaled $1.6 million and $1.3 million, respectively.

Legal Proceedings

The Company and certain of its subsidiaries are subject to various pending or threatened legal proceedings arising out of the normal course of business 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.

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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.

	June 30, 2016				December 31, 2015
(Dollars in thousands)	Amount		Weighted Average Rate (1)		Amount		Weighted Average Rate (1)
Short-term borrowings:
FHLB advances: 0.47% - 0.81% fixed-rate notes	$	425,000	0.53	%	$	300,000	0.58	%
FHLB advances: 0.21% variable-rate notes	50,000		0.21		—		—
Securities sold under agreements to repurchase: 0.10% variable-rate notes	13,460		0.10		18,998		0.10
Holding company line of credit: floating-rate based on one-month LIBOR plus 1.75%	37,500		2.21		30,000		2.18
Total short-term borrowings	525,960		0.61		348,998		0.69
Long-term debt:
FHLB advances: 0.59% - 7.44% fixed-rate notes due 2016 to 2027 (2)	227,190		1.65		393,851		1.34
Securities sold under agreements to repurchase: 4.11% - 4.30% fixed-rate notes due 2016 to 2037 (3)	53,975		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)	10,938		2.88		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)	4,553		3.88		4,541		3.58
Total long-term debt	296,656		2.19		464,057		1.73
Total short-term borrowings and long-term debt	$	822,616	1.18	%	$	813,055	1.28	%

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

(2) The June 30, 2016 balance includes advances payable of $223.9 million and purchase accounting premiums of $3.3 million. The December 31, 2015 balance includes advances payable of $389.6 million and purchase accounting premiums of $4.3 million.

(3) The June 30, 2016 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $4.0 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.

(4) The June 30, 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 June 30, 2016 balance includes subordinated notes related to trust preferred securities of $5.0 million and purchase accounting discounts of $447 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.

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

	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
FHLB advances:
Average daily balance	$	366,483		$	33,517		$	331,181		$	26,022
Average interest rate during the period	0.53		%	0.27		%	0.59		%	0.27		%
Maximum month-end balance	$	475,000		$	200,000		$	475,000		$	200,000
Securities sold under agreement to repurchase:
Average daily balance	$	19,166		$	19,390		$	19,526		$	19,911
Average interest rate during the period	0.10		%	0.10		%	0.10		%	0.10		%
Maximum month-end balance	$	21,661		$	23,945		$	21,980		$	23,945
Federal funds purchased:
Average daily balance	$	—		$	—		$	—		$	696
Average interest rate during the period	N/A			N/A			N/A			0.31		%
Maximum month-end balance	$	—		$	—		$	—		$	126,000
Holding company line of credit:
Average daily balance	$	37,500		$	22,912		$	33,832		$	16,271
Average interest rate during the period	2.19		%	3.18		%	2.19		%	3.18		%
Maximum month-end balance	$	37,500		$	30,000		$	37,500		$	30,000

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 $60.3 million at June 30, 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:

	June 30, 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	$	13,460	$	—	$	10,000	$	40,000	$	63,460
Total borrowings	$	13,460	$	—	$	10,000	$	40,000	$	63,460
Amounts related to securities sold under agreements to repurchase not included in offsetting disclosure in Footnote 10									$	63,460

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 June 30, 2016, FHLB advances were collateralized by $2.0 billion of commercial and mortgage loans, with $1.3 billion in the form of a blanket lien arrangement and $763.7 million under specific lien arrangements.  Based on this collateral, the Company is eligible to borrow up to an additional $141.0 million at June 30, 2016.

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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 June 30,										For the six months ended June 30,
	2016					2015					2016					2015
(Dollars in thousands)	Amount			Rate		Amount			Rate		Amount			Rate		Amount			Rate
Tax based on federal statutory rate	$	8,924		35.0	%	$	9,004		35.0	%	$	16,821		35.0	%	$	13,860		35.0	%
Effect of:
Tax exempt income	(787		)	(3.1	)	(644		)	(2.6	)	(1,549		)	(3.2	)	(1,275		)	(3.2	)
State taxes, net of federal benefit	204			0.8		194			0.8		384			0.8		460			1.2
Change in valuation allowance	(225		)	(0.9	)	—			—		(495		)	(1.0	)	—			—
Tax settlement with the Internal Revenue Service	—			—		—			—		(4,306		)	(9.0	)	—			—
Excess tax benefits (1)	(2,612		)	(10.2	)	—			—		(4,084		)	(8.5	)	—			—
Transaction costs	209			0.8		18			0.1		475			1.0		47			0.1
Other, net	(369		)	(1.4	)	(393		)	(1.5	)	(494		)	(1.1	)	(472		)	(1.2	)
Income tax expense	$	5,344		21.0	%	$	8,179		31.8	%	$	6,752		14.0	%	$	12,620		31.9	%

(1) Following the Company's early adoption of ASU 2016-09 in the second quarter of 2016, all excess tax benefits resulting from the exercise or settlement of share-based payment transactions are recognized directly into income tax expense. Refer to Note 1, "Basis of Presentation and Recently Adopted and Issued Accounting Standards" for further information.

During the six months ended June 30, 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 June 30, 2016, 1.5 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 six months endedJune 30, 2016 and 2015, there were no stock options granted.

Activity in the Plan during the six months endedJune 30, 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)	(1,271	)	6.98
Outstanding at June 30, 2016	5,964		6.97		5.20	$	72,763
Options fully vested	5,964		6.97		5.20	72,763
Exercisable at June 30, 2016	5,964		6.97		5.20	72,763

(1) Options exercised during the six months endedJune 30, 2016 had a weighted average fair value of $18.13, at respective exercise dates.

The total intrinsic value of stock options exercised was $14.2 million and $5.4 million for the six months endedJune 30, 2016 and 2015, respectively.

Total cash received from option exercises during the six months endedJune 30, 2016 and 2015 was $1.8 million and $210 thousand, respectively, resulting in the issuance of 259 thousand shares and 35 thousand shares, respectively.  During the six months endedJune 30, 2016 and 2015, there were 518 thousand shares and 210 thousand shares, respectively, issued under the net-settlement option.  The tax benefit realized from option exercises during the six months endedJune 30, 2016 and 2015 was $4.1 million and $1.4 million, 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
Vested	(17	)	16.56
Forfeited	(23	)	15.37
Nonvested at June 30, 2016	1,012		$	15.36

The following table provides information regarding total expense for restricted stock awards:

	For the three months ended June 30,				For the six months ended June 30,
	2016		2015		2016		2015
Restricted stock expense related to employees (1)	$	792	$	441	$	1,419	$	739
Restricted stock expense related to directors (2)	53		74		124		127
Total restricted stock expense	$	845	$	515	$	1,543	$	866

(1) Included in "Salary and employee benefits" in the Consolidated Statements of Income.

(2) Included in "Professional fees" in the Consolidation Statements of Income.

As of June 30, 2016, the total compensation costs related to nonvested restricted stock that has not yet been recognized totaled $12.1 million and the weighted-average period over which these costs are expected to be recognized is 3.1 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 June 30, 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 June 30, 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
June 30, 2016
Total capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	$	753,175	13.3	%	$	453,001	8.0	%	$	488,392	8.6	%	N/A		N/A
Talmer Bank and Trust	783,093		13.9		452,253		8.0		487,585		8.6		$	565,316	10.0	%
Common equity tier 1 capital
Talmer Bancorp, Inc. (Consolidated)	699,266		12.4		254,813		4.5		290,204		5.1		N/A		N/A
Talmer Bank and Trust	729,184		12.9		254,392		4.5		289,724		5.1		367,455		6.5
Tier 1 capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	699,266		12.4		339,751		6.0		375,142		6.6		N/A		N/A
Talmer Bank and Trust	729,184		12.9		339,189		6.0		374,522		6.6		452,253		8.0
Tier 1 leverage ratio
Talmer Bancorp, Inc. (Consolidated)	699,266		10.6		265,150		4.0		265,150		4.0		N/A		N/A
Talmer Bank and Trust	729,184		10.9		267,869		4.0		267,869		4.0		334,837		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.

During the three and six months ended June 30, 2016 and for the three months ended June 30, 2015, no dividends were paid, while for the six months ended June 30, 2015, $15.0 million were paid to the Company.

On July 11, 2016, a cash dividend on the Company’s Class A common stock of $0.05 per share was declared.  The dividend was paid on July 29, 2016, to the Company’s Class A common shareholders of record as of July 22, 2016.

