UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

Commission File Number: 000-26335

TEAM FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

8 West Peoria, Suite 200, Paola, Kansas 66071

(Address of principal executive offices) (Zip Code)

Registrant’s telephone, including area code:  (913) 294-9667

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

 

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 3,598,784 shares of the Registrant’s common stock, no par value, outstanding as of November 10, 2006.

Part I.	Financial Information
Item 1.		Financial Statements
		Unaudited Consolidated Statements of Financial Condition as of September 30, 2006 and December 31, 2005
		Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005
		Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2006 and 2005
		Unaudited Consolidated Statements of Changes In Stockholders’ Equity for the Nine Months Ended September 30, 2006
		Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
		Notes to Unaudited Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis Of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosure About Market Risk
Item 4.		Controls and Procedures
Part II.	Other Information
Item 1.		Legal Proceedings
Item 1.a		Risk Factors
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Default upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits
Signature Page
Exhibit 31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes- Oxley Act of 2002
Exhibit 31.2		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes- Oxley Act of 2002
Exhibit 32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350
Exhibit 32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350

 

2

                                               

TEAM FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Financial Condition

(In Thousands)

		September 30,			December 31,
		2006			2005
Assets
Cash and due from banks		$	12,956		$	14,592
Federal funds sold and interest bearing bank deposits		2,519			19,768
Cash and cash equivalents		15,475			34,360
Investment securities:
Available for sale, at fair value (amortized cost of $177,476 and $183,719 at September 30, 2006 and December 31, 2005, respectively)		175,093			181,758
Other non-marketable securities (amortized cost of $8,955 and $8,669 at September 30, 2006 and December 31, 2005, respectively)		8,955			8,651
Total investment securities		184,048			190,409
Loans receivable, net of unearned fees		468,562			420,181
Allowance for loan losses		(5,769		)	(5,424		)
Net loans receivable		462,793			414,757
Accrued interest receivable		5,583			4,607
Premises and equipment, net		16,489			16,359
Assets acquired through foreclosure		902			455
Goodwill		10,700			10,700
Intangible assets, net of accumulated amortization		2,792			3,223
Bank-owned life insurance policies		19,725			19,173
Other assets		1,774			2,486
Total assets		$	720,281		$	696,529
Liabilities and Stockholder’s Equity
Deposits:
Checking deposits		$	168,269		$	186,791
Savings deposits		30,382			31,944
Money market deposits		60,207			46,465
Certificates of deposit		272,649			242,678
Total deposits		531,507			507,878
Federal funds purchased and securities sold under agreements to repurchase		4,172			4,036
Federal Home Loan Bank advances		108,090			111,131
Notes payable		192			202
Subordinated debentures		22,681			16,005
Accrued expenses and other liabilities		5,657			3,928
Total liabilities		672,299			643,180
Stockholders’ Equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued		—			—
Common stock, no par value, 50,000,000 shares authorized; 4,501,516 and 4,499,470 shares issued; 3,598,784 and 4,034,995 shares outstanding at September 30, 2006 and December 31, 2005, respectively		27,901			27,880
Capital surplus		588			417
Retained earnings		32,710			30,941
Treasury stock, 902,732 and 464,475 shares of common stock at cost at September 30, 2006, and December 31, 2005, respectively		(11,645		)	(4,583		)
Accumulated other comprehensive loss		(1,572		)	(1,306		)
Total stockholders’ equity		47,982			53,349
Total liabilities and stockholders’ equity		$	720,281		$	696,529

 

See accompanying notes to the unaudited consolidated financial statements

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TEAM FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

