UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2003

 

Securities and Exchange Commission File Number: 000-26335

 

TEAM FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

KANSAS

 

48-1017164

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

8 West Peoria, Suite 200, Paola, Kansas 66071

(Address of principal executive offices) (Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý       No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

 

Yes o       No ý

 

APPLICABLE ONLY TO CORPORATE ISSUES:

 

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

 

There were 4,073,505 shares of the Registrant’s common stock, no par value, outstanding as of October 31, 2003.

 

 



 

Part I.   Financial Information

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

Consolidated Statements of Financial Condition as of September 30, 2003 and December 31, 2002

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2003 and 2002

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2003

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

Item 2.

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

 

 

Item 3.

Quantitative And Qualitative Disclosure About Market Risk

 

 

Item 4.

Controls and Procedures

 

 

Part II.  Other Information

 

 

Item 1.

Legal Proceedings

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

Signature Page

 

Exhibit 10.30

 

Exhibit 31.1

 

Exhibit 31.2

 

Exhibit 32.1

 

Exhibit 32.2

 

2



 

Team Financial, Inc. And Subsidiaries

Consolidated Statements of Financial Condition

(In Thousands)

(Unaudited)

 

 

 

September 30,
2003

 

December 31,
2002

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

12,965

 

$

18,298

 

Federal funds sold and interest bearing bank deposits

 

3,840

 

17,260

 

Cash and cash equivalents

 

16,805

 

35,558

 

 

 

 

 

 

 

Investment securities

 

 

 

 

 

Available for sale, at fair value (amortized cost of $219,056 and $218,037 at September 30, 2003 and December 31, 2002, respectively)

 

222,000

 

224,052

 

Total investment securities

 

222,000

 

224,052

 

 

 

 

 

 

 

Loans receivable, net of unearned fees

 

338,285

 

340,986

 

Allowance for loan losses

 

(4,568

)

(4,611

)

Net loans receivable

 

333,717

 

336,375

 

 

 

 

 

 

 

Accrued interest receivable

 

4,040

 

4,053

 

Premises and equipment, net

 

13,926

 

12,219

 

Assets acquired through foreclosure

 

1,032

 

1,770

 

Goodwill

 

14,538

 

14,407

 

Intangible assets, net of accumulated amortization

 

6,077

 

6,579

 

Bank owned life insurance policies

 

17,563

 

16,968

 

Other assets

 

3,197

 

3,888

 

 

 

 

 

 

 

Total assets

 

$

632,895

 

$

655,869

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Deposits:

 

 

 

 

 

Checking deposits

 

$

153,482

 

$

172,886

 

Savings deposits

 

33,069

 

31,212

 

Money market deposits

 

51,159

 

54,485

 

Certificates of deposit

 

199,024

 

197,022

 

Total deposits

 

436,734

 

455,605

 

Federal funds purchased and securities sold under agreements to repurchase

 

5,660

 

4,401

 

Federal Home Loan Bank advances

 

111,273

 

112,331

 

Notes payable

 

3,719

 

6,455

 

Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures

 

15,525

 

15,525

 

Accrued expenses and other liabilities

 

8,251

 

9,724

 

 

 

 

 

 

 

Total liabilities

 

581,162

 

604,041

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, no par value, 10,000,000 shares authorized, no shares issued

 

 

 

Common stock, no par value, 50,000,000 shares authorized; 4,448,888 and 4,442,210 shares issued; 4,073,505 and 4,107,627 shares outstanding at September 30, 2003 and December 31, 2002, respectively

 

27,443

 

27,393

 

Capital surplus

 

195

 

211

 

Retained earnings

 

25,624

 

23,290

 

Treasury stock, 375,383 and 334,583 shares of common stock at cost at September 30, 2003, and December 31, 2002, respectively

 

(3,471

)

(3,034

)

Accumulated other comprehensive income

 

1,942

 

3,968

 

 

 

 

 

 

 

Total stockholders’ equity

 

51,733

 

51,828

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

632,895

 

$

655,869

 

 

See accompanying notes to the unaudited consolidated financial statements

 

3



 

Team Financial, Inc. And Subsidiaries

Consolidated Statements of Operations

(Dollars In Thousands, Except Per Share Data)

(Unaudited)

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2003

 

2002

 

2003

 

2002

 

Interest Income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

5,807

 

$

6,249

 

$

17,574

 

$

19,846

 

Taxable investment securities

 

1,606

 

2,796

 

5,275

 

7,662

 

Nontaxable investment securities

 

292

 

226

 

804

 

670

 

Other

 

15

 

19

 

97

 

216

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

7,720

 

9,290

 

23,750

 

28,394

 

 

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

Checking deposits

 

108

 

238

 

424

 

790

 

Savings deposits

 

56

 

92

 

189

 

393

 

Money market deposits

 

121

 

231

 

441

 

721

 

Certificates of deposit

 

1,307

 

1,771

 

4,177

 

6,179

 

Federal funds purchased and securities sold under agreements to repurchase

 

12

 

24

 

34

 

53

 

FHLB advances payable

 

1,259

 

1,226

 

3,744

 

2,976

 

Notes payable

 

37

 

81

 

141

 

261

 

Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures

 

377

 

377

 

1,131

 

1,131

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

3,277

 

4,040

 

10,281

 

12,504

 

 

 

 

 

 

 

 

 

 

 

Net interest income before provision for loan losses

 

4,443

 

5,250

 

13,469

 

15,890

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

832

 

412

 

1,319

 

746

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

3,611

 

4,838

 

12,150

 

15,144

 

 

 

 

 

 

 

 

 

 

 

Non-Interest Income:

 

 

 

 

 

 

 

 

 

Service charges

 

966

 

952

 

2,667

 

2,757

 

Trust fees

 

159

 

152

 

433

 

439

 

Insurance agency commissions

 

1,377

 

 

3,687

 

 

Gain on sales of mortgage loans

 

946

 

516

 

2,368

 

1,463

 

Gain on sales of investment securities

 

145

 

3

 

295

 

69

 

Gain on sale of branch assets

 

 

 

 

452

 

Other

 

925

 

785

 

2,259

 

2,017

 

 

 

 

 

 

 

 

 

 

 

Total non-interest income

 

4,518

 

2,408

 

11,709

 

7,197

 

 

 

 

 

 

 

 

 

 

 

Non-Interest Expenses:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,389

 

2,876

 

10,372

 

8,740

 

Occupancy and equipment

 

653

 

573

 

2,042

 

1,729

 

Data processing

 

577

 

457

 

1,558

 

1,439

 

Professional fees

 

292

 

275

 

907

 

839

 

Marketing

 

112

 

86

 

310

 

202

 

Supplies

 

121

 

94

 

331

 

275

 

Intangible asset amortization

 

309

 

335

 

985

 

670

 

Disposal of branch assets

 

 

 

258

 

 

Conversion

 

4

 

 

54

 

6

 

Other

 

982

 

749

 

2,800

 

2,462

 

 

 

 

 

 

 

 

 

 

 

Total non-interest expenses

 

6,439

 

5,445

 

19,617

 

16,362

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,690

 

1,801

 

4,242

 

5,979

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

546

 

545

 

1,133

 

2,234

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,144

 

$

1,256

 

$

3,109

 

$

3,745

 

 

 

 

 

 

 

 

 

 

 

Shares applicable to basic income per share

 

4,091,169

 

4,166,785

 

4,097,041

 

4,178,169

 

 

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.28

 

$

0.30

 

$

0.76

 

$

0.90

 

 

 

 

 

 

 

 

 

 

 

Shares applicable to diluted income per share

 

4,125,981

 

4,190,421

 

4,127,215

 

4,195,698

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share

 

$

0.28

 

$

0.30

 

$

0.75

 

$

0.89

 

 

See accompanying notes to the unaudited consolidated financial statements

 

4



 

Team Financial, Inc. And Subsidiaries

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

1,144

 

$

1,256

 

$

3,109

 

$

3,745

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on investment securities available for sale net of tax of $(1) and $792 for the three months ended September 30, 2003 and September 30, 2002, respectively; and net of tax $(945) and $1,637 for the nine months ended September 30, 2003 and September 30, 2002, respectively

 

(1,081

)

1,539

 

(1,831

)

3,237

 

Reclassification adjustment for gains included in net income net of tax of $(49) and $(1) for the three months ended September 30, 2003 and September 30, 2002, respectively; and net of tax $(100) and $(23) for the nine months ended September 30, 2003 and September 30, 2002, respectively

 

(96

)

(2

)

(195

)

(46

)

Other comprehensive income (loss), net

 

(1,177

)

1,537

 

(2,026

)

3,191

 

Comprehensive income (loss), net

 

$

(32

)

$

2,793

 

$

1,083

 

$

6,936

 

 

See accompanying notes to the unaudited consolidated financial statements

 

5



 

Team Financial, Inc. And Subsidiaries

Consolidated Statements of Changes In Stockholders’ Equity

Nine Months Ended September 30, 2003

(Dollars In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Common
stock

 

Capital
surplus

 

Retained
earnings

 

Treasury
stock

 

Accumulated
other
comprehensive
income

 

Total
stockholders’
equity

 

BALANCE, December 31, 2002

 

$

27,393

 

$

211

 

$

23,290

 

$

(3,034

)

$

3,968

 

$

51,828

 

Treasury stock purchased (40,800 shares)

 

 

 

 

 

 

 

(437

)

 

 

(437

)

Common stock issued in connection with compensation plans (6,678 shares)

 

50

 

 

 

 

 

 

 

 

 

50

 

Decrease in capital surplus in connection with compensation plans

 

 

 

(16

)

 

 

 

 

 

 

(16

)

Net Income

 

 

 

 

 

3,109

 

 

 

 

 

3,109

 

Dividends ($0.19 per share)

 

 

 

 

 

(775

)

 

 

 

 

(775

)

Other comprehensive income (loss) net of $(1,045) in taxes

 

 

 

 

 

 

 

 

 

(2,026

)

(2,026

)

BALANCE, September 30, 2003

 

