SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002
OR
[ ] 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: 000-50015
TierOne Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Wisconsin 04-3638672
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(State or Other Jurisdiction of (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1235 "N" Street
Lincoln, Nebraska 68508
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(Address of Principal Executive Offices) (Zip Code)
(402) 475-0521
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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 No X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
---
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: As of November 8, 2002, a
total of 22,575,075 shares of the Registrant's common stock were issued and
outstanding.
PART I - FINANCIAL INFORMATION
Interim financial information required by Rule 10-01 of Regulation S-X and
Item 303 of Regulation S-K is included in this Form 10-Q as referenced below.
Page
----
Item 1 - Financial Statements.......................................... 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.... 28
Item 4 - Controls and Procedures....................................... 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................. 28
Item 2 - Changes in Securities and Use of Proceeds..................... 28
Item 3 - Defaults Upon Senior Securities............................... 29
Item 4 - Submission of Matters to a Vote of Security Holders........... 29
Item 5 - Other Information............................................. 29
Item 6 - Exhibits and Reports on Form 8-K.............................. 29
Signatures............................................................. 31
2
TierOne Bank and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 2002 (Unaudited) and December 31, 2001
(dollars in thousands)
September 30, December 31,
2002 2001
------------- ------------
(unaudited) (audited)
Assets
Cash and due from banks $ 29,043 $ 24,141
Federal funds sold 42,000 10,300
----------- -----------
Total cash and cash equivalents 71,043 34,441
Investment securities:
Held-to-maturity 160 221
Available-for-sale 68,346 90,811
Loans receivable, net 1,592,809 1,379,066
Loans held for sale 37,064 14,373
Accrued interest receivable 8,019 7,834
Federal Home Loan Bank stock 19,630 14,836
Premises and equipment 24,932 18,201
Other assets 15,460 10,230
----------- -----------
Total assets $ 1,837,463 $ 1,570,013
=========== ===========
Liabilities and Retained Earnings
Liabilities:
Deposits $ 1,168,810 $ 1,096,242
Advances from Federal Home Loan
Bank and other borrowings 276,999 303,315
Advances from borrowers for taxes
and insurance 16,633 15,535
Accrued interest payable 5,493 8,734
Stock subscription proceeds 213,333 --
Accrued expenses and other
liabilities 21,823 24,432
----------- -----------
Total liabilities 1,703,091 1,448,258
----------- -----------
Retained earnings:
Retained earnings, subject
to certain restrictions 134,626 121,678
Cumulative other comprehensive
income (loss), net (254) 77
----------- -----------
Total retained earnings 134,372 121,755
Commitments and contingent liabilities
Total liabilities and retained
earnings $ 1,837,463 $ 1,570,013
=========== ===========
See accompanying notes to consolidated financial statements.
3
TierOne Bank and Subsidiaries
Consolidated Statements of Income
(dollars in thousands)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
------------- ------------ ------------ ------------
(unaudited)
Interest income:
Loans receivable $25,329 $23,653 $72,480 $70,666
Investment securities 1,095 1,993 3,778 7,052
Other interest-earning assets 118 435 325 1,164
------- ------- ------- -------
Total interest income 26,542 26,081 76,583 78,882
------- ------- ------- -------
Interest expense:
Deposits 7,941 11,114 23,963 37,937
Advances from Federal Home Loan Bank
and other borrowings 3,323 2,567 9,347 6,988
------- ------- ------- -------
Total interest expense 11,264 13,681 33,310 44,925
------- ------- ------- -------
Net interest income 15,278 12,400 43,273 33,957
Provision for loan losses 1,262 953 2,469 1,893
------- ------- ------- -------
Net interest income after provision
for loan losses 14,016 11,447 40,804 32,064
------- ------- ------- -------
Other income:
Fees and service charges 2,279 2,007 6,218 5,109
Mortgage servicing rights impairment (1,160) (50) (1,620) (50)
Income from real estate operations, net 224 137 583 401
Other operating income 761 398 1,893 1,563
Net gain (loss) on sales of:
Investments -- 5 -- --
Loans held for sale 806 511 2,120 1,247
Real estate owned 4 (1) 3 8
------- ------- ------- -------
Total other income 2,914 3,007 9,197 8,278
------- ------- ------- -------
Other expense:
Salaries and employee benefits 5,640 5,121 16,127 14,546
Occupancy, net 1,393 1,629 4,297 4,223
Data processing 358 344 1,070 1,031
Advertising 848 486 2,737 1,344
Legal services 107 149 259 544
Other operating expense 1,687 1,418 5,253 4,292
------- ------- ------- -------
Total other expense 10,033 9,147 29,743 25,980
------- ------- ------- -------
Income before income taxes 6,897 5,307 20,258 14,362
Income tax expense 2,487 1,899 7,310 5,114
------- ------- ------- -------
Net income $ 4,410 $ 3,408 $12,948 $ 9,248
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
TierOne Bank and Subsidiaries
Consolidated Statements of Changes in Retained Earnings and Comprehensive Income
Nine Months Ended September 30, 2002 (Unaudited) and
Year Ended December 31, 2001
(dollars in thousands)
Cumulative other
comprehensive Total retained
Retained earnings income (loss) earnings
----------------- ---------------- --------------
Balance at December 31, 2000 $108,636 $ (764) $ 107,872
-------- ------ ---------
Comprehensive income:
Net income 13,042 -- 13,042
Change in unrealized loss on
available-for-sale securities, net -- 841 841
-------- ------ ---------
Total comprehensive income 13,042 841 13,883
-------- ------ ---------
Balance at December 31, 2001 121,678 77 121,755
-------- ------ ---------
Comprehensive income:
Net income 12,948 -- 12,948
Change in unrealized gain on
available-for-sale securities, net -- (331) (331)
-------- ------ ---------
Total comprehensive income (loss) 12,948 (331) 12,617
-------- ------ ---------
Balance at September 30, 2002 $134,626 $ (254) $ 134,372
======== ====== =========
See accompanying notes to consolidated financial statements.