(Dollars In Thousands, Except Per Share Data)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Interest Income:
Interest and fees on loans		$	9,290		$	7,136		$	25,951		$	20,141
Taxable investment securities		2,015			1,815			5,829			5,483
Nontaxable investment securities		256			310			796			889
Other		115			55			422			217
Total interest income		11,676			9,316			32,998			26,730
Interest Expense:
Deposits:
Checking deposits		460			301			1,399			788
Savings deposits		57			58			163			166
Money market deposits		417			157			994			444
Certificates of deposit		3,010			1,792			7,815			4,776
Federal funds purchased and securities sold under agreements to repurchase		36			51			124			107
FHLB advances payable		1,139			1,175			3,402			3,515
Notes payable and other borrowings		94			11			137			58
Subordinated debentures		411			388			1,188			1,165
Total interest expense		5,624			3,933			15,222			11,019
Net interest income before provision for loan losses		6,052			5,383			17,776			15,711
Provision for loan losses		131			263			563			675
Net interest income after provision for loan losses		5,921			5,120			17,213			15,036
Non-Interest Income:
Service charges		951			1,029			2,702			2,931
Trust fees		173			159			555			529
Gain on sales of mortgage loans		125			240			455			667
Loss on sales of investment securities		(74		)	—			(164		)	—
Bank-owned life insurance income		220			209			650			625
Other		372			356			1,090			1,008
Total non-interest income		1,767			1,993			5,288			5,760
Non-Interest Expenses:
Salaries and employee benefits		2,977			2,811			9,213			8,261
Occupancy and equipment		735			705			2,231			2,072
Data processing		737			726			2,135			2,137
Professional fees		250			346			1,100			1,001
Marketing		109			106			284			253
Supplies		63			98			249			259
Intangible asset amortization		141			151			436			464
Other		1,681			1,069			3,342			2,696
Total non-interest expenses		6,693			6,012			18,990			17,143
Income from continuing operations before income taxes		995			1,101			3,511			3,653
Income tax expense		211			220			850			809
Net income from continuing operations		$	784		$	881		$	2,661		$	2,844
Net loss from discontinued operations		—			—			—			(108		)
Net income		$	784		$	881		$	2,661		$	2,736
Basic income per share from continuing operations		$	0.22		$	0.22		$	0.70		$	0.70
Diluted income per share from continuing operations		$	0.21		$	0.21		$	0.68		$	0.69
Basic loss per share from discontinued operations		$	—		$	—		$	—		$	(0.03	)
Diluted loss per share from discontinued operations		$	—		$	—		$	—		$	(0.03	)
Basic income per share		$	0.22		$	0.22		$	0.70		$	0.68
Diluted income per share		$	0.21		$	0.21		$	0.68		$	0.67
Shares applicable to basic income per share		3,594,401			4,040,595			3,821,758			4,039,068
Shares applicable to diluted income per share		3,692,392			4,101,431			3,912,655			4,095,474

 

See accompanying notes to the unaudited consolidated financial statements

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Team Financial, Inc. And Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income

(In thousands)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Net income		$	784		$	881		$	2,661		$	2,736
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities available for sale net of tax of $889 and $(286) for the three months ended September 30, 2006 and September 30, 2005, respectively; and net of tax $(4,152) and $(629) for the nine months ended September 30, 2006 and September 30, 2005, respectively		1,726			(557		)	(374		)	(1,220		)
Reclassification adjustment for gains included in net income net of tax of $49 and $0 for the three months ended September 30, 2006 and September 30, 2005, respectively; and net of tax $108 and $0 for the nine months ended September 30, 2006 and September 30, 2005, respectively		49			—			108			—
Other comprehensive income (loss), net		1,775			(557		)	(266		)	(1,220		)
Comprehensive income		$	2,559		$	324		$	2,395		$	1,516

 

See accompanying notes to the unaudited consolidated financial statements

Team Financial, Inc. And Subsidiaries

Unaudited Consolidated Statements of Changes In Stockholders’ Equity

Nine Months Ended September 30, 2006

(Dollars In Thousands, Except Per Share Amounts)

														Accumulated
														other			Total
		Common			Capital			Retained			Treasury			comprehensive			stockholders’
		stock			surplus			earnings			stock			loss			equity
BALANCE, December 31, 2005		$	27,880		$	417		$	30,941		$	(4,583	)	$	(1,306	)	$	53,349
Treasury stock purchased (444,657 shares)		—			—			—			(7,197		)				(7,197		)
Common stock issued in connection with compensation plans (2046 shares)		21			—			—			—			—			21
Issuance of Treasury Shares in connection with compensation plans (8,400 shares)		—			(47		)	—			135			—			88
Increase in capital surplus in connection with compensation plans		—			218			—			—			—			218
Net income		—			—			2,661			—			—			2,661
Dividends ($0.24 per share)		—			—			(892		)	—			—			(892		)
Other comprehensive (loss) net of $(4,152) in taxes		—			—			—			—			(266		)	(266		)
BALANCE, September 30, 2006		$	27,901		$	588		$	32,710		$	(11,645	)	$	(1,572	)	$	47,982

 

See accompanying notes to the unaudited consolidated financial statements

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Team Financial, Inc. And Subsidiaries

Unaudited Consolidated Statements Of Cash Flows

(Dollars in thousands)

