Analysis of the Results of Operations
Net Interest Income
Our income is derived primarily from net interest income, which is the difference between interest income, principally from loans, investment securities, federal funds sold,
and interest bearing deposits, and interest expense, principally on customer deposits and other borrowings. Changes in net interest income result from changes in volume and interest rates earned and
expensed. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities.
The
following tables set forth the average balances of interest-earning assets and interest-bearing liabilities, as well as the amount of interest income or interest expense and the average rate for
each category of interest-earning assets and interest-bearing liabilities on a tax-equivalent basis assuming a 34% tax rate for the periods indicated.
|
|
Year ended December 31, 2007
|
|
Year ended December 31, 2006
|
|
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net(1)(2)(3)
|
|
$
|
509,414
|
|
$
|
41,615
|
|
8.17
|
%
|
$
|
458,102
|
|
$
|
35,761
|
|
7.81
|
%
|
|
Investment securities-taxable
|
|
|
152,643
|
|
|
7,973
|
|
5.22
|
%
|
|
156,319
|
|
|
7,832
|
|
5.01
|
%
|
|
Investment securities-nontaxable(4)
|
|
|
27,845
|
|
|
1,872
|
|
6.72
|
%
|
|
28,217
|
|
|
1,794
|
|
6.36
|
%
|
|
Federal funds sold and interest-bearing deposits
|
|
|
10,240
|
|
|
498
|
|
4.86
|
%
|
|
9,328
|
|
|
459
|
|
4.92
|
%
|
|
Other assets
|
|
|
681
|
|
|
49
|
|
7.20
|
%
|
|
545
|
|
|
49
|
|
8.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
$
|
700,823
|
|
$
|
52,007
|
|
7.42
|
%
|
$
|
652,511
|
|
$
|
45,895
|
|
7.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits and interest bearing checking
|
|
$
|
193,200
|
|
$
|
4,300
|
|
2.23
|
%
|
$
|
188,365
|
|
$
|
3,582
|
|
1.90
|
%
|
|
Time deposits
|
|
|
308,814
|
|
|
14,996
|
|
4.86
|
%
|
|
262,696
|
|
|
11,059
|
|
4.21
|
%
|
|
Federal funds purchased and securities sold under agreements to repurchase(5)
|
|
|
6,056
|
|
|
206
|
|
3.40
|
%
|
|
4,496
|
|
|
171
|
|
3.80
|
%
|
|
Notes payable and Federal Home Loan Bank advances
|
|
|
108,142
|
|
|
4,617
|
|
4.27
|
%
|
|
110,864
|
|
|
4,681
|
|
4.22
|
%
|
|
Subordinated debentures
|
|
|
22,681
|
|
|
1,610
|
|
7.10
|
%
|
|
18,174
|
|
|
1,588
|
|
8.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
638,893
|
|
25,729
|
|
4.03
|
%
|
584,595
|
|
21,081
|
|
3.61
|
%
|
Net interest income (tax equivalent)
|
|
|
|
|
$
|
26,278
|
|
|
|
|
|
|
$
|
24,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
3.42
|
%
|
Net interest earning assets
|
|
$
|
61,930
|
|
|
|
|
|
|
$
|
67,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(4)
|
|
|
|
|
|
|
|
3.75
|
%
|
|
|
|
|
|
|
3.80
|
%
|
Ratio of average interest bearing liabilities to average interest earning assets
|
|
|
91.16
|
%
|
|
|
|
|
|
|
89.59
|
%
|
|
|
|
|
|
-
(1)
-
Loans
are net of deferred costs, less fees.
-
(2)
-
Non-accruing
loans are included in the computation of average balances.
-
(3)
-
Interest
income includes loan fees. These fees for the years ended December 31, 2007 and 2006, were $630,000 and $1,269,000, respectively.
-
(4)
-
Yield
is adjusted for the tax effect of tax-exempt securities. The tax effects for the years ended December 31, 2007 and 2006 were $798,000 and $756,000,
respectively.
-
(5)
-
Interest
expense on Federal funds purchased and securities sold under agreements to repurchase includes imputed interest on premises under construction. Imputed interest for the years
ended December 31, 2007 and 2006 was $67,000 and $0, respectively.
25
Net interest margin decreased five basis points to 3.75% for the year ended December 31, 2007 from 3.80% for the year ended December 31, 2006. The
decrease in net interest margin was largely due to higher average balances of interest-bearing liabilities, coupled with higher average rates paid on interest-bearing liabilities, which were not fully
offset by the increases in average balances or average yields on average earning assets. We expect continued pressure on our net interest margin, as some of our loan portfolio reprices with the
decrease in the prime rate, while our deposit rates, which are highly correlated to treasury rates, are not expected to decline at the same rate.
Total
interest income on a tax equivalent basis for 2007 was $52.0 million, representing an increase of $6.1 million, or 13.3%, from $45.9 million for 2006. The increase was
primarily the result of a $6.1 million increase in interest income on loans receivable.
Interest
income on loans receivable increased $6.1 million due to a $51.3 million increase in the average balances of loans receivable to $509.4 million in 2007 from $458.1
million in 2006, coupled with a 36 basis point increase in the yield on loans receivable in 2007 compared to 2006. The increase in the yield of loans receivable reflected the increase in the rates
applied to loans that re-priced in 2007 as required by the notes' terms and the pricing of newly originated loans at higher rates.
The
average yield on taxable investment securities increased 21 basis points from 5.01% in 2006 to 5.22% in 2007. Offsetting the increase in interest income due to higher yields was a decrease in
average balances of approximately $3.7 million, resulting in a decrease in interest income on taxable investment securities of approximately $184 thousand. The net increase in interest
income as a result of the higher average yield and lower average balance on taxable investment securities was $141 thousand. Cash flow from the reduction of investment securities was redirected
to fund loan growth.
Total
interest expense was $25.7 million for 2007, a $4.6 million, or a 21.8% increase from $21.1 million in 2006. The increase was primarily related to the increase in average
balances and average rates paid on time deposits, which increased to 4.86% in 2007 from 4.21% in 2006, representing a 65 basis point increase. The majority of the increase in average balances and
average rates paid on time deposits came from brokered certificates of deposit, which increased $27.4 million during 2007 as a method to fund loan growth. The brokered certificates of deposit
carried an average rate of 5.11%, compared to 4.84% on all other time deposits, thereby increasing the total average rates paid on total time deposits. The average rates paid on interest bearing
savings and checking deposits increased 33 basis points from 1.90% in 2006 to 2.23% in 2007.
As
a result of the changes described above, net interest income on a tax equivalent basis increased to $26.3 million during 2007, representing an increase of $1.5 million, or 6.1%,
compared to $24.8 million in 2006.
The
average rate paid on our subordinated debentures, which we restructured in September 2006, was 7.10% for 2007 compared to 8.74% for 2006. Pursuant to the provisions of Financial Accounting
Standards Board Interpretation No. 46 Revised (FIN 46R),
Consolidation of Variable Interest Entities
, the Trust is not consolidated in the
consolidated financial statements. See
Note 11 Subordinated Debentures
in the notes to the consolidated financial statements for a full
discussion on the trust preferred securities.
26
The following table presents the components of changes in our net interest income, on a tax equivalent basis, attributed to volume and rate. Changes in interest income or interest expense attributable
to volume changes are calculated by multiplying the change in volume by the prior fiscal year's average interest rate. The changes in interest income or interest expense attributable to changes in
interest rates are calculated by multiplying the change in interest rate by the prior fiscal year's average volume. The changes in interest income or interest expense attributable to the combined
impact of changes in volume and change in interest rate are calculated by multiplying the change in rate by the change in volume.
|
|
Year ended December 31, 2007
Compared To
Year ended December 31, 2006
|
|
Year ended December 31, 2006
Compared To
Year ended December 31, 2005
|
|
|
|
Increase (decrease) due to
|
|
Increase (decrease) due to
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net (1)(2)(3)
|
|
$
|
4,005
|
|
$
|
1,849
|
|
$
|
5,854
|
|
$
|
3,780
|
|
$
|
4,203
|
|
$
|
7,983
|
|
|
Investment securities-taxable
|
|
|
(184
|
)
|
|
325
|
|
|
141
|
|
|
(400
|
)
|
|
880
|
|
|
480
|
|
|
Investment securities-nontaxable(4)
|
|
|
(24
|
)
|
|
101
|
|
|
77
|
|
|
(125
|
)
|
|
(49
|
)
|
|
(174
|
)
|
|
Federal funds sold and interest-bearing deposits
|
|
|
45
|
|
|
(6
|
)
|
|
39
|
|
|
(1
|
)
|
|
194
|
|
|
193
|
|
|
Other assets
|
|
|
12
|
|
|
(11
|
)
|
|
1
|
|
|
6
|
|
|
(2
|
)
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
3,854
|
|
|
2,258
|
|
|
6,112
|
|
|
3,260
|
|
|
5,226
|
|
|
8,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits and interest bearing checking
|
|
|
93
|
|
|
626
|
|
|
719
|
|
|
77
|
|
|
1,532
|
|
|
1,609
|
|
|
Time deposits
|
|
|
1,942
|
|
|
1,972
|
|
|
3,914
|
|
|
1,077
|
|
|
3,159
|
|
|
4,236
|
|
|
Federal funds purchased and securities sold under agreements to repurchase(5)
|
|
|
59
|
|
|
(24
|
)
|
|
35
|
|
|
(22
|
)
|
|
57
|
|
|
35
|
|
|
Notes Payable and Federal Home Loan Bank Advances
|
|
|
(115
|
)
|
|
51
|
|
|
(64
|
)
|
|
(88
|
)
|
|
11
|
|
|
(77
|
)
|
|
Subordinated debentures
|
|
|
394
|
|
|
(372
|
)
|
|
22
|
|
|
210
|
|
|
(175
|
)
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
2,373
|
|
|
2,253
|
|
|
4,626
|
|
|
1,254
|
|
|
4,584
|
|
|
5,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
1,481
|
|
$
|
5
|
|
$
|
1,486
|
|
$
|
2,006
|
|
$
|
642
|
|
$
|
2,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Loans
are net of deferred costs, less fees.
-
(2)
-
Non-accruing
loans are included in the computation of average balances.
-
(3)
-
Interest
income includes loan fees. These fees for the years ended December 31, 2007 and 2006 were $630,000, $1,269,000, respectively.
-
(4)
-
Income
is adjusted for the tax effect of tax-exempt securities. The tax effects for the years ended December 31, 2007 and 2006 were $798,000 and $756,000,
respectively.
-
(5)
-
Interest
expense on Federal funds purchased and securities sold under agreements to repurchase includes imputed interest on premises under construction. Imputed interest for the years
ended December 31, 2007 and 2006 was $67,000 and $0, respectively.
27
Provision for Loan Losses
The provision for losses on loans represents management's estimate of the amount necessary to be charged to earnings to bring the total allowance for loan losses to a level
considered appropriate by management based on historical loss experience, the volume and type of lending conducted, the status of past due principal and interest payments, general economic conditions,
particularly as such conditions relate to our market areas or areas that we have loans receivable, and other factors related to the collectibility of our loan portfolio. It is management's practice to
review the allowance on a monthly basis to determine the level of provision to be recognized in the allowance, and after considering the above factors, management recorded a provision for loan losses
on loans totaling $0.7 million for the year ended 2007, and $1.0 million for the year ended 2006. The decrease in the provision recorded in 2007 compared to 2006 was primarily a result
of improved asset quality in 2007 compared to 2006, as non-performing loans decreased by $2.4 million, therefore not necessitating further amounts of loan loss reserves. The
improved asset quality resulted in the decrease of approximately $0.7 million in the provision for loan losses recorded for specific allowances associated with loans that management considers
the ultimate collectibility is doubtful, despite the fact that loan balances increased more in 2007 than in 2006.
Non-Interest Income
The following table sets forth non-interest income for the indicated periods.
|
|
Years ended December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
Service charges
|
|
$
|
3,623
|
|
$
|
3,658
|
|
Trust fees
|
|
|
789
|
|
|
720
|
|
Brokerage service revenue
|
|
|
201
|
|
|
230
|
|
Gain on sales of mortgage loans
|
|
|
580
|
|
|
584
|
|
Loss on sales of investment securities
|
|
|
(4
|
)
|
|
(157
|
)
|
Mortgage servicing fees, net of amortization
|
|
|
181
|
|
|
204
|
|
Merchant processing fees
|
|
|
32
|
|
|
35
|
|
ATM and debit card fees
|
|
|
652
|
|
|
527
|
|
Income from investment in bank owned life insurance
|
|
|
966
|
|
|
884
|
|
Other
|
|
|
565
|
|
|
527
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
7,585
|
|
$
|
7,212
|
|
|
|
|
|
|
|
Non-interest
income was $7.6 million for 2007, a $0.4 million, or 5.6%, increase from 2006. This increase was primarily a result of a decrease of loss on the sale of
investment securities of $153,000, as a loss of $157,000 was recorded in 2006 as a result of restructuring certain investments maintained in our portfolio in order to achieve higher yields in the
future. Other non-interest income increased, primarily due to $75,000 of income related to credit life insurance. Gain on sales of mortgage loans remained stable at $0.6 million in
2007. We expect gain on sales of mortgage loans to remain relatively stable in the near future as a result of the current interest rate environment, coupled with increased loan originations at our new
branches. Service charges decreased approximately $35,000 for the year ended 2007 compared to the year ended 2006 due to decreased overdraft fees and decreased service charges.
28
Non-Interest Expense
The following table presents non-interest expense for the indicated periods:
|
|
Years ended December 31
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Salaries and employee benefits
|
|
$
|
12,299
|
|
$
|
12,299
|
Occupancy and equipment
|
|
|
3,356
|
|
|
3,127
|
Data processing
|
|
|
2,937
|
|
|
2,937
|
Professional fees
|
|
|
1,569
|
|
|
1,435
|
Marketing
|
|
|
563
|
|
|
408
|
Supplies
|
|
|
409
|
|
|
350
|
Intangible asset amortization
|
|
|
577
|
|
|
579
|
Trust preferred securities redemption amortization
|
|
|
|
|
|
823
|
Lawsuit settlements and related expenses
|
|
|
958
|
|
|
|
Other
|
|
|
3,567
|
|
|
3,326
|
|
|
|
|
|
|
Total non-interest expenses
|
|
$
|
27,097
|
|
$
|
25,284
|
|
|
|
|
|
Non-interest
expense was $27.1 million for the year ended 2007, an increase of $1.8 million, or 7.1%, compared to $25.3 million for the year ended 2006. Salaries and
employee benefits increased approximately $728,000, or 5.9%, primarily as a result of hiring additional personnel to staff the new branches and increased compensation expense. Stock-based compensation
expense decreased $163,000 during 2007 compared to 2006, largely due to a decrease in the estimated fair value of the three-year options, which reprice each quarter due to their
discretionary vesting nature. Occupancy and equipment increased approximately $230,000 during 2007 primarily due to the re-evaluation of the useful lives of our fixed assets and to
immaterial corrections of prior period depreciation differences, coupled with increased maintenance and utilities expenses. Data processing fees are expected to decrease in 2008, as we have signed a
new agreement with our core processor and have renegotiated our processing rates. In 2007, our professional fees included approximately $273,000 of expense related to complying with the internal
control provisions of Sarbanes-Oxley. We do not anticipate having these expenses in the future, however, there will be ongoing expense associated with maintaining our compliance with of
Sarbanes-Oxley. The largest increase in non-interest expense was the $958,000 charge taken as a result of lawsuit settlements and related charges. See
Recent
Developments
under
Item 1Business
for more information on these charges. This was largely offset by the reduction in the
$823,000 charge taken as a result of the restructuring of the Trust Preferred Securities in 2006. See
Note 11 Subordinated Debentures
in the
notes to the consolidated financial statements for more information on the restructuring of the Trust Preferred Securities and the related charge in 2006. As discussed in
Item I Business
of this
report under Deposit Insurance Premiums, we have a one-time credit to apply towards FDIC deposit insurance
premiums under the new pricing structure established and implemented by the FDIC in 2007. We expect to use our remaining credit towards these insurance premiums in the first two quarters of 2008;
however, we expect that our credit will be used up by the third quarter of 2008, and therefore, we expect our deposit insurance premiums to increase by approximately $150,000 in 2008 and by another
approximately $140,000 in 2009, or $290,000 over 2007 levels. Deposit insurance premiums are determined based on our level of deposits, therefore, as our deposits increase, so will our associated
deposit insurance premiums.
