Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-50015
TIERONE CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Wisconsin 04-3638672
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1235 "N" Street
Lincoln, Nebraska 68508
- --------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 475-0521
Common Stock, $.01 par value
----------------------------
Title of Class
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 and (2) has been subject to such filing requirements for
the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The aggregate market value of the 22,056,555 shares of the Registrant's Common
Stock held by non-affiliates (22,575,075 shares outstanding less 518,520 shares
held by affiliates), based upon the closing price of $14.00 for the Common Stock
on October 2, 2002, the date the Registrant's Common Stock commenced trading on
the Nasdaq Stock Market, was approximately $308.8 million. Shares of Common
Stock held by each executive officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded since such persons
may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Number of shares of Common Stock outstanding as of March 31, 2003: 22,575,075
DOCUMENTS INCORPORATED BY REFERENCE
Set forth below are the documents incorporated by reference and the part
of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 2002 are incorporated by reference into Part II, Items 5-8 and Part
IV, Item 15 of this Form 10-K.
(2) Portions of the definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-13 of
this Form 10-K.
PART I
Item 1. Business.
General
TierOne Corporation is a Wisconsin corporation headquartered in Lincoln,
Nebraska. TierOne Corporation became the bank holding company for TierOne Bank
in connection with the public stock conversion of TierOne Bank in October 2002.
TierOne Bank operates from 58 banking offices located in Nebraska, southwest
Iowa and northern Kansas and two loan production offices in Colorado. As of
December 31, 2002, we had $1.9 billion of total assets, $1.1 billion of deposits
and $339.9 million of shareholders' equity. Our shareholders' equity represented
17.5% of total assets as of December 31, 2002.
As used in this report, unless the context otherwise requires, the terms
"we," "us," or "our" refer to TierOne Corporation, a Wisconsin corporation, and
its wholly owned subsidiary, TierOne Bank, a federally chartered stock savings
bank.
Our principal business is gathering deposits from the general public in
our primary market area surrounding our 58 banking offices and investing those
deposits, together with funds generated from operations and borrowings, in loans
and investment securities. In the mid-1990s we revised our management strategy
and commenced efforts to evolve into a community bank. Highlights of our revised
management strategy, which is designed to increase our profitability, include:
o increasing the yield on our loan portfolio and reducing our exposure to
interest rate risk while maintaining high credit quality;
o growing our core deposits and reducing our costs of funds; and
o increasing other income through increased transaction fees, gains on loan
sales and fee income from non-traditional products such as annuities and
securities.
In recent years, we have significantly increased our emphasis on
commercial real estate and land loans, construction loans, warehouse mortgage
lines of credit and consumer loans. These loans typically have higher yields
compared to single-family residential mortgage loans and have adjustable rates
of interest and/or shorter terms to maturity. At December 31, 2002, our
commercial real estate and land loans, construction loans, warehouse mortgage
lines of credit and consumer loans amounted to $1.2 billion in the aggregate or
64.1% of our total loan portfolio at such date compared to an aggregate of
$928.1 million or 61.2% of our total loan portfolio at December 31, 2001. The
remainder of our loan portfolio consisted of one- to four-family residential
mortgage loans, multi-family residential mortgage loans and commercial business
loans which amounted to $686.5 million, or 35.9% of the total loan portfolio and
$588.9 million, or 38.8% of the total loan portfolio, at December 31, 2002 and
2001, respectively.
1
We originate loans to customers in Nebraska, Iowa, Kansas and Colorado.
However, due to relatively limited demand for certain loan products in our
primary market area of Nebraska, southwest Iowa and northern Kansas, we also
purchase loans and loan participation interests from financial institutions,
loan correspondents and brokers throughout the United States. At December 31,
2002, approximately 60.4% of our loan portfolio was secured by properties or
made to individuals located outside our primary market area. We purchase
adjustable-rate single-family residential mortgage loans for our portfolio while
selling newly originated fixed-rate single-family mortgage loans (with servicing
retained). Our loan sales produce non-interest income in the form of gains on
sales and loan servicing fees. We also have developed relationships with several
financial institutions from which we purchase commercial real estate and
construction loans or participation interests in such loans. In addition, we
originate warehouse mortgage lines of credit with a number of mortgage brokerage
firms located throughout the United States.
In order to effectively manage our diversifying loan portfolio, we have
hired a number of additional loan officers in recent years with experience in
construction, commercial real estate, consumer and business lending. We endeavor
to ensure that all of our loans, whether originated by us or purchased, are in
compliance with our own underwriting standards or standards which are
substantially similar to ours.
In addition to our loan activities, we focus on our deposit products,
particularly core deposits such as checking accounts, and the sale of other
products such as annuities and securities.
Our revenues are derived principally from interest on our loans, and to a
lesser extent, interest and dividends on our investment and mortgage-backed
securities, and non-interest income. Our primary sources of funds are deposits,
principal and interest payments on loans, investment securities, mortgage-backed
securities, advances from the Federal Home Loan Bank of Topeka and proceeds from
the sale of loans.
Forward-Looking Statements
In the normal course of business, TierOne Corporation, in an effort to
help keep our shareholders and the public informed about our operations, may
from time to time issue or make certain statements, either in writing or orally,
that are or contain forward-looking statements, as that term is defined in the
federal securities laws. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits from potential acquisitions,
projections involving anticipated revenues, earnings, profitability or other
aspects of operating results or other future developments in our affairs or the
industry in which we conduct business. These forward-looking statements, which
are based on various assumptions (some of which are beyond our control), may be
identified by reference to a future period or periods or by the use of
forward-looking terminology such as "anticipate," "believe," "commitment,"
"consider," "continue," "could," "encourage," "estimate," "expect," "intend,"
"in the event of," "may," "plan," "present," "propose," "prospect," "update,"
"whether," "will," "would," future or conditional verb tenses, similar terms,
variations on such terms or negatives of such terms. Although we believe that
the anticipated results or other
2
expectations reflected in such forward-looking statements are based on
reasonable assumptions, we can give no assurance that those results or
expectations will be attained. Actual results could differ materially from those
indicated in such statements due to risks, uncertainties and changes with
respect to a variety of factors, including, but not limited to, the following:
competitive pressure among depository and other financial institutions may
increase significantly; changes in the interest rate environment may reduce
interest margins and net interest income, as well as adversely affect loan
originations and sales activities and the value of certain assets, such as
investment securities; general economic or business conditions, either
nationally or in regions in which we do business, may be less favorable than
expected, resulting in, among other things, a deterioration in credit quality or
a reduced demand for credit; legislation or changes in regulatory requirements,
including without limitation, capital requirements, or accounting standards may
adversely affect us and the business in which we are engaged; adverse changes
may occur in the securities markets; our competitors may have greater financial
resources and develop products and technology that enable those competitors to
compete more successfully than us; and the growth and profitability of our
noninterest income may be less than expected.
We undertake no obligation to update forward-looking statements to reflect
events or circumstances occurring after the date of this report on Form 10-K.
Available Information
TierOne Corporation is a public company and files annual, quarterly and
special reports, proxy statements and other information with the Securities and
Exchange Commission. Our SEC filings are available to the public at the SEC's
web site at http://www.sec.gov. Members of the public may also read and copy any
document we file at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents by writing to
the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the Public Reference
Room. In addition, our stock is listed for trading on the Nasdaq National Market
and trades under the symbol "TONE." You may find additional information
regarding TierOne Corporation at www.nasdaq.com. In addition to the foregoing,
we maintain a web site at www.tieronebank.com. We make available on our Internet
web site copies of our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and any amendments to such documents as soon
as reasonably practicable after we file such material with or furnish such
documents to the SEC.
Market Area and Competition
We are a community-oriented bank offering a variety of financial products
and services to meet the needs of the customers we serve. Our deposit gathering
is concentrated in the communities surrounding our 58 banking offices located in
Nebraska, seven counties in southwest Iowa and two counties in northern Kansas.
Although in the past we have invested primarily in residential loans secured by
mortgages on properties located in our primary market area, in recent years we
have increased our investment in commercial real estate, land and construction
loans secured by properties
3
located in other parts of the United States. The five largest concentrations of
loans outside our primary market area (excluding warehouse mortgage lines of
credit) are New York ($153.7 million or 8.0% of the total loan portfolio, which
consists primarily of loans secured by properties in the New York City
metropolitan area), California ($104.7 million or 5.5%), Washington State ($70.6
million or 3.7%), Colorado ($67.5 million or 3.5%) and Arizona ($59.2 million or
3.1%). We have also purchased pools aggregating $334.0 of adjustable-rate
single-family residential loans in order to increase the interest-rate
sensitivity of our loan portfolio.
Our corporate headquarters is located in Lincoln, Nebraska, which is the
state capital and home of the University of Nebraska-Lincoln. The region in
which our banking offices are located was once dominated by agriculture, but now
consists of a diverse blend of industries, urban centers, and significant
corporate investment. The region's population is 1.9 million persons and more
than 90% of the individuals in our primary market area live in Nebraska. The
region continues to experience a migration from rural communities to the Omaha
and Lincoln metropolitan areas, as well as other mid-sized regional growth
centers scattered throughout our primary market area. According to the 2000
Census, the median household income in Nebraska was approximately $37,900, while
the per capita income was approximately $19,800, in each case more than 45%
higher than the amounts at the time of the 1990 Census.
Even with a modest national slowdown, the state of the Nebraska economy
remains relatively resilient despite a growing state budget deficit and a severe
drought which has impacted several states throughout the Midwest. Nebraska
non-farm employment growth has been relatively consistent and continues to
experience modest gains despite more cyclical volatility in the national
economy. The trade and government sectors have exhibited the strongest growth
and have helped offset recent declines in manufacturing. Unemployment rates in
Nebraska have historically been two to three percentage points below national
averages. Net taxable retail sales in 2002 continue to grow to record levels but
lag previous years' growth rates. Motor vehicle sales, despite a slowdown in the
fourth quarter, remained strong during 2002. Sales of existing homes in
Nebraska's two leading urban markets (Omaha and Lincoln) remain at or near
record levels with major developments of new home construction underway in both
communities. Median home values of $109,200 in Omaha at December 31, 2001, the
latest available figures, are below national levels of $134,100 and
significantly less than the Minneapolis ($118,700), Dallas ($125,700), Denver
($145,400) and Chicago ($158,200) metropolitan areas. Major capital developments
along Omaha's riverfront and in Lincoln's downtown area combined with other
investment projects scattered throughout the primary market region are expected
to contribute to a modest, but growing regional economy for the foreseeable
future.
We expanded our physical presence in late 2002 with the opening of a loan
production office in Colorado Springs, Colorado and a second loan production
office in early 2003 in the Denver metropolitan area. These offices were
established to build upon our growing commercial real estate and construction
lending business and were located in metropolitan areas known for economic
growth and vitality. The Denver metropolitan area, with a 2000 Census population
of nearly 2.6 million people, has grown to become the 19th largest metropolitan
area in the United States and
4
ranks among the fastest growing metropolitan areas in the nation. Denver's
diverse economy is driven by telecommunications and biomedical technology; two
of the city's largest industries, with construction, real estate and retail
trade among the fastest growing. Unemployment in metropolitan Denver was 5.5% in
2002 and was nearly identical to national levels. The Colorado Springs
metropolitan area, with nearly 517,000 residents, grew more than 30.2% during
the 1990's nearly matching Denver's 30.4% growth rate during the same period.
While tourism remains one of the leading industries and contributed $1.2 billion
in 2002, electronics, high-technology and manufacturing have become major
sectors in Colorado Springs' growing economy. The presence of various military
installations has provided regional employment stability. Colorado Springs had
record average total employment in 2002 with unemployment levels slightly above
national levels of nearly 6.0%.
We face significant competition, both in generating loans as well as in
attracting deposits. Our primary market area is highly competitive and we face
direct competition from a significant number of financial service providers,
many with a state-wide or regional presence and, in some cases, a national
presence. In recent years, our market area has experienced continued
consolidation of the banking industry as locally based institutions have been
acquired by large regional and nationally based financial institutions.
Many of these financial service providers are significantly larger than us
and have greater financial resources. Our competition for loans comes
principally from commercial banks, savings banks, credit unions, mortgage
brokers, mortgage-banking companies and insurance companies. Our most direct
competition for deposits has historically come from savings associations,
commercial banks and credit unions. In addition, we face increasing competition
for deposits from non-bank institutions such as brokerage firms and insurance
companies in such instruments as short-term money market funds, corporate and
government securities funds, equity securities, mutual funds and annuities.
Lending Activities
Loan Portfolio Composition. A significant amount of our loan portfolio
continues to consist of first mortgage loans secured by single-family
residential properties. At December 31, 2002, our total loans receivable was
$1.9 billion, of which $573.2 million or 30.0% consisted of single-family
residential mortgage loans. Although the amount of such loans has remained
relatively stable (single-family residential loans totaled $502.5 million at
December 31, 2001), the percentage of our portfolio accounted for by such loans
has declined from 33.1% of our total loan portfolio at December 31, 2001 to
30.0% at December 31, 2002 as we have restructured our loan portfolio as a
result of our decision to increase our emphasis on commercial real estate and
land, commercial and residential construction and consumer lending as well as
warehouse mortgage lines of credit. In furtherance of our goals of increasing
the interest-rate sensitivity of the loans in our loan portfolio, we sell
essentially all newly originated fixed-rate single-family residential mortgage
loans. The emphasis on construction, commercial and multi-family real estate and
consumer lending has also allowed us to reduce the weighted average contractual
maturity of our loan portfolio. As a result of
5
implementing this strategy, at December 31, 2002, more than 68.8% of our total
loan portfolio had contractual maturities of 10 years or less while more than
68.2% of our total loan portfolio had adjustable interest rates.
As a result of the shift in emphasis, aggregate construction loans
(including undisbursed loans in process) have increased from $208.9 million or
13.8% of our total loan portfolio at December 31, 2001 to $299.3 million or
15.7% of our total loan portfolio at December 31, 2002. Our investment in
commercial real estate and land loans has also increased, from $258.3 million at
December 31, 2001 to $398.1 million at December 31, 2002. We also continued to
expand our involvement in providing warehouse mortgage lines of credit to
brokers. Such lending increased from $224.1 million or 14.8% of our total loan
portfolio at December 31, 2001 to $236.5 million or 12.4% of the total loan
portfolio at December 31, 2002. Warehouse mortgage lending advances in the
aggregate totaled $4.4 billion in 2002 compared to $3.8 billion in 2001 due to
the continued mortgage refinance activity.