		Nine Months Ended September 30,
		2006			2005
Cash flows from operating activities:
Net income		$	2,661		$	2,736
Net loss from discontinued operations		—			108
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		563			675
Depreciation and amortization		1,607			1,869
Stock-based compensation expense		218			129
Increase in bank owned life insurance		(552		)	(534		)
Net loss on sales of investment securities		164			—
Stock Dividends		(286		)	(233		)
Net gain on sales of mortgage loans		(455		)	(667		)
Net loss/gain on sales of assets		14			(57		)
Proceeds from sale of mortgage loans		29,863			38,652
Origination of mortgage loans for sale		(28,902		)	(38,126		)
Net increase in other assets		73			(20		)
Net increase in accrued expenses and other liabilities		1,902			788
Net cash provided by operating activities		6,870			5,320
Net cash flows of discontinued operations		—			6,892
Net cash provided by operating activities		6,870			12,212
Cash flows from investing activities:
Net increase in loans		(49,709		)	(38,072		)
Proceeds from sale of investment securities		10,809			—
Proceeds from maturities and principal reductions of investment securities		20,133			31,551
Purchases of investment securities		(25,149		)	(34,762		)
Purchase of premises and equipment, net		(1,079		)	(1,626		)
Proceeds from sales of assets		66			273
Net cash used in investing activities		(44,929		)	(42,636		)
Cash flows from financing activities:
Net increase in deposits		23,629			17,205
Net increase in federal funds purchased and securities sold under agreements to repurchase		136			7,267
Payments on Federal Home Loan Bank advances		(41		)	(2,670		)
Proceeds from Federal Home Loan Bank advances		(3,000		)	10
Payments on notes payable		(10,480		)	(8,006		)
Proceeds from notes payable		10,470			4,662
Proceeds from company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures, net		6,475			—
Common stock issued		21			31
Purchase of treasury stock		(7,197		)	(31		)
Issuance of treasury stock		88			30
Dividends paid on common stock		(927		)	(970		)
Net cash provided by financing activities		19,174			17,528
Net change in cash and cash equivalents		(18,885		)	(12,896		)
Cash and cash equivalents at beginning of the period		34,360			34,741
Cash and cash equivalents at end of the period		$	15,475		$	21,845
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	15,231		$	10,461
Income taxes		720			569
Noncash activities related to operations:
Assets acquired through foreclosure		$	593		$	487
Loans to facilitate the sale of real estate acquired through foreclosure		131			336

 

See accompanying notes to the unaudited consolidated financial statements

6

Team Financial, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Three and nine month periods ended September 30, 2006 and 2005

(1)           Basis of Presentation

The accompanying unaudited consolidated financial statements of Team Financial, Inc. and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial condition and results of operations required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all normal recurring adjustments necessary for a fair presentation of results have been included.  The consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

The interim consolidated financial statements include the accounts of Team Financial, Inc. and its wholly owned subsidiaries, Team Financial Acquisition Subsidiary, Inc., including TeamBank, N.A. and its subsidiaries, and Post Bancorp and its subsidiary, Colorado National Bank.   All material inter-company transactions, profits, and balances are eliminated in consolidation.  The consolidated financial statements do not include the accounts of our wholly owned statutory trust, Team Financial Capital Trust II (the “Trust”).  The Trust qualifies as a special purpose entity that is not required to be consolidated in the financial statements of Team Financial, Inc.  The Trust Preferred Securities issued by the Trust are included in Tier I capital for regulatory capital purposes.

The December 31, 2005 statement of financial condition has been derived from the audited consolidated financial statements as of that date.  Certain amounts in the 2005 financial statements have been reclassified to conform to the 2006 presentation.  The results of the interim periods ended September 30, 2006 are not necessarily indicative of the results that may occur for the year ending December 31, 2006.

(2)           Recent Accounting Pronouncements

In December of 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payments, (“SFAS 123(R)”). This statement requires that the cost resulting from all share-based transactions be recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share-based arrangements and requires all entities to apply a fair-value based measurement method in accounting for share based payments with employees except for equity instruments held by employee share ownership plans. SFAS 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and Accounting Principal Board Opinion No. 25, Accounting for Stock Issued to Employees,(“APB 25”) and became effective as of the beginning of 2006. Prior to fiscal year 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in APB 25, and related interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation. More information regarding the adoption of SFAS 123(R) is set forth in footnote 4.

In May of 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement requires retrospective application to all voluntary changes in accounting principle with all prior period financial statements presented using the new accounting principle, unless it is impracticable to do so. For the Company, this standard is effective for accounting changes and corrections of errors made during or after 2006. The Company does not anticipate this statement to have a material effect on its financial statements.

In November 2005, the FASB issued FASB Staff Position (“FSP”) 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance clarifies that an impairment loss should be recognized when the impairment loss is deemed other-than-temporary, even if the decision to sell has not been made. The FSP also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP is effective for fiscal years beginning after December 15, 2005 and the Company began applying the guidance in 2006. The adoption of FSP FAS 115-1 did not have a material impact on the Company’s financial position, results of operations, or liquidity.

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In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.  This statement requires that all separately recognized servicing rights be initially measured at fair value, if practicable.  For each class of separately recognized servicing assets and servicing liabilities, this Statement permits the Company to choose either to report servicing assets and liabilities at fair value or at amortized cost.  This Statement also requires separate presentation in the financial statements, supplemented by additional disclosures.  The Statement is effective as of the beginning of the first fiscal year that begins after September 15, 2006, and the Company will adopt this Statement as of January 1, 2007.  The Company does not expect that this Statement will have a material impact on its financial position, results of operations and  liquidity.

In June 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109 Accounting for Income Taxes.  This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The evaluation of a tax position in accordance with this interpretation is a two-step process.  The first step is a recognition process to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.  The interpretation is effective for fiscal years beginning after December 15, 2006, and the Company will begin applying the guidance in January, 2007.  The Company is currently evaluating the impact of adopting this interpretation on its financial position, results of operations, and liquidity.