Income Tax Expense
We recorded income tax expense of $1,148,000 for 2007 compared to $1,050,000 for 2006, representing an increase of $98,000, or 9.3%. The effective tax rate for 2007 and 2006
was 21.7% and 20.9%, respectively. An increase in taxable income contributed to the higher effective tax rate in 2007 compared to 2006. The
29
effective
tax rate was less than the statutory federal rate of 34.0% in 2007 and 2006 primarily due to municipal interest income and non-taxable income from our investment in bank owned
life insurance. The increase in the effective tax rate from 2006 to 2007 was largely due to a decrease in the amount of reversals of previously provided tax reserves from closed tax years as the
related statutes of limitations expired.
Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income. Our other comprehensive income is composed of the change in equity resulting from an increase or
decrease in the market value of our available for sale investment securities, due to the changes in interest rates, net of tax.
Comprehensive
income was $4.6 million for the year ended 2007, an increase of $0.1 million from $4.5 million for the year ended 2006. The increase was primarily the result of the
$152,000 increase in net income, offset by a $38,000 decrease in other comprehensive income as the change in unrealized losses experienced during 2007 decreased compared to the change in unrealized
losses experienced during 2006.
Analysis of Financial Condition
Overview
Total assets were $825.1 million at December 31, 2007, an increase of $68.6 million, or 9.1%, from $756.4 million in total assets as of
December 31, 2006. The increase in total assets was primarily due to an increase in loans receivable of $74.4 million, offset by a decrease in cash and cash equivalents of
$7.0 million and a decrease in investment securities available for sale of $4.2 million.
Loan Portfolio Composition
The following tables present the composition of our loan portfolio by type of loan at the dates indicated.
|
|
December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Principal Balance
|
|
Percent of Total
|
|
Principal Balance
|
|
Percent of Total
|
|
Principal Balance
|
|
Percent of Total
|
|
Principal Balance
|
|
Percent of Total
|
|
Principal Balance
|
|
Percent of Total
|
|
|
|
(Dollars in thousands)
|
|
Loans secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
77,961
|
|
14.1
|
%
|
$
|
84,078
|
|
17.5
|
%
|
$
|
86,880
|
|
20.9
|
%
|
$
|
87,633
|
|
23.4
|
%
|
$
|
93,711
|
|
27.3
|
%
|
|
Construction and land development
|
|
|
210,083
|
|
37.9
|
|
|
136,835
|
|
28.5
|
|
|
80,918
|
|
19.5
|
|
|
49,388
|
|
13.2
|
|
|
43,748
|
|
12.7
|
|
|
Commercial
|
|
|
156,085
|
|
28.1
|
|
|
145,747
|
|
30.3
|
|
|
136,318
|
|
32.9
|
|
|
122,007
|
|
32.6
|
|
|
103,568
|
|
30.2
|
|
|
Other
|
|
|
32,235
|
|
5.8
|
|
|
34,305
|
|
7.1
|
|
|
36,738
|
|
8.9
|
|
|
17,781
|
|
4.8
|
|
|
15,161
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
476,364
|
|
85.9
|
|
|
400,965
|
|
83.4
|
|
|
340,854
|
|
82.2
|
|
|
276,809
|
|
74.0
|
|
|
256,188
|
|
74.6
|
|
Commercial and agricultural
|
|
|
68,120
|
|
12.3
|
|
|
67,403
|
|
14.0
|
|
|
63,080
|
|
15.2
|
|
|
82,889
|
|
22.2
|
|
|
70,734
|
|
20.6
|
|
Installment and other
|
|
|
17,127
|
|
3.1
|
|
|
18,661
|
|
3.9
|
|
|
17,176
|
|
4.1
|
|
|
19,863
|
|
5.3
|
|
|
21,819
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
561,611
|
|
101.2
|
|
|
487,029
|
|
101.3
|
|
|
421,110
|
|
101.5
|
|
|
379,561
|
|
101.5
|
|
|
348,741
|
|
101.5
|
|
Less unearned fees
|
|
|
(750
|
)
|
(0.1
|
)
|
|
(532
|
)
|
(0.1
|
)
|
|
(929
|
)
|
(0.2
|
)
|
|
(790
|
)
|
(0.2
|
)
|
|
(646
|
)
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
|
560,861
|
|
101.1
|
|
|
486,497
|
|
101.2
|
|
|
420,181
|
|
101.3
|
|
|
378,771
|
|
101.3
|
|
|
348,095
|
|
101.3
|
|
Less allowance for loan losses
|
|
|
(5,987
|
)
|
(1.1
|
)
|
|
(5,715
|
)
|
(1.2
|
)
|
|
(5,424
|
)
|
(1.3
|
)
|
|
(4,898
|
)
|
(1.3
|
)
|
|
(4,506
|
)
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loans receivable
|
|
$
|
554,874
|
|
100.0
|
%
|
$
|
480,782
|
|
100.0
|
%
|
$
|
414,757
|
|
100.0
|
%
|
$
|
373,873
|
|
100.0
|
%
|
$
|
343,589
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable were $560.9 million at December 31, 2007 compared to $486.5 million at December 31, 2006, representing an
increase of $74.4 million, or 15.3%. The increase in total loans receivable was primarily due to a $73.2 million increase in construction and land development loans. $18.2 million
of the loan growth in 2007 was as a result of purchased participation loans, all of which were classified as construction and land development loans, with the remainder of the total loan growth being
generated through our network of branches and lending officers. Slightly offsetting the increase in our construction and land development and commercial real estate loans was a decrease in our one to
four family loans and our lease financing receivables of $6.1 million and $2.0 million, respectively. Installment
30
loans
have continued to decrease as a percentage of our loan portfolio over the past several years as we have placed more emphasis on growing our small to mid-size business lending.
Loans secured by real estate
Loans secured by real estate represent our largest loan category. At December 31, 2007 these loans totaled $476.4 million, a $75.4 million, or 18.8%, an
increase from $401.0 million at December 31, 2006. The increase was generated from a $73.2 million, or 53.5% increase in construction and land development loans and a
$10.3 million increase in non-farm, non-residential commercial loans secured by real estate from $145.7 million at
December 31, 2006 to $156.1 million at December 31, 2007, an increase of 7.1%. We have experienced steady growth in this area over the last five years, and we anticipate continued
growth in this loan portfolio with our continued emphasis on small to mid-size business loans in our metropolitan markets. Other loans secured by real estate, including one to four family,
farmland and multifamily loans, decreased a combined $8.2 million during 2007. Our one to four family loan portfolio continued its decline of recent years and decreased $6.1 million, or
7.3%, in 2007. Part of the decline in the one to four family loan portfolio in recent years has been due to the interest rate environment in which customers have been more inclined to lock in the low
rates through fixed rate loans. We typically sell fixed rate one to four family loans to the secondary market instead of holding such loans in our one to four family portfolio, resulting in the
decline in this portfolio. Included in one to four family loans were loans held for sale of $1.9 million at December 31, 2007 and $2.6 million at December 31, 2006. We
occasionally retain the servicing rights on these loans. Capitalized servicing rights are recorded at the time the loan is sold, thereby increasing the gain on sale by such amount. The balance of our
mortgage servicing rights was $275,000 at December 31, 2007 compared to $320,000 at December 31, 2006.
Commercial and Agricultural
Commercial and agricultural loans were $68.1 million at December 31, 2007, an increase of $0.7 million, or 1.0%, from $67.4 million at
December 31, 2006. Commercial loans include loans to service, retail, wholesale, and light manufacturing businesses. Agricultural loans include loans to farmers for production and other
agricultural needs.
Commercial
loans were $59.8 million at December 31, 2007, compared to $60.2 million at December 31, 2006, a decrease of $0.4 million, or 0.7%. At December 31,
2007, agricultural loans were $8.4 million compared to $7.2 million at December 31, 2006, an increase of $1.2 million, or 15.3%.
Installment and Other
Installment and other loans include automobile and other personal loans, leases and loans to state and political subdivisions. The majority of these loans are installment loans
with fixed interest rates. Installment and other loans were $17.1 million at December 31, 2007, a decrease of $1.6 million, or 8.6% from $18.7 million at
December 31, 2006. Installment and other loans have been decreasing as a percentage of total loans over the past several years as we have placed less emphasis in this area and more emphasis on
our small to mid-size business loans in our markets.
31
Loan Maturities
The following tables present, at December 31, 2007 and 2006, loans by maturity in each major category of our portfolio based on contractual schedules. Actual maturities
may differ from the contractual maturities shown below as a result of renewals and prepayments. Loan renewals are re-evaluated using substantially the same credit procedures that are used
when loans are made.
|
|
December 31, 2007
|
|
|
|
|
Over One Year Through Five Years
|
|
|
|
|
|
|
|
|
|
|
Over Five Years
|
|
|
|
|
One Year or Less
|
|
|
|
|
Fixed Rate
|
|
Variable
|
|
Fixed Rate
|
|
Variable
|
|
Total
|
|
|
(In thousands)
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
11,414
|
|
$
|
10,843
|
|
$
|
2,178
|
|
$
|
10,615
|
|
$
|
42,911
|
|
$
|
77,961
|
|
Construction and land development
|
|
|
160,203
|
|
|
26,224
|
|
|
20,265
|
|
|
850
|
|
|
2,541
|
|
|
210,083
|
|
Commercial
|
|
|
27,222
|
|
|
36,524
|
|
|
30,607
|
|
|
6,189
|
|
|
55,543
|
|
|
156,085
|
|
Other
|
|
|
11,664
|
|
|
2,686
|
|
|
979
|
|
|
2,257
|
|
|
14,649
|
|
|
32,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
210,503
|
|
|
76,277
|
|
|
54,029
|
|
|
19,911
|
|
|
115,644
|
|
|
476,364
|
Commercial and agricultural
|
|
|
42,967
|
|
|
10,000
|
|
|
5,639
|
|
|
5,601
|
|
|
3,913
|
|
|
68,120
|
Installment and other
|
|
|
4,832
|
|
|
7,718
|
|
|
8
|
|
|
2,727
|
|
|
1,842
|
|
|
17,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
258,302
|
|
|
93,995
|
|
|
59,676
|
|
|
28,239
|
|
|
121,399
|
|
|
561,611
|
Less unearned fees
|
|
|
119
|
|
|
85
|
|
|
276
|
|
|
89
|
|
|
181
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
$
|
258,183
|
|
$
|
93,910
|
|
$
|
59,400
|
|
$
|
28,150
|
|
$
|
121,218
|
|
$
|
560,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
Over One Year Through Five Years
|
|
|
|
|
|
|
|
|
|
|
Over Five Years
|
|
|
|
|
One Year or Less
|
|
|
|
|
Fixed Rate
|
|
Variable
|
|
Fixed Rate
|
|
Variable
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
14,128
|
|
$
|
9,518
|
|
$
|
2,672
|
|
$
|
12,055
|
|
$
|
45,705
|
|
$
|
84,078
|
|
Construction and land development
|
|
|
114,612
|
|
|
8,627
|
|
|
11,350
|
|
|
62
|
|
|
2,184
|
|
|
136,835
|
|
Commercial
|
|
|
20,273
|
|
|
46,257
|
|
|
12,464
|
|
|
5,383
|
|
|
61,370
|
|
|
145,747
|
|
Other
|
|
|
13,978
|
|
|
1,761
|
|
|
1,321
|
|
|
2,359
|
|
|
14,886
|
|
|
34,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
162,991
|
|
|
66,163
|
|
|
27,807
|
|
|
19,859
|
|
|
124,145
|
|
|
400,965
|
Commercial and agricultural
|
|
|
39,068
|
|
|
9,698
|
|
|
5,822
|
|
|
5,309
|
|
|
7,505
|
|
|
67,402
|
Installment and other
|
|
|
4,018
|
|
|
10,768
|
|
|
|
|
|
1,710
|
|
|
2,166
|
|
|
18,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
206,077
|
|
|
86,629
|
|
|
33,629
|
|
|
26,878
|
|
|
133,816
|
|
|
487,029
|
Less unearned fees
|
|
|
630
|
|
|
(66
|
)
|
|
(32
|
)
|
|
|
|
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
$
|
205,447
|
|
$
|
86,695
|
|
$
|
33,661
|
|
$
|
26,878
|
|
$
|
133,816
|
|
$
|
486,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets
Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans consist of loans 90 days or
more delinquent and still accruing interest, non-accrual loans, and restructured loans. Loans are generally placed on non-accrual status when principal or interest is
90 days or more past due, or when, in the opinion of management, a reasonable doubt exists as to the collectibility of interest, regardless of the delinquency status of a loan. When a loan is
placed on non-accrual status, the accrual of
32
interest
income is typically discontinued and any interest accrued to date is reversed through a charge to interest income, unless the loans are well-secured and in the process of
collection. While a loan is on non-accrual status, it is our policy that interest income is recognized only after payment in full of the past due principal. However, in some instances, we
will recognize interest on a cash basis for loans that are on non-accrual when there is no doubt, in the opinion of management, that the interest and principal will be collected in full
based on the collateral values and management's analysis of the collectibility of the loan.
The
following table presents information concerning the non-performing assets at the dates indicated.
|
|
December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans
|
|
$
|
6,069
|
|
$
|
7,918
|
|
$
|
2,343
|
|
$
|
1,281
|
|
$
|
5,481
|
|
Loans 90 days past due and still accruing
|
|
|
233
|
|
|
434
|
|
|
1,184
|
|
|
420
|
|
|
641
|
|
Restructured loans
|
|
|
669
|
|
|
1,010
|
|
|
1,055
|
|
|
1,053
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans
|
|
|
6,971
|
|
|
9,362
|
|
|
4,582
|
|
|
2,754
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
934
|
|
|
817
|
|
|
455
|
|
|
408
|
|
|
1,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
7,905
|
|
$
|
10,179
|
|
$
|
5,037
|
|
$
|
3,162
|
|
$
|
8,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a percentage of total loans
|
|
|
1.24
|
%
|
|
1.91
|
%
|
|
1.09
|
%
|
|
0.73
|
%
|
|
2.09
|
%
|
Non-performing assets as a percentage of total assets
|
|
|
0.96
|
%
|
|
1.34
|
%
|
|
0.72
|
%
|
|
0.48
|
%
|
|
1.29
|
%
|
Total
non-performing assets were $7.9 million at December 31, 2007 compared to $10.2 million at December 31, 2006, representing a decrease of
$2.3 million, or 22.5%. The decrease in non-performing assets was due to a decrease in non-performing loans of $2.4 million, slightly offset by an increase in
other real estate owned of $117,000.
