Table of Contents
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
For the quarterly period ended
September 30, 2008
|
|
|
|
OR
|
|
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For
the transition period from
to
|
Commission
File Number: 000-26335
TEAM FINANCIAL, INC.
(Exact
name of registrant as specified in its charter)
KANSAS
|
|
48-1017164
|
(State
or other jurisdiction
|
|
(I.R.S.
Employer Identification No.)
|
of
incorporation or organization)
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|
|
8 West Peoria, Suite 200,
Paola, Kansas 66071
(Address
of principal executive offices) (Zip Code)
Registrants
telephone, including area code:
(913) 294-9667
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of accelerated
filer. and large accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer
|
o
|
|
|
Accelerated filer
o
|
Non-accelerated filer
|
o
|
(do not check if a smaller
reporting company)
|
|
Smaller Reporting Company
x
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
There were 3,597,671 shares
of the Registrants common stock, no par value, outstanding as of December 4,
2008.
Table of Contents
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Pag
e
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Part I.
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Financial
Information
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Item 1.
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Financial Statements
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Unaudited
Consolidated Statements of Financial Condition as of September 30, 2008
and December 31, 2007
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3
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Unaudited
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2008 and 2007
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4
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Unaudited
Consolidated Statements of Comprehensive Income for the Three and Nine Months
Ended September 30, 2008 and 2007
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5
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Unaudited
Consolidated Statements of Changes in Stockholders Equity for the Nine
Months Ended September 30, 2008
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6
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Unaudited
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and 2007
|
7
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Notes to Unaudited Consolidated Financial Statements
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8
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Managements
Discussion and Analysis of Financial Condition and Results of Operations
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21
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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39
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Item 4.
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Controls and Procedures
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39
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Part II.
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Other Information
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41
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Item 1.
|
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Legal Proceedings
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41
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|
Item 1A.
|
Risk Factors
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41
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Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
50
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Item 4.
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Submission of Matters to a Vote of Security Holders
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50
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Item 5
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Other Information
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51
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Item 6.
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Exhibits
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51
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|
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Signature Page
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53
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|
Exhibit 3.2
|
Amended and Restated
Bylaws of Team Financial Inc.
|
|
|
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|
Exhibit 10.32
|
Advance Pledge and Security
Agreement between the Federal Home Loan Bank of Topeka and TeamBank, N.A.
dated November 25, 2003
|
|
|
|
|
Exhibit 10.33
|
Amendment
to Revolving Credit Agreement and Note between US Bank N.A., dated October
22, 2008
|
|
|
|
|
Exhibit 31.1
|
Certification of Principal
Executive Officer Pursuant to Section 302 of Sarbanes- Oxley Act of 2002
|
|
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|
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|
Exhibit 31.2
|
Certification of Chief
Financial Officer Pursuant to Section 302 of Sarbanes- Oxley Act of 2002
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|
|
|
|
Exhibit 32.1
|
Certification of Principal
Executive Officer Pursuant to 18 U.S.C. 1350
|
|
|
|
|
|
Exhibit 32.2
|
Certification of Chief
Financial Officer Pursuant to 18 U.S.C. 1350
|
|
2
Table of Contents
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of
Financial Condition
(Dollars in thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Assets
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
13,359
|
|
$
|
20,258
|
|
Federal funds sold and interest bearing
bank deposits
|
|
1,499
|
|
9,926
|
|
Cash and cash equivalents
|
|
14,858
|
|
30,184
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
Available for sale, at fair value
(amortized cost of $147,988 and $166,369 at September 30, 2008 and December 31,
2007, respectively)
|
|
148,772
|
|
165,848
|
|
Non-marketable equity securities at cost
|
|
9,778
|
|
9,493
|
|
Total investment securities
|
|
158,550
|
|
175,341
|
|
|
|
|
|
|
|
Loans receivable, net of unearned fees
|
|
550,637
|
|
560,861
|
|
Allowance for loan losses
|
|
(16,657
|
)
|
(5,987
|
)
|
Net loans receivable
|
|
533,980
|
|
554,874
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
4,805
|
|
5,599
|
|
Premises and equipment, net
|
|
21,287
|
|
22,083
|
|
Assets acquired through foreclosure
|
|
2,616
|
|
934
|
|
Goodwill
|
|
|
|
10,700
|
|
Intangible assets, net of accumulated
amortization
|
|
2,080
|
|
2,523
|
|
Bank owned life insurance policies
|
|
21,370
|
|
20,739
|
|
Deferred tax assets
|
|
4,840
|
|
2,429
|
|
Other assets
|
|
1,501
|
|
2,087
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
765,887
|
|
$
|
827,493
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Checking deposits
|
|
$
|
146,325
|
|
$
|
187,356
|
|
Savings deposits
|
|
26,236
|
|
25,848
|
|
Money market deposits
|
|
46,779
|
|
68,472
|
|
Certificates of deposit
|
|
358,371
|
|
347,710
|
|
Total deposits
|
|
577,711
|
|
629,386
|
|
Federal funds purchased and securities sold
under agreements to repurchase
|
|
13,143
|
|
2,969
|
|
Federal Home Loan Bank advances
|
|
107,960
|
|
108,005
|
|
Notes payable and treasury, tax, and loan
|
|
4,123
|
|
2,195
|
|
Subordinated debentures
|
|
22,681
|
|
22,681
|
|
Accrued expenses and other liabilities
|
|
9,849
|
|
9,206
|
|
|
|
|
|
|
|
Total liabilities
|
|
735,467
|
|
774,442
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
Common stock, no par value, 50,000,000
shares authorized; 4,506,830 and 4,502,791 shares issued; 3,596,103 and
3,575,064 shares outstanding at September 30, 2008 and December 31, 2007,
respectively
|
|
27,972
|
|
27,916
|
|
Capital surplus
|
|
253
|
|
308
|
|
Retained earnings
|
|
13,403
|
|
37,149
|
|
Treasury stock, 910,727 and 927,727 shares
of common stock at cost at September 30, 2008, and December 31, 2007,
respectively
|
|
(11,719
|
)
|
(11,978
|
)
|
Accumulated other comprehensive income
(loss)
|
|
511
|
|
(344
|
)
|
|
|
|
|
|
|
Total stockholders equity
|
|
30,420
|
|
53,051
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
765,887
|
|
$
|
827,493
|
|
See accompanying notes to the unaudited consolidated
financial statements
3
Table of Contents
TEAM FINANCIAL, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of
Operations
(Dollars in thousands, except per share data)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
9,430
|
|
$
|
10,384
|
|
$
|
29,701
|
|
$
|
30,597
|
|
Taxable investment securities
|
|
1,750
|
|
2,015
|
|
5,318
|
|
6,007
|
|
Nontaxable investment securities
|
|
308
|
|
326
|
|
949
|
|
906
|
|
Other
|
|
32
|
|
186
|
|
275
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
11,520
|
|
12,911
|
|
36,243
|
|
38,013
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Checking deposits
|
|
185
|
|
435
|
|
691
|
|
1,488
|
|
Savings deposits
|
|
46
|
|
47
|
|
137
|
|
149
|
|
Money market deposits
|
|
225
|
|
628
|
|
931
|
|
1,662
|
|
Certificates of deposit
|
|
3,454
|
|
3,874
|
|
11,221
|
|
11,098
|
|
Federal funds purchased and securities sold
under agreements to repurchase
|
|
36
|
|
35
|
|
91
|
|
61
|
|
Federal Home Loan Bank advances payable
|
|
1,178
|
|
1,175
|
|
3,511
|
|
3,414
|
|
Notes payable and other borrowings
|
|
65
|
|
5
|
|
138
|
|
12
|
|
Subordinated debentures
|
|
257
|
|
406
|
|
857
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
5,446
|
|
6,605
|
|
17,577
|
|
19,094
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for
loan losses
|
|
6,074
|
|
6,306
|
|
18,666
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
5,564
|
|
91
|
|
12,258
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses
|
|
510
|
|
6,215
|
|
6,408
|
|
18,521
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income:
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
915
|
|
950
|
|
2,668
|
|
2,675
|
|
Trust fees
|
|
191
|
|
184
|
|
543
|
|
602
|
|
Gain on sales of mortgage loans
|
|
166
|
|
145
|
|
495
|
|
444
|
|
Gain (loss) on sales of investment
securities
|
|
|
|
(5
|
)
|
420
|
|
(4
|
)
|
Bank-owned life insurance income
|
|
250
|
|
242
|
|
739
|
|
717
|
|
Bankcard Income
|
|
219
|
|
175
|
|
603
|
|
473
|
|
Other
|
|
271
|
|
216
|
|
748
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
2,012
|
|
1,907
|
|
6,216
|
|
5,575
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Expenses:
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
2,939
|
|
3,441
|
|
9,577
|
|
9,638
|
|
Occupancy and equipment
|
|
808
|
|
947
|
|
2,468
|
|
2,524
|
|
Data processing
|
|
636
|
|
783
|
|
2,027
|
|
2,305
|
|
Professional fees
|
|
713
|
|
435
|
|
2,109
|
|
1,107
|
|
Marketing
|
|
153
|
|
167
|
|
324
|
|
446
|
|
Supplies
|
|
75
|
|
104
|
|
250
|
|
296
|
|
Intangible asset amortization
|
|
155
|
|
156
|
|
469
|
|
422
|
|
Loss on impairment of investment securities
|
|
3,664
|
|
|
|
4,569
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
10,700
|
|
|
|
Other
|
|
1,863
|
|
955
|
|
4,145
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
11,006
|
|
6,988
|
|
36,638
|
|
19,408
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
(8,484
|
)
|
1,134
|
|
(24,014
|
)
|
4,688
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
1,538
|
|
226
|
|
(556
|
)
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,022
|
)
|
$
|
908
|
|
$
|
(23,458
|
)
|
$
|
3,487
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
(2.79
|
)
|
$
|
0.25
|
|
$
|
(6.53
|
)
|
$
|
0.97
|
|
Diluted income (loss) per share
|
|
$
|
(2.79
|
)
|
$
|
0.25
|
|
$
|
(6.53
|
)
|
$
|
0.95
|
|
Shares applicable to basic income per share
|
|
3,596,103
|
|
3,616,515
|
|
3,590,584
|
|
3,609,033
|
|
Shares applicable to diluted income per
share
|
|
3,596,103
|
|
3,695,337
|
|
3,600,426
|
|
3,682,588
|
|
See accompanying notes to the unaudited consolidated
financial statements
4
Table of Contents
Team Financial, Inc, And Subsidiaries
Unaudited Consolidated Statements of Comprehensive
Income
(In thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,022
|
)
|
$
|
908
|
|
$
|
(23,458
|
)
|
$
|
3,487
|
|
Other comprehensive income (loss), net of
tax:
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investment
securities available for sale net of tax of $807 and $671 for the three
months ended September 30, 2008 and September 30, 2007, respectively; and net
of tax of $593 and $(33) for the nine months ended September 30, 2008 and
September 30, 2007 respectively
|
|
(868
|
)
|
1,301
|
|
(1,883
|
)
|
(67
|
)
|
Reclassification adjustment for (gains)
losses included in net income net of tax of $0 and $2 for the three months ended
September 30, 2008 and September 30, 2007, respectively; and net of tax of
$(143) and $1 for the nine months ended September 30, 2008 and September 30,
2007 respectively
|
|
|
|
3
|
|
(277
|
)
|
3
|
|
Reclassification adjustment for loss on
impairments included in net income net of tax of $1,246 and $0 for the three
months ended September 30, 2008 and September 30, 2007, respectively; and net
of tax of $1,553 and $0 for the nine months ended September 30, 2008 and
September 30, 2007, respectively
|
|
2,418
|
|
|
|
3,016
|
|
|
|
Other comprehensive income (loss), net
|
|
1,550
|
|
1,304
|
|
855
|
|
(64
|
)
|
Comprehensive income (loss), net
|
|
$
|
(8,472
|
)
|
$
|
2,212
|
|
$
|
(22,603
|
)
|
$
|
3,423
|
|
See accompanying notes to the unaudited consolidated
financial statements
5
Table of Contents
Team Financial, Inc, And Subsidiaries
Unaudited Consolidated Statements of Changes In
Stockholders Equity
Nine Months Ended September 30, 2008
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
Total
|
|
|
|
Common
|
|
Capital
|
|
Retained
|
|
Treasury
|
|
comprehensive
|
|
stockholders
|
|
|
|
stock
|
|
surplus
|
|
earnings
|
|
stock
|
|
income (loss)
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2007
|
|
$
|
27,916
|
|
$
|
308
|
|
$
|
37,149
|
|
$
|
(11,978
|
)
|
$
|
(344
|
)
|
$
|
53,051
|
|
Treasury stock purchased (7,600 shares)
|
|
|
|
|
|
|
|
(102
|
)
|
|
|
(102
|
)
|
Common stock issued in connection with employee
benefit plans (4,039 shares)
|
|
56
|
|
|
|
|
|
|
|
|
|
56
|
|
Contribution of shares of treasury stock to
Company ESOP (17,000 shares)
|
|
|
|
|
|
|
|
249
|
|
|
|
249
|
|
Issuance of Treasury Shares in connection with
compensation plans (7,600 shares)
|
|
|
|
(65
|
)
|
|
|
112
|
|
|
|
47
|
|
Recognition of stock-based compensation
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
Net loss
|
|
|
|
|
|
(23,458
|
)
|
|
|
|
|
(23,458
|
)
|
Dividends ($0.08 per share)
|
|
|
|
|
|
(288
|
)
|
|
|
|
|
(288
|
)
|
Other comprehensive income net of $450 in
taxes
|
|
|
|
|
|
|
|
|
|
855
|
|
855
|
|
BALANCE, September 30, 2008
|
|
$
|
27,972
|
|
$
|
253
|
|
$
|
13,403
|
|
$
|
(11,719
|
)
|
$
|
511
|
|
$
|
30,420
|
|
See accompanying notes to the unaudited consolidated
financial statements
6
Table of Contents
Team Financial, Inc, and Subsidiaries
Unaudited Consolidated Statements Of Cash
Flows
(Dollars in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(23,458
|
)
|
$
|
3,487
|
|
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
|
|
|
|
|
|
Goodwill impairment
|
|
10,700
|
|
|
|
Provision for loan losses
|
|
12,258
|
|
398
|
|
Depreciation and amortization
|
|
1,552
|
|
1,645
|
|
Impairment of assets
|
|
301
|
|
14
|
|
Stock-based compensation expense
|
|
10
|
|
111
|
|
Change in bank owned life insurance
|
|
(631
|
)
|
(606
|
)
|
Net gain on sales of investment securities
|
|
(420
|
)
|
|
|
Net loss on sales of investment securities
|
|
|
|
4
|
|
Net loss on impairment of investment
securities
|
|
4,569
|
|
|
|
Stock dividends
|
|
(225
|
)
|
(325
|
)
|
Net gain on sales of mortgage loans
|
|
(495
|
)
|
(444
|
)
|
Net (gain) loss on sales of assets
|
|
(52
|
)
|
58
|
|
Proceeds from sale of mortgage loans
|
|
39,342
|
|
32,341
|
|
Origination of mortgage loans for sale
|
|
(37,745
|
)
|
(29,951
|
)
|
(Increase) decrease in deferred tax asset
|
|
(2,862
|
)
|
273
|
|
Net (increase) decrease in other assets
|
|
1,435
|
|
(915
|
)
|
Net increase in accrued expenses and other
liabilities
|
|
979
|
|
755
|
|
Net cash provided by operating activities
|
|
5,258
|
|
6,845
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Net (increase) decrease in loans
|
|
4,826
|
|
(32,313
|
)
|
Proceeds from sale of investment securities
available-for-sale
|
|
13,373
|
|
1,670
|
|
Proceeds from maturities and principal
reductions of investment securities
|
|
42,671
|
|
13,370
|
|
Purchases of investment securities
|
|
(41,978
|
)
|
(17,127
|
)
|
Purchase of premises and equipment, net
|
|
(357
|
)
|
(5,272
|
)
|
Proceeds from sales of assets
|
|
826
|
|
372
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
19,361
|
|
(39,300
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
(51,676
|
)
|
20,328
|
|
Net increase (decrease) in federal funds
purchased and securities sold under agreements to repurchase
|
|
10,174
|
|
(2,627
|
)
|
Payments on Federal Home Loan Bank advances
|
|
(45
|
)
|
(166,188
|
)
|
Proceeds from Federal Home Loan Bank
advances
|
|
|
|
166,145
|
|
Payments on notes payable
|
|
(4,169
|
)
|
(4,064
|
)
|
Proceeds from notes payable
|
|
6,097
|
|
4,064
|
|
Common stock issued
|
|
56
|
|
15
|
|
Purchase of treasury stock
|
|
(102
|
)
|
(1,184
|
)
|
Issuance of treasury stock
|
|
296
|
|
778
|
|
Dividends paid on common stock
|
|
(576
|
)
|
(863
|
)
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities
|
|
(39,945
|
)
|
16,404
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(15,326
|
)
|
(16,051
|
)
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
the period
|
|
30,184
|
|
37,150
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the
period
|
|
$
|
14,858
|
|
$
|
21,099
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
18,071
|
|
$
|
18,584
|
|
Income taxes (net of refunds)
|
|
1,150
|
|
1,751
|
|
|
|
|
|
|
|
Noncash activities related to operations
|
|
|
|
|
|
Assets acquired through foreclosure
|
|
$
|
2,627
|
|
$
|
448
|
|
See accompanying notes to the unaudited
consolidated financial statements
7
Table
of Contents
Team Financial, Inc and Subsidiaries
Notes to
Unaudited Consolidated Financial Statements
Three and nine month periods ended September
30, 2008 and 2007
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Team
Financial, Inc. and Subsidiaries (the Company) have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not
include all of the information and footnotes necessary for a comprehensive
presentation of financial condition and results of operations required by U.S.
generally accepted accounting principles for complete financial
statements. In the opinion of
management, all normal recurring adjustments necessary for a fair presentation
of results have been included. The
operating results for interim periods are not necessarily indicative of results
that may be expected for any other interim period or the full year. The consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
included in our Annual Report on Form 10-K/A for the year ended December 31,
2007.
The interim consolidated financial statements include the accounts of
Team Financial, Inc. and its wholly owned subsidiaries, Team Financial
Acquisition Subsidiary, Inc., including TeamBank, N.A. and its subsidiaries,
and Post Bancorp, including Colorado National Bank, all of which are
collectively considered one segment. All
material inter-company transactions, profits, and balances are eliminated in
consolidation. The consolidated
financial statements do not include the accounts of our wholly owned statutory
trust, Team Financial Capital Trust II (the Trust). In accordance with Financial Accounting
Standards Board Interpretation No. 46R, Consolidation of Variable Interest
Entities (FIN 46 R), adopted in December 2003, the Trust qualifies as a
special purpose entity that is not required to be consolidated in the financial
statements of Team Financial, Inc. The
Trust was formed in 2006 for the purpose of issuing $22 million of Trust
Preferred Securities. We continue to include the Trust Preferred Securities
issued by the Trust in Tier I capital for regulatory capital purposes.
The December 31, 2007 statement of financial condition has been derived
from the audited consolidated financial statements as of that date. Certain amounts in the 2007 financial
statements have been reclassified to conform to the 2008 presentation. The results of the three and nine months
ended September 30, 2008, have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. Our ability
to continue as a going concern is substantially dependent upon the successful
execution of many of the actions referred to within this report. Our interim condensed financial statements do
not include any adjustments relating to the recoverability and classification
of recorded asset amounts nor to the amounts and classification of liabilities
should the Company be unable to continue as a going concern.
(2) Recent Accounting
Pronouncements
In September 2006, the Financial Accounting Standards Board (the
FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements. This statement
defines fair value, establishes a framework for measuring fair value in U.S.
generally accepted accounting principles, and expands disclosures about fair
value measurements. The Statement was
effective for the Company on January 1, 2008 and did not have a significant
impact on the Companys financial position, operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities Including 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 was
effective for the Company on January 1, 2008, however, the Company did not
elect to adopt SFAS No. 159 for any financial instruments, therefore, SFAS No.
159 did not have a significant impact on the Companys financial position,
operations or cash flows.
In September 2006, the FASB ratified the consensus reached by the
FASBs 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 SFAS No. 106, Employers Accounting for Postretirement
Benefits Other Than Pensions, or Accounting Principles Board (APB) Opinion No.
12, Omnibus Opinion 1967. Entities
should recognize the effects of applying this issue through either (a) a change
in
8
Table of Contents
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 was effective for the Company on January 1, 2008 and did not
have a significant impact on the Companys financial position, operations or
cash flows.
(3) Stock Based Compensation
The Companys 1999 Stock
Incentive Plan and 2007 Stock Incentive Plan provide for the following stock
and stock-based awards: restricted stock, stock options, stock appreciation
rights and performance shares. As of
September 30, 2008, up to 66,850 shares of our common stock were available to
be issued under the 1999 Stock Incentive Plan and up to 378,750 shares of our common
stock were available to be issued under the 2007 Stock Incentive Plan. All employees, directors and consultants are
eligible to participate in these 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 both
plans.
The Company accounts for all share-based
transactions according to the provisions set forth in SFAS No. 123(R),
Share-Based Payments
, (SFAS No. 123(R)). This statement
requires that the cost resulting from all share-based transactions be
recognized in the financial statements. SFAS 123(R) establishes fair value as
the measurement objective in accounting for share-based arrangements and
requires all entities to apply a fair-value based measurement method in
accounting for share-based payments with employees except for equity instruments
held by employee share ownership plans.
The Company recognized share-based compensation expense or (reversal) of
approximately ($14,000) and ($25,000), respectively during the three months
ended September 30, 2008 and 2007, and $10,000 and $111,000 during the nine
months ended September 30, 2008 and 2007 respectively.
Stock-based compensation
expense for outstanding options with a vesting period during the three months
ended September 30, 2008 was estimated using the Black-Scholes option pricing
model with the following assumptions:
|
|
One-year options
|
|
Three-year options
|
|
Expected life in years
|
|
5.0
|
|
6.7
|
|
Expected volatility
|
|
17.29
|
%
|
34.89
|
%
|
Risk-fee interest rate
|
|
3.45
|
%
|
3.32
|
%
|
Annual rate of quarterly dividends
|
|
2.09
|
%
|
1.82
|
%
|
The following table summarizes
option activity for the nine months ended September 30, 2008:
|
|
|
|
Weighted
|
|
Weighted average
|
|
Aggregate
|
|
|
|
Number of
|
|
average exercise
|
|
remaining contractual
|
|
Intrinsic
|
|
|
|
optioned shares
|
|
price per share
|
|
life in years
|
|
Value
|
|
Outstanding at December 31, 2007
|
|
335,700
|
|
$
|
12.17
|
|
|
|
|
|
Granted
|
|
45,000
|
|
14.81
|
|
|
|
|
|
Exercised
|
|
(7,600
|
)
|
10.43
|
|
|
|
|
|
Expired or forfeited
|
|
(93,750
|
)
|
15.15
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
279,350
|
|
11.56
|
|
5.2
|
|
$
|
0.00
|
|
Exercisable at September 30, 2008
|
|
240,100
|
|
11.00
|
|
4.6
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Companys
nonvested options as of September 30, 2008 and changes during the nine months
then ended are presented below:
9
Table of Contents
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
average grant
|
|
|
|
shares
|
|
date fair value
|
|
Nonvested at December 31, 2007
|
|
56,000
|
|
$
|
2.72
|
|
Granted
|
|
45,000
|
|
1.61
|
|
Vested
|
|
0
|
|
|
|
Expired or forfeited
|
|
(61,750
|
)
|
2.62
|
|
Nonvested at September 30, 2008
|
|
39,250
|
|
2.59
|
|
|
|
|
|
|
|
|
On September 30, 2008, there
was approximately $17,000 of unrecognized compensation benefit related to
nonvested stock-based compensation awards, which the Company expects to recognize
over a weighted-average period of 0.57 years.
(4) Stock Repurchase Program
There were 0 and 7,600 shares
of common stock repurchased during the three and nine months ended September
30, 2008, respectively, at an average price of $13.46 per share under a stock
repurchase program authorized by the Board of Directors that allows the
repurchase of up to 400,000 shares. At
September 30, 2008, there were 194,678 shares of our common stock remaining for
possible repurchase. As previously
disclosed, the Company does not anticipate that it will repurchase shares in
the near future in order to preserve liquidity.
