TLMR Update: 1Q15 Final Review – Lowering Forward Estimates Slightly; Reducing Rating to ‘Market-Perform’ on Valuation

“Market-Perform” / Price Target: $17 / HQ=Troy, MI /$1.1 Bil. Mkt. Cap.

TLMR 1Q15 EPS Review

TLMR-Talmer Bancorp reported 1Q15 EPS of $0.12 vs. $0.16 in 4Q14. Core EPS were ~$0.15 and exclude $3.3 Mil. in merger costs. Included in our core number is a negative MSR adjustment of $4.1 Mil. ($0.04/sh.) vs. -$3.7 Mil. last quarter. Accordingly, on an adjusted basis the results were ~$0.19 (ex-MSR adj.) vs. our $0.17 estimate and the consensus of $0.19.

Overall, this was a solid but noisy quarter for TLMR as they closed the First of Huron transaction in February. Non-interest income was aided by higher FDIC related items + better gains on the sale of mortgage Loans. Additionally, while operating expenses (ex-merger items) were somewhat higher than modeled this quarter they are still expected to trend down going forward and be more in-line with expectations (targeted ER of 65% by mid-year still on track vs. ~69% in 1Q15). Core Loan growth also remained solid with the portfolio up 2.3% Q/Q and low double-digit growth still seems reasonable in FY15. Finally, credit quality showed modest improvement (NPAs down 6%) and core capital remained relatively strong (TCE = 11.8%). At this time, while the Company remains interested in additional acquisitions nothing appears imminent and the focus remains on improved operating efficiencies and added core Loan growth.

Earnings Estimates: Following the 1Q15 results we are making the following adjustments to our EPS estimates: (a) for FY15 we are lowering our estimate by $0.05 to $0.80. This is primarily driven by the lower reported results in 1Q15 and in total we are reducing our estimates for the final three quarters by $0.01. That said within the line times we did lower our outlook modestly for spread income but that was mostly offset by somewhat higher fee income (mortgage driven); and (b) for FY16 we are tweaking our estimate down by $0.01 to $1.07.

Rating Change: Based on valuation we are lowering our investment rating on TLMR shares to ‘Market-Perform’ from ‘Outperform’. On a YTD-basis the shares are up ~13% vs. a median increase of ~2% for our FIG Bank peer group and a 1-2% rise in the NASDAQ Bank Index. At the same time we are increasing our price target by $1 to $17/share. This is driven by the improved earnings visibility at the Company and better bank stock valuations in general. Our $17 target assumes the shares trade at ~16x our FY16 EPS estimate and ~150% of forward TBV. This compares to our current FIG Bank peer group medians of ~13.6x and 170%, respectively. Based on current pricing our revised target of $17 has potential upside of ~7%. Accordingly, we are lowering our rating to ‘Market-Perform’.