Non-performing
loans decreased $2.4 million, or 25.5%, to $7.0 million at December 31, 2007 from $9.4 million at December 31, 2006. The decrease in
non-performing loans was primarily the result of a decrease in non-accrual loans of $1.9 million. This decrease was primarily 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 as of December 31, 2006. As of December 31, 2007, all loans with
this customer were in good standing and continue to be through March 25, 2008, the date of this report. Also contributing to the decrease in non-accrual loans were several other
payoffs or significant reductions in loans that were on non-accrual as of December 31, 2006. At December 31, 2007 our largest single loan relationship on
non-accrual was for approximately $1.1 million, including $857,000 for a construction loan, secured by real estate, in our Colorado market.
Also
included in the $6.1 million of non-accrual loans at December 31, 2007 were several smaller loan relationships, the largest of which was approximately $520,000 for a
commercial loan. Non-accrual loans had approximately $503,000 specific allocations included in the allowance for loan losses at December 31, 2007. We do not anticipate losses on
these credits in excess of the specific allocations. Restructured loans at December 31, 2007 consisted of eight relationships. The largest relationship included three agricultural loans for
approximately $506,000 which were restructured through Farm Service Agency and are therefore 75% guaranteed.
In
addition to the non-accrual loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment
terms. These loans are primarily classified as substandard or doubtful for regulatory purposes under the Company's internal rating system. The loans are generally secured by either real estate or
other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become
non-performing. Such loans totaled $20.2 million at December 31, 2007.
33
Other
real estate owned was $934,000 at December 31, 2007 compared to $817,000 at December 31, 2006. Other real estate owned consisted of seven properties, consisting of five commercial
buildings and two single family dwellings at December 31, 2007. The properties are all located within our market areas. Management is working to sell the real estate as soon as practicable.
During the year ended December 31, 2007, five properties held in other real estate owned were sold at a total net gain of approximately $31,000.
Non-performing
assets as a percent of total assets were 0.96% at December 31, 2007, compared to 1.35% at December 31, 2006. Despite this decrease, management believes our loan portfolio
may be adversely affected in future periods as a result of the current weakening economic conditions in our market areas. The construction and land development portfolio is particularly susceptible
and has
recently shown additional weakness due to declining residential demand and the corresponding downward pressure on land and home prices as well as decreased real estate collateral values. Thus,
increased provisions for loan losses may be incurred in future periods and net charge-offs may increase as a result of the current conditions, although the magnitude of any increase in non-performing
loans is not determinable at this time. Non-performing assets will generally increase in times of economic uncertainty or stress, and management believes the level of non-performing assets may
increase if economic weaknesses in the Company's lending areas, particularly relating to real estate loans, are experienced in 2008.
Impaired loans
We consider a loan to be impaired when it is deemed probable by management that we will be unable to collect all contractual principal and interest payments in accordance with
the terms of the original loan agreement. When determining whether a loan is impaired, management also considers the loan documentation, the current ratio of the loan's balance to collateral value,
and the borrower's present financial position. Included as impaired loans are all loans contractually delinquent 90 days or more, all loans upon which accrual of interest has been suspended and
all restructured loans.
At
December 31, 2007, we had impaired loans totaling $6.6 million, which have related specific reserves of $648,000. This compares to $9.9 million of impaired loans, which had
related specific reserves of $465,000 at December 31, 2006. The decrease in impaired loans was the result of the decrease in non-accrual loans described above. The average recorded
investment in impaired loans was $5.1 million during 2007 and $6.2 million during 2006. Interest income recognized on impaired loans during the period the loans were considered to be
impaired for 2007 and 2006 approximated $294,000 and $605,000, respectively. There were $6.1 million and $7.9 million of loans on non-accrual status as of December 31, 2007 and
2006, respectively. The interest income not recognized on these loans was $298,000 and $455,000 at December 31, 2007 and 2006, respectively. Impaired loans will generally increase in times of
economic uncertainty or stress. Management believes the level of impaired loans could increase if economic weaknesses are experienced in our market area or in areas that we have participations during
2008.
Allowance for Loan Losses
Credit losses are inherent in the lending business. The risk of loss will vary with general economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and the quality of the collateral of the loan.
Management
maintains our 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.
34
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
believes our allowance for loan losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses. Further, 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. Material additions to the allowance for loan losses would result in a
decrease of our net income and capital and could result in an inability to pay dividends, among other adverse consequences.
The
following table sets forth information regarding changes in the allowance for loan losses for the periods indicated.
|
|
Year ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
Average total loans
|
|
$
|
509,415
|
|
$
|
458,123
|
|
$
|
403,234
|
|
$
|
365,587
|
|
$
|
341,782
|
|
Total loans at end of year
|
|
|
560,861
|
|
|
486,497
|
|
|
420,181
|
|
|
378,771
|
|
|
348,095
|
|
Allowance at beginning of year
|
|
|
5,715
|
|
|
5,424
|
|
|
4,898
|
|
|
4,506
|
|
|
4,611
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
(60
|
)
|
|
(117
|
)
|
|
(87
|
)
|
|
(307
|
)
|
|
(229
|
)
|
|
|
Construction
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
(200
|
)
|
|
|
|
|
|
Other
|
|
|
(7
|
)
|
|
(59
|
)
|
|
|
|
|
(218
|
)
|
|
(2
|
)
|
|
Commercial
|
|
|
(291
|
)
|
|
(441
|
)
|
|
(293
|
)
|
|
(267
|
)
|
|
(1,296
|
)
|
|
Lease financing receivables
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
(32
|
)
|
|
Installment and other
|
|
|
(342
|
)
|
|
(234
|
)
|
|
(331
|
)
|
|
(298
|
)
|
|
(688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(700
|
)
|
|
(871
|
)
|
|
(711
|
)
|
|
(1,306
|
)
|
|
(2,247
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
13
|
|
|
16
|
|
|
39
|
|
|
16
|
|
|
49
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
5
|
|
|
3
|
|
|
7
|
|
|
|
Other
|
|
|
5
|
|
|
5
|
|
|
7
|
|
|
|
|
|
80
|
|
|
Commercial
|
|
|
144
|
|
|
76
|
|
|
175
|
|
|
38
|
|
|
35
|
|
|
Lease financing receivables
|
|
|
|
|
|
|
|
|
1
|
|
|
6
|
|
|
|
|
|
Installment and other
|
|
|
104
|
|
|
114
|
|
|
190
|
|
|
170
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
266
|
|
|
211
|
|
|
417
|
|
|
233
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(434
|
)
|
|
(660
|
)
|
|
(294
|
)
|
|
(1,073
|
)
|
|
(1,895
|
)
|
Provision for loan losses
|
|
|
706
|
|
|
951
|
|
|
820
|
|
|
1,465
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of year
|
|
$
|
5,987
|
|
$
|
5,715
|
|
$
|
5,424
|
|
$
|
4,898
|
|
$
|
4,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average total loans
|
|
|
0.09
|
%
|
|
0.14
|
%
|
|
0.07
|
%
|
|
0.29
|
%
|
|
0.55
|
%
|
Allowance to total loans at end of year
|
|
|
1.07
|
%
|
|
1.17
|
%
|
|
1.29
|
%
|
|
1.29
|
%
|
|
1.29
|
%
|
Allowance to non-performing loans
|
|
|
85.9
|
%
|
|
57.1
|
%
|
|
118.4
|
%
|
|
177.9
|
%
|
|
62.10
|
%
|
The
increase in the allowance as a percent of non-performing loans was due to higher specific reserves allocated through the allowance to the current year's non-performing
loans than on the non-performing loans as of December 31, 2006. Net charge-offs were $434,000 for 2007 compared to $660,000 for 2006. In 2007, net
charge-offs consisted of several small loans, the largest of which was for $134,000 related to a
35
commercial
loan. Net charge-offs for 2006 consisted of several credits. The largest charge-off during 2006 was approximately $174,000 for a commercial loan.
Lending
personnel are responsible for continuous monitoring of the loan portfolio. Additionally we have a separate loan review process, which reviews the loan portfolio on a quarterly basis to
determine compliance with loan policy, including the appropriateness of risk ratings assigned to individual loans, as well as the adequacy of the allowance for loan losses. The allowance for loan
losses is based primarily on management's estimates of probable loan losses from the foregoing processes and
historical experience. Management also provides additional allowance for loan losses based on current economic factors.
The
following table presents an allocation of the allowance for loan losses by loan category as of the dates indicated. The allocation table should not be interpreted as an indication of the specific
amounts, by loan classification, to be charged to the allowance. The table has been derived in part by applying historical loan loss ratios to both internally classified loans and the portfolio as a
whole to determine the allocation of the loan losses attributable to each category of loans.
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Amount of Gross Allowance
|
|
Loans in Category as a Percentage of Total Loans
|
|
Amount of Gross Allowance
|
|
Loans in Category as a Percentage of Total Loans
|
|
Amount of Gross Allowance
|
|
Loans in Category as a Percentage of Total Loans
|
|
Amount of Gross Allowance
|
|
Loans in Category as a Percentage of Total Loans
|
|
Amount of Gross Allowance
|
|
Loans in Category as a Percentage of Total Loans
|
|
|
|
(Dollars in thousands)
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
408
|
|
13.8
|
%
|
$
|
345
|
|
17.3
|
%
|
$
|
417
|
|
20.7
|
%
|
$
|
423
|
|
23.1
|
%
|
$
|
397
|
|
27.0
|
%
|
|
Construction and land development
|
|
|
743
|
|
37.5
|
%
|
|
1,214
|
|
28.1
|
%
|
|
705
|
|
19.3
|
|
|
402
|
|
13.0
|
|
|
635
|
|
13.0
|
|
|
Commercial and other
|
|
|
1,928
|
|
33.7
|
%
|
|
624
|
|
37.1
|
%
|
|
1,035
|
|
41.1
|
|
|
1,137
|
|
36.9
|
|
|
944
|
|
34.0
|
|
Commercial and agricultural
|
|
|
1,941
|
|
12.2
|
%
|
|
2,619
|
|
13.9
|
%
|
|
2,588
|
|
15.0
|
|
|
2,331
|
|
21.9
|
|
|
1,638
|
|
20.0
|
|
Lease financing receivables
|
|
|
5
|
|
0.2
|
%
|
|
18
|
|
0.6
|
%
|
|
6
|
|
0.3
|
|
|
9
|
|
0.4
|
|
|
8
|
|
|
|
Installment and other
|
|
|
837
|
|
2.7
|
%
|
|
593
|
|
3.0
|
%
|
|
582
|
|
3.6
|
|
|
393
|
|
4.7
|
|
|
602
|
|
6.0
|
|
Unallocated
|
|
|
125
|
|
|
|
|
302
|
|
|
|
|
91
|
|
|
|
|
203
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,987
|
|
100.0
|
%
|
$
|
5,715
|
|
100.0
|
%
|
$
|
5,424
|
|
100.0
|
%
|
$
|
4,898
|
|
100.0
|
%
|
$
|
4,506
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for loan losses takes into account many factors such as our historical experience with loan losses and an evaluation of the risks in the loan
portfolio at any given time, including changes in economic, operating, and other conditions of borrowers, the economies in our areas of operations and to a lesser extent, the national economy. The
Company relies on various economic trend reports for the Kansas City metropolitan market and the Colorado Springs metropolitan market. The allowance for loan losses allocated to construction and land
development increased approximately $181,000 at December 31, 2007 compared to December 31, 2006 due to an increase in the allocation of the allowance associated with historical trends
and economic conditions for our markets. The allowance for loan losses allocated to commercial and other loans secured by real estate increased $652,000 due to increases in the allowance based on
historical trends for our markets compared to the prior year. The allowance for loan losses allocated to commercial and agricultural loans decreased approximately $678,000 due to a decrease in
specific allowance allocations of $977,000, offset by an increase in
historic and economic reserves allocated to commercial and agriculture loans at December 31, 2007 compared to December 31, 2006. In 2007, management increased the allowance associated
with current economic conditions by a total of $251,000 in response to the weakened economic conditions in our markets, as well as generally volatile conditions in the broader economy.
36
Investments
We invest a portion of our available funds in short-term and long-term instruments, including federal funds sold and investment securities. Our
investment portfolio is designed to provide liquidity for cash flow requirements, assist in managing interest rate risk and provide collateral for certain public deposits and other borrowing
arrangements. At December 31, 2007 and 2006, the investment portfolio was comprised principally of mortgage-backed securities, obligations of U.S. government agencies and obligations of states
and political subdivisions. Total investment securities at December 31, 2007 of $175.3 million represented a decrease of $3.8 million from total investment securities of
$179.1 million at December 31, 2006. The decrease was primarily a result of a decrease in mortgage backed securities of $4.8 million, the proceeds of which were used to fund the
loan portfolio growth.
We
initiated a long-term balance sheet management strategy starting in the fourth quarter of 2001 to increase the asset sensitivity of our balance sheet with the expectation of benefiting
from an anticipated increase in interest rates and to borrow long-term during the period of historically low interest rates.
Under
this strategy we borrowed $87.0 million in Federal Home Loan Bank advances and purchased short-term investment securities and funded loans. The Federal Home Loan Bank
borrowings, which carry an average rate of 4.20%, upon origination consisted of $69.0 million in 10-year fixed rate advances convertible to floating rate advances if LIBOR increases
to a range of 6.0% to 7.50% within the 10 years, $10.0 million in 5-year fixed rate advances convertible to floating rate advances if LIBOR increases to 7.50% within the
5 years, $5.0 million in 10-year floating rate advances and $3.0 million in 3-year fixed rate advances. As of December 31, 2007, we had outstanding
balances of $84 million on these Federal Home Loan Bank borrowings.
A
decreasing interest rate environment may cause an unfavorable impact on net interest income and net interest margin and an increasing interest rate environment may increase net interest income and
net interest margin over the remaining borrowing period. We have performed an analysis on our
investment portfolio and do not believe that we have risk associated with the current sub-prime market conditions.
The
following table presents our investment portfolio at December 31, 2007 and 2006. "Other" investments is comprised of Federal Home Loan Bank of Topeka common stock, Federal Reserve Bank
common stock and certain equity securities, all of which carry no stated maturity.