In September 2006, the FASB issued Statement No. 158, Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).  This statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position.  This Statement requires recognition of changes in funded status in the year in which the changes occur as an adjustment to accumulated other comprehensive income in shareholders’ equity, net of tax.  As an issuer of publicly traded securities, the Company is required to initially recognize the funded status of defined benefit postretirement plans and provide the related disclosures as of fiscal year ending December 31, 2006, and pursuant to the Statement, the Company will adopt prospective application.  The effects of applying this Statement could have a material impact to the Company’s financial statements.   The Company is currently evaluating the impact of adopting this statement on its financial position, results of operations, and liquidity.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, which provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. Prior year misstatements must be considered in quantifying misstatements in current year financial statements and if the effect of those misstatements is material to the current year, the prior year financial statements must be corrected even though such revision previously was and continues to be immaterial to the prior year financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It does not require any new fair value measurements. For calendar year companies, the Statement is effective beginning January 1, 2008. The Company does not expect that adoption of the Statement will have a material effect on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”, was ratified. This EITF Issue addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying this Issue must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. For calendar year companies, the Issue is effective beginning January 1, 2008. Early adoption is permitted as of January 1, 2007. The Company does not expect the adoption of the Issue to have a material effect on the Company’s consolidated financial statements.

(3)           Discontinued Operations

On February 25, 2005, we completed the sale of Team Insurance Group, Inc., our insurance agency subsidiary. This subsidiary was operated as a subsidiary of TeamBank, N.A. from December of 2002 until December, 2004 and offered employee benefit insurance and property and casualty insurance to businesses and individuals. We sold all the issued and outstanding shares of the subsidiary to an unaffiliated third party for total cash consideration of $6.8 million after adjustments. Our investment in this subsidiary as of February 25, 2005 was approximately $7.0 million. As a result of the sale, the operations related to this subsidiary have been reclassified in discontinued operations. A loss on the sale of the subsidiary of approximately $164,000 was recorded in the second quarter of 2005 upon finalization of the selling price. Pursuant to the terms of the agreement, the buyer could present any breach of warranty or representations claims up to 18 months after the close of the transaction.  On July 25, 2006, we received a claim from the buyer against the warranties and representations of the sale; however, we do not believe that any of the claims presented are legitimate, and we intend to dispute all claims.  Any loss potential is currently considered to be neither probable nor estimatable.

(4)           Stock Based Compensation and Income Per Share

The Company’s 1999 Stock Incentive Plan provides for the following stock and stock-based awards: restricted stock, stock options, stock appreciation rights and performance shares.  As of September 30, 2006, up to 71,500 shares of our common stock were available to be issued under the plan. All employees, directors and consultants are eligible to participate in the plan. The Company generally grants stock options with either a one-year cliff vesting schedule and a ten year expiration from the date of grant, or with a three-year potential vesting schedule and a ten year expiration from the date of grant, with vesting at the discretion of the Executive Compensation Committee of the Board of Directors, which administers the plan.  Prior to 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in APB

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25, and related interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation.

The following table illustrates what the Company’s share-based compensation expense and earnings per share would have been for the three and nine months ended September 30, 2005 (in thousands, except per share data) had the fair value method been used to account for stock-based compensation last year in accordance with SFAS 123(R):

		Three Months		Nine Months
		Ended		Ended
		September 30, 2005		September 30, 2005
		(Dollars in thousands,  except per share data)
Net income:
As reported		$                     881		$                  2,736
Stock-based compensation expense included in reported net income, net of tax		33		60
Compensation expense determined under fair value, net of tax		(54	)	(123	)
Pro forma		$                     860		$                  2,673
Basic earnings per share:
As reported		$                    0.22		$                    0.68
Pro forma		0.21		0.66
Diluted earnings per share:
As reported		$                    0.21		$                    0.67
Pro forma		0.21		0.65

 

Beginning in 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payments, (“SFAS No. 123(R)”). This statement requires that the cost resulting from all share-based transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based arrangements and requires all entities to apply a fair-value based measurement method in accounting for share based payments with employees except for equity instruments held by employee share ownership plans. The Company elected to adopt SFAS No. 123(R) using the modified prospective transition method and, accordingly, previously reported amounts have not been restated for the change in accounting.  During the three and nine months ended September 30, 2006, the Company recognized share-based compensation expense of approximately $89,000 and $218,000, respectively.

