Filed with the SEC from Jun 5 to Jun 11:
Team Financial (TFIN)
Bicknell Family Holding said that there is "clearly a need for a change" on Team Financial's board, in order to "produce greater independence, more active and effective oversight, fresh thinking, financial discipline and better leadership."
Bicknell also said it's concerned about the deterioration of the Kansas-based multibank-holding company's financial condition and performance, the loss of stockholder value, numerous instances of poor corporate governance, and excessive executive compensation, among other things.
Bicknell plans to vote its shares in favor of dissident former director Keith B. Edquist's nominees at the company's June 17 shareholder meeting. Bicknell currently holds 427,025 shares (11.9% of the total outstanding).
The Company and Subsidiaries
Team Financial, Inc. (the "Company", "management", "we", "our", or "us") is a financial holding company incorporated in the State of Kansas. Our principal executive offices are located at 8 West Peoria, Paola, Kansas 66071. Our common stock is listed on the Nasdaq Global Market under the symbol "TFIN".
The Company presently owns all of the outstanding capital stock of its two wholly owned banking subsidiaries, TeamBank, N.A. ("TeamBank") and Colorado National Bank. We offer a broad range of community banking and financial services through 21 locations in Kansas, Missouri, Nebraska and Colorado through our banking subsidiaries, TeamBank and Colorado National Bank. Our presence consists of nine locations in the Kansas City metropolitan area and three locations in southeast Kansas. We operate two locations in south-western Missouri, three in metropolitan Omaha, Nebraska, and four in metropolitan Colorado Springs, Colorado. We do not have any current plans to open any additional branches in 2008.
We were formed in 1986 when our founders, along with an Employee Stock Ownership Plan (ESOP), purchased a one-bank holding company in Paola, Kansas, in a leveraged transaction. The ESOP owned 23.8% of our outstanding common stock as of December 31, 2007. Management believes the ESOP reflects our corporate culture in that employees are the integral component of a financial institution. Management intends to continue the ESOP, as it is a significant incentive to attract and retain qualified employees.
We serve the needs and cater to the economic strengths of the local communities in which we operate and strive to provide a high level of personal and professional customer service. We offer a variety of financial services to our retail and commercial banking customers including personal and corporate banking services, mortgage banking, trust and estate planning, and personal investment financial counseling services.
Our assortment of lending services includes:
mortgages for multi-family real estate;
commercial real estate loans;
commercial loans to businesses, including revolving lines of credit and term loans;
real estate development loans;
a broad array of residential mortgage products, both fixed and adjustable rate;
consumer loans, including home equity lines of credit, auto loans, recreational vehicle, and other secured and unsecured loans and
specialized financing programs to support community development.
Our assortment of deposit instruments include:
multiple checking and NOW accounts for both personal and business accounts;
various savings accounts, including those for minors;
money market accounts;
tax qualified deposit accounts such as Health Savings Accounts and Individual Retirement Accounts; and
a broad array of certificate of deposit products.
We also support our customers by providing services such as:
telephone and internet banking;
debit cards and credit cards;
trust and investment services
functioning as a federal tax depository;
access to merchant bankcard services;
various forms of electronic funds transfer and
cash management services.
Through our trust and estate planning and our investment financial counseling services, we offer a wide variety of mutual funds, equity investments, and fixed and variable annuities.
We participate in the wholesale capital markets through the management of our investment securities portfolio and our use of various forms of wholesale funding. Our investment securities portfolio contains a variety of instruments, including callable debentures, taxable and nontaxable debentures, fixed and adjustable rate mortgage backed securities and collateralized mortgage obligations.
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 affected by non-interest income, such as service charges, trust 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, data processing expenses, occupancy costs, and provisions for loan losses.
As was previously disclosed in prior filings with the Securities and Exchange Commission, on February 6, 2007, the buyer of our former insurance agency subsidiary, International Insurance Brokers, Ltd., LLC ("IIB") filed a complaint in the United States District Court for the Northern District of Oklahoma against TeamBank, N.A. Asset Corporation, Mystic Capital Advisors Group, LLC, Robert Weatherbie, Michael Gibson and Kevin Donoghue, claiming breach of contract, negligent misrepresentation, fraud and misrepresentation and civil conspiracy in connection with the sale of the insurance agency subsidiary that was sold to the buyer effective December 31, 2004. All parties had been dismissed from the complaint with the exception of TeamBank, Robert Weatherbie and Michael Gibson.
On December 5, 2007, TeamBank, by way of court-ordered mediation, agreed with IIB to settle all claims between the parties, including the claims regarding the sale of the Company's former insurance agency subsidiary. The Company's portion of the settlement was approximately $630,000, with the Company's corporate insurance policy paying approximately $856,500, for a total settlement of approximately $1,486,500. The Company's portion of the $630,000 includes the forfeiture of a receivable of approximately $60,000.
During 2007, the Company opened three new branches. In April 2007, a location in Falcon, Colorado was opened as an addition to Colorado National Bank; in August, 2007 the Lee's Summit, Missouri branch was opened, and in December, 2007, a branch was opened in Olathe, Kansas. The Lee's Summit and Olathe branches were both additions to TeamBank.