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Investment securities available for sale (at fair value):
|
|
|
|
|
|
|
|
Government-sponsored entities
|
|
$
|
51,225
|
|
$
|
53,913
|
|
Obligations of state and political subdivisions
|
|
|
32,687
|
|
|
27,967
|
|
Mortgage-backed securities
|
|
|
78,002
|
|
|
82,850
|
|
Other
|
|
|
3,773
|
|
|
5,185
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
165,687
|
|
|
169,915
|
Equity securities
|
|
|
|
|
|
|
|
Marketable
|
|
|
161
|
|
|
164
|
|
Non-marketable
|
|
|
9,493
|
|
|
9,061
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
175,341
|
|
$
|
179,140
|
|
|
|
|
|
37
The following tables set forth a summary of the contractual maturities in the investment portfolio at December 31, 2007 and December 31, 2006.
|
|
December 31, 2007
|
|
|
|
One year or less
|
|
Over one year through five years
|
|
Over five years through ten years
|
|
Over ten years
|
|
Total
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
Government-sponsored entities
|
|
$
|
7,497
|
|
3.74
|
%
|
$
|
8,820
|
|
3.86
|
%
|
$
|
26,327
|
|
5.19
|
%
|
$
|
8,581
|
|
5.25
|
%
|
$
|
51,225
|
|
4.76
|
%
|
Obligations of states and political subdivisions
|
|
|
399
|
|
4.41
|
|
|
8,086
|
|
4.35
|
|
|
10,937
|
|
3.96
|
|
|
13,265
|
|
5.17
|
|
|
32,687
|
|
4.55
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
448
|
|
6.02
|
|
|
3,325
|
|
5.15
|
|
|
3,773
|
|
5.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,896
|
|
|
|
$
|
16,906
|
|
|
|
$
|
37,712
|
|
|
|
$
|
25,171
|
|
|
|
$
|
87,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,002
|
|
5.15
|
|
Equity securities(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
One year or less
|
|
Over one year through five years
|
|
Over five years through ten years
|
|
Over ten years
|
|
Total
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
Government-sponsored entities
|
|
$
|
1,691
|
|
4.58
|
%
|
$
|
14,725
|
|
3.69
|
%
|
$
|
25,742
|
|
5.06
|
%
|
$
|
11,755
|
|
5.07
|
%
|
$
|
53,913
|
|
4.67
|
%
|
Obligations of states and political subdivisions
|
|
|
1,169
|
|
3.99
|
|
|
6,764
|
|
4.48
|
|
|
11,807
|
|
4.11
|
|
|
8,227
|
|
4.30
|
|
|
27,967
|
|
4.25
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,185
|
|
4.71
|
|
|
5,185
|
|
4.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,860
|
|
|
|
$
|
21,489
|
|
|
|
$
|
37,549
|
|
|
|
$
|
25,167
|
|
|
|
$
|
87,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,850
|
|
5.07
|
|
Equity securities(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Equity
securities consist principally of Federal Home Loan Bank of Topeka common stock and Federal Reserve Bank stock, which have no stated maturity
Deposits
Deposits are the major source of our funds for lending and other investments. Deposits are attracted principally from within our primary market areas through the offering of a
broad variety of deposit instruments for individual and corporate customers. At December 31, 2007, total deposits were $629.4 million, a $66.5 million, or 11.8% increase from
$562.9 million at December 31, 2006. The increase was a result of an increase in certificates of deposits of $65.5 million, primarily due to branch promotional campaigns and an
increase of $27.4 million in brokered certificates of deposit in order to meet our funding requirements. Average balances for checking, savings and money market deposits were
$265.2 million for 2007 compared to $266.6 million for the same accounts in 2006.
38
The
following table sets forth the average balances and weighted average rates for categories of deposits for the periods indicated.
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Average Balance
|
|
Average Rate
|
|
Average Balance
|
|
Average Rate
|
|
|
|
(Dollars in thousands)
|
|
Non-interest-bearing demand
|
|
$
|
72,013
|
|
|
|
$
|
78,266
|
|
|
|
Interest-bearing demand
|
|
|
174,932
|
|
2.35
|
%
|
|
157,862
|
|
2.12
|
%
|
Savings
|
|
|
27,267
|
|
0.72
|
%
|
|
30,503
|
|
0.75
|
%
|
Time
|
|
|
308,814
|
|
4.86
|
%
|
|
262,296
|
|
4.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
583,026
|
|
|
|
$
|
528,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes at December 31, 2007 and December 31, 2006, our certificates of deposit of $100,000 or more by time remaining until maturity.
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Remaining maturity:
|
|
|
|
|
|
|
|
Less than three months
|
|
$
|
46,915
|
|
$
|
34,053
|
|
Three to six months
|
|
|
46,730
|
|
|
25,836
|
|
Six months to one year
|
|
|
36,311
|
|
|
30,398
|
|
One year and over
|
|
|
30,630
|
|
|
10,534
|
|
|
|
|
|
|
|
Total
|
|
$
|
160,586
|
|
$
|
100,821
|
|
|
|
|
|
Derivative Financial Instruments
We do not utilize derivative instruments as part of our overall interest rate sensitivity management strategy to mitigate exposure to interest rate risk.
Federal Home Loan Bank and Federal Reserve Bank Borrowings
Our subsidiary banks are members of the Federal Home Loan Bank of Topeka (FHLB). The FHLB system functions as a central bank providing credit for members. As members of the
FHLB, our subsidiary banks are entitled to borrow funds from the FHLB and are required to own FHLB stock in an amount determined by a formula based upon total assets and FHLB borrowings. Our
subsidiary banks may use FHLB borrowings to supplement deposits as a source of funds.
At
December 31, 2007, FHLB borrowings aggregated $108.0 million, compared to $108.1 million at December 31, 2006. As discussed in the investment section above,
approximately $84.0 million of the FHLB borrowings are part of a long-term balance sheet strategy to increase the sensitivity of our balance sheet by borrowing long-term
funds at historically low interest rates and purchasing short-term investments securities and fund loans. At December 31, 2007, the aggregate available and unused borrowing capacity
of our subsidiary banks was approximately $9.4 million, which was available through a line of credit and term advances. FHLB borrowings are collateralized by FHLB common stock, investment
securities and certain qualifying mortgage loans of our subsidiary banks.
TeamBank
and Colorado National Bank are member banks of the Federal Reserve Bank and may use the Federal Reserve Bank discount window to meet short-term funding needs. Neither of our
subsidiary banks utilized short-term Federal Reserve Bank borrowings during 2007 or 2006.
39
Subordinated Debentures
On August 10, 2001, Team Financial Capital Trust I (the Trust), a Delaware business trust formed by Team Financial, Inc., completed the sale of
$15.5 million 9.50% Cumulative Trust Preferred Securities. The Trust used the net proceeds from the offering to purchase a like amount of Team Financial, Inc.'s 9.50% subordinated
debentures. The debentures, maturing August 10, 2031, were the sole assets of the Trust. On or after August 10, 2006, we had the right to redeem the debentures, in whole or in part, at a
redemption price specified in the governing indentures plus any accrued but unpaid interest to the redemption date.
On
September 18, 2006, we redeemed all of the debentures and the Trust redeemed its trust preferred securities, at a redemption price equal to 100% of the principal amount of the Trust, or
$15.5 million, plus interest accrued and unpaid through September 17, 2006. As a result of the redemption, we incurred a pretax charge, recorded as "trust preferred securities redemption
amortization" to earnings of approximately $823,000 on the redemption date of the debentures. This charge was the unamortized portion of the offering cost that was being amortized over the original
30-year life of the debentures.
To
fund the redemption, on September 14, 2006 we replaced the prior existing debentures and the former trust with Team Financial Capital Trust II, a pooled trust preferred security of
$22.0 million at a variable rate of 1.65% above the 90-day LIBOR. The new trust preferred securities have a 30-year term maturing on October 7, 2035 and a call
option 5 years after the issuance date. The new trust preferred securities did not have a placement or annual trustee fee associated with it. In 2007, interest expense was reduced by
approximately $417,000 on the original $16.0 million of trust preferred securities based on the reduction in interest rates. Total interest expense on the trust preferred securities increased
in 2007 over prior years due to the additional $6.7 million of trust preferred securities.
In
accordance with Financial Accounting Standards Board Interpretation No. 46R,
Consolidation of Variable Interest Entities
(FIN 46 R),
adopted in December 2003, the new Trust qualifies as a special purpose entity that is not required to be consolidated in our financial statements.
We
continue to include the new trust preferred securities issued by Team Financial Capital Trust II in Tier I capital for regulatory capital purposes.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
We have various contractual obligations in the normal course of business that are integral to our operations. We have commitments to extend credit to our customers of
approximately $121.9 million at December 31, 2007. Additionally, the contractual amount of standby letters of credit at December 31, 2007 was approximately $6.4 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.
Standby
letters of credit are a conditional, but irrevocable form of guarantee issued to guarantee payment to a third party obligee upon default of payment by our customer. Standby letters of credit
are initially issued for a period of one year, but can be extended depending on the customers' needs. As of December 31, 2007, the maximum remaining term for any standby letter of credit was
October, 2010. Since the credit risk involved in issuing standby letters of credit is the same as that involved in extending loans to customers, Team Financial, Inc. uses the same credit
policies in evaluating the
creditworthiness of the customers and determining the required collateral. Commitments for standby letters of credit do not necessarily represent future cash requirements.
We
have a data processing contract that contains minimum obligations. Under the terms of this contract as of December 31, 2007, we are committed to pay minimum payments of $2.9 million
over the remaining term of the contract. Additional payments may be required based on volume of transactions processed or conversion fees.
40
Capital Resources
We actively monitor compliance with bank and financial holding company regulatory capital requirements, focusing primarily on risk-based guidelines. Under the
risk-based capital method of capital measurement, the ratio computed is dependent upon the amount and composition of assets recorded on the balance sheet, and the amount and composition of
off-balance sheet items, such as commitments to extend credit, in addition to the level of capital. Included in the risk-based capital method are two measures of capital
adequacy, core capital and total capital, which consist of core and secondary capital. Historically, we have increased core capital through retention of earnings or capital infusions. The primary
source of funds available to us is dividends by our subsidiary banks. Each subsidiary bank's ability to pay dividends is subject to regulatory requirements. Core capital, also known as Tier 1
capital, generally includes common shareholders' equity, perpetual preferred stock and minority interests in consolidated subsidiaries, less goodwill and intangible assets. No more than 25% of core
capital elements may consist of cumulative preferred stock. The trust preferred securities, issued by our subsidiary, Team Financial Capital Trust II, to purchase Team Financial, Inc.
subordinated debentures, is included in Tier I capital of Team Financial, Inc. for regulatory purposes. Total risk based capital, also known as Tier 2 capital, generally includes
the allowance for loan losses limited to 1.25% of weighted risk assets, certain forms of perpetual preferred stock, as well as hybrid capital instruments.
The
following tables present capital ratios as of the indicated dates.
|
|
Risk Based Capital Ratios
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
Core capital
|
|
$
|
58,244
|
|
8.81
|
%
|
$
|
55,393
|
|
9.82
|
%
|
Core capital minimum requirement(1)
|
|
|
26,437
|
|
4.00
|
%
|
|
22,563
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
31,807
|
|
4.81
|
%
|
$
|
32,830
|
|
5.82
|
%
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital
|
|
$
|
68,433
|
|
10.35
|
%
|
$
|
61,108
|
|
10.83
|
%
|
Total risk based capital requirement (1)
|
|
|
52,875
|
|
8.00
|
%
|
|
45,126
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
15,558
|
|
2.35
|
%
|
$
|
15,982
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
|
|
Total risk adjusted assets
|
|
$
|
660,936
|
|
|
|
$
|
564,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratios
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
Core capital
|
|
$
|
58,244
|
|
7.43
|
%
|
$
|
55,393
|
|
7.90
|
%
|
Core capital minimum requirement(2)
|
|
|
31,369
|
|
4.00
|
%
|
|
28,040
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
26,875
|
|
3.43
|
%
|
$
|
27,353
|
|
3.90
|
%
|
|
|
|
|
|
|
|
|
|
|
Average total assets for leverage capital purposes
|
|
$
|
784,224
|
|
|
|
$
|
701,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Based
on risk-based capital guidelines of the Federal Reserve Board, a bank holding company is required to maintain a core capital to risk-adjusted assets
ratio of 4% and a total capital, risk-based, to risk-adjusted assets ratio of 8%.
-
(2)
-
The
leverage ratio is defined as the ratio of core capital to average tangible assets. Based on Federal Reserve Board guidelines, a bank holding company generally is required to
maintain a leverage ratio in excess of 4%.
41
Impact of Inflation and Changes in Prices
The primary impact of inflation on our operations is reflected in increasing operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, changes in interest rates have a more significant impact on the performance of a financial institution than do changes in the general rate of
inflation and changes in prices. Interest rate changes do not necessarily move in the same direction, or have the same magnitude, as changes in the prices of goods and services.
Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income TaxesAn 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 14 to the consolidated financial statements.
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
deferral 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.
42
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. The Statement is effective for the Company on January 1, 2008 and is not expected to
have a significant impact on the Company's financial position, operations or cash flows.
In
September 2006, the FASB ratified the consensus reached by the FASB's Emerging Issues Task Force (EITF) relating to EITF 06-4, Accounting for the Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This EITF requires employers accounting for endorsement split-dollar life insurance arrangements that provide a
benefit to an employee that extends to postretirement periods to recognize a liability for future benefits in accordance with FASB Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion1967. Entities should recognize the
effects of applying this issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in
the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective
application to all prior periods. This EITF is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company's financial position, operations or
cash flows.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115. This statement permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions,
(ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Statement No. 159 is effective for the
Company on January 1, 2008 and is not expected to have a significant impact on the Company's financial position, operations or cash flows.
43
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
|
|
Page
|
Report of Independent Registered Public Accounting Firm
|
|
45
|
Consolidated Statements of Financial Condition as of December 31, 2007 and 2006
|
|
46
|
Consolidated Statements of Operations for the years ended December 31, 2007 and 2006
|
|
47
|
Consolidated Statements of Comprehensive Income for the years ended December 31,
2007 and 2006
|
|
48
|
Consolidated Statements of Changes In Stockholders' Equity for the years ended December 31,
2007 and 2006
|
|
49
|
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006
|
|
50
|
Notes to Consolidated Financial Statements
|
|
51
|
44
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
(1) Summary of Significant Accounting Policies
The following accounting policies, together with those disclosed elsewhere in the audited consolidated financial statements, represent the significant accounting policies used
in presenting the accompanying consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Team Financial, Inc. and its wholly owned subsidiaries, Team Financial Acquisition Subsidiary, Inc.,
including TeamBank 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.
Financial Statement Presentation and Use of Estimates
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and reporting
practices applicable to the banking industry. In preparing the consolidated financial statements under GAAP, management is required to make estimates and assumptions that affect the reported amounts
of assets, liabilities, and contingent assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting years. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold.
Securities Available-for-Sale
Securities to be held for indefinite periods of time, including securities that management intends to use as a part of its asset/liability strategy that may be sold in response
to changes in interest rates, loan prepayments or growth, or other factors, are classified as available-for-sale and carried at fair value. Gains or losses on the sale of
securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to call date and maturity date,
respectively. A decline in the fair value of any security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security.
Unrealized holding gains or losses, net of tax, for securities available-for-sale are reported as a component of other comprehensive income (loss).
Loans
Loans are stated at unpaid principal balances, reduced by unearned fees. Interest on loans is accrued and credited to income as it is earned using the simple interest method on
daily balances of the principal amount outstanding. However, interest is generally not accrued on loans over 90 days contractually delinquent. Accrued interest income is reversed when a loan is
placed on non-accrual status. While a loan is on non-accrual status, interest income is generally recognized only after payment in full of the past due principal. However, in
some instances, interest is recognized on a cash basis for loans that are on non-accrual when there is no doubt, in the opinion of management, that the interest and principal will be
51
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
collected
in full based on the collateral values and management's analysis of the collectibility of the loan. Prior to 2006, fees received on loans in excess of amounts representing the estimated cost
of origination were deferred and credited to income using the interest method. Beginning in 2006, loan and commitment fees on loans, net of costs, are deferred and recognized in income over the term
of the loan or commitment as an adjustment of yield. See discussion below regarding Staff Accounting Bulletin No. 108 under
Recent Accounting
Developments
.