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16.  PARENT COMPANY FINANCIAL STATEMENTS

Balance Sheets - Parent Company

(Dollars in thousands)	June 30, 2016		December 31, 2015
Assets
Cash and cash equivalents	$	10,762	$	12,581
Investment in subsidiary	802,483		750,713
Income tax benefit	10,189		8,504
Other assets	2,493		994
Total assets	$	825,927	$	772,792
Liabilities
Short-term borrowings	$	37,500	$	30,000
Long-term debt	15,491		15,406
Accrued expenses and other liabilities	3,961		2,171
Total liabilities	56,952		47,577
Shareholders’ equity	768,975		725,215
Total liabilities and shareholders’ equity	$	825,927	$	772,792

Statements of Income and Comprehensive Income - Parent Company

	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
Income
Dividend income from subsidiary	$	—		$	—		$	—		$	15,000
Other noninterest income	21			4			26			9
Total income	21			4			26			15,009
Expenses
Salary and employee benefits	1,927			1,671			3,615			2,892
Merger and acquisition expense	308			159			3,182			1,155
Professional service fees	287			491			802			868
Insurance expense	114			33			229			113
Marketing expense	32			35			47			49
Interest on short-term borrowings	208			187			375			261
Interest on long-term debt	202			182			400			344
Other	39			59			92			173
Total expenses	3,117			2,817			8,742			5,855
Income (loss) before income taxes and equity in undistributed net earnings of subsidiaries	(3,096		)	(2,813		)	(8,716		)	9,154
Income tax benefit	3,812			1,082			7,098			1,735
Equity in undistributed earnings of subsidiaries	19,437			19,279			42,926			16,092
Net income	$	20,153		$	17,548		$	41,308		$	26,981
Total comprehensive income, net of tax	$	24,429		$	13,144		$	49,311		$	25,367

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Statements of Cash Flows - Parent Company

	For the six months ended June 30,
(Dollars in thousands)	2016			2015
Cash flows from operating activities
Net income	$	41,308		$	26,981
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries	(42,926		)	(16,092		)
Stock-based compensation expense	702			371
Increase in income tax benefit	(1,685		)	(71		)
(Increase) decrease in other assets, net	(1,499		)	168
Increase (decrease) in accrued expenses and other liabilities, net	1,875			(4,194		)
Net cash from operating activities	(2,225		)	7,163
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	(418		)	(127		)
Repurchase of warrants to repurchase 2.5 million shares, at fair value	—			(19,892		)
Cash dividends paid on common stock(1)	(6,676		)	(1,415		)
Draw on senior unsecured line of credit	7,500			30,000
Repayment of long-term debt	—			(3,500		)
Net cash from financing activities	406			5,066
Net increase (decrease) in cash and cash equivalents	(1,819		)	1,131
Beginning cash and cash equivalents	12,581			9,497
Ending cash and cash equivalents	$	10,762		$	10,628

(1) $0.10 per share and $0.02 per share for the six months endedJune 30, 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 June 30,						For the six months ended June 30,
(In thousands, except per share data)	2016			2015			2016			2015
Net income	$	20,153		$	17,548		$	41,308		$	26,981
Net income allocated to participating securities	313			174			583			211
Net income allocated to common shareholders (1)	$	19,840		$	17,374		$	40,725		$	26,770
Weighted average common shares - issued	67,050			71,006			66,776			70,814
Average unvested restricted share awards	(1,039		)	(705		)	(952		)	(555		)
Weighted average common shares outstanding - basic	66,011			70,301			65,824			70,259
Effect of dilutive securities
Employee and director stock options	3,996			4,339			4,048			4,174
Warrants	19			260			17			613
Weighted average common shares outstanding - diluted	70,026			74,900			69,889			75,046
EPS available to common shareholders
Basic	$	0.30		$	0.25		$	0.62		$	0.38
Diluted	$	0.28		$	0.23		$	0.58		$	0.36

(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 $19.25 per share and $16.14 per share for the three months ended June 30, 2016 and 2015, respectively, and the average stock valuation is $18.10 per share and $15.12 per share for the six months ended June 30, 2016 and 2015, respectively.

There were no outstanding antidilutive options or warrants during the three and six months endedJune 30, 2016 and 2015.

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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 June 30, 2016
Beginning balance	$	8,312			$	(1,186	)		$	7,126
Other comprehensive income (loss) before reclassifications	4,766				(585		)		4,181
Amounts reclassified from accumulated other comprehensive income	—			(1)	95			(2)	95
Net current period other comprehensive income (loss)	4,766				(490		)		4,276
Ending balance	$	13,078			$	(1,676	)		$	11,402
For the three months ended June 30, 2015
Beginning balance	$	6,939			$	(299	)		$	6,640
Other comprehensive income (loss) before reclassifications	(4,831		)		362				(4,469		)
Amounts reclassified from accumulated other comprehensive income	(3		)	(1)	68			(2)	65
Net current period other comprehensive income (loss)	(4,834		)		430				(4,404		)
Ending balance	$	2,105			$	131			$	2,236
For the six months ended June 30, 2016
Beginning balance	$	3,589			$	(190	)		$	3,399
Other comprehensive income (loss) before reclassifications	9,705				(1,677		)		8,028
Amounts reclassified from accumulated other comprehensive income	(216		)	(1)	191			(2)	(25		)
Net current period other comprehensive income (loss)	9,489				(1,486		)		8,003
Ending balance	$	13,078			$	(1,676	)		$	11,402
For the six months ended June 30, 2015
Beginning balance	$	3,995			$	(145	)		$	3,850
Other comprehensive income before reclassifications	(1,956		)		151				(1,805		)
Amounts reclassified from accumulated other comprehensive income	66			(1)	125			(2)	191
Net current period other comprehensive income (loss)	(1,890		)		276				(1,614		)
Ending balance	$	2,105			$	131			$	2,236

(1) Amounts are included in “Net gain (loss) on sales of securities” in the Consolidated Statements of Income within total noninterest income, and were net gains of $0 thousand and $6 thousand for the three months ended June 30, 2016 and 2015, respectively, and net gains of $333 thousand and net losses of $101 thousand for the six months ended June 30, 2016 and 2015, respectively. Income tax expense associated with the reclassification adjustments for the three months ended June 30, 2016 and 2015 was an expense of $0 thousand and $3 thousand, respectively, and for the six months ended June 30, 2016 and 2015 was an expense of $117 thousand and a benefit of $35 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 $147 thousand and $104 thousand for the three months ended June 30, 2016 and 2015, respectively, and $295 thousand and $192 thousand for the six months ended June 30, 2016 and 2015, respectively. Income tax benefit associated with the reclassification adjustment for the three months ended ended June 30, 2016 and 2015 was $52 thousand and $36 thousand, respectively, and $104 thousand and $67 thousand for the six months ended June 30, 2016 and 2015, respectively, and were included in “Income tax provision” in the Consolidated Statements of Income.

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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 and six months ended June 30, 2016 and June 30, 2015 and also analyzes our financial condition as of June 30, 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 June 30, 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.

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 Huron 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 entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Chemical Financial Corporation ("Chemical"), a Michigan corporation. The Merger Agreement has been approved by both Chemical's and the Company's shareholders, and is subject to regulatory approval and the satisfaction of 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 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.

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

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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.

Financial Overview

As of June 30, 2016, our total assets were $6.9 billion, our net total loans were $5.0 billion, our total deposits were $5.3 billion and our total shareholder’s equity was $769.0 million.

As of June 30, 2016, we had $5.0 billion in total loans, compared to $4.8 billion at December 31, 2015. Approximately 75.3% of our total loans at June 30, 2016 were generated through non-acquisition growth, compared to 70.3% of our total loans at December 31, 2015 and 63.6% of our total loans at June 30, 2015.  Of the $5.0 billion in total loans at June 30, 2016, $1.2 billion, or 24.7%, 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 $41.3 million for the six months endedJune 30, 2016, compared to $27.0 million for the six months endedJune 30, 2015.  During the six months endedJune 30, 2016 we incurred $3.2 million of transaction and integration related expenses related to the pending merger with Chemical.  Net income for the six months endedJune 30, 2015, included $3.8 million of transaction and integration related expenses primarily related to the acquisition of First Huron.  We completed the operational integrations of both Talmer West Bank and First Huron 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.”

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Economic Overview

Gross Domestic Product (“GDP”) growth in the first quarter of 2016 increased 1.1% compared to growth of 1.4% in fourth 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 4.7% as of May 31, 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 April 30, 2016, up 3.0% from the rolling twelve month total of 4.6 million units as of April 30, 2015. Inventory levels were at a 4.3 months’ supply, or 1.7 million units, as of April 30, 2016, compared to a 4.5 months’ supply as of April 30, 2015. New home sales were up to a seasonally adjusted annual rate of 522 thousand units as of April 30, 2016, up 6.5% from 490 thousand as of April 30, 2015. Inventory for new homes increased to a 5.6 months’ supply as of April 30, 2016 versus a 5.0 month supply as of April 30, 2015, while the median sales price of new homes increased 1.6% to $298 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 5.4% from April 2015 to April 2016. The pace of increasing values has increased from the April 2015 year-over-year increase of 4.9%.

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 and Ohio were up 0.7% and 0.3%, respectively.

According to McGraw-Hill Financials compilation of Residential Real Estate Statistics, overall mortgage industry performance saw improvement with prime mortgage delinquency falling to 2.81% as of March 31, 2016 versus 2.83% as of December 31, 2015 and 3.25% as of December 31, 2014, according to the Mortgage Bankers Association. New foreclosures on prime loans fell to 0.19% as of March 31, 2016, down from 0.24% as of December 31, 2015 and 0.28% as of December 31, 2014. According to S&P Indices, first mortgages in default were at 0.63% as of May 30, 2016, down from 0.84% as of December 31, 2015 and 1.02% 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 1.9% as of April 30, 2016 to 170.1. The overall consumer confidence index was at 96.1 as of April 30, 2016, down slightly from 96.5 as of December 31, 2015 and 101.4 as of April 30, 2015.