The types of loans that we may purchase and originate are subject to
federal and state laws and regulations. The interest rates we charge on loans
are affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"), and legislative tax policies.
6
Loan Portfolio Composition. The following table shows the composition of
our loan portfolio by type of loan at the dates indicated.
December 31
-----------------------------------------------------------------------------
2002 2001 2000
---------------------- --------------------- ----------------------
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
(Dollars in Thousands)
Real estate loans:
One- to four-family residential(1) $ 573,209 30.00% $ 502,502 33.13% $ 565,441 46.75%
Multi-family residential 79,953 4.18 74,209 4.89 67,025 5.54
Commercial real estate and land 398,076 20.83 258,277 17.03 210,654 17.42
Residential construction 156,322 8.18 113,300 7.47 77,421 6.40
Commercial construction 143,020 7.49 95,614 6.30 46,187 3.82
---------- ----- ---------- ----- ---------- -----
Total real estate loans 1,350,580 70.68 1,043,902 68.82 966,728 79.93
---------- ----- ---------- ----- ---------- -----
Commercial business 33,375 1.75 12,193 0.80 2,755 0.23
Warehouse mortgage lines of credit 236,492 12.38 224,067 14.77 37,173 3.07
Consumer loans:
Home equity 37,522 1.96 45,398 2.99 57,264 4.74
Home equity line of credit 94,801 4.96 61,839 4.08 38,700 3.20
Home improvement 82,081 4.30 76,555 5.05 76,015 6.29
Automobile 60,707 3.18 42,547 2.80 22,496 1.86
Other 15,131 0.79 10,486 0.69 8,283 0.68
---------- ----- ---------- ----- ---------- -----
Total consumer loans 290,242 15.19 236,825 15.61 202,758 16.77
---------- ----- ---------- ----- ---------- -----
Total loans 1,910,689 100.00% 1,516,987 100.00% 1,209,414 100.00%
====== ====== ======
Less:
Unearned premiums and discounts 4,688 558 30
Discounts on loans acquired
through merger (174) (270) (336)
Undisbursed portion of
construction loans in process (123,331) (109,852) (70,625)
Deferred loan fees (516) (520) (462)
Allowance for loan losses (17,108) (13,464) (9,947)
---------- ---------- ----------
Net loans $1,774,248 $1,393,439 $1,128,074
========== ========== ==========
December 31
----------------------------------------------
1999 1998
--------------------- --------------------
Amount % Amount %
---------- ------ -------- -----
Real estate loans:
One- to four-family residential(1) $ 552,129 54.06% $507,586 55.69%
Multi-family residential 61,140 5.99 52,278 5.73
Commercial real estate and land 152,768 14.96 123,475 13.55
Residential construction 41,558 4.07 35,086 3.85
Commercial construction 6,800 0.66 7,220 0.79
---------- ------ -------- -----
Total real estate loans 814,395 79.74 725,645 79.61
---------- ------ -------- -----
Commercial business 1,956 0.19 1,781 0.20
Warehouse mortgage lines of credit 24,420 2.39 46,154 5.06
Consumer loans:
Home equity 43,683 4.28 35,477 3.89
Home equity line of credit 34,716 3.40 27,366 3.00
Home improvement 73,441 7.19 53,466 5.87
Automobile 20,966 2.05 15,251 1.67
Other 7,733 0.76 6,347 0.70
---------- ------ -------- -----
Total consumer loans 180,539 17.68 137,907 15.13
---------- ------ -------- -----
Total loans 1,021,310 100.00% 911,487 100.00%
====== ======
Less:
Unearned premiums and discounts 698 533
Discounts on loans acquired
through merger (453) (614)
Undisbursed portion of
construction loans in process (23,484) (16,125)
Deferred loan fees (337) (1,081)
Allowance for loan losses (8,860) (7,834)
---------- --------
Net loans $ 988,874 $886,366
========== ========
- ----------
(1) Includes loans held for sale of $8.5 million, $14.4 million, $3.7 million,
$2.0 million and $3.1 million at December 31, 2002, 2001, 2000, 1999 and
1998, respectively.
7
Contractual Terms to Final Maturities. The following table shows the
scheduled contractual maturities of our loans as of December 31, 2002, before
giving effect to net items. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The amounts shown below do not take into account loan prepayments.
One- to Commercial
Four-Family Multi-family Real Estate Residential Commercial
Residential Residential and Land Construction Construction
----------- ------------ ----------- ------------ ------------
(In Thousands)
Amounts due after December 31, 2002 in:
One year or less $ 1,098 $ 16,163 $ 38,494 $ 129,447 $ 39,526
After one year through two years 894 8,042 32,706 12,265 33,480
After two years through three years 1,225 479 20,095 -- 3,200
After three years through five years 5,153 8,024 49,114 -- 24,675
After five years through ten years 39,455 36,113 237,542 -- 34,755
After ten years through fifteen years 37,726 11,132 16,958 371 7,384
After fifteen years 487,658 -- 3,167 14,239 --
---------- ---------- ---------- ---------- ----------
Total(1) $ 573,209 $ 79,953 $ 398,076 $ 156,322 $ 143,020
========== ========== ========== ========== ==========
Commercial Warehouse
Business Mortgage Lines
Loans of Credit Consumer Total
---------- -------------- ---------- ----------
(In Thousands)
Amounts due after December 31, 2002 in:
One year or less $ 8,275 $ 236,492 $ 22,352 $ 491,847
After one year through two years 8,639 -- 23,346 119,372
After two years through three years 5,269 -- 19,714 49,982
After three years through five years 6,308 -- 185,108 278,382
After five years through ten years 3,611 -- 23,648 375,124
After ten years through fifteen years 1,152 -- 15,668 90,391
After fifteen years 121 -- 406 505,591
---------- ---------- ---------- ----------
Total(1) $ 33,375 $ 236,492 $ 290,242 $1,910,689
========== ========== ========== ==========
- ----------
(1) Gross of loans in process, deferred fees, premiums and discounts, and
allowance for loan losses.
The following table shows the dollar amount of all loans, including loans
held for sale, before net items, due after one year from December 31, 2002 as
shown in the preceding table, which have fixed interest rates or which have
floating or adjustable interest rates.
Floating or
Fixed-Rate Adjustable-Rate Total
---------- --------------- ----------
(In Thousands)
One- to four-family residential $ 112,218 $ 459,893 $ 572,111
Multi-family residential 20,501 43,289 63,790
Commercial real estate and land 96,696 262,886 359,582
Residential construction 9,112 17,763 26,875
Commercial construction 61,258 42,235 103,493
Commercial business 14,512 10,589 25,101
Consumer 193,248 74,642 267,890
---------- ---------- ----------
Total $ 507,545 $ 911,297 $1,418,842
========== ========== ==========
8
Origination, Purchase, Sale and Servicing of Loans. Our lending activities
are subject to underwriting standards and loan origination procedures
established by our Board of Directors and management. Applications for mortgages
and other loans are taken at our banking and loan production offices. In the
past, we relied on a network of loan correspondents and brokers to originate a
substantial part of our loans. In recent years we have substantially expanded
our capacity to originate loans in-house through the hiring of a number of
experienced loan originators. We continue to use loan correspondents to
originate single-family residential loans for us. A substantial portion of such
loans consists of fixed-rate single-family residential mortgage loans which we
sell into the secondary market with servicing retained.
Although we originate both adjustable-rate and fixed-rate loans, our
ability to originate and purchase fixed or adjustable-rate loans is dependent
upon the relative customer demand for such loans, which is affected by the
current and expected future level of interest rates. The recent decline in
interest rates has increased our customer demand for fixed-rate loans. In order
to implement our strategy of building a mortgage loan portfolio that consists
primarily of adjustable-rate loans, our purchase activity has increased in
recent years. During the year ended December 31, 2002, we purchased a total of
$334.0 million of adjustable-rate single-family residential mortgage loans while
we originated an aggregate of $15.7 million of such loans. The loans purchased
for retention during this period consisted primarily of pools of adjustable-rate
jumbo single-family residential mortgage loans (loans in excess of secondary
market size limits of $322,700), commercial real estate and residential
construction loans and participation interests in such loans and consumer loans
(primarily home improvement loans and indirect automobile financing).
Generally, we originate adjustable-rate mortgage loans for our portfolio.
While we have in the past retained fixed-rate single-family loans, it is
currently our policy to sell substantially all the single-family fixed-rate
mortgage loans we originate or purchase. Substantially all of the loans sold are
sold to either Fannie Mae or Freddie Mac or the Federal Home Loan Bank of Topeka
pursuant to the Mortgage Partnership Finance program. Upon receipt of an
application to make a fixed-rate loan, we typically enter into agreements to
sell such loans to Fannie Mae, Freddie Mac or the Federal Home Loan Bank of
Topeka pursuant to forward sale commitments, with delivery being required in
approximately 90 days. We generally agree to deliver a somewhat smaller dollar
amount of loans in the event that not all the loans for which applications are
submitted actually close. Loans are delivered pursuant to such sale contracts
upon their origination or purchase and are not aggregated for sale as loan
packages. As a result, we typically do not have a significant amount of loans
held for sale at any given point in time. We recognize, at the time of
disposition, the gain or loss on the sale of the loans. The gain or loss is
based on the difference between the net proceeds received and the carrying value
of the loans sold. During 2002, we increased our purchases of fixed-rate
single-family residential mortgage loans for immediate sale when we decided to
increase the size of our servicing portfolio. While we purchased $15.6 million
of such loans in 2000, in 2001 and 2002 such purchases increased to $196.3
million and $339.2 million, respectively.
In recent years, we have developed primary lending relationships with
several financial institutions pursuant to which we have purchased whole loans
or loan participation interests secured
9
by properties located outside our market area. Most of such loans have consisted
of construction loans or participation interests in such loans, both residential
and commercial, as well as commercial real estate, and were originated under
underwriting guidelines substantially identical to our own guidelines. We
generally require the lead lender to maintain an interest in the loans, anywhere
from 5% to 50%, while our participation interest does not exceed 95%. Prior to
entering into such relationships, we conducted on-site due diligence of each
lender, including document review as well as management interviews. We also
conduct on-site inspections of selected properties and of market areas in which
the properties are located. In addition, we review each loan or loan
participation presented for purchase by the correspondent lender by applying our
own underwriting guidelines. We also review and underwrite, with respect to
construction loans, the individual builders to whom loans are being extended,
establishing a limit as to the total amount that we will lend to each such
builder. With respect to construction loans, we engage local inspectors to
inspect the progress of construction on properties securing such loans. We also
generally visit the lenders every three to six months to conduct follow-up
inspections of the lenders' operations as well as to review the collateral
property securing the loans or participations purchased by us. Of the primary
relationships, the first is with a mortgage broker in the Charleston and
Columbia, South Carolina markets. Pursuant to the relationship with this
mortgage broker, we have purchased loans made to local builders to finance the
construction of residential properties. Under the terms of our arrangement, the
mortgage broker shares 50% of any losses incurred on the loans purchased under
this arrangement and we service these loans. The second relationship is with a
financial institution headquartered in Birmingham, Alabama and involves the
purchase of generally a 50% loan participation interest in residential
construction loans and to a lesser extent, acquisition, development and
construction loans extended to builders. To date, the loans have been secured by
properties located in or surrounding Birmingham, Alabama, Atlanta, Georgia and
Jacksonville, Florida. A third relationship is with a financial institution in
Spokane, Washington, pursuant to which we have acquired participation interests,
generally 80% or less, primarily in commercial real estate, and to a lesser
extent, commercial construction loans. Most of the loans are secured by office
buildings, retail facilities and hotels located in various urban areas of Oregon
and Washington State including Portland, Oregon and Seattle and Spokane,
Washington. A substantial portion of loans purchased from the financial
institution in Spokane, Washington occurred in March 2002 and consisted of a 75%
to 80% participation interest in 25 commercial real estate loans totaling $54.0
million (with respect to our interest). We entered into a fourth relationship
with a life and health insurance company located in Portland, Oregon to purchase
up to a 95% participation interest in permanent loans secured by commercial real
estate located throughout the United States. In September 2002, we purchased 19
loans totaling $12.6 million (with respect to our interest) from this company. A
second transaction with this company was closed in December 2002 with the
purchase of 51 loans totaling $46.0 million. The loans in these packages are
secured by properties located primarily in California and Texas. At December 31,
2002, we held $293.4 million of loans and participations acquired through such
relationships. We have not incurred any losses on loans purchased through such
relationships as of December 31, 2002.
At December 31, 2002, we were servicing $730.1 million of loans for
others, primarily consisting of fixed-rate loans sold by us to investors. In
recent years, we began selling substantially
10
all loans with servicing retained in order to develop additional sources of
non-interest income. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagees, supervising foreclosures and property dispositions in the event of
unremedied defaults, remitting certain insurance and tax payments on behalf of
the borrowers and generally administering the loans. The gross servicing fee
income from loans sold is generally 0.25% to 0.50% of the total balance of each
loan serviced.
As a federal savings bank, we are limited in the amount of loans we can
make to any one borrower. This amount is equal to 15% of our unimpaired capital
and surplus (this amount was approximately $38.2 million at December 31, 2002),
although we are permitted to lend an additional 10% of unimpaired capital and
surplus if the loans are secured by readily marketable securities. Our aggregate
loans to any one borrower have been within these limits. At December 31, 2002,
our three largest credit relationships with an individual borrower and related
entities consisted of either commercial construction loans or land acquisition
and development loans that total $20.2 million, $17.5 million, and $15.0
million, respectively. The largest credit relationship consists of two
construction loans (a first mortgage of $16.2 million and a second mortgage of
$4.0 million) to build a 184 unit apartment complex in Des Moines, Iowa. The
second largest relationship consists of a construction loan to acquire the land
and build a specialized for-profit cardiac hospital in Lincoln, Nebraska, while
the third relationship is a land acquisition loan to acquire and develop a 557
acre parcel of land in Lincoln, Nebraska. Each of these relationships was
performing in accordance with its terms and conditions as of December 31, 2002.