Mortgage Banking
Loans held for sale in the secondary market are carried at the lower of aggregate cost or fair value. Unrealized losses are recognized via a charge against operations through
the establishment of a valuation reserve. Realized gains and losses on such loans are accounted for under the specific identification method. Loan origination fees and costs are not amortized during
the period the loans are held for sale and are recorded as part of the gain or loss on the sale of loans.
Certain
mortgage loans are sold to permanent investors while we retain the right to service the loans. Service fees are recorded in income when earned. Capitalized servicing rights are recorded at the
time the loan is sold, thereby increasing the gain on sale by such amount, and subsequently amortized over the period of the estimated future net servicing income of the underlying financial assets.
Any remaining unamortized amount is charged to expense if the related loan is repaid prior to maturity.
Management
monitors the capitalized mortgage servicing rights for impairment based on the fair value of those rights, as determined on a quarterly basis. Any impairment is recognized through a
valuation allowance.
Allowances for Loan Losses
Impaired loans, except those loans that are accounted for at fair value or at the lower of cost or fair value, are recorded at the present value of the expected future cash
flows discounted at the loan's effective interest rate at the date of initial impairment, or, as a practical expedient, at the loan's observable market prices or fair value of the collateral if the
loan is collateral dependent. Management evaluates the collectibility of both contractual interest and contractual principal when assessing the need for a loss accrual.
A
loan is considered to be impaired when it is deemed probable by management that we will be unable to collect all contractual principal and interest payments in accordance with the terms of the
original loan agreement. However, when determining whether a loan is impaired, management also considers the loan documentation, the current ratio of the loan's balance to collateral value, and the
borrower's present financial position. Included as impaired loans are loans contractually delinquent 90 days or more and all loans upon which accrual of interest has been suspended.
Management
performs periodic and systematic detailed reviews to historical loss 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 impaired. Since certain lending activities involve greater risks, the percentage applied to
specific loan types may vary. The allowance provided is subject to review by our banking regulators.
Management
believes that the allowance for loan losses as of December 31, 2007 is adequate for probable loan losses inherent in the loan portfolio. However, additions to or recaptures from the
allowances may be
52
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
necessary
based upon changes in economic conditions, borrower financial status, the regulatory environment, real estate values, and loan portfolio size and composition. As such, periodic provisions
for estimated loan losses may vary.
Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the lower of cost or fair value, as determined by an appraisal, less estimated cost to sell. If fair value
less cost to sell is less than
amortized cost, a charge against the allowance for loan losses is recorded at property acquisition. Declines in property value subsequent to acquisition are charged to operations.
Recognition
of gains on the sale of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property and the terms of the sale and potential financing.
These criteria are presented within SFAS No. 66
Accounting For Sales Of Real Estate
, and Accounting Principal Board No. 21,
Interest On Receivables and
Payables
. Under certain circumstances, a gain on sale of real estate, or a portion thereof, may be deferred until the
criteria are met. Losses on disposition of real estate, including expenses incurred in connection with the disposition, are charged to operations.
Land, Premises and Equipment
Land is carried at cost. Other premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the
straight-line method over the estimate useful lives of the assets or the term of the related lease, whichever is shorter. Maintenance and repairs are charged to non-interest
expense as incurred. The useful lives for the principal classes of assets are:
Assets
|
|
Useful life
|
Buildings and improvements
|
|
5 to 40 years
|
Furniture, fixtures, and equipment
|
|
3 to 10 years
|
Goodwill and Other Intangible Assets
Goodwill resulting from the acquisition of bank branches and subsidiaries represents the excess of the purchase price over the fair value of the net assets acquired or net
liabilities assumed. Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually. Intangible assets with estimated useful lives are amortized to their
estimated residual values and reviewed for impairment.
Core
deposit intangible assets resulting from the acquisition of bank branches and subsidiaries represent the fair value assigned to core deposits assumed. Core deposit intangible assets are amortized
using the straight-line method over periods ranging from seven to fifteen years.
Bank Owned Life Insurance
Bank owned life insurance is recorded at the cash surrender value of the underlying policies. Income on the investments in the policies, net of insurance costs, is recorded as
non-interest income.
Income Taxes
We file consolidated federal income tax returns. Certain income and expense items are treated differently for financial reporting purposes than for income tax purposes.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the temporary difference between the
53
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
consolidated
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Stock Based Compensation
The Company's stock-based employee compensation plan is described in Note 13,
Stock-Based Compensation
. The Company
accounts for stock based compensation under Statement of Financial Accounting Standards No. 123(R),
Share-Based Payments
, ("SFAS
No. 123(R)"). This statement requires that the cost resulting from all share-based transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the
measurement objective in accounting for share-based arrangements and requires all entities to apply a fair-value based measurement method in accounting for share based payments with
employees except for equity instruments held by employee share ownership plans.
Income per Share
Basic income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted income
per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The shares used in the calculation of
basic and diluted income per share are shown below:
|
|
Years ended
|
|
|
2007
|
|
2006
|
Basic weighted average common shares outstanding
|
|
3,604,443
|
|
3,765,118
|
Stock options
|
|
54,105
|
|
94,324
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
3,658,548
|
|
3,859,442
|
|
|
|
|
|
Recent Accounting Developments
In June 2006, the FASB issued Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income TaxesAn 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
54
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
guidance
in January, 2007. The adoption of FIN 48 did not have a material effect on our consolidated financial statements. See note 14 to the consolidated financial statements.
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
deferral 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.
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. The Statement is effective for the Company on January 1, 2008 and is not expected to
have a significant impact on the Company's financial position, operations or cash flows.
In
September 2006, the FASB ratified the consensus reached by the FASB's Emerging Issues Task Force (EITF) relating to EITF 06-4, Accounting for the Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This EITF requires employers accounting for endorsement split-dollar life insurance arrangements that provide a
benefit to an employee that extends to postretirement periods to recognize a liability for future benefits in accordance with FASB Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion1967. Entities should recognize the
effects of applying this issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in
the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. This EITF is
effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company's financial position, operations or cash flows.
55
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement No. 115. This statement permits entities to choose to measure eligible items at fair value at specified election dates.
Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied
instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of
instruments. Statement No. 159 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company's financial position, operations or cash
flows.
(2) Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of investment securities are presented below:
|
|
December 31, 2007
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair value
|
|
|
(In thousands)
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored entities
|
|
$
|
50,842
|
|
$
|
414
|
|
$
|
(31
|
)
|
$
|
51,225
|
|
Mortgage-backed securities
|
|
|
78,672
|
|
|
486
|
|
|
(1,156
|
)
|
|
78,002
|
|
Nontaxable municipal securities
|
|
|
28,151
|
|
|
301
|
|
|
(133
|
)
|
|
28,319
|
|
Taxable municipal securities
|
|
|
4,435
|
|
|
28
|
|
|
(95
|
)
|
|
4,368
|
|
Other debt securities
|
|
|
4,139
|
|
|
|
|
|
(366
|
)
|
|
3,773
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
166,239
|
|
|
1,229
|
|
|
(1,781
|
)
|
|
165,687
|
Equity securities
|
|
|
9,623
|
|
|
42
|
|
|
(11
|
)
|
|
9,654
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
175,862
|
|
$
|
1,271
|
|
$
|
(1,792
|
)
|
$
|
175,341
|
|
|
|
|
|
|
|
|
|
Equity
securities held at cost as of December 31, 2007 consist primarily of $8.0 million of Federal Home Loan Bank of Topeka stock and $1.5 million of Federal Reserve Bank stock.
The Company is required to
56
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
hold
these securities as a member of the Federal Reserve system and the Federal Home Loan Bank of Topeka; these equity securities are restricted in that they can only be sold back at par or stated
value.
|
|
December 31, 2006
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair value
|
|
|
(In thousands)
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored entities
|
|
$
|
54,481
|
|
$
|
81
|
|
$
|
(649
|
)
|
$
|
53,913
|
|
|
Mortgage-backed securities
|
|
|
83,684
|
|
|
344
|
|
|
(1,178
|
)
|
|
82,850
|
|
|
Nontaxable 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
|
|
|
|
|
|
|
|
|
|
Equity
securities held at cost as of December 31, 2006 consist primarily of $7.5 million of Federal Home Loan Bank of Topeka stock and $1.5 million of Federal Reserve Bank stock.
Gross
realized gains and losses on sale of investment securities available for sale are summarized as follows:
|
|
Year ended December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
Gain on sales of investment securities
|
|
$
|
1
|
|
$
|
13
|
|
Loss on sales of investment securities
|
|
|
(5
|
)
|
|
(170
|
)
|
|
|
|
|
|
|
|
Net gain (loss) on sales of investment securities
|
|
$
|
(4
|
)
|
$
|
(157
|
)
|
|
|
|
|
|
|
Proceeds from the sale of investment securities
|
|
$
|
1,670
|
|
$
|
11,818
|
|
|
|
|
|
|
|
Information
on temporarily impaired securities at December 31, 2007 and 2006, segregated by those investments that have been in continuous unrealized loss position for less than
12 months and those
57
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
investments
that have been in continuous unrealized loss position for 12 months or longer, is summarized as follows:
|
|
December 31, 2007
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
|
|
(In thousands)
|
|
Description of securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored entities
|
|
$
|
|
|
$
|
|
|
$
|
11,484
|
|
$
|
(31
|
)
|
$
|
11,484
|
|
$
|
(31
|
)
|
|
Mortgage-backed securities
|
|
|
4,885
|
|
|
(15
|
)
|
|
37,834
|
|
|
(1,141
|
)
|
|
42,719
|
|
|
(1,156
|
)
|
|
Nontaxable municipal securities
|
|
|
3,312
|
|
|
(34
|
)
|
|
8,030
|
|
|
(99
|
)
|
|
11,342
|
|
|
(133
|
)
|
|
Taxable municipal securities
|
|
|
3,690
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
3,690
|
|
|
(95
|
)
|
|
|
Other debt securities
|
|
|
2,033
|
|
|
(106
|
)
|
|
1,740
|
|
|
(260
|
)
|
|
3,773
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
13,920
|
|
|
(250
|
)
|
|
59,088
|
|
|
(1,531
|
)
|
|
73,008
|
|
|
(1,781
|
)
|
Equity securities
|
|
|
41
|
|
|
(10
|
)
|
|
8
|
|
|
(1
|
)
|
|
49
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
13,961
|
|
$
|
(260
|
)
|
$
|
59,096
|
|
$
|
(1,532
|
)
|
$
|
73,057
|
|
$
|
(1,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
|
|
(In thousands)
|
|
Description of securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored entities
|
|
$
|
3,990
|
|
$
|
(10
|
)
|
$
|
39,572
|
|
$
|
(639
|
)
|
$
|
43,562
|
|
$
|
(649
|
)
|
|
Mortgage-backed securities
|
|
|
4,921
|
|
|
(33
|
)
|
|
52,545
|
|
|
(1,145
|
)
|
|
57,466
|
|
|
(1,178
|
)
|
|
Nontaxable municipal securities
|
|
|
4,588
|
|
|
(21
|
)
|
|
6,579
|
|
|
(146
|
)
|
|
11,167
|
|
|
(167
|
)
|
|
|
|
Total debt securities
|
|
|
|
|
|
|
|
|
1,953
|
|
|
(47
|
)
|
|
1,953
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,499
|
|
|
(64
|
)
|
|
100,649
|
|
|
(1,977
|
)
|
|
114,148
|
|
|
(2,041
|
)
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
|
4
|
|
|
|
|
|
6
|
|
|
(1
|
)
|
|
10
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,503
|
|
$
|
(64
|
)
|
$
|
100,655
|
|
$
|
(1,978
|
)
|
$
|
114,158
|
|
$
|
(2,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
tables above represent 172 and 214 individual investment securities at December 31, 2007 and December 31, 2006, respectively, where the current fair value is less than the related
amortized cost. The unrealized losses on these temporarily impaired securities are a result of changes in interest rates for fixed-rate securities where the interest rate received is less
than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and changes in the level of prepayments for
mortgage-backed securities. These unrealized losses are considered temporary based on our ability and intent to hold until values recover.
58
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
Contractual maturities of investment securities are set forth in the following table. Expected maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without penalties.
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
|
|
(In thousands)
|
|
(In thousands)
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due less than one year
|
|
$
|
7,915
|
|
$
|
7,896
|
|
$
|
2,876
|
|
$
|
2,860
|
|
Due after one through five years
|
|
|
16,816
|
|
|
16,905
|
|
|
21,659
|
|
|
21,489
|
|
Due after five through ten years
|
|
|
37,414
|
|
|
37,711
|
|
|
37,718
|
|
|
37,549
|
|
Due after ten years
|
|
|
25,421
|
|
|
25,173
|
|
|
25,266
|
|
|
25,167
|
|
Equity Securities
|
|
|
130
|
|
|
161
|
|
|
98
|
|
|
164
|
|
Mortgage-backed securities
|
|
|
78,673
|
|
|
78,002
|
|
|
83,684
|
|
|
82,850
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,369
|
|
$
|
165,848
|
|
$
|
171,301
|
|
$
|
170,079
|
|
Non-marketable equity securities
|
|
|
9,493
|
|
|
9,493
|
|
|
9,061
|
|
|
9,061
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
175,862
|
|
|
175,341
|
|
|
180,362
|
|
|
179,140
|
|
|
|
|
|
|
|
|
|
At
December 31, 2007, securities with amortized cost of approximately $150.7 million and fair value of approximately $150.5 million were pledged as collateral to creditors,
collateral for repurchase agreements, collateral for public funds on deposits and for other purposes as required by law. At December 31, 2006 securities with amortized cost of approximately
$155.0 million and fair value of approximately $153.8 million and were pledged for the same purposes.
59
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
(3) Loans
Major classifications of loans at December 31, 2007 and 2006 are as follows:
|
|
2007
|
|
2006
|
|
|
|
Total
|
|
Percent of Total Loans
|
|
Total
|
|
Percent of Total Loans
|
|
|
|
(Dollars in thousands)
|
|
(Dollars in thousands)
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
77,961
|
|
13.9
|
%
|
$
|
84,078
|
|
17.3
|
%
|
|
|
Construction and land development
|
|
|
210,083
|
|
37.4
|
|
|
136,835
|
|
28.1
|
|
|
|
Nonfarm, nonresidential
|
|
|
156,085
|
|
27.7
|
|
|
145,747
|
|
30.0
|
|
|
|
Farmland
|
|
|
28,380
|
|
5.1
|
|
|
29,196
|
|
6.0
|
|
|
|
Multifamily
|
|
|
3,855
|
|
0.7
|
|
|
5,109
|
|
1.1
|
|
|
Commercial and industrial
|
|
|
59,770
|
|
10.7
|
|
|
60,177
|
|
12.4
|
|
|
Agricultural
|
|
|
8,350
|
|
1.5
|
|
|
7,226
|
|
1.4
|
|
|
Installment loans
|
|
|
10,506
|
|
1.9
|
|
|
10,344
|
|
2.1
|
|
|
Obligations of state and political subdivision
|
|
|
5,628
|
|
1.0
|
|
|
5,286
|
|
1.1
|
|
|
Lease financing receivables
|
|
|
993
|
|
0.2
|
|
|
3,031
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
561,611
|
|
100.1
|
|
|
487,029
|
|
100.1
|
|
|
Less unearned fees, net
|
|
|
750
|
|
0.1
|
|
|
532
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
$
|
560,861
|
|
100.0
|
%
|
$
|
486,497
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Included
in one-to-four family real estate loans are mortgage loans held for sale of approximately $1.9 million and $2.6 million at December 31, 2007 and
2006, respectively. At December 31, 2007 and 2006, respectively, purchased participations totaled $50.1 million and $31.9 million and are included in the above loan totals. Additionally, at
December 31, 2007 and 2006, respectively, sold participations totaled $91.4 million and $86.1 million.