(5) Dividend Suspension
On June 24, 2008, the Company
suspended paying cash dividends on its common stock in order to enhance its
capital position. The timing of any
future cash dividends is not known.
(6) Investment Securities
During the three and nine
months ended September 30, 2008, the Company recognized other than temporary
impairments totaling approximately $3.7 million and $4.6 million, respectively. Approximately $1.3 million of the reduction
in fair value during the nine months ended was the result of current market
conditions related to trust preferred securities and corporate bond obligations
issued by other financial institutions that the Company holds as
investments. These securities are
classified as Other debt securities in the tables that follow.
The Company also recognized all
of the remaining $3.3 million in losses in its investment portfolio due to the
changes in market rate from the date of purchase as a result of managements
assessment of the Companys ability to hold those impaired securities until
values recover. The Company intends to
hold these securities until values recover; however, the Companys ability to
hold these securities may be deemed to be compromised by its current liquidity,
regulatory and capital environment (see Notes 10, 11, 16 and 17); therefore,
the Company recognized all remaining losses as of September 30, 2008.
The following tables summarize
the amortized cost, gross unrealized gains and losses, and fair value of
investment securities at September 30, 2008 and December 31, 2007:
10
Table
of Contents
|
|
September 30, 2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In thousands)
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
Government-sponsored entities
|
|
$
|
20,710
|
|
$
|
152
|
|
$
|
|
|
$
|
20,862
|
|
Mortgage-backed securities
|
|
92,664
|
|
427
|
|
|
|
93,091
|
|
Nontaxable Municipal Securities
|
|
28,150
|
|
136
|
|
|
|
28,286
|
|
Taxable Municipal Securities
|
|
4,033
|
|
28
|
|
|
|
4,061
|
|
Other debt securities
|
|
2,325
|
|
|
|
|
|
2,325
|
|
Total debt securities
|
|
147,882
|
|
743
|
|
|
|
148,625
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Marketable (available for sale)
|
|
106
|
|
41
|
|
|
|
147
|
|
Non-marketable
|
|
9,778
|
|
|
|
|
|
9,778
|
|
Total investment securities
|
|
$
|
157,766
|
|
$
|
784
|
|
$
|
|
|
$
|
158,550
|
|
|
|
December 31, 2007
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
Cost
|
|
Gains
|
|
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:
|
|
|
|
|
|
|
|
|
|
Marketable (available for sale)
|
|
130
|
|
42
|
|
(11
|
)
|
161
|
|
Non-marketable
|
|
9,493
|
|
|
|
|
|
9,493
|
|
Total investment securities
|
|
$
|
175,862
|
|
$
|
1,271
|
|
$
|
(1,792
|
)
|
$
|
175,341
|
|
11
Table of Contents
(7) Loans
Major classifications
of loans at September 30, 2008 and December 31, 2007 are as follows:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
Principal
|
|
Percent of
|
|
Principal
|
|
Percent of
|
|
|
|
Balance
|
|
Total
|
|
Balance
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
One-to-four family
|
|
$
|
75,932
|
|
13.8
|
%
|
$
|
77,961
|
|
13.9
|
%
|
Construction and land development
|
|
223,804
|
|
40.7
|
|
210,083
|
|
37.4
|
|
Commercial
|
|
148,146
|
|
26.9
|
|
156,085
|
|
27.7
|
|
Farmland
|
|
27,405
|
|
5.0
|
|
28,380
|
|
5.1
|
|
Multifamily
|
|
3,474
|
|
0.6
|
|
3,855
|
|
0.7
|
|
Commerical and industrial
|
|
47,584
|
|
8.6
|
|
59,770
|
|
10.7
|
|
Agricultural
|
|
6,993
|
|
1.3
|
|
8,350
|
|
1.5
|
|
Installment loans
|
|
8,168
|
|
1.5
|
|
10,506
|
|
1.9
|
|
Obligations of state & political
subdivisions
|
|
8,911
|
|
1.6
|
|
5,628
|
|
1.0
|
|
Lease financing receivables
|
|
768
|
|
0.1
|
|
993
|
|
0.2
|
|
Gross loans
|
|
551,185
|
|
100.1
|
|
561,611
|
|
100.1
|
|
Less unearned fees
|
|
(548
|
)
|
(0.1
|
)
|
(750
|
)
|
(0.1
|
)
|
Total loans receivable
|
|
$
|
550,637
|
|
100.0
|
%
|
$
|
560,861
|
|
100.0
|
%
|
Included in one-to-four family real estate loans were loans held for
sale of approximately $768,000 at September 30, 2008 and $1.9 million at
December 31, 2007.
A summary of non-performing
assets is as follows for the dates indicated:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual
loans
|
|
$
|
36,007
|
|
6,069
|
|
Loans 90 days past due and still
accruing
|
|
5,026
|
|
233
|
|
Restructured loans
|
|
847
|
|
669
|
|
Nonperforming loans
|
|
41,880
|
|
6,971
|
|
Assets acquired through foreclosure
|
|
2,612
|
|
934
|
|
Total nonperforming assets
|
|
$
|
44,492
|
|
7,905
|
|
|
|
|
|
|
|
Nonperforming loans as a percentage of
total loans
|
|
7.61
|
%
|
1.24
|
%
|
Nonperforming assets as a percentage
of total assets
|
|
5.81
|
%
|
0.96
|
%
|
Information regarding
impaired loans is summarized as follows:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Impaired loans for which a related
allowance has been provided
|
|
$
|
16,976
|
|
$
|
5,471
|
|
Impaired loans for which a related
allowance has not been provided
|
|
19,878
|
|
1,439
|
|
Total impaired loans
|
|
$
|
36,854
|
|
$
|
6,910
|
|
|
|
|
|
|
|
Allowance related to impaired loans
|
|
$
|
3,436
|
|
$
|
648
|
|
12
Table
of Contents
(8) Allowance for Loan
Losses
A summary of the
allowances for loan losses for the nine months ended September 30, 2008
and 2007 is as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Allowance at beginning of period
|
|
$
|
5,987
|
|
5,715
|
|
Provision for estimated loan losses
|
|
12,258
|
|
398
|
|
Loans charged off
|
|
(1,733
|
)
|
(475
|
)
|
Recoveries
|
|
145
|
|
217
|
|
Allowance at end of period
|
|
$
|
16,657
|
|
5,855
|
|
|
|
|
|
|
|
Annualized net charge-offs as a percent of
average total loans
|
|
0.38
|
%
|
0.07
|
%
|
Allowance as a percent of total loans
|
|
3.03
|
%
|
1.13
|
%
|
Allowance as a percent of non-performing
loans
|
|
39.77
|
%
|
71.77
|
%
|
The
Company significantly added to the allowance for loan losses during the nine
months ended September 30, 2008 through the provision for loan losses as a
result of further deterioration of the Companys loan portfolio and the
continuing decline in the economy in the Companys area of operations.
(9)
Premises and Equipment, Net
As of September 30,
2008, the assets of the 601 North Nevada Avenue branch in Colorado Springs,
Colorado were held-for-sale, as the Company had a contract in place to sell
those assets during the fourth quarter of 2008.
The total amount of premises and equipment held for sale as of September 30,
2008 was approximately $1.2 million. The
Company sold substantially all of the premises and equipment located at that
branch in October 2008. The total amount
of premises and equipment sold was approximately $1.2 million, which resulted
in a $15,000 loss on the sale of the assets.
No loans or deposits were sold in the transaction; however, that branch
is now closed and all financial instruments were transferred to the Companys
branch located at 3110 North Nevada Avenue in Colorado Springs.
(10) Notes Payable and Other Borrowings
Effective as of June 30, 2008,
the Companys line of credit was amended to lower the Companys borrowing
capacity under the line of credit from $6 million to $4 million, the
outstanding balance as of September 30, 2008.
Effective July 1, 2008, interest began accruing at an annual rate of 2%
over the prime rate announced by US Bank, which will adjust each time that
prime rate adjusts. The line of credit
matures on January 31, 2009, at which time the Company will request that the
maturity date be extended. As a result
of the Companys subsidiaries not being in compliance with their Consent Orders
with the Office of the Comptroller of the Currency (OCC) at this time, the
Company is currently in default on the terms of this line of credit. While US Bank has not waived the event of
default, it has agreed in writing to forbear any action at this time. However, its future forbearance cannot be assured. The Consent Orders do not permit the
declaration of a dividend from either bank to the holding company unless
certain conditions are met (see Note 16 Regulatory Environment). As a result, should US Bank require that the
note be paid off because of the default, or should US Bank not extend the
maturity date upon its January 31, 2009 maturity date, the Company anticipates
that it will not have the means to comply with the payoff provisions stipulated
in the line of credit agreement without sales of assets or raising additional
equity or debt capital, which the Company may not be able to accomplish. The Company has pledged 100% of the Banks
stock as collateral to secure this line of credit and accordingly, the
Companys ability to continue operations would be extremely doubtful if US Bank
exercises its remedies.
The subsidiary banks have debt
arrangements at the FHLB with aggregated balances outstanding of $118.5 million
as of September 30, 2008, which consists of $10.5 million of overnight advances
included in federal funds purchased and $108.0 million in FHLB advances. FHLB borrowings are collateralized by FHLB
common stock, investment securities and certain qualifying mortgage loans of
our subsidiary banks. Classified loans
are not considered eligible collateral at the FHLB. Because the Companys subsidiary banks, and
TeamBank in particular, have had significant increases in classified loans in
recent months, the Banks have seen a corresponding decrease in their loans that
are considered eligible collateral. As
of the date of this report, TeamBank does not have adequate eligible collateral
pledged to cover the outstanding obligation on these borrowings, but is in the
process of providing other collateral it believes to be adequate. TeamBank is in the process of moving this
collateral from the Federal Reserve Bank of Kansas City to the FHLB to cover
the outstanding balances. TeamBank is
also replacing the collateral moved from the Federal Reserve with other
qualifying collateral. As a result of the current deficit in eligible pledged
collateral at the FHLB, the FHLB, in its sole judgement, could deem the
advances to be in default, at which time the balance outstanding would become
immediately due and payable. As with the
US Bank line of credit, the Company anticipates that it would not have the
means to comply with the payoff provisions stipulated in the agreement, and
therefore, the FHLB could seize and sell the banks assets, which may in-turn
result in substantial losses and the Companys ability to continue operations
would be extremely doubtful.
(11)
Subordinated Debentures
On September 19, 2008 the
Company elected to defer all interest payments on its Junior Subordinated Debt
Securities due on October 7, 2036 by extending the interest distribution period
until further notice, not to extend beyond the maturity date, redemption date
or special redemption date. The Company
has elected this interest deferral in order to enhance its liquidity and will
not be able to resume these interest payments until the restrictions on
dividends to the holding company initiated by the Consent Orders (see Note 16
Regulatory Environment) are lifted of which there can be no assurance. Under the terms of the Junior Subordinated
Debt Securities Agreement, the Company is prohibited from issuing dividends and
other distributions during the interest deferral period.
13
Table of Contents
(12) Commitments and Contingencies
Commitments to extend credit to our customers with unused approved
lines of credit were approximately $75.5 million at September 30, 2008. Additionally, the contractual amount of standby
letters of credit at September 30, 2008 was approximately $7.2 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. While we do not
expect to have to fund the full amount of the unused lines of credit and
standby letters of credit, the current liquidity sources of our subsidiary banks
would not be sufficient to fund the full amount of these commitments absent
asset sales, significantly improve operating results and the raising up
additional capital, or a combination thereof, none of which can be assured. In some cases we expect to continue to fund
impaired loans, in instances we feel it would be more beneficial to have
completed projects. As of September 30,
2008, we had unfunded commitments on impaired loans of approximately $156,000
for which we believe there is no current loss to the Company given collateral
levels.
(13) Income
Tax Expense
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 or 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. SFAS 109
requires that when determining the need for a valuation allowance against a
deferred tax asset, management must assess both positive and negative evidence
with regard to the realizability of the tax losses represented by that asset.
To the extent available sources of taxable income are insufficient to absorb
tax losses, a valuation allowance is necessary. Sources of taxable income for
this analysis include prior years tax returns, the expected reversals of
taxable temporary differences between book and tax income, prudent and feasible
tax-planning strategies, and future taxable income.
The
Companys gross deferred tax asset resulted primarily from a significant
increase in its loan loss allowance as well as impairment losses on available
for sale securities. The Company has recorded a valuation allowance of $2.8
million against its deferred tax asset of $9.6 million as of September 30,
2008, after considering all available evidence related to the amount of the tax
asset that is more likely than not to be realized. Given the companys recent operating losses,
the valuation allowance recorded at September 30, 2008 reduces the deferred tax
asset to an amount management deems more likely than not to be realized through
the carry back of tax losses to prior years federal taxable income.
As
a result of the Companys net operating loss for the three and nine months
ended September 30, 2008, the Company had an income tax expense of $1.5 million
for the three months ended and an income tax benefit of approximately $556,000
for the nine months ended September 30, 2008, compared to income tax expense of
$226,000 for the three and $1.2 million for the nine months ended September 30,
2007. The effective tax rate is
typically less than the statutory federal rate of 34.0% due primarily to
municipal interest income and income from the investment in bank owned life
insurance. The lower tax rate in 2008 is
a result of impairment of goodwill which is not deducted in computing income
tax expense, taxable income from the surrender of bank owned life insurance
policies not reportable in book income as well as the establishment of a
valuation allowance against deferred tax assets that management deems more
likely than not will not be realized.
In
accordance with FIN 48, the Company has performed an analysis and believes that
it is not more likely than not that certain state tax benefits will be
recognized in the future. As of the nine months ended September 30, 2008,
approximately $868,000 of unrecognized tax benefits related to certain state
tax benefits, and approximately $7,000 of unrecognized tax benefits related to
acquisition costs were included in other liabilities within the consolidated
balance sheet. For the nine months ended September 30, 2008, the reserve for
the unrecognized benefits increased by a total of approximately $168,000. If recognized, all of the tax benefits would
increase net income, decreasing the effective tax rate.
The
Company recognizes any interest and penalties related to unrecognized tax
benefits in the provision for income taxes and subsequently recognizes those
state tax benefits when the related statutes expire. Interest and penalties
associated with the above-mentioned unrecognized tax benefits approximated
$261,000 ($232,000 after tax) at September 30, 2008. During the fourth quarter of 2008, should the
2004 related statutes expire, the Company expects to recognize approximately
$119,000 of state tax benefits as well as $48,000 of interest and penalties
associated with these state tax positions.
The recognition of these tax benefits would increase net income by
approximately $127,000.
The
Companys federal tax returns for the years 2005 through 2007 and various state
income tax returns for the years 2004 through 2007 remain subject to review by
the various tax authorities.
(14) Fair
Value Measurements
Effective January 1,
2008, the Company adopted SFAS No. 157,
Fair
Value Measurements
, which provides a framework for measuring fair
value within generally accepted accounting principles and expands disclosures
about
14
Table of Contents
fair value measurements.
SFAS No. 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS 157 identifies three primary
valuation techniques: the market approach, the income approach and the cost
approach. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets or
liabilities. The income approach uses valuation techniques to convert future
amounts such as cash flows or earnings, to a single present amount. The
measurement is based on the value indicated by current market expectations
about those future amounts. The cost approach is based on the amount that
currently would be required to replace the service capacity of an asset.
SFAS No. 157
establishes a fair value hierarchy and prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The fair value
hierarchy gives the highest priority to observable inputs such as quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). The maximization of observable
inputs and the minimization of the use of unobservable inputs are required.
Classification within the fair value hierarchy is based upon the objectivity of
the inputs that are significant to the valuation of an asset or liability as of
the measurement date. The three levels within the fair value hierarchy are
characterized as follows:
Level 1
- Quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to
access at the measurement date.
Level 2
- Inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs include: quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; inputs other than quoted prices
that are observable for the asset or liability; and inputs that are derived
principally from or corroborated by observable market data by correlation or
other means.
Level 3
- Unobservable inputs for the asset or liability
for which there is little, if any, market activity for the asset or liability
at the measurement date. Unobservable inputs reflect the Companys own
assumptions about what market participants would use to price the asset or
liability. These inputs may include internally developed pricing models,
discounted cash flow methodologies, as well as instruments for which the fair
value determination requires significant management judgment.
The Company measures
financial assets and liabilities at fair value in accordance with SFAS No. 157.
These measurements involve various valuation techniques and assume that the
transactions would occur between market participants in the most advantageous
market for the Company. Certain
non-financial assets and liabilities which are deferred under the provision of
FASB Staff Position 157-2 are excluded from the following disclosures. These non-financial assets and liabilities
are written down to fair value upon impairment including foreclosed real
estate, long-lived assets and core deposit intangibles. The following is a summary of valuation
techniques utilized by the Company for its significant financial assets and
liabilities:
Valuation
techniques for instruments at fair value on a recurring basis
The Companys valuation
techniques used for financial instruments measured at fair value on a recurring
basis is described below.
Available
for sale investment securities
The available for sale
securities are recorded at fair value on a recurring basis. Exchange-traded equities
have quoted prices in an active market and are classified as Level 1.
Government sponsored entities, mortgage-backed securities, and corporate debt
securities are valued using industry-standard models that consider assumptions,
including interest rates, yield curves, volatilities, prepayment speeds, loss
severities, credit risks and default rates as well as other observable relevant
economic measures. Municipal bonds securities are valued using a type matrix,
or grid, pricing in which securities are benchmarked against the treasury rate
based on their credit ratings. These measurements are classified as Level 2.
15
Table of Contents
The
table below presents the balances of assets and liabilities measured at fair
value on a recurring basis.
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(in thousands)
|
|
September 30, 2008
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
$
|
148,772
|
|
$
|
147
|
|
$
|
148,625
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
148,772
|
|
$
|
147
|
|
$
|
148,625
|
|
$
|
|
|
Valuation
techniques for instruments at fair value on a nonrecurring basis
The Companys valuation
techniques used for other financial instruments measured at fair value on a
nonrecurring basis is described below. Other than as noted below, no fair value
adjustments were recognized in the current period on these instruments.
Private
equity stock and restricted stock
Non-marketable equity stock
consists of private equity stock and restricted stock. Private equity stock is
carried at cost and reviewed periodically for impairment based on estimated
fair value. Carrying cost would be reduced for other than temporary
impairments. Federal Reserve Bank and
Federal Home Loan Bank stock is held by the bank subsidiaries as required for
regulatory purposes and sale or liquidation of this stock is restricted.
Non-marketable equity stock is currently carried at cost which approximates
fair value and these securities are classified as Level 3. No fair value adjustments have been recorded
in 2008.
Collateral
dependent impaired loans
Collateral dependent
impaired loans are carried at the lower of the unpaid principal balance or the
fair value of the underlying collateral. Loans are not recorded at fair value
on a recurring basis. However, nonrecurring fair value adjustments are recorded
on certain loans to reflect partial write-downs that are based on the
observable market price or current appraised value of the collateral. The value
of the collateral is determined based on external appraisals and internal
assessments which inputs may not be observable. Therefore, collateral dependent
impaired loans are Level 3. The carrying value of these impaired loans
increased $ 11.6 million from $23.4 million at June 30, 2008 to $ 35.0 million
at September 30, 2008, with $ 821,000 in charges offs on impaired loans during
the current quarter. The related allowance increased by $ 93,000, from $2.9
million at June 30, 2008 to $ 3.0 million at September 30, 2008.
Mortgage
Servicing Rights
Mortgage servicing rights
are measured at fair value and amortized over the period of estimated net
servicing income initially. These rights do not trade in an active market with
readily observable prices. Therefore, the fair value is assessed quarterly
based on a valuation model that calculates the discounted cash flow based on
the assumptions that market participants use in estimating the future net
servicing income. The model incorporates assumptions such as estimates of
prepayment speeds, market discount rates and cost of servicing. The fair value
measurements are classified as Level 3. No fair value adjustments have been
recorded during 2008.
Premises
and Equipment held for sale
Premises and Equipment held
for sale are carried at the lower of cost or fair value. These assets are
currently carried at cost which approximates fair value as determined by a
contract to sale with an independent third party and these assets are
classified as Level 3. The carrying value of premises and equipment held for
sale was $1.2 million at September 30, 2008. No fair value adjustments have been recorded
during 2008.
16
Table of Contents
Loans held for sale
Loans held for sale are
measured at the lower of cost or market value.
The portfolio consists of residential real estate loans. Mortgage loans held for sale fair value
measurements are based on quoted market prices for similar loans in the
secondary market and are classified as Level 2.
No fair value adjustments have been recorded during 2008.
(15) Goodwill and Other Intangible Assets
Due
to the adverse changes in the business climate in which the Company operates,
goodwill impairment tests were performed as of March 31, 2008 and June 30,
2008 relating to the financial statement carrying value of goodwill of our two
subsidiary banks, TeamBank, N.A. and Colorado National Bank, in accordance with
SFAS No. 142,
Goodwill and Other
Intangible Assets
. The banks
are treated as separate reporting units for purposes of goodwill impairment
testing. Prior to the goodwill
impairment tests, TeamBank, N.A. had approximately $4.7 million of goodwill and
Colorado National Bank had approximately $6.0 million of goodwill. Through the valuations, the Company
determined that the goodwill associated with Colorado National Bank was
impaired by the entire carrying value of $6.0 million as of March 31, 2008
and the goodwill associated with TeamBank was also impaired by the entire
carrying value of $4.7 million as of June 30, 2008. The impairment of goodwill resulted in direct
charges to earnings during the first and second quarters of 2008 and had no
associated tax benefits.
Below
is a summary of goodwill and other intangible assets and changes during the
nine months ended September 30, 2008 (in thousands):
|
|
|
|
Core Deposit
|
|
Mortgage
|
|
Non-compete
|
|
|
|
Goodwill
|
|
Intangible
|
|
Servicing Rights
|
|
Agreement
|
|
Balance at December 31, 2007
|
|
$
|
10,700
|
|
$
|
1,900
|
|
$
|
274
|
|
$
|
349
|
|
Additions
|
|
|
|
|
|
26
|
|
|
|
Amortization
|
|
|
|
(325
|
)
|
(57
|
)
|
(87
|
)
|
Impairment
|
|
(10,700
|
)
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
|
|
$
|
1,575
|
|
$
|
243
|
|
$
|
262
|
|
(16) Regulatory Environment
On September 2,
2008 and September
3, 2008, respectively, both of the Companys subsidiary banks (the Banks),
TeamBank and Colorado National Bank, each consented and agreed to the issuance
of a Consent Order (the Consent Orders) by the Office of the Comptroller of
Currency (the OCC). Among other
things, the Consent Orders require the Banks to appoint a compliance committee
to monitor compliance with the Consent Orders; within 120 days develop a three
year strategic plan establishing objectives for the Banks; within 120 days
develop a capital plan and increase Tier 1 capital to at least 8% of adjusted
total assets and Tier 1 capital to at least 10% of risk-weighted assets or
approximately $3.5 million of capital; appoint a new senior loan officer;
develop within 30 days and maintain a liquidity management program that addresses
the Banks current and expected funding needs and ensure that sufficient funds
or access to funds exists to meet those needs; take action to protect the
Banks interests in assets criticized by the OCC; implement and adhere to a
written credit policy to improve the Banks loan portfolios management; obtain
current independent appraisals on any loan in excess of $500,000 in the case of
TeamBank and $300,000 in the case of Colorado National Bank that is secured by
real property where borrower has failed to comply with contractual terms of the
loan agreement and an analysis of current financial information does not
demonstrate the ongoing ability of the borrower or guarantor to perform in
accordance with the contractual terms of the loan agreement; continue to employ
an independent review annually of the lending function; establish a program
designed to manage the risk of the Banks commercial real estate loan
portfolio, and establish a program for the maintenance of an adequate allowance
for loan and lease losses. Also, the
Banks may not declare a dividend to the holding company unless the Bank is
in compliance with its approved capital plan both before and after the payment
of the dividend, the Bank is in compliance with traditional regulation
regarding dividend declaration amounts, and the Bank has received a prior
written determination of no supervisory objection by the OCC. The OCC staff has expressed its ongoing
concern regarding liquidity issues and related matters of TeamBank, and has
reiterated the need for comprehensive liquidity plans and strategies. As a
result, subsequent to the issuance of the Consent Orders, the OCC has requested
daily liquidity reports in order to monitor
17
Table of Contents
the Banks liquidity.