$

27,443

 

$

195

 

$

25,624

 

$

(3,471

)

$

1,942

 

$

51,733

 

 

See accompanying notes to the unaudited consolidated financial statements

 

6



 

Team Financial, Inc. And Subsidiaries

Consolidated Statements Of Cash Flows

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

3,109

 

$

3,745

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

1,319

 

746

 

Depreciation and amortization

 

3,883

 

2,114

 

Non-cash compensation expense

 

(16

)

97

 

Change in bank owned life insurance

 

(623

)

(556

)

Net gain on sales of investment securities

 

(295

)

(69

)

Net gain on sales of mortgage loans

 

(2,368

)

(1,463

)

Net loss on sales of assets acquired through foreclosure

 

78

 

6

 

Net gain on sale of branch assets

 

 

(452

)

Disposal of branch assets

 

258

 

 

 

Proceeds from sale of mortgage loans

 

114,101

 

82,481

 

Origination of mortgage loans for sale

 

(103,368

)

(73,884

)

Net increase in other assets

 

(635

)

(1,398

)

Net decrease in accrued expenses and other liabilities

 

(427

)

(616

)

 

 

 

 

 

 

Net cash provided by operating activities

 

15,016

 

10,751

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net (increase) decrease in loans

 

(6,631

)

10,873

 

Proceeds from sale of investment securities available-for-sale

 

3,037

 

9,802

 

Proceeds from maturities and principal reductions of investment securities available-for-sale

 

107,722

 

41,677

 

Purchases of investment securities available-for-sale

 

(113,511

)

(101,722

)

Purchase of premises and equipment, net

 

(2,767

)

(1,458

)

Proceeds from sales on assets acquired through foreclosure

 

950

 

291

 

Cash paid for acquisitions and dispositions, net

 

 

(30,493

)

 

 

 

 

 

 

Net cash used in investing activities

 

(11,200

)

(71,030

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net (decrease) increase in deposits

 

(18,871

)

17,138

 

Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase

 

1,259

 

(5,499

)

Payments on Federal Home Loan Bank advances

 

(1,058

)

(1,055

)

Proceeds from Federal Home Loan Bank advances

 

 

40,000

 

Payments on notes payable

 

(2,936

)

(3,486

)

Proceeds of notes payable

 

200

 

300

 

Common stock issued

 

50

 

49

 

Purchase of treasury stock

 

(437

)

(809

)

Dividends paid on common stock

 

(776

)

(628

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(22,569

)

46,010

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(18,753

)

(14,269

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

35,558

 

38,895

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

16,805

 

$

24,626

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

 

$

10,420

 

$

12,891

 

Income taxes

 

3,065

 

1,044

 

 

 

 

 

 

 

Noncash activities related to operations

 

 

 

 

 

Transfer of loans to assets acquired through foreclosure

 

$

339

 

$

978

 

 

See accompanying notes to the consolidated financial statements

 

7



 

TEAM FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three and nine month periods ended September 30, 2003 and 2002

 

Note 1:  Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Team Financial, Inc. and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial condition and results of operations required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all normal recurring adjustments necessary for a fair presentation of results have been included.  The consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

 

The interim consolidated financial statements include the accounts of Team Financial, Inc. and its wholly owned subsidiaries.  Intercompany balances and transactions have been eliminated.  The December 31, 2002 statement of financial condition has been derived from the audited consolidated financial statements as of that date.  The results of the interim periods ended September 30, 2003, are not necessarily indicative of the results that may occur for the year ending December 31, 2003.

 

Note 2:  Income Per Share

 

Basic income per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the year.  Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

We account for employee options under the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees with pro forma disclosures of net income and income per share, as if the fair value method of accounting defined in SFAS No. 123 Accounting for Stock Based Compensation had been applied.  SFAS 123 establishes a fair value based method of accounting for stock based employee compensation plans.  Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  Under SFAS No. 123, our net income and net income per share would have decreased as reflected in the following pro forma amounts.

 

8



 

 

 

Three Months Ended June 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(Dollars In Thousands, Except Per Share Data)

 

Net income:

 

 

 

 

 

 

 

 

 

As reported

 

$

1,144

 

$

1,256

 

$

3,109

 

$

3,745

 

Deduct:  Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

255

 

105

 

501

 

356

 

Pro forma

 

$

889

 

$

1,151

 

$

2,608

 

$

3,389

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.28

 

$

0.30

 

$

0.76

 

$

0.90

 

Pro forma

 

0.22

 

0.28

 

0.64

 

0.81

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.28

 

$

0.30

 

$

0.75

 

$

0.89

 

Pro forma

 

0.22

 

0.27

 

0.63

 

0.81

 

 

 

 

 

 

 

 

 

 

 

Shares utilized in basic earnings per share

 

4,091,169

 

4,166,785

 

4,097,041

 

4,178,169

 

 

 

 

 

 

 

 

 

 

 

Shares utilized in diluted earnings per share

 

4,125,981

 

4,190,421

 

4,127,215

 

4,195,698

 

 

Note 3:  Stock Repurchase Program

 

Our Board of Directors approved a stock repurchase program in January 2001, authorizing the repurchase of up to 300,000 shares of our common stock.  During the nine-month period ended September 30, 2003, we purchased 40,800 shares at an average price of $10.71 per share.  During the three-month period ended September 30, 2003, we purchased 20,800 shares at an average price of $11.16 per share.  As of September 30, 2003, we had repurchased 163,778 shares of our common stock under the program at an average price of $10.00 per share.

 

Note 4:  Dividend Declared

 

On September 27, 2003, we declared a quarterly cash dividend of $0.07 per share to all shareholders of record on September 30, 2003, payable October 20, 2003.

 

Note 5:  Recent Accounting Pronouncements

 

In June 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  The provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002.  We do not believe that the adoption of Statement No. 146 will have a significant impact on our consolidated financial statements.

 

In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain Financial Institutions.  This Statement provides guidance on the accounting for the acquisition of a financial institution and applies to all acquisitions except those between two or more mutual enterprises.  Those transition provisions were effective on October 1, 2002.  The scope of Statement No. 144 was amended to include long-term customer-relationship intangible assets such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets.  The adoption of Statement No. 147 did not have a significant impact on our consolidated financial statements.

 

In November 2002, the FASB issued Interpretation No. 45, Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others.  This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.  The adoption of Interpretation No. 45 did not have a significant impact on our consolidated financial statements.

 

9



 

In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.  This Statement, which amends Statement No. 123, Accounting for Stock-Based Compensation, provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition it requires more prominent and more frequent disclosure in financial statements about the effects of stock-based compensation.  We will continue to account for stock-based compensation in accordance with APB No. 25. We do not believe that the adoption of Statement No. 148 will have a significant impact of our consolidated statements.

 

In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, elaborates on the financial statement disclosures to be made by enterprises involved with variable interest entities (VIE), including requiring consolidation of entities in which an enterprise has a controlling financial interest that is not controlled through voting interests.  FIN 46 established accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary.  The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE.  Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity.  The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003, and are otherwise effective at the beginning of the first interim period beginning after December 15, 2003.  We have a statutory trust that was formed, prior to January 31, 2003, for the purpose of issuing Trust Preferred Securities (see note 11 to the annual consolidated financial statements).  These statutory trust will be subjected to FIN 46 in the first quarter of 2004.  We currently believe the continued consolidation of the trust is appropriate under FIN 46.  However, the applications of FIN 46 to this type of trust are an emerging issue and a possible unintended consequence of FIN 46 is the deconsolidation of the trust.  The deconsolidation of the statutory trust would not have a material effect on our consolidated balance sheet or our consolidated statement of operations.  In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory Capital purposes until notice is given to the contrary.  The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance.  There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes.

 

We adopted SFAS No. 144 Accounting for the Impairment of Disposal of Long-Lived Assets on January 1, 2002. The Statement established a single accounting model for all long-lived assets to be disposed of by sale, which is to measure a long-lived asset classified as held for sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. The Statement also establishes criteria to determine when a long-lived asset is held for sale and provides additional guidance on accounting for such specific circumstances. We do not believe that the adoption of Statement No. 144 will have a significant impact on our consolidated financial statements.

 

In May 2003, FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies, measures and discloses in its financial statements certain financial instruments with characteristics of both liabilities and equity.  Statement No. 150 requires that an issuer classify financial instruments that are within its scope as a liability, in most circumstances.  Such financial instruments include (i) financial instruments that are issued in the form of shares that are mandatorily redeemable; (ii) financial instruments that embody an obligation to repurchase the issuer’s equity shares, or are indexed to such an obligation and that require the issuer to settle the obligation by transferring assets; (iii) financial instruments that embody an obligation that the issuers settle by issuing a variable number of its equity shares if, at inception, the monetary value of the obligations is predominately based on a fixed amount, variations in something other than the fair value of the issuer’s equity share or variations inversely related to changes in the fair value of the issuer’s equity shares; and (iv) certain freestanding financial instruments.  Statement No. 150 is effective for contracts entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003.  Adoption of Statement No. 150 on July 2003 did not have a significant impact on our consolidated financial statements.

 

10



 

Note 6:  Acquisitions and Sale or Disposition of Branches

 

On May 5, 2003, we closed our 2809 South 160th Street branch location in Omaha, Nebraska.  We recorded a $258,000 loss to terminate the building lease and dispose of the assets of the facility.

 

On December 18, 2002, we completed the acquisition of The Quarles Agency, Inc., a 25-year old insurance agency.  The name of the insurance agency was changed to Team Insurance Group in May of 2003.  The total consideration paid to The Quarles Agency Inc.’s shareholders was $6.9 million in the form of $5.0 million of cash at closing and the balance of the cash consideration of $1.9 million plus interest thereon at the Prime Rate published in the Wall Street Journal minus one percent shall be paid in two annual contingent payments of $925,000 each.  The payment is contingent on meeting certain revenue targets defined with the acquisition agreement.  The payment of such contingent consideration will be recorded as goodwill at the time of payment.  During the nine months ended September 30, 2003, there were no payments made related to the contingent consideration.  The acquisition was accounted for using the purchase method of accounting, as required by SFAS 141 Business Combinations.  The results of operations from the date of purchase have been included in the consolidated financial statements.