The banking industry nationally and in our market areas is highly competitive. In our market areas, there are numerous small banks and several national and regional financial banking groups with which we compete. We also compete with savings and loan associations, credit unions, leasing companies, mortgage companies, and other financial service providers. Many of these competitors have capital resources and legal lending limits substantially in excess of our capital resources and legal lending limits.
We compete for loans and deposits principally based on the availability and quality of services provided, responsiveness to customers, interest rates, loan fees and office locations. We actively solicit deposit customers and compete by offering them high quality customer service, a complete product line and competitive interest rates and terms. We believe our personalized customer service, broad product line, competitive pricing and our banking franchise enables us to compete in our market areas.
We face competition for our personnel. We compete for our personnel by offering competitive wages and benefit packages in our respective markets and by offering a pleasant work environment through our emphasis on a community banking culture. The ESOP contributes to our ability to effectively retain personnel in our market areas because it provides incentives for employees to continue their employment and motivation to enhance shareholder value.
Market Areas Served
TeamBank has banking locations in Kansas, Missouri and Nebraska. TeamBank's Miami County branches are located in Paola, the county seat of Miami County, Osawatomie, the second largest city in the county and Spring Hill, a community developed along the Miami County and Johnson County border. TeamBank's Johnson County branches are located in Prairie Village, De Soto, and Olathe, Kansas. TeamBank also operates branches in Ottawa, Kansas, the county seat of adjoining Franklin County, Iola, Kansas, the county seat of Allen County, and operates two locations in Parsons, Kansas in Labette County. TeamBank's Missouri service areas are in Barton and Vernon counties, which adjoin each other and are located in the southwest section of Missouri near the Kansas-Missouri border. In 2007, a branch was opened in Lee's Summit, Missouri, which is in the Kansas City metropolitan area. TeamBank also operates three facilities in the Omaha, Nebraska metropolitan area. The primary Nebraska service areas are in Washington and Sarpy Counties.
Colorado National Bank
Colorado National Bank, located in Colorado Springs, Colorado, serves El Paso County which is located along the front range of the Colorado Rocky Mountains. The bank operates two full service branches in Colorado Springs and a third branch in Monument, Colorado, which is a community located between Denver and Colorado Springs, along the growing Interstate 25 corridor. In 2007, we opened our new location in Falcon, Colorado, which is situated just east of Colorado Springs on Highway 24.
Growth and Operating Strategies
Our long-term operating strategy is to serve the needs and cater to the economic strengths of the local communities in which we operate and strive to provide a high level of personal and professional customer service. Our banks do this by offering a variety of financial products and services to our retail and commercial banking customers.
Our growth strategy is focused on our expansion in our existing markets through internal growth, establishing new branches and a combination of mergers and acquisitions, when feasible and attractive. We also evaluate other growth opportunities outside of our market area when they become available. Such opportunities include purchasing loan participations, public funds or brokered certificates of deposit that are not in our market areas.
Mergers and Acquisitions and Branch Location Expansion
Management believes that the consolidation in the banking industry, along with the easing of legal requirements of branch banking, increased regulatory requirements, and concerns about technology, are likely to lead owners of community banks within these areas to explore the possibility of sale or combination with broader-based financial service companies such as ourselves. Although the Company has not completed any mergers or acquisitions in recent years, management periodically considers available merger and acquisition options as possible expansion avenues.
On an ongoing basis, management reviews opportunities to expand through the acquisition of branches or developing de novo branches. Because of the economic growth over the past several years in the Omaha, Nebraska area, the Colorado Springs, Colorado area, as well as the Kansas City metropolitan area, management may consider further branch expansion in these areas, although management does not currently have plans to open additional branches in the near-term. However, we will not rule out branch expansion in our current market areas or other areas experiencing economic growth.
Management considers a variety of criteria when evaluating potential merger or acquisition candidates or branching opportunities. These include:
the market location of the potential merger or acquisition target or branch and demographics of the surrounding community;
the overall financial soundness of a resulting institution;
opportunities to improve the efficiency and/or asset quality of the resulting institution;
the effect of the transaction on income per share and book value, generally seeking only those transactions that will be accretive to income within 24 months;
whether we have sufficient management and other resources to integrate the operations of the potential merger, acquisition or branch;
the investment required for, and opportunity costs of, the merger or acquisition or branch; and
the Company's current financial position and its ability to support the transaction with its current financial resources.
We believe that our largest source of internal growth is through our ongoing solicitation practices conducted by bank presidents, market leaders, and lending officers, followed by referrals from customers.
The primary reason for referrals is positive customer feedback regarding our products, customer service and response time.
Our goal in continuing our expansion is to maintain a profitable, customer-focused financial institution. We believe that our existing structure, management, data, and operational systems are sufficient to achieve further internal growth in asset size, revenues, and capital without proportionate increases in operating costs. This internal growth should also allow us to increase the legal lending limits of our banks, thereby enabling us to increase our ability to serve the needs of existing and new customers. Our operating strategy is to provide high quality community banking and financial services to our customers and increase market share through active solicitation of new business, repeat business, referrals from customers, and continuation of selected promotional strategies.