For more information regarding these loans, see "Lending Activities -
Construction Lending" and "- Multi-Family Residential Real Estate, Commercial
Real Estate and Land Lending."
11
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31
-------------------------------------------------
2002 2001 2000
----------- ----------- -----------
(In Thousands)
Loan originations:
One- to four-family residential:
Adjustable-rate $ 15,647 $ 15,099 $ 19,654
Fixed-rate 224,530 190,952 50,611
Multi-family residential 6,243 14,360 4,300
Commercial real estate and land 75,889 54,017 59,670
Residential construction 100,599 73,539 69,518
Commercial construction 69,793 66,270 35,210
Commercial business 38,340 14,701 2,287
Warehouse mortgage lines of credit(1) 4,427,554 3,841,872 1,311,926
Consumer 133,379 99,086 86,034
----------- ----------- -----------
Total loan originations 5,091,974 4,369,896 1,639,210
----------- ----------- -----------
Loan purchases:
One- to four-family residential:
Adjustable-rate 333,999 134,349 132,981
Fixed-rate(2) 339,173 196,303 15,631
Multi-family residential 19,696 -- 6,025
Commercial real estate and land 120,291 22,208 15,364
Residential construction 97,949 41,413 27,461
Commercial construction 14,200 9,655 14,927
Commercial business -- -- 262
Consumer 85,249 73,891 32,173
----------- ----------- -----------
Total loan purchases 1,010,557 477,819 244,824
----------- ----------- -----------
Total loan originations and
purchases 6,102,531 4,847,715 1,884,034
----------- ----------- -----------
Sales and loan principal repayments:
Loan sales:
One- to four-family residential (565,585) (359,010) (60,942)
Consumer (2,129) (1,171) (815)
Loan principal repayments:
Mortgage (545,312) (380,038) (239,134)
Warehouse mortgage lines of
credit(1) (4,415,441) (3,654,978) (1,299,172)
Consumer (180,362) (144,945) (95,940)
----------- ----------- -----------
Total loan sales and principal
repayments (5,708,829) (4,540,142) (1,696,003)
----------- ----------- -----------
Decrease due to other items, net(3) (12,893) (42,208) (48,831)
----------- ----------- -----------
Net increase in loan portfolio $ 380,809 $ 265,365 $ 139,200
=========== =========== ===========
- ----------
(1) Reflects amounts advanced and repaid under such lines of credit during the
periods presented.
(2) Substantially all of these loans were acquired from loan brokers and sold
to Fannie Mae, Freddie Mac and the Federal Home Loan Bank of Topeka with
servicing retained.
(3) Other items consist of loans in process, deferred fees, premiums and
discounts, and the allowance for loan losses.
Multi-Family Residential Real Estate, Commercial Real Estate and Land
Lending. We invest in multi-family residential real estate loans that are
secured by multi-family housing units and in commercial real estate loans that
are secured by properties generally used for business purposes, such as office
buildings and retail facilities, and land being held for commercial and
residential
12
development. The properties securing these loans are located primarily in
Lincoln and Omaha, Nebraska and in selected areas outside of our primary market
area. In the past, many of these loans were secured by properties in California,
Colorado and Arizona. In recent years, our focus has shifted toward Oregon and
Washington State. We have increased our involvement in this lending category as
part of our strategy to increase our investment in higher yielding and shorter
term loans. We have also increased our capacity to originate such loans
internally with the hiring of several experienced commercial real estate lenders
as well as the opening of new commercial real estate loan production offices in
Colorado Springs and Denver, Colorado.
Our underwriting procedures provide generally that commercial real estate
loans (as well as multi-family, land and commercial construction loans) may be
made in amounts up to 80% of the value of the property if it is located within
our primary market area and 75% of the value if it is outside our primary market
area. Any loan exceeding such loan-to-value ratio must be supported by
documentation of the relevant factors justifying the deviation which is reviewed
by the Board of Directors on a quarterly basis. The total of commercial real
estate loans exceeding established loan to value limits may not exceed 30% of
our risk-based capital. At December 31, 2002, commercial real estate and land,
multi-family and commercial construction loans exceeding our loan-to-value
guidelines totaled $53.5 million or 21% of our risk-based capital. In addition,
the total of all commercial and multi-family residential real estate, commercial
construction and land loans cannot exceed 50% of our total loan portfolio.
Furthermore, no more than 40% of such loans can be secured by properties located
in any one market area. Such loans are currently originated with adjustable
rates tied to the one year United States Treasury bill adjusted to a constant
maturity ("CMT") with terms of nine or ten years and with interest rates which
initially adjust three or five years after origination and every three or five
years thereafter. The loans have 20 or 25 year amortization schedules and
require payment of the remaining principal at maturity. We establish for each
loan an interest rate floor and ceiling. However, our loans do not have any
limit on the increase or decrease in the interest rate that may be effected at
the time of adjustment other than such floor and ceiling limits. All commercial
and multi-family residential loans are underwritten by our centralized loan
underwriting department. In underwriting these loans, we consider all aspects of
the ability and the credit profile of each borrower to repay the debt. We
consider the borrower's income, probable continuation of income and credit
history. Loans in excess of $10.0 million must be presented to and approved by
our Board of Directors. We have generally required that the properties securing
these real estate loans have debt service coverage ratios (the ratio of earnings
before debt service to debt service) of at least 125%. Personal guarantees are
often required. In addition, we require that security instruments contain
affirmative language concerning the prospective borrower's responsibility for
compliance with laws and regulations (including environmental, health and
safety) and for protecting the environmental conditions of the security
property. A phase one environmental assessment report, prepared in conformance
with our environmental risk policy, is obtained if the loan is in excess of $1.0
million or if there is any indication of possible contamination at the security
property.
Our commercial real estate loan portfolio, including land loans, at
December 31, 2002 was $398.1 million, or 20.8% of total loans, and our
multi-family residential real estate loan portfolio
13
at such date was $80.0 million, or 4.2% of total loans. Of the aggregate of such
portfolios, $322.1 million related to loans secured by properties outside our
primary market area. The average size of our commercial real estate,
multi-family residential real estate and land loans at December 31, 2002 was
$1.2 million, $1.3 million and $724,000, respectively. The largest multi-family
or commercial real estate loan at December 31, 2002 was a $10.0 million
participation interest which we purchased in 2001 in a $50.2 million two-year
credit facility issued by a local financial institution to a locally based and
nationally recognized golf course developer. The loan is secured by liens on 10
golf courses developed by the borrower. In addition, the principals have issued
personal guarantees. At December 31, 2002, $9.7 million of our participation
interest had been disbursed. This loan was performing in accordance with its
terms at December 31, 2002.
In recent periods we have increased our lending to finance the acquisition
of land for residential and commercial real estate projects. Such land loans
totaled $66.6 million at December 31, 2002 ($53.7 million of which had been
disbursed at such date). The largest of these loans at such date totaled $15.0
million and consists of a loan made in 2001 to a joint venture to acquire and
complete the infrastructure development of a 557 acre parcel of land in Lincoln,
Nebraska. This mixed-use project includes 740 residential lots, 14 acres for the
construction of multi-family residential units, 50 acres for the construction of
office and retail space and 68 acres for light industrial use. The majority
joint venture partner is a financial institution which has pledged a $1.0
million letter of credit against which we can draw in the event of default. The
other joint venture partner has given us a personal guarantee with respect to
40% of the loan principal. At December 31, 2002, $11.8 million had been
disbursed. The borrower is currently selling the residential and commercial
lots. The loan has a seven year term, interest only. The loan was performing in
accordance with its terms at December 31, 2002.
Loans secured by commercial and multi-family residential real estate
properties generally involve larger principal amounts and a greater degree of
risk than single-family residential mortgage loans. Payments on loans secured by
multi-family and commercial real estate properties are often dependent on the
successful operation or management of the properties. Repayment of such loans
may be subject to adverse conditions in the real estate market or the economy
and a concentration of loans in a geographic region may be subject to greater
risk because of the potential for adverse economic conditions affecting that
region. We seek to minimize these risks through our underwriting standards.
Construction Lending. We offer residential construction loans for either
pre-sold houses (a purchase contract has been signed) or speculative houses
(properties for which no buyer yet exists). We have also during recent years
become involved in commercial real estate construction as well as purchasing
residential construction loans or participation interests in such loans.
Approximately 53% of our residential construction loans are for pre-sold houses.
As part of the increased emphasis on construction lending, we hired several
experienced loan originators in order to increase our capabilities in this
lending area.
14
We originate our residential construction loans within our primary market
area typically through direct contact with home builders. Most of such loans
involve properties located in the Omaha and Lincoln, Nebraska metropolitan
areas. During the past few years, we have become involved in purchasing
residential construction loans and participation interests in such loans secured
by properties outside our primary market area, generally in Columbia and
Charleston, South Carolina, Atlanta, Georgia, and Birmingham, Alabama. Whether
we originate or purchase residential construction loans, we review all plans,
specifications and cost estimates and require that the contractor be known by us
to be reputable. The amount of construction advances to be made, together with
the sum of previous disbursements, may not exceed the percentage of completion
of the construction. Such loans generally have terms not exceeding 12 months,
have loan-to-value ratios of 90% or less of the appraised value upon completion
and do not require the amortization of the principal during the term of the
loan. The loans are made with adjustable rates of interest based on the Wall
Street Journal prime rate. At December 31, 2002, residential construction loans
(including participation interests) totaled $156.3 million (including
undisbursed loans in process), or 8.2% of our total loan portfolio. Of such
amount, $86.6 million related to loans secured by properties outside our primary
market area. The average loan size of our residential construction loans was
$218,000 at December 31, 2002.
We have increased significantly our involvement in commercial construction
lending during the last two years. As a result of such efforts, commercial
construction loans totaled $143.0 million (including undisbursed loans in
process) at December 31, 2002, or 7.5% of total loans, as compared to $95.6
million or 6.3% of total loans at December 31, 2001. The average loan size of
our commercial construction loans was $4.8 million at December 31, 2002. At
December 31, 2002, $30.1 million of our commercial construction loans were
secured by properties outside our primary market area. Most of such loans are
extended to build office buildings, hotels or apartment buildings. However,
during the past year, we have extended loans for substantially larger amounts
than was our past practice. A significant portion of our commercial construction
portfolio is accounted for by two loans. During 2001, we extended a $17.5
million two year construction loan to a limited liability company formed by
local physicians to acquire the land and build a 59 bed specialized for-profit
cardiac hospital located in Lincoln, Nebraska. Under the original terms of the
loan, we required the doctors who were to be the members of the limited
liability company to make a $7.4 million equity contribution, payable over the
construction period to the limited liability company. These amounts are pledged
to us as further security for the loan. At December 31, 2002, $14.0 million had
been disbursed. We also extended in 2001 a $16.2 million first mortgage loan to
construct a 184 unit upscale apartment complex located in Des Moines, Iowa. In
October 2002, additional financing was provided in the amount of $4.0 million
secured by a second mortgage loan on the 184 unit apartment complex. At December
31, 2002, we had disbursed $16.2 million and $1.9 million of the first and
second mortgages, respectively. Both loans mature in September 2003. We have
obtained personal guarantees from the borrower and there is a commitment in
place for financing from a permanent lender. Both loans were performing in
accordance with their terms at December 31, 2002.
15
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction
and other assumptions, including the estimated time to sell residential
properties. If the estimate of value proves to be inaccurate, we may be
confronted with a project, when completed, having a value which is insufficient
to assure full repayment.
Warehouse Mortgage Lines of Credit. In recent years, we have become
actively involved in originating revolving lines of credit to mortgage brokers.
The lines are drawn upon by such companies to fund the origination of one- to
four-family loans. Prior to funding the advance, the mortgage broker must have
an approved commitment for the purchase of the loan which in turn reduces credit
exposure associated with the line. The lines are repaid upon completion of the
sale of the mortgage loan to third parties which usually occurs within 30 days
of origination of the loan. In connection with extending the line of credit to
the mortgage broker, we enter into agreements with each company to which such
mortgage broker intends to sell loans which are being funded with the line of
credit from us. Under such agreements, the loan purchaser agrees to hold the
mortgage documents issued by the mortgage brokers on behalf of and for our
benefit until such time that the purchasers remit to us the purchase price for
such loans. The lines are structured with adjustable rates tied to the Wall
Street Journal prime rate plus or minus a margin with a floor on the interest
rate. We fund a portion of the advances using short-term borrowings from the
Federal Home Loan Bank. Maximum amounts permitted to be advanced by us under
existing warehouse mortgage lines of credit range in amount from $2.5 million to
$47.0 million. With respect to our largest line of credit, we arranged
participation interests aggregating $17.0 million to two other financial
institutions before extending a $30.0 million line of credit in order to limit
our risk and to ensure compliance with our loans-to-one borrower regulatory
limitation. At December 31, 2002, the largest outstanding amount under an
individual warehouse mortgage line was $27.8 million. This lending area
increased during 2002 due to the strength of the mortgage market resulting in
large part from the low interest rate environment. Outstanding balances under
warehouse mortgage lines of credit totaled $236.5 million and $224.1 million or
12.4% and 14.8% of the total loan portfolio at December 31, 2002, and 2001,
respectively. As part of the structure of the lines of credit, the mortgage
brokers are required to maintain commercial deposits with us, with the amount of
such deposits depending upon the amount of the line and other factors.
Single-Family Mortgage Lending. We offer both fixed-rate and
adjustable-rate loans with maturities of up to 30 years secured by single-family
residences. Single-family mortgage loan originations are generally obtained from
our in-house loan representatives, from existing or past customers, from
mortgage brokers, and through referrals from members of our local communities.
Due to the limited demand at the present time in our market area for
adjustable-rate loans, we have determined to maintain the portfolio's size while
increasing its interest sensitivity through the purchase of pools of
adjustable-rate mortgage loans. At December 31, 2002, our single-family mortgage
loans totaled $573.2 million, or 30.0% of total loans. Of the single-family
residential
16
mortgage loans outstanding at that date, approximately 80.2% had adjustable
rates. The majority of such loans are secured by properties located outside our
primary market area.