60
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
A
summary of non-performing assets is as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Non-performing assets:
|
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
$
|
3,807
|
|
$
|
6,801
|
|
|
Commercial, industrial, and agricultural
|
|
|
2,195
|
|
|
721
|
|
|
Installment loans
|
|
|
67
|
|
|
396
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
6,069
|
|
|
7,918
|
|
|
|
|
|
|
Loans past due 90 days or more still accruing:
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
271
|
|
|
Commercial, industrial, and agricultural
|
|
|
190
|
|
|
140
|
|
|
Installment loans
|
|
|
43
|
|
|
23
|
|
|
|
|
|
|
|
|
Total past due 90 days or more still accruing
|
|
|
233
|
|
|
434
|
|
|
|
|
|
|
Restructured loans
|
|
|
669
|
|
|
1,010
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
6,971
|
|
|
9,362
|
|
Assets acquired through foreclosure
|
|
|
934
|
|
|
817
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
7,905
|
|
$
|
10,179
|
|
|
|
|
|
Information
regarding impaired loans is summarized as follows:
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Impaired loans for which a related allowance has been provided
|
|
$
|
5,471
|
|
$
|
7,755
|
Impaired loans for which a related allowance has not been provided
|
|
|
1,439
|
|
|
2,180
|
|
|
|
|
|
Total Impaired Loans
|
|
|
6,910
|
|
|
9,935
|
|
|
|
|
|
Allowance related to impaired loans
|
|
$
|
648
|
|
$
|
465
|
|
|
|
|
|
Impaired
loans include loans on non-accrual status and loans that have been restructured from their original terms. Average investment in impaired loans was $5.1 million and
$6.2 million during the years ended December 31, 2007 and 2006 respectively. Interest recognized on these loans during their period of impairment was approximately $294,000 and $605,000
during the years ended December 31, 2007 and December 31, 2006. The Company had $6.1 million and $7.9 million of loans on non-accrual status as of
December 31, 2007 and 2006, respectively. The interest income not recognized on these loans was $298,000 and $455,000 at December 31, 2007 and 2006, respectively.
61
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
Activity
related to loans made to our directors and executive officers during 2007 is presented below. Such loans were made in the ordinary course of business on normal credit terms, including
interest rate and collateralization (in thousands):
Loans to executive officers and directors at January 1, 2007
|
|
$
|
2,916
|
|
|
Additions
|
|
|
1,534
|
|
|
Amounts collected
|
|
|
(1,175
|
)
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,275
|
|
|
|
|
|
Our
primary market areas in Kansas are Miami County, Allen County, Franklin County, Labette County, Johnson County and surrounding counties. The primary market areas in Nebraska are Washington County,
and Sarpy County. The primary market area in Colorado is El Paso County along the front range of the Colorado Rocky Mountains and in Missouri the primary market areas are Vernon County and Barton
County. The majority of the loans made by our subsidiary banks are within these primary market areas, however some loan participations are to borrowers outside of these market areas.
(4) Mortgage Banking Activities
We service first mortgage loans for secondary investors. Escrow balances are held on deposit for first mortgage loans serviced in our subsidiary banks. The aggregate first
mortgage loans serviced and escrow balances held are as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Mortgage loans serviced
|
|
$
|
67,919
|
|
$
|
76,868
|
Escrow deposits
|
|
|
411
|
|
|
493
|
Included
in gain on sales of mortgage loans are capitalized mortgage servicing rights. A summary of the net mortgage servicing rights, which are included in intangible assets for the years ended
December 31, 2007 and 2006 is as follows:
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
Balance January 1
|
|
$
|
319
|
|
$
|
403
|
|
Mortgage servicing rights capitalized during the year
|
|
|
34
|
|
|
16
|
|
Amortization
|
|
|
(79
|
)
|
|
(100
|
)
|
Valuation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31
|
|
$
|
274
|
|
$
|
319
|
|
|
|
|
|
|
|
Service
fees earned, included in other income, were approximately $181,000 and $204,000 for the years ended December 31, 2007 and 2006, respectively.
62
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
(5) Allowance for Loan Losses
A summary of the allowances for loan losses for the years ended December 31, 2007 and 2006 is as follows:
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
Balance, beginning of year
|
|
$
|
5,715
|
|
$
|
5,424
|
|
Provision for loan losses
|
|
|
706
|
|
|
951
|
|
Charge-offs
|
|
|
(700
|
)
|
|
(871
|
)
|
Recoveries
|
|
|
266
|
|
|
211
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
5,987
|
|
$
|
5,715
|
|
|
|
|
|
|
|
(6) Premises and Equipment, Net
Major classifications of bank premises and equipment at December 31, 2007 and 2006 are summarized as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Land
|
|
$
|
6,103
|
|
$
|
4,666
|
Bank premises
|
|
|
18,128
|
|
|
13,612
|
Furniture, fixtures, and equipment
|
|
|
8,133
|
|
|
9,061
|
Construction in process
|
|
|
409
|
|
|
1,694
|
|
|
|
|
|
|
|
|
32,773
|
|
|
29,033
|
Less accumulated depreciation
|
|
|
10,690
|
|
|
11,405
|
|
|
|
|
|
|
|
$
|
22,083
|
|
$
|
17,628
|
|
|
|
|
|
Depreciation
expense aggregating $1,427,000 and $1,258,000 for the years ended December 31, 2007 and 2006, respectively, is included in occupancy and equipment expense in the accompanying
consolidated statements of operations.
Space
in certain facilities is rented under operating leases extending to 2013. Rent expense related to the leases was approximately $146,000 during 2007 and $110,000 during 2006. Following is a
summary of future minimum lease payments for years following December 31, 2007:
|
|
Minimum Lease Payments
|
|
|
(In thousands)
|
2008
|
|
$
|
183
|
2009
|
|
|
105
|
2010
|
|
|
95
|
2011
|
|
|
95
|
2012
|
|
|
95
|
Thereafter
|
|
|
95
|
|
|
|
|
|
$
|
668
|
|
|
|
63
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
(7) Goodwill and Intangible Assets
The following table presents the original cost and accumulated amortization of intangible assets.
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
|
(In thousands)
|
|
(In thousands)
|
Core deposit intangible
|
|
$
|
6,400
|
|
$
|
4,500
|
|
$
|
6,400
|
|
$
|
4,060
|
Noncompete agreements
|
|
|
407
|
|
|
58
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
|
2,499
|
|
|
2,225
|
|
|
2,465
|
|
|
2,146
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
9,306
|
|
$
|
6,783
|
|
$
|
8,865
|
|
$
|
6,206
|
|
|
|
|
|
|
|
|
|
Expected
amortization expense is as follows:
|
|
Estimated amortization expense
|
|
|
Core Deposit Intangible
|
|
Noncompete Agreements
|
|
Mortgage Servicing Rights
|
|
Total
|
|
|
(In thousands)
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
420
|
|
$
|
116
|
|
$
|
54
|
|
$
|
590
|
2009
|
|
|
383
|
|
|
116
|
|
|
54
|
|
|
553
|
2010
|
|
|
383
|
|
|
116
|
|
|
54
|
|
|
553
|
2011
|
|
|
383
|
|
|
|
|
|
54
|
|
|
437
|
2012
|
|
|
298
|
|
|
|
|
|
54
|
|
|
352
|
Thereafter
|
|
|
33
|
|
|
|
|
|
4
|
|
|
37
|
Goodwill
was $10.7 million at December 31, 2007 and December 31, 2006. Goodwill is annually tested for impairment as of October 31. As a result of the current economic and market
conditions, an additional test was performed as of December 31, 2007. The tests resulted in no impairment of goodwill for the years ended December 31, 2007 or 2006.
64
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
(8) Deposit Accounts
Deposits are summarized as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Demand:
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
74,720
|
|
$
|
75,914
|
|
|
|
|
|
|
Interest bearing:
|
|
|
|
|
|
|
|
|
NOW
|
|
|
112,636
|
|
|
119,065
|
|
|
Money market
|
|
|
68,472
|
|
|
57,123
|
|
|
|
|
|
|
Total interest bearing
|
|
|
181,108
|
|
|
176,188
|
|
|
|
|
|
|
|
|
Total demand
|
|
|
255,828
|
|
|
252,102
|
Savings
|
|
|
25,848
|
|
|
28,536
|
Time
|
|
|
347,710
|
|
|
282,244
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
629,386
|
|
$
|
562,882
|
|
|
|
|
|
Time deposits of $100,000 and over
|
|
$
|
156,582
|
|
$
|
100,821
|
|
|
|
|
|
Principal
maturities of time deposits at December 31, 2007 are as follows:
|
|
Amount
|
|
|
(In thousands)
|
Year:
|
|
|
|
|
2008
|
|
$
|
276,328
|
|
2009
|
|
|
62,222
|
|
2010
|
|
|
5,522
|
|
2011
|
|
|
1,974
|
|
2012
|
|
|
1,659
|
|
Thereafter
|
|
|
5
|
|
|
|
|
|
$
|
347,710
|
|
|
|
65
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
(9) Federal Funds Purchased & Securities Sold under Agreements to Repurchase
Our obligation to repurchase securities sold at December 31, 2007 and 2006 aggregated approximately $2,969,000 and $6,215,000, respectively. Information concerning
federal funds purchased and securities sold under agreements to repurchase is as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Average monthly balance during the year
|
|
$
|
2,778
|
|
$
|
4,496
|
|
Average interest rate during the year
|
|
|
4.51
|
%
|
|
3.80
|
%
|
Maximum month-end balance during the year
|
|
$
|
19,610
|
|
$
|
9,404
|
|
At
December 31, 2007 and 2006, the securities sold under agreements to repurchase were secured by investment securities.
(10) Advances from the Federal Home Loan Bank, Notes Payable and Treasury Tax & Loan
Following is a summary of the advances from the Federal Home Loan Bank, treasury tax and loan and other borrowings at December 31:
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Federal Home Loan Bank borrowings at interest rates ranging from 3.66% to 6.96%; maturities ranging from 2009 to 2019; secured by real estate loans, investments securities, and Federal Home Loan Bank stock
|
|
$
|
108,005
|
|
$
|
108,069
|
Notes Payable
|
|
|
2,000
|
|
|
|
Treasury Tax and Loan
|
|
|
195
|
|
|
200
|
|
|
|
|
|
|
|
$
|
110,200
|
|
$
|
108,269
|
|
|
|
|
|
The
Company has a $6 million line of credit, interest floating at 2.00% over one month LIBOR, secured by common stock of subsidiary banks. As of December 31, 2007 the Company had an
outstanding balance of $2 million on this line of credit. As of December 31, 2006, the Company did not have an outstanding balance on this line of credit. Interest of .1875% is payable
on the unused line of credit amount.
Our
subsidiary banks maintain lines of credit with the Federal Home Loan Bank of Topeka approximating $172.7 million. As of December 31, 2007, our subsidiary banks had approximately
$108.0 million outstanding on the lines of credit and $55.3 million available of outstanding letters of credit, leaving available borrowings of approximately $9.4 million.
The
Federal Home Loan Bank borrowings at December 31, 2007 consisted of $1,005,302 in fixed rate advances with interest ranging from 5.14%-6.96%, maturing in 2012 through 2019,
$22,000,000 in variable rate advances with interest ranging from 3.86% to 5.87%, maturing in 2010 through 2015, $75,000,000 in fixed rate advances convertible to floating rate if LIBOR increases to a
range of 6.0% to 7.50%, interest ranging from 3.66% to 4.21%, maturing in 2009 through 2012, and $10,000,000 in fixed rate convertible advances subject to the option to exercise on a quarterly basis.
66
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
Principal
maturities on advances from the Federal Home Loan Bank, notes payable and treasury tax & loan payable at December 31, 2007 were as follows:
|
|
Amount
|
|
|
(In thousands)
|
Year:
|
|
|
|
|
2008
|
|
$
|
2,195
|
|
2009
|
|
|
5,000
|
|
2010
|
|
|
22,000
|
|
2011
|
|
|
40,000
|
|
2012
|
|
|
30,344
|
|
Thereafter
|
|
|
10,661
|
|
|
|
|
|
$
|
110,200
|
|
|
|
(11) Subordinated Debentures
On August 10, 2001, Team Financial Capital Trust I (the Trust), a Delaware business trust formed by Team Financial, Inc., completed the sale of
$15.5 million 9.50% Cumulative Trust Preferred Securities. The Trust used the net proceeds from the offering to purchase a like amount of Team Financial, Inc.'s 9.50% subordinated
debentures. The debentures, maturing August 10, 2031, were the sole assets of the Trust. On or after August 10, 2006, we had the right to redeem the debentures, in whole or in part, at a
redemption price specified in the governing indentures plus any accrued but unpaid interest to the redemption date.
On
September 18, 2006, we redeemed all of the debentures and the Trust redeemed its trust preferred securities, at a redemption price equal to 100% of the principal amount of the Trust, or
$15.5 million, plus interest accrued and unpaid through September 17, 2006. As a result of the redemption, we incurred a pretax charge, recorded as "trust preferred securities redemption
amortization" to earnings of approximately $823,000 on the redemption date of the debentures. This charge was the unamortized portion of the offering cost that was being amortized over the original
30-year life of the debentures.
To
fund the redemption, on September 14, 2006 we replaced the prior existing debentures and the former trust with Team Financial Capital Trust II, a pooled trust preferred security of
$22.0 million at a variable rate of 1.65% above the 90-day LIBOR. The new trust preferred securities have a 30-year term maturing on October 7, 2036 and a call
option 5 years after the issuance date. The new trust preferred securities did not have a placement or annual trustee fee associated with it. In 2007, we saved approximately $417,000 on the
original $16.0 million of trust preferred securities based on the reduction in interest rates. Total interest expense on the trust preferred securities increased in 2007 over prior years due to
the additional $6.7 million of trust preferred securities.
In
accordance with Financial Accounting Standards Board Interpretation No. 46R,
Consolidation of Variable Interest Entities
(FIN 46 R),
adopted in December 2003, the new Trust qualifies as a special purpose entity that is not required to be consolidated in our financial statements. The $22 million trust preferred securities
issued by the Trust in September 2006 are reported on the records of the new Trust.
We
continue to include the new trust preferred securities issued by Team Financial Capital Trust II in Tier I capital for regulatory capital purposes.