For the most part, our banking customers seek a banking relationship with a service-oriented community banking organization. Our operational systems have been designed to facilitate personalized service. Management believes our banking locations have an atmosphere which facilitates personalized services and decision making, yet are of sufficient financial size with broad product lines to meet customers' needs. Management also believes that economic conditions in our market areas will continue to contribute to internal growth. Through our primary emphasis on customer service and our management's banking experience, we intend to continue internal growth by attracting customers and focusing on the following:
Products Offered â€”We offer personal and corporate banking services, trust and estate planning, mortgage banking, personal investment, and financial counseling services as well as internet and telephone banking. We offer a broad range of commercial banking services, checking accounts, ATMs, savings accounts, money market accounts, certificates of deposit, NOW accounts, Health Savings Accounts, Individual Retirement Accounts, brokerage and residential mortgage services, branch banking, and debit and credit cards. We also offer installment loans, including auto, recreational vehicle, and other secured and unsecured loans sourced directly by our branches. See "Loans" below for a discussion of the loan products we provide.
Operational Efficiencies â€”We seek to maximize operational and support efficiencies consistent with maintaining high quality customer service. Our banks share a common information system designed to enhance customer service and improve efficiencies by providing system-wide voice and data communication connections. We have consolidated loan processing, bank administration, financial reporting, investment management, information systems, human resources, loan review, and internal audits in order to operate more efficiently.
Marketing Activities â€”We focus on a proactive solicitation program for new business, as well as identifying and developing products and services that satisfy customer needs. We actively sponsor community events within our branch areas. We believe that active community involvement contributes to our long-term success.
We provide a broad range of commercial and retail lending services. Our banks follow a uniform credit policy, which contains criteria related to underwriting and loan administration, levels of loan commitment, loan types, credit criteria, concentration limits, loan review and grading and related matters. In addition, we provide ongoing loan officer training and operate a centralized processing and servicing center for loans. Each loan portfolio is subject to independent loan review on a regular basis in accordance with our loan review process.
We maintain a loan committee approach to lending, which we believe yields positive results in both responsiveness to customer needs and asset quality. Each of our subsidiary banks and some branches have a loan committee, which meets as needed to review and discuss loans. Each bank and some branches also have a loan level threshold, which, if exceeded, requires the approval of our senior loan committee, which meets on an on-call basis. Interest rates charged on loans vary with the degree of risk, maturity, costs associated with underwriting and servicing, loan amount, and the extent of other banking relationships maintained with the customer. Interest rates are further subject to competitive pressures, availability of funds and applicable government regulations.
These loans consist primarily of loans to businesses for various purposes, including revolving lines of credit, equipment financing, and accounts receivable factoring. Commercial loans secured by collateral other than real estate generally mature within one year, have adjustable interest rates and are secured by inventory, accounts receivable, machinery, government guarantees, or other commercial assets. Revolving lines of credit are generally for business purposes, mature annually and have adjustable interest rates. The primary repayment risk of commercial loans is the failure of the borrower's business.
Real Estate Loans
These loans include various types of loans for which we hold real property as collateral. Interest rates on these loans typically adjust annually. Real estate construction loans include commercial and residential real estate construction loans, but are principally made to builders to construct business buildings or single and multi-family residences. Real estate construction loans typically have maturities of six to twelve months, and are charged origination fees. Terms may vary depending upon many factors, including the type of project and financial condition of the borrower. It is our standard practice in making commercial loans to receive real estate as collateral in addition to other appropriate collateral. Therefore, loans categorized in the other real estate loan category can be characterized as commercial loans which are secured by real estate. The primary risks of real estate mortgage loans include the borrower's inability to pay, deterioration in real estate value and increased government planning and zoning activity that may negatively affect the value of real estate that is held as collateral.
We make a variety of agricultural loans which are included in real estate and commercial loans. These loans relate to equipment, livestock, crops, and farmland. The primary risks of agricultural loans include the fluctuating prices of crops and livestock, as well as weather conditions.
Installment loans are primarily to individuals are typically secured by the financed assets, generally have terms of two to five years and bear interest at fixed rates. These loans usually are secured by motor vehicles or other personal assets and in some instances are unsecured. The primary risk of these loans relates to the personal financial circumstances of the borrower.
Letters of Credit
In the ordinary course of business, we issue letters of credit. Standby letters of credit are a conditional, but irrevocable form of a guarantee issued to guarantee payment to a third party obligee upon default of payment by our customers. We apply the same credit standards to these commitments as we use in all of our lending activities and have included these commitments in our lending risk evaluations. Our exposure to credit loss under letters of credit is represented by the amount of these commitments.
As of December 31, 2007, we had approximately 267 full-time equivalent employees. We provide a variety of benefit programs including participation in our ESOP, a 401K plan, group life, health, accident, and other insurance. Certain employees also participate in a salary continuation plan and a deferred compensation plan. Neither the Company nor any of our subsidiaries is a party to any collective bargaining agreement.
