UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended June 30, 2007

 

OR

 

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):

 

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 3,620,064 shares of the Registrant’s common stock, no par value, outstanding as of August 13, 2007.

Part I.     Financial Information
Item 1.		Financial Statements
		Unaudited Consolidated Statements of Financial Condition as of June 30, 2007 and December 31, 2006		3
		Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006		4
		Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2007 and 2006		5
		Unaudited Consolidated Statements of Changes In Stockholders’ Equity for the Six Months Ended June 30, 2007		6
		Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006		7
		Notes to Unaudited Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.		Quantitative and Qualitative Disclosure About Market Risk		24
Item 4.		Controls and Procedures		24
Part II.   Other Information				25
Item 1.		Legal Proceedings		25
Item 1A.		Risk Factors		25
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 4.		Submission of Matters to a Vote of Security Holders		25
Item 6.		Exhibits		26
Signature Page				29
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)

		June 30, 2007			December 31, 2006
Assets
Cash and due from banks		$	16,583		$	14,529
Federal funds sold and interest bearing bank deposits		1,611			22,621
Cash and cash equivalents		18,194			37,150
Investment securities:
Available for sale, at fair value (amortized cost of $174,603 and $171,301 at June 30, 2007 and December 31, 2006, respectively)		171,309			170,079
Non-marketable equity securities (amortized cost of $9,274 and $9,061 at June 30, 2007 and December 31, 2006, respectively)		9,274			9,061
Total investment securities		180,583			179,140
Loans receivable, net of unearned fees		509,982			486,497
Allowance for loan losses		(5,856		)	(5,715		)
Net loans receivable		504,126			480,782
Accrued interest receivable		5,840			5,558
Premises and equipment, net		20,420			17,628
Assets acquired through foreclosure		615			817
Goodwill		10,700			10,700
Intangible assets, net of accumulated amortization		2,825			2,659
Bank-owned life insurance policies		20,325			19,926
Other assets		2,121			2,068
Total assets		$	765,749		$	756,428
Liabilities and Stockholder’s Equity
Deposits:
Checking deposits		$	174,304		$	194,979
Savings deposits		27,873			28,536
Money market deposits		63,119			57,123
Certificates of deposit		305,617			282,244
Total deposits		570,913			562,882
Federal funds purchased and securities sold under agreements to repurchase		7,363			6,215
Federal Home Loan Bank advances		108,038			108,069
Notes payable		100			200
Subordinated debentures		22,681			22,681
Accrued expenses and other liabilities		5,523			5,864
Total liabilities		714,618			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; 3,633,564 and 3,594,784 shares outstanding at June 30, 2007 and December 31, 2006, respectively		27,916			27,901
Capital surplus		290			680
Retained earnings		36,165			34,449
Treasury stock, 869,227 and 906,732 shares of common stock at cost at June 30, 2007, and December 31, 2006, respectively		(11,066		)	(11,707		)
Accumulated other comprehensive loss		(2,174		)	(806		)
Total stockholders’ equity		51,131			50,517
Total liabilities and stockholders’ equity		$	765,749		$	756,428

 

See accompanying notes to the unaudited consolidated financial statements

3

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TEAM FINANCIAL, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(Dollars in thousands, except per share data)

