UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2006
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File Number: 000-26335

TEAM FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

8 West Peoria, Suite 200, Paola, Kansas 66071

(Address of principal executive offices) (Zip Code)

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

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

Yes x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

There were 3,591,084 shares of the Registrant’s common stock, no par value, outstanding as of August 11, 2006.

 

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TEAM FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Financial Condition

(In Thousands)

 

 

See accompanying notes to the unaudited consolidated financial statements

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TEAM FINANCIAL, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

(Dollars In Thousands, Except Per Share Data)

 

 

See accompanying notes to the unaudited consolidated financial statements

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Team Financial, Inc. And Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income

(In Thousands)

 

 

See accompanying notes to the unaudited consolidated financial statements

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Team Financial, Inc. And Subsidiaries

Unaudited Consolidated Statements of Changes In Stockholders’ Equity

Six Months Ended June 30, 2006

(Dollars In Thousands, Except Per Share Amounts)

 

 

See accompanying notes to the unaudited consolidated financial statements

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Team Financial, Inc. And Subsidiaries

Unaudited Consolidated Statements Of Cash Flows

(Dollars in thousands)

 

 

See accompanying notes to the unaudited consolidated financial statements

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Team Financial, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Three and six month periods ended June 30, 2006 and 2005

(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, 2005.

The interim consolidated financial statements include the accounts of Team Financial, Inc. and its wholly owned subsidiaries, Team Financial Acquisition Subsidiary, Inc., including TeamBank, N.A. and its subsidiaries, and Post Bancorp and its subsidiary Colorado National Bank.   All material inter-company transactions, profits, and balances are eliminated in consolidation.  The consolidated financial statements do not include the accounts of our wholly owned statutory trust, Team Financial Capital Trust I (the “Trust”).  The Trust qualifies as a special purpose entity that is not required to be consolidated in the financial statements of Team Financial, Inc.  The Trust Preferred Securities issued by the Trust is included in Tier I capital for regulatory capital purposes.

The December 31, 2005 statement of financial condition has been derived from the audited consolidated financial statements as of that date.  Certain amounts in the 2005 financial statements have been reclassified to conform to the 2006 presentation.  The results of the interim periods ended June 30, 2006, are not necessarily indicative of the results that may occur for the year ending December 31, 2006.

(2)           Recent Accounting Pronouncements

In December of 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payments, (“SFAS 123(R)”). This statement requires that the cost resulting from all share-based transactions be recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share-based arrangements and requires all entities to apply a fair-value based measurement method in accounting for share based payments with employees except for equity instruments held by employee share ownership plans. SFAS 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and Accounting Principal Board Opinion No. 25, Accounting for Stock Issued to Employees,(“APB 25”) and became effective as of the beginning of 2006. Prior to fiscal year 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in APB 25, and related interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation. More information regarding the adoption of SFAS 123(R) is shown in footnote 4.

In May of 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement requires retrospective application to all voluntary changes in accounting principle with all prior period financial statements presented using the new accounting principle, unless it is impracticable to do so. For the Company, this standard is effective for accounting changes and corrections of errors made during or after 2006. The Company does not anticipate this statement to have a material effect on its financial statements.

In November 2005, the FASB issued FASB Staff Position (“FSP”) 115-1, The Meaning of Other-Than-Temporary Impairment and Its application to Certain Investments, which addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance clarifies that an impairment loss should be recognized when the impairment loss is deemed other-than-temporary, even if the decision to sell has not been made. The FSP also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP is effective for fiscal years beginning after December 15, 2005 and the Company began applying the guidance in 2006. The adoption of FSP FAS 115-1 did not have a material impact on the Company’s financial position, results of operations, or liquidity.

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In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140.  This statement requires that all separately recognized servicing rights be initially measured at fair value, if practicable.  For each class of separately recognized servicing assets and servicing liabilities, this Statement permits the Company to choose either to report servicing assets and liabilities at fair value or at amortized cost.  This Statement also requires separate presentation in the financial statements, supplemented by additional disclosures.  The Statement is effective as of the beginning of the first fiscal year that begins after September 15, 2006, and the Company will adopt this Statement as of January 1, 2007.  The Company does not expect that this Statement will have a material impact on its financial position, results of operations, or liquidity.

In June 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109 Accounting for Income Taxes.  This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The evaluation of a tax position in accordance with this interpretation is a two-step process.  The first step is a recognition process to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.  The interpretation is effective for fiscal years beginning after December 15, 2006, and the Company will begin applying the guidance in January, 2007.  The Company is currently evaluating the impact of adopting this interpretation on its financial position, results of operations, or liquidity.