67
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
(12) Employee Benefit Plans
Eligible employees participate in our employee stock ownership plan (ESOP). ESOP contributions charged to salaries and benefits expense were approximately $400,000 in 2007 and
$355,000 in 2006. The 2007 and 2006 contributions consisted of cash only.
Employees
have the opportunity to purchase our common stock through the Emplopyee's Stock Purchase Plan (ESPP) pursuant to Section 423 of the Internal Revenue Code. The price per share of the
common stock under the ESPP is 85% of the fair market value of the stock at the commencement of each offering period. The Company issued 1,275 shares in January 2007 in exchange for cash of $15,134,
and 2,046 shares in January 2006 in exchange for cash of $21,197.
Under
various performance incentive programs, employees may be granted awards for their performance based on certain financial and growth targets. Bonus awards for the Chief Executive Officer, Chief
Financial Officer and Chief Operating Officer are at the discretion of the Compensation Committee of the Board of Directors, and bonus awards for all other employees are at the discretion of executive
management. Bonus awards may consist of cash, common stock, or a combination thereof.
The Company recorded approximately $353,000 and $575,000 to salaries and employee benefits expense as a result of the various bonus programs in 2007 and 2006, respectively.
Employees
meeting certain conditions are eligible to participate in the Team Financial, Inc. 401(k) Savings Plan immediately upon their employment date. Upon meeting certain conditions, the
Company matches 50% of the first 6% of deferred compensation that employees contribute to the Plan. Team Financial, Inc.'s contributions vest ratably over five years. We recorded $192,000 and
$172,000 to salaries and employee benefits expense as a result of this program in 2007 and 2006, respectively.
We
have a nonqualified salary continuation plan for certain executive officers and specified other officers whereby the participant will receive monthly benefits for ten years commencing with the
month after retirement or termination due to disability. The annual benefits for the participants accrue based upon a stated percentage ranging from 25% to 65% of the average of the highest of the
participant's salary for any three years in the five to ten year period immediately preceding termination of employment on or after the normal retirement date. In the event of death of certain
participants, the plan provides a continuing benefit to the spouse based on a vesting schedule defined by a percentage of the participant's age. The subsidiary banks charged $360,400 and $327,300 to
salary and employee benefits expense for 2007 and 2006, respectively, as a result of this program. In connection with the plan, we have recorded a liability of $1,803,200 and $1,466,400 at
December 31, 2007 and 2006, respectively.
We
have a nonqualified deferred compensation plan for executive officers and certain other bank officers whereby the officer may defer a stated percentage of salary ranging from 2% to 10% of
compensation. The deferral amounts are matched by the Company based on a stated percentage ranging from 15% to 25%. We accrue interest on the deferred amounts based on a modified return on equity
calculation, which includes the return on equity of our subsidiary bank, TeamBank, net of core deposit intangible asset amortization. We charged $87,000 during 2007 and $55,000 during 2006, to salary
and employee benefits expense as a result of this program. A liability of $657,000 and $510,000 was recorded at December 31, 2007 and 2006, respectively, associated with this plan.
(13) Stock-Based Compensation
The Company's 1999 Stock Incentive Plan and the 2007 Stock Incentive Plan provide for the following stock and stock-based awards: restricted stock, stock options, stock
appreciation rights and performance
68
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
shares.
All employees, directors and consultants are eligible to participate in the plans. Pursuant to the plans, a total of 870,000 shares of Team Financial, Inc. common stock are currently
reserved for issuance under the stock option components of the plans and as of December 31, 2007, up to 396,850 shares of our common stock were available to be issued under the plans.
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 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 No. 123(R) establishes fair value as the measurement objective
in accounting for share-based arrangements and requires all entities to apply a fair value based measurement method in accounting for share based payments with employees except for equity instruments
held by employee share ownership plans. During the twelve months ended December 31, 2007 and 2006, the Company recognized share-based compensation expense of approximately $147,000 and
$310,000, respectively.
Stock
compensation expense for options granted during the years ended December 31, 2007 and December 31, 2006 was estimated using the Black-Scholes option-pricing model with the
following assumptions:
|
|
2007
|
|
2006
|
|
|
|
One-year options
|
|
Three-year options
|
|
One-year options
|
|
Three-year options
|
|
Expected life in years
|
|
5
|
|
8
|
|
5
|
|
8
|
|
Expected volatility
|
|
16.34
|
%
|
17.14
|
%
|
16.08
|
%
|
18.35
|
%
|
Risk-free interest rate
|
|
2.79
|
%
|
3.45
|
%
|
4.59
|
%
|
4.70
|
%
|
Annual rate of quarterly dividends
|
|
1.68
|
%
|
2.09
|
%
|
2.19
|
%
|
1.58
|
%
|
The
following table summarizes option activity for the year ended December 31, 2007:
|
|
Number of
options
|
|
Weighted
average exercise
price per share
|
|
Weighted average
remaining contractual
life in years
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2006
|
|
367,700
|
|
$
|
11.06
|
|
|
|
|
|
Granted
|
|
61,000
|
|
|
15.61
|
|
|
|
|
|
Exercised
|
|
(80,400
|
)
|
|
9.68
|
|
|
|
|
|
Expired or forfeited
|
|
(12,600
|
)
|
|
14.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
335,700
|
|
|
12.17
|
|
6.2
|
|
$
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
279,700
|
|
$
|
11.46
|
|
5.7
|
|
|
3.52
|
|
|
|
|
|
|
|
|
|
|
|
69
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
The
following table summarizes option activity for the year ended December 31, 2006:
|
|
Number of
options
|
|
Weighted
average exercise
price per share
|
|
Weighted average
remaining contractual
life in years
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2005
|
|
303,850
|
|
$
|
10.07
|
|
|
|
|
|
Granted
|
|
76,500
|
|
|
15.04
|
|
|
|
|
|
Exercised
|
|
(8,400
|
)
|
|
10.54
|
|
|
|
|
|
Expired or forfeited
|
|
(4,250
|
)
|
|
12.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
367,700
|
|
|
11.06
|
|
6.3
|
|
$
|
4.94
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006
|
|
295,100
|
|
$
|
10.13
|
|
5.6
|
|
|
5.87
|
|
|
|
|
|
|
|
|
|
|
|
A
summary of the Company's nonvested options as of December 31, 2007 and December 31, 2006 and changes during those years are presented below:
|
|
2007
|
|
2006
|
|
|
Number of
shares
|
|
Weighted
average grant
date fair value
|
|
Number of
shares
|
|
Weighted
average grant
date fair value
|
Nonvested at January 1
|
|
72,600
|
|
$
|
2.83
|
|
54,600
|
|
$
|
3.25
|
Granted
|
|
61,000
|
|
|
3.59
|
|
76,500
|
|
|
2.97
|
Vested
|
|
(65,000
|
)
|
|
2.89
|
|
(56,500
|
)
|
|
2.59
|
Expired or forfeited
|
|
(12,600
|
)
|
|
2.96
|
|
(4,250
|
)
|
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31
|
|
56,000
|
|
|
2.72
|
|
72,600
|
|
|
2.83
|
|
|
|
|
|
|
|
|
|
|
|
On
December 31, 2007 there was approximately $80,000 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.
70
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
The
following table presents option activity for the years ended December 31, 2007 and 2006:
|
|
Number
|
|
Weighted Average
Exercise Price
|
Options outstanding at December 31, 2005
|
|
303,850
|
|
$
|
10.07
|
Options awarded
|
|
76,500
|
|
|
15.04
|
Options exercised
|
|
(8,400
|
)
|
|
10.54
|
Options forfeited
|
|
(4,250
|
)
|
|
12.89
|
|
|
|
|
|
Options outstanding at December 31, 2006
|
|
367,700
|
|
|
11.06
|
|
|
|
|
|
Options awarded
|
|
61,000
|
|
|
15.61
|
Options exercised
|
|
(80,400
|
)
|
|
9.68
|
Options forfeited
|
|
(12,600
|
)
|
|
14.06
|
|
|
|
|
|
Options outstanding at December 31, 2007
|
|
335,700
|
|
|
12.17
|
|
|
|
|
|
Options vested at December 31, 2007
|
|
279,700
|
|
$
|
11.46
|
|
|
|
|
|
The
following table summarizes information about the plan's stock options at December 31, 2007:
Options Outstanding
|
|
Options Vested
|
Range of
Exercise Price
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
Contractual Life
(years)
|
|
Weighted
Average
Exercise Price
|
|
Number
Vested
|
|
Weighted
Average
Exercise Price
|
$6.50 - 6.75
|
|
35,850
|
|
3.00
|
|
$
|
6.63
|
|
35,850
|
|
$
|
6.63
|
8.25 - 8.50
|
|
23,650
|
|
4.00
|
|
|
8.32
|
|
23,650
|
|
|
8.32
|
8.75 - 9.00
|
|
42,500
|
|
2.00
|
|
|
8.94
|
|
42,500
|
|
|
8.94
|
10.00 - 10.25
|
|
28,200
|
|
5.00
|
|
|
10.10
|
|
28,200
|
|
|
10.10
|
12.00 - 12.25
|
|
27,750
|
|
7.00
|
|
|
12.19
|
|
27,750
|
|
|
12.19
|
12.25 - 12.50
|
|
25,250
|
|
6.00
|
|
|
12.41
|
|
25,250
|
|
|
12.41
|
14.25 - 14.50
|
|
54,500
|
|
8.00
|
|
|
14.30
|
|
45,500
|
|
|
14.30
|
15.01 - 15.25
|
|
10,000
|
|
8.50
|
|
|
15.01
|
|
10,000
|
|
|
15.01
|
15.75 - 16.00
|
|
88,000
|
|
9.10
|
|
|
15.97
|
|
41,000
|
|
|
15.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$6.50 - 16.00
|
|
335,700
|
|
6.20
|
|
$
|
12.20
|
|
279,700
|
|
$
|
11.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
(14) Income Taxes
The provisions of Statement of Financial Accounting Standards, No. 109, Accounting for Income Taxes (SFAS 109), establishes financial accounting and reporting
standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an entity's financial statements for tax returns related to deferred income. Judgment is required in assessing the future
tax consequences of events that have been recognized in
our consolidated financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
We
recorded income tax expense of $1,148,000 for 2007 compared to $1,050,000 for 2006, representing an increase of $98,000. The effective tax rate for 2007 and 2006 was 21.71% and 20.90%,
respectively. An increase in taxable income contributed to the higher effective tax rate in 2007 compared to 2006. The effective tax rate was less than the statutory federal rate of 34% in 2007 and
2006 primarily due to municipal interest income and non-taxable income from our investment in bank owned life insurance.
Total
income tax expense (benefit) for 2007 and 2006 was as follows:
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Income from operations
|
|
$
|
1,148
|
|
$
|
1,050
|
Other comprehensive income
|
|
|
238
|
|
|
258
|
|
|
|
|
|
|
Total
|
|
$
|
1,386
|
|
$
|
1,308
|
|
|
|
|
|
Income
tax expense (benefit) attributable to income for 2007 and 2006 consists of the following:
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,766
|
|
$
|
1,299
|
|
|
State
|
|
|
275
|
|
|
244
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(821
|
)
|
|
(438
|
)
|
|
State
|
|
|
(72
|
)
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,148
|
|
$
|
1,050
|
|
|
|
|
|
|
|
72
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
Following
is a reconciliation between income tax expense attributable to income and the amount computed by multiplying earnings before income taxes by the statutory federal income tax rate of 34%:
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
Expected federal income tax expense
|
|
$
|
1,797
|
|
$
|
1,712
|
|
Tax exempt interest income, net
|
|
|
(451
|
)
|
|
(445
|
)
|
State income taxes, net of federal tax benefit
|
|
|
117
|
|
|
61
|
|
Cash value increase of bank owned life insurance, net of premiums paid
|
|
|
(284
|
)
|
|
(256
|
)
|
Income tax benefit on dividends paid to ESOP
|
|
|
(93
|
)
|
|
(98
|
)
|
Stock-based compensation expense
|
|
|
40
|
|
|
105
|
|
Reduction of estimated income tax accrual
|
|
|
|
|
|
(73
|
)
|
Other
|
|
|
22
|
|
|
44
|
|
|
|
|
|
|
|
|
Income tax expense attributable to income from operations
|
|
$
|
1,148
|
|
$
|
1,050
|
|
|
|
|
|
|
|
The
income tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities of continuing operations at December 31, 2007 and
2006 are presented below:
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
2,070
|
|
$
|
1,978
|
|
|
Net unrealized loss on securities available for sale
|
|
|
177
|
|
|
415
|
|
|
State net operating losses
|
|
|
1,094
|
|
|
924
|
|
|
Deferred compensation
|
|
|
853
|
|
|
722
|
|
|
Self insurance accrual
|
|
|
38
|
|
|
28
|
|
|
Capital loss carry forward
|
|
|
216
|
|
|
124
|
|
|
Other
|
|
|
62
|
|
|
6
|
|
|
State taxes, net
|
|
|
390
|
|
|
104
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
4,900
|
|
|
4,301
|
|
|
Less valuation allowance
|
|
|
(1,094
|
)
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
Net total deferred tax assets
|
|
|
3,806
|
|
|
3,377
|
|
|
|
|
|
|
|
Deferred liabilities:
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
(83
|
)
|
|
135
|
|
|
Mortgage servicing rights
|
|
|
93
|
|
|
109
|
|
|
Premises and equipment
|
|
|
694
|
|
|
800
|
|
|
Core deposit intangible asset
|
|
|
13
|
|
|
32
|
|
|
FHLB stock
|
|
|
647
|
|
|
500
|
|
|
Other
|
|
|
13
|
|
|
28
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
1,377
|
|
|
1,604
|
|
|
|
Net deferred tax asset
|
|
$
|
2,429
|
|
$
|
1,773
|
|
|
|
|
|
|
|
73
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
At
December 31, 2007 and 2006, the Company recorded a valuation allowance to reduce all state net operating loss carry forwards which expire at various times through 2027. Management believes
it is more likely than not that these items will not be realized.
In
2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we recognize in our financial statements the impact of a tax
position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. We adopted the provisions of FIN 48 as of the beginning of our
2007 fiscal year. The adoption of FIN 48 did not result in a cumulative effect adjustment for the Company.
As
of December 31, 2007, the total gross amount of reserves for income taxes, reported in other liabilities, was $708,028. Of that amount, $467,299, if recognized, would affect our effective
tax rate. Any prospective adjustments to our reserves for income taxes will be recorded as an increase or decrease to our provision for income taxes and would impact our effective tax rate.
The
unrecognized tax benefit reconciliation from beginning balance to ending balance is as follows:
|
|
(in thousands)
|
|
Balance at December 31, 2006
|
|
$
|
654,000
|
|
|
FIN 48 adoption adjustment to retained earnings
|
|
|
|
|
|
Reclassification of deductible state tax and interest benefits to other balance sheet accounts
|
|
|
(111,253
|
)
|
|
|
|
|
|
Adjusted Balance at December 31, 2006
|
|
$
|
542,747
|
|
|
Change attributable to tax positions taken during a prior period
|
|
|
|
|
|
Change attributable to tax positions taken during the current period
|
|
|
286,637
|
|
|
Decrease attributable to settlements with tax authorities
|
|
|
|
|
|
Decrease attributable to lapse of statute of limitations
|
|
|
(121,356
|
)
|
|
|
|
|
Unrecognized tax benefit at end of year December 31, 2007
|
|
$
|
708,028
|
|
|
|
|
|
The
Company's continuing practice is to recognize interest and penalties relating to unrecognized tax benefits in the income tax provision, which therefore has an impact on the effective tax rate. As
of December 31, 2007, the Company had $229,515 ($211,056 after-tax) accrued for the payment of interest and penalties.