Stock compensation expense for options granted during the nine months ended September 30, 2006 was estimated using the Black-Scholes option-pricing model with the following assumptions:

		One-year options		Three-year options
Expected life in years		5		8
Expected volatility		19.32	%	18.47	%
Risk-free interest rate		4.59	%	4.59	%
Annual rate of quarterly dividends		2.19	%	2.21	%

 

The following table summarizes option activity for the nine months ended September 30, 2006:

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				Weighted		Weighted average		Aggregate
		Number of		average exercise		remaining contractual		Intrinsic
		options		price per share		life in years		Value
Outstanding at December 31, 2005		304,850		$                      10.08
Granted		47,000		14.45
Exercised		8,400		10.54
Expired or forfeited		2,000		14.30
Outstanding at September 30, 2006		341,450		10.64		6.3		$                        5.36
Exercisable at September 30, 2006		241,850		9.32		5.2		6.68

 

A summary of the Company’s nonvested options as of September 30, 2006 and changes during the nine months ended are presented below:

				Weighted
		Number of		average grant
		shares		date fair value
Nonvested at December 31, 2005		54,600		$                     3.25
Granted		47,000		2.90
Expired or forfeited		2,000		2.88
Nonvested at September 30, 2006		99,600		3.09

 

 

On September 30, 2006, there was approximately $167,000 of unrecognized compensation cost related to nonvested stock-based compensation awards, which the Company expects to recognize over a weighted-average period of 1.2 years.  Due to the discretionary nature of the three-year options, these options are repriced each quarter, resulting in the difference between the weighted average grant date fair value and the currently estimated unrecognized compensation cost.

(5)           Stock Repurchase Program

There were 700 shares of common stock repurchased during the quarter ended September 30, 2006 at an average price of $12.90 per share under a stock repurchase program authorized by the Board of Directors that allows the repurchase of up to 400,000 shares.  At September 30, 2006, there were 307,673 shares of our common stock remaining to be repurchased.

(6)           Dividends Declared

On August 22, 2006, we declared a quarterly cash dividend of $0.08 per share to all common shareholders of record on September 30, 2006, payable on October 20, 2006.  During the nine months ended September 30, 2006, total cash dividends of $.24 per share were declared.

(7)           Investment Securities

The following tables summarize the amortized cost, gross unrealized gains and losses, and fair value of investment securities at September 30, 2006 and December 31, 2005.

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		September 30, 2006
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
		(Dollars in thousands)
Debt securities:
U.S. agency securities		$        55,554		$               53		$            (911	)	$        54,696
Mortgage-backed securities		86,832		256		(1,778	)	85,310
Non-taxable municipal securities		27,649		249		(229	)	27,669
Taxable municipal securities		790		18		—		808
Other debt securities		6,553		16		(119	)	6,450
Total debt securities		177,378		592		(3,037	)	174,933
Equity securities		9,053		63		(1	)	9,115
Total available for sale securities		$      186,431		$             655		$         (3,038	)	$      184,048

 

		December 31, 2005
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
		(Dollars in thousands)
Debt securities:
U.S. agency securities		$        61,062		$               32		$         (1,108	)	$        59,986
Mortgage-backed securities		86,535		404		(1,517	)	85,422
Non-taxable municipal securities		28,629		400		(168	)	28,861
Taxable municipal securities		830		42		—		872
Other debt securities		6,555		40		(152	)	6,443
Total debt securities		183,611		918		(2,945	)	181,584
Equity securities		8,777		52		(4	)	8,825
Total available for sale securities		$      192,388		$             970		$         (2,949	)	$      190,409

 

Management does not believe that any of the securities with unrealized losses at September 30, 2006 are other than temporarily impaired.  

(8)           Trust Preferred Securities

On August 18, 2006, the Company chose to redeem all of the Team Financial Capital Trust I 9.50% Subordinated Debentures, due August 10, 2031 (the “Securities”) at a redemption price equal to 100% of the principal amount of the Securities, or $16.0 million, plus interest accrued and unpaid through September 17, 2006.  As a result of the redemption of the debentures, the Company incurred a pretax charge, recorded as other non-interest expense to earnings of approximately $824,000 on the redemption date of the debentures.  This charge was the unamortized portion of the offering cost that was being amortized over the original life of the debentures.

To fund the redemption of the Securities, the Company replaced the called debentures with a pooled trust preferred security of $22.0 million at a variable rate of 1.65% above the 90-day LIBOR.  The new trust preferred security has a 30-year term and a callable option 5 years after the issuance date and did not have a placement or annual trustee fee associated with it.  The Company expects to save approximately $338,000 annually based on the current reduction in interest rates.

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(9)           Notes payable and Other Borrowings

During the third quarter of 2006, the Company paid off $6.0 million of corporate debt using part of the pooled trust preferred security that was issued.  The Company also renegotiated the terms of line of credit during the third quarter of 2006.  The new terms include a $6 million line of credit with interest floating at 2.00% over the 90-day LIBOR.  Annual interest of .1875% is payable on the unused line of credit amount.

(10)         Commitments and Contingencies

Commitments to extend credit to our customers with unused approved lines of credit were approximately $87.2 million at September 30, 2006.  Additionally, the contractual amount of standby letters of credit at September 30, 2006 was approximately $7.9 million.  These commitments involve credit risk in excess of the loan amounts recorded in the consolidated balance sheets.  Exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments.