(3)           Discontinued Operations

On February 25, 2005, we completed the sale of Team Insurance Group, Inc., our insurance agency subsidiary. This subsidiary was operated as a subsidiary of TeamBank, N.A. from December of 2002 until December, 2004 and offered employee benefit insurance and property and casualty insurance to businesses and individuals. We sold all the issued and outstanding shares of the subsidiary to an unaffiliated third party for total cash consideration of $6.8 million after adjustments. Our investment in this subsidiary as of February 25, 2005 was approximately $7.0 million. As a result of the sale, the operations related to this subsidiary have been reclassified in discontinued operations. A loss on the sale of the subsidiary of approximately $164,000 was recorded in the second quarter of 2005 upon finalization of the selling price. Pursuant to the terms of the agreement, the buyer may present any breach of warranty or representations claims up to 18 months after the close of the transaction.  On July 25, 2006, we received a claim against the warranties and representations of the sale; however, we do not believe that any of the claims presented are legitimate, and we intend to dispute all of them.  Any loss potential is currently considered to be neither probable nor estimatable.

(4)           Stock Based Compensation and Income Per Share

The Company’s 1999 Stock Incentive Plan provides for the following stock and stock-based awards: restricted stock, stock options, stock appreciation rights and performance shares.  As of June 30, 2006, up to 79,500 shares of our common stock were available to be issued under the plan. All employees, directors and consultants are eligible to participate in the plan. The Company generally grants stock options with either a one-year cliff vesting schedule and a ten year expiration from the date of grant, or with a three-year potential vesting schedule and a ten year expiration from the date of grant, with vesting at the discretion of the Executive Compensation Committee of the Board of Directors, which administers the 1999 Stock Incentive Plan. Prior to 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in APB 25, and related interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation.

The following table illustrates what the Company’s share-based compensation expense and earnings per share would have been for the three and six months ended June 30, 2005 (in thousands, except per share data) had the fair value method been used to account for stock-based compensation last year in accordance with SFAS 123:

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		Three Months			Six Months
		Ended June 30,			Ended June 30,
		2005			2005
		(Dollars in thousands, except per share data)
Net income:
As reported		$	859		$	1,855
Stock-based compensation expense included in reported net income, net of tax		27			27
Compensation expense determined under fair value, net of tax		(48		)	(69		)
Pro forma		$	838		$	1,813
Basic earnings per share:
As reported		$	0.21		$	0.46
Pro forma		0.21			0.45
Diluted earnings per share:
As reported		$	0.21		$	0.45
Pro forma		0.20			0.44

Beginning in 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payments, (“SFAS No. 123(R)”). This statement requires that the cost resulting from all share-based transactions be recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share-based arrangements and requires all entities to apply a fair-value based measurement method in accounting for share based payments with employees except for equity instruments held by employee share ownership plans. The Company elected to adopt SFAS No. 123(R) using the modified prospective transition method and, accordingly, previously reported amounts have not been restated for the change in accounting. During the three and six months ended June 30, 2006, the Company recognized share-based compensation expense of approximately $72,000 and $129,000, respectively.

Stock compensation expense for options granted during the six months ended June 30, 2006 was estimated using the Black-Scholes option-pricing model with the following assumptions:

		One-year options		Three-year options
Expected life in years		5		8
Expected volatility		14.54	%	16.52	%
Risk-fee interest rate		5.10	%	5.10	%
Annual rate of quarterly dividends		2.19	%	2.19	%

The following table summarizes option activity for the six months ended June 30, 2006:

				Weighted			Weighted average		Aggregate
		Number of		average exercise			remaining contractual		Intrinsic
		options		price per share			life in years		Value
Outstanding at December 31, 2005		304,850		$	10.08
Granted		37,000		14.30
Outstanding at June 30, 2006		341,850		10.53			6.4		$	4.47
Exercisable at June 30, 2006		250,250		9.36			5.5		5.64

A summary of the Company’s nonvested options as of June 30, 2006 and changes during the six months ended are presented below:

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		Number of		Weighted
		shares		average grant
		(in thousands)		date fair value
Nonvested at December 31, 2005		54,600		$	3.25
Granted		37,000		2.97
Nonvested at June 30, 2006		91,600		3.14

On June 30, 2006, there was approximately $200,000 of unrecognized compensation cost related to nonvested stock-based compensation awards, which the Company expects to recognize over a weighted-average period of 1.2 years. Due to the discretionary nature of the three-year options, these options are repriced each quarter, resulting in the difference between the weighted average grant date fair value and the currently estimated unrecognized compensation cost.

(5)           Stock Repurchase Program

The Board of Directors approved a stock repurchase program, announced October 14, 2004, authorizing the repurchase of up to 400,000 shares of our common stock. There is no expiration date on this program. At June 30, 2006, there were 308,373 shares of our common stock remaining to be repurchased under this stock repurchase program.  During the three and six months ended June 30, 2006, there were 2,600 and 68,757 shares of our common stock repurchased under this program, respectively.