5
TierOne Bank and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001
(dollars in thousands)
September 30,
-------------------------
2002 2001
------------ ------------
(unaudited)
Cash flows from operating activities:
Reconciliation of net income to cash provided by
(used in) operating activities:
Net income $12,948 $9,248
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of investment and mortgage-backed
securities, net 236 23
Depreciation and amortization 1,678 1,595
Amortization on loans receivable, net 229 43
Deferred income tax benefit (654) (511)
Provision for loan losses 2,469 1,893
Proceeds from sales of loans held for sale 277,491 214,120
Originations and purchases of loans held for sale (298,062) (223,311)
Net (gain) loss on sales of:
Loans receivable held for sale (2,120) (1,247)
Real estate owned and held for investment (8) (8)
Premises and equipment (206) 36
Changes in certain assets and liabilities:
Accrued interest receivable (185) (849)
Other assets (4,331) (2,303)
Accrued interest payable (3,241) (4,179)
Accrued expenses and other liabilities (2,609) 6,248
------- -------
Total adjustments (29,313) (8,450)
------- -------
Net cash provided by (used in) operating
activities (16,365) 798
------- -------
Cash flows from investing activities:
Purchase of investment securities:
Held-to-maturity (27) (8)
Available-for-sale (67,759) (75,377)
Proceeds from maturity of investment securities,
available-for-sale 67,554 81,500
See accompanying notes to consolidated financial statements.
6
TierOne Bank and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Nine Months Ended September 30, 2002 and 2001
(dollars in thousands)
September 30,
-------------------------
2002 2001
------------ ------------
(unaudited)
Proceeds from principal repayments of investment and
mortgage-backed securities 22,013 23,055
Increase in loans receivable (217,401) (154,836)
Proceeds from sale of real estate owned and held for
investment 886 1,232
Additions to premises and equipment (8,596) (1,914)
Proceeds from sale of premises and equipment 408 --
Sale of Federal Home Loan Bank stock 3,102 5,138
Purchase of Federal Home Loan Bank stock (7,896) (2,214)
------- -------
Net cash used in investing activities (207,716) (123,424)
------- -------
Cash flows from financing activities:
Net increase in deposits 72,568 38,502
Net increase (decrease) in advances from borrowers for
taxes and insurance 1,098 (760)
Proceeds from Federal Home Loan Bank long-term advances 50,000 80,000
Repayment of Federal Home Loan Bank long-term advances (16) (16)
Net paydowns on Federal Home Loan Bank line of credit
and Federal Home Loan Bank short-term advances (76,300) (7,700)
Proceeds from stock subscription 213,333 --
------- -------
Net cash provided by financing activities 260,683 110,026
------- -------
Net increase (decrease) in cash and cash equivalents 36,602 (12,600)
Cash and cash equivalents at beginning of period 34,441 30,779
------- -------
Cash and cash equivalents at end of period $71,043 $18,179
======= =======
Supplemental disclosure of cash flow information - cash
paid during the period for:
Interest $36,551 $49,104
======= =======
Income taxes, net of refunds $ 7,734 $ 3,242
======= =======
Supplemental schedules of noncash investing activities
transfers from loans to real estate owned and other
assets through foreclosure $ 949 $ 711
======= =======
See accompanying notes to consolidated financial statements.
7
TierOne Bank and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
On April 3, 2002, TierOne Bank (the "Bank") (formerly known as First
Federal Lincoln Bank) incorporated TierOne Corporation, a Wisconsin
corporation (the "Company" or "registrant") to facilitate the conversion of
the Bank from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion"). The Conversion was completed
on October 1, 2002, at which time the Company became the holding company for
the Bank and issued 22,575,075 shares of its common stock to members of the
general public, the Company's employee stock ownership plan and to certain
directors, officers and employees of the Company and the Bank. Included in
such amount were 500,000 shares contributed to the TierOne Charitable
Foundation. The Company owns all the outstanding common stock of the Bank.
As of September 30, 2002, the registrant was in organization and had engaged
in no operations at that date; accordingly, no financial statements of the
Company have been included herein.
References in this document to "we," "our" or "us" refer to the Company
together with the Bank, unless the context requires otherwise.
2. Basis of Consolidation
The consolidated financial statements include the accounts of the Bank
and its wholly owned subsidiary, TMS Corporation of the Americas ("TMS"). TMS
is the holding company of TierOne Investments and Insurance, Inc., a wholly
owned subsidiary that administers the sale of insurance and securities
products. In April 2000, TMS created a new subsidiary, TierOne Reinsurance
Company, which reinsures credit life and accident and health insurance
policies.
The accompanying unaudited consolidated financial statements as of
September 30, 2002 and for the three and nine month periods ended September
30, 2002 and 2001 have been prepared in accordance with the instructions to
Form 10-Q and therefore do not include all information and notes necessary for
complete financial statements in conformity with accounting principles
generally accepted in the United States of America. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation. The results of
operations for interim periods are not necessarily indicative of the results
to be expected for the entire year. These interim financial statements should
be read in conjunction with the Company's consolidated audited financial
statements and the notes thereto contained in the Company's prospectus dated
August 12, 2002.
8
TierOne Bank and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
3. Investment Securities
Investment securities at September 30, 2002 and December 31, 2001 are
summarized below:
Gross Unrealized
-----------------------------
Amortized
September 30, 2002 Cost Gain Loss Fair Value
----------------------------------- --------- ---------- ---------- ------------
(dollars in thousands)
(unaudited)
Held to Maturity:
Municipal obligations $ 160 $ -- $ -- $ 160
Available for Sale:
Mortgage-backed securities 43,541 645 39 44,147
U.S. government agency obligations 7,983 26 -- 8,009
Corporate securities 11,213 -- 1,023 10,190
Mutual fund 6,000 -- -- 6,000
------- ---- ------ -------
$68,897 $671 $1,062 $68,506
======= ==== ====== =======
Gross Unrealized
-----------------------------
Amortized
December 31, 2001 Cost Gain Loss Fair Value
----------------------------------- --------- ---------- ---------- ------------
(dollars in thousands)
(audited)
Held to Maturity:
Municipal obligations $ 221 $ -- $ -- $ 221
Available for Sale:
Mortgage-backed securities 45,788 528 29 46,287
U.S. government agency obligations 26,691 -- -- 26,691
Corporate securities 12,214 -- 381 11,833
Mutual fund 6,000 -- -- 6,000
------- ---- ------ -------
$90,914 $528 $ 410 $91,032
======= ==== ====== =======
9
TierOne Bank and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
4. Loan Portfolio Composition
Loans receivable at September 30, 2002 and December 31, 2001 are
summarized below.