 

On June 21, 2002, we sold its Chapman and Abilene, Kansas branch locations to First National Bank of Belleville, Kansas.  We recorded a pre-tax gain on the sale of $452,000 and an after tax loss on the sale of $196,000.  The after tax loss was due to a difference in the book versus tax basis on the reduction of $1.3 million in goodwill with the sale.

 

11



 

Note 7:  Goodwill and Intangible Assets

 

Goodwill and intangible assets:  Effective July 1, 2001, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141 Business Combinations.  Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets.

 

The following table summarizes our intangible assets as of September 30, 2003.

 

 

 

September 30, 2003

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

 

 

(In Thousands)

 

Core deposit intangible

 

$

6,400

 

$

2,507

 

Agency Expirations

 

1,349

 

106

 

Non-Compete Agreements

 

350

 

91

 

Mortgage servicing rights

 

2,382

 

1,700

 

Total intangible assets

 

$

10,481

 

$

4,404

 

 

The following tables summarize actual and estimated amortization expense on the intangible assets for the three and nine months ended September 30, 2003 and 2002, and for future periods.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ened
September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(In Thousands)

 

Aggregate Amortization Expense

 

$

309

 

$

335

 

$

985

 

$

670

 

 

 

 

Estimated Amortization Expense

 

 

 

Core Deposit
Intangible

 

Mortgage
Servicing Rights

 

Agency
Expirations

 

Non-Compete
Agreements

 

Total

 

 

 

(In Thousands)

 

For the year ending December 31, 2003

 

$

487

 

$

616

 

$

135

 

$

115

 

$

1,353

 

For the year ending December 31, 2004

 

468

 

240

 

135

 

112

 

955

 

For the year ending December 31, 2005

 

463

 

126

 

135

 

40

 

763

 

For the year ending December 31, 2006

 

463

 

126

 

135

 

40

 

763

 

For the year ending December 31, 2007

 

463

 

126

 

135

 

39

 

762

 

 

Goodwill at September 30, 2003, was $14.5 million, an increase of $131,000 from December 31, 2002, due to additional goodwill related to the acquisition of The Quarles Agency, Inc. in December of 2002.  There was no impairment to goodwill recorded for the three or nine months ended September 30, 2003.

 

 

 

Goodwill

 

Balance as of January 1, 2003

 

$

14,407

 

Goodwill acquired during year

 

131

 

Balance as of September 30, 2003

 

$

14,538

 

 

12



 

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

 

OVERVIEW

 

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

 

We offer full service community banking and financial services through 17 locations in the Kansas City metropolitan area, southeastern Kansas, western Missouri, the Omaha, Nebraska metropolitan area, the Tulsa, Oklahoma metropolitan area, and in Colorado Springs, Colorado.  Our presence in Kansas consists of six banking locations in the Kansas City metro area and four banking locations in southeast Kansas.  We operate two banking locations in western Missouri, three banking locations in the metropolitan area of Omaha, Nebraska, one bank in Colorado Springs, Colorado, and an insurance agency in the Tulsa, Oklahoma metropolitan area.

 

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

 

Critical Accounting Policies

 

Our accounting and reporting policies conform to accounting principles generally accepted in the Unites States of America.  In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.

 

Allowance for Loan Losses:  We establish allowances for loan losses.  The provision for loan losses charged to operations is based on management’s judgment of current economic conditions and the credit risk of the loan portfolio.  Management believes that this allowance is adequate for the losses inherent in the loan portfolio.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on borrowers’ conditions and changes in economic conditions.  In addition, various regulatory agencies, as an integral part of the examination process, periodically review this allowance and may require us to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.  See “Non-performing Assets and Allowances for Loan Losses” below for additional discussion.

 

FINANCIAL CONDITION

 

Total assets at September 30, 2003, were $632.9 million compared to $655.9 million at December 31, 2002, a decrease of $23.0 million.  Cash and cash equivalents decreased $18.8 million to $16.8 million at September 30, 2003, compared to $35.6 million at December 31, 2002.  Investment securities decreased $3.1 million to $222.0 million at September 30, 2003, compared to $224.1 million at December 31, 2002.  Loans receivable decreased $2.7 million to $338.3 million at September 30, 2003, from $341.0 million at December 31, 2002.  The decrease in cash and cash equivalents, investment securities, and loans receivable coincided with a decrease in total deposits, Federal Home Loan Bank advances, and notes payable.

 

Total deposits at September 30, 2003, were $436.7 million compared to $455.6 million at December 31, 2002, a decrease of $18.9 million.  The decrease was primarily attributable to a cyclical decrease in tax deposits received from municipal organizations during December of each year.

 

13



 

Investment Securities:  Total investment securities were $222.0 million at September 30, 2003, compared to $224.1 million at December 31, 2002, a decrease of $2.1 million, or 0.9%.  The decrease in investment securities was primarily related to the decrease in mortgage-backed securities.

 

The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk.  The debt securities portfolio is comprised primarily of obligations collateralized by U.S. Government agencies (mainly in the form of mortgage-backed securities), U.S. Government agency securities, U.S. Treasury securities, and municipal obligations.  With the exception of municipal obligations, the maturity structure of the debt securities portfolio is generally short-term in nature or indexed to variable rates.

 

Loans Receivable:  Loans receivable decreased $2.7 million, or 0.8%, to $338.3 million at September 30, 2003, compared to $341.0 million at December 31, 2002.

 

We continue to experience favorable results of our continued emphasis on small to mid-size business lending in our metropolitan markets.  Our commitment to internal loan growth in the commercial, construction and land development, and commercial real estate portfolios in our metropolitan markets produced loan growth of $13.6 million, a 7.1% increase in these loans to $205.0 million at September 30, 2003, compared to $191.4 million at December 31, 2002.  At September 30, 2003, these loans comprised 60.6% of the total loan portfolio compared to 56.1% of the loan portfolio at December 31, 2002, and 45.9% of the loan portfolio at December 31, 2001.

 

Offsetting this growth was a $9.2 million, or 10.2%, decrease in our one to four family loan portfolio to $81.2 million at September 30, 2003, compared to $90.5 million at December 31, 2002.  The decrease was due to a decrease of $8.8 million in our loans held for sale portfolio as well as increased customer refinancing as a result of the favorable fixed mortgage rates and retain our variable rate production loans.  We typically sell fixed rate one to four family loans to the secondary market instead of holding them in our portfolio.

 

Agricultural loans and farmland real estate loans decreased $3.5 million, or 12.2%, to $25.2 million at September 30, 2003, compared to $28.7 million at December 31, 2002.  The decrease was due to our continued reduction in exposure to the Kansas and Missouri agricultural markets.

 

Our installment loans were $17.3 million at September 30, 2003, a decrease of $4.1 million, or 19.2%, from $21.3 million at December 31, 2002.  Installment and other loans have been decreasing as a percentage of total loans over the past several years as we have placed less emphasis in this area as well as tightened our lending standards.

 

Most of our residential mortgage loan production is underwritten in compliance with the requirements for sale to or conversion to mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), and the Government National Mortgage Association (GNMA).  Most of our commercial loans include loans to service, retail, wholesale, and light manufacturing businesses.  These loans are made at rates based on the prevailing national prime interest rate, as well as fixed rates for terms generally ranging from three to five years. Installment loans include automobile, residential, and other personal loans.  The majority of the installment loans are loans with fixed interest rates.

 

Non-performing Assets: Non-performing assets consist of loans 90 days or more delinquent and still accruing interest, non-accrual loans, and assets acquired through foreclosure.  Assets acquired through foreclosure represent real estate properties acquired through foreclosure or by deed in lieu of foreclosure and are classified as assets acquired through foreclosure on our statement of financial condition until the property is sold.  Commercial loans, residential real estate loans, and installment 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.  Classified assets are loans that are rated substandard or lower according to our internal credit review process.

 

14



 

The following table summarizes our non-performing assets:

 

 

 

September 30, 2003

 

December 31, 2002

 

 

 

(In Thousands)

 

Non-performing assets:

 

 

 

 

 

Non-accrual loans

 

 

 

 

 

Real estate loans

 

$

3,637

 

$

1,549

 

Commercial, industrial, and agricultural

 

2,234

 

1,665

 

Installment loans

 

98

 

199

 

Lease financing receivables

 

21

 

 

Total non-accrual loans

 

5,990

 

3,413

 

Loans past due 90 days or more still accruing

 

 

 

 

 

Real estate loans

 

$

66

 

$

799

 

Commercial, industrial, and agricultural

 

197

 

362

 

Installment loans

 

24

 

2

 

Total past due 90 days or more still accruing

 

287

 

1,163

 

Total non-performing loans

 

6,277

 

4,576

 

Assets acquired through foreclosure

 

1,032

 

1,770

 

Total non-performing assets

 

$

7,309

 

$

6,346

 

 

 

 

 

 

 

Non-performing loans to total loans

 

1.86

%

1.34

%

 

 

 

 

 

 

Non-performing assets to total assets

 

1.15

%

0.97

%

 

Non-performing assets totaled $7.3 million at September 30, 2003, compared to $6.3 million at December 31, 2002, representing an increase of $1.0 million or 15.2%.  The increase in non-performing assets was comprised of an increase in non-performing loans of $1.7 million and a decrease in assets acquired through foreclosure of $738,000.

 

Non-performing loans increased $1.7 million or 37.2% to $6.3 million at September 30, 2003, from $4.6 million at December 31, 2002.  The increase in non-performing loans included two credit relationships.  These relationships included $2.7 million to a company that develops residential properties, and a $641,000 to an aluminum extrusion company.