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Interest Income:
Interest and fees on loans		$	10,283		$	8,690		$	20,213		$	16,612
Taxable investment securities		2,024			1,928			3,992			3,814
Nontaxable investment securities		293			271			580			540
Other		136			170			380			307
Total interest income		12,736			11,059			25,165			21,273
Interest Expense:
Deposits:
Checking deposits		509			479			1,053			939
Savings deposits		50			53			102			106
Money market deposits		520			338			1,034			577
Certificates of deposit		3,680			2,632			7,224			4,805
Federal funds purchased and securities sold under agreements to repurchase		52			52			89			88
FHLB advances payable		1,126			1,129			2,239			2,263
Notes payable and other borrowings		3			39			7			43
Subordinated debentures		402			389			804			777
Total interest expense		6,342			5,111			12,552			9,598
Net interest income before provision for loan losses		6,394			5,948			12,613			11,675
Provision for loan losses		77			157			307			432
Net interest income after provision for loan losses		6,317			5,791			12,306			11,243
Non-Interest Income:
Service charges		908			904			1,725			1,751
Trust fees		249			206			418			382
Gain on sales of mortgage loans		154			139			299			330
Gain (loss) on sales of investment securities		1			(90		)	1			(90		)
Bank-owned life insurance income		238			214			475			430
Other		383			369			750			718
Total non-interest income		1,933			1,742			3,668			3,521
Non-Interest Expenses:
Salaries and employee benefits		3,067			3,169			6,197			6,253
Occupancy and equipment		842			728			1,577			1,496
Data processing		785			725			1,522			1,421
Professional fees		222			476			672			850
Marketing		169			95			279			175
Supplies		111			85			192			186
Intangible asset amortization		126			148			266			295
Other		929			852			1,715			1,661
Total non-interest expenses		6,251			6,278			12,420			12,337
Income before income taxes		1,999			1,255			3,554			2,427
Income tax expense		588			335			975			609
Net income		$	1,411		$	920		$	2,579		$	1,818
Basic income per share		$	0.39		$	0.24		$	0.72		$	0.46
Diluted income per share		$	0.38		$	0.23		$	0.70		$	0.45
Shares applicable to basic income per share		3,615,244			3,850,049			3,605,229			3,937,321
Shares applicable to diluted income per share		3,684,649			3,941,529			3,675,921			4,026,881

 

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 June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Net income		$	1,411		$	920		$	2,579		$	1,818
Other comprehensive income, net of tax:
Unrealized losses on investment securities available for sale net of tax of $(865) and $(836) for the three months ended June 30, 2007 and June 30, 2006, respectively; and net of tax of $(703) and $(1,033) for the six months ended June 30, 2007 and June 30, 2006, respectively		(1,678		)	(1,620		)	(1,367		)	(2,002		)
Reclassification adjustment for gains included in net income net of tax of $0 and $31 for the three months ended June 30, 2007 and June 30, 2006, respectively; and net of tax of $0 and $31 for the six months ended June 30, 2007 and June 30, 2006, respectively		(1		)	59			(1		)	59
Other comprehensive loss, net		(1,679		)	(1,561		)	(1,368		)	(1,943		)
Comprehensive income (loss)		$	(268	)	$	(641	)	$	1,211		$	(125	)

 

See accompanying notes to the unaudited consolidated financial statements

5

Team Financial, Inc. And Subsidiaries
Unaudited Consolidated Statements of Changes In Stockholders’ Equity
Six Months Ended June 30, 2007
(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, 2006		$	27,901		$	680		$	34,449		$	(11,707	)	$	(806	)	$	50,517
Treasury stock purchased (42,895 shares)		—			—			—			(656		)				(656		)
Common stock issued in connection with compensation plans (1,275 shares)		15			—			—			—			—			15
Issuance of treasury shares in connection with compensation plans (80,400 shares)		—			(519		)	—			1,297			—			778
Increase in capital surplus in connection with stock-based compensation		—			129			—			—			—			129
Net income		—			—			2,579			—			—			2,579
Dividends ($0.24 per share)		—			—			(863		)	—			—			(863		)
Other comprehensive loss net of $(703) in taxes		—			—			—			—			(1,368		)	(1,368		)
BALANCE, June 30, 2007		$	27,916		$	290		$	36,165		$	(11,066	)	$	(2,174	)	$	51,131

 

See accompanying notes to the unaudited consolidated financial statements

6

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Team Financial, Inc. And Subsidiaries
Unaudited Consolidated Statements Of Cash Flows
(Dollars in thousands)

