UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007

OR

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

For the transition period from                      to               

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 3,653,359 shares of the Registrant’s common stock, no par value, outstanding as of May 10, 2007.

Part I.  Financial Information

 

				Page
Item 1.		Financial Statements		3
		Unaudited Consolidated Statements of Financial Condition as of March 31, 2007 and December 31, 2006		3
		Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006		4
		Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2007 and 2006		5
		Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2007		6
		Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006		7
		Notes to Unaudited Consolidated Financial Statements		9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.		Quantitative and Qualitative Disclosure About Market Risk		24
Item 4.		Controls and Procedures		24
Part II. Other Information
Item 1.		Legal Proceedings		25
Item 1A.		Risk Factors		25
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 6.		Exhibits		25
Signature Page				28
Exhibit 10.1		Employment Agreement Between Team Financial, Inc. and Robert J. Weatherbie effective January 1, 2007
Exhibit 10.2		Employment Agreement Between TeamBank N.A. and Carolyn S. Jacobs effective January 1, 2007
Exhibit 10.3		Employment Agreement Between TeamBank N.A. and Sandra J. Moll effective January 1, 2007
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

(Dollars in thousands)

		March 31,			December 31,
		2007			2006
Assets
Cash and due from banks		$	14,082		$	14,529
Federal funds sold and interest bearing bank deposits		1,505			22,621
Cash and cash equivalents		15,587			37,150
Investment securities:
Available for sale, at fair value (amortized cost of $184,661 and $171,301 at March 31, 2007 and December 31, 2006, respectively)		174,692			170,079
Non-marketable equity securities (amortized cost of $9,220 and $9,061 at March 31, 2007 and December 31, 2006, respectively)		9,220			9,061
Total investment securities		183,912			179,140
Loans receivable, net of unearned fees		504,167			486,497
Allowance for loan losses		(5,833		)	(5,715		)
Net loans receivable		498,334			480,782
Accrued interest receivable		5,336			5,558
Premises and equipment, net		19,234			17,628
Assets acquired through foreclosure		602			817
Goodwill		10,700			10,700
Intangible assets, net of accumulated amortization		2,529			2,659
Bank-owned life insurance policies		20,130			19,926
Other assets		1,975			2,068
Total assets		$	758,339		$	756,428
Liabilities and Stockholders’ Equity
Deposits:
Checking deposits		$	174,929		$	194,979
Savings deposits		28,351			28,536
Money market deposits		61,659			57,123
Certificates of deposit		299,355			282,244
Total deposits		564,294			562,882
Federal funds purchased and securities sold under agreements to repurchase		6,109			6,215
Federal Home Loan Bank advances		108,058			108,069
Notes payable		108			200
Subordinated debentures		22,681			22,681
Accrued expenses and other liabilities		5,645			5,864
Total liabilities		706,895			705,911
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; 4,502,791 and 4,501,516 shares issued; 3,573,459 and 3,594,784 shares outstanding at March 31, 2007 and December 31, 2006, respectively		27,916			27,901
Capital surplus		748			680
Retained earnings		35,330			34,449
Treasury stock, 929,332 and 906,732 shares of common stock at cost at March 31, 2007, and December 31, 2006, respectively		(12,055		)	(11,707		)
Accumulated other comprehensive loss		(495		)	(806		)
Total stockholders’ equity		51,444			50,517
Total liabilities and stockholders’ equity		$	758,339		$	756,428

 

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 share data)