Additionally, TeamBank is currently
subject to the Federal Reserve Banks discount window lending limitations
outlined in Section 142 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 and Regulation A. Accordingly, the Federal Reserve Bank
will not make or have outstanding advances to TeamBank for more than 60 days in
any 120-day period, absent extenuating circumstances.
TeamBank
and Colorado National Bank neither admitted nor denied any wrongdoing in
consenting to their respective Consent Orders. The foregoing description
of the Consent Orders is qualified in its entirety by reference to the terms of
the Consent Orders, which are attached as Exhibits 10.32 and 10.34 in the
Companys Current Report filed on Form 8-K on September 8, 2008 and
incorporated by reference.
The Consent Orders stem from an examination
of the Banks, from which both of the Banks received a letter from the OCC,
Kansas City South Field office on April 24, 2008, indicating that it believes
the Banks are deemed to be in troubled condition for purposes of Section 914
of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
and, as a result, the Banks are subject to specified restrictions on
operations. On July 13, 2008, the
Company also received a similar troubled condition letter from the Federal
Reserve Bank of Kansas City with regard to the holding company. These letters were based upon the OCC staffs
determination that the Banks had deficiencies in credit administration
practices, loan risk rating systems, loan loss allowance methodologies, and
levels of classified assets. The
restrictions provide that: (1) the Banks
must notify the OCC 90 days before adding or replacing a member of their
respective boards of directors or employing any, or promoting any existing
employee as a senior executive officer, and (2) the Banks may not, except under
certain circumstances, enter into any agreements to make severance or
indemnification payments or make any such payments to institution-affiliated
parties. Similar restrictions also apply
to the Company as a result of the troubled condition letter received by the
Federal Reserve Bank of Kansas City.
The Company entered into a similar agreement
(the Written Agreement) with the Federal Reserve Bank of Kansas City (the
Reserve Bank) on November 21, 2008.
Among other things, the Written Agreement provides that the Company will
not declare or pay any dividends, take dividends from the Banks, distribute any
interest principal or other sums on subordinated debentures or trust preferred
securities, incur, increase, or guarantee any debt or purchase or redeem any
shares of Company stock without prior written approval of the Reserve
Bank. Within 60 days, the Company must
also provide an acceptable written capital plan to maintain sufficient capital
at the consolidated organization and at each of the Banks and a written
statement of cash flow projections for 2009. The Written Agreement also stipulates that the
Company shall not increase or materially modify any current service fee
agreement or calculation between the Company and the Banks without prior
written approval of the Reserve Bank.
The Company must also submit quarterly progress reports to the Reserve
Bank detailing the Companys actions and progress in complying with the Written
Agreement.
Although the Company and its subsidiaries are
working on complying with the Consent Orders and correcting the deficiencies
identified by the OCC and the Reserve Bank, deficiencies still exist and the
Companys subsidiaries are not currently in compliance with the Consent
Orders. The Company and its subsidiary
banks expect to continue to work with the OCC and the Reserve Bank to address
any regulatory concerns. However, should
the Company or either of the Companys subsidiaries fail to meet the
requirements of the Consent Orders or the Written Agreement by the specified
due dates, the OCC and/or the Reserve Bank, may in their sole discretion, grant
written extensions of time to comply with any portions of the Consent Orders or
Written agreement, or the regulators may take further enforcement actions,
which could include placing either bank into receivership, in which case our
ability to continue operations would be extremely doubtful.
A consequence of the regulatory issues
mentioned above is that the Company no longer qualifies as a financial holding
company under the Reserve Banks guidelines.
Since early 2005, the Company has not engaged in any activities
permissible only to financial holding companies, such as owning and operating
a broker-dealer or an insurance-related business as defined in the Bank Holding
Company Act. Effective July 3, 2008, the
Company became a bank holding company under the Federal Bank Holding Company
Act.
On May 5, 2008, the Company infused
$1,750,000 and $250,000 in capital to TeamBank, N.A. and Colorado National
Bank, respectively. The capital
infusions were funded through borrowings on the Companys existing line of
credit. The Company has no remaining
borrowing capacity under this line of credit.
As a result of the
Companys subsidiaries not being in compliance with their Consent Orders
at this time, the Company is currently in default on the terms of this line of
credit. While US Bank has not waived the
event of default, it has agreed in writing to forbear any action at this
time. However, its future forbearance
cannot be assured. (See Note 10 Notes
Payable and Other Borrowings).
(17) Capital Adequacy
The
Company and the subsidiary banks are subject to the regulatory capital adequacy
requirements of the Reserve Board, the Federal Deposit Insurance Corporation
and the Office of the Comptroller of the Currency, as applicable. A combination of risk-based guidelines and
leverage ratios are used to evaluate regulatory capital adequacy. Additionally, the Consent Orders stipulate
capital adequacy ratio minimums for the subsidiary banks. As of September 30, 2008, neither TeamBank
nor Colorado National Bank met all of the minimum capital ratios required by
their Consent Orders although they were adequatly capitalized under traditional
bank regulatory capital adequacy requirements.
Additionally, based on the Banks current and projected levels of
capital, the Company does not anticipate that the Banks will be able to meet
the minimum capital ratios established in the Consent Orders by December 31,
2008 without a combination of raising additional capital and selling assets. In the current economic environment, there is
significant risk that the Company will not be able to raise additional capital
or sell assets to ensure compliance with the capital requirements of the
Consent Orders. Failure to meet the
regulatory capital guidelines in
18
Table of Contents
the
Consent Orders may result in the initiation by the Companys regulators of
additional supervisory actions which could include placing the Banks into
receivership, in which case the Companys ability to continue operations would
be extremely doubtful. For additional
information, see Part II Other Information, Item 1.A. Risk Factors.
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 assets, and
of Tier 1 capital to average assets.
The
tables below present our capital adequacy ratios as of September 30, 2008 and
December 31, 2007:
|
|
Actual
|
|
For capital adequacy
purposes
|
|
To be well capitalized
under prompt
corrective action
provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
At September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Team Financial, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted
assets)
|
|
$
|
58,005
|
|
9.26
|
%
|
$
|
50,130
|
|
8
|
%
|
|
|
|
|
Tier 1 capital (to risk weighted
assets)
|
|
38,043
|
|
6.07
|
%
|
25,065
|
|
4
|
%
|
|
|
|
|
Tier 1 capital (to average assets)
|
|
38,043
|
|
4.81
|
%
|
31,611
|
|
4
|
%
|
|
|
|
|
TeamBank, N.A.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted
assets)
|
|
$
|
51,672
|
|
9.58
|
%
|
$
|
43,167
|
|
8
|
%
|
$
|
53,959
|
|
10
|
%
|
Tier 1 capital (to risk weighted
assets)
|
|
44,833
|
|
8.31
|
%
|
21,584
|
|
4
|
%
|
32,375
|
|
6
|
%
|
Tier 1 capital (to average assets)
|
|
44,833
|
|
6.72
|
%
|
26,682
|
|
4
|
%
|
33,353
|
|
5
|
%
|
Colorado National Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted
assets)
|
|
$
|
9,646
|
|
11.18
|
%
|
$
|
6,902
|
|
8
|
%
|
$
|
8,627
|
|
10
|
%
|
Tier 1 capital (to risk weighted
assets)
|
|
8,553
|
|
9.91
|
%
|
3,451
|
|
4
|
%
|
5,176
|
|
6
|
%
|
Tier 1 capital (to average assets)
|
|
8,553
|
|
6.73
|
%
|
5,083
|
|
4
|
%
|
6,354
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Table of Contents
|
|
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
|
%
|
|
|
|
|
Tier 1 capital (to risk weighted
assets)
|
|
58,244
|
|
8.81
|
%
|
26,437
|
|
4
|
%
|
|
|
|
|
Tier 1 capital (to average assets)
|
|
58,244
|
|
7.43
|
%
|
31,840
|
|
4
|
%
|
|
|
|
|
TeamBank, N.A.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted
assets)
|
|
$
|
59,300
|
|
10.56
|
%
|
$
|
44,903
|
|
8
|
%
|
$
|
56,129
|
|
10
|
%
|
Tier 1 capital (to risk weighted
assets)
|
|
54,251
|
|
9.67
|
%
|
22,452
|
|
4
|
%
|
33,677
|
|
6
|
%
|
Tier 1 capital (to average assets)
|
|
54,251
|
|
8.27
|
%
|
26,247
|
|
4
|
%
|
32,809
|
|
5
|
%
|
Colorado National Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital (to risk weighted
assets)
|
|
$
|
10,129
|
|
10.27
|
%
|
$
|
7,891
|
|
8
|
%
|
$
|
9,864
|
|
10
|
%
|
Tier 1 capital (to risk weighted
assets)
|
|
9,191
|
|
9.32
|
%
|
3,946
|
|
4
|
%
|
5,918
|
|
6
|
%
|
Tier 1 capital (to average assets)
|
|
9,191
|
|
7.24
|
%
|
5,080
|
|
4
|
%
|
6,351
|
|
5
|
%
|
(18) Subsequent Events
On December 1, 2008 TeamBank
entered into multiple agreements to convert its approximately $19.4 million of
bank-owned life insurance policies to cash in order to enhance the Banks
liquidity. TeamBank expects to receive approximately $16.0 million in cash
proceeds from the policy conversion, during the first week of December. As a result of a change in TeamBanks intent
to hold its bank owned life insurance policies, TeamBank recorded approximately
$1.9 million in tax expense and approximately $525,000 in early withdrawal fee
during the quarter ended September 30, 2008 as the proceeds were no longer
expected to be nontaxable as of that date. In accordance with U.S. Generally Accepted
Accounting Principles, the tax implications of this transaction are reflected in
the accompanying unaudited consolidated financial statements for the three and
nine months ended September 30, 2008.
20
Table
of Contents
Item 2:
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following is managements
discussion and analysis of particular events or circumstances that have
affected the Companys financial condition or results of operations during the
periods presented in this filing.
Team Financial, Inc. is a bank
holding company incorporated in the State of Kansas. The Company applied for and effective July 3,
2008, was granted certification as a bank holding company as a result of
troubled condition letters received by the holding company and our subsidiary
banks from our primary regulators. Our
common stock is listed on the Nasdaq Global Market (NASDAQ) under the symbol
TFIN.
We recorded net loss of $10.0
million, or $2.79 basic and diluted loss per share for the three months ended
September 30, 2008, compared to net income of $908,000, or $0.25 basic and
diluted income per share for the three months ended September 30, 2007. During the nine months ended September 30,
2008, we recorded a net loss of $23.5 million, or $6.53 basic and diluted loss
per share. During the three months ended
September 30, 2008, we recorded $5.6 million in provisions for loan losses as
it was determined during the quarter that additional allowances for loan losses
would be made to absorb losses in our loan portfolio related to the further
decline in the real estate market in our areas of operation. The net loss during the three months ended
September 30, 2008 was also driven by $3.7 million in other than temporary
impairments on the investment portfolio and an adjustment to our deferred tax
asset through the establishment of a valuation reserve. The net loss of $23.5 million during the nine
months ended September 30, 2008 was primarily due to a non-cash $10.7 million
impairment charge for the write-off of our goodwill associated with Colorado
National Bank and TeamBank during prior quarters, coupled with $12.3 million in
provisions for loan losses, $4.6 million in other than temporary impairments in
the investment portfolio, and the adjustment to the abovementioned deferred tax
asset adjustment of approximately $2.8 million.
The following table presents
selected financial data for the three and nine months ended September 30, 2008
and 2007 (dollars in thousands, except per share data):
|
|
As of and For
|
|
As of and For
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
September 30
|
|
|
|
(Dollars in thousands)
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net income (loss)
|
|
$
|
(10,022
|
)
|
$
|
908
|
|
$
|
(23,458
|
)
|
$
|
3,487
|
|
Basic income (loss) per share
|
|
$
|
(2.79
|
)
|
$
|
0.25
|
|
$
|
(6.53
|
)
|
$
|
0.97
|
|
Diluted income (loss) per share
|
|
$
|
(2.79
|
)
|
$
|
0.25
|
|
$
|
(6.53
|
)
|
$
|
0.95
|
|
Return on average assets
|
|
-5.03
|
%
|
0.47
|
%
|
-3.84
|
%
|
0.61
|
%
|
Return on average equity
|
|
-76.61
|
%
|
6.93
|
%
|
-58.81
|
%
|
9.06
|
%
|
Average equity to average assets
|
|
6.57
|
%
|
6.73
|
%
|
6.53
|
%
|
6.72
|
%
|
Efficiency Ratio
|
|
136.11
|
%
|
85.08
|
%
|
147.25
|
%
|
79.24
|
%
|
Our subsidiary banks are
currently not in compliance with their Consent Orders with the OCC, but are
working to achieve compliance. Additionally,
we are currently in default on our $4 million line of credit with US Bank and
we are under collateralized in our FHLB borrowing agreement (which we are in
the midst of remedying). While neither
US Bank nor the FHLB has demanded immediate payment of our borrowings from them
as a result of these issues, if they do, we do not anticipate that we will have
the means to comply with the immediate payoff provisions in those
agreements. Accordingly, if either US
Bank or the FHLB should demand immediate payment, or if our regulators initiate
any further actions (which could include receivership of one or both of our
Banks) our ability to continue operations would be extremely doubtful.
21
Table of Contents
Critical
Accounting Policies
Our accounting and reporting policies conform
to
U.S. generally
accepted accounting principles. In preparing the consolidated financial
statements and related notes, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses for
the periods presented. Actual results
could differ significantly from those estimates. The Companys significant accounting policies are more fully described
in Note 1 to the consolidated financial statements contained in the Companys
Annual Report on Form 10-K/A for the year ended December 31, 2007, and
significant assumptions and estimates made by management are more fully
described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations under Critical Accounting Policies" in the
Form 10-K/A. As a result of a review of
various national banking-related publications, as well as a pronouncement of,
and discussions with, our primary banking regulator, the Office of the
Comptroller of the Currency (the OCC), and in response to additional data
becoming available, the assumptions and estimates of the allocations
attributable to deteriorating market conditions in our allowance for loan loss
calculation were
significantly
increased
during the nine months ended September 30, 2008. We recorded a provision for loan losses of $5.6
million and $12.3 million during the three and nine months ended September 30,
2008, which was primarily related to the increased estimates of the allocations
attributable to the foregoing regulatory guidance, weakening market conditions
and deterioration of our loan portfolio.
The Company adheres to SFAS 142
Goodwill and Other Intangible Assets
. Goodwill impairment tests were performed
during the fourth quarter of 2007; however, due to the adverse changes in the
business climate in which we operate, we performed additional goodwill
impairment tests as of March 31, 2008 and June 30, 2008 relating to the
financial statement carrying value of goodwill at the Banks, and used modified
estimates of future cash flows that took into account the changes in the
business climate which included the Companys subsidiaries being deemed to be
in troubled condition by their regulators.
Through the valuations, the Company determined that the goodwill
associated with Colorado National Bank was impaired by approximately $6.0
million as of March 31, 2008, and that the goodwill associated with TeamBank,
N.A. was impaired by $4.7 million as of June 30, 2008. These impairments resulted in direct changes
to earnings during their respective quarters of 2008 and had no associated tax
benefits. See Note 15 - Goodwill and
Other Intangible Assets.
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 or 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. SFAS 109 requires that when determining the
need for a valuation allowance against a deferred tax asset, management must
assess both positive and negative evidence with regard to the realizability of
the tax losses represented by that asset. To the extent available sources of
taxable income are insufficient to absorb tax losses, a valuation allowance is
necessary. Sources of taxable income for this analysis include prior years tax
returns, the expected reversals of taxable temporary differences between book
and tax income, prudent and feasible tax-planning strategies, and future
taxable income.
The company has recorded a valuation
allowance of $2.8 million against its deferred tax asset of $9.6 million as of
September 30, 2008, after considering all available evidence related to the
amount of the tax asset that is more likely than not to be realized.
The companys deferred tax asset resulted
primarily from a significant increase in its loan loss allowance. To the extent
the loan loss allowance is not allocable to specific loans, it represents
future tax benefits which would be realized when actual charge-offs are made
against the allowance. Given the companys recent operating losses, the
valuation allowance recorded at September 30, 2008 reduces the deferred tax
asset to the amount management deems more likely than not to be realized only
through the carry back of tax losses to prior years Federal tax returns.
As a result of the Companys net operating
loss for the three and nine months ended September 30, 2008, the Company had an
income tax expense of approximately $1.5 million for the three months and an
income tax benefit of approximately $556,000 for the nine months ended
September 30, 2008, compared to income tax expense of $226,000 for the three
and $1.2 million for the nine months ended September 30, 2007. The effective tax rate is typically less than
the statutory federal rate of 34.0% due primarily to municipal interest income
and income from the investment in bank owned life insurance. The lower tax rate in 2008 is a result of
impairment of goodwill which is not deducted in computing income tax expense,
taxable income from the surrender of bank owned life insurance policies not
reportable in book income as well as the establishment of a valuation allowance
against deferred tax assets that management deems more likely than not will not
be realized.
In accordance with FIN 48, the Company has
performed an analysis and has taken the position that it is not more likely
than not that certain state tax benefits will be recognized in the future. As
of the nine months ended September 30, 2008, approximately $868,000 of
unrecognized tax benefits related to certain state tax benefits, and
approximately $7,000 of unrecognized tax benefits related to acquisition costs
were included in other liabilities within the consolidated balance sheet. For
the nine months ended September 30, 2008, a total of approximately $168,000 was
added to these reserves. If recognized,
all of the tax benefits would increase net income, decreasing the effective tax
rate.
We have also modified our estimates
surrounding our ability and intent to hold our investment securities until
values recover. While management has the intent to hold these securities, our
ability to hold them has been compromised by our current liquidity, regulatory,
and capital environment. Accordingly, we have realized all of the losses
present in our investment securities portfolio as of September 30, 2008.
There have been no other material changes to
our critical accounting policies or the estimates made pursuant to those
policies during our most recent quarter.
Regulatory Environment
As previously reported, on September 2,
2008
and September 3, 2008, respectively, both of the Companys subsidiary banks (the
Banks), TeamBank and Colorado National Bank, each consented and agreed to the
issuance of a Consent Order (the Consent Orders) by the Office of the
Comptroller of Currency (the OCC).
Among other things, the Consent Orders require the Banks to appoint a
compliance committee to monitor compliance with the Consent Orders; within 120
days develop a three year strategic plan establishing objectives for the Banks;
within 120 days develop a capital plan and increase Tier 1 capital to at least
8% of adjusted total assets and Tier 1 capital to at least 10% of risk-weighted
assets; appoint a new senior loan officer; develop within 30 days and maintain
a liquidity management program that address the Banks current and expected
funding needs and ensure that sufficient funds or access to funds exists to
meet those needs; take action to protect the Banks interests in assets
criticized by the OCC; implement and adhere to a written credit policy to
improve the Banks loan portfolios management; obtain current independent
appraisals on any loan in excess of $500,000 in the case of TeamBank and
$300,000 in the case of Colorado National Bank that is secured by real property
where borrower has failed to comply with contractual terms of the loan
agreement and an analysis of current financial information does not demonstrate
the ongoing ability of the borrower or guarantor to perform in accordance with
the contractual terms of the loan agreement; continue to employ an independent
review annually of the lending function; establish a program designed to manage
the risk of the Banks commercial real estate loan portfolio, and establish a
program for the maintenance of an adequate allowance for loan and lease losses.
Also, the Banks may not declare a dividend to pay to the holding company
unless the Bank is in compliance with its approved capital plan both before and
after the payment of the dividend, the Bank is in compliance with traditional
regulation regarding dividend declaration amounts, and the Bank has received a
prior written determination of no supervisory objection by the OCC. The OCC staff has expressed its ongoing
concern regarding liquidity issues and related matters of TeamBank, and has
reiterated the need for ongoing comprehensive liquidity plans and strategies. Subsequent to the issuance of the Consent
Orders, the OCC has requested daily liquidity reports in order to monitor the
Banks liquidity. TeamBank and Colorado
National Bank neither admitted nor denied wrongdoing in consenting to their
respective Consent Orders. The foregoing description of the Consent Order
is qualified in its entirety by reference to the terms of the Consent Orders,
which are attached as Exhibit 10.32 in the Companys Current Report filed
on Form 8-K on September 8, 2008 and incorporated by reference.
The Consent Orders stem from an examination
of the Banks, from which both of the Banks received a letter from the OCC,
Kansas City South Field office on April 24, 2008, indicating that it believes
the Banks are deemed to be in troubled condition for purposes of Section 914
of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
and, as a result, the Banks are subject to specified restrictions on
operations. On July 13, 2008, the
Company also received a similar troubled condition letter from the Federal
Reserve Bank of Kansas City with regard to the holding company. These letters were based upon the OCC staffs
determination that the Banks had deficiencies in credit administration
practices, loan risk rating systems, loan loss allowance methodologies, and
levels of classified assets. The
restrictions provide that: (1) the Banks
must notify the OCC 90 days before adding or replacing a member of their
respective boards of directors or employing any, or promoting any existing
employee as a senior executive officer, and (2) the Banks may not, except under
certain circumstances, enter into any
22
Table of Contents
agreements to make severance or
indemnification payments or make any such payments to institution-affiliated
parties. Similar restrictions also apply
to the Company as a result of the troubled condition letter received by the
Federal Reserve Bank of Kansas City.
The Company entered into a similar agreement
(the Written Agreement) with the Federal Reserve Bank of Kansas City (the
Reserve Bank) on November 21, 2008.
Among other things, the Written Agreement provides that the Company will
not declare or pay any dividends, take dividends from the Banks, distribute any
interest principal or other sums on subordinated debentures or trust preferred
securities, incur, increase, or guarantee any debt or purchase or redeem any
shares of Company stock without prior written approval of the Reserve
Bank. Within 60 days, the Company must
also provide an acceptable written capital plan to maintain sufficient capital
at the consolidated organization and at each of the Banks and a written statement
of cash flow projections for 2009. The
Written Agreement also stipulates that the Company shall not increase or
materially modify any current service fee agreement or calculation between the
Company and the Banks without prior written approval of the Reserve Bank. The Company must also submit quarterly
progress reports to the Reserve Bank detailing the Companys actions and
progress in complying with the Written Agreement.
Although the Company and its subsidiaries are
working on complying with the Consent Orders and the Written Agreement and
correcting the deficiencies identified by the OCC and the Reserve Bank,
deficiencies still exist and the Companys subsidiaries are not currently in
compliance with the Consent Orders, nor do we anticipate that they will be in
compliance by December 31, 2008, particularly as it relates to compliance with
minimum capital levels. The Company and
its subsidiary banks expect to continue to work with the OCC and the Reserve
Bank to address any regulatory concerns.
However, should the Company or either of the Companys subsidiaries fail
to meet the requirements of the Consent Orders or the Written Agreement, by the
specified due dates, the OCC and/or the Reserve Bank, may in their sole
discretion, grant written extensions of time to comply with any portions of the
Consent Orders or Written Agreement, or the regulators may take further
enforcement actions, which could include placing either bank into receivership
in which case our ability to continue operations would be extremely doubtful.
A consequence of the above regulatory issues
mentioned above, is that the Company no longer qualifies as a financial holding
company under the Reserve Banks guidelines.
Since early 2005, the Company has not engaged in any activities permissible
only to financial holding companies, such as owning and operating a
broker-dealer or an insurance-related business as defined in the Bank Holding
Company Act. Effective July 3, 2008, the
Company became a bank holding company under the Federal Bank Holding Company
Act.
On May 5, 2008, the Company
infused $1,750,000 and $250,000 in capital to TeamBank, N.A. and Colorado
National Bank, respectively. The capital
infusions were funded through the Companys existing line of credit. The Company has no remaining borrowing
capacity under this line of credit. As a
result of the Companys subsidiaries not being in compliance with their Consent
Orders at this time, the Company is currently in default on the terms of this
line of credit. US Bank has agreed in
writing to forbear any action at this time; however, its future forbearance
cannot be assured.
Corporate Governance Matters
On June 16, 2008, we entered
into an agreement (the Bicknell Agreement) with several stockholders known as
the Bicknell Group, who are a group as defined in Rule 13d-5 promulgated by
the Securities and Exchange Commission.
The Bicknell Agreement addresses several corporate governance matters
relating to the Company. Under the
Agreement, the Company agreed to postpone or adjourn its 2008 Annual Meeting of
Stockholders which was originally set for June 17, 2008, in order to resolicit
proxies for a revised slate of Class III Director nominees to be elected at a
reconvened meeting. The reconvened
meeting was held on August 19, 2008. The Bicknell Group agreed to vote in favor
of the revised slate nominated by the Company which included existing director,
Robert Blachly; former chief financial officer and director of the Company,
Richard J. Tremblay; and Jeffrey L. Renner, a non-management nominee to the
Board of Directors.