We currently originate or purchase adjustable-rate single-family
residential mortgage loans with terms of up to 30 years and interest rates which
generally adjust one to seven years from the outset of the loan and thereafter
annually for the duration of the loan. The interest rates for such
adjustable-rate loans are indexed to a specified index, generally an index based
on the rate paid on the one year U.S. Treasury CMT, plus a margin. Our
adjustable-rate loans generally provide for periodic caps (not more than 2.0%)
on the increase or decrease in the interest rate at any adjustment date. The
maximum amount the rate can increase or decrease from the initial rate during
the life of the loan is 5% to 6%.
The origination or purchase of adjustable-rate residential mortgage loans
helps reduce our exposure to increases in interest rates. However,
adjustable-rate loans generally pose credit risks not inherent in fixed-rate
loans, primarily because as interest rates rise, the underlying payments of the
borrower rise, thereby increasing the potential for default. Periodic and
lifetime caps on interest rate increases help to reduce the risks associated
with adjustable-rate loans but also limit the interest rate sensitivity of such
loans.
Generally, we originate single-family residential mortgage loans in
amounts up to 80% of the lower of the appraised value or the selling price of
the property and up to 97% if private mortgage insurance is obtained. Mortgage
loans originated by us generally include due-on-sale clauses which provide us
with the contractual right to deem the loan immediately due and payable in the
event the borrower transfers ownership of the property without our consent.
Due-on-sale clauses are an important means of adjusting the yields on our
fixed-rate mortgage loan portfolio and we have generally exercised our rights
under these clauses. We require fire, casualty, title and, in certain cases,
flood insurance on properties securing real estate loans made by us.
Consumer and Other Lending. Consumer loans, consisting primarily of home
equity, home improvement and automobile loans amounted to $290.2 million or
15.2% of our total loan portfolio at December 31, 2002. We generally offer home
equity loans and lines of credit in amounts up to $100,000 with a term of 15
years or less and a loan-to-value ratio up to 100% of value. We also offer home
improvement loans in amounts up to $100,000 with a term of 15 years or less and
a loan-to-value ratio up to 100% of value. A substantial portion of our home
improvement loans consist of participation interests we have purchased from a
third party. Under the terms of our arrangements with this third party, if any
loan becomes more than 120 days past due, we can require the seller to
re-purchase such loan at a price equal to our total investment in the loan,
including any uncollected and accrued interest. During 2002, we purchased $35.8
million of such loans and at December 31, 2002, we held $60.8 million of loans
purchased under such arrangement. We also offer automobile loans in amounts up
to $50,000 with 72 month and 60 month terms for new and used cars, respectively,
and purchase price ratios of not more than 95% for new cars and not more than
85% for used cars. Most of our automobile loans are obtained through a network
of 49 new and used automobile dealers located primarily in Lincoln and Omaha,
Nebraska. During 2002, we
17
purchased approximately $32.5 million of such loans. Although employees of the
automobile dealership take the application, the loans are made pursuant to our
own underwriting standards and must be approved by one of our authorized loan
officers. Upon closing of the loan by the dealer, the loan is purchased by us.
During 2000, we hired the members of an experienced lending group from another
financial institution which specialized in such lending. Our consumer loans also
include loans on recreational vehicles, boat loans, motorcycle loans, unsecured
loans, loans on deposit accounts and student loans.
Unsecured loans and loans secured by rapidly depreciating assets, such as
automobiles, entail greater risks than single-family residential mortgage loans.
In such cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance. Further, consumer
loan collections on these loans are dependent on the borrower's continuing
financial stability and, therefore, are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Finally, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default. At December 31, 2002, our consumer loans 90 days or more
delinquent totaled $427,000.
Commercial Business Lending. At December 31, 2002, we had $33.4 million in
commercial business loans which amounted to 1.8% of total loans receivable. Our
commercial business loans are made predominantly to small to mid-sized
businesses located within our primary market area. The largest credits consist
of two loans extended to a construction and excavation company located in
Lincoln, Nebraska. The loans are revolving credit lines with an aggregate
maximum of $16.5 million of which $6.5 million was disbursed as of December 31,
2002. We are increasing our focus on such lending in conjunction with our
overall increased emphasis on commercial real estate lending, including hiring
experienced commercial business lending officers. Although we currently
anticipate that commercial lending activity will increase in the future, we do
not expect it to become a significant part of our overall lending activity in
the near future.
Loan Approval Procedures and Authority. Our Board of Directors establishes
the lending policies and procedures for us. All general lending policies are set
on an ongoing basis by the Asset/Liability Committee composed of the following
officers of TierOne Bank: Chief Executive Officer; Chief Operating Officer;
Directors of: Lending, Administration, Retail Banking and Finance; Marketing
Officer and Controller. Under policies established by the Asset/Liability
Committee, various officers or combinations of officers have loan approval
authority, the specific amounts and requirements being set forth for each loan
type. For loan amounts in excess of $10.0 million, approval of our Board of
Directors is required.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis. These
reports include information regarding all loans 30 days or more delinquent and
all real estate owned. These reports are provided to the Board
18
of Directors. The procedures we take with respect to delinquencies vary
depending on the nature of the loan, period and cause of delinquency and whether
the borrower is habitually delinquent. When a borrower fails to make a required
payment on a loan, we take a number of steps to have the borrower cure the
delinquency and restore the loan to current status. We generally send the
borrower a written notice of non-payment after the loan is first past due. Our
underwriting guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment. When contact is made with the borrower at any
time prior to foreclosure, we will attempt to obtain full payment, work out a
repayment schedule with the borrower to avoid foreclosure or, in some instances,
accept a deed in lieu of foreclosure. In the event payment is not then received
or the loan not otherwise satisfied, additional letters and telephone calls
generally are made. If the loan is still not brought current or satisfied and it
becomes necessary for us to take legal action, which typically occurs after a
loan is 90 days or more delinquent, we will commence foreclosure proceedings
against any real property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the property securing the loan generally is sold at
foreclosure and, if purchased by us, becomes real estate owned.
Federal regulations and our Asset Classification Policy require that we
utilize an internal asset classification system as a means of reporting problem
and potential problem assets. We have incorporated the Office of Thrift
Supervision's internal asset classifications as a part of our credit monitoring
system. We currently classify problem and potential problem assets as
"substandard," "doubtful" or "loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the borrower or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that we will sustain "some
loss" if the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as "loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention."
When we classify one or more assets, or portions thereof, as
"substandard", "doubtful" or "loss", we establish a specific valuation allowance
for loan losses in an amount deemed prudent by management based on the specific
facts of the asset. In addition to these specific valuation allowances, we
establish a general valuation allowance to absorb losses which exist in the loan
portfolio but which have not been specifically identified. To quantify this
general valuation allowance, we segregate the loan portfolio by loan type and
apply loss factors to develop our allowance levels. These loss factors are
developed using our historical loan loss experience for each group of loans as
further adjusted for specific documented factors, including the following:
o Trends and levels of delinquent or "impaired" loans;
19
o Trends and levels of charge-offs;
o Trends in volume and underwriting terms or guarantees for the loans;
o Impact of changes in underwriting standards, risk tolerances, or
other changes in lending practices;
o Changes in qualifications or experience in lending staff;
o Local or national changes in economic or industry conditions; and
o Changes in credit concentration
When loss factors are not available from our own experience, we utilize
loss experience from other institutions as a starting point. This peer group
information is only utilized if the other institutions possesses similar
portfolio size, composition and risk factors.
Although management believes that, based on information currently
available to us at this time, our allowance for loan losses is maintained at a
level which covers all known and inherent losses that are both probable and
reasonably estimable at such date, actual losses are dependent upon future
events and, as such, further additions to the level of allowances for loan
losses may become necessary.
The Asset Classification Committee is composed of the following officers
of TierOne Bank: Chief Executive Officer; Chief Operating Officer; Directors of
Lending and Finance; Assistant Director of Lending; Controller and Chief Credit
Officer. The Asset Classification Committee reviews and classifies assets on a
monthly basis and the Board of Directors reviews the results of the reports on a
quarterly basis. At December 31, 2002 and 2001, we had $7.5 million and $1.8
million, respectively, of assets classified as "substandard" which consisted of
real estate owned, non-accrual single-family residential mortgage and consumer
loans. Non-accrual loans are those loans 90 days or more delinquent. At December
31, 2002 and 2001, included in loans 90 days or more delinquent were $5.5
million and $1.7 million, respectively, of substandard assets. At such dates, we
had no loans classified as "doubtful" or "loss." In addition, as of December 31,
2002 and 2001, we had $18.1 million and $0, respectively, of loans designated
"special mention."
20
Delinquent Loans. The following table shows the delinquencies in our loan
portfolio as of the dates indicated.
December 31, 2002 December 31, 2001
------------------------------------------- ---------------------------------------------
30-89 90 or More Days 30-89 90 or More Days
Days Overdue Overdue Days Overdue Overdue
-------------------- -------------------- ---------------------- --------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
One- to four-family residential 26 $3,763 11 $1,161 40 $6,632 14 $ 898
Multi-family residential -- -- -- -- -- -- -- --
Commercial real estate and land -- -- 2 3,795 -- -- -- --
Residential construction 2 258 1 106 -- -- -- --
Commercial construction -- -- -- -- -- -- -- --
Commercial business -- -- -- -- -- -- -- --
Warehouse mortgage lines of credit -- -- -- -- -- -- -- --
Consumer loans 209 2,499 39 427 204 2,694 89 767
------ ------ ------ ------ ------ ------ ------ ------
Total delinquent loans 237 $6,520 53 $5,489 244 $9,326 103 $1,665
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to total loans 0.34% 0.29% 0.61% 0.11%
====== ====== ====== ======
21
Non-Accrual Loans and Real Estate Owned. The following table sets forth
information regarding non-accrual loans and real estate owned. At December 31,
2002, nonperforming loans consisted of 12 single-family residential loans with
an average balance of $106,000 and 39 consumer loans with an average balance of
$11,000. At such date, real estate owned totaled $2.0 million consisting of nine
single-family residential properties and repossessed automobiles. Troubled debt
restructurings consisted of six loans with an average balance of $35,000 at
December 31, 2002. Such restructured loans were performing in accordance with
their terms at such date. It is our policy to cease accruing interest on loans
90 days or more past due and to charge off all accrued interest. For the years
ended December 31, 2002 and 2001, the amount of interest income not recognized
on non-accrual loans was $290,000 and $86,000, respectively. Total impaired
loans, amounted to approximately $4.0 million and $345,000 at December 31, 2002
and 2001, respectively.
The following table shows the amounts of our nonperforming assets at the
dates indicated. We did not have any accruing loans 90 days or more past due at
the dates shown.
December 31
--------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family residential $1,161 $ 898 $1,009 $1,312 $1,101
Multi-family residential -- -- -- -- 672
Commercial real estate and land 3,795 -- 2,703 -- --
Residential construction 106 -- 380 -- --
Commercial construction -- -- -- -- --
Commercial business -- -- -- -- --
Warehouse mortgage lines of credit -- -- -- -- --
Consumer 427 767 416 239 52
------ ------ ------ ------ ------
Total non-accruing loans 5,489 1,665 4,508 1,551 1,825
Real estate owned, net (1) 1,967 168 807 352 540
------ ------ ------ ------ ------
Total nonperforming assets $7,456 $1,833 $5,315 $1,903 $2,365
====== ====== ====== ====== ======
Troubled debt restructurings $ 209 $ 345 $ 185 $ 127 $ 127
Total nonperforming assets and troubled
debt restructurings $7,665 $2,178 $5,500 $2,030 $2,492
====== ====== ====== ====== ======
Total nonperforming loans as a percent of
net loans, exclusive of allowance for
loan losses 0.31% 0.12% 0.40% 0.16% 0.20%
====== ====== ====== ====== ======
Total nonperforming assets as a percent of
total assets 0.38% 0.12% 0.39% 0.15% 0.21%
====== ====== ====== ====== ======
Total nonperforming assets and troubled
debt restructurings as a percent of total
assets 0.39% 0.14% 0.40% 0.16% 0.22%
====== ====== ====== ====== ======
- ----------
(1) Real estate owned balances are shown net of related loss allowances.
Includes both real property and other repossessed collateral consisting
primarily of automobiles.
22
When we acquire property through foreclosure or deed in lieu of
foreclosure, it is initially recorded at the lower of the recorded investment in
the corresponding loan or the fair value of the related assets at the date of
foreclosure, less costs to sell. Thereafter, if there is a further deterioration
in value, we provide for a specific valuation allowance and charge operations
for the diminution in value. It is our policy to obtain an appraisal or broker's
price opinion on all real estate subject to foreclosure proceedings prior to the
time of foreclosure. It is our policy to require appraisals on a periodic basis
on foreclosed properties and conduct inspections on foreclosed properties.
Allowance for Loan Losses. A provision for loan losses is charged to
income when it is determined by management to be required based on its analysis.
The allowance is maintained at a level to cover all known and inherent losses in
the loan portfolio that are both probable and reasonable to estimate at each
reporting date. Management reviews the loan portfolio no less frequently than
quarterly in order to identify those inherent losses and to assess the overall
collection probability of the portfolio. Management's review includes a
quantitative analysis by loan category, using historical loss experience,
classifying loans pursuant to a grading system and consideration of a series of
qualitative loss factors. The evaluation process includes, among other things,
an analysis of delinquency trends, nonperforming loan trends, the level of
charge-offs and recoveries, prior loss experience, the type, size and geographic
concentration of loans, the value of collateral securing the loan, the number of
loans requiring heightened management oversight, prevailing local and national
economic conditions and loan loss data of comparable institutions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available or as
future events change.