According to the Beige Book published by the Federal Reserve Board in May 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 District (San Francisco) reported moderate growth. 

The economy in the Cleveland District grew at a modest pace since the Federal Reserve Board's last report dated March 2016. Manufacturing output increased at a slow rate. The housing market improved, with higher unit sales and higher prices. Nonresidential contractors reported that construction pipelines are strong and backlogs continue to grow. Retailers experienced disappointing sales during March and into April. Motor vehicle sales moved slightly higher. Commercial and retail credit conditions expanded slowly. Oil and gas exploration remains depressed, while investment in pipeline projects moved forward. Freight volume trended lower. Reports indicated a modest increase in manufacturing output on net. Activity for suppliers to the motor vehicle, aerospace, commercial construction, and housing industries remains elevated. Key factors tempering output growth include a depressed energy sector and slow growth in business fixed investment. It was also noted that uncertainty about the general economy motivated producers and their customers to keep inventories at low levels. Year-to-date production through April 2016 at the Cleveland District auto assembly plants declined 1.4% when compared to the same time period during 2015. Estimates of single-family construction starts rose moderately over the period. New-home contracts remain concentrated in the move-up price point categories, though reports indicated rising activity across lower price points. New-home list prices held steady over the period. Homebuilders and real estate agents expect stability or further improvement in housing markets during the upcoming months. Nonresidential contractors said that business conditions remain favorable. They reported an increase in the number of publicly funded and industrial projects. The former was attributed to last December’s passage of the congressional five-year highway bill.

Growth in economic activity in the Chicago District slowed to a modest pace in April and early May of 2016, tempering optimism about growth over the next six to 12 months. Business spending and manufacturing production grew at a modest pace, while consumer spending grew at a moderate pace. Construction and real estate activity edged up and financial conditions improved marginally. Price and wage pressures tightened some, but remained mild overall. Corn and soybean prices rose, improving farmers’ earnings prospects. Growth in consumer spending picked up to a moderate pace over the reporting

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period. Contacts in Michigan indicated that sales were the best they had seen in over a year. Retailers reported stronger sales in the apparel, lawn and garden, furniture, and hospitality sectors, and weaker sales in the jewelry, toys, and electronics sectors. Sales of new and used light vehicles remained robust and strengthened further in recent weeks, helped by more generous incentives. Leasing activity was especially strong. Average overall transaction prices moved higher as the vehicle mix continued to shift toward larger, more expensive vehicles, and because of greater demand for high-tech options. Growth in business spending slowed to a modest pace in April and early May of 2016. Retail inventories were generally at desirable levels, with many contacts reporting boosting stocks in anticipation of strong summer sales. Used car inventories were low, despite a large number of vehicles coming off leases. Manufacturing inventories also were generally at desirable levels, though steel service center inventories were slightly lower than normal. The pace of current capital expenditures slowed to a more modest rate as did expectations for future spending. Outlays were primarily for replacing IT and industrial equipment. Construction and real estate activity edged up over the reporting period. Residential construction rose slightly, with growth concentrated in the single- family and suburban markets. Home sales increased across most locations and markets, most notably in urban areas and in the market for existing homes. Sales were particularly strong for homes under $250,000.

Economic activity in the San Francisco District grew at a moderate pace during the reporting period of early April through mid-May of 2016. Overall price inflation was modest, while wage pressures picked up. Sales of retail goods grew slightly, while activity in the consumer and business services sector expanded at a moderate pace. Demand for manufacturing products was largely flat. Activity in the agriculture sector expanded somewhat. Residential and commercial real estate market activity continued to expand at a robust pace. Lending activity grew moderately. Real estate market activity grew at a robust pace across most of the San Francisco District. Demand for residential real estate remained strong for both multifamily and single-family units. Growth in the construction of multifamily units continued to outpace that for single-family units. Construction lead times of up to six months for multifamily projects in some urban areas constrained by shortages of skilled labor and building materials was noted. Building permits for all types of residential construction picked up in most parts of the San Francisco District. Demand for commercial real estate expanded further, most notably in urban areas with robust technology and health-care services industries.

The economy in the state of Michigan noted slow improvements during the first 5 months of 2016. The unemployment rate, as indicated by the U.S. Bureau of Labor Statistics, fell to 4.7% as of May 31, 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 June 30, 2016, $1.7 billion, or 33.8% 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-Livonia MSA, as indicated by the U.S. Bureau of Labor Statistics, was revised for years 2010 - 2016 in April, 2016. Levels were down at 5.7% as of May 31, 2016, down from the revised figure of 6.3% as of December 31, 2015, and down from the revised figure of 7.3% at December 31, 2014. The Detroit MSA showed an increase in home prices as reported in the Case-Shiller index (seasonally adjusted) of 6.3% for the rolling 12 months ending April 30, 2016 versus an increase of 4.1% for the 12 months ending April 30, 2015. As of June 30, 2016, approximately $68.5 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 was up slightly at 5.1% as of May 31, 2016, compared to 4.8% as of December 31, 2015, but flat from 5.1% as of December 31, 2014. The Cleveland MSA showed unemployment of 5.1% as of May 31, 2016, up from 4.0% as of December 31, 2015 but down 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 2.7% for the 12 month period ending April 30, 2016, versus 1.4% increase for the 12 months ending April 30, 2015.

The Illinois economy also showed mixed signs of recovery. Unemployment was up at 6.4% as of May 31, 2016, compared to 6.1% as of December 31, 2015 and 6.2% as of December 31, 2014. Unemployment in the Chicago MSA decreased to 5.5% as of May 31, 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 3.0% for the twelve-month period ending April 30, 2016, compared to a 2.4% increase for the 12 months ending April 30, 2015.

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The Indiana economy continued to recover. The unemployment rate was up at 5.0% as of May 31, 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 down at 3.5% as of May 31, 2016 compared to 3.6% as of December 31, 2015, and 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 slightly according to statistics from Zillow with prices increasing 0.3% for the 12 months ending June 30, 2016.

The Nevada economy also showed signs of gradual recovery. Unemployment was down at 6.1% as of May 31, 2016 compared to 6.3% as of December 31, 2015 and down from 7.0% as of December 31, 2014. Unemployment in the Las Vegas MSA was up slightly at 6.4% as of May 31, 2016 versus 6.2% as of December 31, 2015, but down from 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 5.7% for the 12 months ending April 30, 2016, versus an increase of 6.3% for the 12 months ending April 30, 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” ("ASC 820"). 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 Huron and First Place Bank approximately 35% and 30% of the acquired loan portfolio was specifically reviewed, respectively.

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 Huron 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

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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 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 by FDIC loss share agreements ("FDIC 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 June 30, 2016 of $20.2 million, or $0.28 per diluted average common share, compared to $17.5 million, or $0.23 per diluted average common share, for the same period ended June 30, 2015. The increase in net income for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, reflected an increase in net interest income of $7.8 million and decreases in noninterest expense of $7.4 million and income tax expense of $2.8 million, partially offset by an increase in provision for loan losses of $10.5 million and a decrease in noninterest income of $4.9 million. Core earnings per diluted average common share, a non-GAAP financial measure, were $0.28 per share for both the three months ended June 30, 2016 and 2015. Please see the section entitled "Reconciliation of Non-GAAP Financial Measures" for a discussion of this measure and a reconciliation of this measure to the most comparable GAAP measure.

We had net income for the six months ended June 30, 2016 of $41.3 million, or $0.58 per diluted average common share, compared to $27.0 million, or $0.36 per diluted average common share, for the same period ended June 30, 2015. The increase in net income for the six months ended June 30, 2016 of $14.3 million reflected decreases in noninterest expense of $15.7 million and income tax expense of $5.9 million and an increase in net interest income of $12.9 million, partially offset by a decrease in noninterest income of $12.7 million and an increase in provision for loan losses of $7.4 million. Core earnings per diluted average common share, a non-GAAP financial measure, were $0.59 per share for the six months ended June 30, 2016, compared to $0.48 per share for the six months ended June 30, 2015. Please see the section entitled "Reconciliation of Non-GAAP Financial Measures" for a discussion of this measure and a reconciliation of this measure to the most comparable GAAP measure.

Net Interest Income

Net interest income is the difference between interest income and yield-related fees earned on assets and interest expense paid on liabilities. Adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis. The “Analysis of Net Interest Income-Fully Taxable Equivalent” tables within this financial review provide an analysis of net interest income for the three and six months ended June 30, 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 and six months ended June 30, 2016 and 2015.

We had net interest income of $57.4 million for the three months ended June 30, 2016, an increase of $7.8 million from $49.6 million for the same period in 2015. The increase in net interest income in the three months ended June 30, 2016, compared to the same period in 2015, was primarily due to a decrease of $8.5 million in negative accretion on the FDIC indemnification asset. 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. Our net interest margin (FTE) for the three months ended June 30, 2016 increased 23 basis points to 3.73% from 3.50% for the comparable period in 2015. The increase in net interest margin was primarily due to the elimination of negative accretion on the FDIC indemnification asset, partially offset by the decline in the benefit provided by our higher yielding acquired loans, significantly comprised of purchased credit impaired loans, as the balances continue to run-off.