		Three Months Ended
		March 31
		2007			2006
Interest Income:
Interest and fees on loans		$	9,930		$	7,923
Taxable investment securities		2,003			1,886
Nontaxable investment securities		287			269
Other		209			137
Total interest income		12,429			10,215
Interest Expense:
Deposits:
Checking deposits		544			460
Savings deposits		52			53
Money market deposits		514			239
Certificates of deposit		3,544			2,173
Federal funds purchased and securities sold under agreements to repurchase		37			36
FHLB advances payable		1,113			1,134
Notes payable and other borrowings		4			4
Subordinated debentures		402			388
Total interest expense		6,210			4,487
Net interest income before provision for loan losses		6,219			5,728
Provision for loan losses		230			275
Net interest income after provision for loan losses		5,989			5,453
Non-Interest Income:
Service charges		817			847
Trust fees		169			176
Gain on sales of mortgage loans		145			191
Bank-owned life insurance income		237			216
Other		367			349
Total non-interest income		1,735			1,779
Non-Interest Expenses:
Salaries and employee benefits		3,130			3,083
Occupancy and equipment		735			768
Data processing		737			697
Professional fees		450			374
Marketing		110			80
Supplies		81			101
Intangible asset amortization		140			147
Other		786			809
Total non-interest expenses		6,169			6,059
Income before income taxes		1,555			1,173
Income tax expense		387			274
Net income		$	1,168		$	899
Basic income per share		$	0.32		$	0.22
Diluted income per share		$	0.32		$	0.22
Shares applicable to basic income per share		3,595,103			4,025,563
Shares applicable to diluted income per share		3,697,358			4,078,114

 

See accompanying notes to the unaudited consolidated financial statements

4

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TEAM FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Comprehensive Income

(In thousands)

		Three Months Ended
		March 31,
		2007			2006
Net income		$	1,168		$	899
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities available for sale net of tax of $162 and $(197) for the three months ended March 31, 2007 and March 31, 2006, respectively		311			(382		)
Other comprehensive income (loss), net		311			(382		)
Comprehensive income		$	1,479		$	517

 

See accompanying notes to the unaudited consolidated financial statements

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Team Financial, Inc. And Subsidiaries

Unaudited Consolidated Statements of Changes In Stockholders’ Equity

Three Months Ended March 31, 2007

(Dollars in thousands, except share amounts)

														Accumulated
														other			Total
		Common			Capital			Retained			Treasury			comprehensive			stockholders’
		stock			surplus			earnings			stock			loss			equity
BALANCE, December 31, 2006		$	27,901		$	680		$	34,449		$	(11,707	)	$	(806	)	$	50,517
Treasury stock purchased (22,600 shares)		—			—			—			(348		)	(348		)
Common stock issued in connection with compensation plans (1,275 shares)		15			—			—			—			—			15
Increase in capital surplus in connection with compensation plans		—			68			—			—			—			68
Net income		—			—			1,168			—			—			1,168
Dividends ($0.08 per share)		—			—			(287		)	—			—			(287		)
Other comprehensive income net of $162 in taxes		—			—			—			—			311			311
BALANCE, March 31, 2007		$	27,916		$	748		$	35,330		$	(12,055	)	$	(495	)	$	51,444

 

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)

		Three Months Ended March 31,
		2007			2006
Cash flows from operating activities:
Net income		$	1,168		$	899
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		230			275
Depreciation and amortization		499			553
Writedown on assets acquired through foreclosure		10			—
Stock-based compensation expense		68			57
Change in bank owned life insurance		(204		)	(182		)
Stock dividends		(105		)	(87		)
Net gain on sales of mortgage loans		(142		)	(191		)
Net gain on sales of assets		(8		)	(11		)
Proceeds from sale of mortgage loans		9,658			10,949
Origination of mortgage loans for sale		(8,347		)	(9,830		)
Net (increase) decrease in other assets		334			(96		)
Net decrease in accrued expenses and other liabilities		(381		)	(8		)
Net cash provided by operating activities		2,780			2,328
Cash flows from investing activities:
Net increase in loans		(18,980		)	(24,416		)
Proceeds from maturities and principal reductions of investment securities		3,687			7,128
Purchases of investment securities		(7,938		)	(3,589		)
Purchase of premises and equipment, net		(1,918		)	(173		)
Proceeds from sales of assets		223			11
Net cash used in investing activities		(24,926		)	(21,039		)
Cash flows from financing activities:
Net increase (decrease) in deposits		1,412			(2,120		)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(106		)	5,368
Payments on Federal Home Loan Bank advances		(156,155		)	(11		)
Proceeds from Federal Home Loan Bank advances		156,144			—
Payments on notes payable		(1,461		)	(1,377		)
Proceeds from notes payable		1,369			1,353
Common stock issued		15			21
Purchase of treasury stock		(348		)	(924		)
Dividends paid on common stock		(287		)	(323		)
Net cash provided by financing activities		583			1,987
Net change in cash and cash equivalents		(21,563		)	(16,724		)
Cash and cash equivalents at beginning of the period		37,150			34,360
Cash and cash equivalents at end of the period		$	15,587		$	17,637