(11)         Legal Proceedings

During the third quarter of 2005, a summary judgment was entered against the Company and its subsidiaries by a Nebraska district court in pending litigation regarding a contract provision in the Company’s 1999 acquisition of Ft. Calhoun State Bank, now operated as part of TeamBank, N.A.  Although this judgment is currently on appeal, it did result in a charge to other non-interest expense in the amount of $214,000 in the third quarter of 2005.  We do not anticipate that any interest that may be accrued on this amount until the appeal is settled will be material to our financial position or operating results.  The Company does not believe that any other pending litigation to which we are a party will have a material adverse effect on our liquidity, financial condition, or results of operations.

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Item 2:             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Team Financial, Inc. is a financial holding company incorporated in the State of Kansas.  Our common stock is listed on the Nasdaq Global Market (“NASDAQ”) under the symbol “TFIN”.

We offer full service community banking and financial services through 18 locations in Kansas, Missouri, Nebraska and Colorado through our wholly owned banking subsidiaries, TeamBank N.A and Colorado National Bank. Our presence in Kansas consists of seven locations in the Kansas City metropolitan area and three locations in southeast Kansas. We operate two locations in western Missouri, three in the metropolitan area of Omaha, Nebraska and three in the Colorado Springs, Colorado metropolitan area.  Another location in the Colorado Springs, Colorado metropolitan area is currently under construction, and is scheduled to open during the first quarter of 2007.

Results of operations depend primarily on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities.  Results of operations are also affected by non-interest income, such as service charges, loan fees, and gains and losses from the sales of mortgage loans.  Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, data processing expense and provisions for loan losses.

The following table presents selected financial data for the three and nine months ended September 30, 2006 and September 30, 2005 (dollars in thousands, except per share data):

		As of and For				As of and For
		Three Months Ended				Nine Months Ended
		September 30				September 30
		2006		2005		2006		2005
Net income from continuing operations		$                 784		$                 881		$              2,661		$              2,844
Net loss from discontinued operations		—		—		—		(108	)
Net income		784		881		2,661		2,736
Basic income per share from continuing operations		$                0.22		$                0.22		$                0.70		$                0.70
Diluted income per share from continuing operations		$                0.21		$                0.21		$                0.68		$                0.69
Return on average assets		0.43	%	0.52	%	0.50	%	0.55	%
Return on average equity		6.61	%	6.52	%	7.10	%	6.88	%
Average equity to average assets		6.53	%	7.96	%	7.04	%	7.95	%
Efficiency Ratio		85.60	%	81.51	%	82.34	%	79.84	%

 

On February 25, 2005, we completed the sale of Team Insurance Group, Inc., our insurance agency subsidiary. This subsidiary was operated as a subsidiary of TeamBank, N.A. from December of 2002 until December, 2004 and offered employee benefit insurance and property and casualty insurance to businesses and individuals. We sold all the issued and outstanding shares of the subsidiary to an unaffiliated third party for total cash consideration of $6.8 million after adjustments. Our investment in this subsidiary as of February 25, 2005 was approximately $7.0 million. As a result of the sale, the operations related to this subsidiary have been reclassified in discontinued operations. A loss on the sale of the subsidiary of approximately $164,000 was recorded in the second quarter of 2005 upon finalization of the selling price. Pursuant to the terms of the agreement, the buyer could present any breach of warranty or representations claims up to 18 months after the close of the transaction.  On July 25, 2006, we received a claim by the buyer against the warranties and representations of the sale.  Although we have continued discussions with the buyer regarding its claims, no litigation has been filed and we have not changed our assessment.  We do not believe any of the claims presented are legitimate and we intend to dispute all of them.  Any loss potential is currently considered to be neither probable nor estimatable.

FINANCIAL CONDITION

Total assets at September 30, 2006, were $720.3 million compared to $696.5 million at December 31, 2005, an increase of $23.8 million.  The increase was due primarily to the increase in loans receivable, which increased $48.4 million to $468.6

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million at September 30, 2006, from $420.2 million at December 31, 2005.  The increase in loans receivable was funded with excess cash, which decreased $18.9 million to $15.5 million at September 30, 2006 from $34.4 million at December 31, 2005, and an increase in deposits, which increased $23.6 million to $531.5 million at September 30, 2006 from $507.9 million at December 31, 2005.

Investment Securities

Total investment securities were $184.0 million at September 30, 2006, compared to $190.4 million at December 31, 2005, a decrease of $6.4 million, or 3.4%.  This decrease was primarily due managements’ decision not to reinvest maturing investments in the securities markets in order to help fund loan growth.   Management does not believe that any of the securities with unrealized losses at September 30, 2006 are other than temporarily impaired.

Loans Receivable

Loans receivable increased $48.4 million, or 11.5%, to $468.6 million at September 30, 2006, compared to $420.2 million at December 31, 2005.  This increase was primarily due to continued increases in construction and land development loans.

The following table presents the composition of the loan portfolio by type of loan at the dates indicated.