Robert J. Weatherbie has served as our Chairman of the Board and director since May 1986, and Chief Executive Officer since September 1995. Effective January 2004, Mr. Weatherbie was appointed President and Chief Executive Officer of TeamBank, N.A. Prior to 1986 he was an executive officer of TeamBank, N.A., formally known as Miami County National Bank, for 13 years. Mr. Weatherbie is also a director of Colorado National Bank. Mr. Weatherbie is a member of the Miami County Bankers Association. He obtained a Bachelor of Arts degree from Emporia State University, Emporia, Kansas, in 1969 and graduated from the Colorado School of Banking at the University of Colorado and the American Institute of Bankingâ€”Kansas City Chapter. Mr. Weatherbie serves as a Class II director, and his current term expires in 2010.
Carolyn S. Jacobs has served as our Treasurer and director since May 1986 and has been a director of TeamBank, N.A. since 1990. She has been Senior Vice President and Trust Officer of TeamBank, N.A., since May 1986. Prior to 1986, she worked for Miami County National Bank, the predecessor to TeamBank, N.A., since 1961. In addition to her supervisory responsibilities over trust services of TeamBank, N.A., she also chairs the ESOP Advisory Committee. Ms. Jacobs has attended the American Institute of Bankingâ€”Kansas City Chapter, MoKan Basic Trust School, graduating in 1977, the National Business Institute and was designated as a Certified Trust Financial Advisor in June 1992. Ms. Jacobs is a member of the Kansas Bankers Association Trust Division and the Miami County Bankers Association. As a Class III director, her term expires at the annual meeting.
Sandra J. Moll is Chief Operating Officer for the Company and, effective April 28, 2008, was appointed to the Company's Board of Directors to replace Richard J. Tremblay as a Class II Director. Ms. Moll has served as a Senior Vice President, Operations of Team Financial, Inc. for 4 years and Senior Vice President and Chief Operations Officer for TeamBank, N.A., a $636 million wholly-owned subsidiary of Team Financial, Inc., for 8 years, and has 19 years of cumulative banking experience, including operations, lending and retail functions within the banking industry. She holds a Bachelor of Science Degree from Missouri Southern State College, attended the Graduate School of Banking at Colorado and also attended the MBA program at the University of Kansas.
Bruce R. Vance was appointed as Chief Financial Officer of the Company, on an interim basis, effective April 28, 2008. Mr. Vance is a Certified Public Accountant who has served as the Director of Internal Audit for the Company since May 2006. Prior to joining the Company, Mr. Vance spent four years as an independent financial institution consultant with Bruce R. Vance, C.P.A., Chartered, a local firm which specialized in financial institution consulting. Previous experience also includes fifteen years as a Federal financial institution regulator with the Office of Thrift Supervision, four years as chief financial officer of a $110 million financial institution, and four years in public accounting with national and regional accounting firms.
Kaila D. Beeman , CPA, was appointed as the Company's Principal Accounting Officer, on an interim basis, effective April 28, 2008. Ms. Beeman, joined the Company in February, 2007 and serves as the Cashier for TeamBank, N.A., a wholly-owned subsidiary of the Company. Prior to joining the Company, Ms. Beeman served as Chief Financial Officer of Bank of the Prairie, a $105 million bank from 2005 to 2007, and as Vice President of Finance/Cashier of Legacy Bank, a $165 million bank, from 1992 to 2005. Ms. Beeman also has experience working in public accounting with a regional accounting firm.
Denis A. Kurtenbach, a Class III director whose term will expire at the annual meeting, has served as a director of Team Financial, Inc. since December 1995. Prior to serving as a director at Team Financial, Inc., he served as a director of Miami County National Bank, the predecessor to TeamBank, N.A., for 13 years. He is a retired Chairman and director of Pemco, Inc., a privately held construction management company and former officer for Carrothers Construction Company, Inc. and Triangle Builders, Inc. Mr. Kurtenbach is a life director of the Associated General Contractors of America and was a member of the 1996 and 1997 Executive Committees. Mr. Kurtenbach graduated in 1962 with a Bachelor's Degree in Civil Engineering from South Dakota State University.
Kenneth L. Smith was elected to the Board of Directors in 2004 and serves as a Class I director whose term will expire in 2009. Mr. Smith has been President and principal owner of G.K. Smith & Sons, Inc., a mechanical contracting firm since 1987. Mr. Smith continues to serve on the Board of Directors for Team Financial, Inc. where he has been a director since April 2004. Mr. Smith served on the Board of Directors for TeamBank, N.A. from January 1992 thru July 2006. Throughout his career, he has served on the board of directors for several community organizations. Mr. Smith was one of the organizers of the Miami County Economic Development Corporation and served on the original Board of Directors for two terms.