We had net interest income of $113.5 million for the six months ended June 30, 2016, an increase of $12.9 million from $100.6 million for the same period in 2015. The increase in net interest income in the six months ended June 30, 2016, compared to the same period in 2015, was primarily due to a decrease of $17.8 million in negative accretion on the FDIC indemnification asset due to the early termination of our FDIC loss share agreements resulting in no further negative accretion beginning in the fourth quarter of 2015, partially offset by a decrease of $4.0 million in interest and fees on loans primarily the

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result of run-off of higher-yielding acquired loans. Our net interest margin (FTE) for the six months ended June 30, 2016 increased nine basis points to 3.73% from 3.64% for the comparable period in 2015. The increase in net interest margin was primarily due to the elimination of the negative accretion of the FDIC indemnification asset, partially offset by the decline in the benefit provided by our higher yielding acquired loans, significantly comprised of purchased credit impaired loans, as the balances continue to run-off.

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 June 30, 2016 and 2015, the yield on total loans was 4.66% and 5.14%, respectively, while the yield on total loans generated using only the expected coupon (with respect to purchased credit impaired loans) would have been 4.09% and 4.28%, respectively. For the six months ended June 30, 2016 and 2015, the yield on total loans was 4.66% and 5.31%, respectively, while the yield on total loans generated using only the expected coupon (with respect to purchased credit impaired loans) would have been 4.08% and 4.43%, respectively. The difference between the actual yield earned on total loans and the yield generated based on the expected coupon (not including any interest income for loans in nonaccrual status) represents excess accretable yield. The decline in our 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. The excess accretable yield benefited the net interest margin by 45 basis points and 46 basis points for the three and six months ended June 30, 2016, respectively, compared to 68 basis points and 70 basis points for the three and six months ended June 30, 2015, respectively.

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 73.00% and 65.63% for the three and six months ended June 30, 2015, respectively. The combination of the excess accretable yield and the negative yield on the FDIC indemnification asset benefited net interest margin by nine basis points and six basis points for the three and six months ended June 30, 2015, respectively.

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 June 30,
	2016							2015
(Dollars in thousands)	Average Balance			Interest (1)		Average Rate (2)		Average Balance			Interest (1)			Average Rate (2)
Earning assets:
Interest-earning balances	$	77,778		$	82	0.42	%	$	195,874		$	117		0.24	%
Federal funds sold and other short-term investments	225,555			600		1.07		152,593			269			0.71
Investment securities (3):
Taxable	618,994			3,414		2.22		527,632			2,375			1.81
Tax-exempt	296,355			2,053		3.64		250,765			1,658			3.52
Federal Home Loan Bank stock	29,621			312		4.23		20,380			224			4.40
Gross loans (4)	5,000,439			57,915		4.66		4,552,481			58,319			5.14
FDIC indemnification asset	—			—		—		46,971			(8,548		)	(73.00	)
Total earning assets	6,248,742			64,376		4.18	%	5,746,696			54,414			3.84	%
Non-earning assets:
Cash and due from banks	81,868							86,290
Allowance for loan losses	(51,471		)					(51,033		)
Premises and equipment	41,774							47,775
Core deposit intangible	11,886							14,465
Goodwill	3,524							3,524
Other real estate owned and repossessed assets	23,618							44,888
Loan servicing rights	51,580							55,986
FDIC receivable	—							6,830
Company-owned life insurance	109,354							104,327
Other non-earning assets	243,381							236,881
Total assets	$	6,764,256						$	6,296,629
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	846,243		$	675	0.32	%	$	828,482		$	382		0.19	%
Money market and savings deposits	1,268,058			650		0.21		1,267,347			562			0.18
Time deposits	1,587,128			3,296		0.84		1,353,226			2,131			0.63
Other brokered funds	385,794			841		0.88		483,716			607			0.50
Short-term borrowings	423,149			678		0.64		75,819			209			1.10
Long-term debt	327,332			842		1.03		463,210			914			0.79
Total interest-bearing liabilities	4,837,704			6,982		0.58	%	4,471,800			4,805			0.43	%
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits	1,111,039							976,044
FDIC clawback liability	—							28,087
Other liabilities	56,409							62,414
Shareholders’ equity	759,104							758,284
Total liabilities and shareholders’ equity	$	6,764,256						$	6,296,629
Net interest income				$	57,394						$	49,609
Interest spread						3.60	%							3.41	%
Tax equivalent effect						0.04	%							0.04	%
Net interest margin on a fully tax equivalent basis						3.73	%							3.50	%

(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 $625 thousand and $540 thousand on tax-exempt securities for the three months ended June 30, 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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	For the six months ended June 30,
	2016							2015
(Dollars in thousands)	Average Balance			Interest (1)		Average Rate (2)		Average Balance			Interest (1)			Average Rate (2)
Earning assets:
Interest earning balances	$	110,435		$	266	0.48	%	$	176,459		$	203		0.23	%
Federal funds sold and other short-term investments	206,035			1,068		1.04		125,159			434			0.70
Investment securities (3):
Taxable	612,951			6,654		2.18		510,948			4,698			1.85
Tax-exempt	289,840			4,044		3.67		243,657			3,273			3.54
Federal Home Loan Bank stock	29,621			624		4.24		20,529			469			4.61
Gross loans (4)	4,932,520			114,275		4.66		4,491,749			118,257			5.31
FDIC indemnification asset	—			—		—		54,685			(17,798		)	(65.63	)
Total earning assets	6,181,402			126,931		4.17	%	5,623,186			109,536			3.96	%
Non-earning assets:	0							0			0
Cash and due from banks	84,771							88,729
Allowance for loan losses	(53,174		)					(52,145		)
Premises and equipment	42,518							48,074
Core deposit intangible	12,202							14,334
Goodwill	3,524							2,803
Other real estate owned and repossessed assets	25,443							46,715
Loan servicing rights	53,891							58,074
FDIC receivable	—							6,155
Company-owned life insurance	108,491							102,634
Other non-earning assets	242,862							235,798
Total assets	$	6,701,930						$	6,174,357
Interest-bearing liabilities:	0							0
Deposits:
Interest-bearing demand deposits	$	850,599		$	1,076	0.25	%	$	800,487		$	672		0.17	%
Money market and savings deposits	1,281,169			1,317		0.21		1,239,805			1,033			0.17
Time deposits	1,598,384			6,410		0.81		1,308,911			3,958			0.61
Other brokered funds	341,173			1,459		0.86		536,186			1,230			0.46
Short-term borrowings	384,539			1,335		0.70		62,900			288			0.92
Long-term debt	372,272			1,842		1.00		432,786			1,714			0.80
Total interest-bearing liabilities	4,828,136			13,439		0.56	%	4,381,075			8,895			0.41	%
Noninterest-bearing liabilities and shareholders’ equity:								0			0
Noninterest-bearing demand deposits	1,068,818							948,856
FDIC clawback liability	—							27,600
Other liabilities	57,234							58,004
Shareholders’ equity	747,742							758,822
Total liabilities and shareholders’ equity	$	6,701,930						$	6,174,357
Net interest income				$	113,492			0			$	100,641
Interest spread						3.61	%				0			3.55	%
Tax equivalent effect						0.04	%							0.03	%
Net interest margin on a fully tax equivalent basis						3.73	%							3.64	%

(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 $1.2 million and $1.0 million on tax-exempt securities for the six months ended June 30, 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 June 30, 2016 vs. 2015
	Increase (Decrease) Due to:						Net Increase
(Dollars in thousands)	Rate			Volume			(Decrease)
Interest-earning assets
Interest-earning balances	$	59		$	(94	)	$	(35	)
Federal funds sold and other short-term investments	171			160			331
Investment securities:
Taxable	587			452			1,039
Tax-exempt	82			313			395
FHLB stock	(10		)	98			88
Gross loans	(5,864		)	5,460			(404		)
FDIC indemnification asset (1)	—			8,548			8,548
Total interest income	(4,975		)	14,937			9,962
Interest-bearing liabilities
Interest-bearing demand deposits	285			8			293
Money market and savings deposits	88			—			88
Time deposits	755			410			1,165
Other brokered funds	376			(142		)	234
Short-term borrowings	(121		)	590			469
Long-term debt	236			(308		)	(72		)
Total interest expense	1,619			558			2,177
Change in net interest income	$	(6,594	)	$	14,379		$	7,785

(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.

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	For the six months ended June 30, 2016 vs. 2015
	Increase (Decrease) Due to:						Net Increase
(Dollars in thousands)	Rate			Volume			(Decrease)
Interest earning assets
Interest earning balances	$	160		$	(97	)	$	63
Federal funds sold and other short-term investments	275			359			634
Investment securities:
Taxable	929			1,027			1,956
Tax-exempt	131			640			771
FHLB stock	(39		)	194			155
Gross loans	(14,960		)	10,978			(3,982		)
FDIC indemnification asset (1)	—			17,798			17,798
Total interest income	(13,504		)	30,899			17,395
Interest-bearing liabilities
Interest-bearing demand deposits	360			44			404
Money market and savings deposits	249			35			284
Time deposits	1,461			991			2,452
Other brokered funds	791			(562		)	229
Short-term borrowings	(86		)	1,133			1,047
Long-term debt	389			(261		)	128
Total interest expense	3,164			1,380			4,544
Change in net interest income	$	(16,668	)	$	29,519		$	12,851

(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.