		Six Months Ended June 30,
		2007			2006
Cash flows from operating activities:
Net income		$	2,579		$	1,818
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		307			433
Depreciation and amortization		1,016			1,093
Impairment on goodwill and intangible assets		14			—
Stock-based compensation expense		129			129
Change in bank owned life insurance		(399		)	(366		)
Net (gain) loss on sales of investment securities		(1		)	90
Stock dividends		(212		)	(184		)
Net gain on sales of mortgage loans		(299		)	(330		)
Net (gain) loss on sales of assets		30			(18		)
Proceeds from sale of mortgage loans		21,421			20,805
Origination of mortgage loans for sale		(20,976		)	(21,143		)
Net increase in other assets		(706		)	(567		)
Net increase in accrued expenses and other liabilities		72			748
Net cash provided by operating activities		2,775			2,508
Cash flows from investing activities:
Net increase in loans		(23,971		)	(35,068		)
Proceeds from sale of investment securities available-for-sale		3			4,411
Proceeds from maturities and principal reductions of investment securities		7,239			13,622
Purchases of investment securities		(10,654		)	(14,865		)
Purchase of premises and equipment, net		(3,517		)	(790		)
Proceeds from sales of assets		356			65
Net cash used in investing activities		(30,544		)	(32,625		)
Cash flows from financing activities:
Net increase in deposits		8,031			24,826
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		1,148			(329		)
Payments on Federal Home Loan Bank advances		(156,175		)	(30		)
Proceeds from Federal Home Loan Bank advances		156,144			(3,000		)
Payments on notes payable		(2,744		)	(2,946		)
Proceeds from notes payable		2,644			8,867
Common stock issued		15			21
Purchase of treasury stock		(656		)	(7,186		)
Issuance of treasury stock		778			—
Dividends paid on common stock		(572		)	(642		)
Net cash provided by financing activities		8,613			19,581
Net change in cash and cash equivalents		(18,956		)	(10,536		)
Cash and cash equivalents at beginning of the period		37,150			34,360
Cash and cash equivalents at end of the period		$	18,194		$	23,824
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	12,261		$	9,129
Income taxes		1,274			715
Noncash activities related to operations
Assets acquired through foreclosure		$	113		$	543
Loans to facilitate the sale of real estate acquired through foreclosure		—			120

 

See accompanying notes to the unaudited consolidated financial statements

7

Team Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Three and six month periods ended June 30, 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 interim periods ended June 30, 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.

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(2)                                 Recent Accounting Pronouncements

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 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.

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.

(3)                                 Stock Based Compensation and Income Per Share

The Company’s 1999 Stock Incentive Plan and 2007 Stock Incentive Plan, which was approved by shareholders at the Company’s annual meeting of shareholders in June, 2007, provide for the following stock and stock-based awards: restricted stock, stock options, stock appreciation rights and performance shares.  As of June 30, 2007, up to 15,850 shares of our common stock were available to be issued under the 1999 Stock Incentive Plan and up to 400,000 shares of our common stock were available to be issued under the 2007 Stock Incentive 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 both plans.

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 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.  During the three and six

9

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months ended June 30, 2007, the Company recognized share-based compensation expense of approximately $61,000 and $129,000, respectively.

Stock compensation expense for options granted during the three and six months ended June 30, 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		15.69	%	18.18	%
Risk-fee interest rate		4.82	%	4.94	%
Annual rate of quarterly dividends		1.73	%	2.64	%

 

The following table summarizes option activity for the six months ended June 30, 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
Exercised		(80,400	)	9.68
Expired or forfeited		(12,600	)	14.06
Outstanding at June 30, 2007		316,700		11.86			7		$	3.77
Exercisable at June 30, 2007		214,700		10.18			5.8		5.36

 

A summary of the Company’s nonvested options as of June 30, 2007 and changes during the six months ended 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		3.28
Expired or forfeited		(12,600	)	2.96
Nonvested at June 30, 2007		102,000		2.83

 

On June 30, 2007, there was approximately $187,000 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.

(4)                                 Stock Repurchase Program

The Board of Directors approved a stock repurchase program, announced October 14, 2004, authorizing the repurchase of up to 400,000 shares of our common stock.  There is no expiration date on this program.  At June 30, 2007, there were 260,778 shares of our common stock remaining to be repurchased under this stock repurchase program.  During the three and six months ended June 30, 2007, there were 20,295 and 42,895 shares of our common stock repurchased under this program, respectively.