The allowance for loan losses is maintained at a level believed, to the
best of management's knowledge, to cover all known and inherent losses in the
portfolio that are both probable and reasonable to estimate at each reporting
date. The allowance for loan losses consists of two elements. The first element
is an allocated allowance established for specific loans identified by the
Company's credit review function that are evaluated individually for impairment
and are considered to be impaired. A loan is considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect the scheduled payments of principal and interest when due according
to the contractual terms of the loan agreement. Impairment is measured by (i)
the fair value of the collateral if the loan is collateral dependent, (ii) the
present value of expected future cash flows, or (iii) the loan's obtainable
market price. The second element is an estimated allowance established for
losses which are probable and reasonable to estimate on each of the Company's
categories of outstanding loans. While management uses available information to
recognize probable losses on loans inherent in the portfolio, future additions
to the allowance may be necessary based on changes in economic conditions and
other factors. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgment of information available to them at the
time of their examination.
23
The following table shows changes in our allowance for loan losses during
the periods presented.
At or For the Year Ended December 31
-------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Net loans, exclusive of allowance for loan
losses $1,791,356 $1,406,903 $1,138,021 $ 997,734 $ 894,200
Average net loans outstanding 1,469,785 1,228,956 1,109,365 926,748 864,848
Allowance for loan losses, beginning of period 13,464 9,947 8,860 7,834 7,160
Provision for loan losses 4,695 3,997 1,273 1,132 832
Charge-offs:
One- to four-family residential 37 37 61 4 3
Multi-family -- -- -- -- --
Commercial real estate and land -- 1 -- -- 80
Residential construction -- -- -- -- --
Commercial construction -- -- -- -- --
Commercial business 99 -- -- -- --
Warehouse mortgage lines of credit -- -- -- -- --
Consumer(1) 1,018 458 137 117 90
---------- ---------- ---------- ---------- ----------
Total charge-offs 1,154 496 198 121 173
---------- ---------- ---------- ---------- ----------
Recoveries on loans previously charged off 103 16 12 15 15
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, end of period $ 17,108 $ 13,464 $ 9,947 $ 8,860 $ 7,834
========== ========== ========== ========== ==========
Allowance for loan losses as a percent of
net loans, exclusive of allowance for loan
losses 0.96% 0.96% 0.87% 0.89% 0.88%
========== ========== ========== ========== ==========
Allowance for loan losses as a percent of
nonperforming loans 311.68% 808.65% 220.65% 571.24% 429.26%
========== ========== ========== ========== ==========
Ratio of net charge-offs during the period
to average loans outstanding during the
period 0.08% 0.04% 0.02% 0.01% 0.02%
========== ========== ========== ========== ==========
- ----------
(1) Includes, for the year ended December 31, 2002, charge-offs of home equity
loans, home improvement loans, auto loans, recreation vehicle loans,
equity lines of credit and other loans of $94,000, $68,000, $708,000,
$23,000, $39,000 and $86,000, respectively.
24
The following table shows how our allowance for loan losses is allocated
by type of loan at each of the dates indicated.
December 31
------------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
Loan Loan Loan
Category Category Category
Amount as a % Amount as a % Amount as a %
of of Total of of Total of of Total
Allowance Loans Allowance Loans Allowance Loans
--------- -------- --------- -------- --------- --------
(Dollars in Thousands)
One- to four-family residential $ 1,071 30.00% $ 976 33.13% $ 813 46.75%
Multi-family residential 1,740 4.18 1,715 4.89 1,395 5.54
Commercial real estate and
land 6,343 20.83 3,876 17.03 3,316 17.42
Residential construction 1,051 8.18 597 7.47 353 6.40
Commercial construction 1,259 7.49 586 6.30 235 3.82
Commercial business 400 1.75 146 0.80 33 0.23
Warehouse mortgage lines of
credit 473 12.38 448 14.77 74 3.07
Consumer 4,771 15.19 4,736 15.61 3,447 16.77
Unallocated -- -- 384 -- 281 --
------- ------ ------- ------ ------- ------
Total $17,108 100.00% $13,464 100.00% $ 9,947 100.00%
======= ====== ======= ====== ======= ======
December 31
--------------------------------------------------
1999 1998
---------------------- ----------------------
Loan Loan
Category Category
Amount as a % Amount as a %
of of Total of of Total
Allowance Loans Allowance Loans
--------- -------- --------- --------
One- to four-family residential $ 899 54.06% $ 892 55.69%
Multi-family residential 1,440 5.99 1,329 5.73
Commercial real estate and
land 2,723 14.96 2,377 13.55
Residential construction 214 4.07 195 3.85
Commercial construction 40 0.66 45 0.79
Commercial business 14 0.19 14 0.20
Warehouse mortgage lines of
credit 56 2.39 114 5.06
Consumer 3,474 17.68 2,868 15.13
Unallocated -- -- -- --
------- ------ ------- ------
Total $ 8,860 100.00% $ 7,834 100.00%
======= ====== ======= ======
25
Investment Activities
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Historically, we have maintained liquid assets at a
level considered to be adequate to meet our normal daily activities.
Our investment policy, as approved by the Board of Directors, requires
management to maintain adequate liquidity, generate a favorable return on
investments without incurring undue interest rate and credit risk and to
complement our lending activities. We primarily utilize investments in
securities for liquidity management and as a method of deploying excess funding
not utilized for loan originations. We have invested primarily in U.S.
Government and agency securities, corporate commercial paper, mutual funds, U.S.
Government sponsored agency issued mortgage-backed securities and collateralized
mortgage obligations. As required by SFAS No. 115, we have established an
investment portfolio of securities that are categorized as held to maturity or
available for sale. We do not currently maintain a portfolio of securities
categorized as held for trading. The majority of our investment securities are
purchased for the available for sale portfolio which totaled $30.5 million, or
1.6% of total assets, at December 31, 2002. At such date, we had net unrealized
losses with respect to such securities of $872,000. At December 31, 2002, the
held to maturity securities portfolio totaled $157,000.
At December 31, 2002, we had invested $29.9 million in mortgage-backed
securities, or 1.5% of total assets, all of which were classified as available
for sale. Of such amount, $13.1 million were issued by Fannie Mae, $12.8 million
were issued by the Government National Mortgage Association ("GNMA") and
$552,000 were issued by Freddie Mac. Of the $29.9 million of mortgage-backed
securities, $22.1 million had adjustable-rates with maximum interest rate
adjustments of 1.0% to 2.0% annually and up to 5.0% to 6.0% over the life of the
security. Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby changing the net
yield on such securities. There is also reinvestment risk associated with the
cash flows from such securities or in the event such securities are redeemed by
the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
The GNMA is a government agency within the Department of Housing and Urban
Development which is intended to help finance government_assisted housing
programs. GNMA securities are backed by loans insured by the Federal Housing
Administration, or guaranteed by the Veterans Administration. The timely payment
of principal and interest on GNMA securities is guaranteed by GNMA and backed by
the full faith and credit of the U.S. Government. Freddie Mac
26
is a private corporation chartered by the U.S. Government. Freddie Mac issues
participation certificates backed principally by conventional mortgage loans.
Freddie Mac guarantees the timely payment of interest and the ultimate return of
principal on participation certificates. Fannie Mae is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for mortgage loans. Fannie Mae guarantees the timely payment of principal and
interest on Fannie Mae securities. Freddie Mac and Fannie Mae securities are not
backed by the full faith and credit of the U.S. Government, but because Freddie
Mac and Fannie Mae are U.S. Government-sponsored enterprises, these securities
are considered to be among the highest quality investments with minimal credit
risks.
Collateralized mortgage obligations are typically issued by
special-purpose entities, such as private issuers or government agencies, which
may be organized in a variety of legal forms, such as a trust, a corporation, or
a partnership. Substantially all of the collateralized mortgage obligations held
in our portfolio consist of senior sequential tranches, primarily investments in
the first tranche of the collateralized mortgage obligations. By purchasing
senior sequential tranches, management attempts to ensure the cash flow
associated with such an investment. While non_agency private issues are somewhat
less liquid than collateralized mortgage obligations issued by GNMA, Fannie Mae
or Freddie Mac, they generally have a higher yield than agency insured or
guaranteed collateralized mortgage obligations, such higher yield reflecting in
part the lack of guarantee or protection and, thus, the potentially higher risk
of loss or default associated with such assets.
27
The following table sets forth certain information relating to our
investment securities portfolio (excluding mortgage-backed securities) at the
dates indicated.
December 31
---------------------------------------------------------------------------------------
2002 2001 2000
----------------------- ------------------------ ------------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- -------- --------
(In Thousands)
U.S. government agency obligations $ 2,000 $ 2,000 $ 26,691 $ 26,691 $ 76,500 $ 76,230
Corporate securities 23,418 22,546 12,214 11,833 8,978 8,705
Municipal obligations 157 157 221 221 195 195
Asset Management Fund-ARM Fund 6,000 6,000 6,000 6,000 -- --
-------- -------- -------- -------- -------- --------
Total investment securities 31,575 30,703 45,126 44,745 85,673 85,130
FHLB stock 21,459 21,459 14,836 14,836 15,160 15,160
-------- -------- -------- -------- -------- --------
Total investment securities and
FHLB stock $ 53,034 $ 52,162 $ 59,962 $ 59,581 $100,833 $100,290
======== ======== ======== ======== ======== ========
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities) which mature during each of the periods
indicated and the weighted average yields for each range of maturities at
December 31, 2002. No tax-exempt yields have been adjusted to a tax-equivalent
basis.
Amounts at December 31, 2002 Which Mature In
--------------------------------------------------------------------------------------
Over One
Weighted Year Weighted Over Five Weighted Over Weighted
One Year Average Through Average Through Average Ten Average
or Less Yield Five Years Yield Ten Years Yield Years Yield
-------- -------- ---------- -------- --------- -------- ------- --------
(Dollars in Thousands)
Bonds and other debt securities:
U.S. government agency obligations $ -- $ 2,000 3.13% $ -- $ --
Corporate securities 9,916 3.44% 4,990 5.81 -- 8,512 2.62%
Municipal obligations -- -- 157 8.25% --
Equity securities: -- -- -- --
Asset Management Fund-ARM Fund 6,000 2.43 -- -- --
FHLB stock(1) 21,459 3.50 -- -- --
------- ---- ------- ---- ------- ---- ------- ----
Total investment securities and FHLB
stock $37,375 3.31% $ 6,990 5.04% $ 157 8.25% $ 8,512 2.62%
======= ==== ======= ==== ======= ==== ======= ====
(1) As a member of the Federal Home Loan Bank of Topeka, we are required to
maintain our investment in FHLB stock, which has no stated maturity.
28
The following table sets forth the composition of our mortgage-backed
securities portfolio at each of the dates indicated.
December 31
-------------------------------------
2002 2001 2000
------- ------- -------
(In Thousands)
Fixed-rate:
FHLMC $ 148 $ 233 $ 349
FNMA 4,132 6,228 9,648
FHLMC/FNMA CMOs -- 3,101 387
Private CMOs 3,492 7,582 8,314
------- ------- -------
Total fixed-rate 7,772 17,144 18,698
------- ------- -------
Adjustable-rate:
GNMA 12,786 4,608 7,058
FNMA 8,919 23,441 41,990
FHLMC 404 595 1,266
------- ------- -------
Total adjustable-rate 22,109 28,644 50,314
------- ------- -------
Total mortgage-backed securities $29,881 $45,788 $69,012
======= ======= =======
Information regarding the contractual maturities and weighted average
yield of our mortgage-backed securities portfolio at December 31, 2002 is
presented below. Due to repayments of the underlying loans, the actual
maturities of mortgage-backed securities generally are substantially less than
the scheduled maturities.
Amounts at December 31, 2002 Which Mature In
----------------------------------------------------------------------------
Weighted Over One Weighted Weighted
One Year Average through Average Over Five Average
or Less Yield Five Years Yield Years Yield
-------- -------- ---------- -------- --------- --------
(Dollars in Thousands)
Fixed-rate:
FHLMC $ -- --% $ -- --% $ 148 8.50%
FNMA -- -- 26 8.00 4,106 6.17
Private CMOs -- -- 9 8.59 3,483 6.47
------- ------- ---- ------- ----
Total fixed-rate -- -- 35 8.15 7,737 6.35
------- ------- ---- ------- ----
Adjustable-rate:
GNMA -- -- -- -- 12,786 4.36
FNMA -- -- -- -- 8,919 5.95
FHLMC -- -- -- -- 404 5.90
------- ------- ---- ------- ----
Total adjustable-rate -- -- -- -- 22,109 5.03
------- ---- ------- ---- ------- ----
Total $ -- --% $ 35 8.15% $29,846 5.37%
======= ==== ======= ==== ======= ====
29
The following table sets forth the purchases, sales and principal
repayments of our mortgage-backed securities during the periods indicated.
At or For the
Year Ended December 31
-----------------------------------------------
2002 2001 2000
--------- --------- ---------
(Dollars in Thousands)
Mortgage-backed securities at beginning of period $ 45,788 $ 69,012 $ 155,047
Purchases 19,706 11,628 --
Repayments (35,485) (34,810) (27,213)
Sales -- -- (59,528)
Amortizations of premiums and discounts, net (128) (42) 706
--------- --------- ---------
Mortgage-backed securities at end of period $ 29,881 $ 45,788 $ 69,012
========= ========= =========
Weighted average yield at end of period 5.37% 6.14% 6.66%
========= ========= =========
Sources of Funds
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and Federal Home Loan Bank advances
are the primary sources of our funds for use in lending, investing and for other
general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposits consist of checking (both interest-bearing and
noninterest-bearing), money market, savings, certificate accounts and individual
retirement accounts. At December 31, 2002, more than 54% of the funds deposited
with us are in core deposits (deposits other than certificates of deposit).
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Our deposits are obtained predominantly from the areas where our
banking offices are located. We have historically relied primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect our ability to attract and retain
deposits.
We use traditional means of advertising our deposit products, including
broadcast and print media, and generally do not solicit deposits from outside
our market area. In recent years, we have expanded our marketing efforts to
include direct mailings in an effort to attract new checking relationships. This
marketing strategy has resulted in a significant increase in core deposits,
particularly checking accounts, as well as increased fee income and new customer
relationships. In 2000, we introduced our "High Performance" checking product
line which includes a number of product options for our customers including free
checking, interest-bearing checking and the "Wall Street" checking account. As a
result, the number and aggregate balance of our checking accounts increased from
approximately 47,000 and $251.9 million, respectively, at December 31, 2001 to
30
approximately 56,600 and $326.0 million, respectively, at December 31, 2002,
reflecting increases of 20.4% and 29.4%. Employees are offered incentives to
sell the products and customers receive gifts for opening new accounts as well
as referring other customers.