		September 30, 2006				December 31, 2005
		Principal		Percent of		Principal		Percent of
		Balance		Total		Balance		Total
		(Dollars in thousands)
Loans secured by real estate:
One-to-four family		$            84,246		18.0	%	$            86,880		20.7	%
Construction and land development		126,760		27.0		80,918		19.3
Nonfarm/nonresidential		143,433		30.6		136,318		32.4
Farmland		28,948		6.2		32,135		7.6
Multifamily		4,604		1.0		4,603		1.1
Commerical and industrial		54,261		11.6		55,128		13.1
Agricultural		8,349		1.8		7,952		1.9
Installment loans		11,178		2.4		11,843		2.8
Obligations of state and political subdivisions		4,810		1.0		4,131		1.0
Other		2,915		0.6		1,202		0.3
Gross loans		469,504		100.2		421,110		100.2
Less unearned fees		(942	)	(0.2	)	(929	)	(0.2	)
Total loans receivable		$          468,562		100.0	%	$          420,181		100.0	%

 

Included in one-to-four family real estate loans were loans held for sale of approximately $1.2 million at September 30, 2006 and $1.8 million at December 31, 2005.

Non-performing Assets

Non-performing assets consist of loans 90 days or more delinquent and still accruing interest, non-accrual loans, restructured loans and assets acquired through foreclosure.  Loans are generally placed on non-accrual status when principal or interest is 90 days or more past due, unless the loans are well-secured and in the process of collection.  Loans may be placed on non-accrual status earlier when, in the opinion of management, reasonable doubt exists as to the full, timely collection of interest or principal.

The following table summarizes non-performing assets:

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		September 30, 2006		December 31, 2005
		(Dollars in thousands)
Non-performing assets:
Non-accrual loans		$                  4,515		$                  2,343
Loans 90 days past due and still accruing		3,027		1,184
Restructured loans		1,021		1,055
Non-performing loans		8,563		4,582
Other real estate owned		902		455
Total non-performing assets		$                  9,465		$                  5,037
Non-performing loans as a percentage of total loans		1.83	%	1.09	%
Non-performing assets as a percentage of total assets		1.31	%	0.72	%

 

Non-performing assets totaled approximately $9.5 million at September 30, 2006, compared to $5.0 million at December 31, 2005, representing an increase of $4.5 million, or 90.0%.  The increase in non-performing assets was primarily a result of an increase in non-accrual loans of approximately $2.2 million and an increase in loans 90 days past due and still accruing interest of approximately $1.8 million.  The Company believes these loans are well secured...

Non-performing loans of approximately $8.6 million at September 30, 2006 were comprised of several non-accrual loans. The largest relationships in non-accrual at September 30, 2006 were $1.8 million to a diversified commercial loan customer and $574,000 to a fence manufacturing company.  The largest relationship included in non-accrual at December 31, 2005 was the $540,000 to the fence manufacturing company.  Restructured loans at September 30, 2006 and December 31, 2005 included several relationships; the largest was an agricultural loan restructured through Farm Service Agency of approximately $391,000 at September 30, 2006 and $500,000 at December 31, 2005.

Other real estate owned has increased approximately $447,000, or 98.2%, compared to December 31, 2005.  Other real estate owned of approximately $902,000 at September 30, 2006 consisted of ten properties.   The properties consisted of five commercial properties totaling $500,000, four single family dwellings totaling $342,000, and a parcel of land totaling $60,000. These properties are all located within our market areas and management is working to sell the real estate as soon as practical.

The loan portfolio is continuously monitored for possible non-performing assets as information becomes available.  The magnitude of any increase in non-performing loans is not determinable.

Allowance for loan losses

Management maintains an allowance for loan losses based on historical experience, an evaluation of economic conditions and regular review of delinquencies and loan portfolio quality.  Based upon these factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for probable loan losses based upon a percentage of the outstanding balances and for specific loans if their ultimate collectibility is considered questionable.  Actual losses may differ due to changing conditions or information that is currently not available.

The following table summarizes the allowance for loan losses:

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		Nine Months Ended September 30,
		2006		2005
		(Dollars in thousands)
Allowance at beginning of period		$              5,424		$              4,898
Provision for estimated loan losses		563		675
Loans charged off		(387	)	(526	)
Recoveries		169		343
Allowance at end of period		$              5,769		$              5,390
Annualized net charge-offs as a percent of total loans		0.06	%	0.06	%
Allowance as a percent of total loans		1.23	%	1.29	%
Allowance as a pecent of non-performing loans		67.37	%	152.56	%

 

The allowance for loan losses as a percent of non-performing loans decreased to 67.37% at September 30, 2006, compared to 152.56% at September 30, 2005 due to an increase in non-accrual loans at September 30, 2006 compared to September 30, 2005.   Non-accrual loans at September 30, 2006 were approximately $4.5 million compared to approximately $1.9 million at September 30, 2005, an increase of approximately $2.6 million.  The increase in non-accrual loans was primarily due to a group of diversified commercial loans to one borrower totaling $1.8 million that were categorized as non-accrual during the second quarter of 2006, and remained on non-accrual at September 30, 2006.  These loans are well secured, and therefore, additional provisions to the reserves were not deemed necessary.