 

Included in our $6.3 million of non-performing loans are five large borrowing relationships aggregating $4.9 million with specific reserves of $763,000.  The borrowing relationships include:

 

                  A $2.7 million relationship with residential development properties in Kansas secured by real estate, with $200,000 in specific reserves.  We began allocating reserves to the loan in September 2003.  The loans were placed on non-accrual status for payment delinquency beginning in February 2003.  As of September 30, 2003, we were in negotiations with a buyer for the property.  However, the negotiations ceased in October of 2003.  We anticipate foreclosure proceedings with respect to the property.  We do not anticipate a loss on the credit in excess of our specific reserves.

                  A $1.2 million agricultural relationship in Kansas, with $200,000 in specific reserves.  We began allocating specific reserves to the loans in December 2002.  The loans were placed on non-accrual status for payment delinquency beginning in July 2002.  The loans are secured by real estate and farm machinery, which management believes will be adequate to pay the loan.  We are working with the borrower to liquidate a portion of the real estate and obtain financing for the borrower at another financial institution.  At September 30, 2003, we had commitments from other financial institutions for $800,000 of the $1.2 million balance.  We do not anticipate a loss on the credit in excess of our specific reserves.

                  A $395,000 agricultural relationship in Kansas, with $75,000 in specific reserves.  We began allocating specific reserves to the loans in September 2002.  The loans were placed on non-accrual status for payment delinquency beginning in March 2002.  The loan is secured by real estate and farm machinery, which management believes will be adequate to pay the loan.  We have obtained a 90% Farm Service Agency guarantee and expect a resolution during the fourth quarter of 2003.  We do not anticipate a loss on the credit in excess of our specific reserves.

 

15



 

                  A $641,000 relationship with an aluminum extrusion company in Kansas with a 36.6% Small Business Administration guarantee.  The loans were placed on non-accrual in April 2003 when the company filed for reorganization in bankruptcy court.  In April of 2003, the company then sought to be acquired as a going concern.  The company has subsequently petitioned the courts to convert to a liquidation under Chapter 7 of the U.S. Bankruptcy law.  Efforts to sell this borrower’s operations as a going concern have been unsuccessful to date.  We allocated an additional $163,000 in specific reserves upon the company’s petition for Chapter 7 in September, in addition to the $125,000 in reserves allocated in April 2003, for a total of $288,000 of reserves allocated to the relationship.  The loan is secured by machinery and equipment.  We do not anticipate a loss on the credit in excess of you specific reserves.

 

Installment loans of $122,000 were also included in non-performing loans.  These loans have specific reserves allocated to them of $24,400, which we believe is adequate.

 

Other real estate owned was $1.0 million at September 30, 2003, compared to $1.8 million at December 31, 2002.  Other real estate owned consists of 11 properties.  The properties consist of five commercial buildings totaling $685,000, three one to four family properties totaling $88,000, and three parcels of land totaling $259,000.  The properties are all located within our market areas.  Management is working to sell the real estate as soon as practical.

 

Non-performing assets as a percent of total assets increased to 1.15% at September 30, 2003, compared to 0.97% at December 31, 2002, and 0.81% at December 31, 2001.  Non-performing assets will generally increase in times of economic uncertainty or stress.  Management believes the level of non-performing assets may increase if the economic weakness experienced in 2002 and the first nine months of 2003 continues in the remainder of 2003 and into 2004, although the magnitude of any increase in non-performing loans is not determinable.

 

Total classified assets, which are loans rated substandard or lower according to our internal credit review process, were $13.9 million at September 30, 2003, an increase of $213,000 from $13.7 million at December 31, 2002.  The increase was primarily related to the increase in the non-performing loans discussed above.  Also contributing to the increase in classified assets was the addition to a $2.2 million substandard loan relating to a long-term care facility, which is a participation from another bank.

 

16



 

Allowance for loan losses:  Management maintains its allowance for loan losses based on industry standards, historical experience, and an evaluation of economic conditions.  We regularly review delinquencies and loan portfolio quality.  Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for probable loan losses based upon a percentage of the outstanding balances and for specific loans if their ultimate collectibility is considered questionable.

 

The following table summarizes our allowance for loan losses:

 

 

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

(Dollars In Thousands)

 

Balance, beginning of period

 

$

4,611

 

$

4,392

 

Provision for estimated loan losses

 

1,319

 

746

 

Charge-offs

 

(1,627

)

(927

)

Recoveries

 

265

 

233

 

Allowance due to (sales) acquisitions

 

 

(3

)

Balance, end of period

 

$

4,568

 

$

4,441

 

 

 

 

 

 

 

Allowance for loan and lease losses as a percent of total loans

 

1.35

%

1.35

%

 

 

 

 

 

 

Allowance for loan and lease losses as a percent of non performing loans

 

72.77

%

58.52

%

 

 

 

 

 

 

Annualized net charge-offs as a percent of total loans

 

0.54

%

0.28

%

 

Allowance for loan losses was 1.35% of total loans at September 30, 2003, December 31, 2002, and September 30, 2002.  The allowance for loan losses as a percent of non-performing loans was 72.77% at September 30, 2003, compared to 91.22% at December 31, 2002 and 58.52% at September 30, 2002.  The increase in the ratio from September 30, 2002 was a result of a $1.3 million decrease in non-performing loans at September 30, 2003.  The decrease in the ratio from December 31, 2002, was the increase in non-performing loans of $1.7 million at September 30, 2003.

 

We experienced net charge-offs of $1.4 million, or an annualized 0.54% of total loans, for the nine months ended September 30, 2003, versus $694,000, or an annualized 0.28% of total loans, for the corresponding period in 2002.  The $1.4 million in net charge-offs was primarily comprised of $130,000 in one to four family loan net charge-offs, $959,000 in commercial loan net charge-offs, and $324,000 in installment loan net charge-offs.  The commercial loan net charge-offs included the following charge-offs:

 

                  $400,000 from a participation with another bank for local grocery store chain in Kansas.  We had $400,000 of specific reserves allocated to the loan.  We began allocating specific reserves to the loan in June 2001.

 

                  $144,000 from a loan to a used car dealership in Kansas.  We had $110,000 of specific reserves allocated to the loan.  We began allocating specific reserves to the loan in March 2003.

 

                  $125,000 from a loan to a box manufacturer in Kansas.  We had $75,000 of specific reserves against the loan, which we allocated to the loan in March 2003.

 

                  $90,000 in accounts receivable factoring from a Kansas trenching company.

 

17



 

Deposits:  Total deposits decreased $18.9 million, or 4.1%, to $436.7 million at September 30, 2003, from $455.6 million at December 31, 2002.  The decrease was primarily attributable to a cyclical decrease in tax deposits received from municipal organizations during December of each year.  NOW accounts decreased $21.9 million, resulting from a $20.9 decrease in the cyclical wholesale public fund deposits.  Time deposits increased $4.5 million due to an increase in wholesale public fund deposits.  Non-interest bearing demand accounts increased $2.0 million due to an increase in retail and commercial deposit balances.

 

The following table summarizes our deposits:

 

 

 

September 30, 2003

 

December 31, 2002

 

 

 

(In Thousands)

 

Demand:

 

 

 

 

 

Noninterest bearing

 

$

65,489

 

$

62,950

 

Interest bearing:

 

 

 

 

 

NOW

 

87,993

 

109,936

 

Money market

 

51,159

 

54,485

 

 

 

139,152

 

164,421

 

Total demand

 

204,641

 

227,371

 

Savings

 

33,069

 

31,212

 

Time

 

199,024

 

197,022

 

Total Deposits

 

$

436,734

 

$

455,605

 

 

Federal funds purchased and securities sold under agreements to repurchase:  Federal funds purchased and securities sold under agreements to repurchase increased $1.3 million, to $5.7 million at September 30, 2003.  The increase was related to normal liquidity management operations.

 

Notes payable:  We maintain a line of credit of $8.0 million to an unrelated bank with interest floating at 2.00% over one-month LIBOR, due April 30, 2004.  At September 30, 2003, we had $1.0 million outstanding on the line of credit with an available balance of $7.0 million.  We also have a term note with the same bank with interest floating at 2.00% over one-month LIBOR, due April 30, 2006, with $2.7 million outstanding at September 30, 2003.

 

On November 14, 2003, we renegotiated certain covenants under our line of credit and term note with this bank, which we were not in compliance with at September 30, 2003 due to the level of our non-performing assets and return on assets.

 

Notes payable decreased $2.7 million, to $3.7 million at September 30, 2003, compared to $6.4 million at December 31, 2002.  The decrease was related to normal liquidity management operations with the holding company notes payable.

 

Regulatory Capital:  We are subject to regulatory capital requirements administered by Federal Reserve, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency.  Failure to meet the regulatory capital guidelines may result in the initiation by the Federal Reserve of appropriate supervisory or enforcement actions.  As of September 30, 2003, we met all capital adequacy requirements to which we are subject and management does not anticipate any difficulty in meeting these requirements on an ongoing basis.  Our ratios at September 30, 2003, were as follows:

 

18



 

 

 

At September 30, 2003

 

Ratio

 

Actual

 

Minimum Required

 

Total capital to risk weighted assets

 

12.48

%

8.00

%

Core capital to risk weighted assets

 

11.34

%

4.00

%

Core capital to average assets

 

7.22

%

4.00

%

 

19



 

Liquidity

 

We continuously forecast and manage our liquidity in order to satisfy cash flow requirements of depositors and borrowers and allow us to meet our own cash flow needs.  We have developed internal and external sources of liquidity to meet our continued growth needs.  These include, but are not limited to, the ability to raise deposits through branch promotional campaigns, maturity of overnight funds, short term investment securities classified as available-for-sale and draws on credit facilities established through the Federal Home Loan Bank.  Our most liquid assets are cash and cash equivalents and investment securities available-for-sale.  The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.  At September 30, 2003, and December 31, 2002, these liquid assets totaled $238.8 million and $259.6 million, respectively.  Management believes our sources of liquidity are adequate to meet expected cash needs for the foreseeable future.