In conjunction with the
Bicknell Agreement, Carolyn Jacobs and Denis Kurtenbach declined to stand for
nomination as Class III directors. In
addition, independent director, Harold G. Sevy, Jr. tendered his resignation as
a director on August 19, 2008, the date of the reconvened meeting so that the
number of Board positions would be reduced to eight directors.
In addition, the Bicknell
Agreement provides that the Companys Strategic Planning Committee of the Board
will consist of Connie Hart, Jeffrey Renner and Richard Tremblay, with Ms. Hart
serving as chairperson. Also the Audit
Committee of the Board is to be composed of Greg Sigman, who will serve as chairperson,
Connie Hart and Jeffrey Renner. The Nominating
Committee is to be composed of Robert Blachly, who will be the chairperson,
Gregory Sigman and Kenneth Smith. The
Compensation Committee will be composed of Kenneth Smith, who will be chairperson,
Connie Hart and Jeffrey Renner.
Consistent with regulatory requirements and committee charters, all
other directors have the right to participate in committee meetings as
observers.
The Company also agreed to not
extend its Rights Agreement with American Securities Transfer & Trust,
Inc., as rights agent, beyond the expiration date of June 3, 2009 or adopt any
similar agreement without stockholder approval.
The Company further agreed to seek to eliminate its classification of
the Board of Directors so that annually all directors will stand for re-election. This proposal to declassify the Board is to
be presented to the stockholders at the 2009 Annual Meeting.
Pursuant to the Bicknell
Agreement, the Company has named Connie Hart, an independent director, as
chairperson of the Board.
The Bicknell Group, which owns
427,025 shares of common stock, or 11.9% of the outstanding shares, agreed to
refrain from any tender offer, exchange offer, merger or business combination
with the Company as well as to refrain from any solicitation of proxies until
the earlier of the 2009 Annual Meeting or June 30, 2009. Also, prior to
23
Table of Contents
the 2009 Annual Meeting, the
Bicknell Group agreed not to propose any matter to submission to the Companys
stockholders or to seek to amend any provision of the Companys Articles of
Incorporation or bylaws.
On July 10, 2008 we entered into a settlement
agreement (the Edquist Agreement) with shareholder and former director Keith
B. Edquist with respect to the Companys 2008 Annual Meeting of Shareholders
and related matters. The 2008 Annual
Meeting of Shareholders was originally scheduled for June 17, 2008, but was
postponed.
Under the terms of the Edquist
Agreement, Mr. Edquist has agreed to terminate his efforts to nominate persons
for election as Class III directors at the Companys 2008 Annual Meeting of
Shareholders, agreed to vote his shares in favor of the Companys nominees for
director at the 2008 Annual Meeting (Robert M. Blachly, Jeffrey L. Renner and
Richard J. Tremblay), and agreed to abide by certain standstill provisions
until the earlier of June 30, 2010 or the Companys 2010 Annual Meeting. As part of the settlement, the parties
executed a mutual release as well.
Additionally, under the terms
of the Edquist Agreement, the Company agreed to reimburse Mr. Edquist for
certain expenses related to his proxy solicitation efforts. Under the reimbursement arrangement, Mr.
Edquist will receive approximately $22,572 monthly through January 1, 2009, for
a total of approximately $158,000.
Mr. Edquists obligations are
contingent on the Bicknell Agreement remaining in full force and effect.
Effective September 1, 2008, Robert J.
Weatherbie resigned as Chief Executive Officer and Director of Team
Financial, Inc. (the Registrant) and as President of TeamBank, N.A. and
as Director of TeamBank, N.A. and Colorado National Bank and their affiliates.
On September 19, 2008, the board of directors of TeamBank,
N.A. appointed Sandra J. Moll as Interim President and Chief Executive Officer
of TeamBank. Ms. Moll also serves as a Director and the Chief
Operating Officer of the Company. The
Company is actively searching for a permanent replacement for Mr.
Weatherbie.
Effective November 4, 2008, the Board of Directors
named Bruce R. Vance as Chief Financial Officer of the Company. Vance had served as interim Chief Financial
Officer of the Company since April 28, 2008, and prior to that time he had
served as the Companys Director of Internal Audit since May of 2006.
FINANCIAL
CONDITION
Total assets at September 30, 2008, were $765.9
million compared to $827.5 million at December 31, 2007, a decrease of $61.6
million, or 7.4%. This decrease was
primarily a result of a decrease in cash and cash equivalents of $15.3 million
coupled with a decrease in investment securities of $16.8 million, a $10.2
million decrease in loans receivable, and the $10.7 million write-off of
goodwill. Total deposits decreased $51.7
million to $577.7 million at September 30, 2008 compared to $629.4 million at
December 31, 2007. The decrease in total
deposits was primarily due to a decrease in checking deposits and money market
deposits of $41.0 million and $21.7 million, respectively. The decrease in checking deposits and money
market deposits, and the corresponding decrease in cash and cash equivalents,
was primarily a result of the withdrawl of public funds deposits.
Investment
Securities
Total investment securities
were $158.6 million at September 30, 2008, compared to $175.3 million at
December 31, 2007, a decrease of $16.8 million, or 9.6%.
During the three and
nine months ended September 30, 2008
certain debt
securities portfolio were determined to be impaired. During the three and nine months ended
September 30, 2008, the Company recognized other than temporary impairments
totaling approximately $3.7 million and $4.6 million, respectfully (see Note 6). Approximately $1.3 million of the reduction
in fair value was the result of current market conditions related to trust
preferred securities and corporate bond obligations issued by other financial
institutions that the Company holds as investments. These securities are classified as Other debt
securities in the tables that follow.
We also
realized all of the remaining $3.3 million in losses in our investment
portfolio due to changes in market rates from the date of purchase as a result
our assessment of our ability to hold those impaired securities until values
recover. We intend to hold these securities
until values recover; however, our ability to hold these securities has been
compromised by our current liquidity, regulatory and capital environment (see
Notes 10, 11, 16 and 17); therefore, all remaining losses were recognized as of
September 30, 2008.
The following tables set forth
a summary of the amortized cost, gross unrealized gains and losses, and fair
value of investment securities at September 30, 2008 and December 31, 2007.
24
Table of Contents
|
|
September 30, 2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In thousands)
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
Government-sponsored entities
|
|
$
|
20,710
|
|
$
|
152
|
|
$
|
|
|
$
|
20,862
|
|
Mortgage-backed securities
|
|
92,664
|
|
427
|
|
|
|
93,091
|
|
Nontaxable Municipal Securities
|
|
28,150
|
|
136
|
|
|
|
28,286
|
|
Taxable Municipal Securities
|
|
4,033
|
|
28
|
|
|
|
4,061
|
|
Other debt securities
|
|
2,325
|
|
|
|
|
|
2,325
|
|
Total debt securities
|
|
147,882
|
|
743
|
|
|
|
148,625
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Marketable (available for sale)
|
|
106
|
|
41
|
|
|
|
147
|
|
Non-marketable
|
|
9,778
|
|
|
|
|
|
9,778
|
|
Total investment securities
|
|
$
|
157,766
|
|
$
|
784
|
|
$
|
|
|
$
|
158,550
|
|
|
|
December 31, 2007
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
Cost
|
|
Gains
|
|
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:
|
|
|
|
|
|
|
|
|
|
Marketable (available for sale)
|
|
130
|
|
42
|
|
(11
|
)
|
161
|
|
Non-marketable
|
|
9,493
|
|
|
|
|
|
9,493
|
|
Total investment securities
|
|
$
|
175,862
|
|
$
|
1,271
|
|
$
|
(1,792
|
)
|
$
|
175,341
|
|
Loans Receivable
Loans receivable decreased
$10.2 million, or 1.82%, to $550.6 million at September 30, 2008, compared to
$560.9 million at December 31, 2007.
This decrease was primarily due to a $12.2 million decrease in
commercial and industrial loans and a $7.9 million decrease in nonfarm,
nonresidential loans, offset by a $13.7 million increase in construction and
land development loans which was largely driven by funding commitments and
lines of credit in place.
Our loan originations have
declined in recent months. In addition
to an overall weak economy that has led to a decreased demand for our loan
products, we are not actively pursuing loan growth in order to preserve liquidity
and sustain capital levels and capital ratios.
As such, we do not anticipate loan growth consistent with loan growth of
previous periods, and we are seeking to further decrease our loan balances in
order to provide for increased levels of capital ratios and liquidity.
We currently have a high
concentration in real estate and construction and land development loans. The current economic downturn in the housing
market, particularly as it relates to our market areas, coupled with our high
concentration in these loans, has necessitated increased allowances for loan
losses and increased levels of capital to provide protection from losses if
market conditions deteriorate further.
In order to provide ample liquidity and capital ratios and decrease our
concentration in real estate construction and land development loans, we may
decrease these loan balances in the near future through a variety of channels,
including but not limited to loan sales, with or without recourse, to other
financial institutions. However, the
economic downturn in the real estate market has led to a decreased market for
such loan sales, and we cannot assure that we will be successful in lowering
our concentration in real estate and construction and land development loans in
the near future through these channels.
Management does not have an estimate of how long the currently
challenging operating environment will persist.
25
Table of Contents
The
following table presents the composition of our loan portfolio by type of loan
at the dates indicated.
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
Principal
|
|
Percent of
|
|
Principal
|
|
Percent of
|
|
|
|
Balance
|
|
Total
|
|
Balance
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
One-to-four family
|
|
$
|
75,932
|
|
13.8
|
%
|
$
|
77,961
|
|
13.9
|
%
|
Construction and land development
|
|
223,804
|
|
40.7
|
|
210,083
|
|
37.4
|
|
Commercial
|
|
148,146
|
|
26.9
|
|
156,085
|
|
27.7
|
|
Farmland
|
|
27,405
|
|
5.0
|
|
28,380
|
|
5.1
|
|
Multifamily
|
|
3,474
|
|
0.6
|
|
3,855
|
|
0.7
|
|
Commerical and industrial
|
|
47,584
|
|
8.6
|
|
59,770
|
|
10.7
|
|
Agricultural
|
|
6,993
|
|
1.3
|
|
8,350
|
|
1.5
|
|
Installment loans
|
|
8,168
|
|
1.5
|
|
10,506
|
|
1.9
|
|
Obligations of state & political
subdivisions
|
|
8,911
|
|
1.6
|
|
5,628
|
|
1.0
|
|
Lease financing receivables
|
|
768
|
|
0.1
|
|
993
|
|
0.2
|
|
Gross loans
|
|
551,185
|
|
100.1
|
|
561,611
|
|
100.1
|
|
Less unearned fees
|
|
(548
|
)
|
(0.1
|
)
|
(750
|
)
|
(0.1
|
)
|
Total loans receivable
|
|
$
|
550,637
|
|
100.0
|
%
|
$
|
560,861
|
|
100.0
|
%
|
Included
in one-to-four family real estate loans were loans held for sale of
approximately $768,000 at September 30, 2008 and $1.9 million at
December 31, 2007.
Non-performing Assets
Non-performing
assets consist of loans 90 days or more delinquent and still accruing interest,
non-accrual loans, restructured loans and assets acquired through
foreclosure. Loans are generally placed
on non-accrual status when principal or interest is 90 days or more past due,
unless the loans are well-secured and in the process of collection. Loans may be placed on non-accrual status
earlier when, in the opinion of management, reasonable doubt exists as to the
full, timely collection of interest or principal.
The
following table summarizes our non-performing assets at the dates indicated:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans
|
|
$
|
36,007
|
|
6,069
|
|
Loans 90 days past due and still accruing
|
|
5,026
|
|
233
|
|
Restructured loans
|
|
847
|
|
669
|
|
Nonperforming loans
|
|
41,880
|
|
6,971
|
|
Assets acquired through foreclosure
|
|
2,612
|
|
934
|
|
Total nonperforming assets
|
|
$
|
44,492
|
|
7,905
|
|
Nonperforming loans as a percentage of
total loans
|
|
7.61
|
%
|
1.24
|
%
|
Nonperforming assets as a percentage of
total assets
|
|
5.81
|
%
|
0.96
|
%
|
26
Table of Contents
Information regarding
impaired loans is summarized as follows:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Impaired loans for which a related
allowance has been provided
|
|
$
|
16,976
|
|
$
|
5,471
|
|
Impaired loans for which a related
allowance has not been provided
|
|
19,878
|
|
1,439
|
|
Total impaired loans
|
|
$
|
36,854
|
|
$
|
6,910
|
|
|
|
|
|
|
|
Allowance related to impaired loans
|
|
$
|
3,436
|
|
$
|
648
|
|
We
have experienced a significant increase in non-performing loans since December
31, 2007. Non-performing assets totaled
$44.5 million at September 30, 2008, compared to $7.9 million at December 31,
2007, representing an increase of approximately $36.6 million. Non-performing loans were the largest
component of non-performing assets during both periods, and were approximately
$41.9 million at September 30, 2008 compared to $7.0 million at December 31,
2007, an increase of approximately $34.9 million.
We
are experiencing a trend of increasing non-performing loans as well as
classified loans that are not yet considered non-performing as a result of the
current difficult economic conditions being experienced in our market areas and
nationwide. The slowdown in the housing
market has impacted some of our borrowers and their ability to repay according
to their original terms, especially those with construction and land
development loans. Although we believe
that many of these loans are adequately collateralized, we are actively working
with these borrowers to minimize any loss exposure that the Company may be
subject to as a result of the slowdown in the economy.
The
increase in non-performing loans during the nine months ended September 30,
2008 was largely due to a $29.9 million increase in non-accrual loans primarily
as a result of various real estate loans that were on non-accrual status at
September 30, 2008, but at December 31, 2007 were performing and accruing
interest. Of the $29.9 million increase
in non-performing loans, approximately $27.0 million was due to an increase in
real estate loans on non-accrual status at TeamBank, and $2.8 million was due
to an increase of the same at Colorado National Bank. Non-accrual loans increased $12.6 million
from the June 30, 2008 total of $23.4 million.
The largest area of non-accrual loans include $18.9 million in
commercial real estate loans, of which $9.9 million are located in the Colorado
Springs market and $6.4 million in the Kansas City area market.
Subsequent
to September 30, 2008, we have experienced an increase of $16.8 million in
non-accrual loans, and as of November 28, 2008, we estimate that non-accrual
loans totaled $51.8 million, an increase from the September 30, 2008 total of
$35.0 million.
Loans
90 days past due and still accruing interest totaled $5 million as of September
30, 2008, and have increased $4.8 million over December 31, 2007. The increase in loans 90 days past due and
still accruing interest at September 30, 2008, compared to December 31, 2007,
resulted primarily from a $3.9 million increase in real estate loans. Subsequent to September 30, 2008, loans 90
days past due and still accruing interest have decreased $390,000.
In
addition to the non-performing loans mentioned above, we have also 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 our 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. As of November 28, 2008, such loans totaled
approximately $84.8 million compared to $20.2 million at December 31,
2007. Management is in the process of
addressing outstanding issues with these credits in order to improve the
classifications of the loans as soon as practicable and maximize the Companys
opportunities of full payment in accordance with the terms of the loan
agreements.
Restructured
loans at September 30, 2008 and December 31, 2007 consisted of six and eight
relationships, respectively, the largest of which was an agricultural loan with
an outstanding balance of approximately $488,000 at September 30, 2008 that was
restructured through the Farmers Home Administration.
27
Table of Contents
Other
real estate owned at September 30, 2008 consisted of fifteen properties
including four commercial buildings totaling approximately $627,000, nine
one-to-four family properties totaling approximately $1.7 million, and two
parcels of vacant land totaling approximately $242,000. The properties are all located within our
market areas. Management is working to
sell the real estate as soon as practicable.
Our
loan portfolio is continuously monitored for possible non-performing assets as
information becomes available.
Allowance
for loan losses
We
maintain an allowance for loan losses based on historical experience, an
evaluation of economic conditions and regular review of delinquencies and loan
portfolio quality. Based upon these
factors, we make various assumptions and judgments about the ultimate
collectibility of our loan portfolio and provide an allowance for probable loan
losses based upon a percentage of the outstanding balances and for specific
loans if their ultimate collectibility is considered questionable. Actual
losses may differ due to changing conditions or information that is currently
not available.
During
the three and nine months ended September 30, 2008, we significantly increased
our allowance for loan losses through charges to provision for loan
losses. The increases were primarily the
result of the economic downturn in the national and local housing market. Our Banks have high concentrations in this
area of lending through real estate construction and land development
loans. The Federal Deposit Insurance
Corporation has recommended that financial institutions such as our Banks, that
have concentration levels in these types of loans, increase their levels of
loan loss allowances and increase capital to provide ample protection from
losses if market conditions deteriorate further. As a result of this guidance and additional
deterioration in our loan portfolio, the national economy, and more
specifically to our market areas, we have considerably increased our Banks
allowance for loan loss allocations for the three and nine months ended
September 30, 2008. Due to the downturn
in the economy in our market areas, and the significant increases in our
classified loans, we may increase our allowance for loan loss allocations in
the future if deemed necessary.
The
following table summarizes our allowance for loan losses:
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In thousands)
|
|
Allowance at beginning of period
|
|
$
|
5,987
|
|
$
|
5,715
|
|
Provision for loan losses
|
|
12,258
|
|
398
|
|
Loans charged off
|
|
(1,733
|
)
|
(475
|
)
|
Recoveries
|
|
145
|
|
217
|
|
Allowance at end of period
|
|
$
|
16,657
|
|
$
|
5,855
|
|
|
|
|
|
|
|
Annualized net charge-offs as a percent of
total loans
|
|
0.38
|
%
|
0.07
|
%
|
Allowance as a percent of total loans
|
|
3.03
|
%
|
1.13
|
%
|
Allowance as a pecent of non-performing
loans
|
|
39.77
|
%
|
71.77
|
%
|
The allowance for loan losses as a percent of
total loans was 3.03% at September 30, 2008 compared to 1.17% at December 31,
2007 and 1.13% at September 30, 2007.
The allowance for loan losses as a percent of
non-performing loans was 39.77% at September 30, 2008, compared to 85.87% at
December 31, 2007 and 71.77% at September 30, 2007. This allowance for non-performing loans at
September 30, 2008 decreased compared to December 31, 2007 due to the
substantial increase of loans added to nonaccrual that were well-collateralized
and therefore did not require a corresponding increase in the allowance for
loan losses. While management believes
that the allowance for loan losses is sufficient to absorb the inherent losses
in our portfolio known at this time, continued decreases in real estate that is
pledged as collateral on these non-accrual loans would lower their liquidation values
and thereby necessitate additional allowances in the future.
28
Table
of Contents
Goodwill and Intangible Assets
Due to the adverse changes in the business
climate in which we operate, we performed goodwill impairment tests as of March
31, 2008 and June 30, 2008 relating to the financial statement carrying value
of goodwill at the Banks, in accordance with SFAS No. 142,
Goodwill and
Other Intangible Assets
. The
Banks are treated as separate reporting units for purposes of goodwill
impairment testing. Prior to the
goodwill impairment tests, TeamBank, N.A. had approximately $4.7 million of
goodwill and Colorado National Bank had approximately $6.0 million of
goodwill. Through the valuations, the
Company determined that the goodwill associated with Colorado National Bank was
impaired by approximately $6.0 million as of March 31, 2008, and that the
goodwill associated with TeamBank, N.A. was impaired by $4.7 million as of June
30, 2008. These impairments resulted in
direct charges to earnings during their respective quarters of 2008 and had no
associated tax benefits.
Deposits
Total deposits decreased
approximately $51.7 million, or 8.21%, to $577.7 million at September 30, 2008
from $629.4 million at December 31, 2007.
Approximately $26.9 million of this decrease occurred during the third
quarter of 2008. The decrease was
primarily a result of a decrease in checking deposits of $41.0 million coupled
with a decrease in money market deposits of $21.7 million since December 31,
2007. These decreases were largely due
to the loss of public funds deposits as a result of seasonality of those
funds.
Recently, Kansas Bankers Surety
Company announced its plans to discontinue offering bank deposit guarantee
bonds for deposits over the FDIC insurance limits effective in February 2009. As a result of this decision, we expect to have
lower deposits of municipalities and county governments during 2009 compared to
previous years, but cannot estimate the amount of such lower deposits. However, non-interest bearing business
accounts now have unlimited FDIC insurance coverage.
We experienced withdrawl of our
deposits during the third quarter of approximately $26.9 million. However, as of November 28, 2008, deposits
had increased to $616.7 million from $577.7 million at September 30, 2008.
Principal maturities of
certificates of deposit at September 30, 2008 were as follows:
Year ending December 31:
|
|
(Dollars in thousands)
|
|
4th Quarter
2008
|
|
153,113
|
|
1st Quarter
2009
|
|
47,779
|
|
2nd Quarter
2009
|
|
73,557
|
|
3rd Quarter
2009
|
|
35,736
|
|
4th Quarter
2009
|
|
18,194
|
|
Total 2009
|
|
175,266
|
|
2010
|
|
22,460
|
|
2011
|
|
2,710
|
|
2012
|
|
3,305
|
|
Thereafter
|
|
1,517
|
|
Total
|
|
$
|
358,371
|
|
|
|
|
|
|
Included in the
table above are approximately $16.0 million in brokered CDs to mature during
the remainder of 2008 and approximately $20.1 million to mature during 2009. Due to the Banks Consent Orders, we are not permitted
to purchase brokered CDs to replace these maturing time deposits. We are actively promoting our deposit
products and paying premium rates for CDs in order to maintain adequate
liquidity.
Notes
Payable and Other Borrowings
Effective as of June 30,
2008, the Companys line of credit with US Bank was amended to lower the
Companys borrowing capacity under the line of credit from $6 million to $4
million, the outstanding balance as of September 30, 2008. Effective July 1, 2008, interest began accruing
at an annual rate of 2% over the prime rate announced by US Bank, which will
adjust each time that prime rate adjusts.
The line of credit matures on January 31, 2009, at which time the
Company expects that it will request that the maturity date be extended.
As a result of the Companys subsidiaries not being in compliance
with their Consent Orders with the Office of the Comptroller of Currency
(OCC) at this time, the Company is currently in default on the terms of this
line of credit. While US Bank has not waived the event of
default, it has agreed in writing to forbear any action at this time. However, its future forbearance cannot be
assured.
The Consent Orders do not
permit
the declaration of a dividend from either bank to our holding company
unless certain conditions are met. As a
result, should US Bank require that the note be paid off because of the
default, or should US Bank not extend the maturity date upon its January 31,
2009 maturity date, the Company does not anticipate that it will have the means
to comply with the immediate payoff provisions stipulated in the line of credit
agreement without sales of significant assets. However, we cannot assure that we will be
successful in the sale of our assets. The
Company has pledged 100% of the Banks stock as collateral to secure this line
of credit, and accordingly, the Companys ability to conduct operations would
be extremely doubtful if US Bank seizes the collateral.
29
Table of Contents
Our subsidiary banks have debt arrangements at the
Federal Home Loan Bank (FHLB) with aggregated balances outstanding of $118.5
million as of September 30, 2008, which consists of $10.5 million of overnight
advances included in federal funds purchased and $108.0 million in FHLB
advances. FHLB borrowings are
collateralized by FHLB common stock, investment securities and certain
qualifying mortgage loans of our subsidiary banks. Classified loans are not considered eligible
collateral at the FHLB. Because the
Companys subsidiary banks, and TeamBank in particular, have had significant
increases in classified loans in recent months, the Banks have experienced a
corresponding decrease in loans that are considered eligible collateral. As of the date of this report, TeamBank does
not have adequate eligible collateral pledged with the FHLB to cover the
outstanding obligation on these borrowings, but is in the process of providing
other collateral it believes is adequate to the FHLB. TeamBank is moving this collateral from the
Federal Reserve Bank of Kansas City to the FHLB. TeamBank is also replacing the collateral
moved from the Federal Reserve Bank with other qualifying collateral for the
Federal Reserve Bank. As a result of the current deficit in eligible pledged
collateral at the FHLB, TeamBank currently has no borrowing capacity at the
FHLB. As a result of TeamBank having
inadequate collateral at the FHLB, if the FHLB were to declare a default on the
applicable borrowing agreement, the entire balance outstanding would become
immediately due and payable and the FHLB could seize and sell most of
TeamBanks assets, which would in-turn result in substantial losses and a
corresponding decrease in capital, and the Companys ability to continue
operations would be extremely doubtful.