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(5)                                 Dividends Declared

On May 22, 2007, we declared a quarterly cash dividend of $0.08 per share to all shareholders of record on July 2, 2007, payable July 20, 2007. This dividend has been recorded in the accompanying financial statements, but was not recorded in the balance sheet accompanying our press release on second quarter results, resulting in the $291,000 difference between stockholders’ equity and liabilities in the press release and stockholders’ equity and liabilities presented in this Form 10-Q.

(6)                                 Investment Securities

The following tables summarize the amortized cost, gross unrealized gains and losses, and fair value of investment securities at June 30, 2007 and December 31, 2006.

		June 30, 2007
					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
		(In thousands)
Debt securities:
Government-sponsored entities		$	55,763		$	—		$	(1,035	)	$	54,728
Mortgage-backed securities		83,583			181			(2,012		)	81,752
Non-taxable municipal securities		28,740			114			(492		)	28,362
Taxable municipal securities		690			4			—			694
Other debt securities		5,698			5			(112		)	5,591
Total debt securities		174,474			304			(3,651		)	171,127
Equity securities		9,404			55			(3		)	9,456
Total investment securities		$	183,878		$	359		$	(3,654	)	$	180,583

 

		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

 

Management does not believe that any of the securities with unrealized losses at June 30, 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)                                 Notes Payable and Other Borrowings

During the second quarter of 2007, the maturity date of the advances under the line of credit was extended an additional year from June 30, 2007 to June 30, 2008.   All other terms of the borrowing agreement remain consistent with the terms as of December 31, 2006.

(8)                                 Commitments and Contingencies

Commitments to extend credit to our customers with unused approved lines of credit were approximately $113.3 million at June 30, 2007.  Additionally, the contractual amount of standby letters of credit at June 30, 2007 was approximately $6.7

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million.  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.

(9)                                 Income Taxes

Income tax expense was $588,000 for the three months ended June 30, 2007, compared to income tax expense of $335,000 for the three months ended June 30, 2006, representing an increase of approximately $253,000.  The effective tax rate for the three months ended June 30, 2007, was 29.4%, compared to 26.7% for the three months ended June 30, 2006.  Income tax expense was $975,000 for the six months ended June 30, 2007, compared to income tax expense of $609,000 for the six months ended June 30, 2006, representing an increase of approximately $366,000.  The effective tax rate for the six months ended June 30, 2007, was 27.4%, compared to 25.1% for the six months ended June 30, 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 three and six months ended June 30, 2007, a total of approximately $39,000 and $69,000, was added to these reserves, respectively.  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 these state tax positions.

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 June 30, 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.

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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 20 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 eight 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

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 and gains and losses from the sales of mortgage loans.  The 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 six months ended June 30, 2007 and June 30, 2006 (dollars in thousands, except per share data):

		As of and For						As of and For
		Three Months Ended						Six Months Ended
		June 30						June 30
		2007			2006			2007			2006
Net income		$	1,411		$	920		$	2,579		$	1,818
Basic income per share		$	0.39		$	0.24		$	0.72		$	0.46
Diluted income per share		$	0.38		$	0.23		$	0.70		$	0.45
Return on average assets		0.74		%	0.51		%	0.68		%	0.52		%
Return on average equity		10.98		%	7.44		%	10.17		%	7.11		%
Average equity to average assets		6.76		%	6.91		%	6.71		%	7.28		%
Efficiency Ratio		75.07		%	81.64		%	76.29		%	81.19		%

 

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.

FINANCIAL CONDITION

Total assets at June 30, 2007, were $765.7 million compared to $756.4 million at December 31, 2006, an increase of $9.3 million.  Loans receivable increased $23.5 million to $510.0 million at June 30, 2007, from $486.5 million at December 31, 2006.  The increase in loans receivable was funded with excess cash and an increase in deposits.