Deposits

Total deposits increased approximately $23.6 million to $531.5 million at September 30, 2006 from $507.9 million at December 31, 2005. This increase was primarily a result of an increase in certificates of deposits as a result of branch promotional campaigns and an increase in public funds, offset by a decrease in checking deposits.

Principal maturities of time deposits at September 30, 2006 were as follows:

		(Dollars in thousands)
Year ending December 31:
2006		$                        58,873
2007		164,033
2008		40,962
2009		5,502
2010		2,335
Thereafter		944
Total		$                      272,649

 

Notes Payable

During the third quarter of 2006, the Company paid off $6.0 million of corporate debt using part of the pooled trust preferred security that was issued.  The Company also renegotiated the terms of line of credit during the third quarter of 2006.  The new terms include a $6 million line of credit with interest floating at 2.00% over the 90-day LIBOR.  Annual interest of 0.1875% is payable on the unused line of credit amount.

Subordinated Debentures

On August 18, 2006 the Company chose to redeem all of the Team Financial Capital Trust I 9.50% Subordinated Debentures, due August 10, 2031 (the “Securities”) at a redemption price equal to 100% of the principal amount of the Securities, or $16.0 million, plus interest accrued and unpaid through September 17, 2006.  As a result of the redemption of the debentures, the Company incurred a pretax charge to earnings of approximately $824,000 on the redemption date of the

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debentures.  This charge was the unamortized portion of the offering cost that was being amortized over the original life of the debentures.

To fund the redemption of the Securities, the Company replaced the called debentures with a pooled trust preferred security of $22.0 million at a variable rate of 1.65% above the 90-day LIBOR.  The new trust preferred security has a 30-year term and a callable option five years after the issuance date and did not have a placement or annual trustee fee associated with it.  The Company expects to save approximately $338,000 annually based on the current reduction in interest rates.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

We have various contractual obligations in the ordinary course of business that are integral to our operations.  The following table summarizes payments due per these contractual obligations for the time periods shown:

		Payments Due By
		12/31/2006		12/31/2007		12/31/2008		12/31/2009		12/31/2010		Thereafter		Total
		(In thousands)
Time Deposits		$   58,873		$ 164,033		$   40,962		$     5,502		$     2,335		$        945		$ 272,650
Repurchase Agreements		4,172		0		0		0		0		0		4,172
Subordinated debentures, FHLB advances and notes payable		192		27,000		0		5,000		5,000		93,771		130,963
Operating lease obligations		21		85		0		0		0		0		106
Loan commitments		13,028		54,711		5,930		1,679		1,439		10,455		87,242
Data processing contracts		139		577		100		0		0		0		816
Total		$   76,425		$ 246,406		$   46,992		$   12,181		$     8,774		$ 105,171		$ 495,949

 

Included in subordinated debentures, FHLB advances and notes payable in the above table is subordinated debt of $22.7 million.  The debentures mature on September 18, 2036; however, we may redeem all or part of the debentures at any time on or after September 18, 2011.  These debentures are included in the “Thereafter” maturity category based on the date of earliest redemption.

Regulatory Capital

We are subject to regulatory capital requirements administered by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.  Failure to meet the regulatory capital guidelines may result in the initiation by the Federal Reserve of appropriate supervisory or enforcement actions.  As of September 30, 2006 and December 31, 2005, we met all applicable capital adequacy requirements.  Regulatory capital ratios at September 30, 2006, were as follows:

Ratio		Actual		Minimum Required
Total capital to risk weighted assets		10.24	%	8.00	%
Core capital to risk weighted assets		9.23	%	4.00	%
Core capital to average assets		7.64	%	4.00	%

 

Liquidity

Our liquidity is continuously forecasted and managed in order to satisfy cash flow requirements of depositors and borrowers and to meet other operating cash flow needs.  We have developed internal and external sources of liquidity to meet our liquidity needs.  These sources include, but are not limited to, the ability to raise deposits through branch promotional campaigns, the purchase of brokered certificates of deposits, overnight funds, short term investment securities classified as available-for-sale and draws on credit facilities established through the Federal Home Loan Bank of Topeka.

Our most liquid assets are cash and cash equivalents and investment securities available-for-sale.  The levels of these assets are dependent on operating, financing, lending and investing activities during any given period.  At September 30, 2006, these assets, approximating $190.6 million, consisted of $15.5 million in cash and cash equivalents, and $175.1 million in

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investment securities available-for-sale.  Approximately $156.4 million of these investment securities were pledged as collateral for borrowings, repurchase agreements and for public funds on deposit at September 30, 2006.

At September 30, 2006, we had approximately $23.8 million borrowing capacity remaining under existing agreements with the Federal Home Loan Bank of Topeka, and approximately $6.0 million borrowing capacity under our corporate line of credit.

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