September 30, 2002 December 31, 2001
----------------------------- ----------------------------
Amount % Amount %
-------------- ----------- -------------- ----------
(dollars in thousands)
(unaudited) (audited)
Real estate loans:
One- to four-family residential(1) $ 544,813 30.94% $ 502,502 33.13%
Multi-family residential 68,008 3.86 74,209 4.89
Commercial real estate and land 341,335 19.38 258,277 17.03
Residential construction 144,851 8.23 113,300 7.47
Commercial construction 129,084 7.33 95,614 6.30
---------- ------ ---------- ------
Total real estate loans 1,228,091 69.74 1,043,902 68.82
---------- ------ ---------- ------
Commercial business 21,375 1.21 12,193 0.80
Warehouse mortgage lines of credit 225,236 12.79 224,067 14.77
Consumer loans:
Home equity 41,092 2.33 45,398 2.99
Home equity line of credit 90,648 5.15 61,839 4.08
Home improvement 82,841 4.70 76,555 5.05
Automobile 59,331 3.37 42,547 2.80
Other 12,511 0.71 10,486 0.69
---------- ------ ---------- ------
Total consumer loans 286,423 16.26 236,825 15.61
---------- ------ ---------- ------
Total loans 1,761,125 100.00% 1,516,987 100.00%
---------- ====== ---------- ======
Less:
Unearned premiums and discounts 2,253 558
Discounts on loans acquired through merger (196) (270)
Undisbursed portion of construction and
land loans in process (117,615) (109,852)
Deferred loan fees (540) (520)
Allowance for loan losses (15,154) (13,464)
---------- ----------
Net loans (1) $1,629,873 $1,393,439
========== ==========
______________________
(1) Includes loans held for sale of $37.1 million and $14.4 million at
September 30, 2002 and December 31, 2001, respectively.
10
TierOne Bank and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
At or For the Nine Months
Ended September 30,
-------------------------
2002 2001
------------ ------------
(dollars in thousands)
Allowance for loan losses, beginning
of period $13,464 $ 9,947
Provision for loan losses 2,469 1,893
Charge-offs (839) (361)
Recoveries on loans previously
charged off 60 10
------- -------
Allowance for loan losses, end of period $15,154 $11,489
======= =======
Allowance for loan losses as a percent
of total loans receivable (1) 0.92% 0.88%
======= =======
(1) Total loans receivable consists of loans receivable, including loans
held for sale, less undisbursed loan funds, deferred loan fees and
unamortized premiums and discounts.
11
TierOne Bank and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
The following table sets forth information with respect to non-performing
assets and troubled debt restructurings at the dates indicated. It is the
Bank's policy to cease accruing interest on loans 90 days or more past due and
to charge off all accrued interest.
September 30, 2002 December 31, 2001
------------------ -----------------
(dollars in thousands)
(unaudited) (audited)
Non-accruing loans:
One- to four-family residential $2,625 $ 898
Multi-family residential -- --
Commercial real estate and land -- --
Residential construction 131 --
Commercial construction -- --
Commercial business -- --
Warehouse mortgage lines of credit -- --
Consumer 552 767
------ ------
Total non-accruing loans 3,308 1,665
Real estate owned, net (1) 248 168
------ ------
Total non-performing assets 3,556 1,833
Troubled debt restructurings 210 345
------ ------
Total non-performing assets and troubled debt
restructurings $3,766 $2,178
====== ======
Allowance for loan losses as a percent of non-
performing loans 458.10% 808.65%
====== ======
Non-performing loans as percent of total loans
receivable (2) 0.20% 0.12%
====== ======
Non-performing assets as a percent of total
assets 0.19% 0.12%
====== ======
Allowance for loan losses as a percent of
total loans receivable (2) 0.92% 0.96%
====== ======
______________________
(1) Real estate owned balances are shown net of related loss allowances.
Includes both real property and other repossessed collateral consisting
primarily of automobiles.
(2) Total loans receivable consists of loans receivable, including loans
held for sale, less undisbursed loan funds, deferred loan fees and
unamortized premiums and discounts.
12
TierOne Bank and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
5. Mortgage Servicing Rights
Mortgage servicing rights are included in the Consolidated Statements of
Financial Condition under the caption "Other Assets." The activity of
mortgage servicing rights is summarized as follows for the following periods:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Beginning balance $5,664 $2,424 $4,577 $1,101
Mortgage servicing rights
capitalized 1,333 1,312 3,480 3,047
Amortization expense (607) (216) (1,207) (628)
------ ------ ------ ------
6,390 3,520 6,850 3,520
Valuation adjustment (1,160) (50) (1,620) (50)
------ ------ ------ ------
Ending balance $5,230 $3,470 $5,230 $3,470
====== ====== ====== ======
The activity of the valuation allowances on mortgage servicing rights is
summarized as follows for the following periods:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Beginning balance $ 810 $ -- $ 350 $ --
Amounts charged to operations 1,160 50 1,620 50
------ ------ ------ ------
Ending balance $1,970 $ 50 $1,970 $ 50
====== ====== ====== ======
The estimated fair value of the Bank's mortgage servicing rights at
September 30, 2002 totaled approximately $5.2 million on a balance of $592.9
million of serviced loans at such date.