Subordinated Debentures
On September 19, 2008 the Company elected to defer
all interest payments on its Junior Subordinated Debt Securities due on October
7, 2036 by extending the interest distribution period until further notice, not
to extend beyond the maturity date, redemption date or special redemption
date. The Company has elected this
interest deferral to preserve capital and because of the restrictions on
dividends to the holding company initiated by the Consent Orders (see Note 16
Regulatory Environment). Under the terms
of the Junior Subordinated Debt Securities Agreement, the Company is prohibited
from issuing dividends and other distributions during the interest deferral
period.
Regulatory
Capital
We are subject to regulatory capital
requirements administered by the Federal Reserve, the Federal Deposit Insurance
Corporation and the Comptroller of the Currency. Additionally, the Consent Orders stipulate
capital adequacy ratio minimums for the subsidiary banks. As of September 30,
2008, neither TeamBank nor Colorado National Bank met all of the minimum
capital ratios required by their Consent Orders.
As of September 30, 2008 and December 31,
2007, we were adequately capitalized according to traditional regulatory
capital adequacy requirements. Our
ratios at September 30, 2008 were as follows:
|
|
September 30, 2008
|
|
|
|
|
|
Minimum
|
|
Ratio
|
|
Actual
|
|
required
|
|
Total capital to risk weighted assets
|
|
9.26
|
%
|
8.00
|
%
|
Core capital to risk weighted assets
|
|
6.07
|
%
|
4.00
|
%
|
Core capital to average assets
|
|
4.81
|
%
|
4.00
|
%
|
As discussed above, we have
increased allowances for loan losses and infused capital at each of the Banks
to provide protection from unexpected losses if market conditions deteriorate
further. Specifically, on May 5, 2008,
we infused $1,750,000 and $250,000 in capital to TeamBank, N.A. and Colorado
National Bank, respectively. On June 24,
2008 we suspended paying cash dividends on our common stock. Both actions were in response to the current
operating environment as the Company seeks higher levels of capital and a
stronger balance sheet during the current
30
Table of Contents
economic cycle. We expect
to seek further increases in the level
of the Banks regulatory capital in the near term, and in order to do so, we
expect to consider several alternatives, including seeking additional equity and
selling assets. Additionally, based on the Banks current and projected levels
of capital, the Company does not anticipate that the Banks will be able to meet
the minimum capital ratios established in the Consent Orders without raising
additional capital or asset sales. The Companys recent financial performance,
coupled with the tight capital markets, provides substantial doubt about our
ability to raise the capital levels of our Banks to ensure compliance with the
capital requirements of the Consent Orders absent asset sales. Additionally, we
cannot assure that we will be successful in the sale of our assets. Failure to
meet the regulatory capital guidelines in the Consent Orders may result in the
initiation by the Companys regulators of additional supervisory actions which
could include placing the Banks into receivership, in which case the Companys
ability to continue operations would be extremely doubtful. For additional
information, see Part II Other Information, Item I.A. Risk Factors.
Liquidity
Our
liquidity position has been adversely affected by the ongoing strain in the
economy, by the increased level of classified assets in our loan portfolio and
by our recent regulatory issues. The
capital markets remain extremely tight and this has also negatively impacted
our access to liquidity. A continued
increase in our non-performing assets, non-compliance with the terms of our
regulatory orders, and additional strain on our net interest margin could
further hinder our liquidity.
Our
liquidity is continuously forecasted and managed in order to satisfy cash flow
requirements of depositors and borrowers and to meet other operating cash flow
needs. We have developed internal and
external sources of liquidity to meet our liquidity needs. These sources include, but are not limited
to, the ability to raise deposits through promotional campaigns, overnight
funds, draws on our available lines of credit, the sale of investment
securities classified as available-for-sale, if they are not pledged and the
Federal Reserve Bank and other banks. However, TeamBank is currently subject to the
Federal Reserve Banks discount window lending limitations outlined in Section
142 of the Federal Deposit Insurance Corporation Improvement Act of 1991 and
Regulation A. Accordingly, the Federal Reserve Bank will not make or have
outstanding advances to TeamBank for more than 60 days in any 120-day period,
absent extenuating circumstances. Other
liquidity sources include the sale of loans (with or without recourse), loan
maturities and repayments and the conversion of our bank owned life insurance
policies to cash which TeamBank has elected to do, which triggers significant
tax consequences that are reflected in the accompanying unaudited financial
statements.
Our most liquid assets are cash
and cash equivalents and investment securities available-for-sale that are not
pledged as collateral. The levels of
these assets are dependent on operating, financing, lending and investing
activities during any given period. At
September 30, 2008, these assets, approximating $163.6 million, consisted of
$14.9 million in cash and cash equivalents, and $148.8 million in investment
securities available-for-sale.
Approximately $145.1 million of these investment securities were pledged
as collateral for borrowings, repurchase agreements and for public funds on
deposit at September 30, 2008
.
As of November 26, 2008, approximately $213.6 million of collateralized
loans were pledged on our borrowings with the Federal Home Loan Bank of
Topeka.
Classified loans are not considered eligible collateral at the FHLB. Because the Companys subsidiary banks, and
TeamBank in particular, have had significant increases in classified loans in
recent months, the Banks have experienced a corresponding decrease in our loans
that are considered eligible collateral.
As of the date of this report, TeamBank currently does not have adequate
eligible collateral pledged with the FHLB to cover the outstanding obligation
on these borrowings, but is in the process of providing other collateral it
believes is adequate. TeamBank is in the
process of moving this collateral from the Federal Reserve Bank of Kansas City
to the FHLB. TeamBank is also replacing
the collateral moved from the Federal Reserve with other qualifying collateral
for the Federal Reserve Bank. As a result of the current deficit in eligible
pledged collateral at the FHLB, TeamBank has no borrowing capacity at the
FHLB. If TeamBank is not able to cure
the collateral deficit with eligible collateral at the FHLB and if the FHLB
were to declare a default on the applicable borrowing agreement, the entire
balance outstanding would become immediately due and payable and the FHLB could
seize and sell most of TeamBanks assets, which would in-turn result in
substantial losses and the Companys ability to continue operations would be extremely
doubtful.
As a result of the Consent
Orders and the Written Agreement, the subsidiary banks are not allowed to pay
dividends to the holding company without the prior written consent of our
regulators. Without dividends from the
Banks, the holding company has no other immediate source of repayment for the
$4 million line of credit outstanding at the holding company. This line of credit will expire on January
31, 2009, at which time the Company intends to seek an extension of the
maturity date; however, no assurance can be made that the Company will be
successful in extending the terms of this line of credit. In the event that this line of credit is not
extended, the entire $4 million will become immediately due and payable and
the Company
anticipates that it will not have the means to comply with the payoff
provisions stipulated in the line of credit agreement without sales of significant
assets. However, we cannot assure that
we will be successful in the sale of our assets. The Company has pledged 100% of the Banks
stock as collateral to secure this line of credit, and accordingly, the
Companys ability to continue operations would be extremely doubtful should the
line of credit not be renewed.
RESULTS OF OPERATIONS
We incurred a net loss for the three months
ended September 30, 2008 of $10.0 million, or $2.79 basic and diluted loss
per share, compared to net income of $908,000, or $0.25 basic and diluted
income per share for the three months ended September 30, 2007. During the nine months ended September 30,
2008, we incurred a net loss of $23.5 million, or $6.53 basic and diluted loss
per share, compared to net income of $3.5 million, or $0.97 basic and $0.95
diluted income per share for the same period ended in 2007. The net loss of $10.0
million during the three months ended September 30, 2008 was primarily due to
$5.6 million in provisions for loan losses, $3.7 million in other than
temporary impairments on securities in our investment portfolio and $2.8
million in a tax valuation allowance.
The net loss of $23.5 million for the nine months ended September 30,
2008 was primarily due to $10.7 million in non-cash impairment charges for the
write-off of our goodwill associated with Colorado National Bank and TeamBank
during the first and second quarters of 2008, coupled with $12.3 million in
provisions for loan losses, $4.6 million in other than temporary impairment
charges to our investment portfolio, and the abovementioned $2.8 million tax valuation
allowance.
Net Interest Income
Net interest income before provision for loan
losses, adjusted for the tax effect of tax exempt securities and loans, for the
three months ended September 30, 2008 totaled $6.3 million compared to $6.5
million for the same period in 2007, a decrease of 3.4%.
Net interest margin on average earning
assets, adjusted for the tax effect of tax exempt securities and loans, was
3.39% for the three months ended September 30, 2008, compared to 3.69% during
the three months ended
31
Table of Contents
September 30, 2007.
The
average rate on interest earning assets for the quarter ended September 30,
2008 decreased 112 basis points to 6.32% from 7.45% for the quarter ended
September 30, 2007. Partially offsetting
the decrease on the rate of interest earning assets was a decrease in the
average cost of interest bearing liabilities of 90 basis points to 3.22% during
the three months ended September 30, 2008 from 4.12% during the three months
ended September 30, 2007.
During the nine months ended September 30,
2008, the net interest margin on average earning assets, adjusted for the tax
effect of tax exempt securities, was 3.39% compared to 3.76% during the nine
months ended September 30, 2007. The
average rate of interest earning assets decreased 97 basis points to 6.47% from
7.44% during the nine months ended September 30, 2007. The average rate paid on interest bearing
liabilities also decreased, from 4.04% during the nine months ended September
30, 2007 to 3.40% during the nine months ended September 30, 2008.
A primary driver for the decrease in the net
interest margin for the three and nine months ended September 30, 2008 compared
to the same periods of the prior year, was a decrease in the average rate
earned on our loan portfolio. During the
three months ended September 30, 2008, our loan portfolio decreased 151 basis
points from 8.19% during the three months ended September 30, 2007 to 6.68%
during the same three months ended in 2008.
Similarly, the average rate earned on our loan portfolio decreased 125
basis points during the nine months ended September 30, 2008 compared to the
same nine months in 2007. The decrease
in the average rate earned on the loan portfolio was largely due to the
substantial increase in non-accrual loans during the three and nine months
ended September 30, 2008, whereby any accrued interest on those loans was
reversed at the time the loan was put on non-accrual status.
Additionally, the decreases in the rates
earned on interest earning assets, and a corresponding decrease in rates paid
on interest bearing liabilities, also occurred in response to several federal
funds rate cuts made by the Federal Reserve Bank during the fourth quarter of
2007 and in 2008. Our loan portfolio is
comprised of both fixed rate and variable rate interest earning assets, and
therefore, many of the variable rate assets and liabilities have re-priced at
lower rates. However, the re-pricing of
our interest earning assets outpaced the re-pricing of our interest bearing
liabilities, resulting in a lower net interest margin.
The following tables present certain
information relating to net interest income for the three and nine months ended
September 30, 2008 and 2007. The average
rates are derived by dividing annualized interest income or expense by the
average balance of assets and liabilities, respectively, for the periods shown
and are presented on a tax-equivalent basis assuming a 34% tax rate for the
periods indicated.
32
Table
of Contents
|
|
Three Months Ended September 30, 2008
|
|
Three Months Ended September 30, 2007
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
|
|
(Dollars in Thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
(1) (2) (3) (4)
|
|
$
|
564,710
|
|
$
|
9,486
|
|
6.68
|
%
|
$
|
504,462
|
|
$
|
10,418
|
|
8.19
|
%
|
Investment securities-taxable
|
|
132,218
|
|
1,750
|
|
5.27
|
%
|
152,781
|
|
2,016
|
|
5.23
|
%
|
Investment securities-nontaxable (5)
|
|
29,804
|
|
467
|
|
6.23
|
%
|
28,290
|
|
494
|
|
6.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
11,072
|
|
24
|
|
0.86
|
%
|
13,630
|
|
174
|
|
5.07
|
%
|
Other interest earning assets
|
|
681
|
|
8
|
|
4.67
|
%
|
681
|
|
16
|
|
6.99
|
%
|
Total interest earning assets
|
|
$
|
738,485
|
|
11,735
|
|
6.32
|
%
|
$
|
699,844
|
|
13,118
|
|
7.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits and interest bearing checking
|
|
$
|
170,617
|
|
456
|
|
1.06
|
%
|
189,337
|
|
1,112
|
|
2.33
|
%
|
Time deposits
|
|
359,376
|
|
3,454
|
|
3.82
|
%
|
313,011
|
|
3,873
|
|
4.91
|
%
|
Federal funds purchased and securities sold
under agreements to repurchase (6)
|
|
7,307
|
|
36
|
|
1.96
|
%
|
3,751
|
|
39
|
|
3.70
|
%
|
Federal Home Loan Bank advances &
other borrowings
|
|
112,050
|
|
1,243
|
|
4.41
|
%
|
107,710
|
|
1,179
|
|
4.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures
|
|
22,681
|
|
257
|
|
4.51
|
%
|
22,681
|
|
406
|
|
7.10
|
%
|
Total interest bearing liabilities
|
|
$
|
672,031
|
|
5,446
|
|
3.22
|
%
|
$
|
636,490
|
|
6,609
|
|
4.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax equivalent)
|
|
|
|
$
|
6,289
|
|
|
|
|
|
$
|
6,509
|
|
|
|
Interest rate spread
|
|
|
|
|
|
3.10
|
%
|
|
|
|
|
3.33
|
%
|
Net interest earning assets
|
|
$
|
66,454
|
|
|
|
|
|
$
|
63,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4) (5)
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
3.69
|
%
|
Ratio of average interest bearing
liabilities to average interest earning assets
|
|
91.00
|
%
|
|
|
|
|
90.95
|
%
|
|
|
|
|
(1)
Loans are net of deferred costs, less fees.
(2)
Non-accruing loans are included in the computation of average balances.
(3) The Company includes loan fees in interest income. These fees for the three months ended
September 30, 2008 and 2007 were $144,000 and $186,000, respectively.
(4) Yield is adjusted for the tax effect of tax exempt loans. The tax effects for the three months ended
September 30, 2008 and 2007 were $56,000 and $35,000, respectively.
(5) Yield is adjusted for the tax effect of tax exempt
securities. The tax effects for the
three months ended September 30, 2008 and 2007 were $159,000 and $168,000,
respectively.
(6) Interest expense on
federal funds purchased and securities sold under agreements to repurchase
includes imputed interest on premises under construction. Imputed interest for the three months ended
September 30, 2008 and September 30, 2007 was $0 and $4,000
respectively.
33
Table of Contents
|
|
Nine Months Ended September 30, 2008
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
(1) (2) (3) (4)
|
|
$
|
572,112
|
|
29,836
|
|
6.97
|
%
|
$
|
499,774
|
|
$
|
30,727
|
|
8.22
|
%
|
Investment securities-taxable
|
|
134,885
|
|
5,318
|
|
5.27
|
%
|
153,187
|
|
6,007
|
|
5.24
|
%
|
Investment securities-nontaxable (5)
|
|
30,286
|
|
1,438
|
|
6.34
|
%
|
27,712
|
|
1,373
|
|
6.62
|
%
|
Interest-bearing deposits
|
|
22,851
|
|
248
|
|
1.45
|
%
|
12,530
|
|
467
|
|
4.98
|
%
|
Other assets
|
|
681
|
|
26
|
|
5.10
|
%
|
681
|
|
36
|
|
7.07
|
%
|
Total interest-earning assets
|
|
$
|
760,815
|
|
$
|
36,866
|
|
6.47
|
%
|
$
|
693,884
|
|
$
|
38,610
|
|
7.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits and interest-bearing checking
|
|
$
|
188,205
|
|
1,759
|
|
1.25
|
%
|
$
|
192,631
|
|
$
|
3,299
|
|
2.29
|
%
|
Time deposits
|
|
362,307
|
|
11,221
|
|
4.14
|
%
|
305,042
|
|
11,098
|
|
4.86
|
%
|
Federal funds purchased and securities sold
under agreements to repurchase
|
|
5,919
|
|
91
|
|
2.05
|
%
|
3,744
|
|
61
|
|
2.18
|
%
|
Federal Home Loan Bank advances and other
borrowings (6)
|
|
111,198
|
|
3,649
|
|
4.38
|
%
|
108,008
|
|
3,426
|
|
4.24
|
%
|
Subordinated debentures
|
|
22,681
|
|
857
|
|
5.05
|
%
|
22,681
|
|
1,210
|
|
7.13
|
%
|
Total interest-bearing liabilities
|
|
$
|
690,310
|
|
$
|
17,577
|
|
3.40
|
%
|
$
|
632,106
|
|
$
|
19,094
|
|
4.04
|
%
|
Net interest income (tax equivalent)
|
|
|
|
$
|
19,289
|
|
|
|
|
|
$
|
19,516
|
|
|
|
Interest rate spread
|
|
|
|
|
|
3.07
|
%
|
|
|
|
|
3.40
|
%
|
Net interest-earning assets
|
|
$
|
70,505
|
|
|
|
|
|
$
|
61,778
|
|
|
|
|
|
Net interest margin (4) (5)
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
3.76
|
%
|
Ratio of average interest-bearing
liabilities to average interest-earning assets
|
|
90.73
|
%
|
|
|
|
|
91.10
|
%
|
|
|
|
|
(1)
Loans are net of deferred costs, less fees.
(2)
Non-accruing loans are included in the computation of average balances.
(3) The Company includes loan fees in interest income. These fees for the nine months ended
September 30, 2008 and 2007 were $413,000 and $551,000, respectively.
(4) Yield is adjusted for the tax effect of tax exempt loans. The tax effects for the nine months ended
September 30, 2008 and 2007 were $134,000 and $130,000, respectively.
(5) Yield is adjusted for the tax effect of tax exempt
securities. The tax effects for the nine
months ended September 30, 2008 and 2007 were $489,000 and $467,000,
respectively.
(6) Interest expense on federal funds purchased and securities
sold under agreements to repurchase includes imputed interest on premises under
construction. Imputed interest for the
nine months ended September 30, 2008 and 2007 was $0 and $67,000,
respectively.
The
following table presents the components of changes in 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 average interest rate during the prior years second
quarter. The changes in interest income
or interest expense attributable to change in interest rates are calculated by
multiplying the change in interest rate by the average volume during the prior
years second quarter. The changes in
interest income or interest expense attributable to the combined impact of
changes in volume and changes in interest rates are calculated by multiplying
the change in rate by the change in volume.
34
Table
of Contents
|
|
Three Months Ended September 30, 2008
|
|
Nine Months Ended September 30, 2008
|
|
|
|
Compared To
|
|
Compared To
|
|
|
|
Three Months Ended September 30, 2007
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Increase (decrease) due to
|
|
Increase (decrease) due to
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
(1) (2) (3) (4)
|
|
$
|
1,241
|
|
$
|
(2,175
|
)
|
$
|
(934
|
)
|
$
|
4,452
|
|
$
|
(5,343
|
)
|
$
|
(891
|
)
|
Investment securities-taxable
|
|
(275
|
)
|
11
|
|
(264
|
)
|
(713
|
)
|
23
|
|
(690
|
)
|
Investment securities-nontaxable (5)
|
|
26
|
|
(53
|
)
|
(27
|
)
|
129
|
|
(64
|
)
|
65
|
|
Interest-bearing deposits
|
|
(33
|
)
|
(117
|
)
|
(150
|
)
|
385
|
|
(603
|
)
|
(218
|
)
|
Other assets
|
|
|
|
(4
|
)
|
(4
|
)
|
|
|
(10
|
)
|
(10
|
)
|
Total interest income
|
|
$
|
959
|
|
$
|
(2,338
|
)
|
$
|
(1,379
|
)
|
$
|
4,253
|
|
$
|
(5,997
|
)
|
$
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits and interest bearing checking
|
|
$
|
(110
|
)
|
$
|
(544
|
)
|
$
|
(654
|
)
|
$
|
(76
|
)
|
$
|
(1,464
|
)
|
$
|
(1,540
|
)
|
Time deposits
|
|
572
|
|
(992
|
)
|
(420
|
)
|
2,095
|
|
(1,972
|
)
|
123
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
33
|
|
(32
|
)
|
1
|
|
35
|
|
(5
|
)
|
30
|
|
Federal Home Loan Bank advances and other borrowings (5)
|
|
46
|
|
17
|
|
63
|
|
101
|
|
122
|
|
222
|
|
Subordinated debentures
|
|
|
|
(149
|
)
|
(149
|
)
|
|
|
(353
|
)
|
(353
|
)
|
Total interest expense
|
|
541
|
|
(1,700
|
)
|
(1,159
|
)
|
2,155
|
|
(3,673
|
)
|
(1,518
|
)
|
Net change in net interest income
|
|
$
|
418
|
|
$
|
(638
|
)
|
$
|
(220
|
)
|
$
|
2,098
|
|
$
|
(2,324
|
)
|
$
|
(226
|
)
|
(1)
Loans are net of deferred costs, less fees.
(2)
Non-accruing loans are included in the computation of average balances.
(3) The Company includes loan fees in interest income. These fees for the three months ended
September 30, 2008 and 2007 were $144,000 and $186,000, and for the nine
months ended September 30, 2008 and 2007 were $413,000 and $551,000,
respectively.
(4) Yield is adjusted for the tax effect of tax exempt loans. The tax effects for the three months ended
September 30, 2008 and 2007 were $56,000 and $35,000, and for the nine
months ended September 30, 2008 and 2007 were $134,000 and $130,000,
respectively.
(5) Yield is adjusted for the tax effect of tax exempt
securities. The tax effects for the
three months ended September 30, 2008 and 2007 were $159,000 and $168,000,
and for the nine months ended September 30, 2008 and 2007 were $489,000
and $467,000, respectively.
(6) Interest expense on federal funds purchased and securities
sold under agreements to repurchase includes imputed interest on premises under
construction. Imputed interest for the
three months ended September 30, 2008 and 2007 was $0 and $4,000, respectively. Imputed interest for the nine months ended
September 30, 2008 and 2007 was $0 and $67,000, respectively.
Interest
earning assets
The average rate on interest-earning assets was 6.32% for the three
months ended September 30, 2008, representing a decrease of 113 basis points
from 7.45% for the same three months ended 2007. The average rate on interest-earning assets
was 6.47% for the nine months ended September 30, 2008, representing a decrease
of 97 basis points from 7.44% for the same nine months ended 2007. Interest-earning assets are comprised of
loans receivable, investment securities, interest-bearing deposits and an
investment in a non-consolidated wholly owned subsidiary that was formed for
the purpose of issuing trust preferred securities.
As discussed above, the average rates earned on our loans receivable
decreased considerably during the three and nine months ended September 30,
2008, primarily due to the reversal of accrued interest on loans put on
non-accrual status. During the three and
nine months ended September 30, 2008, approximately $408,000 and $1.0 million
was reversed out of income as a result of loans being put on non-accrual
status. As a result, the average rate on
loans receivable was 6.68% for the three months ended September 30, 2008,
compared to 8.19% for the three months in September 30, 2007, a decrease of 151
basis points. Accordingly, the average
rate on loans receivable decreased
35
Table of Contents
125 basis points to 6.97% for the nine months ended September 30, 2008,
compared to 8.22% for the nine months ended September 30, 2007. The average balance of loans receivable
increased approximately $60.2 million during the three months ended September
30, 2008 compared to the same three months in 2007 and $72.3 million during the
nine months ended September 30, 2008 compared to the same nine months in
2007. However, the decrease in the
average rates earned on loans receivable offset the increase in average
balances, resulting in a decrease in interest income from loans receivable, on
a tax equivalent basis of $934,000 during the third quarter of 2008 compared to
the third quarter of 2007 and a decrease of $891,000 during the nine months
ended September 30, 2008 compared to the same period in 2007.
The average rate on investment securities, adjusted for the tax effect
of tax exempt securities, decreased 7 basis points to 5.44% for the quarter
ended September 30, 2008 compared to 5.51% for the quarter ended September 30,
2007 and increased 1 basis point to 5.46% for the nine months ended September 30,
2008, compared to 5.45% for the nine months ended September 30, 2007. The average balances of investment securities
during the three and nine months ended September 30, 2008 decreased $15.7
million and $19.1 million, respectively, compared to the same periods of the
previous year.