 

See accompanying notes to the unaudited consolidated financial statements

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Team Financial, Inc. And Subsidiaries

Unaudited Consolidated Statements Of Cash Flows (continued)

(Dollars in thousands)

		Three Months Ended March 31,
		2007		2006
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		5,955		4,353
Income taxes		806		397
Noncash activities related to operations
Assets acquired through foreclosure		—		63
Loans to facilitate the sale of real estate acquired through foreclosure		—		94
SAB 108 Adjustments		—		(29	)

 

See accompanying notes to the unaudited consolidated financial statements

8

Team Financial, Inc and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three month periods ended March 31, 2007 and 2006

(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, 2006.

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 including Colorado National Bank, all of which are collectively considered one segment.  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”).  In accordance with Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46 R”), adopted in December 2003, 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 was formed in 2006 for the purpose of issuing $22 million of Trust Preferred Securities. We continue to include the Trust Preferred Securities issued by the Trust in Tier I capital for regulatory capital purposes.

The December 31, 2006 statement of financial condition has been derived from the audited consolidated financial statements as of that date.  Certain amounts in the 2006 financial statements have been reclassified to conform to the 2007 presentation.  The results of the quarter ended March 31, 2007, are not necessarily indicative of the results that may occur for the year ending December 31, 2007.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements”, 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. SAB 108 requires an entity to quantify misstatements using both a balance sheet perspective (iron curtain approach) and income statement perspective (rollover approach) and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. Prior year misstatements must be considered in quantifying misstatements in current year consolidated financial statements and if the effect of those misstatements is material to the current year, the prior year consolidated financial statements must be corrected even though such revision previously was and continues to be immaterial to the periods in which they originated.

During the fourth quarter of 2006, the Company adopted SAB 108, and in accordance with its provisions, the Company recorded a $631,000 cumulative increase, net of tax of $215,000, to retained earnings as of January 1, 2006.  The net impact of the adoption of SAB 108 was material to the Company and resulted in an increase in book value per share $0.03 as of this date.  The prior year misstatements were associated with certain loan origination costs which had not been deferred over the life of the loans as an adjustment to yield as is required by SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (SFAS 91), an over-accrual of the Company’s self insurance fund and certain data processing expenses that had been amortized over a shorter duration than their useful life.  This resulted in the Company recording a $293,000 cumulative increase to deferred loan costs, net of tax of $100,000, a $247,000 cumulative decrease to other liabilities for the self-insurance fund, net of tax of $84,000, and a $91,000 increase to other assets for data processing, net of tax of $31,000.  All amounts had previously been considered immaterial to the periods in which they originated.  In the unaudited consolidated financial statements and the accompanying notes thereto, 2006 data has been adjusted to reflect the adoption and application of SAB 108.

(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. More information regarding SFAS No. 123(R) is set forth in note 3, “Stock Based Compensation and Income Per Share”.

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

9

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interpretation is effective for fiscal years beginning after December 15, 2006, and the Company began applying the guidance in January, 2007.  The adoption of FIN 48 did not have a material effect on our consolidated financial statements. See note 8 to the consolidated financial statements for more information regarding the adoption of FIN 48.

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 February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with long-term measurement objectives for accounting for financial instruments. For calendar year companies who do not adopt early, the Statement is effective beginning January 1, 2008. The Company does not expect that its adoption of the Statement in 2008 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 an employer to recognize a liability for future benefits payable to its employees 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. The Company is currently evaluating the impact of adopting this interpretation on its financial position, results of operations, and liquidity.

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(3)   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 March 31, 2007, up to 3,250 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 Compensation Committee of the Board of Directors, which administers the 1999 Stock Incentive Plan.