The following table compares the key assumptions used in measuring the
fair values of mortgage servicing rights for the periods presented:
September 30, 2002 December 31, 2001
------------------ -----------------
(dollars in thousands)
Fair value $5,230 $5,069
Prepayment speed 11.1% - 46.1% 8.7% - 37.8%
Weighted average prepayment speed 29.7% 14.0%
Discount rate 9.0% - 15.0% 10.5% - 15.0%
13
TierOne Bank and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
6. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." However, the Statement retains the fundamental provisions
of Statement 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. This Statement supersedes the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
for the disposal of a segment of a business. However, this Statement retains
the requirement of Opinion 30 to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, by abandonment, or in
distribution to owners) or is classified as held for sale. This Statement
also amends APB No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a temporarily controlled subsidiary. The
provisions of this Statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years. The provisions of this Statement generally are to be
applied prospectively. The adoption of Statement No. 144 did not have an
impact on our earnings, financial condition or equity.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This Statement rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." This
Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The adoption of Statement No. 145 is
not expected to have a material effect on our financial position or results of
operation.
In October 2002, the FASB issued Statement No. 147, "Acquisition of
Certain Financial Institutions," which amends SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and FASB
Interpretation No. 9. Except for transactions between two or more mutual
enterprises, this Statement removes acquisitions of financial institutions
from the scope of both Statement No. 72 and Interpretation 9 and requires that
those transactions be accounted for in accordance with FASB Statements No.
141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement No. 72 to
recognize
14
TierOne Bank and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
any excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an unidentifiable
intangible asset no longer applies to acquisitions within the scope of
this Statement. In addition, this Statement amends Statement No. 144 to
include within its scope long-term customer-relationship intangible assets
of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently,
those intangible assets are subject to the same undiscounted cash flow
recoverability test and impairment loss recognition and measurement provisions
that Statement No. 144 requires for other long-lived assets that are held and
used. The adoption of Statement No. 147 is not expected to have a material
effect on our financial position or results of operations.
15
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The Bank, which is a wholly owned subsidiary of the Company as a result
of the completion of the Bank's conversion to stock form, is a $1.8 billion
federally chartered savings bank headquartered in Lincoln, Nebraska.
Established in 1907, the Bank offers a wide variety of full-service consumer
and commercial banking products and services to customers through a
geographically diverse network of 58 offices in Nebraska, Iowa and Kansas.
Leading products offered include residential and commercial real estate
financing, consumer, construction and business loans and lines of credit,
consumer and business checking and savings plans, investment and insurance
services, and telephone and Internet banking access.
The Company was formed by the Bank in connection with the Bank's
conversion and as of September 30, 2002, had not yet commenced operations. The
Company's results of operations initially will be primarily dependent on the
results of the Bank, which became a wholly owned subsidiary of the Company
upon completion of the conversion on October 1, 2002. The Bank's results of
operations depend, to a large extent, on net interest income, which is the
difference between the income earned on its loan and investment portfolios and
the cost of funds, consisting of the interest paid on deposits and borrowings.
Results of operations are also affected by provisions for loan losses, loan
sale activities and loan servicing. Non-interest expense principally consists
of compensation and employee benefits, office occupancy and equipment expense,
data processing, advertising and business promotion and other expense. Our
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities. Future changes in applicable
law, regulations or government policies may materially impact our financial
condition and results of operations.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements, which can be
identified by the use of such words as "estimate, "project, "believe,"
"intend," "anticipate," "plan," "seek," "expect" and similar expressions.
These forward-looking statements include: statements of our goals, intentions
and expectations; statements regarding our prospects and business strategy;
statements regarding our asset quality and market risk; and estimates of
future costs, benefits and results. These forward-looking statements are
subject to significant risks, assumptions and uncertainties, including, among
other things, the following important factors that could affect the actual
outcome of future events: changes in demand for loans, deposits and other
financial services in our market area; changes in interest rates; changes in
general economic conditions; changes in the monetary and fiscal policies of
the U.S. Government; legislative or regulatory changes that adversely affect
our business; changes in our asset quality; changes in accounting policies and
practices, as may be adopted by the bank regulatory agencies and the FASB; and
changes in our organization, compensation and benefit plans. Because of these
and other uncertainties, our actual future results may be materially different
from
16
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
the results indicated by these forward-looking statements. We have no
obligation to update or revise any forward-looking statements to reflect any
changed assumptions, any unanticipated events or any changes in the future.
Critical Accounting Policies
We have identified the evaluation of the allowance for loan losses as a
critical accounting policy where amounts are sensitive to material variation.
This policy is significantly affected by our judgment and uncertainties and
there is a likelihood that materially different amounts would be reported
under different, but reasonably plausible, conditions or assumptions. We
establish provisions for loan losses, which are charges to our operating
results, in order to maintain a level of total allowance for losses that
management believes covers all known and inherent losses that are both
probable and reasonably estimable at each reporting date. Management performs
reviews no less than quarterly in order to identify these inherent losses and
to assess the overall collection probability for the loan portfolio. Our
reviews consist of a quantitative analysis by loan category, using historical
loss experience, and consideration of a series of qualitative loss factors.
For each primary type of loan, we establish a loss factor reflecting our
estimate of the known and inherent losses in each loan type using both the
quantitative analysis as well as consideration of the qualitative factors.
Our evaluation process includes, among other things, an analysis of
delinquency trends, non-performing loan trends, the levels of charge-offs and
recoveries, prior loss experience, total loans outstanding, the volume of loan
originations, the type, size, terms and geographic concentration of loans held
by us, the value of collateral securing loans, the number of loans requiring
heightened management oversight, general economic conditions and loan loss
information for other institutions. The amount of the allowance for loan
losses is only an estimate and actual losses may vary from these estimates.
17
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
Our total assets were $1.8 billion at September 30, 2002, a $267.5
million, or 17.0%, increase from December 31, 2001. A decrease in investment
securities available for sale was substantially offset by increases in cash
and cash equivalents and net loans receivable (including loans held for sale).