 The provision for loan losses was $3.2 million for the three months ended June 30, 2016, compared to a net benefit for loan losses of $7.3 million for the three months ended June 30, 2015. For the six months ended June 30, 2016, we recorded a provision for loan losses of $2.1 million, compared to a net benefit for loan losses of $5.3 million for the six months ended June 30, 2015. The allowance for loan losses was $51.6 million, or 1.02% of total loans at June 30, 2016, compared to $54.0 million, or 1.12% of total loans at December 31, 2015. The provision for loan losses on total loans for the three months ended June 30, 2016 primarily reflects additional provision expense recorded due to new loan originations, impairment recorded as a

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result of our re-estimation of cash flows for purchased credit impaired loans and the shift in the current economic outlook. The provision for loan losses on total loans for the six months ended June 30, 2016 primarily reflects additional provision expense recorded due to new loan originations and the shift in the current economic outlook. The decrease in the allowance for loan losses in the six months ended June 30, 2016 was primarily due to credit recoveries on acquired loans that were paid off, increases in collateral and cash flow expectations on loans individually evaluated for impairment and reductions in the percentage of nonperforming loans to total loans.

We recorded impairment related to the re-estimations of cash flows on purchased credit impaired loans of $522 thousand and net impairment relief of $441 thousand for the three and six months ended June 30, 2016, respectively, compared to impairment of $2.6 million and $5.2 million for the three and six months ended June 30, 2015, respectively. The re-estimations also resulted in improvements in gross cash flow expectations on purchased credit impaired loans of $9.6 million and $25.4 million for the three and six months ended June 30, 2016, respectively, and $21.6 million and $51.1 million for the three and six months ended June 30, 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.

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Noninterest Income

The following table presents noninterest income for the three and six months ended June 30, 2016 and 2015.

	For the three months ended  June 30,						For the six months ended  June 30,
(Dollars in thousands)	2016			2015			2016			2015
Noninterest income
Deposit fee income	$	2,420		$	2,561		$	4,817		$	4,881
Mortgage banking and other loan fees:
Changes in loan servicing rights fair value due to valuation inputs or assumptions (1)	(3,499		)	3,146			(10,124		)	(938		)
Other	1,134			1,552			3,879			4,375
Total mortgage banking and other loans fees	(2,365		)	4,698			(6,245		)	3,437
Net gain on sales of loans	7,588			8,748			12,826			17,366
Accelerated discount on acquired loans	5,076			7,444			10,128			15,642
Net gain (loss) on sales of securities	—			6			333			(101		)
Company-owned life insurance	795			856			1,545			1,596
FDIC loss share income (2)	—			(5,928		)	—			(6,996		)
Other income	3,726			3,713			7,460			7,703
Total noninterest income	$	17,240		$	22,098		$	30,864		$	43,528

(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 agreements and, therefore eliminating any further loss share income.

Noninterest income decreased $4.9 million to $17.2 million for the three months ended June 30, 2016, compared to the same period in 2015. The decrease in noninterest income for the three months ended June 30, 2016, compared to 2015, was primarily due to decreases in mortgage banking and other loan fees of $7.1 million and accelerated discount on acquired loans of $2.4 million, partially offset by the elimination of FDIC loss share income of a negative $5.9 million. 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 $3.5 million in the three months ended June 30, 2016, compared to a benefit to earnings of $3.1 million for the same period in 2015. The decrease in accelerated discount on acquired loans is primarily due to a decrease in cash payments received outside of expected terms.

Noninterest income decreased $12.7 million to $30.9 million for the six months ended June 30, 2016, compared to the same period in 2015. The decrease in noninterest income for the six months ended June 30, 2016, compared to 2015, was primarily due to decreases in mortgage banking and other loan fees of $9.7 million, accelerated discount on acquired loans of $5.5 million and net gain on sales of loans of $4.5 million, partially offset by the elimination of FDIC loss share income of a negative $7.0 million. 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 $10.1 million in the six months ended June 30, 2016, compared to a detriment to earnings of $938 thousand for the same period in 2015. 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 net gain on sales of loans reflects the reduced levels of residential mortgage loans originated for sale.

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Noninterest Expenses

The following table presents noninterest expenses for the three and six months ended June 30, 2016 and 2015.

	For the three months ended  June 30,				For the six months ended  June 30,
(Dollars in thousands)	2016		2015		2016		2015
Noninterest expense
Salary and employee benefits	$	26,913	$	28,685	$	52,726	$	57,897
Occupancy and equipment expense	6,039		8,415		12,046		16,081
Data processing fees	1,909		1,805		3,652		3,659
Professional service fees	2,547		3,275		5,837		6,818
Merger and acquisition expense	312		419		3,186		1,831
Marketing expense	1,158		1,483		2,687		2,578
Other employee expense	579		826		1,387		1,760
Insurance expense	1,485		1,527		3,035		3,057
FDIC loss share expense (1)	—		133		—		1,082
Other expense	4,987		6,725		9,643		15,125
Total noninterest expense	$	45,929	$	53,293	$	94,199	$	109,888

(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 $7.4 million to $45.9 million for the three months ended June 30, 2016, compared to the same period in 2015. The decrease in noninterest expense was primarily due to decreases of $2.4 million in occupancy and equipment expense and $1.8 million and in salary and employee benefits and other declines in operating expenses. 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 Huron in February 2015 and the charter consolidation of Talmer West Bank into Talmer Bank in August 2015.

Noninterest expenses decreased $15.7 million to $94.2 million for the six months ended June 30, 2016, compared to the same period in 2015. The decrease in noninterest expense was primarily due to decreases of $5.2 million in salary and employee benefits and $4.0 million in occupancy and equipment expense and other declines in operating expenses, partially offset by an increase in merger and acquisition related expense of $1.4 million. The decreases in both salary and employee benefits and occupancy and equipment expense were primarily due to the rationalization of staff levels and branches as noted above.

We had transaction and integration related expenses of $3.2 million for the six months ended June 30, 2016 related to our pending merger with Chemical. We had transaction and integration related expenses of $3.8 million for the six months ended June 30, 2015, which included anticipated and paid severance payments for reductions in the work force following the acquisition and integration of First Huron, the operational integration of Talmer West Bank, system conversion expenses and merger and acquisition expense.

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Our transaction and integration related expenses for the six months ended June 30, 2016 and 2015 are detailed in the tables below.

	For the six months ended June 30, 2016
(Dollars in thousands)	Actual		Transaction and integration related expenses		Excluding transaction and integration related expenses
Noninterest expense
Salary and employee benefits	$	52,726	$	—	$	52,726
Occupancy and equipment expense	12,046		—		12,046
Data processing fees	3,652		—		3,652
Professional service fees	5,837		—		5,837
Merger and acquisition expense	3,186		3,186		—
Marketing expense	2,687		—		2,687
Other employee expense	1,387		—		1,387
Insurance expense	3,035		—		3,035
Other expense	9,643		—		9,643
Total noninterest expense	$	94,199	$	3,186	$	91,013

	For the six months ended June 30, 2015
(Dollars in thousands)	Actual		Transaction and integration related expenses		Excluding transaction and integration related expenses
Noninterest expense
Salary and employee benefits	$	57,897	$	972	$	56,925
Occupancy and equipment expense	16,081		—		16,081
Data processing fees	3,659		875		2,784
Professional service fees	6,818		88		6,730
Merger and acquisition expense	1,831		1,831		—
Marketing expense	2,578		—		2,578
Other employee expense	1,760		—		1,760
Insurance expense	3,057		—		3,057
FDIC loss share expense	1,082		—		1,082
Other expense	15,125		—		15,125
Total noninterest expense	$	109,888	$	3,766	$	106,122

The efficiency ratio is a measure of noninterest expense as a percentage of net interest income and noninterest income. Our efficiency ratio improved to 65.3% for the six months ended June 30, 2016, compared to 76.2% for the six months ended June 30, 2015. Our core operating efficiency ratio, a non-GAAP financial measure, improved to 58.9% for the six months ended June 30, 2016, compared to 68.6% for the six months ended June 30, 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 and $1.8 million of net expense recognized in the second quarter of 2015 related to our targeted review of property efficiency. Please see the section entitled "Reconciliation of Non-GAAP Financial Measures" for a discussion of this measure and a reconciliation of this measure to the most comparable GAAP measure.

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Income Taxes and Tax-Related Items

We recognized income tax expense of $5.3 million on $25.5 million of pre-tax income for the three months ended June 30, 2016, resulting in an effective tax rate of 21.0%, compared to income tax expense of $8.2 million on $25.7 million of pre-tax income for the three months ended June 30, 2015, resulting in an effective tax rate of 31.8%. Due to the early adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09")during the second quarter of 2016, all excess tax benefits or detriments realized during the year are recorded directly into "Income tax provision" whereas they were previously recorded directly into "Additional paid-in-capital" as a component of equity. The early adoption of ASU 2016-09 resulted in excess tax benefits recognized in the three months ended June 30, 2016 of $2.6 million. The effective tax rate, excluding the impact of excess tax benefits, for the three months ended June 30, 2016 was 31.2%.