Under a separate repurchase authorization of the Board of Directors, on May 16, 2006, the Company entered into an agreement to repurchase 377,200 shares of our common stock from an unaffiliated third party for approximately $6.2 million.  The repurchase was completed on June 1, 2006.  This repurchase was funded with borrowings under the Company’s existing line of credit.

(6)           Dividends Declared

On May 23, 2006, we declared a quarterly cash dividend of $0.08 per share to all shareholders of record on June 30, 2006, payable July 20, 2006.

(7)           Investment Securities

The following tables summarize the amortized cost, gross unrealized gains and losses, and fair value of investment securities at June 30, 2006 and December 31, 2005.

		June 30, 2006
					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
		(In thousands)
Debt securities:
U.S. Agency securities		$	56,522		$	11		$	(1,691	)	$	54,842
Mortgage-backed securities		87,530			116			(3,008		)	84,638
Non-taxable Municipal securities		28,707			222			(333		)	28,596
Taxable Municipal securities		830			10			—			840
Other debt securities		6,554			25			(327		)	6,252
Total debt securities		180,143			384			(5,359		)	175,168
Equity securities		8,960			54			(3		)	9,011
Total available for sale securities		$	189,103		$	438		$	(5,362	)	$	184,179

 

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		December 31, 2005
					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
		(In thousands)
Debt securities:
U.S. Agency securities		$	61,062		$	32		$	(1,108	)	$	59,986
Mortgage-backed securities		86,535			404			(1,517		)	85,422
Non-taxable Municipal securities		28,629			400			(168		)	28,861
Taxable Municipal securities		830			42			—			872
Other debt securities		6,555			40			(152		)	6,443
Total debt securities		183,611			918			(2,945		)	181,584
Equity securities		8,777			52			(4		)	8,825
Total available for sale securities		$	192,388		$	970		$	(2,949	)	$	190,409

Management does not believe that any of the securities with unrealized losses at June 30, 2006 are other than temporarily impaired.

(8)           Notes Payable and Other Borrowings

During the second quarter of 2006, our line of credit was extended until September 30, 2006, at which time the terms will be renegotiated.  All other terms of the borrowing agreement remain consistent with the terms as of December 31, 2005. Also during the second quarter, we advanced $6.0 million of our line of credit to fund the repurchase of 377,200 shares of our common stock.

(9)           Commitments and Contingencies

Commitments to extend credit to our customers with unused approved lines of credit were approximately $81.7 million at June 30, 2006.  Additionally, the contractual amount of standby letters of credit at June 30, 2006 was approximately $10.3 million .  These commitments involve credit risk in excess of the amount stated in the consolidated balance sheet.  Exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments.

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

OVERVIEW

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

We offer full service community banking and financial services through 18 locations in Kansas, Missouri, Nebraska and Colorado through our wholly owned banking subsidiaries, TeamBank, N.A and Colorado National Bank. Our presence in Kansas consists of seven locations in the Kansas City metropolitan area and three locations in southeast Kansas. We operate two locations in western Missouri, three in the metropolitan area of Omaha, Nebraska and three in the Colorado Springs, Colorado metropolitan area.

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

The following table presents selected financial data for the three and six months ended June 30, 2006 and June 30, 2005 (dollars in thousands, except per share data):

		As of and For						As of and For
		Three Months Ended						Six Months Ended
		June 30						June 30
		2006			2005			2006			2005
Net income from continuing operations		949			967			1,877			1,963
Net loss from discontinued operations		—			(108		)	—			(108		)
Net income		949			859			1,877			1,855
Basic income per share from continuing operations		$	0.25		$	0.24		$	0.48		$	0.49
Diluted income per share from continuing operations		$	0.24		$	0.24		$	0.47		$	0.48
Return on average assets		0.53		%	0.51		%	0.53		%	0.56		%
Return on average equity		7.74		%	6.50		%	7.39		%	7.05		%
Average equity to average assets		6.86		%	7.86		%	7.23		%	7.95		%

On February 25, 2005, we completed the sale of Team Insurance Group, Inc., our insurance agency subsidiary. This subsidiary was operated as a subsidiary of TeamBank, N.A. from December of 2002 until December, 2004 and offered employee benefit insurance and property and casualty insurance to businesses and individuals. We sold all the issued and outstanding shares of the subsidiary to an unaffiliated third party for total cash consideration of $6.8 million after adjustments. Our investment in this subsidiary as of February 25, 2005 was approximately $7.0 million. As a result of the sale, the operations related to this subsidiary have been reclassified in discontinued operations in the unaudited consolidated financial statements and related footnotes.  A loss on the sale of the subsidiary of approximately $164,000 was recorded in the second quarter of 2005 upon finalization of the selling price. The sale was effective December 31, 2004 and, therefore, the operating activities of the insurance subsidiary during 2005 were assumed by the new owners. Pursuant to the terms of the agreement, the buyer may present warranty or representation claims up to 18 months after the close of the transaction.  On July 25, 2006, we received a claim against the warranties and representations of the sale; however, we do not believe that any of the claims presented are legitimate, and we intend to dispute all of them.  Any loss potential is currently considered to be neither probable nor estimatable.