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Investment Securities

Total investment securities were $180.6 million at June 30, 2007, compared to $179.1 million at December 31, 2006, an increase of $1.4 million, or 0.8%.  This increase was primarily due to managements’ decision to reinvest maturing investments and excess liquidity in the securities markets reduced by an increase of $2.1 million of gross unrealized losses.   Management does not believe that any of the securities with unrealized losses at June 30, 2007 are other than temporarily impaired.

Loans Receivable

Loans receivable increased $23.5 million, or 4.8%, to $510.0 million at June 30, 2007, compared to $486.5 million at December 31, 2006.  This increase was due to increases in real estate loans, primarily loans secured by construction and land development.

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

		June 30, 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		$	80,975		15.9	%	$	84,078		17.3	%
Construction and land development		168,680			33.1		136,835			28.1
Commercial		144,037			28.2		145,747			30.0
Other		35,851			7.0		34,305			7.1
Other Commerical		54,363			10.7		60,177			12.4
Agricultural		8,184			1.6		7,226			1.4
Installment loans		9,577			1.9		10,344			2.1
Other		8,783			1.7		8,317			1.7
Gross loans		510,450			100.1		487,029			100.1
Less unearned fees		(468		)	(0.1	)	(532		)	(0.1	)
Total loans receivable		$	509,982		100.0	%	$	486,497		100.0	%

 

Included in one-to-four family real estate loans were loans held for sale of approximately $2.4 million at June 30, 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.

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The following table summarizes non-performing assets:

		June 30, 2007			December 31, 2006
		(Dollars in thousands)
Non-accrual loans		$	3,539		$	7,918
Loans 90 days past due and still accruing		679			434
Restructured loans		679			1,010
Non-performing loans		4,897			9,362
Other real estate owned		615			817
Total non-performing assets		$	5,512		$	10,179
Non-performing loans as a percentage of total loans		0.96		%	1.92		%
Non-performing assets as a percentage of total assets		0.72		%	1.35		%

 

Non-performing assets totaled $5.5 million at June 30, 2007 compared to $10.2 million at December 31, 2006.  Non-performing loans were the largest component of non-performing assets during both periods, and were approximately $4.9 million at June 30, 2007 compared to $9.4 million at December 31, 2006, a decrease of approximately $4.5 million.

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 June 30, 2007.  Management actively worked with the borrower to resolve the delinquencies and during the first quarter of 2007, the borrower paid off approximately $2.2 million of the impaired loans and the borrower brought another $2.6 million up to performing status.  During the second quarter, the borrower failed to make any payments on these loans, however, as of June 30, 2007, these loans were still not considered non-performing based on days past due at that time.  These loans are currently greater than 90 days past due and still accruing interest.  The loans are well-secured and management is currently utilizing legal action to resolve these credits.

Included in non-accrual loans at June 30, 2007 were several loans.  The largest three relationships included in non-accrual at June 30, 2007 included a $666,000 commercial loan secured by real estate that is currently in foreclosure, a $458,000 commercial loan that is secured by farmland that is currently in foreclosure, and a $346,000 commercial loan secured by real estate and leasehold improvements that management is actively seeking resolution with the borrower.

Offsetting the decrease in non-accrual loans was a $245,000 increase in loans 90 days past due and still accruing interest.  The increase in loans 90 days past due and still accruing interest was primarily due to decreases in commercial, industrial, and agricultural loans.

Restructured loans at June 30, 2007 and December 31, 2006 consisted of seven relationships, the largest of which was an agricultural loan for approximately $379,000 restructured through Farmer Home Administration.

Other real estate owned at June 30, 2007 consisted of seven properties including three commercial buildings totaling approximately $420,000, two one-to-four family properties totaling approximately $130,000, 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 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.

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The following table summarizes our allowance for loan losses:

		Six Months Ended June 30,
		2007			2006
		(Dollars in thousands)
Allowance at beginning of period		$	5,715		$	5,424
Provision for loan losses		307			432
Loans charged off		(316		)	(290		)
Recoveries		150			135
Allowance at end of period		$	5,856		$	5,701
Annualized net charge-offs as a percent of total loans		0.07		%	0.07		%
Allowance as a percent of total loans		1.15		%	1.25		%
Allowance as a pecent of non-performing loans		119.58		%	97.48		%

 

The allowance for loan losses as a percent of non-performing loans increased at June 30, 2007, compared to June 30, 2006 due to a decrease in non-accrual loans at June 30, 2007 to $3.5 million from $4.7 million at June 30, 2006.  This decrease was primarily due to the group of diversified commercial loans to one borrower, mentioned above, totaling $1.9 million that were classified as non-accrual during the second quarter of 2006, but were not on non-accrual status at June 30, 2007.  These loans were well-secured, and therefore, additional reserves were not deemed necessary.