We recognized income tax expense of $6.8 million on $48.1 million of pre-tax income for the six months ended June 30, 2016, resulting in an effective tax rate of 14.0%, compared to income tax expense of $12.6 million on $39.6 million of pre-tax income for the six months ended June 30, 2015, resulting in an effective tax rate of 31.9%. The lower effective tax rate for the six months ended June 30, 2016 includes the impact of 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. The low effective tax rate for the six months ended June 30, 2016 was additionally impacted by excess tax benefits recognized of $4.1 million due to our early adoption of ASU 2016-09. The effective tax rate, excluding excess tax benefits and the benefits from the finalization of the First Place Bank tax matter, for the six months ended June 30, 2016 was 31.5%.

Financial Condition

Balance Sheet

Total assets were $6.9 billion at June 30, 2016, compared to $6.6 billion at December 31, 2015. The increase in total assets of $316.8 million was primarily due to increases of $243.8 million in net total loans, $72.9 million in cash and cash equivalents and $28.0 million in securities available-for-sale. 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 $6.1 billion at June 30, 2016, compared to $5.9 billion at December 31, 2015. The $273.1 million increase in liabilities for the six months ended June 30, 2016 was primarily due to increases in total deposits of $252.6 million. The increase in deposits included growth in total demand deposits of $199.1 million. The reported growth in brokered deposits of $159.8 million was significantly due to a reclassification of certain deposits that were previously reported as time deposits. These increases were partially offset by declines in time deposits of $54.9 million and money market and savings deposits of $51.3 million. The strong growth in core deposit balances reflects management’s drive to increase core deposit growth achieved through deposit initiative programs.

Total shareholders’ equity at June 30, 2016 was $769.0 million, an increase of $43.8 million compared to $725.2 million at December 31, 2015. The increase was primarily the result of our net income for the six months ended June 30, 2016 of $41.3 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.

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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.  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 June 30, 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 $1.7 billion, or approximately 33.8% of total loans, at June 30, 2016. 

The following tables detail our loan portfolio by loan type and geographic location as of June 30, 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
June 30, 2016
Commercial real estate (1)(2)	$	932,383	$	312,375	$	168,813	$	44,993	$	42,124	$	39,570	$	4,633	$	2,820	$	114,079	$	1,661,790
Residential real estate (3)(4)	841,029		494,978		46,118		91,856		28,311		11,143		35,006		51		126,123		1,674,615
Commercial and industrial (5)	465,912		195,242		178,338		24,752		32,855		12,692		3,190		317		369,343		1,282,641
Real estate construction	148,749		64,146		19,845		405		10,688		1,793		483		267		10,735		257,111
Consumer	18,420		3,287		3,048		2,200		840		2,210		3,341		272		138,339		171,957
Total loans	$	2,406,493	$	1,070,028	$	416,162	$	164,206	$	114,818	$	67,408	$	46,653	$	3,727	$	758,619	$	5,048,114

______________________________________________________________________________

(1) Commercial real estate loans to borrowers in the Detroit-Warren-Dearborn MSA totaled $670.8 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 $169.8 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 $630.0 million.

(4) Residential real estate loans to borrowers in the Cleveland MSA totaled $109.6 million.

(5) Commercial and industrial loans to borrowers in the Detroit-Warren-Dearborn MSA totaled $292.3 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)	June 30, 2016		December 31, 2015
Commercial real estate
Non-owner occupied	$	1,080,132	$	1,039,305
Owner-occupied	554,950		503,814
Farmland	26,708		24,978
Total commercial real estate	1,661,790		1,568,097
Residential real estate	1,674,615		1,547,799
Commercial and industrial	1,282,641		1,257,406
Real estate construction	257,111		241,603
Consumer	171,957		191,795
Total loans	$	5,048,114	$	4,806,700

Total loans were $5.0 billion at June 30, 2016, an increase of $241.4 million from December 31, 2015. The increase in total loans of $241.4 million resulted from increases in residential real estate loans of $126.8 million, commercial real estate loans of $93.7 million, commercial and industrial loans of $25.2 million and real estate construction loans of $15.5 million, partially offset by a decrease in consumer loans of $19.8 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 June 30, 2016.

Residential real estate loans totaled $1.7 billion at June 30, 2016, of which $15.8 million were on nonaccrual status. Included in residential real estate loans are $193.8 million of home equity loans and lines of credit of which $77.7 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 June 30, 2016. Also included in residential real estate loans are $336.9 million of jumbo adjustable rate mortgages and $8.2 million of loans with balloon payment terms, of which $454 thousand were on nonaccrual status as of June 30, 2016.

Real estate construction loans totaled $257.1 million at June 30, 2016, of which $203 thousand were on nonaccrual status. Included in real estate construction loans are $30.9 million of jumbo adjustable rate mortgages and $1.6 million of loans with balloon payment terms, of which $166 thousand were on nonaccrual status as of June 30, 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
June 30, 2016
Loans:
Commercial real estate	$	244,201	$	938,701	$	478,888	$	1,661,790
Residential real estate	58,548		163,203		1,452,864		1,674,615
Commercial and industrial	341,302		781,385		159,954		1,282,641
Real estate construction	76,326		89,495		91,290		257,111
Consumer	3,606		73,141		95,210		171,957
Total loans	$	723,983	$	2,045,925	$	2,278,206	$	5,048,114
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			1,273,784		946,869
Floating interest rates			772,141		1,331,337
Total			$	2,045,925	$	2,278,206

	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. The historical loss estimates for loans are based on our own historical losses 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. The estimate of losses for single family residential and consumer loans which are not individually evaluated is also based on our own historical losses. This estimate is also adjusted to give consideration to borrower rating migration experience and trends, changes in collateral values of properties securing loans and trends with respect to past due and nonaccrual amounts.

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

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

	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
Balance at beginning of period	$	17,849		$	29,060		$	22,266		$	32,732
Transfer to loans not accounted for under ASC 310-30 (1)	(568		)	(578		)	(960		)	(656		)
Loan charge-offs:
Commercial real estate	(655		)	(3,241		)	(2,419		)	(7,512		)
Residential real estate	(875		)	(593		)	(1,610		)	(2,157		)
Commercial and industrial	(668		)	(723		)	(1,402		)	(1,401		)
Real estate construction	(246		)	(695		)	(319		)	(1,226		)
Consumer	(5		)	(19		)	(11		)	(214		)
Total loan charge-offs	(2,449		)	(5,271		)	(5,761		)	(12,510		)
Recoveries of loans previously charged-off:
Commercial real estate	1,117			3,937			1,543			7,508
Residential real estate	393			660			2,005			908
Commercial and industrial	463			2,616			848			2,981
Real estate construction	116			134			184			636
Consumer	15			50			34			89
Total loan recoveries	2,104			7,397			4,614			12,122
Net (charge-offs) recoveries	(345		)	2,126			(1,147		)	(388		)
Benefit for loan losses	(844		)	(4,854		)	(4,067		)	(5,934		)
Balance at end of period	$	16,092		$	25,754		$	16,092		$	25,754
Allowance for loan losses as a percentage of total ASC 310-30 loans at period end	3.27		%	3.84		%	3.27		%	3.84		%

(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 June 30,						For the six months ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
Balance at beginning of period	$	34,529		$	23,405		$	31,687		$	22,440
Transfer in (1)	568			578			960			656
Loan charge-offs:
Commercial real estate	(1,738		)	(462		)	(2,148		)	(1,620		)
Residential real estate	(759		)	(642		)	(1,314		)	(1,539		)
Commercial and industrial	(2,399		)	(1,287		)	(2,643		)	(2,693		)
Real estate construction	(171		)	(31		)	(198		)	(43		)
Consumer	(380		)	(244		)	(884		)	(530		)
Total loan charge-offs	(5,447		)	(2,666		)	(7,187		)	(6,425		)
Recoveries of loans previously charged-off:
Commercial real estate	680			6,165			1,644			6,838
Residential real estate	781			600			1,413			987
Commercial and industrial	245			1,347			463			1,729
Real estate construction	30			120			229			152
Consumer	56			62			121			161
Total loan recoveries	1,792			8,294			3,870			9,867
Net (charge-offs) recoveries	(3,655		)	5,628			(3,317		)	3,442
Provision (benefit) for loan losses	4,052			(2,459		)	6,164			614
Balance at end of period	$	35,494		$	27,152		$	35,494		$	27,152
Allowance for loan losses as a percentage of total loans excluded from ASC 310-30 accounting at period end	0.78		%	0.70		%	0.78		%	0.70		%