 

20



 

RESULTS OF OPERATIONS

 

Net Interest Income

 

Net interest income before provision for loan losses for the three months ended September 30, 2003 totaled $4.4 million compared to $5.3 million for the same period in 2002, a decrease of $807,000, or 15.2%.  Net interest income before provision for loan losses for the nine months ended September 30, 2003, totaled $13.5 million compared to $15.9 million for the same period in 2002, a decrease of $2.4 million, or 15.1%.

 

Our net interest margin as a percent of average earning assets was 3.22% for the three months ended September 30, 2003, compared to 3.79% for the three months ended September 30, 2002.  Net interest margin as a percent of average earning assets was 3.26% for the nine months ended September 30, 2003, compared to 3.87% for the nine months ended September 30, 2002.  Favorably impacting net interest margin was a 65 and 62 basis point decrease in the average cost of interest bearing liabilities for the respective three and nine months ended September 30, 2003, compared to the same periods in 2002.  Offsetting the favorable decrease in the cost of interest bearing liabilities was an unfavorable decrease of 109 and 115 basis points in the average rate of interest earning assets for the respective three and nine months ended September 30, 2003, compared to the same periods in 2002.  The result was an unfavorable decrease in our net interest margin of 57 and 61 basis points for the respective three and nine month comparisons for September 30, 2003 and 2002.

 

We are maintaining an asset sensitive balance sheet where our interest earning assets are expected to re-price at a faster rate than our interest paying liabilities.  Accordingly, we expect net interest income to increase in a rising interest rate environment and decrease in a flat or decreasing interest rate environment.

 

Interest earning assets

 

The average rate on interest earning assets was 5.49% for the three months ended September 30, 2003, representing a decrease of 109 basis points from 6.58% for the same three months ended 2002.  The average rate on interest earning assets was 5.64% for the nine months ended September 30, 2003, representing a decrease of 115 basis points from 6.79% for the same nine months ended 2002.    Interest earning assets are comprised of loans receivable, investment securities, and federal funds sold and interest-bearing deposits.

 

The average rate on loans receivable decreased 85 basis points to 6.73% for the three months ended September 30, 2003, compared to 7.58% for the three months ended September 30, 2002.  The average rate on loans receivable decreased 98 basis points to 6.89% for the nine months ended September 30, 2003, compared to 7.87% for the nine months ended September 30, 2002.  The decrease is primarily reflective of a decrease in the national prime rate of 550 basis points since January 1, 2001, decreasing the interest rate on our variable rate commercial loans tied to the prime interest rate index, decreasing the interest rate on newly originated commercial loans, and resulting in lower interest rates on loans re-financed by customers.  In addition to the decrease in the prime interest rate was a decrease in our higher yielding one to four family mortgage loans as customers re-financed for lower fixed rate loans, which we primarily sell and do not hold as part of the one to four family mortgage portfolio.  Favorably impacting net interest income was an increase in the average balance of loans receivable of $15.7 million for the three months ended September 30, 2003 and $3.9 million for the nine months ended September 30, 2003.

 

The average rate on investment securities-taxable decreased 176 basis points to 3.33% for the three months ended September 30, 2003, compared to 5.09% for the three months ended September 30, 2002.  The average rate on investment securities-taxable decreased 167 basis points to 3.62% for the nine months ended September 30, 2003, compared to 5.29% for the nine months ended September 30, 2002.  The decrease in the average rate of investment securities is related to the decrease in market interest rates since January of 2001.  The decrease has caused many of our portfolio’s issuers of securities to retire or prepay their securities prior to maturity since they have been able to refinance at lower rates.  Because of these early prepayments, we have re-invested the proceeds in new securities, which yield lower interest rates due to the decline in market interest rates.  In addition, the early prepayments accelerate the amortization on premiums paid for investment securities, further decreasing the yield on the securities.  The average balance of investment securities-taxable decreased $26.6 million to $191.3 million for the three months ended September 30, 2003 compared to the three months ended September 30, 2002, and increased $1.3 million to $195.0 million for the nine months ended September 30, 2003, compared to the same nine months ended in 2002.

 

21



 

Interest bearing liabilities

 

The average rate paid on interest-bearing liabilities decreased 65 basis points to 2.52% for the three months ended September 30, 2003, compared to 3.17% for the same three months ended 2002.  The average rate paid on interest-bearing liabilities decreased 62 basis points to 2.64% for the nine months ended September 30, 2003, compared to 3.26% for the same nine months ended 2002.  Interest bearing liabilities are comprised of interest paid on 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 on our subordinated debentures held by our subsidiary trust which issued the 9.50% preferred securities.

 

The average rate paid on interest-bearing savings and interest bearing checking deposits decreased 0.60% to 0.65% for the three months September 30, 2003, compared to 1.25% for the three months ended September 30, 2002, while the average rate paid on time deposits decreased 0.83% to 2.56%, from 3.39% over the same respective thee month period.  The average rate paid on interest-bearing savings and interest bearing checking deposits decreased 0.59% to 0.79% for the nine months September 30, 2003, compared to 1.38% for the nine months ended September 30, 2002, while the average rate paid on time deposits decreased 98 basis points to 2.73%, from 3.71% over the same nine month period.  We decreased the average rate paid on deposit accounts as interest rates decreased.  The average balance of interest-bearing savings and interest bearing checking deposits decreased $3.1 million to $175.2 million, while the average balance of time deposits decreased $4.6 million to $202.6 million for the three months ended September 30, 2003, compared to the three months ended September 30, 2002.  The average balance of interest-bearing savings and interest bearing checking deposits decreased $5.1 million to $179.1 million, while the average balance of time deposits decreased $17.7 million to $204.8 million for the nine months ended September 30, 2003, compared to the nine months ended September 30, 2002.  The decrease in the average balance was primarily due to the sale of the bank branches in June 2002.

 

The average rate paid on federal funds purchased and securities sold under agreements to repurchase decreased 0.75% to 0.86% for the three months ended September 30, 2003, from 1.61% for the same period a year ago.  For the nine months ended September 30, 2003, the average rate paid on federal funds purchased and securities sold under agreements to repurchase decreased 0.62% to .89%, from 1.51% for the nine months ended September 30, 2002.

 

The average rate paid on notes payable and Federal Home Loan Bank advances decreased 0.87% to 4.39% for the three months ended September 30, 2003, compared to 5.26% for the same three months ended a year ago, with an increase of $18.4 million in the average balance over the corresponding time period.  The average rate paid on notes payable and Federal Home Loan Bank advances decreased 0.60% to 4.44% for the nine months ended September 30, 2003, compared to 5.04% for the same period ended a year ago, with an increase of $31.3 million in the average balance over the corresponding time period.  The decrease in the interest rate was the result of the general decrease in market interest rates, while the increase in the average balance was the result of increased borrowing with the continuation of our balance sheet management strategy described below.

 

The average rate paid on our 9.50% subordinated debentures, which we issued in connection with the sale by our wholly-owned subsidiary, Team Financial Capital Trust I, of 9.50% trust preferred securities was 9.71% for the three and nine months ended September 30, 2003 and 2002.  The difference between the contractual interest rate of 9.50% on the trust preferred securities and the 9.71% recorded interest rate, is the amortization of debt issuance costs.  The debt issuance costs are being amortized over a 30-year period.  We can redeem the subordinated debentures beginning August 10, 2006.

 

Balance sheet management strategy

 

We initiated a long-term balance sheet management strategy to increase the asset sensitivity of our balance sheet with the expectation of benefiting from an anticipated increase in interest rates and to borrow long-term borrowings during the period of historically low interest rates.  We initiated separate transactions in the fourth quarter of 2001 and the third quarter of 2002.  These long-term transactions are currently having an unfavorable impact on our current net interest income and net interest margin.

 

22



 

Under the transactions we borrowed $88.0 million in FHLB advances and purchased short-term mortgage backed investment securities, of which $48.0 million was consummated in the fourth quarter of 2001 and $40.0 million was consummated in the third quarter of 2002.  The Federal Home Loan Bank borrowings, which carry an average rate of 4.05%, consisted of $78.0 million in 10 year fixed rate advances convertible to floating rate advances if LIBOR increases to a range of 7.00% to 7.50% within the next 10 years and $10.0 million in 5 year fixed rate advances convertible to floating rate advances if LIBOR increases to 7.50% within the next 5 years.

 

The initial transaction generated a spread of approximately 167 basis points when initiated.  The cumulative spread since the inception of the transactions through September 30, 2003, was approximately 57 basis points, or $500,000.  The spread for the three months ended September 30, 2003, was approximately a negative 73 basis points, or ($161,000), compared to a spread of 115 basis points for the three months ended September 30, 2002, or $256,000, representing a total decrease for the three months ended September 30, 2003, of $417,000 compared to the three months ended September 30, 2002.  The spread for the nine months ended September 30, 2003, was approximately a negative 64 basis points, or ($423,000), compared to a spread of 110 basis points for the nine months ended September 30, 2002, or $725,000, representing a total decrease for the nine months ended September 30, 2003, of $1.1 million compared to the nine months ended September 30, 2002.

 

We believe short-term interest rates may stay relatively low for the next several quarters causing a continued unfavorable impact on our net interest income and net interest margin, but cannot estimate the magnitude of this impact.  While we believe net interest income will be negatively affected by this transaction for the next several quarters, we anticipate the next major trend in interest rates to be one of rising interest rates enabling us to increase net interest income over the remaining borrowing period.

 

23



 

The following tables present certain information relating to net interest income for the three and nine months ended September 30, 2003 and 2002.  The average rates are derived by dividing annualized interest income or expense by the average balance of assets and liabilities, respectively, for the periods shown.