Interest bearing liabilities
The average rate paid on interest-bearing liabilities decreased 90
basis points to 3.22% for the three months ended September 30, 2008,
compared to 4.12% for the same three months in 2007. The average rate paid on interest-bearing
liabilities decreased 64 basis points to 3.40% for the nine months ended September 30,
2008, compared to 4.04% for the same nine months in 2007. Interest-bearing liabilities are comprised of
savings and interest bearing checking deposits, time deposits, federal funds
purchased and securities sold under agreements to repurchase, holding company
notes payable, Federal Home Loan Bank advances and other borrowings, and
subordinated debentures held by our subsidiary trust which issued trust
preferred securities.
The average rate paid on interest-bearing savings and interest-bearing
checking deposits decreased 127 basis points to 1.06% for the three months
ended September 30, 2008 compared to 2.33% for the three months ended September 30,
2007. The average rate paid on time
deposits decreased 109 basis points to 3.82% during the third quarter of 2008
from 4.91% during the third quarter of 2007.
The average rate paid on interest-bearing savings and interest-bearing
checking deposits decreased 104 basis points to 1.25% for the nine months ended
September 30, 2008, compared to 2.29% for the nine months ended September 30,
2007. The average rate paid on time deposits decreased 72 basis points to 4.14%
during the nine months ended September 30, 2008 compared to 4.86% during
the nine months ended September 30, 2007.
We anticipate increased deposit costs in the future due to the need to
replace lost public funds deposits.
The
effective interest rate on the subordinated debentures was 4.51% for the three
months ended September 30, 2008, a 259 basis point decrease from the 7.10%
effective interest rate for the same period of 2007. During the nine months ended September 30,
2008, the effective interest rate on the subordinated debentures was 5.05%
compared to 7.13% during the same period of 2007, a decrease of 208 basis
points.
The subordinated debentures are part of a pooled trust preferred security
at a variable rate of 1.65% above the 90-day LIBOR. The trust preferred security has a 30-year
term maturing in 2035 and a callable option in 2011, five years after the
issuance date. The issuance of the
subordinated debentures did not have a placement or annual trustee fee associated
with it.
Provision for Loan Losses
A provision for losses on loans is 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 types of lending and
our market areas, and other factors related to the collectibility of our loan
portfolio.
As discussed above, we have considerably increased our Banks allowance
for loan losses, and during the three and nine months ended September 30, 2008,
we recorded a provision for loan losses totaling $5.6 million and $12.3
million, respectively, compared to $91,000 and $398,000 for the three and nine
months ended September 30, 2007.
36
Table of Contents
Non-Interest Income
The
following table summarizes non-interest income for the three and nine months
ended September 30, 2008 and 2007:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Service charges
|
|
$
|
915
|
|
$
|
950
|
|
$
|
2,668
|
|
$
|
2,675
|
|
Trust fees
|
|
191
|
|
184
|
|
543
|
|
602
|
|
Brokerage service revenue
|
|
55
|
|
60
|
|
182
|
|
161
|
|
Gain on sales of mortgage loans
|
|
166
|
|
145
|
|
495
|
|
444
|
|
Gain (loss) on sales of investment
securities
|
|
|
|
(5
|
)
|
420
|
|
(4
|
)
|
Mortgage servicing fees
|
|
39
|
|
44
|
|
124
|
|
137
|
|
Merchant processing fees
|
|
10
|
|
4
|
|
18
|
|
12
|
|
ATM and debit card fees
|
|
186
|
|
150
|
|
526
|
|
420
|
|
Bank owned life insurance income
|
|
250
|
|
242
|
|
742
|
|
717
|
|
Other
|
|
200
|
|
133
|
|
498
|
|
411
|
|
Total non-interest income
|
|
$
|
2,012
|
|
$
|
1,907
|
|
$
|
6,216
|
|
$
|
5,575
|
|
Non
interest income for the three months ended September 30, 2008 was
approximately $2.0 million, an increase of $105,000, from $1.9 million for the
three months ended September 30, 2007.
Non-interest income for the nine months ended September 30, 2008
was $6.2 million, an increase of $641,000, from $5.6 million for the nine
months ended September 30, 2007.
The
primary reasons for the increase in non-interest income for the three and nine
months ended September 30, 2008 was an increase in gain on sales of
mortgage loans, coupled with an increase in bankcard income. Also contributing to the increase in
non-interest income during the nine months ended September 30, 2008 was a
$424,000 increase in gain on sale of investment securities, approximately
$313,000 of which was due to the Companys restructuring of the investment
portfolio during the second quarter, and $111,000 of which was due to a gain on
redemption of Visa, Inc. stock. As
a Visa member bank, the Company had an obligation to share certain litigation
costs of Visa and had previously recorded this obligation. Visa held an initial
public offering in March of 2008 in which it redeemed a portion of Class B
stock held by member banks. The Company received cash of $111,000 in that
redemption, which was recorded as a gain on sale of investment securities. The Companys remaining obligation to pay for
other unsettled portions of the Visa lawsuits is approximately $65,000.
37
Table of Contents
Non-Interest Expense
The
following table presents non-interest expense for the three and nine months
ended September 30, 2008 and 2007:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
September 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Salaries and employee benefits
|
|
$
|
2,939
|
|
$
|
3,441
|
|
$
|
9,577
|
|
$
|
9,638
|
|
Occupancy and equipment
|
|
808
|
|
947
|
|
2,468
|
|
2,524
|
|
Data processing
|
|
636
|
|
783
|
|
2,027
|
|
2,305
|
|
Professional fees
|
|
713
|
|
435
|
|
2,109
|
|
1,107
|
|
Marketing
|
|
153
|
|
167
|
|
324
|
|
446
|
|
Supplies
|
|
75
|
|
104
|
|
250
|
|
296
|
|
Intangible asset amortization
|
|
155
|
|
156
|
|
469
|
|
422
|
|
Loss on impairment of securities
|
|
3,664
|
|
|
|
4,569
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
10,700
|
|
|
|
Other
|
|
1,863
|
|
955
|
|
4,145
|
|
2,670
|
|
Total non-interest expenses
|
|
$
|
11,006
|
|
$
|
6,988
|
|
$
|
36,638
|
|
$
|
19,408
|
|
Non-interest
expense increased approximately $4.0 million for the three months ended September 30,
2008 compared to the three months ended September 30, 2007 and increased $17.2
million for the nine months ended September 30, 2008 compared to the same
nine months in 2007. The increase in
non-interest expense during the three months ended September 30, 2008 was
primarily due to the loss on impairment of securities of $3.7 million related
to the other than temporary decline in value of a portion of our securities
portfolio, coupled with our strained ability to hold securities until values
recover, as discussed above.
Additionally, professional fees increased $278,000 for the third
quarter, primarily as a result of increased legal, audit and compliance fees
relating to the Companys compliance efforts associated with bank regulatory
matters and a proxy contest with regard to the Companys annual meeting of
shareholders. The $17.2 million increase
in non-interest expense during the nine months ended September 30, 2008
was primarily as a result of the non-cash $10.7 million goodwill impairment
charge taken in earlier quarters, coupled with the increase in professional
fees discussed above, and increases in other non-interest expenses, which
includes FDIC insurance premiums. We
expect our FDIC insurance premiums to increase significantly in 2009 as the
FDIC has stated that it intends to raise premiums in order to rebuild the fund
following the recent increase in bank failures.
Salaries
and employee benefits, our largest non-interest expense, has decreased for both
the three and nine months ended September 30, 2008 compared to the same
periods of the prior year. The decrease
is due to decreases in bonuses, lending commissions, stock option grants, and
other benefits. We expect salaries and
employee benefits to continue to decrease in the near future due to the loss of
several highly paid employees, including the former Chief Executive Officer, Robert
J. Weatherbie, who resigned from all positions with the Company effective September 2,
2008. We have not yet secured a
permanent replacement for Mr. Weatherbie.
Income Tax Expense
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 or 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. SFAS 109 requires that when determining the
need for a valuation allowance against a deferred tax asset, management must
assess both positive and negative evidence with regard to the realizability of
the tax losses represented by that asset. To the extent available sources of
taxable income are insufficient to absorb tax losses, a valuation allowance is
necessary. Sources of taxable income for this analysis include prior years tax
returns, the expected reversals of taxable temporary differences between book
and tax income, prudent and feasible tax-planning strategies, and future
taxable income.
The companys gross deferred
tax asset resulted primarily from a significant increase in its loan loss
allowance as well as impairment losses on available for sale securities. The
company has recorded a valuation allowance of $2.8 million against its deferred
tax asset of $9.6 million as of September 30, 2008, after considering all
available evidence related to the amount of the tax asset that is more likely
than not to be realized. Given the
companys recent operating losses, the valuation allowance recorded at
September 30, 2008 reduces the deferred tax asset to an amount management deems
more likely than not to be realized through the carry back of tax losses to
prior years federal taxable income.
As a result of the Companys
net operating loss for the three and nine months ended September 30, 2008, the
Company had an income tax expense of $1.5 million for the three months ended
and an income tax benefit of approximately $556,000 for the nine months ended
September 30, 2008, compared to income tax expense of $226,000 for the three
and $1.2 million for the nine months ended September 30, 2007. The effective tax rate is typically less than
the statutory federal rate of 34.0% due primarily to municipal interest income
and income from the investment in bank owned life insurance. The lower tax rate in 2008 is a result of
impairment of goodwill which is not deducted in computing income tax expense,
taxable income from the surrender of bank owned life insurance policies not
reportable in book income as well as the establishment of a valuation allowance
against deferred tax assets that management deems more likely than not will not
be realized.
In accordance with FIN 48, the
Company has performed an analysis and believes that it is not more likely than
not that certain state tax benefits will be recognized in the future. As of the
nine months ended September 30, 2008, approximately $868,000 of unrecognized
tax benefits related to certain state tax benefits, and approximately $7,000 of
unrecognized tax benefits related to acquisition costs were included in other
liabilities within the consolidated balance sheet. For the nine months ended
September 30, 2008, the reserve for the unrecognized benefits increased by a
total of approximately $168,000. If
recognized, all of the tax benefits would increase net income, decreasing the
effective tax rate.
The Company recognizes any
interest and penalties related to unrecognized tax benefits in the provision
for income taxes and subsequently recognizes those state tax benefits when the
related statutes expire. Interest and penalties associated with the
above-mentioned unrecognized tax benefits approximated $261,000 ($232,000 after
tax) at September 30, 2008. During the
fourth quarter of 2008, should the 2004 related statutes expire, the Company
expects to recognize approximately $119,000 of state tax benefits as well as
$48,000 of interest and penalties associated with these state tax positions. The recognition of these tax benefits would
increase net income by approximately $127,000.
The Companys federal tax
returns for the years 2005 through 2007 and various state income tax returns
for the years 2004 through 2007 remain subject to review by the various tax
authorities.
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Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
Asset
and liability management refers to managements efforts to minimize
fluctuations in net interest income caused by interest rate changes. This is accomplished by managing the
repricing of interest rate sensitive interest bearing assets and interest
bearing liabilities.
The
following table indicates that at September 30, 2008, if there had been a
sudden and sustained increase in prevailing market interest rates, our net
interest income would be expected to increase, while a decrease in rates would
indicate a decrease in net interest income.
|
|
Net interest
|
|
(Decrease)
|
|
|
|
Change in interest rates
|
|
income
|
|
increase
|
|
% change
|
|
|
|
(Dollar in thousands)
|
|
200 basis point rise
|
|
$
|
27,329
|
|
1,087
|
|
4.14
|
%
|
100 basis point rise
|
|
26,786
|
|
544
|
|
2.07
|
%
|
Base rate scenario
|
|
26,242
|
|
|
|
|
|
100 basis point decline
|
|
25,055
|
|
(1,187
|
)
|
(4.52
|
)%
|
200 basis point decline
|
|
23,388
|
|
(2,854
|
)
|
(10.87
|
)%
|
|
|
|
|
|
|
|
|
|
Item 4: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
Regulations under the
Securities Exchange Act of 1934 require public companies to maintain disclosure
controls and procedures, which are defined to mean a companys controls and
other procedures that are designed to ensure that information required to be
disclosed in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Commissions rules and forms. Our principal
executive officer and our chief financial officer, with the assistance of our
principal accounting officer, based on their evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures as of the
end of the period covered by this report concluded that, as disclosed below
with respect to material weakness in and changes in our internal controls over
financial reporting, the Companys disclosure controls and procedures were not
effective as of September 30, 2008.
Management is also
responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) of the Securities
Act of 1934. The Companys internal control framework and processes are
designed to provide reasonable assurance to management and the board of
directors regarding the reliability of financial reporting and the preparation
of the Companys consolidated financial statements in accordance with the
accounting principles generally accepted in the United States. Management
assessed the effectiveness of our internal control over financial reporting as
of September 30, 2008 based on criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
ControlIntegrated Framework. As a result of that assessment, management
concluded that, as of September 30, 2008, our internal control over
financial reporting was not effective.
Managements conclusion was based upon findings of control deficiencies
that constituted material weaknesses in internal controls over financial
reporting in connection with a lack of adequate policies, procedures, resources,
Board oversight and controls with respect to the credit administration, the
detection of risks related to the Companys concentration in real estate
lending and other risks associated with our loan portfolio, the determination
of our provision for loan losses and related allowance for loan losses, and the
Companys ability to adequately and timely assess and record material
impairments to our assets that result from the current downward trends in the
economy. Additionally, management
believes there are control deficiencies resulting from a lack of resources over
regulatory compliance and financial reporting. The lack of resources has
resulted in the Companys inability to maintain effective controls regarding
the Companys ability to timely identify and record its transactions. These
control deficiencies constituted a material weakness in our control environment
over financial reporting. As a result of these material weaknesses, there is
more than a reasonable possibility that a material misstatement of the
Companys financial statements may not be prevented or detected on a timely
basis.
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Our internal control over
financial reporting includes policies and procedures that pertain to the
maintenance of records to accurately and fairly reflect, in reasonable detail,
transactions, acquisitions and dispositions of assets, and provide reasonable
assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are
being made only in accordance with authorizations of management and the
directors of the Company; and (3) unauthorized acquisition, use or
disposition of the Companys assets that could have a material effect on the
Companys financial statements are prevented or timely detected.
Limitations on Controls
Management does not
expect that our disclosure controls and procedures or our internal control over
financial reporting will prevent or detect all error and fraud. Any control
system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been
detected. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
We have determined after
discussions with the OCC that (1) the Banks had engaged in unsafe or
unsound banking practices by engaging in rapid growth and unsatisfactory lending
practices and loan administration, operating with inadequate management and
board supervision with less than satisfactory capital in relation to their
large volume of construction and development loans, with an inadequate loan
valuation reserve, and with inadequate internal systems and policies; (2) the
Banks had initiated a loan growth strategy without implementing sound lending
policies, risk management practices, and controls which resulted in the Banks
deteriorating condition, high risk profile and significant increases in the
levels of classified assets, past due loans, nonperforming loans, and
significantly increased allowance for loan loss provisions; and (3) the
management and boards of directors of our subsidiary Banks did not effectively
oversee the operations of the Banks.
We have made or are in
the process of implementing the following managerial and operational changes to
correct these deficiencies and to improve our internal controls over financial
reporting:
·
|
|
the former Chief
Executive Officer of the Company, who among other duties, also served as
President and functioning chief lending officer of TeamBank, resigned from
all capacities as of September 2, 2008.
|
|
|
|
·
|
|
the audit committee of
the board of directors engaged the services of a national independent loan
consulting firm to perform loan reviews.
|
|
|
|
·
|
|
the boards of directors
of both of the Banks established executive committees to oversee management
actions taken in response to the recent OCC examination and to implement a
communication procedure to ensure accurate and timely communication with
regulatory agencies.
|
|
|
|
·
|
|
outside directors have
been added to the senior loan committees which approve all loans in excess of
$500,000 and to the credit risk committees which oversee the problem credit
identification process and problem credits.
|
|
|
|
·
|
|
in May 2008, we
created a team of experienced senior staff to review credit administration
and loan origination processes. The team reallocated resources and
reassigned an experienced senior commercial lender with a workout background
to aggressively review and modify the problem loan identification process and
act as a loan workout manager.
|
|
|
|
·
|
|
TeamBank, N.A. has
appointed a senior loan officer to manage its loan origination and approval
process, credit administration and controls, timely identification of risk
and problem loans and emerging risks in the loan portfolio in compliance with
company policies and procedures and banking laws and regulations. The senior
loan officer reports to the Banks chief executive officer.
|
|
|
|
·
|
|
all credit
administration and loan approval processes are being reviewed for controls
and efficiency. A risk assessment process for all credit administration
and loan approval processes is being evaluated and modeled after the current
successful risk assessment process utilized for the Information Security
Program.
|
|
|
|
·
|
|
TeamBank, N.A. has
centralized the construction loan draw and inspection process.
|
40
Table of Contents
·
|
|
the problem loan
identification process including the loan risk rating system has been
reviewed and modified to insure more timely and effective problem loan
identification.
|
|
|
|
·
|
|
loan policy and
procedures have been reviewed and modified to include more specific direction
for all lending staff.
|
|
|
|
·
|
|
management has
developed a series of new or improved reports for credit administration to
better monitor credit risks internally and provide more detail about loans
and credits to senior management, the board of directors and their loan
committees, including but not limited to, concentrations, exceptions to loan
policies, special assets and OREO reports, and monthly delinquent,
non-accrual, classified loans and exposure. These activities will
enhance the loan risk rating system and provide better information to be used
in the allowance for loan and lease loss methodology.
|
|
|
|
·
|
|
management is actively
recruiting additional personnel to assist with compliance of the Consent
Orders and to ensure that the internal control environment is effective.
|
Through these control
actions we are seeking to mitigate the control deficiencies listed above. We believe that these corrective actions,
taken as a whole, should mitigate the control deficiencies identified above,
however we cannot assure that these actions will be comprehensive enough or
effective until those controls are tested. We plan to continue an on-going
review and evaluation of our internal control over financial reporting, and we
may make other changes as appropriate based on the results of managements
reviews and evaluations.
Except as described
above, through the filing date of this report on Form 10-Q, there were no
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time the Company is involved in routine litigation
incidental to the conduct of our business.
There have
been no material changes to the status of the litigation reported under Legal
Proceedings in its Form 10-K/A for the year ended December 31, 2007,
which is incorporated herein by reference.
The Company does not believe that any pending litigation to which it is
a party will have a material adverse effect on its liquidity, financial
condition, or results of operations.
ITEM 1A. RISK FACTORS
There are numerous risks
and uncertainties that can affect our business, financial performance or share
price. Set forth below are the material risks which we believe could cause our
future business, operating results, financial condition or share price to be
different than our expectations.
We
are seeking to comply with OCC Consent Orders relating to our subsidiary banks,
but we are not yet in compliance with them.
Failure to achieve compliance could subject us to further significant
regulatory enforcement action, including placing one or both of our subsidiary
banks into a receivership, in which case our ability to continue operations
would be extremely doubtful.
In early September 2008, both of our subsidiary
banks entered into Consent Orders (Consent Orders) with the Office of the
Comptroller of the Currency (the OCC), their primary bank regulatory. Among other things, the Consent Orders
require each subsidiary bank to appoint a compliance committee to monitor compliance
with the Consent Orders; develop a three-year strategic plan establishing
objectives for the bank; develop a capital plan and increase Tier 1 capital to
at least 8% of adjusted total assets and Tier 1 capital to at least 10% of
risk-weighted assets; appoint a new senior loan officer; develop and maintain a
liquidity management program that assesses the banks current and expected
funding needs and ensures that sufficient funds or access to funds exists to
meet those needs; take action to protect the banks interest in assets
criticized by the OCC; implement and adhere to a written credit policy to
improve the Banks loan portfolio management; employ an independent review
annually of the lending function; establish a program designed to manage the risk
of the Banks commercial real estate loan portfolio; and establish a program
for the maintenance of an adequate allowance for loan and lease losses.
Our subsidiary banks have
submitted plans to comply with the Consent Orders; however, both banks have been
deemed by the OCC to be out of compliance with their Consent Orders. TeamBank recently resubmitted its responses
to the OCC and will be continuing to work with the OCC to correct deficiencies
in its plan to comply with its Consent Order.
We expect that attaining compliance with the Consent Orders will be an
ongoing process that will require modifications and changes to our compliance
efforts to date.
The Company entered into
a similar agreement (the Written Agreement) with the Federal Reserve Bank of
Kansas City (the Reserve Bank) on November 21, 2008. Among other things, the Written Agreement
provides that the Company will not declare or pay any dividends, take dividends
from the Banks, distribute any interest principal or other sums on subordinated
debentures or trust preferred securities, incur, increase, or guarantee any
debt or purchase or redeem any shares of Company stock without prior written
approval of the Reserve Bank. Within 60
days, the Company must also provide an acceptable written capital plan to
maintain sufficient capital at the consolidated organization and at each of the
Banks and a written statement of cash flow projections for 2009. The Written Agreement also stipulates that
the Company shall not increase or materially modify any current service fee
agreement or calculation between the Company and the Banks without prior
written approval of the Reserve Bank.
The Company must also submit quarterly progress reports to the Reserve
Bank detailing the Companys actions and progress in complying with the Written
Agreement.
Although we will seek to
comply with the above Consent Orders and the Written Agreement with the Federal
Reserve Bank of Kansas City, we cannot assure that full compliance will
occur. For example, the Consent Orders
relating to the banks require that by January 2009, each bank shall
achieve and maintain minimum capital of Tier 1 capital at least equal to eight
percent (8%) of adjusted total assets and Tier 1 capital at least equal to ten
percent (10%) of risk-weighted assets.
As of the date of this report, neither TeamBank nor Colorado National
Bank had met the minimum capital
requirements of the Consent Orders. We
do not forsee that the Banks will be in compliance with the minimum capital
requirements of the Consent Orders by December 31, 2008 absent sales of
assets. However, we cannot assure that we will be successful in the sale of our
assets. The Banks are seeking to meet
the minimum capital requirements set forth in its Consent Order through a
combination of earnings, additional capital contributions from other sources
and loan payoffs. In addition, both of
the banks have submitted liquidity management programs to the OCC and the
liquidity contingency plan of TeamBank was deemed by the OCC to be not acceptable. TeamBank is revising its liquidity
contingency plan and expects to continue to work with the OCC in seeking to
have a satisfactory liquidity contingency plan.
We expect that in seeking to comply with all of the Consent Orders we
and our subsidiary banks will be required to devote significant management
attention and time on an ongoing basis.
In connection with its
liquidity management program, TeamBank has determined that a significant
portion of its collateral pledged to the Federal Home Loan Bank (FHLB) in
connection with its FHLB borrowings is not eligible collateral. TeamBank is in the midst of replacing
existing deficient collateral with other collateral, consisting primarily of
loans that are not pledged to the FHLB, that we believe will be
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acceptable to the
FHLB. We expect the substitution of
collateral to be completed in the near future but cannot assure that the
collateral will be replaced such that it may not place strains on the ability
of TeamBank to obtain additional FHLB funding.
If TeamBank were not able to provide sufficient acceptable collateral for
the FHLB, the FHLB could determine that TeamBank would be in default under its
borrowing agreement with the FHLB, and the FHLB could pursue available remedies
which could include seizing collateral and selling it to be repaid. Such actions could have a material adverse
effect on our results of operations, liquidity and financial condition and our
ability to continue operations would be doubtful.
If we or our subsidiary
banks do not comply with applicable Consent Orders or the Written Agreement
without a waiver from the applicable regulatory agency or an amendment of the
applicable Consent Order or Written
Agreement, we and our subsidiary banks could be subject to further
regulatory enforcement action, including, without limitation, the issuance of
additional cease and desist orders or supervisory agreements (which may, among
other things, further restrict our business activities and the business
activities of our subsidiary banks, the imposition of civil monetary penalties
and the placing of one or both banks into a conservatorship or a receivership
which would make our ability to continue operations extremely doubtful). Notwithstanding any consent order or
supervisory agreement requiring certain time tables be met, bank regulators
could take enforcement action before that date which could include placing a
bank into receivership. If a bank is
placed into a conservatorship or receivership, it is highly likely that this
will lead to complete loss of all value of our ownership interest in that bank
and we subsequently may be exposed to significant claims by the Federal Deposit
Insurance Corporation and the OCC. In
addition, further restrictions would be placed on a bank following a
determination that the bank is undercapitalized, significantly undercapitalized,
or critically undercapitalized, with increasingly greater restrictions being
imposed as the level of undercapitalization increases. Further, the failure to comply with a consent
order could result in termination of a banks Federal Deposit Insurance,
subject to a number of other conditions.