Our available-for-sale investment securities amounted to $68.3 million at
September 30, 2002, a $22.5 million decrease from December 31, 2001 primarily
due to a $18.7 million or 70.0% decline in U.S. government agency obligations
to $8.0 million. During the nine months ended September 30, 2002, we
purchased $67.8 million in investment securities which were partially offset
by the maturing of an aggregate of $67.6 million of securities. Cash and cash
equivalents totaled $71.0 million at September 30, 2002, a $36.6 million
increase from December 31, 2001 and our net loan portfolio, including loans
held for sale, totaled $1.6 billion at September 30, 2002, a $236.4 million
increase compared to December 31, 2001. The composition of the loan portfolio
continued to change reflecting our emphasis on originating or purchasing
commercial real estate, construction and consumer loans. As a result,
commercial real estate and land, construction (both commercial and
residential) and consumer loans increased by $83.1 million, $65.0 million and
$49.6 million, respectively, at September 30, 2002 as compared to December 31,
2001. During the nine months ended September 30, 2002, we purchased for
portfolio retention a total of $378.0 million of loans, including $160.5
million of adjustable-rate single-family residential loans, $67.0 million of
commercial real estate and land loans, $82.5 million of construction loans and
$68.0 million of consumer loans. A substantial portion of the commercial real
estate and land loans purchased during this period consisted of our purchase
of 75% to 95% participation interests in loans originated by two financial
institutions headquartered in the State of Washington with the underlying
collateral located in several states.
Our total deposits increased by $72.6 million to $1.2 billion during the
nine months ended September 30, 2002 as we continued our efforts to increase
the level of our core deposits, especially checking accounts. At September
30, 2002, our interest-bearing and non-interest-bearing checking accounts
amounted to $323.3 million in the aggregate, a $71.4 million, or 28.3%,
increase from the aggregate amount at December 31, 2001. In addition, during
the nine-month period ended September 30, 2002, our total certificates of
deposit declined to $534.6 million at September 30, 2002 compared to $535.3
million at December 31, 2001. Our FHLB advances and other borrowings amounted
to $277.0 million at September 30, 2002 compared to $303.3 million at December
31, 2001.
Our total retained earnings increased by $12.6 million to $134.4 million
at September 30, 2002 compared to $121.8 million at December 31, 2001
primarily reflecting $12.9 million in net income earned for the nine months
ended September 30, 2002.
18
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Operating Results for the Three and Nine Months Ended September
30, 2002 and 2001
General. Our net income increased by $1.0 million, or 29.4%, to $4.4
million for the three months ended September 30, 2002 compared to $3.4 million
for the three months ended September 30, 2001. For the nine months ended
September 30, 2002, our net income increased by $3.7 million, or 40.0%, to
$12.9 million compared to $9.2 million for the same period in 2001. Our net
income increased during 2002 due primarily to greater declines in our cost of
funds than the yield on our interest-earning assets which resulted in an
improved net interest income. Our average interest rate spread increased to
3.34% for the quarter ended September 30, 2002 compared to 3.19% for the three
months ended September 30, 2001. For the nine months ended September 30,
2002, our average interest rate spread was 3.36% as compared to 2.85% for the
same period in 2001. Our net interest margin improved to 3.76% and 3.75% for
the three and nine months ended September 30, 2002, respectively, compared to
3.56% and 3.30% for the three and nine months ended September 30, 2001,
respectively. Our ratio of average interest-earning assets to average
interest-bearing liabilities increased to 115.31% and 113.55% for the three
and nine month periods ended September 30, 2002, respectively, compared to
109.46% and 110.11% for the same periods in 2001. The improvement in the
average interest rate spread and net interest margin during 2002 reflected
both the effects of the decline in our cost of funds as a result of the low-
interest rate environment which exceeded the decline in the yields earned on
our interest-earning assets as well as the continued growth of the loan
portfolio.
As previously disclosed, the Company formed the TierOne Charitable
Foundation in connection with the Conversion. The Company contributed 500,000
shares of common stock on October 1, 2002. As a consequence, the Company will
record a charge of $5.0 million ($3.2 million net of taxes) which will
substantially reduce our net income for the fourth quarter of fiscal 2002.
Interest Income. Our total interest income for the three months ended
September 30, 2002 was $26.5 million compared to $26.1 million for the three
months ended September 30, 2001 while for the nine month periods ended
September 30, 2002 and 2001, our total interest income amounted to $76.6
million and $78.9 million, respectively. Total interest income during the
three months ended September 30, 2002 increased due to the increase in the
average balance of interest-earning assets, primarily loans, partially offset
by a decline in the average yield. The average balance of loans during the
three months ended September 30, 2002 and 2001 was $1.5 billion and $1.2
billion, respectively. The primary reason for the decrease in total interest
income during the nine months ended September 30, 2002 was the decline in
market rates of interest throughout 2001 partially offset by the growth in
the loan portfolio. The average yield earned on net loans receivable was
6.73% for the three months ended September 30, 2002 compared to 7.78% for the
three months ended September 30, 2001 and was 6.85% for the nine months ended
September 30, 2002 as compared to 7.90% for the same period in 2001. Average
yields also were lower on our investment securities and mortgage-backed
securities during the three months and the nine months ended September 30,
2002 compared to the same periods in 2001.
19
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Interest Expense. Our total interest expense for the three and nine
months ended September 30, 2002 was $11.3 million and $33.3 million,
respectively, compared to $13.7 million and $44.9 million for the three months
and nine months ended September 30, 2001, respectively. The primary reason
for the decrease in our interest expense during 2002 was a reduction in the
average rate on deposits to 2.86% and 2.93% during the three and nine months
ended September 30, 2002, respectively, compared to 4.14% and 4.74% during the
same periods in 2001 combined with the continued emphasis on increasing the
amount of core deposits. The average rate on our certificates of deposit was
3.99% and 4.01% for the three months and the nine months ended September 30,
2002, respectively, compared to 5.25% and 5.84% for the same periods in 2001.
The average rates on our interest-bearing checking accounts, money market
accounts and savings accounts also declined during the 2002 periods compared
to the same periods in 2001. Interest expense on FHLB advances and other
borrowings increased by $756,000 and $2.4 million during the three and nine
months ended September 30, 2002 compared to the same periods in 2001 as a
result of a higher average balance of borrowings in 2002 which more than
offset a reduction in the average rate paid. The average balance of
borrowings increased in 2002 as the Bank continued to fund loan growth in part
through borrowings in connection with the implementation of its business plan.
20
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Average Balances, Net Interest Income, and Yields Earned and Rates Paid.