Harold G. Sevy, Jr. , a Class I director whose term expires in 2009, is a Magna Cum Laude graduate of Washburn University and received a Master's Degree in Science from Fort Hays State University. Since 1994, Mr. Sevy has served as the president of W.H. Debrick Co., Inc, a construction company. In addition, he is currently a managing partner of several real estate development companies. Mr. Sevy continues to serve on the Board of Directors for Team Financial, Inc. where he has been a director since June 2006. Mr. Sevy served on the Board of Directors of TeamBank, N.A. from January 1985 thru July 2006, where he served on the audit and executive review committees and as chairman of the compliance committee. Mr. Sevy serves on the Company's Audit Committee, Nomination Committee, Compensation Committee and the Executive Committee.
Gregory D. Sigman was elected to the Board of Directors in 2006 as a Class I director. Mr. Sigman is a graduate of the University of Missouri, Columbia, where he received a degree in accounting. He is a CPA and a member of the American Institute of Certified Public Accountants and the Kansas and Missouri Societies of Certified Public Accountants. Mr. Sigman has been an owner and chief executive officer of Sigman & Co., PC, a CPA firm, since 1998. During the period 1983 to 1998, Mr. Sigman was partner and/or shareholder of other CPA firms. Mr. Sigman has eleven years of prior auditing experience with Touche, Ross & Co. He serves on the Company's Audit Committee, Nominating Committee and Executive Committee, and is a designated financial expert.
Connie D. Hart was elected to the Board of Directors in 2007 and is a Class II director whose term will expire in 2010. Ms. Hart has served as the Chief Financial Officer of Bluestem Environmental Engineering, Inc. since 1995. Ms. Hart formerly served as a bank holding company and commercial bank examiner for the Federal Reserve Bank. She holds a Bachelor of Science Degree in Business Administration, Finance from Kansas State University. Ms. Hart was elected to serve on the Board of Directors for TeamBank, N.A. in August 2006, and continues to serve in that capacity. Ms. Hart serves on the Company's Audit Committee, Nomination Committee and the Executive Committee.
Robert M. Blachly, a nominee as a Class III director, is a graduate of the University of Kansas with a Bachelor of Science degree in Business Administration. He serves as an Executive Vice President of The Industrial Fumigant Company, in Olathe, Kansas, where he has served in various progressive capacities since 1976. Mr. Blachly has served as a director of TeamBank, N.A. since August 2006, and continues to serve in that capacity. As a member of the TeamBank, N.A. Board of Directors, Mr. Blachly has served as a member of the Board Loan Committee.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are a financial holding company offering a broad range of community banking and financial services through our locations in Kansas, Missouri, Nebraska and Colorado through our wholly owned banking subsidiaries, TeamBank and Colorado National Bank. Our presence in Kansas consists of nine locations in the Kansas City metropolitan area and three locations in southeast Kansas. We operate two locations in southwestern Missouri, three in metropolitan Omaha, Nebraska, and four in the Colorado Springs, Colorado metropolitan area. Our total assets over the past ten years have grown from $300.0 million at January 1, 1997 to $825.1 million at December 31, 2007.
The growth in assets and the corresponding increase in earnings were achieved primarily through purchases of branches, purchases of community banks, and internal branch expansions. Our branch expansion includes growth at existing branches, primarily through the addition of loan officers at those locations, as well as the opening of new branches. Increased legal lending limits have also contributed to our growth, allowing our loan officers to make larger loans, thereby further contributing to our asset growth. Accompanying the growth were increased operating expenses as well as increases in provisions for loan losses and amortization expense of intangible assets related to acquisitions, and in some instances, issuance of our common stock in conjunction with the acquisitions. Our experience is that it takes 18 to 24 months to realize meaningful net income improvements from acquisitions due to our emphasis on retaining key employees rather than the immediate implementation of significant cost reduction measures.
At December 31, 2007 total assets were $825.1 million, an increase of $68.6 million, or 9.1%, from $756.4 million at December 31, 2006. The increase in total assets was primarily due to an increase in loans receivable of $74.4 million. The increase in loans was offset by a decrease in cash and cash equivalents of $7.0 million and a decrease in investment securities of $3.8 million.
Net income totaled $4.1 million for the year ended December 31, 2007 versus $4.0 million for the year ended December 31, 2006. The increase of $152,000, or 3.8%, was primarily the result of an increase in net interest income of $1.4 million, or 6.0%, coupled with a decrease of $245,000 in provision for loan losses and an increase of $373,000 in non-interest income, offset by an increase in non-interest expense of $1.8 million, or 7.2%. The $1.8 million increase in non-interest expense was largely due to lawsuit settlements and related expenses and increased salaries, net of the reduction in the trust preferred securities redemption amortization expense.
Critical Accounting Policies
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements and related notes, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period presented. Actual results could differ significantly from those estimates.
Allowance for Loan Losses
One of our critical accounting policies relates to the allowance for loan losses and involves significant management valuation judgments. We perform periodic and systematic detailed reviews considering historical loss experience, the volume and type of lending conducted, the status of past due principal and interest payments, an evaluation of economic conditions, particularly as such conditions relate to our market areas and other areas where we have loans receivable, and other factors related to the collectibility of our loan portfolio. 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 additional allowances for specific loans if their ultimate collectibility is considered doubtful. Since certain lending activities involve greater risks, the percentage applied to specific loan types may vary. The allowance provided is subject to review by our regulators. Management believes that the allowance is adequate for probable loan losses inherent in the loan portfolio. Though management uses available information to provide appropriate allowances for inherent losses on loans, future additions to the allowance may be necessary based on borrowers' circumstances and changes in economic conditions.