 

 

 

Three Months Ended September 30, 2003

 

Three Months Ended September 30, 2002

 

 

 

Average
Balance

 

Interest

 

Average
Rate

 

Average
Balance

 

Interest

 

Average
Rate

 

 

 

(Dollars In Thousands)

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable, net (1) (2) (3)

 

$

342,584

 

$

5,807

 

6.73

%

$

326,882

 

$

6,249

 

7.58

%

Investment securities-taxable

 

191,324

 

1,606

 

3.33

%

217,920

 

2,796

 

5.09

%

Investment securities-nontaxable (4)

 

30,546

 

513

 

6.66

%

25,109

 

468

 

7.40

%

Federal funds sold and interest-bearing deposits

 

9,362

 

15

 

0.64

%

4,771

 

19

 

1.58

%

Total interest earning assets

 

$

573,816

 

7,941

 

5.49

%

$

574,682

 

9,532

 

6.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits and interest bearing checking

 

$

175,204

 

285

 

0.65

%

$

178,286

 

561

 

1.25

%

Time deposits

 

202,644

 

1,307

 

2.56

%

207,269

 

1,771

 

3.39

%

Federal funds purchased and securities sold under agreements to repurchase

 

5,561

 

12

 

0.86

%

5,900

 

24

 

1.61

%

Notes Payable and Federal Home Loan Bank Advances

 

117,034

 

1,296

 

4.39

%

98,651

 

1,307

 

5.26

%

Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures

 

15,525

 

377

 

9.71

%

15,525

 

377

 

9.71

%

Total interest bearing liabilities

 

$

515,968

 

3,277

 

2.52

%

$

505,631

 

4,040

 

3.17

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (tax equivalent)

 

 

 

$

4,664

 

 

 

 

 

$

5,492

 

 

 

Interest rate spread

 

 

 

 

 

2.97

%

 

 

 

 

3.41

%

Net interest earning assets

 

$

57,848

 

 

 

 

 

$

69,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

3.22

%

 

 

 

 

3.79

%

Ratio of average interest bearing liabilities to average interest earning assets

 

89.92

%

 

 

 

 

87.98

%

 

 

 

 

 


(1)                     Loans are net of deferred loan 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, 2003 and 2002 were $266,000 and $196,000, respectively.

(4)                     Yield is adjusted for the tax effect of tax exempt securities.  The tax effects for the three months ended September 30, 2003 and 2002 were $221,000 and $242,000, respectively.

 

24



 

 

 

Nine Months Ended September 30, 2003

 

Nine Months Ended September 30, 2002

 

 

 

Average
Balance

 

Interest

 

Average
Rate

 

Average
Balance

 

Interest

 

Average
Rate

 

 

 

(Dollars In Thousands)

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable, net (1) (2) (3)

 

$

340,933

 

$

17,574

 

6.89

%

$

337,080

 

$

19,846

 

7.87

%

Investment securities-taxable

 

194,955

 

5,275

 

3.62

%

193,692

 

7,662

 

5.29

%

Investment securities-nontaxable (4)

 

28,335

 

1,464

 

6.91

%

24,915

 

1,361

 

7.30

%

Federal funds sold and interest-bearing deposits

 

14,449

 

97

 

0.90

%

16,920

 

217

 

1.72

%

Total interest earning assets

 

$

578,672

 

24,410

 

5.64

%

$

572,607

 

29,086

 

6.79

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits and interest bearing checking

 

$

179,147

 

1,054

 

0.79

%

184,276

 

1,904

 

1.38

%

Time deposits

 

204,787

 

4,177

 

2.73

%

222,457

 

6,179

 

3.71

%

Federal funds purchased and securities sold under agreements to repurchase

 

5,119

 

34

 

0.89

%

4,701

 

53

 

1.51

%

Notes payable and Federal Home Loan Bank advances

 

117,104

 

3,885

 

4.44

%

85,853

 

3,237

 

5.04

%

Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures

 

15,525

 

1,131

 

9.71

%

15,525

 

1,131

 

9.71

%

Total interest bearing liabilities

 

$

521,682

 

10,281

 

2.64

%

$

512,812

 

12,504

 

3.26

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (tax equivalent)

 

 

 

$

14,129

 

 

 

 

 

$

16,582

 

 

 

Interest rate spread

 

 

 

 

 

3.01

%

 

 

 

 

3.53

%

Net interest earning assets

 

$

56,990

 

 

 

 

 

$

59,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin (4)

 

 

 

 

 

3.26

%

 

 

 

 

3.87

%

Ratio of average interest bearing liabilities to average interest earning assets

 

90.15

%

 

 

 

 

89.56

%

 

 

 

 

 


(1)                     Loans are net of deferred loan 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, 2003, and 2002 were $776,000 and $710,000, respectively.

(4)                     Yield is adjusted for the tax effect of tax exempt securities.  The tax effects for the nine months ended September 30, 2003, and 2002 were $660,000 and $691,000, respectively.

 

25



 

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 prior fiscal year’s average interest rate.  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 prior fiscal year average volume.  The changes in interest income or interest expense attributable to the combined impact of changes in volume and change in interest rate are calculated by multiplying the change in rate by the change in volume.

 

 

 

Three Months Ended September 30, 2003
Compared To
Three Months Ended September 30, 2002
Increase (Decrease) Due To:

 

 

 

Volume

 

Rate

 

Net

 

 

 

(In Thousands)

 

Interest Income:

 

 

 

Loans receivable, net (1) (2) (3)

 

$

300

 

$

(742

)

$

(442

)

Investment securities-taxable

 

(341

)

(849

)

(1,190

)

Investment securities-nontaxable (4)

 

101

 

(56

)

45

 

Federal funds sold and interest-bearing deposits

 

18

 

(22

)

(4

)

Total Interest Income

 

78

 

(1,669

)

(1,591

)

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

Savings deposits and interest bearing checking

 

(10

)

(266

)

(276

)

Time deposits

 

(40

)

(424

)

(464

)

Federal funds purchased and securities sold under agreements to repurchase

 

(1

)

(11

)

(12

)

Notes Payable and Federal Home Loan Bank Advances

 

244

 

(255

)

(11

)

Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures

 

 

 

 

Total Interest Expense

 

193

 

(956

)

(763

)

 

 

 

 

 

 

 

 

Net change in net interest income

 

$

(115

)

$

(713

)

$

(828

)

 


(1)          Loans are net of deferred loan 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, 2003 and 2002 were $266,000 and $196,000, respectively.

(4)          Yield is adjusted for the tax effect of tax exempt securities.  The tax effects for the three months ended September 30, 2003 and 2002 were $221,000 and $242,000, respectively.

 

26



 

 

 

Nine Months Ended September 30, 2003
Compared To
Nine Months Ended September 30, 2002
Increase (Decrease) Due To:

 

 

 

Volume

 

Rate

 

Net

 

 

 

(In Thousands)

 

Interest Income:

 

 

 

 

 

 

 

Loans receivable, net (1) (2) (3)

 

$

227

 

$

(2,499

)

$

(2,272

)

Investment securities-taxable

 

50

 

(2,437

)

(2,387

)

Investment securities-nontaxable (4)

 

187

 

(84

)

103

 

Federal funds sold and interest-bearing deposits

 

(32

)

(88

)

(120

)

Total Interest Income

 

432

 

(5,108

)

(4,676

)

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

Savings deposits and interest bearing checking

 

(53

)

(797

)

(850

)

Time deposits

 

(491

)

(1,511

)

(2,002

)

Federal funds purchased and securities sold under agreements to repurchase

 

5

 

(24

)

(19

)

Notes Payable and Federal Home Loan Bank Advances

 

1,178

 

(530

)

648

 

Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures

 

 

 

 

Total Interest Expense

 

639

 

(2,862

)

(2,223

)

 

 

 

 

 

 

 

 

Net change in net interest income

 

$

(207

)

$

(2,246

)

$

(2,453

)

 


(1)          Loans are net of deferred loan 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, 2003, and 2002 were $776,000 and $710,000, respectively.

(4)          Yield is adjusted for the tax effect of tax exempt securities.  The tax effects for the nine months ended September 30, 2003, and 2002 were $660,000 and $691,000, respectively.

 

27



 

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 market areas, and other factors related to the collectibility of our loan portfolio.  After considering the above factors, management recorded a provision for loan losses on loans totaling $832,000 for the three months ended September 30, 2003, and $412,000 for the three months ended September 30, 2002.  The provision for loan losses for the nine months ended September 30, 2003, was $1.3 million, compared to $746,000 for the nine months ended September 30, 2002.  The provision recorded for the three and nine months ended 2003 was predicated upon the level of non-performing loans and net charge-offs during the period of $908,000, and $1.4 million for the respective three and nine months.

 

Non-Interest Income

 

The following table presents non-interest income for the three and nine months ended September 30, 2003, compared to the same periods a year ago.  For comparative purposes, the table indicates the variances in non-interest income including and excluding the effects of the insurance agency acquisition in December of 2002.

 

 

 

Three Months Ended
September 30

 

Favorable
(Unfavorable)
Variance

 

Acquisition

 

Net
Favorable
(Unfavorable)
Variance

 

Nine Months Ended
September 30

 

Favorable
(Unfavorable)
Variance

 

Acquisition

 

Net
Favorable
(Unfavorable)
Variance

 

 

 

2003

 

2002

 

 

 

 

2003

 

2002

 

 

 

 

 

 

(In Thousands)

 

Non-Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges

 

$

966

 

$

952

 

$

14

 

$

 

$

14

 

$

2,667

 

$

2,757

 

$

(90

)

$

 

$

(90

)

Trust fees

 

159

 

152

 

7

 

 

7

 

433

 

439

 

(6

)

 

(6

)

Insurance agency commissions

 

1,377

 

 

1,377

 

1,377

 

 

3,687

 

 

3,687

 

3,687

 

 

Gain on sales of mortgage loans

 

946

 

516

 

430

 

 

430

 

2,368

 

1,463

 

905

 

 

905

 

Gain (loss) on sales of investment securities

 

145

 

3

 

142

 

 

142

 

295

 

69

 

226

 

 

226

 

Gain on sale of branch assets

 

 

 

 

 

 

 

452

 

(452

)

 

(452

)

Other

 

925

 

785

 

140

 

21

 

119

 

2,259

 

2,017

 

242

 

57

 

185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-interest income

 

$

4,518

 

$

2,408

 

$

2,110

 

$

1,398

 

$

712

 

$

11,709

 

$

7,197

 

$

4,512

 

$

3,744

 

$

768

 

 

Non-interest income for the three months ended September 30, 2003, was $4.5 million, an increase of $2.1 million, or 87.6%, from $2.4 million for the three months ended September 30, 2002.  Non-interest income for the nine months ended September 30, 2003, was $11.7 million, an increase of $3.7 million, or 83.0%, from $7.2 million for the nine months ended September 30, 2002.