Intangible assets, net of accumulated amortization

During the second quarter of 2007, the Company terminated the employment agreement with Michael L. Gibson, President of Corporate Development, and entered into a retirement and release agreement with him in connection to his early retirement from the Company.  At that time, the Company entered into a non-compete, non-solicitation and restrictive covenant agreement (“non-compete agreement”) with Mr. Gibson under which the Company paid Mr. Gibson a lump sum of approximately $407,000 on June 30, 2007 as consideration for the non-solicitation of employees or customers and non-competition agreement covering Miami County, Kansas for a period of three and one-half years, ending on December 31, 2010.  The Company will amortize the amount of the non-compete agreement over the three and one-half year life of the non-compete agreement.

Deposits

Total deposits increased approximately $8.0 million to $570.9 million at June 30, 2007 from $562.9 million at December 31, 2006. This increase was primarily a result of an increase in certificates of deposits as a result of branch promotional campaigns, offset by a decrease in checking deposits.

Principal maturities of time deposits at June 30, 2007 were as follows:

Year:
2007		$	147,747
2008		131,691
2009		20,055
2010		3,522
2011		1,674
Thereafter		928
		$	305,617

 

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 June 30, 2007 and December 31, 2006,

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we met all capital adequacy requirements to which we are subject.  Regulatory capital ratios at June 30, 2007, were as follows:

						To be well-
				Minimum Required		capitalized under
				for capital		prompt corrective
Ratio		Actual		adequacy purposes		action provisions
Total capital to risk weighted assets		11.46	%	8.00	%	10.00	%
Core capital to risk weighted assets		9.76	%	4.00	%	6.00	%
Core capital to average assets		7.72	%	4.00	%	5.00	%

 

Liquidity

Liquidity is continuously forecasted and managed in order to satisfy cash flow requirements of depositors and borrowers and 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, purchase brokered certificates of deposits, maturity of 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 our operating, financing, lending, and investing activities during any given period.  At June 30, 2007, these assets, approximating $189.5 million, consisted of investment securities available-for-sale of $171.3 million.  Approximately $150.5 million of these investment securities were pledged as collateral for borrowings, repurchase agreements and for public funds on deposit at June 30, 2007.

At June 30, 2006, we had approximately $35.7 million borrowing capacity remaining under agreements with Federal Home Loan Bank of Topeka.

RESULTS OF OPERATIONS

Net income for the three months ended June 30, 2007 was $1,411,000, or $.39 basic and $.38 diluted income per share, an increase of 53.4%, compared to $920,000 or $.24 basic and $.23 diluted income per share, for the three months ended June 30, 2006.  Net income for the six months ended June 30, 2007 was $2,579,000, or $.72 basic and $.70 diluted income per share, compared to $1,818,000, or $.46 basic and $.45 diluted income per share for the six months ended June 30, 2006, an increase of 41.8%.

The increases in net income were driven by continued increases net interest margin on average earning assets and an increase in non-interest income.  Also contributing to the increase in net income was the decrease in provisions for loan losses.

Net Interest Income

Net interest income before provision for loan losses for the three months ended June 30, 2007 totaled $6.4 million compared to $5.9 million for the same period in 2006, an increase of $446,000, or 7.5%.  Net interest income before provision for loan losses for the six months ended June 30, 2007, totaled $12.6 million compared to $11.7 million for the same period in 2006, an increase of $938,000, or 8.0%.