Impairment of Goodwill Analysis
The provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), require that goodwill be evaluated for impairment annually or more frequently if conditions indicate impairment may have occurred. The evaluation of possible impairment of intangible assets involves judgment based upon short-term and long-term projections of future performance. The Company has completed its most recent evaluation of goodwill and determined that no impairment exists for the year ended December 31, 2007. There was no impairment of goodwill in 2006.
Deferred Income Taxes
The provisions of Statement of Financial Accounting Standards, No. 109, Accounting for Income Taxes (SFAS 109) and Financial Accounting Standards Board Interpretation No. 48 (FIN 48), establish financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns related to deferred income. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
Analysis of the Results of Operations
Net Interest Income
Our income is derived primarily from net interest income, which is the difference between interest income, principally from loans, investment securities, federal funds sold, and interest bearing deposits, and interest expense, principally on customer deposits and other borrowings. Changes in net interest income result from changes in volume and interest rates earned and expensed. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities.
The following tables set forth the average balances of interest-earning assets and interest-bearing liabilities, as well as the amount of interest income or interest expense and the average rate for each category of interest-earning assets and interest-bearing liabilities on a tax-equivalent basis assuming a 34% tax rate for the periods indicated.
Net interest margin decreased five basis points to 3.75% for the year ended December 31, 2007 from 3.80% for the year ended December 31, 2006. The decrease in net interest margin was largely due to higher average balances of interest-bearing liabilities, coupled with higher average rates paid on interest-bearing liabilities, which were not fully offset by the increases in average balances or average yields on average earning assets. We expect continued pressure on our net interest margin, as some of our loan portfolio reprices with the decrease in the prime rate, while our deposit rates, which are highly correlated to treasury rates, are not expected to decline at the same rate.
Total interest income on a tax equivalent basis for 2007 was $52.0 million, representing an increase of $6.1 million, or 13.3%, from $45.9 million for 2006. The increase was primarily the result of a $6.1 million increase in interest income on loans receivable.
Interest income on loans receivable increased $6.1 million due to a $51.3 million increase in the average balances of loans receivable to $509.4 million in 2007 from $458.1 million in 2006, coupled with a 36 basis point increase in the yield on loans receivable in 2007 compared to 2006. The increase in the yield of loans receivable reflected the increase in the rates applied to loans that re-priced in 2007 as required by the notes' terms and the pricing of newly originated loans at higher rates.
The average yield on taxable investment securities increased 21 basis points from 5.01% in 2006 to 5.22% in 2007. Offsetting the increase in interest income due to higher yields was a decrease in average balances of approximately $3.7 million, resulting in a decrease in interest income on taxable investment securities of approximately $184 thousand. The net increase in interest income as a result of the higher average yield and lower average balance on taxable investment securities was $141 thousand. Cash flow from the reduction of investment securities was redirected to fund loan growth.
Total interest expense was $25.7 million for 2007, a $4.6 million, or a 21.8% increase from $21.1 million in 2006. The increase was primarily related to the increase in average balances and average rates paid on time deposits, which increased to 4.86% in 2007 from 4.21% in 2006, representing a 65 basis point increase. The majority of the increase in average balances and average rates paid on time deposits came from brokered certificates of deposit, which increased $27.4 million during 2007 as a method to fund loan growth. The brokered certificates of deposit carried an average rate of 5.11%, compared to 4.84% on all other time deposits, thereby increasing the total average rates paid on total time deposits. The average rates paid on interest bearing savings and checking deposits increased 33 basis points from 1.90% in 2006 to 2.23% in 2007.
As a result of the changes described above, net interest income on a tax equivalent basis increased to $26.3 million during 2007, representing an increase of $1.5 million, or 6.1%, compared to $24.8 million in 2006.
The average rate paid on our subordinated debentures, which we restructured in September 2006, was 7.10% for 2007 compared to 8.74% for 2006. Pursuant to the provisions of Financial Accounting Standards Board Interpretation No. 46 Revised (FIN 46R), Consolidation of Variable Interest Entities , the Trust is not consolidated in the consolidated financial statements. See Note 11 Subordinated Debentures in the notes to the consolidated financial statements for a full discussion on the trust preferred securities.
The following table presents the components of changes in our net interest income, on a tax equivalent basis, attributed to volume and rate. Changes in interest income or interest expense attributable to volume changes are calculated by multiplying the change in volume by the prior fiscal year's average interest rate. The changes in interest income or interest expense attributable to changes in interest rates are calculated by multiplying the change in interest rate by the prior fiscal year's average volume. The changes in interest income or interest expense attributable to the combined impact of changes in volume and change in interest rate are calculated by multiplying the change in rate by the change in volume.