 

Contributing to the increase in non-interest income for the three and nine months ended September 30, 2003, was $1.4 million and $3.7 million, respectively, of insurance revenue from the operations of the insurance agency acquired in December 2002.

 

Gain on sales of mortgage loans increased $430,000, or 83.3%, for the three months ended September 30, 2003, and $905,000, or 61.9% increase for the nine months ended September 30, 2003, compared to the same periods in 2002.  The increase in gain on sale of mortgage loans was the result of the increase in the volume of loans refinanced and originated and sold, due to a lower interest rate environment during the past two years.  Management believes that the loans refinanced and originated for future quarters in 2003 and 2004 will not keep pace with that of the past two years, but cannot estimate the magnitude of the expected decreased volume.

 

Gain on sale of investment securities was $145,000 for the three months ended September 30, 2003, an increase of $142,000 from $3,000 for the three months ended September 30, 2002.  For the nine months ended September 30, 2003, gain on sale of investment securities was $295,000, an increase $226,000 from $69,000 for the nine months ended September 30, 2002.

 

There was no gain on sale of branch assets for the nine months ended September 30, 2003, compared to a $452,000 gain on the sale of two branches for the during the second quarter ended June 30, 2002.

 

28



 

Non-Interest Expense

 

The following table presents non-interest expense for the three and nine months ended September 30, 2003, compared to the same periods a year ago.  For comparative purposes, the table indicates the variances in non-interest income including and excluding the effects of the insurance agency acquisition in December of 2002.

 

 

 

Three Months Ended
September 30

 

Favorable
(Unfavorable)
Variance

 

Acquisition

 

Net
Favorable
(Unfavorable)
Variance

 

Nine Months Ended
September 30

 

Favorable
(Unfavorable)
Variance

 

Acquisition

 

Net
Favorable
(Unfavorable)
Variance

 

 

 

2003

 

2002

 

 

 

 

2003

 

2002

 

 

 

 

 

 

(In Thousands)

 

Non-Interest Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

3,389

 

$

2,876

 

$

(513

)

$

680

 

$

167

 

$

10,372

 

$

8,740

 

$

(1,632

)

$

2,176

 

$

544

 

Occupancy and equipment

 

653

 

573

 

(80

)

40

 

(40

)

2,042

 

1,729

 

(313

)

204

 

(109

)

Data processing

 

577

 

457

 

(120

)

 

(120

)

1,558

 

1,439

 

(119

)

 

(119

)

Professional fees

 

292

 

275

 

(17

)

5

 

(12

)

907

 

839

 

(68

)

22

 

(46

)

Marketing

 

112

 

86

 

(26

)

38

 

12

 

310

 

202

 

(108

)

118

 

10

 

Supplies

 

121

 

94

 

(27

)

18

 

(9

)

331

 

275

 

(56

)

47

 

(9

)

Intangible asset amortization

 

309

 

335

 

26

 

34

 

60

 

985

 

670

 

(315

)

101

 

(214

)

Disposal of branch assets

 

 

 

 

 

 

258

 

 

(258

)

 

(258

)

Conversion

 

4

 

 

(4

)

 

(4

)

54

 

6

 

(48

)

 

(48

)

Other

 

982

 

749

 

(233

)

177

 

(56

)

2,800

 

2,462

 

(338

)

372

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-interest expenses

 

$

6,439

 

$

5,445

 

$

(994

)

$

992

 

$

(2

)

$

19,617

 

$

16,362

 

$

(3,255

)

$

3,040

 

$

(215

)

 

Non-interest expense increased $994,000, or 18.3%, to $6.4 million, for the three months ended September 30, 2003, compared to $5.4 million for the three months ended September 30, 2002.  Non-interest expense increased $3.3 million, or 19.9% to $19.6 million, for the nine months ended September 30, 2003, compared to $16.4 million for the nine months ended September 30, 2002.  The increases for the three and nine months ended were primarily attributable to non-interest expense of $992,000 and $3.0 million, respectively, from the operations of the insurance agency acquired in December 2002.  Also included in non-interest expense for the nine months ended was a $258,000 charge to terminate the building lease and dispose of the fixed assets of a branch facility.  Net of the operations of the acquired insurance agency and the disposal of the branch facility, non-interest expense increased $2,000 for the three months ended September 30, 2003, and decreased $43,000 for the nine months ended September 30, 2003, compared to the respective periods ended September 30, 2002.

 

Salary and employee benefits expense decreased $167,000 and $544,000 for the respective three and nine months ended September 30, 2003, compared to the same periods for 2002, excluding the operations from the insurance agency.  The decreases were primarily attributable to a decrease in bonus expense.

 

Data processing expense increased $120,000 and $119,000, respectively for the three and nine months ended September 30, 2003, compared to the same periods ended September 30, 2002.  The increase was primarily the result of converting Colorado National Bank to our core processor.

 

Intangible asset amortization expense decreased $26,000 for the three months ended September 30, 2003, compared to the same three-month period ended in 2002, and increased $315,000 for the nine months ended September 30, 2003, compared to the same nine-month period ended September 30, 2002.  The insurance agency acquisition contributed $34,000 and $101,000 to the expense for the three and nine months ended September 30, 2003.  The remaining decrease of $60,000 for the three months ended September 30, 2003, and increase of $214,000 for the nine months ended September 30, 2003, was the result of fluctuations in the intangible amortization expense on our mortgage servicing rights, which was caused by the decrease in the volume of mortgage loan prepayments.

 

Other expense for the three and nine months ended September 30, 2003, includes a reduction of $270,000 related to the valuation allowance on mortgage servicing rights.  The valuation allowance was reduced based upon our recent valuation of the fair value of our mortgage servicing rights.

 

29



 

Income Tax Expense

 

We recorded income tax expense of $546,000 for the three months ended September 30, 2003, an increase of $1,000 compared to an income tax expense of $545,000 for the three months ended September 30, 2002.  Income tax expense for the nine months ended September 30, 2003 was $1.1 million, a decrease of $1.1 million from $2.2 million recorded for the nine months ended September 30, 2002.  Included in income tax expense for the nine-month period ended September 30, 2002, was $648,000 of income tax expense related to the sale of the branches during the second quarter of 2002.

 

The effective tax rate for the three months ended September 30, 2003, was 32.3%, compared to 30.3% for the three months ended September 30, 2002.  The effective tax rate for the nine months ended September 30, 2003, was 26.7%, compared to 37.6% for the nine months ended September 30, 2002.  The higher effective tax rate for the nine months ended September 30, 2002 was the result of the book versus tax basis on $1.3 million in goodwill related to the branch sale in 2002 as summarized in the following table:

 

 

 

Book Basis

 

Tax Basis

 

Proceeds from sale

 

$

1,762,000

 

$

1,762,000

 

Goodwill, net

 

(1,310,000

)

 

Gain on sale before tax

 

452,000

 

1,762,000

 

Income tax expense

 

(648,000

)

(648,000

)

Net (loss) gain on sale of branches

 

$

(196,000

)

$

1,114,000

 

 

Our effective tax rate is less than the statutory federal rate of 34.0% due primarily to municipal interest income and the income tax benefit resulting from dividends passed through the ESOP to the ESOP participants and non-taxable income from our investment in bank owned life insurance.

 

30



 

Item 3:             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Asset and Liability Management

 

Asset and liability management refers to management’s 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.  Controlling the maturity of repricing of an institution’s liabilities and assets in order to minimize interest rate risk is commonly referred to as gap management.  Close matching of repricing assets and liabilities will normally result in little change in net interest income when interest rates change.

 

The following table indicates that at September 30, 2003, if there had been a sudden and sustained increase in prevailing market interest rates, our 2003 interest income would be expected to increase, while a decrease in rates would indicate a decrease in income.

 

Change in Interest Rates

 

Net Interest
Income

 

(Decrease)
Increase

 

Percent
Change

 

 

 

(Dollars In Thousands)

 

200 basis point rise

 

$

21,643

 

$

1,487

 

7.38

%

100 basis point rise

 

20,900

 

743

 

3.69

 

base rate scenario

 

20,157

 

 

 

100 basis point decline

 

18,261

 

(1,896

)

(9.41

)

200 basis point decline

 

15,679

 

(4,477

)

(22.21

)

 

Item 4:             CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures over financial reporting pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures over financial reporting are adequate and effective in timely alerting them to material information required to be included in this quarterly report on Form 10-Q.

 

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or because of intentional circumvention of the established process.

 

During the period covered by this report, there have been no significant changes in our internal controls over financial reporting or in other factors, which could significantly affect internal controls over financial reporting, including any corrective actions with regard to significant deficiencies or material weaknesses.

 

31



 

PART II   OTHER INFORMATION

 

Item 1.             Legal Proceedings

 

We are from time to time involved in routine litigation incidental to the conduct of our business.  We believe that no pending litigation to which we are a party will have a material adverse effect on our liquidity, financial condition, or results of operations.