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 123(R) establishes fair value as the measurement objective in accounting for share-based arrangements and requires a fair-value based measurement method in accounting for share based payments with employees except for equity instruments held by employee share ownership plans.  During the three months ended March 31, 2007, the Company recognized share-based compensation expense of approximately $68,000 compared to approximately $57,000 during the three months ended March 31, 2006.

Stock compensation expense for options granted or options with a vesting period during the three months ended March 31, 2007 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		16.24	%	18.36	%
Risk-fee interest rate		4.55	%	4.55	%
Annual rate of quarterly dividends		1.73	%	2.62	%

 

The following table summarizes option activity for the three months ended March 31, 2007:

				Weighted			Weighted average		Aggregate
		Number of		average exercise			remaining contractual		Intrinsic
		options		price per share			life in years		Value
Outstanding at December 31, 2006		367,700		$	11.06
Granted		42,000		15.97
Outstanding at March 31, 2007		409,700		11.56			6.7		$	3.80
Exercisable at March 31, 2007		295,100		10.13			5.6		5.87

 

A summary of the Company’s nonvested options as of March 31, 2007 and changes during the quarter are presented below:

		Number of		Weighted
		shares		average grant
		(in thousands)		date fair value
Nonvested at December 31, 2006		72,600		$	2.83
Granted		42,000		15.97
Nonvested at March 31, 2007		114,600		2.83

 

On March 31, 2007, there was approximately $283,000 of unrecognized compensation cost related to nonvested stock-based compensation awards, which the Company expects to recognize over a weighted-average period of 1.3 years.

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(4)  Stock Repurchase Program

At March 31, 2007, there were 281,073 shares of our common stock remaining to be repurchased under a stock repurchase program authorized by the Board of Directors.  During the quarter ended March 31, 2007, there were 22,600 shares of our common stock repurchased under this program at an average price of $15.39.

(5) Dividend Declared

On November 28, 2006, we declared a quarterly cash dividend of $0.08 per share to all shareholders of record as of January 2, 2007, payable on January 19, 2007 and on February 27, 2007, we declared a quarterly cash dividend of $0.08 per share to all shareholders of record on April 2, 2007, payable April 20, 2007.

(6) Investment Securities

The following tables summarize the amortized cost, gross unrealized gains and losses, and fair value of investment securities at March 31, 2007 and December 31, 2006.

		March 31, 2007
					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			(Losses)			Value
		(In thousands)
Debt securities:
Government-sponsored entities		$	55,772		$	104		$	(490	)	$	55,386
Mortgage-backed securities		86,047			406			(947		)	85,506
Non-taxable municipal securities		27,190			269			(146		)	27,313
Taxable municipal securities		690			24			—			714
Other debt securities		5,698			20			(50		)	5,668
Total debt securities		175,397			823			(1,633		)	174,587
Equity securities		9,264			62			(1		)	9,325
Total investment securities		$	184,661		$	885		$	(1,634	)	$	183,912

 

		December 31, 2006
					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			(Losses)			Value
		(In thousands)
Debt securities:
Government-sponsored entities		$	54,481		$	81		$	(649	)	$	53,913
Mortgage-backed securities		83,684			344			(1,178		)	82,850
Non-taxable municipal securities		27,148			271			(167		)	27,252
Taxable municipal securities		690			25			—			715
Other debt securities		5,200			32			(47		)	5,185
Total debt securities		171,203			753			(2,041		)	169,915
Equity securities		9,159			67			(1		)	9,225
Total investment securities		$	180,362		$	820		$	(2,042	)	$	179,140

 

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Management does not believe that any of the securities with unrealized losses at March 31, 2007 or December 31, 2007 are other than temporarily impaired due to changes in market rate from the date of purchase, and the Company has the ability and intent to hold these securities.

(7)  Commitments and Contingencies

Commitments to extend credit to our customers with unused approved lines of credit were approximately $112,632,000 at March 31, 2007.  Additionally, the contractual amount of standby letters of credit at March 31, 2006 was approximately $9,024,000.  These commitments involve credit risk in excess of the amount stated in the consolidated balance sheet.  Exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments.