Provision for Loan Losses
The provision for losses on loans represents management's estimate of the amount necessary to be charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical loss experience, the volume and type of lending conducted, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to our market areas or areas that we have loans receivable, and other factors related to the collectibility of our loan portfolio. It is management's practice to review the allowance on a monthly basis to determine the level of provision to be recognized in the allowance, and after considering the above factors, management recorded a provision for loan losses on loans totaling $0.7 million for the year ended 2007, and $1.0 million for the year ended 2006. The decrease in the provision recorded in 2007 compared to 2006 was primarily a result of improved asset quality in 2007 compared to 2006, as non-performing loans decreased by $2.4 million, therefore not necessitating further amounts of loan loss reserves. The improved asset quality resulted in the decrease of approximately $0.7 million in the provision for loan losses recorded for specific allowances associated with loans that management considers the ultimate collectibility is doubtful, despite the fact that loan balances increased more in 2007 than in 2006.
Non-interest income was $7.6 million for 2007, a $0.4 million, or 5.6%, increase from 2006. This increase was primarily a result of a decrease of loss on the sale of investment securities of $153,000, as a loss of $157,000 was recorded in 2006 as a result of restructuring certain investments maintained in our portfolio in order to achieve higher yields in the future. Other non-interest income increased, primarily due to $75,000 of income related to credit life insurance. Gain on sales of mortgage loans remained stable at $0.6 million in 2007. We expect gain on sales of mortgage loans to remain relatively stable in the near future as a result of the current interest rate environment, coupled with increased loan originations at our new branches. Service charges decreased approximately $35,000 for the year ended 2007 compared to the year ended 2006 due to decreased overdraft fees and decreased service charges.
Non-interest expense was $27.1 million for the year ended 2007, an increase of $1.8 million, or 7.1%, compared to $25.3 million for the year ended 2006. Salaries and employee benefits increased approximately $728,000, or 5.9%, primarily as a result of hiring additional personnel to staff the new branches and increased compensation expense. Stock-based compensation expense decreased $163,000 during 2007 compared to 2006, largely due to a decrease in the estimated fair value of the three-year options, which reprice each quarter due to their discretionary vesting nature. Occupancy and equipment increased approximately $230,000 during 2007 primarily due to the re-evaluation of the useful lives of our fixed assets and to immaterial corrections of prior period depreciation differences, coupled with increased maintenance and utilities expenses. Data processing fees are expected to decrease in 2008, as we have signed a new agreement with our core processor and have renegotiated our processing rates. In 2007, our professional fees included approximately $273,000 of expense related to complying with the internal control provisions of Sarbanes-Oxley. We do not anticipate having these expenses in the future, however, there will be ongoing expense associated with maintaining our compliance with of Sarbanes-Oxley. The largest increase in non-interest expense was the $958,000 charge taken as a result of lawsuit settlements and related charges. See Recent Developments under Item 1Business for more information on these charges. This was largely offset by the reduction in the $823,000 charge taken as a result of the restructuring of the Trust Preferred Securities in 2006. See Note 11 Subordinated Debentures in the notes to the consolidated financial statements for more information on the restructuring of the Trust Preferred Securities and the related charge in 2006. As discussed in Item I Business of this report under Deposit Insurance Premiums, we have a one-time credit to apply towards FDIC deposit insurance premiums under the new pricing structure established and implemented by the FDIC in 2007. We expect to use our remaining credit towards these insurance premiums in the first two quarters of 2008; however, we expect that our credit will be used up by the third quarter of 2008, and therefore, we expect our deposit insurance premiums to increase by approximately $150,000 in 2008 and by another approximately $140,000 in 2009, or $290,000 over 2007 levels. Deposit insurance premiums are determined based on our level of deposits, therefore, as our deposits increase, so will our associated deposit insurance premiums.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONS
We incurred a net loss for the three months ended March 31, 2008 of $6.4 million, or $1.79 basic and $1.77 diluted loss per share, compared to net income of $1,168,000, or $.32 basic and diluted income per share for the three months ended March 31, 2007. The net loss of $6.4 million was driven by a non-cash $6.0 million impairment charge for the write-off of our goodwill associated with Colorado National Bank. During the three months ended March 31, 2008, we also recorded $2.6 million in provisions for loan losses.
Net Interest Income
Net interest income before provision for loan losses for the three months ended March 31, 2008 totaled $6.4 million compared to $6.2 million for the same period in 2007, an increase of 3.1%.
Net interest margin, adjusted for the tax effect of tax exempt securities, as a percent of average earning assets was 3.51% for the three months ended March 31, 2008, compared to 3.75% during the three months ended March 31, 2007. The average rate on interest earning assets for the quarter ended March 31, 2008 decreased 42 basis points to 6.94% from 7.36% for the quarter ended March 31, 2007. Partially offsetting the decrease on the rate of interest earning assets was a decrease in the average cost of interest bearing liabilities of 24 basis points to 3.72% during the three months ended March 31, 2008 from 3.96% during the three months ended March 31, 2007.