 

Item 6.             Exhibits and Reports on Form 8-K

 

Exhibit
Number

 

Description

 

 

 

3.1

 

Restated and Amended Articles of Incorporation of Team Financial, Inc. (1)

 

 

 

3.2

 

Amended Bylaws of Team Financial, Inc. (1)

 

 

 

4.1

 

Form of Indenture. (5)

 

 

 

4.2

 

Form of Subordinated Debenture (included as Exhibit A to Exhibit 4.1).  (5)

 

 

 

4.3

 

Certificate of Trust. (5)

 

 

 

4.4

 

Trust Agreement. (5)

 

 

 

4.5

 

Form of Amended and Restated Trust Agreement. (5)

 

 

 

4.6

 

Form of Preferred Securities Certificate (included as Exhibit D to Exhibit 4.5). (5)

 

 

 

4.7

 

Form of Preferred Securities Guarantee Agreement. (5)

 

 

 

4.8

 

Form of Agreement as to Expenses and Liabilities (included as Exhibit C to Exhibit 4.5). (5)

 

 

 

10.1

 

Employment Agreement between Team Financial, Inc. and Robert J. Weatherbie dated January 1, 2002. (6)

 

 

 

10.2

 

Employment Agreement between Team Financial, Inc. and Michael L. Gibson dated January 1, 2003. (7)

 

 

 

10.3

 

Employment Agreement between Team Financial, Inc. and Rick P. Bartley dated January 1, 2001. (5)

 

 

 

10.5

 

Data Processing Services Agreement between Team Financial, Inc. and Metavante Corporation dated March 1, 2001. (5)

 

 

 

10.6

 

401K Plan of Team Financial, Inc. 401(k) Trust, effective January 1, 1999 and administered by Nationwide Life Insurance Company. (1)

 

 

 

10.7-10.10

 

Exhibit numbers intentionally not used.

 

 

 

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

 

Loan agreement between Team Financial, Inc. and US Bank dated December 3, 1999. (4)

 

 

 

10.16

 

Acquisition Agreement and Plan of Merger by and among Team Financial, Inc., Team Financial, Inc. Acquisition Subsidiary II and Post Bancorp, Inc. date April 30, 2001 and amendment dated July 25, 2001 (1) 

 

 

 

10.17

 

Acquisition Agreement and Plan of Merger dated December 18, 2002 among Team Financial, Inc. and The Quarles Agency, Inc. (2)

 

32



 

10.18

 

Deferred Compensation Agreement between TeamBank, N.A. and Robert J. Weatherbie dated February 1, 2002. (6)

 

 

 

10.19

 

Salary Continuation Agreement between TeamBank, N.A. and Robert J. Weatherbie dated July 1, 2001. (6)

 

 

 

10.20

 

Split Dollar Agreement between TeamBank, N.A. and Robert J. Weatherbie dated January 25, 2002. (6)

 

 

 

10.21

 

Deferred Compensation Agreement between TeamBank, N.A. and Michael L. Gibson dated February 1, 2002. (6)

 

 

 

10.22

 

Salary Continuation Agreement between TeamBank, N.A. and Michael L. Gibson dated July 1, 2001. (6)

 

 

 

10.23

 

Split Dollar Agreement between TeamBank, N.A. and Michael L. Gibson dated January 25, 2002. (6)

 

 

 

10.24

 

Deferred Compensation Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated February 1, 2002. (6)

 

 

 

10.25

 

Salary Continuation Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated July 1, 2001. (6)

 

 

 

10.26

 

Split Dollar Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated January 25, 2002. (6)

 

 

 

10.27

 

Deferred Compensation Agreement between TeamBank, N.A. and Rick P. Bartley dated February 1, 2002. (6)

 

 

 

10.28

 

Salary Continuation Agreement between TeamBank, N.A. and Rick P. Bartley dated July 1, 2001. (6)

 

 

 

10.29

 

Employment Agreement between Team Financial, Inc. and Carolyn S. Jacobs dated January 1, 2003. (7)

 

 

 

10.30

 

Amendment to Loan agreement between Team Financial, Inc. and US Bank dated November 13, 2003 (3)

 

 

 

11.1

 

Statement regarding Computation of per share earnings – see consolidated financial statements. (3)

 

 

 

31.1

 

Certification of Chief Executive Officer under section 302 under Sarbanes-Oxley Act of 2002 (3).

 

 

 

31.2

 

Certification of Chief Financial Officer under section 302 under Sarbanes-Oxley Act of 2002 (3).

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 (3)

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350 (3)

 


(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 the amended Form 8-K dated December 30, 1999 and incorporated herein by reference.

 

(3)                                  Filed herewith.

 

(4)                                  Filed with quarterly report on form 10-Q for the period ended September 30, 2000 and incorporated herein by reference.

 

(5)                                  Filed with Registration Statement on Form S-1 dated July 12, 2001, as amended, (Registration Statement No. 333-64934) and are incorporated herein by reference.

 

(6)                                  Filed with annual report on Form 10-K for the year end December 31, 2003, and incorporated herein by reference

 

33



 

(7)                                  Filed with quarterly report on form 10-Q for the period ended March 31, 2003 and incorporated herein by reference.

 

(b)                                 Reports on Form 8-K Filed.

 

1.               Filed on Form 8-K dated July 25, 2003, under item 9 (including item 12 information) the registrant’s second quarter 2003 earnings press release dated July 24, 2003.

 

34



 

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:     November 14, 2003

By:

/s/  Robert J. Weatherbie

 

 

Robert J. Weatherbie

 

Chairman and
Chief Executive Officer

 

 

 

 

Date:     November 14, 2003

By:

/s/  Michael L. Gibson

 

 

Michael L. Gibson

 

President of Investments and
Chief Financial Officer

 

35



 

EXHIBIT INDEX

 

Exhibit
Number

 

Description

 

 

 

3.1

 

Restated and Amended Articles of Incorporation of Team Financial, Inc. (1)

 

 

 

3.2

 

Amended Bylaws of Team Financial, Inc. (1)

 

 

 

4.1

 

Form of Indenture. (5)

 

 

 

4.2

 

Form of Subordinated Debenture (included as Exhibit A to Exhibit 4.1).  (5)

 

 

 

4.3

 

Certificate of Trust. (5)

 

 

 

4.4

 

Trust Agreement. (5)

 

 

 

4.5

 

Form of Amended and Restated Trust Agreement. (5)

 

 

 

4.6

 

Form of Preferred Securities Certificate (included as Exhibit D to Exhibit 4.5). (5)

 

 

 

4.7

 

Form of Preferred Securities Guarantee Agreement. (5)

 

 

 

4.8

 

Form of Agreement as to Expenses and Liabilities (included as Exhibit C to Exhibit 4.5). (5)

 

 

 

10.1

 

Employment Agreement between Team Financial, Inc. and Robert J. Weatherbie dated January 1, 2002. (6)

 

 

 

10.2

 

Employment Agreement between Team Financial, Inc. and Michael L. Gibson dated January 1, 2003. (7)

 

 

 

10.3

 

Employment Agreement between Team Financial, Inc. and Rick P. Bartley dated January 1, 2001. (5)

 

 

 

10.5

 

Data Processing Services Agreement between Team Financial, Inc. and Metavante Corporation dated March 1, 2001. (5)

 

 

 

10.6

 

401K Plan of Team Financial, Inc. 401(k) Trust, effective January 1, 1999 and administered by Nationwide Life Insurance Company. (1)

 

 

 

10.7-10.10

 

Exhibit numbers intentionally not used.

 

 

 

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

 

Loan agreement between Team Financial, Inc. and US Bank dated December 3, 1999. (4)

 

 

 

10.16

 

Acquisition Agreement and Plan of Merger by and among Team Financial, Inc., Team Financial, Inc. Acquisition Subsidiary II and Post Bancorp, Inc. date April 30, 2001 and amendment dated July 25, 2001 (1) 

 

 

 

10.17

 

Acquisition Agreement and Plan of Merger dated December 18, 2002 among Team Financial, Inc. and The Quarles Agency, Inc. (2)

 

 

 

10.18

 

Deferred Compensation Agreement between TeamBank, N.A. and Robert J. Weatherbie dated February 1, 2002. (6)

 

 

 

10.19

 

Salary Continuation Agreement between TeamBank, N.A. and Robert J. Weatherbie dated July 1, 2001. (6)

 

 

 

10.20

 

Split Dollar Agreement between TeamBank, N.A. and Robert J. Weatherbie dated January 25, 2002. (6)

 

36



 

10.21

 

Deferred Compensation Agreement between TeamBank, N.A. and Michael L. Gibson dated February 1, 2002. (6)

 

 

 

10.22

 

Salary Continuation Agreement between TeamBank, N.A. and Michael L. Gibson dated July 1, 2001. (6)

 

 

 

10.23

 

Split Dollar Agreement between TeamBank, N.A. and Michael L. Gibson dated January 25, 2002. (6)

 

 

 

10.24

 

Deferred Compensation Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated February 1, 2002. (6)

 

 

 

10.25

 

Salary Continuation Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated July 1, 2001. (6)

 

 

 

10.26

 

Split Dollar Agreement between TeamBank, N.A. and Carolyn S. Jacobs dated January 25, 2002. (6)

 

 

 

10.27

 

Deferred Compensation Agreement between TeamBank, N.A. and Rick P. Bartley dated February 1, 2002. (6)

 

 

 

10.28

 

Salary Continuation Agreement between TeamBank, N.A. and Rick P. Bartley dated July 1, 2001. (6)

 

 

 

10.29

 

Employment Agreement between Team Financial, Inc. and Carolyn S. Jacobs dated January 1, 2003. (7)

 

 

 

10.30

 

Amendment to Loan agreement between Team Financial, Inc. and US Bank dated November 13, 2003 (3)

 

 

 

11.1

 

Statement regarding Computation of per share earnings – see consolidated financial statements. (3)

 

 

 

31.1

 

Certification of Chief Executive Officer under section 302 under Sarbanes-Oxley Act of 2002 (3).

 

 

 

31.2

 

Certification of Chief Financial Officer under section 302 under Sarbanes-Oxley Act of 2002 (3).

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 (3)

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350 (3)

 


(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 the amended Form 8-K dated December 30, 1999 and incorporated herein by reference.

 

(3)                                  Filed herewith.

 

(4)                                  Filed with quarterly report on form 10-Q for the period ended September 30, 2000 and incorporated herein by reference.

 

(5)                                  Filed with Registration Statement on Form S-1 dated July 12, 2001, as amended, (Registration Statement No. 333-64934) and are incorporated herein by reference.

 

(6)                                  Filed with annual report on Form 10-K for the year end December 31, 2003, and incorporated herein by reference

 

(7)                                  Filed with quarterly report on form 10-Q for the period ended March 31, 2003 and incorporated herein by reference.

 

37