(8) Income Taxes

Income tax expense was $387,000 for the three months ended March 31, 2007, an increase of approximately $113,000 compared to income tax expense of $274,000 for the three months ended March 31, 2006.  The effective tax rate for the three months ended March 31, 2007, was 24.9%, compared to 23.4% for the three months ended March 31, 2006.  The effective tax rate is less than the statutory federal rate of 34.0% due primarily to municipal interest income and income from the investment in bank owned life insurance.

In accordance with FIN 48, discussed in note 2, “Recent Accounting Pronouncements,” the Company has performed an analysis and has concluded that it is not more likely than not that certain state tax benefits will be recognized in the future.  The adoption of FIN 48 did not result in a cumulative effect adjustment for the Company.  As of the date of adoption of FIN 48, approximately $597,000 of unrecognized tax benefits related to certain state tax benefits, and approximately $57,000 of unrecognized tax benefits related to acquisition costs and information reporting reserves were included in other liabilities within the consolidated balance sheet.  During the first quarter of 2007, a total of approximately $30,000 was added to these reserves.  If recognized, all of the tax benefits would increase net income, decreasing the effective tax rate. The Company accrues tax expense, including interest and penalties, for unrecognized tax benefits related to certain state tax positions based on the applicable tax rates, and subsequently recognizes those state tax benefits when the related statutes expire.  During the fourth quarter of 2007, when the 2003 related statutes expire, the Company expects to recognize approximately $80,000 of state tax benefits associated with the REIT.

The Company recognizes any interest and penalties related to unrecognized tax benefits in the provision for income taxes.  Interest and penalties associated with the above-mentioned unrecognized tax benefits approximated $160,000 at March 31, 2007.

The Company’s federal and various state income tax returns for the years 2003 through 2006 remain subject to review by the various tax authorities.

(9) Subsequent Event

On May 9, 2007, the Company issued 79,900 shares of treasury stock in response to an employee’s exercise of stock options.  The weighted average exercise price of those options was $9.68 per share, and the shares were issued out of treasury stock at an average price of $16.13 per share, resulting in a decrease to capital surplus of approximately $515,000.  This transaction will impact the future assumptions used in the Black-Scholes option-pricing model and could impact the related compensation expense.  For more information regarding assumptions used for option-pricing, see note 3 to the consolidated financial statements.

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

The following is management’s discussion and analysis of particular events or circumstances that have affected the Company’s financial condition or results of operations during the periods presented in this filing.

Critical Accounting Policies

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements and related notes, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period presented. Actual results could differ significantly from those estimates. The Company’s significant accounting policies are more fully described in Note 1 to the consolidated financial statements contained in the Company’s 2006 Annual Report on Form 10-K and significant assumptions and estimates made by management are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Critical Accounting Policies” in the Company’s 2006 Annual Report on Form 10-K. There have been no material changes to those policies or the estimates made pursuant to those policies during the most recent quarter.

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 19 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 four in the Colorado Springs, Colorado metropolitan area.

Our 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.  Our 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.

During the fourth quarter of 2006, the Company adopted SAB 108, as discussed in note 2, “Recent Accounting Pronouncements” and in accordance with its provisions, the Company recorded a $631,000 cumulative increase, net of tax of $215,000, to retained earnings as of January 1, 2006.  The net impact of the adoption of SAB 108 was material to the Company and resulted in an increase in book value per share $0.03 as of this date.  The prior year misstatements were associated with certain loan origination costs which had not been deferred over the life of the loans as an adjustment to yield as is required by SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (SFAS 91), an over-accrual of the Company’s self insurance fund and certain data processing expenses that had been amortized over a shorter duration than their useful life.  This resulted in the Company recording a $293,000 cumulative increase to deferred loan costs, net of tax of $100,000, a $247,000 cumulative decrease to other liabilities for the self-insurance fund, net of tax of $84,000, and a $91,000 increase to other assets for data processing, net of tax of $31,000.  All amounts had previously been considered immaterial to the periods in which they originated.  In the unaudited consolidated financial statements and the accompanying notes thereto, 2006 data has been adjusted to reflect the adoption and application of SAB 108.