We do not use brokers to obtain deposits. At December 31, 2002, the
weighted average remaining maturity of our certificate of deposit accounts was
15 months.
The following table shows the distribution of, and certain other
information relating to, our deposits by type of deposit, as of the dates
indicated.
December 31
--------------------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ ------------------------
Amount % Amount % Amount %
---------- ------ ---------- ------ ---------- ------
(Dollars in Thousands)
Certificate accounts:
1.00% - 1.99% $ 61,399 5.44% $ -- --% $ -- --%
2.00% - 2.99% 89,316 7.91 32,156 2.93 23 --
3.00% - 3.99% 124,186 11.00 178,062 16.25 -- --
4.00% - 4.99% 132,626 11.75 126,641 11.55 2,885 0.28
5.00% - 5.99% 99,786 8.84 158,226 14.43 193,736 18.49
6.00% - 6.99% 9,399 0.83 39,697 3.62 333,628 31.84
7.00% - 7.99% -- -- 547 0.05 30,391 2.90
8.00% or more 8 -- 7 -- 7 --
---------- ------ ---------- ------ ---------- ------
Total certificate accounts 516,720 45.77 535,336 48.83 560,670 53.51
---------- ------ ---------- ------ ---------- ------
Transaction accounts:
Passbook savings 15,855 1.41 12,988 1.19 10,129 0.97
Money market 270,275 23.94 295,991 27.00 319,498 30.49
Interest-bearing checking 290,237 25.71 227,473 20.75 137,735 13.14
Noninterest-bearing
checking 35,793 3.17 24,454 2.23 19,804 1.89
---------- ------ ---------- ------ ---------- ------
Total transaction
accounts 612,160 54.23 560,906 51.17 487,166 46.49
---------- ------ ---------- ------ ---------- ------
Total deposits $1,128,880 100.00% $1,096,242 100.00% $1,047,836 100.00%
========== ====== ========== ====== ========== ======
31
The following table shows the average balance of each type of deposit and
the average rate paid on each type of deposit for the periods indicated.
Year Ended December 31
-------------------------------------------------------------------------------------------
2002 2001
------------------------------------------ -----------------------------------------
Average Interest Average Average Interest Average
Balance Expense Rate Paid Balance Expense Rate Paid
---------- ---------- --------- ---------- ---------- ---------
(Dollars in Thousands)
Interest-bearing checking $ 269,274 $ 4,619 1.72% $ 177,984 $ 4,750 2.67%
Passbook 14,811 179 1.21 11,296 171 1.51
Money market 284,399 5,533 1.95 305,987 10,551 3.45
Certificates of deposit 524,911 20,759 3.95 570,846 31,685 5.55
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,093,395 31,090 2.84% 1,066,113 47,157 4.42%
==== ====
Noninterest-bearing checking 29,901 -- -- 22,234 -- --
---------- ---------- ---- ---------- ----------
Total deposits $1,123,296 $ 31,090 2.77% $1,088,347 $ 47,157 4.33%
========== ========== ==== ========== ========== ====
Year Ended December 31
-----------------------------------------
2000
----------------------------------------
Average Interest Average
Balance Expense Rate Paid
---------- ---------- ---------
Interest-bearing checking $ 97,319 $ 2,512 2.58%
Passbook 10,829 189 1.75
Money market 338,181 15,450 4.57
Certificates of deposit 554,137 32,162 5.80
---------- ----------
Total interest-bearing deposits 1,000,466 50,313 5.03%
====
Noninterest-bearing checking 19,392 -- --
---------- ---------- ----
Total deposits $1,019,858 $ 50,313 4.93%
========== ========== ====
The following table shows our savings flows during the periods indicated.
Year Ended December 31
---------------------------------------------------
2002 2001 2000
----------- ----------- -----------
(In Thousands)
Total deposits $ 5,402,525 $ 5,327,227 $ 3,484,178
Total withdrawals (5,397,347) (5,320,688) (3,482,242)
Interest credited 27,460 41,867 39,912
----------- ----------- -----------
Total increase in deposits $ 32,638 $ 48,406 $ 41,848
=========== =========== ===========
32
The following table presents, by various interest rate categories and
maturities, the amount of certificates of deposit at December 31, 2002.
Balance at December 31, 2002
Maturing in the 12 Months Ending December 31
------------------------------------------------------------------------
Certificates of Deposit 2003 2004 2005 Thereafter Total
----------------------- -------- -------- -------- ---------- --------
(In Thousands)
1.00% - 1.99% $ 58,582 $ 2,817 $ -- $ -- $ 61,399
2.00% - 2.99% 65,447 6,945 1,552 15,372 89,316
3.00% - 3.99% 40,121 22,446 4,510 57,109 124,186
4.00% - 4.99% 92,309 12,192 11,178 16,947 132,626
5.00% - 5.99% 71,258 15,849 6,056 6,623 99,786
6.00% - 6.99% 9,154 68 121 56 9,399
7.00% - 7.99% -- -- -- -- --
8.00% or more 8 -- -- -- 8
-------- -------- -------- -------- --------
Total certificate accounts $336,879 $ 60,317 $ 23,417 $ 96,107 $516,720
======== ======== ======== ======== ========
The following table shows the maturities of our certificates of deposit of
$100,000 or more at December 31, 2002 by time remaining to maturity.
Weighted
Quarter Ending: Amount Average Rate
------------------------------------ ------- ------------
(Dollars in Thousands)
March 31, 2003 $11,670 3.40%
June 30, 2003 7,115 2.96
September 30, 2003 10,522 4.21
December 31, 2003 7,190 2.77
After December 31, 2003 24,653 3.51
------- ----
Total certificates of deposit with
balances of $100,000 or more $61,150 3.57%
======= ====
Borrowings. We utilize advances from the Federal Home Loan Bank of Topeka
as an alternative to retail deposits to fund our operations as part of our
operating strategy. These Federal Home Loan Bank advances are collateralized by
our qualifying first mortgage, multi-family, commercial real estate, second
mortgage and residential construction loans and secondarily by our investment in
capital stock of the Federal Home Loan Bank of Topeka. Federal Home Loan Bank
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
Federal Home Loan Bank of Topeka will advance to member institutions, including
us, fluctuates from time to time in accordance with the policies of the Federal
Home Loan Bank of Topeka. See "Regulation-Federal Home Loan Bank
33
System." At December 31, 2002, we had $418.1 million in outstanding Federal Home
Loan Bank advances.
The following table shows certain information regarding our borrowings at
or for the dates indicated:
At or For the Year
Ended December 31
------------------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in Thousands)
FHLB advances:
Average balance outstanding $268,473 $202,852 $246,789
Maximum amount outstanding at any month-end
during the period $418,082 $296,715 $325,365
Balance outstanding at end of period $418,082 $296,715 $172,449
Average interest rate during the period 4.76% 4.91% 6.17%
Weighted average interest rate at end of period 3.81% 4.30% 5.66%
FNMA note and other borrowings:
Average balance outstanding $ 6,132 $ 1,015 --
Maximum amount outstanding at any month-end
during the period $ 6,855 $ 6,600 --
Balance outstanding at end of period $ 247 $ 6,600 --
Average interest rate during the period 5.77% 5.77% --
Weighted average interest rate at end of period 1.64% 5.77% --
At December 31, 2002, our overnight line of credit amounted to $62.7
million with a weighted average rate of 1.47%. For more information regarding
our borrowings, see Note 12 to our consolidated financial statements included in
Exhibit 13, attached hereto.
Subsidiary Activities
TierOne Bank is the wholly owned subsidiary of TierOne Corporation. TMS
Corporation of the Americas is the wholly owned subsidiary of TierOne Bank and
holds all of the stock of TierOne Investments and Insurance, Inc. and TierOne
Reinsurance Company. TierOne Investments and Insurance provides a wide selection
of investment and insurance products, including equity securities, mutual funds
and annuities. These products are made available to consumers via licensed
representatives in our banking offices. TierOne Reinsurance Company reinsures
credit life and disability insurance that is sold in conjunction with the
origination of consumer loans by TierOne Bank. Fees generated through equity,
annuity, mutual fund and insurance sales and commissions contributed $2.2
million and $2.0 million in non-interest income during the years ended December
31, 2001 and 2002, respectively.
34
Personnel
As of December 31, 2002, we had 464 full-time employees and 59 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to TierOne Corporation and TierOne Bank. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
General
TierOne Bank, as a federally chartered savings institution, is subject to
federal regulation and oversight by the Office of Thrift Supervision extending
to all aspects of its operations. TierOne Bank is also subject to regulation and
examination by the Federal Deposit Insurance Corporation, which insures the
deposits of TierOne Bank to the maximum extent permitted by law, and
requirements established by the Federal Reserve Board. Federally chartered
savings institutions are required to file periodic reports with the Office of
Thrift Supervision and are subject to periodic examinations by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation. The investment
and lending authority of savings institutions is prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Such regulation and
supervision primarily is intended for the protection of depositors and not for
the purpose of protecting shareholders.
The Office of Thrift Supervision regularly examines TierOne Bank and
prepares reports for consideration by its Board of Directors on any deficiencies
that it may find in the bank's operations. The Federal Deposit Insurance
Corporation also has the authority to examine TierOne Bank in its role as the
administrator of the Savings Association Insurance Fund. TierOne Bank's
relationship with its depositors and borrowers is also regulated to a great
extent by both federal, and to a lesser extent, state laws, especially in such
matters as the ownership of savings accounts and the form and content of TierOne
Bank's mortgage requirements. The Office of Thrift Supervision's enforcement
authority over all savings institutions and their holding companies includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to initiate injunctive actions. In general,
these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the Office of Thrift Supervision. Any change in such laws or
regulations, whether by the Federal Deposit Insurance Corporation, Office of
Thrift Supervision or Congress, could have a material adverse impact on us and
TierOne Bank and our operations.
35
TierOne Corporation
TierOne Corporation, a Wisconsin corporation and the holding company for
TierOne Bank, is a registered savings and loan holding company under Section 10
of the Home Owners' Loan Act, as amended and is subject to Office of Thrift
Supervision examination and supervision as well as certain reporting
requirements. In addition, because TierOne Bank's deposits are insured by the
Savings Association Insurance Fund maintained by the Federal Deposit Insurance
Corporation, TierOne Bank is, and will continue to be, subject to certain
restrictions in dealing with the company and with other persons affiliated with
the bank.
We currently operate as a unitary savings and loan holding company.
Generally, the Home Owners' Loan Act prohibits a savings and loan holding
company, such as us, directly or indirectly, from (1) acquiring control (as
defined) of a savings institution (or holding company thereof) without prior
Office of Thrift Supervision approval, (2) acquiring more than 5% of the voting
shares of a savings institution (or holding company thereof) which is not a
subsidiary, subject to certain exceptions, without prior Office of Thrift
Supervision approval, or (3) acquiring through a merger, consolidation or
purchase of assets of another savings institution (or holding company thereof)
or acquiring all or substantially all of the assets of another savings
institution (or holding company thereof) without prior Office of Thrift
Supervision approval or (4) acquiring control of an uninsured institution. A
savings and loan holding company may not acquire as a separate subsidiary, a
savings institution which has its principal offices outside of the state where
the principal offices of its subsidiary institution is located, except (a) in
the case of certain emergency acquisitions approved by the Federal Deposit
Insurance Corporation, (b) if the holding company controlled (as defined) such
savings institution as of March 5, 1987 or (c) when the laws of the state in
which the savings institution to be acquired is located specifically authorize
such an acquisition. No director or officer of a savings and loan holding
company or person owning or controlling more than 25% of such holding company's
voting shares may, except with the prior approval of the Office of Thrift
Supervision, acquire control of any savings institution which is not a
subsidiary of such holding company.
TierOne Bank
Insurance of Accounts. The deposits of TierOne Bank are insured to the
maximum extent permitted by the Savings Association Insurance Fund, which is
administered by the Federal Deposit Insurance Corporation, and are backed by the
full faith and credit of the U.S. Government. As insurer, the Federal Deposit
Insurance Corporation is authorized to conduct examinations of, and to require
reporting by, insured institutions. It also may prohibit any insured institution
from engaging in any activity the Federal Deposit Insurance Corporation
determines by regulation or order to pose a serious threat to the Federal
Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also
has the authority to initiate enforcement actions against savings institutions
after giving the Office of Thrift Supervision an opportunity to take such
action.
36
Under current Federal Deposit Insurance Corporation regulations, Savings
Association Insurance Fund-insured institutions are assigned to one of three
capital groups which are based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt corrective
action system discussed below. These three groups are then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates during the last six months of 2001 ranging from zero
for well capitalized, healthy institutions, such as TierOne Bank, to 27 basis
points for undercapitalized institutions with substantial supervisory concerns.
In addition, all institutions with deposits insured by the Federal Deposit
Insurance Corporation are required to pay assessments to fund interest payments
on bonds issued by the Financing Corporation, a mixed-ownership government
corporation established to recapitalize the predecessor to the Savings
Association Insurance Fund. The assessment rate for the fourth quarter of 2002
was .0168% of insured deposits and is adjusted quarterly. These assessments will
continue until the Financing Corporation bonds mature in 2019.
The Federal Deposit Insurance Corporation may terminate the deposit
insurance of any insured depository institution, including TierOne Bank, if it
determines after a hearing that the institution has engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any
condition imposed by an agreement with the Federal Deposit Insurance
Corporation. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution
has no tangible capital. If insurance of accounts is terminated, the accounts at
the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the Federal Deposit Insurance Corporation. Management is aware of
no existing circumstances which would result in termination of TierOne Bank's
deposit insurance.
Regulatory Capital Requirements. The Office of Thrift Supervision capital
requirements consist of a "tangible capital requirement," a "leverage capital
requirement" and a "risk-based capital requirement." The Office of Thrift
Supervision is authorized to impose capital requirements in excess of those
standards on individual institutions on a case-by-case basis.
Under the tangible capital requirement, a savings bank must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights.