There can be no assurance that recently enacted legislation
and other measures undertaken by the Treasury, the Federal Reserve and other
governmental agencies will help stabilize the U.S. financial system, improve
the housing market or be of specific benefit to us.
On October 3, 2008, President Bush signed into law the Emergency
Economic Stabilization Act of 2008 or EESA, which, among other measures,
authorized the Treasury Secretary to establish the Troubled Asset Relief
Program (TARP). EESA gives broad authority to the Treasury to purchase,
manage, modify, sell and insure the troubled mortgage related assets that
triggered the current economic crisis as well as other troubled assets and
invest in financial institutions. EESA
includes additional provisions directed at bolstering the economy, including:
·
Authority for the Federal Reserve to pay
interest on depository institution balances;
·
Mortgage loss mitigation and homeowner
protection;
·
Temporary increase in FDIC insurance
coverage from $100,000 to $250,000 through December 31, 2009; and
·
Authority to the SEC to suspend
mark-to-market accounting requirements for any issuer or class of category of
transactions.
Under the TARP, the
Treasury has created a capital purchase program, pursuant to which it proposes
to provide access to capital to financial institutions through a standardized
program to acquire preferred stock (accompanied by warrants) from eligible
financial institutions that will serve as Tier I capital. We do not expect to obtain capital under this
program.
EESA followed, and has
been followed by, numerous actions by the Federal Reserve, Congress, Treasury,
the SEC and others to address the current liquidity and credit crisis that has
followed the subprime securities meltdown that commenced in 2007. These
measures include homeowner relief that encourage loan restructuring and
modification; the establishment of liquidity and credit facilities for
financial institutions and investment banks; the lowering of the federal funds
rate; emergency action against short selling practices; a temporary guaranty
program for money market funds; the establishment of a commercial paper funding
facility to provide back-stop liquidity to commercial paper issuers; and
coordinated international efforts to address illiquidity and other weaknesses
in the banking sector.
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On October 14, 2008,
the FDIC announced the establishment of a temporary liquidity guarantee program
to provide insurance for all non-interest bearing transaction accounts and
guarantees of certain newly issued senior unsecured debt issued by financial
institutions and bank holding companies.
Financial institutions are automatically covered by this program
commencing October 14, 2008. Any eligible entity that opts out of the
Program on or before December 5, 2008, will not pay any assessment under
the Program. Any eligible entity that does not opt out on or before December 5,
2008, will be required to pay related assessment fees. Under the program, newly
issued senior unsecured debt issued on or before June 30, 2009 will be
insured in the event the issuing institution subsequently fails, or its holding
company files for bankruptcy. The debt includes all newly issued unsecured
senior debt. The aggregate coverage for
an institution may not exceed 125% of its debt outstanding on September 30,
2008 that was scheduled to mature before June 30, 2009. The guarantee will
extend to June 30, 2012 even if the maturity of the debt is after that
date. Many details of the program still remain to be worked out. We do not expect this program will be of
significant benefit to us, as we did not have significant debt outstanding at September 30,
2008 and we do not expect to seek significant debt financing in the near
future.
There can be no assurance
as to the actual impact that EESA and such related measures undertaken to
alleviate the credit crisis will have generally on the financial markets,
including the extreme levels of volatility and limited credit availability
currently being experienced. The failure of such measures to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit or the trading price of our
common stock.
Finally, there can be no
assurance regarding the specific impact that such measures may have on
us. Since our subsidiary banks are considered troubled banks by the
OCC, and we have been designated in troubled condition by the Federal
Reserve.
Our access to liquidity may be negatively impacted if market
conditions and regulatory restrictions persist.
While we seek to actively manage
our liquidity risk and maintain liquidity at least sufficient to cover all
forecasted funding requirements, our liquidity and the liquidity of our
subsidiary banks may be adversely affected by unforeseen or extraordinary
demands on cash and our inability to access sources of deposits for our
subsidiary banks. This situation may arise due to circumstances beyond our
control.
In addition, we
anticipate that we may not issue new debt or renew existing debt without prior
non-objection of the Federal Reserve Bank of Kansas City, and our subsidiary
banks must receive approval of the OCC in order for them to issue debt.
Current market conditions
have limited our liquidity sources principally to secure FHLB borrowings and to
FDIC-insured deposits originated through our subsidiary banks. Other sources of funding, are not generally
available to us. There can be no
assurance that actions by the FHLB or the Federal Reserve Bank of Kansas City
would not reduce or eliminate our borrowing capacity or that we would be able
to continue to attract deposits at competitive rates. Such events could have a
material adverse impact on our liquidity and results of operations and
financial condition.
Current levels of market volatility are unprecedented.
The capital and credit markets
have been experiencing volatility and disruption for more than a year. In
recent months, the volatility and disruption has reached unprecedented levels.
In some cases, the markets have produced downward pressure on stock prices and
credit availability for certain issuers without regard to those issuers
underlying financial strength. If current levels of market disruption and
volatility continue or worsen, there can be no assurance that we will not
experience an adverse effect, which may be material, on our ability to access
capital and on our business, financial condition and results of operations.
The continued slowdown in real estate sales and a decrease
in residential real estate values within our market areas have and may continue
to adversely affect our earnings and financial condition.
The downturn of economic
conditions in the national residential real estate market during 2007, the
continued decline in home sales, the stagnate, and even declining median home
prices year-over-year in the major metropolitan areas in our market areas and
the decline in prices for newly constructed homes, spurred an increase in
non-performing assets and our provision for loan losses for the three and nine months
ended September 30, 2008, as well as continued increases in nonaccrual
loans and classified loans since then. The housing industry in the
Midwest experienced a downturn during the last quarter of 2007 and continuing
into 2008 reflecting, in part, decreased availability of mortgage financing for
residential home buyers, reduced demand for new home construction resulting in
some over-supply of housing inventory and increased foreclosure rates. If these
market conditions do not improve, or deteriorate further, or if these market
conditions and slowing economy negatively impact the commercial non-residential
real estate market, our earnings and financial condition will continue to be
adversely impacted because a significant portion of our loans are secured by
real estate in our market areas.
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Our loan portfolio is concentrated in real estate lending
which has made and will make our loan portfolio more susceptible to credit
losses in the current real estate market.
The new home real estate market in our market
areas declined during the fourth quarter of 2007 and continuing into
2008. Our loan portfolio has a concentration in construction and land
development loans and in commercial real estate loans (most of which are
located in our market areas and many of which involve land development).
We have a heightened exposure to credit losses that may arise from this concentration
as a result of the downturn in the real estate sector. Our non-performing
assets and allowance for loan loss increased substantially during the nine
months ended September 30, 2008.
If the current economic
environment continues for a prolonged period of time or deteriorates further,
collateral values may further decline and may result in increased credit losses
in these loans.
Construction and
development loans generally carry a higher degree of risk than long-term
financing of existing properties because repayment depends on the ultimate
completion of the project and usually on the sale of the property or permanent
financing. Specific risks include:
·
cost overruns;
·
mismanaged construction;
·
inferior or improper construction
techniques;
·
economic changes or downturns during
construction;
·
zoning approvals;
·
adverse weather;
·
shortages of supplies and/or labor;
·
rising interest rates that may prevent
sale of the property; and
·
failure to sell completed projects or
units in a timely manner.
The occurrence of any of
the preceding risks has resulted and could result in the deterioration of one
or more of these loans which could increase our non-performing assets. An
increase in non-performing loans may result in a loss of earnings from these
loans, an increase in the related provision for loan losses and an increase in
charge-offs, all of which could have a material adverse affect on our financial
condition, results of operations and/or liquidity.
Also, our construction
and land development loans could be susceptible to extended maturities or
borrower defaults. We have experienced and could experience higher credit
losses and non-performing loans in this portfolio if the economy continues to
slow down, capital markets involving commercial real estate loans deteriorate,
real estate market conditions weaken further and lenders further tighten credit
standards and limit availability of financing.
Our loan losses could
exceed our allowance for loan losses.
Our average loan size continues to increase and part of our allowance
for loan losses relies on historical results which may not be representative of
future losses. Approximately 67.5% of our loan portfolio at September 30,
2008 was composed of construction and land development loans and commercial
loans secured by real estate. Repayment of such loans is generally
considered more subject to market risk than residential mortgage loans.
Industry experience shows that a portion of loans will become delinquent and a
portion of these delinquent loans will require partial or entire charge-off.
Regardless of the underwriting criteria utilized, losses may be experienced as
a result of various factors beyond our control, including among other things,
changes in market conditions affecting the value of loan collateral and
problems affecting the credit strength of our borrowers and/or guarantors.
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We are subject to extensive regulation that could further
limit or restrict our activities.
We operate in a highly regulated industry and are
subject to examination, supervision, and comprehensive regulation by the Office
of the Comptroller of the Currency (the OCC), the FDIC, and the Federal
Reserve Board. Compliance with these regulations is costly and restricts
certain activities, including payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, interest rates paid on deposits,
types of deposits we are able to utilize, and locations of branches. We must
also meet regulatory capital requirements. Failure to meet these capital and
other regulatory requirements, could impede our financial condition, liquidity,
and results of operations, all of which could be materially and adversely
affected. Our failure to be well capitalized and well managed for
regulatory purposes could affect customer confidence, our ability to grow, our
cost of funds and higher FDIC insurance premiums, our ability to pay dividends
on our capital stock, our ability to raise capital, and our ability to make
acquisitions.
The laws and regulations
applicable to the banking industry could change at any time, and the effects of
these changes on our business and profitability cannot be predicted. For
example, new legislation or regulation could limit the manner in which we may
conduct business, including our ability to obtain financing, attract deposits,
make loans and expand our business through opening new branch offices. Many of
these regulations are intended to protect depositors, the public, and the FDIC,
not shareholders. In addition, the burden imposed by these regulations may
place us at a competitive disadvantage compared to competitors who are less
regulated. The laws, regulations, interpretations, and enforcement policies
that apply to us have been subject to significant change in recent years,
sometimes retroactively applied, and may change significantly in the future.
The cost of compliance with these laws and regulations could adversely affect
our ability to operate profitably. Moreover, as a regulated entity, we can be
requested by regulators to implement changes to our operations.
We were subject to an
examination by the OCC our primary banking regulator, the results of which
require us to raise substantial additional capital and decrease our
concentration in construction and land development loans, as well as other
corrective actions. National banking-related publications, as well as a
pronouncement of our primary banking regulator, the OCC, have indicated that
the economic downturn in the national housing market is significant. Our
Banks have concentrations in this area of lending through real estate
construction and land development loans. The Federal Deposit Insurance
Corporation has recommended that financial institutions such as our Banks, that
have concentration levels in these types of loans, increase their levels of
loan loss allowances and increase capital to provide ample protection from
unexpected losses if market conditions deteriorate further. As a result
of this guidance and additional data becoming available relating to the
national economy, and more specifically to our market areas, we have increased
our Banks allowance for loan loss allocations by over $10 million since
December 31, 2007. We infused $1,750,000 and $250,000 in capital to
TeamBank, N.A. and Colorado National Bank, respectively on May 5, 2008.
We funded the capital infusions through our existing line of credit,
however we have no remaining available borrowing capacity under the line of
credit should we need it. Also, in order to increase their regulatory
capital ratios and decrease their concentrations in real estate construction
and land development loans, the Banks may decrease these loan balances through
loan sales to other financial institutions or investors. In order
to provide additional capital to the Banks, we have suspended dividends on our
common stock and we have stopped paying interest on our subordinated
debentures. Additionally, we expect to
consider several other alternatives, including seeking additional equity, debt,
selling certain assets of the Company and selling the Company in its entirety.
We cannot, however, assure that we will be successful in any of these
endeavors, that the capital adequacy levels or loan loss reserves of the Banks
will be deemed satisfactory by our banking regulators, that the Banks will not
be subject to additional regulatory action, or of the impact of such actions on
debt covenants.
As previously reported,
on September 2, 2008 and September 3, 2008, respectively, both of the
Companys subsidiary banks (the Banks), TeamBank and Colorado National Bank,
each consented and agreed to the issuance of a Consent Order (the Consent
Orders) by the Office of the Comptroller of Currency (the OCC). Among other things, the Consent Orders
require both banks to appoint a compliance committee to monitor compliance with
the Consent Orders; within 120 days develop a three year strategic plan
establishing objectives for the Banks; within 120 days develop a capital plan
and increase Tier 1 capital to at least 8% of adjusted total assets and Tier 1
capital to at least 10% of risk-weighted assets appoint a new senior loan officer;
develop within 30 days and maintain a liquidity management program that
assesses the Banks current and expected
45
Table
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funding needs and ensure
that sufficient funds or access to funds exists to meet those needs; take
action to protect the Banks interests in assets criticized by the OCC;
implement and adhere to a written credit policy to improve the Banks loan portfolios
management; obtain current independent appraisals on any loan in excess of
$500,000 in the case of TeamBank and $300,000 in the case of Colorado National
Bank that is secured by real property where borrower has failed to comply with
contractual terms of the loan agreement and an analysis of current financial
information does not demonstrate the ongoing ability of the borrower or
guarantor to perform in accordance with the contractual terms of the loan
agreement; continue to employ an independent review annually of the lending
function; establish a program designed to manage the risk of the Banks
commercial real estate loan portfolio, and establish a program for the
maintenance of an adequate allowance for loan and lease losses. TeamBank
and Colorado National Bank neither admitted nor denied wrongdoing in consenting
to their respective Consent Orders. The foregoing description of the
Consent Order is qualified in its entirety by reference to the terms of the
Consent Orders, which are attached as Exhibits 10.32 and 10.34 in the
Companys Current Report filed on Form 8-K on September 8, 2008. While the Company and its subsidiary banks
are seeking to comply with the Consent Orders, we can provide no assurance that
we will be successful in meeting all of the requirements of the Consent Orders
or that there will not be further regulatory action, which could include
putting the Banks into receivership, should we fail to do so. If this were to occur, our ability to
continue operations would be extremely doubtful.
The
Consent Orders stem from an examination of the Banks, from which both of the
Banks received a letter from the OCC, Kansas City South Field office on April
24, 2008, indicating that it believes the Banks are deemed to be in troubled
condition for purposes of Section 914 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, and, as a result, the Banks are subject
to specified restrictions on operations.
On July 13, 2008, the Company also received a similar troubled
condition letter from the Federal Reserve Bank of Kansas City with regard to
the holding company. These letters were
based upon the OCC staffs determination that the Banks had deficiencies in
credit administration practices, loan risk rating systems, loan loss allowance
methodologies, and levels of classified assets.
The restrictions provide that:
(1) the Banks must notify the OCC 90 days before adding or replacing a
member of their respective boards of directors or employing any, or promoting
any existing employee as a senior executive officer, and (2) the Banks may not,
except under certain circumstances, enter into any agreements to make severance
or indemnification payments or make any such payments to institution-affiliated
parties. Similar restrictions also apply
to the Company as a result of the troubled condition letter received by the
Federal Reserve Bank of Kansas City. The
Company expects that it will enter into a similar agreement with the Federal
Reserve Bank of Kansas City in the near future.
The Company and its subsidiaries expect to cooperate with the OCC and
the Federal Reserve Bank to address any regulatory concerns. The implications of the regulatory actions
listed above, and any future regulatory actions, could have a material adverse
affect on our business, financial condition, liquidity and results of
operation.
We are required by our primary banking regulator to raise our capital
levels, but we may not be able to.
We are required by regulatory authorities to
maintain adequate levels of capital to support our operations. To the extent
that regulatory authorities require us to increase our capital ratios, we will
be required to raise additional capital.
Our primary regulator, the OCC, is requiring us to increase the capital
ratios of our subsidiary Banks as discussed above.
Our
ability to raise additional capital will depend on conditions in the capital
markets, which are outside of our control, and on our financial performance,
which has deteriorated significantly as discussed elsewhere in this
report. Accordingly, it is unlikely that
we will be able to meet the capital requirements in our Consent Orders by
December 31, 2008 absent asset sales. If we cannot raise additional capital
when needed, we expect we will be subject to increased regulatory supervision which
may include additional restrictions on operations or even placing either or
both Banks into receivership, either of which could result in increases in
operating expenses and reductions in revenues that would negatively affect our
operating results and ability to continue operations.
An increase in our allowance for loan losses will result in reduced
earnings.
We are
exposed to the risk that our customers will be unable to repay their loans
according to their terms and that any collateral securing the payment of their
loans will not be sufficient to assure full repayment. We continually evaluate the collectibility of
our loan portfolio and provide an allowance for loan losses that we believe is
adequate based upon such factors as:
·
the risk
characteristics of various classifications of loans and our experience in
managing those risks;
·
recent loan
growth rates;
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·
previous loan loss experience;
·
specific loans that have loss potential;
·
delinquency trends;
·
estimated fair value of the collateral;
·
current economic conditions;
·
the views of our regulators; and
·
geographic and industry loan concentrations.
Many of these factors are
difficult to predict or estimate accurately.
If our evaluation is incorrect and borrower defaults cause losses
exceeding the portion of our allowance for loan losses allocated to those
loans, our earnings could be significantly and adversely affected. We may
experience losses in our loan portfolio or perceive adverse trends that require
us to significantly increase our allowance for loan losses in the future, such
as has occurred in 2008 to date, which would reduce future earnings. In
addition, our regulators may require our Banks to increase or decrease our
allowance for loan losses.
Our nonresidential real estate loans expose us to increased
lending risks.
At September 30, 2008, $372 million, or 67.5%, of our loan
portfolio consisted of construction and land development loans and commercial
loans secured by real estate. These types of loans generally expose a
lender to greater risk of non-payment and loss than residential mortgage loans
because repayment of the loans often depends on the income stream of the
borrowers. Such loans expose us to additional risks because they typically are
made on the basis of the borrowers ability to make repayments from the cash
flow of the borrowers business and are secured by collateral that may
depreciate over time. These loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to residential
mortgage loans. Because such loans generally entail greater risk than
residential mortgage loans, and due to the declining economic conditions in our
market areas, we may need to increase our allowance for loan losses in the
future to account for the increase in probable credit losses associated with
such loans. Additionally, many of our
nonresidential real estate borrowers have more than one loan outstanding with
us. Consequently, an adverse development
with respect to one loan or one credit relationship can expose us to a
significantly greater risk of loss compared to an adverse development with
respect to a residential mortgage loan.
The banking regulators
are giving commercial real estate lending greater scrutiny, and have required
banks with high levels of commercial real estate loans to implement more
stringent underwriting, internal controls, risk management policies and
portfolio stress testing, as in some instances, higher levels of allowances for
losses and capital levels as a result of commercial real estate lending growth
and exposures. During the second quarter, we received letters from the
OCC indicating that it believes our subsidiary Banks are deemed to be in troubled
condition and specifically citing that our Banks had deficiencies in credit
administration practices, loan risk rating systems, loan loss allowance
methodologies and levels of classified assets. They may request that we
consider increasing our levels of allowance for loan losses and increase the
capital ratios of our Banks.
Our stock price can be volatile.
Our stock price can fluctuate widely in
response to a variety of factors.
Factors include actual or anticipated variations in our quarterly
operating results, recommendations by securities analysts, operating and stock
price performance of other companies, news reports, results of litigation and
other factors, including those described in this Risk Factors section. Our ability or intent to pay dividends on our
stock, can also have a significant impact on our stock price, as was shown
recently when our Board of Directors announced that dividends on our common
stock would be suspended in order to enhance our capital position during the
current economic cycle. Our common stock also has a low average daily
trading volume, which limits a persons ability to quickly accumulate or
quickly divest themselves of large blocks of our stock. In addition, a low average trading volume can
lead to significant price swings even when a relatively small number of shares
are being traded.
Our decisions regarding credit risk may materially and
adversely affect our business.
Making loans and other extensions of credit is an
essential element of our business. Although we seek to mitigate risks inherent
in lending by adhering to specific underwriting practices, we may incur losses
on loans that meet our underwriting criteria, and these losses may exceed our
loan loss reserves. The risk of nonpayment is affected by a number of factors,
including:
·
the duration of the credit;
·
credit risks of a particular customer;
·
changes in economic and industry conditions; and
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·
in the case of a collateralized loan, risks resulting
from uncertainties about the future value of the collateral.
While we generally
underwrite the loans in our portfolio in accordance with our own internal
underwriting guidelines and regulatory supervisory limits, in certain
circumstances, we have made loans that exceed either our internal underwriting
guidelines, supervisory limits, or both as provided by the regulations.
We generally consider making such loans only after taking into account the
financial strength of the borrower and/or guarantor. The number of loans in our
portfolio with loan-to-value ratios in excess of supervisory limits, our
internal guidelines, or both could increase the risk of delinquencies or
defaults in our portfolio. Any such delinquencies or defaults could have an
adverse affect on our results of operations and financial condition.
We depend on the accuracy and completeness of information
about clients and counterparties and our financial condition could be adversely
affected if we rely on misleading information.
In deciding whether to extend credit or
to enter into other transactions with clients and counterparties, we may rely
on information furnished to us by or on behalf of clients and counterparties,
including financial statements and other financial information, which we do not
independently verify. We also may rely on representations of clients and
counterparties as to the accuracy and completeness of that information and,
with respect to financial statements, on reports of independent auditors. For
example, in deciding whether to extend credit to clients, we may assume that a
customers audited financial statements conform with GAAP and present fairly,
in all material respects, the financial condition, results of operations and
cash flows of the customer. Our financial condition and results of operations
could be negatively impacted to the extent we rely on financial statements that
do not comply with GAAP or are materially misleading.
Our small to medium-sized business target markets may have
fewer financial resources to weather a downturn in the economy.
We target the banking and financial
services needs of small and medium-sized businesses. These businesses generally have fewer
financial resources in terms of capital borrowing capacity than larger entities.
If general economic conditions negatively impact these businesses in the
markets in which we operate, our business, financial condition, and results of
operation could be adversely affected.
We are subject to ongoing changes in monetary policy and the
economic environment.
The policies of regulatory authorities, including the
monetary policy of the Federal Reserve, have a significant effect on the
operating results of financial holding companies and their subsidiaries. Among
the means available to the Federal Reserve to affect the money supply are open
market operations in U.S. Government securities, changes in the discount rate
on member bank borrowings, and changes in reserve requirements against member
bank deposits. These means are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may affect interest rates charged on loans or paid on deposits.
The Federal Reserves
monetary policies have materially affected the operating results of commercial
banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and
the effect of these policies on our business and earnings cannot be predicted.
Liquidity needs could adversely affect our financial
condition and results of operation.
The primary sources of funds of our bank subsidiaries
are customer deposits and loan repayments. While scheduled loan repayments are
typically a relatively stable source of funds, they are subject to the ability
of borrowers to repay the loans. The
ability of borrowers to repay loans can be adversely affected by a number of
factors, including changes in economic conditions, adverse trends or events
affecting business industry groups, reductions in real estate values or
markets, business closings or lay-offs, inclement weather, natural disasters
and international instability.
Additionally, deposit
levels may be affected by a number of factors, including rates paid by
competitors, general interest rate levels, regulatory capital requirements,
returns available to customers on alternative investments, our pledging
ability, customer confidence in our banks and general economic conditions.
Accordingly, we may be required from time to time to rely on secondary sources
of liquidity to meet withdrawal demands or otherwise fund operations. Such sources typically include proceeds from
Federal Home Loan Bank advances, sales of investment securities and loans,
federal funds lines of credit from correspondent banks, and extension of credit
from the Federal Reserve Bank, as well as out-of-market time deposits. Because the Companys subsidiary banks, and
TeamBank in particular, have had significant increases in classified loans in
recent months, the Banks have experienced a corresponding decrease in their
loans that are considered eligible collateral.
As of the date of this report, TeamBank currently does not have adequate
eligible collateral pledged with the FHLB to cover the outstanding obligation
on these borrowings, but is in the process of providing other collateral it
believes is adequate. TeamBank is in the
process of moving this collateral from the Federal Reserve Bank of Kansas City
to the FHLB. TeamBank is also replacing
the collateral moved from the Federal Reserve Bank with other qualifying
collateral for the Federal Reserve Bank.
As a result of the current deficit in eligible pledged collateral at the
FHLB, TeamBank has no borrowing capacity at the FHLB. While we believe that the liquidity sources
of our Banks are currently adequate, there can be no assurance they will be
sufficient to meet future liquidity demands, particularly if our levels of
classified loans continue to increase, if our customers choose to withdraw
their deposits in large amounts or if US Bank demands payment of the $4 million
line of credit that is currently in default. If however, TeamBank is not able to cure the
collateral deficit at the FHLB and if the FHLB were to declare a default on the
applicable borrowing agreement, the entire balance outstanding would become
immediately due and payable and the FHLB could seize and sell most of
TeamBanks assets, which would in-turn result in substantial losses and the
Companys ability to continue operations would be extremely doubtful.