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

Our total allowance for loan losses was $51.6 million, or 1.02% of total loans, at June 30, 2016, compared to $54.0 million, or 1.12% of total loans, at December 31, 2015. The $2.4 million decrease in the allowance for loan losses during the six months ended June 30, 2016 was primarily due to credit recoveries on acquired loans that were paid off, increases in collateral and cash flow expectations on loans individually evaluated for impairment and reductions in the percentage of nonperforming loans to total loans, 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
June 30, 2016
Balance at end of period applicable to:
Commercial real estate	$	7,521	3.52	%	43.4	%	$	11,258	0.78	%	31.8	%
Residential real estate	6,915		2.86		49.1		9,021		0.63		31.4
Commercial and industrial	960		4.61		4.2		11,480		0.91		27.7
Real estate construction	629		7.98		1.6		1,585		0.64		5.5
Consumer	67		0.81		1.7		2,150		1.31		3.6
Total loans	$	16,092	3.27	%	100.0	%	$	35,494	0.78	%	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)	June 30, 2016		December 31, 2015
Nonperforming troubled debt restructurings
Commercial real estate	$	4,840	$	7,485
Residential real estate	5,090		5,485
Commercial and industrial	3,555		1,167
Real estate construction	172		187
Consumer	34		127
Total nonperforming troubled debt restructurings	13,691		14,451
Nonaccrual loans other than nonperforming troubled debt restructurings
Commercial real estate	$	7,685	$	9,313
Residential real estate	10,756		12,905
Commercial and industrial	13,727		20,501
Real estate construction	31		226
Consumer	64		79
Total nonaccrual loans other than nonperforming troubled debt restructurings	32,263		43,024
Total nonaccrual loans	45,954		57,475
Other real estate and repossessed assets (1)	20,461		28,157
Total nonperforming assets	66,415		85,632
Performing troubled debt restructurings
Commercial real estate	19,102		15,340
Residential real estate	8,468		5,749
Commercial and industrial	3,319		3,438
Real estate construction	266		420
Consumer	318		242
Total performing troubled debt restructurings	31,473		25,189
Total impaired assets	$	97,888	$	110,821
Loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	823	$	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 $66.4 million as of June 30, 2016, compared to $85.6 million as of December 31, 2015. The $19.2 million decrease in total nonperforming assets was primarily due to a reduction in nonaccrual loans of $11.5 million, largely due to a reduction in commercial and industrial nonaccrual loans, and sales of other real estate owned occurring during the period.

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Investment Securities

	June 30,		December 31,
(Dollars in thousands)	2016		2015
Securities available-for-sale:
U.S. government sponsored agency obligations	$	52,072	$	60,022
Obligations of state and political subdivisions:
Taxable	4,385		1,321
Tax exempt	310,798		287,208
Small Business Administration (SBA) Pools	25,729		27,925
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	298,861		309,306
Privately issued	90,369		89,450
Privately issued commercial mortgage backed securities	23,852		13,705
Corporate debt securities:
Senior debt	81,988		71,365
Subordinated debt	30,723		30,468
Total securities available-for-sale	$	918,777	$	890,770
Securities held-to-maturity	1,655		1,678
Total investment securities	$	920,432	$	892,448

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 June 30, 2016, total investment securities were $920.4 million, or 13.3% 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 June 30, 2016, primarily reflected increases in a diverse mix of tax exempt obligations of state and political subdivisions, corporate debt securities, privately issued commercial mortgage backed securities and taxable obligations of state and political subdivisions reflecting management's decision to invest liquid assets while retaining accessibility to the funds for potential liquidity needs. Securities with a carrying value of $430.8 million and $390.5 million were pledged at June 30, 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 June 30, 2016 and December 31, 2015.

	Maturity as of June 30, 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)	$	—	—	%	$	31,870	1.28	%	$	19,997	2.03	%	$	—	—	%
Obligations of state and political subdivisions:
Taxable	—		—		3,279		1.89		1,000		3.27		—		—
Tax exempt (2)	3,383		4.74		53,359		3.85		127,356		4.04		115,194		4.36
SBA Pools (3) (4)	—		—		1,210		1.73		24,052		1.10		—		—
Residential mortgage-backed securities (3):
Issued and/or guaranteed by U.S. government agencies or sponsored enterprises	13,334		2.09		256,717		2.42		22,567		2.74		—		—
Privately issued (1)	30,280		2.66		59,662		2.39		—		—		—		—
Commercial mortgage-backed securities (3)	23,840		2.01		—		—		—		—		—		—
Corporate debt securities (5)	—		—		69,668		2.10		29,878		4.21		12,012		2.67
Total securities available-for-sale	70,837		1.30		475,765		2.45		224,850		3.44		127,206		4.20
Securities held-to-maturity	—		—		1,655		—		—		—		—		—
Total investment securities	$	70,837	1.30	%	$	477,420	2.44	%	$	224,850	3.44	%	$	127,206	4.20	%

(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. $10.0 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 51 basis points, or resulting in average yield of 2.54%.

(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 June 30, 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 June 30, 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 June 30, 2016, we serviced loans for others with an aggregate outstanding principal balance of $5.7 billion.

Total loan servicing rights were $47.7 million as of June 30, 2016, compared to $58.1 million as of December 31, 2015. The $10.4 million decrease was due to a $14.6 million decline in the fair value of loan servicing rights from December 31, 2015 to June 30, 2016 due to a combination of changes in market interest rates and reduced fair value due to loans paid off, partially offset by $4.2 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 would result in increases in fair value, and a corresponding benefit to earnings. Management may

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choose to hedge the loan servicing assets in the future. The cumulative acquisition-to-date detriment to pre-tax earnings due to the changes in fair value has been $9.5 million since the majority of our servicing rights were acquired on January 1, 2013.

Deposits

(Dollars in thousands)	June 30, 2016		December 31, 2015
Noninterest-bearing demand deposits	$	1,148,558	$	1,011,414
Interest-bearing demand deposits	911,509		849,599
Money market and savings deposits	1,263,599		1,314,909
Time deposits	1,554,946		1,609,895
Other brokered funds	388,596		228,764
Total deposits	$	5,267,208	$	5,014,581

Total deposits were $5.3 billion at June 30, 2016 and $5.0 billion at December 31, 2015, representing 85.7% and 85.4% of total liabilities at each period end, respectively. The increase in deposits included growth in total demand deposits of $199.1 million. The reported growth in other brokered funds of $159.8 million was significantly due to a reclassification of certain deposits that were previously reported as time deposits. These increases were partially offset by declines in time deposits of $54.9 million and money market and savings deposits of $51.3 million. The strong growth in core deposit balances reflects management’s drive to increase core deposit growth achieved through deposit initiative programs. Our interest-bearing deposit costs were 51 basis points and 36 basis points for the six months ended June 30, 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)	June 30, 2016		December 31, 2015
Maturing in
3 months or less	$	411,437	$	374,424
3 months to 6 months	236,161		250,006
6 months to 1 year	387,521		326,232
1 year or greater	153,315		138,936
Total	$	1,188,434	$	1,089,598

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Borrowings

(Dollars in thousands)	June 30, 2016		December 31, 2015
Short-term borrowings:
FHLB advances	$	475,000	$	300,000
Securities sold under agreements to repurchase	13,460		18,998
Holding company line of credit	37,500		30,000
Total short-term borrowings	525,960		348,998
Long-term debt:
FHLB advances (1)	227,190		393,851
Securities sold under agreements to repurchase (2)	53,975		54,800
Subordinated notes related to trust preferred securities (3)	15,491		15,406
Total long-term debt	296,656		464,057
Total short-term borrowings and long-term debt:	$	822,616	$	813,055

(1) The June 30, 2016 balance includes advances payable of $223.9 million and purchase accounting premiums of $3.3 million. The December 31, 2015 balance includes advances payable of $389.6 million and purchase accounting premiums of $4.3 million.

(2) The June 30, 2016 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $4.0 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 June 30, 2016 and December 31, 2015 balances each include subordinated notes related to trust preferred securities of $20.0 million and purchase accounting discounts of $4.5 million. 

Total short-term borrowings and long-term debt outstanding at June 30, 2016 was $822.6 million, an increase of $9.6 million compared to December 31, 2015. The increase in total borrowings was primarily due to an increase of $8.3 million in total FHLB advances.

Total debt was collateralized by $2.1 billion of commercial and mortgage loans, mortgage-backed securities and bonds at June 30, 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 June 30,						For the six months ended June 30,
(Dollars in thousands)	2016			2015			2016			2015
Balance at beginning of period	$	748,670		$	753,849		$	725,215		$	761,607
Net income	20,153			17,548			41,308			26,981
Other comprehensive income	4,276			(4,404		)	8,003			(1,614		)
Stock-based compensation expense	845			515			1,543			866
Restricted stock awards, including tax benefit	—			16			—			16
Issuance of common shares, net of stock option exercises	(1,613		)	(409		)	(418		)	(143		)
Repurchase of warrants to purchase 2.5 million shares, at fair value	—			—			—			(19,892		)
Cash dividends paid on common stock (1)	(3,356		)	(709		)	(6,676		)	(1,415		)
Balance at end of period	$	768,975		$	766,406		$	768,975		$	766,406

(1) The Company declared common stock cash dividends of $0.10 per share and $0.02 per share for the six months endedJune 30, 2016 and 2015, respectively.