Under the leverage capital requirement adopted by the Office of Thrift
Supervision, savings banks must maintain "core capital" in an amount equal to at
least 3.0% of adjusted total assets. Core capital is defined as common
shareholders' equity (including retained earnings), non-cumulative
37
perpetual preferred stock, and minority interests in the equity accounts of
consolidated subsidiaries, plus purchased mortgage servicing rights valued at
the lower of 90% of fair market value, 90% of original cost or the current
amortized book value as determined under generally accepted accounting
principles, and "qualifying supervisory goodwill," less non-qualifying
intangible assets.
Under the risk-based capital requirement, a savings bank must maintain
total capital (which is defined as core capital plus supplementary capital)
equal to at least 8.0% of risk-weighted assets. A savings bank must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors, which range from 0% for cash and securities issued by the
United States Government or its agencies to 100% for repossessed assets or loans
more than 90 days past due. Qualifying one-to four-family residential real
estate loans and qualifying multi-family residential real estate loans (not more
than 90 days delinquent and having an 80% or lower loan-to-value ratio), which
at December 31, 2002 represented 33.9% of the total loans receivable of TierOne
Bank, are weighted at a 50% risk factor. Supplementary capital may include,
among other items, cumulative perpetual preferred stock, perpetual subordinated
debt, mandatory convertible subordinated debt, intermediate-term preferred
stock, and general allowances for loan losses. The allowance for loan losses
includable in supplementary capital is limited to 1.25% of risk-weighted assets.
The amount of supplementary capital that can be included is limited to 100% of
core capital.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital. Such exclusions consist of equity investments (as
defined by regulation) and that portion of land loans and non-residential
construction loans in excess of an 80% loan-to-value ratio and reciprocal
holdings of qualifying capital instruments. However, in calculating regulatory
capital, institutions can add back unrealized losses and deduct unrealized gains
net of taxes, on debt securities reported as a separate component of capital
calculated according to generally accepted accounting principles.
Office of Thrift Supervision regulations establish special capitalization
requirements for savings banks that own service corporations and other
subsidiaries, including subsidiary savings banks. According to these
regulations, certain subsidiaries are consolidated for capital purposes and
others are excluded from assets and capital. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks, engaged solely in mortgage-banking activities, or engaged in
certain other activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to TierOne
Bank's level of ownership, including the assets of includable subsidiaries in
which TierOne Bank has a minority interest that is not consolidated for
generally accepted accounting principles purposes. For excludable subsidiaries,
the debt and equity investments in such subsidiaries are deducted from assets
and capital. At December 31, 2002, TierOne Bank had $1.0 million of investments
subject to a deduction from tangible capital.
Under currently applicable Office of Thrift Supervision policy, savings
institutions must value securities available for sale at amortized cost for
regulatory capital purposes. This means that in computing regulatory capital,
savings institutions should add back any unrealized losses and
38
deduct any unrealized gains, net of income taxes, on debt securities reported as
a separate component of capital calculated according to generally accepted
accounting principles.
At December 31, 2002, TierOne Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 12.2%, 12.2%
and 15.7%, respectively.
The Office of Thrift Supervision and the Federal Deposit Insurance
Corporation generally are authorized to take enforcement action against a
savings bank that fails to meet its capital requirements, which action may
include restrictions on operations and banking activities, the imposition of a
capital directive, a cease-and-desist order, civil money penalties or harsher
measures such as the appointment of a receiver or conservator or a forced merger
into another institution. In addition, under current regulatory policy, a
savings bank that fails to meet its capital requirements is prohibited from
paying any dividends.
Prompt Corrective Action. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991, federal banking regulators are required to take prompt
corrective action if an insured depository institution fails to satisfy certain
minimum capital requirements, including a leverage limit, a risk-based capital
requirement, and any other measure of capital deemed appropriate by the federal
banking regulator for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying management fees to
controlling persons if the institution would thereafter fail to satisfy the
minimum levels for any of its capital requirements.
Under the Federal Deposit Insurance Corporation Improvement Act, an
institution is deemed to be (a) "well capitalized" if it has total risk-based
capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more,
has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any
order or final capital directive to meet and maintain a specific capital level
for any capital measure, (b) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of
4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(c) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (d) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%, and (e) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Under specified
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the Federal
Deposit Insurance Corporation may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
39
An institution generally must file a written capital restoration plan
which meets specified requirements with its appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to various
regulatory restrictions, and the appropriate federal banking agency also may
take any number of discretionary supervisory actions.
At December 31, 2002, TierOne Bank was in the "well capitalized" category
for purposes of the above regulations.
Safety and Soundness Guidelines. The Office of Thrift Supervision and the
other federal bank regulatory agencies have established guidelines for safety
and soundness, addressing operational and managerial standards, as well as
compensation matters for insured financial institutions. Institutions failing to
meet these standards may be required to submit compliance plans to their
appropriate federal regulators. The Office of Thrift Supervision and the other
agencies have also established guidelines regarding asset quality and earnings
standards for insured institutions. TierOne Bank believes that it is in
compliance with these guidelines and standards.
Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by savings institutions, which include cash dividends,
stock repurchases and other transactions charged to the capital account of a
savings institution to make capital distributions. A savings institution must
file an application for Office of Thrift Supervision approval of the capital
distribution if any of the following occur or would occur as a result of the
capital distribution (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's net income for that year to
date plus the institution's retained net income for the preceding two years, (2)
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or Office of Thrift Supervision-imposed condition, or (4)
the institution is not eligible for expedited treatment of its filings. If an
application is not required to be filed, savings institutions which are a
subsidiary of a holding company (as well as certain other institutions) must
still file a notice with the Office of Thrift Supervision at least 30 days
before the Board of Directors declares a dividend or approves a capital
distribution.
Branching by Federal Savings Institutions. Office of Thrift Supervision
policy permits interstate branching to the full extent permitted by statute
(which is essentially unlimited). Generally, federal law prohibits federal
savings institutions from establishing, retaining or operating a branch outside
the state in which the federal institution has its home office unless the
institution meets the IRS' domestic building and loan test (generally, 60% of a
thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement
does not apply if: (a) the branch(es) result(s) from
40
an emergency acquisition of a troubled savings institution (however, if the
troubled savings institution is acquired by a bank holding company, does not
have its home office in the state of the bank holding company bank subsidiary
and does not qualify under the IRS Test, its branching is limited to the
branching laws for state-chartered banks in the state where the savings
institution is located); (b) the law of the state where the branch would be
located would permit the branch to be established if the federal savings
institution were chartered by the state in which its home office is located; or
(c) the branch was operated lawfully as a branch under state law prior to the
savings institution's reorganization to a federal charter.
Furthermore, the Office of Thrift Supervision will evaluate a branching
applicant's record of compliance with the Community Reinvestment Act of 1977. An
unsatisfactory Community Reinvestment Act record may be the basis for denial of
a branching application.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities, and failure to comply with
the fair lending laws could result in enforcement actions by the Office of
Thrift Supervision, as well as other federal regulatory agencies and the
Department of Justice.
Qualified Thrift Lender Test. All savings institutions are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. Under Section 2303 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, a savings institution can comply with the qualified
thrift lender test by either qualifying as a domestic building and loan bank as
defined in Section 7701(a)(19) of the Internal Revenue Code or by meeting the
second prong of the qualified thrift lender test set forth in Section 10(m) of
the Home Owner's Loan Act. A savings institution that does not meet the
qualified thrift lender test must either convert to a bank charter or comply
with the following restrictions on its operations: (a) the institution may not
engage in any new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national bank; (b) the
branching powers of the institution shall be restricted to those of a national
bank; (c) the institution shall not be eligible to obtain any new advances from
its Federal Home Loan Bank, other than special liquidity advances with the
approval of the Office of Thrift Supervision; and (d) payment of dividends by
the institution shall be subject to the rules regarding payment of dividends by
a national bank. Upon the expiration of three years from the date the savings
institution ceases to be a qualified thrift lender, it must cease any activity
and not retain any investment not permissible for a national bank and
immediately repay any outstanding Federal Home Loan Bank advances (subject to
safety and soundness considerations).
Currently, the portion of the qualified thrift lender test that is based
on Section 10(m) of the Home Owners' Loan Act rather than the Internal Revenue
Code requires that 65% of an institution's
41
"portfolio assets" (as defined) consist of certain housing and consumer-related
assets on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-backed securities
(where the mortgages are secured by domestic residential housing or manufactured
housing); stock issued by the Federal Home Loan Bank and direct or indirect
obligations of the Federal Deposit Insurance Corporation. Small business loans,
credit card loans and student loans are also included without limitation as
qualified investments. In addition, the following assets, among others, may be
included in meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans originated and
sold within 90 days of origination; 100% of loans for personal, family and
household purposes (other than credit card loans and educational loans); and
stock issued by Fannie Mae or Freddie Mac. Portfolio assets consist of total
assets minus the sum of (a) goodwill and other intangible assets, (b) property
used by the savings institution to conduct its business, and (c) liquid assets
up to 20% of the institution's total assets. At December 31, 2002, approximately
90.3% of the portfolio assets of TierOne Bank were qualified thrift investments.
Federal Home Loan Bank System. TierOne Bank is a member of the Federal
Home Loan Bank of Topeka, which is one of 12 regional Federal Home Loan Banks
that administer the home financing credit function of savings institutions. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank System. It
makes loans to members (i.e., advances) in accordance with policies and
procedures established by its Board of Directors. At December 31, 2002, TierOne
Bank had $418.1 million of Federal Home Loan Bank advances.
As a member, TierOne Bank is required to purchase and maintain stock in
the Federal Home Loan Bank of Topeka in an amount equal to at least 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of the members' aggregate amount
of outstanding advances. At December 31, 2002, TierOne Bank had $21.5 million in
stock of the Federal Home Loan Bank of Topeka, which was in compliance with this
requirement.
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid and could continue to do so in the future and could also result
in the Federal Home Loan Banks imposing higher interest rates on advances to
members. These contributions also could have an adverse effect on the value of
Federal Home Loan Bank stock in the future.
Federal Reserve System. Federal Reserve Board regulations require all
depository institutions to maintain noninterest earning reserves against their
transaction accounts (primarily
42
NOW and Super NOW checking accounts) and non-personal time deposits. At December
31, 2002, TierOne Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the Office of Thrift Supervision.
Savings banks are authorized to borrow from a Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require savings banks
to exhaust other reasonable alternative sources of funds, including Federal Home
Loan Bank advances, before borrowing from a Federal Reserve Bank.
Affiliate Restrictions. Section 11 of the Home Owners' Loan Act provides
that transactions between an insured subsidiary of a holding company and an
affiliate thereof will be subject to the restrictions that apply to transactions
between banks that are members of the Federal Reserve System and their
affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act.
Generally, Section 23A and 23B and Office of Thrift Supervision
regulations issued in connection therewith limit the extent to which a savings
institution or its subsidiaries may engage in certain "covered transactions"
with affiliates to an amount equal to 10% of the institution's capital and
surplus, in the case of covered transactions with any one affiliate, and to an
amount equal to 20% of such capital and surplus, in the case of covered
transactions with all affiliates. Section 23B applies to "covered transactions"
and certain other transactions and requires that all such transactions be on
terms and under circumstances that are substantially the same, or at least as
favorable to the savings institution or its subsidiary, as those prevailing at
the time for comparable transactions with nonaffiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued by an affiliate; a
purchase of assets from an affiliate, with certain exceptions; the acceptance of
securities issued by an affiliate as collateral for a loan or extension of
credit to any party; or the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate. Section 23B transactions also apply to the
provision of services and the sale of assets by a savings association to an
affiliate.
In addition, under Office of Thrift Supervision regulations, a savings
institution may not make a loan or extension of credit to an affiliate unless
the affiliate is engaged only in activities permissible for bank holding
companies; a savings institution may not purchase or invest in securities of an
affiliate other than shares of a subsidiary; a savings institution and its
subsidiaries may not purchase a low-quality asset from an affiliate; and covered
transactions and certain other transactions between a savings institution or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions, each
loan or extension of credit by a savings institution to an affiliate must be
secured by collateral with a market value ranging from 100% to 130% (depending
on the type of collateral) of the amount of the loan or extension of credit.
The Office of Thrift Supervision regulation generally excludes all
non-bank and non-savings institution subsidiaries of savings institutions from
treatment as affiliates, except to the extent that
43
the Office of Thrift Supervision or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
institutions to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings institutions may
be required to give the Office of Thrift Supervision prior notice of affiliate
transactions.
Federal Securities Law
TierOne Corporation's common stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended, and under Office of Thrift
Supervision regulations, and generally may not be deregistered for at least
three years after the initial public offering completed on October 1, 2002. We
are subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the Securities Exchange Act of 1934, as amended.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 implementing legislative reforms intended to address corporate and
accounting fraud. In addition to the establishment of a new accounting oversight
board which will enforce auditing, quality control and independence standards
and will be funded by fees from all publicly traded companies, the bill
restricts provision of both auditing and consulting services by accounting
firms. To ensure auditor independence, any non-audit services being provided to
an audit client will require preapproval by the company's audit committee
members. In addition, the audit partners must be rotated. The bill requires
chief executive officers and chief financial officers, or their equivalent, to
certify to the accuracy of periodic reports filed with the SEC, subject to civil
and criminal penalties if they knowingly or willfully violate this certification
requirement. In addition, under the Act, counsel will be required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief executive officer or its chief legal officer,
and, if such officer does not appropriately respond, to report such evidence to
the audit committee or other similar committee of the Board of Directors or the
Board itself.
Longer prison terms will also be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited to a fund for the benefit of harmed investors. The Federal Accounts
for Investor Restitution ("FAIR") provision also requires the SEC to develop
methods of improving collection rates. The legislation accelerates the time
frame for disclosures by public companies, as they must immediately disclose any
material changes in their financial condition or operations. Directors and
executive officers must also provide information for most changes in ownership
in a company's securities within two business days of the change.