The decreases in the rates earned on interest earning assets, and a corresponding decrease in rates paid on interest bearing liabilities, occurred in response to several federal funds rate cuts made by the Federal Reserve Bank during the fourth quarter of 2007 and the first quarter of 2008. Our loan portfolio is comprised of both fixed rate and variable rate interest earning assets, and therefore, many of the variable rate assets and liabilities have re-priced at lower rates. However, the re-pricing of our interest earning assets have outpaced the re-pricing of our interest bearing liabilities, resulting in a lower net interest margin.
The following table presents certain information relating to net interest income for the three months ended March 31, 2008 and 2007. The average rates are derived by dividing annualized interest income or expense by the average balance of assets and liabilities, respectively, for the periods shown and are presented on a tax-equivalent basis assuming a 34% tax rate for the periods indicated.
The following table presents the components of changes in net interest income, on a tax equivalent basis, attributed to volume and rate. Changes in interest income or interest expense attributable to volume changes are calculated by multiplying the change in volume by the average interest rate during the prior yearâ€™s first quarter. The changes in interest income or interest expense attributable to change in interest rates are calculated by multiplying the change in interest rate by the average volume during the prior yearâ€™s first quarter. The changes in interest income or interest expense attributable to the combined impact of changes in volume and changes in interest rates are calculated by multiplying the change in rate by the change in volume.
The average rate on interest earning assets was 6.94% for the three months ended March 31, 2008, representing a decrease of 42 basis points from 7.36% for the same three months in 2007. Interest earning assets are comprised of loans receivable, investment securities, interest-bearing deposits and an investment in a non-consolidated wholly owned subsidiary that was formed for the purpose of issuing trust preferred securities.
The average rate on loans receivable decreased 72 basis points to 7.49% for the three months ended March 31, 2008, compared to 8.21% for the three months ended March 31, 2007. The loans receivable average balance increased approximately $76.6 million for the three months ended March 31, 2008 compared to the average balance for the same three months in 2007, partially offsetting the decrease in the average rate received on loans. The increase in the average loan balances offset by the decrease in the rate earned resulted in an increase in interest income from loans receivable of approximately $633,000.
The average rate on investment securities adjusted for the tax effect of tax exempt securities increased to 5.54% for the three months ended March 31, 2008, compared to 5.39% for the three months ended March 31, 2007. This increase in the yield was offset by a decrease in average balance of $13.1 million during the quarter ended March 31, 2008 to $165.9 million compared to average balance during the quarter ended March 31, 2007 of $179.0 million.
Interest bearing liabilities
The average rate paid on interest-bearing liabilities decreased 24 basis points to 3.72% for the three months ended March 31, 2008, compared to 3.96% for the same three months in 2007. Interest-bearing liabilities are comprised of savings and interest bearing checking deposits, time deposits, federal funds purchased and securities sold under agreements to repurchase, holding company notes payable, Federal Home Loan Bank advances and other borrowings, and subordinated debentures held by our subsidiary trust which issued trust preferred securities.
The average rate paid on interest-bearing savings and interest-bearing checking deposits decreased 78 basis points to 1.52% for the three months March 31, 2008, compared to 2.30% for the three months ended March 31, 2007. The average rate paid on time deposits decreased 15 basis points to 4.60% during the first quarter of 2008 compared to 4.75% during the first quarter of 2007.
The effective interest rate on the subordinated debentures was 6.08% for the three months ended March 31, 2008 and 7.19% for the same period of 2007. The subordinated debentures are part of a pooled trust preferred security at a variable rate of 1.65% above the 90-day LIBOR. The trust preferred security has a 30-year term maturing in 2035 and a callable option in 2011, five years after the issuance date. The issuance of the subordinated debentures did not have a placement or annual trustee fee associated with it.
Provision for Loan Losses
A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical loss experience, the volume and type of lending conducted, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to our types of lending and our market areas, and other factors related to the collectibility of our loan portfolio.
As discussed above, we have increased our Banksâ€™ allowance for loan loss allocations, and during the three months ended March 31, 2008 we recorded a provision for loan losses totaling $2.6 million, compared to $230,000 for the three months ended March 31, 2007.
Non-Interest Income Non-interest income increased approximately $240,000, or 13.8%, from the three months ended March 31, 2007 primarily due to a $158,000 increase in gain on sales of investment securities, which was due to a gain on redemption of Visa, Inc. stock. As a Visa member bank, the Company had an obligation to share certain litigation costs of Visa and had previously recorded this obligation. Visa held an initial public offering in March of 2008 in which it redeemed a portion of Class B stock held by member banks. The Company received cash of $111,000 in that redemption, which was recorded as a gain on sale of investment securities. The Companyâ€™s remaining obligation to pay for other unsettled portions of the Visa lawsuits is approximately $65,000 and is included in other liabilities in the March 31, 2008 balance sheet. Also contributing to the increase in total other income was a $35,000 increase in gain on sale of mortgage loans during the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The increase in gain on sale of mortgage loans coincided with the recent interest rate cuts initiated by the Federal Reserve.