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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 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 June 30, 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
June 30, 2016
Total risk-based capital
Consolidated	N/A		13.3	%
Talmer Bank and Trust	10.0	%	13.9
Common equity tier 1 capital
Consolidated	N/A		12.4
Talmer Bank and Trust	6.5		12.9
Tier 1 risk-based capital
Consolidated	N/A		12.4
Talmer Bank and Trust	8.0		12.9
Tier 1 leverage ratio
Consolidated	N/A		10.6
Talmer Bank and Trust	5.0		10.9
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 July 11, 2016. The dividend was paid out on July 29, 2016, to our Class A common shareholders of record as of July 22, 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 June 30, 2016 and December 31, 2015, the allowance for off-balance sheet risk was $673 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.

	June 30, 2016						December 31, 2015
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	595,921	$	750,086	$	1,346,007	$	658,268	$	489,102	$	1,147,370
Standby letters of credit	61,423		3,969		65,392		61,300		4,801		66,101
Total commitments	$	657,344	$	754,055	$	1,411,399	$	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 June 30, 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 $17.7 million.

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

	June 30, 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	$	—	$	2,578	$	37,000	$	105	$	397
Total risk management purposes	37,000		—		2,578		37,000		105		397
Customer-initiated and mortgage banking activities:
Forward contracts related to mortgage loans to be delivered for sale	135,027		—		1,303		105,711		—		38
Interest rate lock commitments	121,893		3,482		—		62,081		1,220		—
Customer-initiated derivatives	492,834		13,310		13,845		354,699		4,143		4,144
Total customer-initiated and mortgage banking activities	749,754		16,792		15,148		522,491		5,363		4,182
Total gross derivatives	$	786,754	$	16,792	$	17,726	$	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 $758 thousand at June 30, 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 six months ended June 30,
(Dollars in thousands)	2016			2015
Reserve balance at beginning of period	$	1,300		$	4,000
Provision expense (benefit)	462			(271		)
Charge-offs	(212		)	(1,729		)
Ending reserve balance	$	1,550		$	2,000
Reserve balance	June 30, 2016			December 31, 2015
Liability for specific claims	$	609		$	380
General allowance	941			920
Total reserve balance	$	1,550		$	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 June 30, 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)	$	1,783,370	$	1,461,786	$	220,731	$	93,619	$	7,234
FHLB borrowings	698,850		625,000		62,850		1,000		10,000
Securities sold under agreements to repurchase	63,460		63,460		—		—		—
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)	29,392		6,046		10,341		7,523		5,482
Total	$	2,632,572	$	2,193,792	$	293,922	$	102,142	$	42,716

(1) At June 30, 2016, the total includes $228.4 million of time deposits included within “Other brokered funds.”

(2) Future minimum lease payments are reduced by $136 thousand related to sublease income to be received in the

following periods: $64 thousand (less than one year); $66 thousand (1-3 years); and $6 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 June 30, 2016, we had liquidity on hand of $948.2 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 provides 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 June 30, 2016, we had $698.9 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 June 30, 2016, Talmer Bank had an unused borrowing capacity of approximately $431 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 June 30, 2016.

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

	June 30, 2016		December 31, 2015
Investment securities available-for-sale to total deposits	17.44	%	17.76	%
Loans (net of unearned income) to total deposits	95.84		95.85
Interest-earning assets to total assets	92.71		92.45
Interest-bearing deposits to total deposits	78.19		79.83

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Reconciliation of Non-GAAP Financial Measures

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, FDIC loss share income and $1.8 million of net expense recognized in the second quarter of 2015 related to our targeted review of property efficiency.

Our earnings per diluted average common share is a measure of profit allocated to each outstanding average share.

Our core earnings per diluted average common share begins with the earnings per diluted average common share and then excludes certain items deemed by management to not be related to regular operations previously noted above in addition to excess tax benefits recognized and the $4.3 million benefit due to finalization of a settlement with the Internal Revenue Service in the first quarter of 2016.

Management believes these non-GAAP financial measures provide 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 these non-GAAP financial measures have a number of limitations. As such, you should not view our disclosure of these non-GAAP financial measures as a substitute for results determined in accordance with GAAP, and these non-GAAP financial measures are 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, and core earnings per diluted average common share to earnings per average diluted common share, the most directly comparable GAAP measure.

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(Dollars in thousands, except per share data)	For the three months ended June 30,						For the six months ended June 30,
	2016			2015			2016			2015
Core efficiency ratio:
Net interest income	$	57,394		$	49,609		$	113,492		$	100,641
Noninterest income	17,240			22,098			30,864			43,528
Total revenue	74,634			71,707			144,356			144,169
Less:
Expense due to change in the fair value of loan servicing rights due to valuation inputs or assumptions	(3,499		)	3,146			(10,124		)	(938		)
FDIC loss share income	—			(5,928		)	—			(6,996		)
Total core revenue	78,133			74,489			154,480			152,103
Total noninterest expense	45,929			53,293			94,199			109,888
Less:
Transaction and integration related costs	312			419			3,186			3,766
Property efficiency review	—			1,820			—			1,820
Total core noninterest expense	$	45,617		$	51,054		$	91,013		$	104,302
Efficiency ratio	61.54		%	74.32		%	65.25		%	76.22		%
Core efficiency ratio	58.38			68.54			58.92			68.57
Core earnings per diluted average common share:
Diluted EPS available to common shareholders	$	0.28		$	0.23		$	0.58		$	0.36
Net income allocated to common shareholders	19,840			17,374			40,725			26,770
Impact to pre-tax net income due to non-core items listed above	(3,811		)	(5,021		)	(13,310		)	(13,520		)
Estimated income tax impact of above non-core items	(1,212		)	(1,597		)	(4,234		)	(4,301		)
After-tax non-core items:
Excess tax benefits	2,612			—			4,084			—
Benefit due to finalization of a settlement with the Internal Revenue Service	—			—			4,306			—
After-tax impact of non-core items	13			(3,424		)	(686		)	(9,219		)
Portion of non-core items allocated to participating securities	—			(34		)	(10		)	(72		)
Impact of non-core items applicable to common shareholders	13			(3,458		)	(676		)	(9,147		)
Core earnings allocated to common shareholders	19,827			20,832			41,401			35,917
Weighted average common shares outstanding - diluted	70,026			74,900			69,889			75,046
Impact to diluted EPS of non-core items	$	—		$	(0.05	)	$	(0.01	)	$	(0.12	)
Core diluted EPS applicable to common shareholders	0.28			0.28			0.59			0.48

 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.

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Interest Rate Risk

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

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

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

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 June 30, 2016 and December 31, 2015, assuming immediate parallel moves in interest rates is presented in the table below.

	June 30, 2016				December 31, 2015
	Following 12  months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	0.4	%	2.9	%	(2.3	)%	(1.4	)%
+300 basis points	0.3		2.2		(2.0	)	(1.2	)
+200 basis points	0.5		1.9		(1.5	)	(0.8	)
+100 basis points	0.5		1.3		(0.8	)	(0.3	)
-100 basis points	(2.4	)	(3.4	)	(1.9	)	(2.1	)
-200 basis points	(5.3	)	(6.7	)	(5.5	)	(6.6	)
-300 basis points	(7.7	)	(9.3	)	(7.7	)	(9.0	)
-400 basis points	(8.8	)	(10.6	)	(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

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analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.

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

The table below presents the change in our economic value of equity as of June 30, 2016 and December 31, 2015 assuming immediate parallel shifts in interest rates.

	June 30, 2016		December 31, 2015
+400 basis points	(22.5	)%	(21.6	)%
+300 basis points	(16.3	)	(16.1	)
+200 basis points	(9.5	)	(10.4	)
+100 basis points	(3.7	)	(5.0	)
-100 basis points	(2.5	)	(0.6	)
-200 basis points	(5.6	)	(4.7	)
-300 basis points	(4.1	)	(6.4	)
-400 basis points	(3.3	)	(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 June 30, 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.

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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.

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 a 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 a 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

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Bushansky v. Talmer Bancorp, Inc., et. al., Case No. 1:16-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, 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. On June 20, 2016, the federal Bushanky lawsuit was voluntarily dismissed by the plaintiff as to all defendants, without prejudice. Also on June 20, 2016, plaintiffs voluntarily dismissed the Nicholl lawsuit as to all defendants, without prejudice.

On June 16, 2016, purported Talmer shareholders filed a complaint in the United States District Court for the Eastern District of Michigan, styled City of Livonia Employees' Retirement System v. Chemical Financial Corporation, et. al., Docket No. 1:16-cv-12229. The plaintiff requests certification as a class action. This lawsuit alleges violations of Section 14(a) and 20(a) of the Securities Exchange Act of 1934. The Complaint alleges, among other things, that the Defendants issued materially incomplete and misleading disclosures in the Form S-4 Registration Statement relating to the proposed merger. The Complaint contains requests for relief that include, among other things, that the Court enjoin the proposed transaction unless and until additional information is provided to Talmer's shareholders, declare that the Defendants violated the securities laws in connection with the proposed merger, award compensatory damages, interest, attorneys' and experts' fees, and that the Court grant such other relief as it 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
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 June 30, 2016, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 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.
August 5, 2016	By:	/s/ David T. Provost
		David T. Provost
		Chief Executive Officer
		(Principal Executive Officer)
August 5, 2016	By:	/s/ Dennis Klaeser
		Dennis Klaeser
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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