The following tables show for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as
well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. Tax-exempt
income and yields have not been adjusted to a tax-equivalent basis. All
average balances are based on month end balances. Management does not believe
that the monthly averages differ significantly from what the daily averages
would be.
Three Months Ended September 30,
-----------------------------------------------------------------------
2002 2001
------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(dollars in thousands)
Interest-earning assets:
Federal funds sold $ 26,430 $ 113 1.71% $ 46,113 $ 430 3.73%
Investment securities 57,612 628 4.36 65,594 1,083 6.60
Mortgage-backed securities 35,258 472 5.35 64,084 915 5.71
Loans receivable 1,504,440 25,329 6.73 1,216,714 23,653 7.78
---------- ------- ---------- --------
Total interest-earning assets 1,623,740 26,542 6.54% 1,392,505 26,081 7.49%
------- ------ -------- ------
Non-interest-earning assets 56,261 52,469
---------- ----------
Total assets $1,680,001 $1,444,974
========== ==========
Interest-bearing liabilities:
Interest-bearing checking accounts $ 283,773 $ 1,223 1.72% $ 187,408 $ 1,188 2.54%
Regular savings accounts 15,626 50 1.28 11,844 46 1.55
Money market accounts 286,073 1,418 1.98 304,751 2,391 3.14
Certificate accounts 525,944 5,250 3.99 570,463 7,489 5.25
---------- ------- ---------- --------
Total interest-bearing deposits 1,111,416 7,941 2.86 1,074,466 11,114 4.14
FHLB advances and other borrowings 296,786 3,323 4.48 197,657 2,567 5.19
---------- ------- ---------- --------
Total interest-bearing liabilities 1,408,202 11,264 3.20 1,272,123 13,681 4.30
------- ------ -------- ------
Non-interest-bearing accounts 31,293 24,796
Other liabilities 107,998 31,609
---------- ----------
Total liabilities 1,547,493 1,328,528
Retained earnings 132,508 116,446
---------- ----------
Total liabilities and retained earnings $1,680,001 $1,444,974
========== ==========
Net interest-earning assets $ 215,538 $ 120,382
========== ==========
Net interest income; average interest
rate spread $15,278 3.34% $ 12,400 3.19%
======= ====== ======== ======
Net interest margin 3.76% 3.56%
====== ======
Average interest-earning assets to
average interest-bearing liabilities 115.31% 109.46%
====== ======
21
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Nine Months Ended September 30,
-----------------------------------------------------------------------
2002 2001
------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(dollars in thousands)
Interest-earning assets:
Federal funds sold $ 24,006 $ 310 1.72% $ 36,982 $ 1,143 4.12%
Investment securities 67,639 2,254 4.44 78,889 4,065 6.87
Mortgage-backed securities 36,728 1,539 5.59 64,865 3,008 6.18
Loans receivable 1,410,569 72,480 6.85 1,193,255 70,666 7.90
---------- ------- ---------- -------
Total interest-earning assets 1,538,942 76,583 6.64% 1,373,991 78,882 7.65%
------- ------ ------- ------
Non-interest-earning assets 52,137 42,709
---------- ----------
Total assets $1,591,079 $1,416,700
========== ==========
Interest-bearing liabilities:
Interest-bearing checking accounts $264,046 $3,627 1.83% $166,924 $3,663 2.93%
Regular savings accounts 14,580 140 1.28 10,948 129 1.57
Money market accounts 287,419 4,391 2.04 308,096 8,737 3.78
Certificate accounts 525,283 15,805 4.01 580,357 25,408 5.84
---------- ------- ---------- -------
Total interest-bearing deposits 1,091,328 23,963 2.93 1,066,325 37,937 4.74
FHLB advances and other borrowings 263,964 9,347 4.72 181,458 6,988 5.13
---------- ------- ---------- -------
Total interest-bearing liabilities 1,355,292 33,310 3.28 1,247,783 44,925 4.80
------- ------ ------- ------
Non-interest-bearing accounts 28,608 21,777
Other liabilities 79,090 34,054
---------- ----------
Total liabilities 1,462,990 1,303,614
Retained earnings 128,089 113,086
---------- ----------
Total liabilities and retained earnings $1,591,079 $1,416,700
========== ==========
Net interest earning assets $ 183,650 $ 126,208
========== ==========
Net interest income; average interest
rate spread $43,273 3.36% $33,957 2.85%
======= ====== ======= ======
Net interest margin 3.75% 3.30%
====== ======
Average interest-earning assets to
average interest-bearing liabilities 113.55% 110.11%
====== ======
22
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Rate/Volume Analysis. The following table shows the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities affected our interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
rate (change in rate multiplied by prior year volume) and (2) changes in
volume (change in volume multiplied by prior year rate). The combined effect
of changes in both rate and volume has been allocated proportionately to the
change due to rate and the change due to volume.
Three Months Ended September 30, 2002 vs. Nine Months Ended September 30, 2002 vs.