We rely on dividends from
our bank subsidiaries as our primary source of funds. The Consent Orders of the Banks and the Written
Agreement of the holding company restrict our ability to receive dividends from
the Banks. Accordingly, we may not have
adequate funds at the holding company to be able to repay our $4 million line
of credit if it is not extended at the end of January, 2009, or to continue
basic operations at the holding company absent asset sales additional capital
and/or improved operating performance of our Banks.
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Regulatory actions or restrictions imposed by our regulators
could adversely affect our reputation, liquidity, financial condition, and
results of operation.
A primary source of funding for our banks is customer
deposits. Should our regulators impose further regulatory restrictions or
an enforcement action on us, our customers may lose confidence in our Banks and
may choose to withdraw their deposits at a rate faster than we are prepared to
handle. While our current sources of liquidity support our current needs,
we cannot assure that they will be adequate to support increased levels of
withdrawals in the case of regulatory enforcement actions that are made known
to our depositors or loss of our customers confidence in us.
Efforts to comply with the Sarbanes-Oxley Act of 2002 will
continue to involve significant expenditures, and non-compliance with the
Sarbanes-Oxley Act of 2002 may adversely affect our business.
The Sarbanes-Oxley Act of 2002, and the
related rules and regulations promulgated by the SEC that are now
applicable to us, have increased the scope, complexity, and cost of corporate
governance, reporting, and disclosure practices. We have experienced, and
expect to continue to experience, greater compliance costs, including costs of
completing our audits and the costs related to internal control deficiencies
and maintaining and certifying internal controls, as a result of the
Sarbanes-Oxley Act. We expect these new rules and regulations to continue
to increase our accounting, legal, and other costs, and to make some activities
more difficult, time consuming, and costly. In the event that we are unable to
maintain or achieve compliance with the Sarbanes-Oxley Act and related rules,
we may be adversely affected.
We evaluate our internal
control systems in order to allow management to report on, our internal control
over financial reporting, as required by Section 404 of the Sarbanes-Oxley
Act. If we identify significant deficiencies or material weaknesses in
our internal control over financial reporting that we cannot remediate in a
timely manner, the trading price of our common stock could decline, our ability
to obtain any necessary equity or debt financing could suffer, and our common
stock could ultimately be delisted from The Nasdaq Global Market. In this
event, the liquidity of our common stock would be severely limited and the market
price of our common stock would likely decline significantly.
We rely heavily on our management team, and the unexpected
loss of key employees may adversely affect our operations.
Much of our performance to date has been
influenced strongly by our ability to attract and retain senior management
experienced in banking and financial services.
Our ability to attract and retain executive officers, management teams
and loan officers of our operating subsidiaries will continue to be important
to the successful implementation of our strategies and has been strained due to
our recent enforcement agreements with our banking regulators and our operating
results in 2008. The unexpected loss of services of any key management
personnel, or the inability to recruit and retain qualified personnel in the
future, could have an adverse affect on our business, financial condition and
results of operations.
We face intense competition in all phases of our business
from other banks and financial institutions.
We compete for deposits with a large
number of depository institutions including commercial banks, savings and loan
associations, credit unions, money market funds and other financial
institutions and financial intermediaries serving our operating areas.
Principal competitive factors with respect to deposits include interest rates
paid on deposits, customer service, convenience, and location.
We compete for loans with
other banks located in our operating areas, with loan production offices of
large banks headquartered in other states, as well as with savings and loan
associations, credit unions, finance companies, mortgage bankers, leasing
companies and other institutions. Competitive factors with respect to loans
include interest rates charged, customer service and responsiveness in
tailoring financial products to the needs of customers.
Changes in interest rates could affect our earnings.
Our net interest income is our largest
source of revenue. Net interest income is the difference between interest
earned on loans and investments and interest paid on deposits and other
borrowings. We cannot predict or control changes in interest rates, which are
affected by national, regional and local economic conditions and the policies
of regulatory authorities. While we continually take measures designed to
49
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manage the risks from
changes in market interest rates, changes in interest rates can still have a
material adverse effect on our earnings.
An interruption in or breach in security of our information
systems may result in a loss of customer business and have an adverse affect on
our results of operations, financial condition and cash flows.
We rely heavily on communications and
information systems to conduct our business.
Any failure, interruption or breach in security of these systems could
result in failures or disruptions in our customer relationship management,
general ledger, deposits, servicing or loan origination systems. Although
we have policies and procedures designed to prevent or minimize the effect of a
failure, interruption or breach in security of our communications or
information systems, there can be no assurance that any such failures,
interruptions or security breaches will not occur, or if they do occur, that
they will be adequately addressed by us. The occurrence of any such
failures, interruptions or security breaches could result in a loss of customer
business and have a negative effect on our results of operations, financial
condition and cash flows.
Our business operations are dependent on technology and our
inability to invest in technological improvements may adversely affect our
results of operations, financial condition and cash flows.
The financial services industry is
undergoing rapid technological changes with frequent introductions of new
technology-driven products and services. In addition to better serving
customers, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. Our future success depends in
part upon our ability to address the needs of our customers by using technology
to provide products and services that will satisfy customer demands for
convenience as well as create additional efficiencies in our operations.
Many of our competitors have substantially greater resources to invest in
technological improvements. We may not be able to implement new
technology-driven products and services effectively or be successful in
marketing these products and services to our customers, which may negatively
affect our results of operations, financial condition and cash flows.
Our operational policies and procedures may prove inadequate
in our current operating environment and as such, may negatively impact our
liquidity, results of operations, financial condition and cash flows.
Our Company and our subsidiary
banks have been deemed to be in troubled condition by our regulators.
The current or future restrictions imposed on us by our regulators may result
in repercussions that our operational policies or procedures are not equipped
to address, the occurrence of which may negatively affect our results of
operations, financial condition and cash flows.
We cannot be certain that our existing line of credit will
be renewed.
We have a $4 million line of credit with our correspondent bank of which we are
currently utilizing $4 million. We are currently in default on this line of
credit and this line of credit expires on January 31, 2009. While the line
of credit has been renewed in the past, we cannot assure renewal in the future.
Nonrenewal of the line of credit would adversely impact our capital resources
and liquidity.
Item
2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
(c) We did not
repurchase any shares of our common stock during the third quarter of 2008.
The
Board of Directors approved a stock repurchase program, announced October 14,
2004, authorizing the repurchase of up to 400,000 shares of our common
stock. The stock repurchase program does
not have an expiration date.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
The
Companys Annual Meeting of Shareholders, originally scheduled for June 17,
2008 was postponed in accordance with the Bicknell Agreement that the Company
entered into on June 16, 2008. As
such, all matters submitted to a vote of security holders were postponed and
were voted on by shareholders at the Companys reconvened meeting on August 19,
2008. Please refer to Corporate
Governance Matters under
Item 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS for more information regarding
the Bicknell Agreement.
a)
The annual meeting of Stockholders was held
on August 19, 2008
50
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b)
The following individuals were elected as
Directors for the term of three years each.
|
|
Votes
|
|
Votes
|
|
Name
|
|
For
|
|
Withheld
|
|
Robert M. Blachly
|
|
2,785,867
|
|
197,761
|
|
Jeffery L. Renner
|
|
2,907,290
|
|
76,338
|
|
Richard J. Tremblay
|
|
2,833,604
|
|
150,024
|
|
c)
Shareholders approved the extension of
the 1999 Employees Stock Purchase Plan for another five years.Shareholders
voted on this proposal as follows:
Votes For
|
|
Votes Against
|
|
Voted Abstained
|
|
Non-Votes
|
|
2,302,166
|
|
131,636
|
|
31,870
|
|
517,956
|
|
d)
The shareholders ratified the
appointment of KPMG LLP as our independent auditors for the fiscal year ending
December 31, 2008. Shareholders
voted on this proposal as follows:
Votes For
|
|
Votes Against
|
|
Voted Abstained
|
|
Non-Votes
|
|
2,904,985
|
|
72,643
|
|
6,000
|
|
0
|
|
Item 5
. OTHER
INFORMATION
Notice of Delisting or Failure
to Satisfy a Continued Listing Rule or Standard
As a result of not timely filing
this Periodic Report on Form 10-Q, the Company received a Nasdaq Staff
Deficiency Letter on November 20, 2008, indicating that the Company fails to
comply with the requirement(s) for continued listing set forth in Marketplace
Rule(s). Pursuant to Nasdaq rules, no
later than January 20, 2009, the Company intends to provide Nasdaq with a plan
to regain compliance in which the Company will request an exception of the
non-compliance. The Company also made a
public announcement regarding this notice of failure to satisfy a continued
listing standard.
Entry into a material
definitive agreement
On December 1, 2008 TeamBank
entered into multiple agreements to convert its approximately $19.4 million of
bank-owned life insurance policies to cash in order to enhance the Banks
liquidity. TeamBank expects to receive
approximately $16.0 million in cash proceeds from the policy conversion, during
the first week of December. As a result
of a change in TeamBanks intent to hold its bank owned life insurance
policies, TeamBank recorded approximately $2.4 million in tax expense (which
included approximately $525,000 in early withdrawal fees) during the quarter
ended September 30, 2008, as the proceeds were no longer expected to be
nontaxable as of that date. In
accordance with U.S. Generally Accepted Accounting Principles, the tax
implications of this transaction are reflected in the accompanying unaudited
consolidated financial statements for the three and nine months ended September
30, 2008.
Item
6.
EXHIBITS
Exhibit
Number
|
|
Description
|
3.1
|
|
Restated
and Amended Articles of Incorporation of Team Financial, Inc. (1)
|
3.2
|
|
Amended
and Restated Bylaws of Team Financial, Inc. (16)
|
4.9
|
|
Indenture
between Team Financial, Inc. and Wells Fargo Bank, N.A. dated
September 14, 2006 (5)
|
4.10
|
|
Debenture
Subscription Agreement between Team Financial, Inc. and Team Financial
Capital Trust II dated September 14, 2006 (5)
|
4.11
|
|
Common
Securities Subscription Agreement between Team Financial Capital Trust II and
Team Financial, Inc. dated September 14, 2006 (5)
|
4.12
|
|
Purchase Agreement among Team Financial Capital Trust II, Team Financial Inc., and Bear, Stearns & Co., Inc. dated September 12, 2006 (5)
|
4.13
|
|
Guarantee Agreement delivered by Team Financial, Inc. and Wells Fargo Bank, N.A. dated September 14, 2006 (5)
|
4.14
|
|
Junior
Subordinated Debenture of Team Financial, Inc. due 2036 (5)
|
4.15
|
|
Capital
Security Certificate of Team Financial Capital Trust II evidencing 22,000
Capital Securities owned by Cede & Co. (5)
|
4.16
|
|
Common
Security Certificate of Team Financial Capital Trust II evidencing 681
Commons Securities owned by Team Financial, Inc. (5)
|
10.1
|
|
Employment
Agreement between Team Financial, Inc. and Robert J. Weatherbie dated
April 15, 2008. (9)
|
10.2
|
|
Employment
Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated March 14,
2007. (6)
|
10.3
|
|
Employment
Agreement between Team Financial, Inc. and Sandra J. Moll dated
March 2, 2007. (6)
|
10.5
|
|
Technology
Outsourcing Renewal Agreement between Team Financial, Inc. and Metavante
Corporation dated December 1, 2007. (8)
|
10.6
|
|
401K
Plan of Team Financial, Inc. 401(k) Trust, effective
January 1, 1999 and administered by Nationwide Life Insurance Company.
(1)
|
51
Table
of Contents
10.7-10.9
|
|
Exhibit numbers
intentionally not used.
|
10.10
|
|
Agreement
dated May 16, 2006 among Team Financial, Inc. and McCaffree
Financial Corporation. (4)
|
10.11
|
|
Team
Financial, Inc. Employee Stock Ownership Plan Summary. (1)
|
10.12
|
|
Team
Financial, Inc. 1999 Stock Incentive Plan. (1)
|
10.13
|
|
Rights
Agreement between Team Financial, Inc. and American Securities Transfer &
Trust, Inc. dated June 3, 1999. (1)
|
10.14
|
|
Team
Financial, Inc. Employee Stock Purchase Plan. (1)
|
10.15
|
|
Revolving
Credit Agreement between Team Financial, Inc. and US Bank dated
March 18, 2004. (3)
|
10.15.1
|
|
Amendment
to Loan Agreement and Note between Team Financial, Inc. and US Bank
dated June 30, 2008. (12)
|
10.16
|
|
Agreement
dated June 16, 2008, between Team Financial, Inc. and the Bicknell
Group. (Other than Exhibit A, thereto, which shall be deemed to be
furnished rather than filed.) (10)
|
10.17
|
|
Agreement
dated July 10, 2008, between Team Financial, Inc. and Keith B.
Edquist. (Other than Exhibit A, thereto, which shall be deemed to be
furnished rather than filed.) (11)
|
10.18
|
|
Deferred
Compensation Agreement between TeamBank, N.A. and Robert J. Weatherbie dated
February 1, 2002. (2)
|
10.19
|
|
Salary
Continuation Agreement between TeamBank, N.A. and Robert J. Weatherbie dated
July 1, 2001. (2)
|
10.20
|
|
Split
Dollar Agreement between TeamBank, N.A. and Robert J. Weatherbie dated
January 25, 2002. (2)
|
10.24
|
|
Deferred
Compensation Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated
February 1, 2002. (2)
|
10.25
|
|
Salary
Continuation Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated
July 1, 2001. (2)
|
10.26
|
|
Split
Dollar Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated
January 25, 2002. (2)
|
10.30
|
|
Executive
Retirement and Release Agreement between Michael L. Gibson and Team
Financial, Inc. dated May 24, 2007. (7)
|
10.31
|
|
Stipulation
and Consent to the Issuance of a Consent Order, between TeamBank, N.A. and
the Office of the Comptroller of the Currency and Colorado National Bank and
the Office of the Comptroller of the Currency dated September 2, 2008. (13)
|
10.32
|
|
Advance,
Pledge and Security Agreement between the Federal Home Loan Bank of Topeka
and TeamBank, N.A. dated November 25, 2003. (16)
|
10.33
|
|
Amendment
to Revolving Credit Agreement and Note between US Bank N.A., dated October
22, 2008 (16)
|
10.34
|
|
Team
Financial, Inc. 2007 Stock Incentive Plan. (14)
|
10.35
|
|
Written
Agreement by and among Team Financial, Inc., Post Bancorp, Inc., Team
Financial Acquisition Subsidiary, Inc., and Federal Reserve Bank of Kansas
City. (15)
|
11.1
|
|
Statement
regarding Computation of per share earnings see consolidated financial
statements. (15)
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (16)
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. (16)
|
32.1
|
|
Certification of Principal
Executive Officer Pursuant to 18 U.S.C. §1350. (16)
|
32.2
|
|
Certification of Chief Financial
Officer Pursuant to 18 U.S.C. §1350. (16)
|
(1)
|
|
Filed with Registration
Statement on Form S-1 dated August 6, 2001, as amended, (Registration
Statement No. 333-76163) and incorporated herein by reference.
|
(2)
|
|
Filed
with Annual Report on Form 10-K for the Year Ending December 31,
2002, and incorporated herein by reference.
|
(3)
|
|
Filed
with quarterly report on form 10-Q for the period ended March 31, 2004
and incorporated herein by reference.
|
(4)
|
|
Filed
with Form 8-K dated May 22, 2006 and incorporated herein by
reference.
|
(5)
|
|
Filed
with quarterly report on form 10-Q for the period ended September 30,
2006 and incorporated herein by reference.
|
(6)
|
|
Filed
with quarterly report on form 10-Q for the period ended March 31, 2007
and incorporated herein by reference.
|
(7)
|
|
Filed
with quarterly report on form 10-Q for the period ended June 30, 2007
and incorporated herein by reference.
|
(8)
|
|
Filed
with annual report on Form 10-K/A for the year ended December 31,
2007, and incorporated herein by reference.
|
(9)
|
|
Filed
with quarterly report on form 10-Q for the period ended March 31, 2008
and incorporated herein by reference.
|
(10)
|
|
Filed
with Form 8-K dated June 18, 2008 and incorporated herein by
reference.
|
(11)
|
|
Filed
with Form 8-K dated July 15, 2008 and incorporated herein by
reference.
|
(12)
|
|
Filed
with Form 8-K dated August 11, 2008 and incorporated herein by
reference.
|
(13)
|
|
Filed
with Form 8-K dated September 8, 2008 and incorporated herein by
reference.
|
(14)
|
|
Filed
with Definitive Proxy Statement dated May 16, 2007 and incorporated herein by
reference.
|
(15)
|
|
Filed
herewith Form 8K dated November 23, 2008 and incorporated herein by reference.
|
(16)
|
|
Filed
herewith.
|
|
|
|
52
Table
of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
|
December
5, 2008
|
By:
|
/s/
Sandra J. Moll
|
|
|
Sandra
J. Moll
|
|
|
Director
and Chief Operating
|
|
|
Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
Date:
|
December
5, 2008
|
By:
|
/s/
Bruce R. Vance
|
|
|
Bruce
R. Vance
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
53
Table
of Contents
Exhibit Index
Exhibit
Number
|
|
Description
|
3.1
|
|
Restated
and Amended Articles of Incorporation of Team Financial, Inc. (1)
|
3.2
|
|
Amended
and Restated Bylaws of Team Financial, Inc. (16)
|
4.9
|
|
Indenture
between Team Financial, Inc. and Wells Fargo Bank, N.A. dated
September 14, 2006 (5)
|
4.10
|
|
Debenture
Subscription Agreement between Team Financial, Inc. and Team Financial
Capital Trust II dated September 14, 2006 (5)
|
4.11
|
|
Common
Securities Subscription Agreement between Team Financial Capital Trust II and
Team Financial, Inc. dated September 14, 2006 (5)
|
4.12
|
|
Purchase Agreement among Team Financial Capital Trust II, Team Financial Inc., and Bear, Stearns & Co., Inc. dated September 12, 2006 (5)
|
4.13
|
|
Guarantee Agreement delivered by Team Financial, Inc. and Wells Fargo Bank, N.A. dated September 14, 2006 (5)
|
4.14
|
|
Junior
Subordinated Debenture of Team Financial, Inc. due 2036 (5)
|
4.15
|
|
Capital
Security Certificate of Team Financial Capital Trust II evidencing 22,000
Capital Securities owned by Cede & Co. (5)
|
4.16
|
|
Common
Security Certificate of Team Financial Capital Trust II evidencing 681
Commons Securities owned by Team Financial, Inc. (5)
|
10.1
|
|
Employment
Agreement between Team Financial, Inc. and Robert J. Weatherbie dated
April 15, 2008. (9)
|
10.2
|
|
Employment
Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated March 14,
2007. (6)
|
10.3
|
|
Employment
Agreement between Team Financial, Inc. and Sandra J. Moll dated
March 2, 2007. (6)
|
10.5
|
|
Technology
Outsourcing Renewal Agreement between Team Financial, Inc. and Metavante
Corporation dated December 1, 2007. (8)
|
10.6
|
|
401K
Plan of Team Financial, Inc. 401(k) Trust, effective
January 1, 1999 and administered by Nationwide Life Insurance Company.
(1)
|
10.7-10.9
|
|
Exhibit numbers
intentionally not used.
|
10.10
|
|
Agreement
dated May 16, 2006 among Team Financial, Inc. and McCaffree
Financial Corporation. (4)
|
10.11
|
|
Team
Financial, Inc. Employee Stock Ownership Plan Summary. (1)
|
10.12
|
|
Team
Financial, Inc. 1999 Stock Incentive Plan. (1)
|
10.13
|
|
Rights
Agreement between Team Financial, Inc. and American Securities
Transfer & Trust, Inc. dated June 3, 1999. (1)
|
10.14
|
|
Team
Financial, Inc. Employee Stock Purchase Plan. (1)
|
10.15
|
|
Revolving
Credit Agreement between Team Financial, Inc. and US Bank dated
March 18, 2004. (3)
|
10.15.1
|
|
Amendment
to Loan Agreement and Note between Team Financial, Inc. and US Bank
dated June 30, 2008. (12)
|
10.16
|
|
Agreement
dated June 16, 2008, between Team Financial, Inc. and the Bicknell
Group. (Other than Exhibit A, thereto, which shall be deemed to be
furnished rather than filed.) (10)
|
10.17
|
|
Agreement
dated July 10, 2008, between Team Financial, Inc. and Keith B.
Edquist. (Other than
|
54
Table of Contents
|
|
Exhibit A,
thereto, which shall be deemed to be furnished rather than filed.) (11)
|
10.18
|
|
Deferred
Compensation Agreement between TeamBank, N.A. and Robert J. Weatherbie dated
February 1, 2002. (2)
|
10.19
|
|
Salary
Continuation Agreement between TeamBank, N.A. and Robert J. Weatherbie dated
July 1, 2001. (2)
|
10.20
|
|
Split
Dollar Agreement between TeamBank, N.A. and Robert J. Weatherbie dated
January 25, 2002. (2)
|
10.24
|
|
Deferred
Compensation Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated
February 1, 2002. (2)
|
10.25
|
|
Salary
Continuation Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated
July 1, 2001. (2)
|
10.26
|
|
Split
Dollar Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated
January 25, 2002. (2)
|
10.30
|
|
Executive
Retirement and Release Agreement between Michael L. Gibson and Team
Financial, Inc. dated May 24, 2007. (7)
|
10.31
|
|
Stipulation
and Consent to the Issuance of a Consent Order, between TeamBank, N.A. and
the Office of the Comptroller of the Currency and Colorado National Bank and
the Office of the Comptroller of the Currency dated September 2, 2008. (13)
|
10.32
|
|
Advance,
Pledge and Security Agreement between the Federal Home Loan Bank of Topeka and
TeamBank, N.A. dated November 25, 2003. (16)
|
10.33
|
|
Amendment
to Revolving Credit Agreement and Note between US Bank N.A., dated October
22, 2008 (16)
|
10.34
|
|
Team
Financial, Inc. 2007 Stock Incentive Plan. (14)
|
10.35
|
|
Written
Agreement by and among Team Financial, Inc., Post Bancorp, Inc., Team
Financial Acquisition Subsidiary, Inc., and Federal Reserve Bank of Kansas
City. (15)
|
11.1
|
|
Statement
regarding Computation of per share earnings see consolidated financial
statements. (14)
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (16)
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. (16)
|
32.1
|
|
Certification of Principal
Executive Officer Pursuant to 18 U.S.C. §1350. (16)
|
32.2
|
|
Certification of Chief Financial
Officer Pursuant to 18 U.S.C. §1350. (16)
|
(1)
Filed with Registration Statement on Form S-1
dated August 6, 2001, as amended, (Registration Statement No. 333-76163)
and incorporated herein by reference.
(2)
Filed with Annual Report on Form 10-K
for the Year Ending December 31, 2002, and incorporated herein by
reference.
(3)
Filed with quarterly report on form 10-Q for
the period ended March 31, 2004 and incorporated herein by reference.
(4)
Filed with Form 8-K dated May 22,
2006 and incorporated herein by reference.
(5)
Filed with quarterly report on form 10-Q for
the period ended September 30, 2006 and incorporated herein by reference.
(6)
Filed with quarterly report on form 10-Q for
the period ended March 31, 2007 and incorporated herein by reference.
(7)
Filed with quarterly report on form 10-Q for
the period ended June 30, 2007 and
incorporated
herein by reference.
(8)
Filed with annual report on Form 10-K/A
for the year ended December 31, 2007, and incorporated herein by
reference.
(9)
Filed with quarterly report on form 10-Q for
the period ended March 31, 2008 and incorporated herein by reference.
(10)
Filed with Form 8-K dated June 18,
2008 and incorporated herein by reference.
(11)
Filed with Form 8-K dated July 15,
2008 and incorporated herein by reference.
(12)
Filed with Form 8-K dated August 11,
2008 and incorporated herein by reference.
(13)
Filed with Form 8-K dated September 8,
2008 and incorporated herein by reference.
(14)
Filed with Definitive Proxy Statement dated
May 16, 2007 and incorporated herein by reference.
(15)
Filed herewith Form 8K dated November 23, 2008 and incorporated herein
by reference.
(16) Filed herewith.
55
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