The following table presents selected financial data for the three months ended March 31, 2007 and 2006 (dollars in thousands, except per share data):

		As of and For
		Three Months Ended
		March 31
		2007			2006
Net income		$	1,168		$	899
Basic income per share		$	0.32		$	0.22
Diluted income per share		$	0.32		$	0.22
Return on average assets		0.62		%	0.52		%
Return on average equity		9.33		%	6.75		%
Average equity to average assets		6.67		%	7.73		%
Efficiency Ratio		77.56		%	80.71		%

 

FINANCIAL CONDITION

Total assets at March 31, 2007, were $758.3 million compared to $756.4 million at December 31, 2006, an increase of $1.9 million.  This increase was primarily a result of an increase in loans receivable of $17.7 million and an increase in investment securities of $4.8 million, offset by a $21.6 million decrease in cash and cash equivalents.

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The decrease in cash and cash equivalents was a result of those funds being used to fund the increases in loan growth and investment securities.  Total deposits increased $1.4 million to $564.3 million at March 31, 2007 compared to $562.9 million at December 31, 2006.

Investment Securities

Total investment securities were $183.9 million at March 31, 2007 compared to $179.1 million at December 31, 2006, an increase of $4.8 million, or 2.7%.  This increase was due primarily to management’s decision to invest approximately $7.9 million of available cash in additional securities with an approximate 5-year average life, offset by maturities of approximately $3.7 million.

Loans Receivable

Loans receivable increased $17.7 million, or 3.6%, to $504.2 million at March 31, 2007, compared to $486.5 million at December 31, 2006, primarily due to growth in construction and land development loans, which increased $17.3 million, or 12.6%, to $154.1 million at March 31, 2007, compared to $136.8 million at December 31, 2006.

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

		March 31, 2007					December 31, 2006
		Principal			Percent of		Principal			Percent of
		Balance			Total		Balance			Total
		(Dollars in thousands)
Loans secured by real estate:
One-to-four family		$	82,767		16.4	%	$	84,078		17.3	%
Construction and land development		154,097			30.6		136,835			28.1
Commercial		145,206			28.8		145,747			30.0
Farmland		32,193			6.4		29,196			6.0
Multifamily		4,590			0.9		5,109			1.1
Commerical and industrial		59,925			11.9		60,177			12.4
Agricultural		7,474			1.5		7,226			1.5
Installment loans		9,678			1.9		10,344			2.1
Obligations of state & political subdivisions		5,913			1.2		5,286			1.1
Lease financing receivables		2,897			0.6		3,031			0.6
Gross loans		504,740			100.2		487,029			100.2
Less unearned fees		(573		)	(0.2	)	(532		)	(0.2	)
Total loans receivable		$	504,167		100.0	%	$	486,497		100.0	%

 

Included in one-to-four family real estate loans were loans held for sale of approximately $1.5 million at March 31, 2007 and $2.6 million at December 31, 2006.

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 our non-performing assets at the dates indicated:

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		March 31, 2007			December 31, 2006
		(Dollars in thousands)
Non-accrual loans		$	3,170		$	7,918
Loans 90 days past due and still accruing		1,642			434
Restructured loans		1,010			1,010
Non-performing loans		5,822			9,362
Other real estate owned		602			817
Total non-performing assets		$	6,424		$	10,179
Non-performing loans as a percentage of total loans		1.16		%	1.92		%
Non-performing assets as a percentage of total assets		0.85		%	1.35		%

 

Non-performing assets totaled $6.4 million at March 31, 2007, compared to $10.2 million at December 31, 2006, representing a decrease of approximately $3.8 million, or 37.3%.  Non-performing loans were the largest component of non-performing assets during both periods, and were approximately $5.8 million at March 31, 2007 compared to $9.4 million at December 31, 2006, a decrease of approximately $4.8 million during the first quarter of 2007.

The decrease in non-performing loans was largely due to a group of loans in our Missouri market from a diversified commercial customer totaling $4.9 million that were on non-accrual status at December 31, 2006, but not at March 31, 2007.  Management actively worked with the borrower to resolve the delinquencies and during the first quarter of 2007, the Company collected approximately $2.2 million on the impaired loans and the borrower brought another $2.6 million to performing status. 