Net interest margin, adjusted for the tax effect of tax exempt securities, as a percent of average earning assets, was 3.81% for the three months ended June 30, 2007, compared to 3.76% for the three months ended June 30, 2006.  Tax equivalent net interest margin as a percent of average earning assets was 3.79% for the six months ended June 30, 2007, compared to 3.77% for the six months ended June 30, 2006.  The average rate of interest-earning assets for the quarter ended June 30, 2007 increased 59 basis points to 7.47% from 6.88% for the quarter ended June 30, 2006.  Contributing to the increase in the tax equivalent net interest margin was approximately $75,000 of interest income realized on a loan that had been charged-off in a prior period.  Also contributing to the increase in net interest margin was an increase in yields on our investment portfolio of 21 basis points and 31 basis points for the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006, respectively.  The increase in the yields on our investment portfolio are partially due to

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restructuring the investment portfolio during the second quarter of 2006, resulting in an increase of the overall yield of our investment portfolio of 10 basis points.

Offsetting the increase in the rate of interest earning assets was an increase in the average cost of interest bearing liabilities of 51 basis points to 4.03% during the three months ended June 30, 2007 from 3.52% during the three months ended June 30, 2006.  Public funds have played a significant role in our balance sheet growth, as we have been able to control our cost of funds by utilizing public funds better than we would be able to by utilizing other forms of deposit growth.

The average rate of interest earning assets increased 69 basis points to 7.46% for the six months ended June 30, 2007 from 6.77% during the same period in 2006.  The average cost of interest-bearing liabilities increased 64 basis points to 4.02% for the six months ended June 30, 2007, compared to 3.38% during the same period in 2006.  The result of the above changes to interest income and interest expense was an increase in the net interest income of $456,000 and $960,000 including the tax equivalent impact on tax exempt securities for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006.

The following tables present certain information relating to net interest income for the three and six months ended June 30, 2007 and 2006.  The average rates are derived by dividing annualized interest income or expense by the average balance of assets and liabilities, respectively, for the periods shown.

		Three Months Ended June 30, 2007								Three Months Ended June 30, 2006
		Average						Average		Average						Average
		Balance			Interest			Rate		Balance			Interest			Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1) (2) (3)		$	504,821		10,331			8.21	%	$	458,044		$	8,690		7.61	%
Investment securities-taxable		155,192			2,024			5.23	%	155,335			1,927			4.98	%
Investment securities-nontaxable (4)		27,362			445			6.52	%	28,761			460			6.42	%
Interest-bearing deposits		6,635			96			5.80	%	12,882			159			4.95	%
Other assets		681			39			22.97	%	480			12			10.03	%
Total interest-earning assets		$	694,691		$	12,935		7.47	%	$	655,502		$	11,248		6.88	%
Interest-bearing liabilities:
Savings deposits and interest-bearing checking		$	192,763		1,079			2.25	%	$	190,458		$	870		1.83	%
Time deposits		302,846			3,680			4.87	%	260,232			2,632			4.06	%
Federal funds purchased and securities sold under agreements to repurchase		4,325			52			4.82	%	5,325			52			3.92	%
Federal Home Loan Bank advances and other borrowings		108,147			1,129			4.19	%	110,686			1,168			4.23	%
Subordinated debentures		22,681			402			7.11	%	16,005			389			9.75	%
Total interest-bearing liabilities		$	630,762		$	6,342		4.03	%	$	582,706		$	5,111		3.52	%
Net interest income (tax equivalent)					$	6,593							$	6,137
Interest rate spread								3.44	%							3.37	%
Net interest-earning assets		$	63,929							$	72,796
Net interest margin (4)								3.81	%							3.76	%
Ratio of average interest-bearing liabilities to average interest-earning assets		90.80		%						88.89		%

(1)             Loans are net of deferred costs, less fees.

(2)             Non-accruing loans are included in the computation of average balances.

(3)             The Company includes loan fees in interest income.  These fees for the three months ended June 30, 2007 and 2006 were $213,000 and $369,000, respectively.

(4)             Yield is adjusted for the tax effect of tax exempt securities.  The tax effects for the three months ended June 30, 2007 and 2006 were $199,000 and $188,000, respectively.

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