Three Months Ended September 30, 2001 Nine Months Ended September 30, 2001
---------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------- --------------------
Total Increase Total Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ -------------- ---- ------ --------------
(dollars in thousands)
Interest income:
Federal funds sold $ (177) $ (140) $ (317) $ (520) $ (313) $ (833)
Investment securities (335) (120) (455) (1,290) (521) (1,811)
Mortgage-backed securities (54) (389) (443) (267) (1,202) (1,469)
Loans receivable, net (2,190) 3,866 1,676 (4,822) 6,636 1,814
------- ------ ------ ------ ------ ------
Total interest-earning assets (2,756) 3,217 461 (6,899) 4,600 (2,299)
------- ------ ------ ------ ------ ------
Interest expense:
Interest-bearing checking accounts (58) 93 35 65 (101) (36)
Savings accounts (5) 9 4 (14) 25 11
Money market accounts (834) (139) (973) (3,794) (552) (4,346)
Certificate accounts (1,689) (550) (2,239) (7,368) (2,235) (9,603)
------- ------ ------ ------ ------ ------
Total deposits (2,586) (587) (3,173) (11,111) (2,863) (13,974)
FHLB advances and other borrowings (287) 1,043 756 (508) 2,867 2,359
------- ------ ------ ------ ------ ------
Total interest-bearing liabilities (2,873) 456 (2,417) (11,619) 4 (11,615)
------- ------ ------ ------ ------ ------
Increase in net interest income $ 117 $2,761 $2,878 $4,720 $4,596 $9,316
======= ====== ====== ====== ====== ======
23
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Provision for Loan Losses. We made a provision for loan losses of $1.3
million for the three months ended September 30, 2002 compared to $953,000 for
the three months ended September 30, 2001. For the nine months ended
September 30, 2002, our provision for loan losses was $2.5 million as compared
to $1.9 million for the same period in 2001. Our portfolios of commercial
real estate and land loans, construction loans (both residential and
commercial), commercial business loans and consumer loans, which generally are
deemed to have higher inherent levels of known and inherent losses than
single-family residential mortgage loans, due to, among other things, the
nature of the collateral, the areas in which the security property is located
and the dependency on economic conditions for successful completion or
operation of the project, have continued to grow, both in terms of total
dollar amounts and as a percentage of our total loan portfolio. Such loans
totaled $923.1 million or 52.4% of the total loan portfolio as compared to
$716.2 million or 47.2% at December 31, 2001. At September 30, 2002, our
total non-performing assets amounted to $3.6 million compared to $1.8 million
at December 31, 2001. The increase in non-performing assets was due primarily
to a $1.7 million increase in non-accrual single-family residential mortgage
loans substantially all of which related to loans we took possession of from a
broker participating in our mortgage warehouse line of credit program. During
the three and nine months ended September 30, 2002, we charged off an
aggregate of $461,000 and $839,000, respectively, of loans, primarily related
to consumer loans, and had $34,000 and $60,000, respectively, in recoveries of
previous charge-offs.
Other Income. Our other income decreased by $93,000, or 3.1%, to $2.9
million for the three months ended September 30, 2002 compared to $3.0 million
for the three months ended September 30, 2001. For the nine months ended
September 30, 2002, such income amounted to $9.2 million as compared to $8.3
million for the same period in 2001, an 11.1% increase. The primary reason
for the decrease in other income for the three months ended September 30, 2002
was a $1.1 million increase to the valuation allowance on our mortgage
servicing rights. We increased our mortgage servicing rights valuation
allowance due to increased prepayments in our loan servicing portfolio due to
the current low interest rate environment and the likelihood of its
continuation. For the nine months ended September 30, 2002, the $919,000
increase in other income over the same period in 2001 reflected a $1.1 million
increase in fee and service charges due primarily to the increase in
transaction accounts as well as an $873,000 increase in gains on sale of
loans, substantially all of which consist of long-term fixed-rate single-
family mortgages sold with servicing retained, offset in part by a $1.6
million increase in the valuation allowance on our mortgage servicing rights.
Other Expense. Our other expense increased by $886,000, or 9.7%, to
$10.0 million for the three months ended September 30, 2002 compared to $9.1
million for the three months ended September 30, 2001. The primary reasons
for the increase in other expense for the three months ended September 30,
2002 were a $362,000 increase in advertising expense, a $269,000 increase in
24
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
other operating expense and a $519,000 increase in salaries and employee
benefits due to an increase in the number of staff, increased health insurance
costs and normal salary increases. During the nine months ended September 30,
2002, our other expense increased $3.8 million, or 14.5%, to $29.7 million
compared to $26.0 million for the same period in 2001 in large part due to
expenses incurred in connection with our name change to TierOne Bank in early
2002, the promotion of our "High Performance" checking product line and
increased employee salary and benefit expense as previously discussed.
Income Tax Expense. Our income tax expense increased by $588,000 to
$2.5 million and by $2.2 million to $7.3 million for the three and nine months
ended September 30, 2002, respectively, compared to the same periods in 2001.
The increases in income tax expense in the three-and nine-month periods ended
September 30, 2002 over the comparable periods in the prior year primarily
reflect the increases in net income.
Liquidity and Commitments
Our primary sources of funds are from deposits, amortization of loans,
loan and investment security prepayments and the maturity of loans, mortgage-
backed securities and other investments, and other funds provided from
operations. While scheduled payments from the amortization of loans and
mortgage-backed securities and maturing investment securities are relatively
predictable sources of funds, deposit flows and loan prepayments can be
greatly influenced by general interest rates, economic conditions and
competition. We also maintain excess funds in short-term, interest-bearing
assets that provide additional liquidity. TierOne Bank also utilizes outside
borrowings, primarily from the FHLBank Topeka (formerly known as the Federal
Home Loan Bank of Topeka), as an additional funding source.
We use our liquidity to fund existing and future loan commitments, to
fund maturing certificates of deposit and demand deposit withdrawals, to
invest in other interest-earning assets, and to meet operating expenses. At
September 30, 2002, we had certificates of deposit maturing within the next 12
months amounting to $372.6 million. Based upon historical experience, we
anticipate that a significant portion of the maturing certificates of deposit
will be redeposited with us.
In addition to cash flow from loan and securities payments and
prepayments as well as from sales of available for sale securities, we have
significant borrowing capacity available to fund our liquidity needs. We have
increased our utilization of borrowings in recent years as a cost efficient
addition to deposits as a source of funds. The average balance of our
borrowings was $296.8 million and $264.0 million for the three and nine months
ended September 30, 2002, respectively, compared to $197.7 million and $181.5
million for the same periods in 2001. To date, substantially all of our
borrowings have consisted of advances from the FHLBank Topeka, of which we are
a member.
25
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Under terms of the collateral agreement with the FHLBank Topeka, we
pledge residential mortgage loans and mortgage-backed securities as well as
our stock in the FHLBank Topeka as collateral for such advances.