The
Company's federal and state income tax returns for the years 2004 through 2007 remain subject to review by the various tax authorities.
74
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
(15) Fair Value of Financial Instruments
Fair value of financial instruments at December 31, 2007 and 2006, including methods and assumptions utilized, are set forth below:
|
|
2007
|
|
2006
|
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
|
(In thousands)
|
Cash and cash equivalents
|
|
$
|
30,000
|
|
$
|
30,000
|
|
$
|
37,000
|
|
$
|
37,000
|
Accrued interest receivable
|
|
|
6,000
|
|
|
6,000
|
|
|
6,000
|
|
|
6,000
|
Investment securities
|
|
|
175,000
|
|
|
175,000
|
|
|
179,000
|
|
|
179,000
|
Loans, net of unearned discounts and allowance for loan losses
|
|
|
555,000
|
|
|
554,000
|
|
|
481,000
|
|
|
478,000
|
Bank owned life insurance policies
|
|
|
21,000
|
|
|
21,000
|
|
|
19,926
|
|
|
19,926
|
Demand deposits
|
|
|
75,000
|
|
|
75,000
|
|
|
76,000
|
|
|
76,000
|
Money market and NOW deposits
|
|
|
181,000
|
|
|
181,000
|
|
|
176,000
|
|
|
176,000
|
Savings deposits
|
|
|
26,000
|
|
|
26,000
|
|
|
29,000
|
|
|
29,000
|
Time deposits
|
|
|
348,000
|
|
|
349,000
|
|
|
282,000
|
|
|
282,000
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
630,000
|
|
$
|
631,000
|
|
$
|
563,000
|
|
$
|
563,000
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
3,000
|
|
$
|
3,000
|
|
$
|
3,000
|
|
$
|
3,000
|
Notes payable and FHLB advances
|
|
|
110,000
|
|
|
111,000
|
|
|
108,000
|
|
|
105,000
|
Subordinated debentures
|
|
|
23,000
|
|
|
23,000
|
|
|
23,000
|
|
|
23,000
|
Methods and assumptions
Cash and cash equivalents have a short-term nature and the fair value is equal to the carrying value.
Accrued
interest receivable has a short-term nature and the fair value is equal to the carrying value.
The
fair value of investment securities is based on quoted market prices or bid quotations received from securities dealers.
The
fair value of our loan portfolio is based on the segregation of loans by maturity using a weighted average pool rate. In estimating the fair value of loans, the carrying amount is reduced by the
allowance for loan losses. The fair value is calculated by discounting scheduled cash flow through the estimated maturity using estimated market discount rates based upon our current offering rates
with similar maturities that reflect the interest rate risk inherent in the loans.
The
fair value of bank owned life insurance policies is based on quoted net policy values from the insurance carrier and is equal to the carrying value.
The
fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW accounts, and money market accounts, is equal to the amount payable on
demand. The fair value of interest bearing time deposits is based on the discounted value of contractual cash flows of such deposits. The discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities.
Accrued
interest payable has a short-term nature and the fair value is equal to the carrying value.
75
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
The
fair value of fixed rate notes payable and Federal Home Loan Bank Advances is based on the discounted value of contractual maturities. The discount rate is estimated using the spread adjusted
London Inter-Bank Offering Rate (LIBOR). The carrying value of all floating rate notes payable and Federal Home Loan Bank Advances approximates fair value, as all these notes are based
upon floating market rates, which approximate market rates.
The
fair value of our obligated mandatory redeemable preferred securities of subsidiary trust holding solely subordinated debentures is estimated based on our incremental borrowing rates for similar
types of borrowing arrangements.
Limitations
Fair values are determined at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial
instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
(16) Capital Adequacy
Our banks are subject to the regulatory capital adequacy requirements of the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller
of the Currency, as applicable. The Federal Reserve Board uses a combination of risk-based guidelines and leverage ratios to evaluate regulatory capital adequacy. Failure to meet the
regulatory capital guidelines may result in the initiation by the Federal Reserve Board of appropriate supervisory or enforcement actions, including but not limited to delaying or denying pending or
future applications to acquire additional financial or bank holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below for Team Financial, Inc. and our
subsidiary banks) of total risk-based and Tier 1 capital (as defined in the applicable regulations) to risk-weighted
76
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
assets,
and of Tier 1 capital to average assets. Management believes, as of December 31, 2007 and 2006, that the banks and Team Financial, Inc. exceeded the regulatory definition
of "well-capitalized".
|
|
Actual
|
|
For capital adequacy purposes
|
|
To be well capitalized under prompt corrective action provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
At December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Team Financial, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted assets)
|
|
$
|
68,433
|
|
10.35
|
%
|
$
|
52,875
|
|
8.00
|
%
|
|
|
|
|
|
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
58,244
|
|
8.81
|
%
|
|
26,437
|
|
4.00
|
%
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets)
|
|
|
58,244
|
|
7.43
|
%
|
|
31,840
|
|
4.00
|
%
|
|
|
|
|
|
|
TeamBank, N.A.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted assets)
|
|
$
|
59,300
|
|
10.56
|
%
|
$
|
44,903
|
|
8.00
|
%
|
$
|
56,129
|
|
10.00
|
%
|
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
54,251
|
|
9.67
|
%
|
|
22,452
|
|
4.00
|
%
|
|
33,677
|
|
6.00
|
%
|
|
|
Tier 1 capital (to average assets)
|
|
|
54,251
|
|
8.27
|
%
|
|
26,247
|
|
4.00
|
%
|
|
32,809
|
|
5.00
|
%
|
|
Colorado National Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted assets)
|
|
$
|
10,129
|
|
10.27
|
%
|
$
|
7,891
|
|
8.00
|
%
|
$
|
9,864
|
|
10.00
|
%
|
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
9,191
|
|
9.32
|
%
|
|
3,946
|
|
4.00
|
%
|
|
5,918
|
|
6.00
|
%
|
|
|
Tier 1 capital (to average assets)
|
|
|
9,191
|
|
7.24
|
%
|
|
5,080
|
|
4.00
|
%
|
|
6,351
|
|
5.00
|
%
|
|
|
Actual
|
|
For capital adequacy purposes
|
|
To be well capitalized under prompt corrective action provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
At December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Team Financial, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted assets)
|
|
$
|
61,108
|
|
10.83
|
%
|
$
|
45,126
|
|
8.00
|
%
|
|
|
|
|
|
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
55,393
|
|
9.82
|
%
|
|
22,563
|
|
4.00
|
%
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets)
|
|
|
55,393
|
|
7.90
|
%
|
|
28,040
|
|
4.00
|
%
|
|
|
|
|
|
|
TeamBank, N.A.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted assets)
|
|
$
|
54,710
|
|
11.48
|
%
|
$
|
38,134
|
|
8.00
|
%
|
$
|
47,668
|
|
10.00
|
%
|
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
49,803
|
|
10.45
|
%
|
|
19,067
|
|
4.00
|
%
|
|
28,601
|
|
6.00
|
%
|
|
|
Tier 1 capital (to average assets)
|
|
|
49,803
|
|
8.39
|
%
|
|
23,730
|
|
4.00
|
%
|
|
29,662
|
|
5.00
|
%
|
|
Colorado National Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted assets)
|
|
$
|
9,712
|
|
11.25
|
%
|
$
|
6,902
|
|
8.00
|
%
|
$
|
8,628
|
|
10.00
|
%
|
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
8,904
|
|
10.32
|
%
|
|
3,451
|
|
4.00
|
%
|
|
5,177
|
|
6.00
|
%
|
|
|
Tier 1 capital (to average assets)
|
|
|
8,904
|
|
8.02
|
%
|
|
4,443
|
|
4.00
|
%
|
|
5,553
|
|
5.00
|
%
|
(17) Commitments, Contingencies and Off-Balance Sheet Risks
Team Financial, Inc. has commitments to extend credit to our customers of approximately $121.9 million at December 31, 2007. Additionally, the contractual
amount of standby letters of credit at December 31, 2007 was approximately $6.4 million. These commitments involve credit risk in excess of the amount stated in
77
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
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.
Standby
letters of credit are a conditional, but irrevocable form of guarantee issued to guarantee payment to a third party obligee upon default of payment by our customer. Standby letters of credit
are initially issued for a period of one year, but can be extended depending on the customers' needs. As of December 31, 2007, the maximum remaining term for any standby letter of credit was
October, 2010. Since the credit risk involved in issuing standby letters of credit is the same as that involved in extending loans to customers, Team Financial, Inc. uses the same credit
policies in evaluating the creditworthiness of the customers and determining the required collateral.
We
have a data processing contract that contains minimum obligations. Under the terms of this contract as of December 31, 2007, we are committed to pay minimum payments of $2.9 million
over the remaining term of the contract. Additional payments may be required based on volume of transactions processed or conversion fees.
The
Company does not believe that any pending litigation to which we are a party will have a material adverse effect on our liquidity, financial condition, or results of operations.
(18) Parent Company Condensed Financial Statements
Team Financial, Inc.
Condensed Statements of Financial Condition
(In thousands)
|
|
December 31,
|
|
|
2007
|
|
2006
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,722
|
|
$
|
2,456
|
Investment in subsidiaries
|
|
|
75,677
|
|
|
70,896
|
Other
|
|
|
1,356
|
|
|
1,061
|
|
|
|
|
|
|
Total assets
|
|
$
|
78,755
|
|
$
|
74,413
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
Subordinated Debt
|
|
$
|
22,681
|
|
$
|
22,681
|
Other Liabilities
|
|
|
3,023
|
|
|
1,215
|
Stockholders' equity
|
|
|
53,051
|
|
|
50,517
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
78,755
|
|
$
|
74,413
|
|
|
|
|
|
78
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
Condensed Statements of Operations
(In thousands)
|
|
Year ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Income:
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
4,300
|
|
$
|
3,500
|
|
|
Interest income
|
|
|
55
|
|
|
52
|
|
|
Other expense, net
|
|
|
(3,874
|
)
|
|
(4,151
|
)
|
|
|
|
|
|
|
|
|
Income before equity in undistributed earnings of subsidiaries
|
|
|
481
|
|
|
(599
|
)
|
Increase (decrease) in undistributed equity of subsidiaries
|
|
|
2,296
|
|
|
3,187
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit
|
|
|
2,777
|
|
|
2,588
|
|
Income tax benefit
|
|
|
1,360
|
|
|
1,397
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,137
|
|
$
|
3,985
|
|
|
|
|
|
|
|
Team Financial, Inc.
Condensed Statements of Cash Flows
(In thousands)
|
|
Year ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,137
|
|
$
|
3,985
|
|
|
(Increase) decrease in undistributed equity of subsidiaries
|
|
|
(2,246
|
)
|
|
(3,187
|
)
|
|
Contribution of treasury stock to ESOP
|
|
|
|
|
|
|
|
|
Non-cash compensation expense
|
|
|
147
|
|
|
310
|
|
|
Other
|
|
|
(527
|
)
|
|
1,788
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,511
|
|
|
2,886
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital contributions to subsidiaries
|
|
|
(2,000
|
)
|
|
|
|
|
Other
|
|
|
(31
|
)
|
|
10
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,031
|
)
|
|
10
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
2,000
|
|
|
12,475
|
|
|
Principal payments on notes payable
|
|
|
|
|
|
(6,000
|
)
|
|
Purchase of treasury stock
|
|
|
(1,568
|
)
|
|
(7,259
|
)
|
|
Issuance of treasury stock
|
|
|
778
|
|
|
88
|
|
|
Common stock issued
|
|
|
15
|
|
|
21
|
|
|
Dividends paid on common stock
|
|
|
(1,438
|
)
|
|
(1,216
|
)
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(213
|
)
|
|
(1,891
|
)
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(733
|
)
|
|
1,005
|
|
Cash and cash equivalents at beginning of the year
|
|
|
2,456
|
|
|
1,451
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
$
|
1,723
|
|
$
|
2,456
|
|
|
|
|
|
|
|
79
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2007 and 2006
The
primary source of funds available to us is the payment of dividends by our subsidiaries. Subject to maintaining certain minimum regulatory capital requirements, regulations limit
the amount of dividends that may be paid without prior approval of the subsidiaries' regulatory agencies. During 2007, our subsidiaries paid $4.3 million in dividends to the holding company. At
December 31, 2007, the subsidiaries could pay additional dividends of $5.4 million without prior regulatory approval.
(19) Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results:
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
(Dollars in thousands, except per share data)
|
Year ended 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
12,394
|
|
$
|
12,708
|
|
$
|
12,911
|
|
$
|
13,197
|
|
Interest expense
|
|
|
6,175
|
|
|
6,314
|
|
|
6,605
|
|
|
6,613
|
|
Provision for loan losses
|
|
|
230
|
|
|
77
|
|
|
91
|
|
|
308
|
|
Net income
|
|
|
1,168
|
|
|
1,411
|
|
|
908
|
|
|
651
|
|
Basic income per share
|
|
|
0.32
|
|
|
0.39
|
|
|
0.25
|
|
|
0.18
|
|
Diluted income per share
|
|
$
|
0.32
|
|
$
|
0.38
|
|
$
|
0.25
|
|
$
|
0.18
|
|
Shares applicable to basic earnings per share
|
|
|
3,595,103
|
|
|
3,651,244
|
|
|
3,616,515
|
|
|
3,590,825
|
|
Shares applicable to diluted earnings per share
|
|
|
3,697,358
|
|
|
3,684,649
|
|
|
3,695,337
|
|
|
3,642,176
|
Year ended 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
10,215
|
|
$
|
11,059
|
|
$
|
11,652
|
|
$
|
12,213
|
|
Interest expense
|
|
|
4,487
|
|
|
5,111
|
|
|
5,624
|
|
|
5,859
|
|
Provision for loan losses
|
|
|
275
|
|
|
157
|
|
|
131
|
|
|
388
|
|
Net income
|
|
|
899
|
|
|
920
|
|
|
755
|
|
|
1,411
|
|
Basic income per share
|
|
|
0.22
|
|
|
0.24
|
|
|
0.21
|
|
|
0.36
|
|
Diluted income per share
|
|
$
|
0.22
|
|
$
|
0.23
|
|
$
|
0.20
|
|
$
|
0.35
|
|
Shares applicable to basic earnings per share
|
|
|
4,025,563
|
|
|
3,850,049
|
|
|
3,594,401
|
|
|
3,597,045
|
|
Shares applicable to diluted earnings per share
|
|
|
4,078,114
|
|
|
3,941,529
|
|
|
3,692,392
|
|
|
3,704,991
|
(20) Subsequent Events
On January 18, 2008 a dividend $0.08 per share was paid to shareholders of record on December 31, 2007, as was declared by the Board of Directors on
December 3, 2007.
On
March 3, 2008, the Board of Directors declared a dividend of $0.08 per share, payable on April 18, 2008 to shareholders of record as of March 31, 2007.
80