Included in non-accrual loans at March 31, 2007 were several loans.  The largest three relationships included in non-accrual at March 31, 2007 included a $458,000 commercial loan secured by farmland that is currently in foreclosure, a $346,000 commercial real estate loan that is currently in foreclosure, and a $225,000 agricultural loan that is currently in bankruptcy.

Offsetting the decrease in non-accrual loans was a $1.2 million increase in loans 90 days past due and still accruing interest. The increase in loans 90 days past due and still accruing interest was due to approximately $890,000 of loans to the abovementioned diversified commercial customer in our Missouri market that were moved from non-accrual to accrual status after interest had been paid current.  Since the loans had matured prior to March 31, 2007, they still maintained a past-due status.  During the second quarter, these loans were approved for renewal.

Restructured loans at March 31, 2007 and December 31, 2006 consisted of ten relationships, the largest of which was an agricultural loan for approximately $532,000 restructured through Farmer Home Administration.

Other real estate owned at March 31, 2007 consisted of nine properties including three commercial buildings totaling approximately $420,000, two one-to-four family properties totaling approximately $117,000, and two pieces of vacant land for approximately $65,000.  The properties are all located within our market areas.  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 maintains 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. Since certain lending activities involve greater risks, the percentage applied to specific loan types may vary. The allowance is increased by provisions for loan losses and reduced by loans charged off, net of recoveries.

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We actively manage our past due and non-performing loans in an effort to minimize credit losses and monitor asset quality to maintain an adequate loan loss allowance.  Although management uses current information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to non-performing or performing loans.  Accordingly, there can be no assurance that our allowance for loan losses will be adequate to cover loan losses or that significant increases to the allowance will not be required in the future if economic conditions should worsen.

The following table summarizes our allowance for loan losses:

		Three Months Ended March 31,
		2007			2006
		(Dollars In thousands)
Allowance at beginning of period		$	5,715		$	5,424
Provision for loan losses		230			275
Loans charged off		(140		)	(147		)
Recoveries		28			53
Allowance at end of period		$	5,833		$	5,605
Annualized net charge-offs as a percent of total loans		0.09		%	0.09		%
Allowance as a percent of total loans		1.17		%	1.26		%
Allowance as a pecent of non-performing loans		100.19		%	132.47		%

 

The allowance for loan losses as a percent of total loans was 1.17% at March 31, 2007 compared to 1.17% at December 31, 2006 and 1.26% at March 31, 2006.

The allowance for loan losses as a percent of non-performing loans was 100.19% at March 31, 2007, compared to 57.1% at December 31, 2006 and 132.47% at March 31, 2006.  The allowance for loan losses as a percent of non-performing loans of 100.19% at March 31, 2007 increased from 57.1% at December 31, 2006 due to the decrease in non-performing loans during that period, primarily as a result of large paydowns of some loans that were on non-accrual status at December 31, 2006.

Deposits

Total deposits increased approximately $1.4 million to $564.3 million at March 31, 2007 from $562.9 million at December 31, 2006. This increase was the combined result of a $20.1 million decrease in checking deposits and a $4.5 million and a $17.1 million increase in money market deposits and certificates of deposits, respectively. The decrease in checking deposits was primarily due to a decrease in public funds, which is generally expected during the first quarter due to seasonality.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

The Company utilizes a variety of financial instruments in the normal course of business to meet the financial needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit and standby letters of credit.  A discussion and table of contractual obligations, commitments and off-balance sheet arrangements is included in the Company’s 2006 annual report on form 10-K, and there have been no material changes since then.  Additional information regarding the impact of adopting FIN 48 with respect to our contractual obligations can also be found in Note 8, “Income Taxes,” of the notes to the unaudited consolidated financial statements contained herein.

Regulatory Capital

We are subject to regulatory capital requirements administered by the Federal Reserve, the Federal Deposit Insurance Corporation and 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 March 31, 2007 and December 31, 2006, we met all capital adequacy requirements to which we are subject.  Our ratios at March 31, 2007 were as follows:

Ratio		Actual		Minimum Required
Total capital to risk weighted assets		11.39	%	8.00	%
Core capital to risk weighted assets		9.60	%	4.00	%
Core capital to average assets		7.01	%	4.00	%

 

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