We have not used, and have no present intention to use, any significant
off-balance sheet financing arrangements for liquidity purposes. Our primary
financial instruments with off-balance sheet risk are limited to loan
servicing for others, our obligations to fund loans to customers pursuant to
existing commitments and commitments to purchase and sell mortgage loans. In
addition, we have certain risks due to limited recourse arrangements on loans
serviced for others. At September 30, 2002, the maximum total amount of such
recourse was approximately $4.9 million. Based on historical experience, at
September 30, 2002, we had established a reserve of $332,000 with respect to
this recourse obligation. In addition, we have not had, and have no intention
to have, any significant transactions, arrangements or other relationships
with any unconsolidated, limited purpose entities that could materially affect
our liquidity or capital resources. We have not traded, and do not intend to
trade, in commodity contracts.
We anticipate that we will continue to have sufficient funds and
alternative funding sources to meet our current commitments.
26
TierOne Bank and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Selected Operating Ratios
Set forth below are selected operating ratios of the Bank for the three
and nine months ended September 30, 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Average yield on interest-earning assets 6.54% 7.49% 6.64% 7.65%
Average rate on interest-bearing liabilities 3.20 4.30 3.28 4.80
Average interest rate spread 3.34 3.19 3.36 2.85
Net interest margin 3.76 3.56 3.75 3.30
Average interest-earning assets to average
interest-bearing liabilities 115.31 109.46 113.55 110.11
Net interest income after provision for loan
losses to noninterest expense 139.70 125.14 137.19 123.42
Total noninterest expense to average assets 2.39 2.53 2.49 2.45
Efficiency ratio 55.15 59.37 56.69 61.51
Return on average assets 1.05 0.94 1.09 0.87
Return on average equity 13.31 11.71 13.48 10.90
Average equity to average assets 7.89 8.06 8.05 7.98
27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.
For a discussion of the Bank's asset and liability management policies
as well as the methods used to manage its exposure to the risk of loss from
adverse changes in market prices and rates market, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations How
We Manage Our Risks" and "Quantitative and Qualitative Disclosures About
Market Risk" in the Company's Prospectus dated August 12, 2002. There has
been no material change in the Bank's asset and liability position or the
market value of the Bank's equity since March 31, 2002.
Item 4 - Controls and Procedures.
Our chief executive officer and chief financial officer directly
supervised and participated in evaluating the effectiveness of the design and
operation of our disclosure controls and procedures (which evaluation was
conducted within 90 days of the filing date of this quarterly report) and
concluded that these controls and procedures are effective. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Securities Exchange Act of 1934
(the "Exchange Act") is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
There are no matters required to be reported under this item. Reference
is made to the Bank's ongoing litigation regarding its goodwill claims against
the U.S. Government as described in "Business of TierOne Bank Legal
Proceedings" in the Company's Prospectus dated August 12, 2002. There is no
change in the status of the litigation.
Item 2 - Changes in Securities and Use of Proceeds.
(a), (b) and (c) Not applicable.
28
(d) Use of Proceeds
(1) The effective date of the Company's Form S-1 was August 12,
2002; and the Commission file number was 333-85838.
(2) The offering commenced on August 22, 2002.
(3) Not applicable.
(4) (i) The offering subscription period ended on September
12, 2002;
(ii) The name of the managing underwriter: Sandler O'Neill
& Partners, L.P.;
(iii) Common stock, par value $.01 per share was registered;
(iv) Amount registered - 22,575,075 shares;
Aggregate price of offering amount registered -
$225,750,750;
Amount sold - 22,075,075 shares; and
Aggregate offering price of stock sold -
$220,750,750;
(v) Expenses of the offering which were direct or indirect
payments to others:
Estimated expenses paid to or for the underwriter -
$2,226,023;
Estimated other expenses - $2,187,767; and
Estimated total expenses - $4,413,790;
(vi) Estimated net offering proceeds - $216,336,960; and
(vii) Direct or indirect payments to others - None.
Item 3 - Defaults Upon Senior Securities.
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders.
There are no matters required to be reported under this item.
Item 5 - Other Information.
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K.
(a) List of exhibits: (filed herewith unless otherwise noted)
2.1 Plan of Conversion, as amended*
3.1 Articles of Incorporation of TierOne Corporation*
3.2 Bylaws of TierOne Corporation*
4.0 Form of Stock Certificate of TierOne Corporation*
29
10.1 Employment Agreement between TierOne Bank and Gilbert G.
Lundstrom*
10.2 Employment Agreement between TierOne Bank and James A.
Laphen*
10.3 Form of Proposed Employment Agreement between TierOne
Corporation and Gilbert G. Lundstrom*
10.4 Form of Proposed Employment Agreement between TierOne
Corporation and James A. Laphen*
10.5 Supplemental Retirement Plan*
10.6 Form of Proposed Change in Control Agreement between TierOne
Bank and certain executive officers*
10.7 Form of Proposed Change in Control Agreement between TierOne
Bank and certain executive officers*
10.8 Form of Proposed TierOne Bank Employee Severance Plan*
10.9 Form of Proposed Employee Stock Ownership Plan Supplemental
Executive Retirement Plan*
10.10 Form of Proposed 401(k) Plan Supplemental Executive
Retirement Plan*
10.11 Directors' Deferred Compensation Program*
10.12 Amended and Restated Consultation Plan for Directors*
10.13 Management Incentive Compensation Plan*
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
__________________
* Incorporated by reference from the Company's Registration Statement on
Form S-1, filed on April 3, 2002, as amended, and declared effective
on August 12, 2002 (File No. 333-85838).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
quarter ended September 30, 2002.
30
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.
TIERONE CORPORATION
Date: November 14, 2002 By: /s/ Gilbert G. Lundstrom
-----------------------------------
Gilbert G. Lundstrom
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2002 By: /s/ Eugene B. Witkowicz
-----------------------------------
Eugene B. Witkowicz
Executive Vice President and
Chief Financial Officer
31
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gilbert G. Lundstrom, the Chairman of the Board and Chief Executive Officer
of TierOne Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TierOne Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
32
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Gilbert G. Lundstrom
-----------------------------------
Gilbert G. Lundstrom
Chairman of the Board and Chief
Executive Officer
33
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eugene B. Witkowicz, the Executive Vice President and Chief Financial
Officer of TierOne Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TierOne Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
34
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Eugene B. Witkowicz
-----------------------------------
Eugene B. Witkowicz
Executive Vice President
and Chief Financial Officer
35