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FINANCIAL CONDITION

Total assets at June 30, 2006, were $715.9 million compared to $696.5 million at December 31, 2005, an increase of $19.4 million.  Loans receivable increased $35.1 million to $455.3 million at June 30, 2006, from $420.2 million at December 31, 2005.  The increases in loans receivable were funded with excess cash and an increase in deposits.

Investment Securities

Total investment securities were $184.2 million at June 30, 2006, compared to $190.4 million at December 31, 2005, a decrease of $6.2 million, or 3.3%.   This decrease was primarily due managements’ decision not to reinvest maturing investments in the securities markets in order to help fund loan growth, coupled with $2.4 million of gross unrealized losses.   Management does not believe that any of the securities with unrealized losses at June 30, 2006 are other than temporarily impaired.

Loans Receivable

Loans receivable increased $35.1 million, or 8.4%, to $455.3 million at June 30, 2006, compared to $420.2 million at December 31, 2005.  This increase was due to increases in real estate loans, primarily loans secured by construction and land development.

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

		June 30, 2006					December 31, 2005
		Principal			Percent of		Principal			Percent of
		Balance			Total		Balance			Total
		(Dollars in thousands)
Loans secured by real estate:
One-to-four family		$	87,370		19.2	%	$	86,880		20.7	%
Construction and land development		110,021			24.2		80,918			19.3
Commercial		145,637			32.0		136,318			32.4
Other		34,605			7.6		36,738			8.7
Other Commerical		51,762			11.4		55,128			13.1
Agricultural		8,931			1.9		7,952			1.9
Installment loans		10,801			2.4		11,843			2.8
Other		6,385			1.4		5,333			1.3
Gross loans		455,512			100.1		421,110			100.2
Less unearned fees		(234		)	(0.1	)	(929		)	(0.2	)
Total loans receivable		$	455,278		100.0	%	$	420,181		100.0	%

Included in one-to-four family real estate loans were loans held for sale of approximately $2.4 million at June 30, 2006 and $1.8 million at December 31, 2005.

Non-performing Assets

Non-performing assets consist of loans 90 days or more delinquent and still accruing interest, non-accrual loans, restructured loans and assets acquired through foreclosure.  Loans are generally placed on non-accrual status when principal or interest is 90 days or more past due, unless the loans are well-secured and in the process of collection.  Loans may be placed on non-accrual status earlier when, in the opinion of management, reasonable doubt exists as to the full, timely collection of interest or principal.

The following table summarizes non-performing assets:

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		June 30, 2006			December 31, 2005
		(Dollars in thousands)
Non-accrual loans		4,679			2,343
Loans 90 days past due and still accruing		145			1,184
Restructured loans		1,024			1,055
Non-performing loans		5,848			4,582
Other real estate owned		856			455
Total non-performing assets		$	6,704		$	5,037
Non-performing loans as a percentage of total loans		1.28		%	1.09		%
Non-performing assets as a percentage of total assets		0.94		%	0.72		%

The increase in non-performing assets at June 30, 2006 compared to December 31, 2005 is primarily a result of an increase in non-accrual loans.

Non-performing loans of approximately $5.8 million at June 30, 2006 were comprised of several non-accrual loans. The largest relationships in non-accrual at June 30, 2006 were $1.9 million to a diversified commercial loan customer and $578,000 to a fence manufacturing company.  The largest relationship included in non-accrual at December 31, 2005 was approximately $540,000 to a fence manufacturing company. Restructured loans at June 30, 2006 and December 31, 2005 included several relationships; the largest was an agricultural loan restructured through Farm Service Agency of approximately $390,000 at June 30, 2006, and $500,000 at December 31, 2005.

Other real estate owned at June 30, 2006 consisted of ten properties.  The properties consisted of four commercial buildings totaling $450,000, four single family dwellings totaling $342,000 and two pieces of vacant land totaling $64,000.  These properties are located within our market areas.  Management is working to sell the real estate as soon as practicable.

The loan portfolio is continuously monitored for possible non-performing assets as information becomes available.  The magnitude of any increase in non-performing loans is not determinable.

Allowance for loan losses

Management maintains an allowance for loan losses based on historical experience, an evaluation of economic conditions and regular review of delinquencies and loan portfolio quality. Based upon these factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for probable loan losses based upon a percentage of the outstanding balances and for specific loans if their ultimate collectibility is considered questionable. Actual losses may differ due to changing conditions or information that is currently not available.

The following table summarizes our allowance for loan losses:

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