44
The Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the
company's "registered public accounting firm" ("RPAF"). Audit committee members
must be independent and are barred from accepting consulting, advisory or other
compensatory fees from the issuer. In addition, companies must disclose whether
at least one member of the committee is a "financial expert" as such term is
defined by the SEC and if not, why not. Under the Act, a RPAF is prohibited from
performing statutorily mandated audit services for a company if such company's
chief executive officer, chief financial officer, comptroller, chief accounting
officer or any person serving in equivalent positions has been employed by such
firm and participated in the audit of such company during the one-year period
preceding the audit initiation date. The Act also prohibits any officer or
director of a company or any other person acting under their direction from
taking any action to fraudulently influence, coerce, manipulate or mislead any
independent public or certified accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statement's
materially misleading. The Act also requires the SEC to prescribe rules
requiring inclusion of an internal control report and assessment by management
in the annual report to shareholders. The Act requires the RPAF that issues the
audit report to attest to and report on management's assessment of the company's
internal controls. In addition, the Act requires that each financial report
required to be prepared in accordance with (or reconciled to) generally accepted
accounting principles and filed with the SEC reflect all material correcting
adjustments that are identified by a RPAF in accordance with generally accepted
accounting principles and the rules and regulations of the SEC.
TAXATION
Federal Taxation
General. We are subject to federal income taxation in the same general
manner as other corporations with some exceptions listed below. The following
discussion of federal taxation is only intended to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the
applicable tax rules. We were last audited by the Internal Revenue Service for
tax year 1991 and by the Nebraska Department of Revenue for tax year 1993.
We file a consolidated federal income tax return and accordingly, any cash
distributions made by us are treated as cash dividends, and not as a non-taxable
return of capital to shareholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, we report income
and expenses on the accrual method of accounting and file our federal income tax
return on a calendar year basis.
Bad Debt Reserves. The Small Business Protection Act of 1996 eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995. Prior to that
time, we were permitted to establish a reserve for bad debts and to make
additions to the reserve. These additions could, within specified formula
limits, be deducted in arriving at taxable income. As a result of the Small
Business Protection Act of 1996, savings
45
associations must use the specific charge-off method in computing their bad debt
deduction beginning with their 1996 federal tax return. In addition, federal
legislation requires the recapture (over a six year period) of the excess of tax
bad debt reserves at December 31, 1995 over those established as of December 31,
1987. The amount of our reserve subject to recapture as of December 31, 2002 was
approximately $181,000.
Taxable Distributions And Recapture. Prior to the Small Business
Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were
subject to recapture into taxable income if we failed to meet certain thrift
asset and definitional tests. New federal legislation eliminated these
thrift-related recapture rules. However, to the extent that we make
"non-dividend distributions" that are considered as made (i) from the reserve
for losses on qualifying real property loans or (ii) from the supplemental
reserve for losses on loans, then an amount based on the amount distributed will
be included in our taxable income. Non-dividend distributions include
distributions in excess of our current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of our current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from our bad debt reserve. As a result, any
dividends that would reduce amounts appropriated to bad debt reserve and
deducted for federal income tax purposes would create a tax liability for us.
At December 31, 2002, our total federal pre-1988 reserve was approximately
$7.7 million. The reserve reflects the cumulative effects of federal tax
deductions for which no federal income tax provisions have been made.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax
at a rate of 20% on a base of regular taxable income plus certain tax
preferences. The alternative minimum tax is payable to the extent such
alternative minimum tax income is in excess of an exemption amount. Net
operating losses, of which we have none, can offset no more than 90% of
alternative minimum tax income. However, net operating losses attributable to
years ending in 2001 or 2002 or carried forward from an earlier year into 2001
or 2002 can offset 100% of alternative minimum tax liability. Certain payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. We have not been subject to the alternative minimum
tax nor do we have any such amounts available as credits for carryover.
Net Operating Loss Carryovers. We may carry back net operating losses to
the two preceding taxable years and forward to the succeeding 20 taxable years.
This provision applies to losses incurred in taxable years beginning before
August 6, 1997. For net operating losses in years beginning after August 5,
1997, such net operating losses can be carried back to the two preceding taxable
years and forward to the succeeding 20 taxable years. At December 31, 2002, we
had no net operating loss carry forwards for federal income tax purposes.
Corporate Dividends-Received Deduction. We may exclude from income 100% of
dividends received from a member of the same affiliated group of corporations.
The corporate
46
dividends received deduction is 80% in the case of dividends received from
corporations which a corporate recipient owns less than 80%, but at least 20% of
the distribution corporation. Corporations which own less than 20% of the stock
of a corporation distributing a dividend may deduct only 70% of dividends
received.
State and Local Taxation
Nebraska Taxation. Under Nebraska law, TierOne Bank presently pays a
franchise tax in lieu of a corporate income tax. The franchise tax is the lesser
of two amounts computed based on our average deposits and net financial income,
respectively. Presently, the tax is $0.47 per $1,000 of average deposits but not
to exceed an amount determined by applying 3.81% to our net financial income.
Net financial income is our income as reported to the Office of Thrift
Supervision, including our subsidiaries, after ordinary and necessary expenses
but before income taxes.
In addition, TierOne Corporation is required to file a Nebraska income tax
return because we are doing business in Nebraska. For Nebraska tax purposes,
corporations are presently taxed at a rate equal to 7.81% of taxable income. For
this purpose, "taxable income" generally means Federal taxable income, subject
to certain adjustments (including addition of interest income on non-Nebraska
municipal obligations and excluding interest income from qualified U.S.
governmental obligations).
Iowa, Kansas and Colorado Taxation. For Iowa, Kansas and Colorado income
tax purposes, we are taxed at a rate equal to 5.00%, 4.50% and 4.63%,
respectively, of taxable income. For this purpose, "taxable income" generally
means Federal taxable income, subject to certain adjustments (including addition
of interest income on state and municipal obligations).
Wisconsin Taxation. As a Wisconsin holding company, TierOne Corporation is
subject to a Wisconsin franchise tax based on its net income on a separate
(rather than on a consolidated) basis. The only income TierOne Corporation earns
are dividends paid to it by its wholly owned subsidiaries. Accordingly, and
because such dividends are generally exempt from Wisconsin franchise tax,
TierOne Corporation pays little or no Wisconsin franchise tax. TierOne
Corporation also files an annual report with and pays a nominal filing fee to
the State of Wisconsin.
47
Item 2. Properties.
Properties
We currently conduct our business from our home office and 57 full-service
banking offices in Nebraska, Kansas and Iowa and two loan production offices in
Colorado. The following table sets forth the net book value of the land,
building and leasehold improvements and certain other information with respect
to our offices and other properties at December 31, 2002.
Date of Net Book
Lease Value of Amount of
Description/Address Leased/Owned Expiration Property Deposits
- ----------------------------------- ------------ ---------- -------- --------
Corporate Headquarters: (In Thousands)
1221 "N" Street
Lincoln, Nebraska 68508 Owned(1) -- $ 8,307 $ --
Home Office:
13 & "N" Street
Lincoln, Nebraska 68508-2008 Owned -- 3,069 85,373
Branch Offices:
8820 Arbor Street
Omaha, Nebraska 68124-2030 Owned -- 333 25,504
2101 South 42nd Street, Suite #100
Omaha, Nebraska 68105-2312 Leased 2006 -- 40,420
135 North Cotner Street
Lincoln, Nebraska 68505-0204 Owned -- 326 53,710
3010 North 90th Street
Omaha, Nebraska 68134-4759 Leased 2003 3 25,216
6945 "A" Street
Lincoln, Nebraska 68510-4113 Leased 2007 247 33,541
2120 1st Avenue
Kearney, Nebraska 68848-0816 Owned -- 265 26,015
513 "E" Street
Fairbury, Nebraska 68352-0022 Leased 2003 7 11,802
1612 "K" Street
Ord, Nebraska 68862-0148 Owned -- 111 14,972
1301 Main Avenue
Crete, Nebraska 68333-0126 Owned -- 106 13,902
423 West 3rd Street
Alliance, Nebraska 69301-3307 Owned -- 36 7,119
48
Date of Net Book
Lease Value of Amount of
Description/Address Leased/Owned Expiration Property Deposits
- ----------------------------------- ------------ ---------- -------- --------
1811 West 2nd Street, Suite #108
Grand Island, Nebraska 68802-2320 Owned -- $ 1,295 $ 28,948
3939 Normal Boulevard
Lincoln, Nebraska 68506-5217 Leased 2004 -- 21,164
840 North 70th Street
Lincoln, Nebraska 68505-2189 Leased 2003 11 13,249
220 North Dewey Street
North Platte, Nebraska 69101-4035 Owned -- 619 23,176
211 West "C" Street
McCook, Nebraska 69001-0339 Leased 2005 -- 16,153
14100 "S" Street
Omaha, Nebraska 68137-2600 Owned -- 296 13,465
3410 North 27th Street
Lincoln, Nebraska 68521-1314 Owned -- 1,058 7,855
1016 Central Avenue
Nebraska City, Nebraska 68410-2337 Owned -- 10 25,474
9628 "M" Street
Omaha, Nebraska 68127-2054 Leased(2) 2004 534 12,679
2625 South 140th Street
Omaha, Nebraska 68144-2338 Owned -- 1,229 24,118
5300 South 56th Street
Lincoln, Nebraska 68516-1833 Owned -- 283 20,738
320 Lincoln Avenue
Hebron, Nebraska 68370-0003 Owned -- 5 8,326
647 West 2nd Street
Hastings, Nebraska 68901-5131 Leased 2005 12 16,764
830 South "E" Street
Broken Bow, Nebraska 68822-0445 Owned -- 17 22,026
609 Howard Avenue
St. Paul, Nebraska 68873-2022 Owned -- 25 7,382
6424 Havelock Avenue
Lincoln, Nebraska 68507-1331 Owned -- 161 23,275
1028 Toledo Street
Sidney, Nebraska 69162-2552 Leased 2003 7 19,910
2001 Broadway; Suite #1
Scottsbluff, Nebraska 69361-1973 Owned -- 345 18,794
49
Date of Net Book
Lease Value of Amount of
Description/Address Leased/Owned Expiration Property Deposits
- ----------------------------------- ------------ ---------- -------- --------
103 East Main Street
Bloomfield, Nebraska 68718-0547 Owned -- $ 1 $ 16,813
3301 South 13th Street
Lincoln, Nebraska 68502-4576 Owned -- 200 13,415
1000 East Court Street
Beatrice, Nebraska 68310-0664 Owned -- 151 17,991
114 West 15th Street
Falls City, Nebraska 68355-0009 Owned -- 74 21,696
1301 "J" Street
Auburn, Nebraska 68305-1964 Owned -- 143 11,527
173 South 3rd Street
Tecumseh, Nebraska 68450-0536 Owned -- 21 8,675
314 East Square
Humboldt, Nebraska 68376-0167 Owned -- 7 11,842
608 North Linden
Wahoo, Nebraska 68066-1770 Owned -- 105 26,221
400 Braasch
Norfolk, Nebraska 68701-4020 Owned -- 298 31,675
1616 North Bell Street
Fremont, Nebraska 68025-3157 Leased 2003 -- 13,467
2457 33rd Avenue, Suite F
Columbus, Nebraska 68601-1309 Leased 2004 -- 12,048
127 South 4th Street
Albion, Nebraska 68620-0269 Leased 2004 3 9,693
203 North Lincoln
West Point, Nebraska 68788-1409 Leased 2003 -- 4,247
1850 10th Street
Gering, Nebraska 69341-2414 Owned -- 30 5,002
1004 Avenue D
Gothenburg, Nebraska 69138-1940 Owned -- 47 4,082
509 West Broadway
Council Bluffs, Iowa 51503-0841 Owned -- 550 22,675
201 South Locust
Glenwood, Iowa 51534-1727 Owned -- 75 12,288
3201 West Broadway
Council Bluffs, Iowa 51501-3360 Owned -- 225 11,999
50
Date of Net Book
Lease Value of Amount of
Description/Address Leased/Owned Expiration Property Deposits
- ----------------------------------- ------------ ---------- -------- --------
700 West Thomas Avenue
Shenandoah, Iowa 51601-1746 Owned -- $ 66 $ 27,803
5533 South 27th Street, Suite 101
Lincoln, Nebraska 68512-1611 Leased 2006 60 20,572
509 Chestnut Street
Atlantic, Iowa 50022-1249 Leased 2004 2 18,982
200 South Jefferson
Plainville, Kansas 67663-0030 Owned -- 20 17,130
201 South Cedar
Stockton, Kansas 67669-0274 Owned -- 16 8,517
802 North Broadway Street
Red Oak, Iowa 51566-1440 Owned -- 170 17,084
301 East Washington
Clarinda, Iowa 51632-1723 Owned -- 34 23,074
203 North 18th Street
Marysville, Kansas 66508-0229 Owned -- 44 14,713
615 North 114th Street
Omaha, Nebraska 68154-1514 Leased 2004 298 32,731
1707 Madison Avenue
Council Bluffs, Iowa 51503-5249 Leased 2017 415 21,044
205 East Erie
Missouri Valley, Iowa 51555-1500 Owned -- 23 10,804
Loan Production Offices:
1283 Kelly Johnson Boulevard
Colorado Springs, Colorado 80920-3973 Leased 2003 -- --
12605 East Euclid Drive #206
Denver, Colorado 80111-6347 Leased(3) 2004 -- --
---------- ----------
Total $ 21,795 $1,128,880
========== ==========
- ----------
(1) In February 2002, we purchased our corporate headquarters. The purchase
price for the building was approximately $3.5 million.
(2) This office will be relocated to a new location during the second quarter
of 2003. We have notified and received approval from the Office of Thrift
Supervision regarding this move. The net book value includes the purchase
price of the land and building of the new location.
(3) This office was opened in February 2003.
51
Item 3. Legal Proceedings.
Other than litigation relating to certain goodwill claims against the U.S.
Government described below, we are not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings, in the aggregate, are believed by
management to be immaterial to the Company's consolidated financial condition or
consolidated results of operations.
In August 1995, we commenced litigation against the U. S. Government in
the U.S. Court of Federal Claims, (the "Claims Court") claiming that the United
States breached its contract with us and has unlawfully taken our property
without just compensation or due process of law. As described below, our claims
arose from changes to the rules for computing our regulatory capital that were
required by the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA").
Pursuant to FIRREA, which became effective in August 1989, the Office of
Thrift Supervision was created as the successor to the Federal Home Loan Bank
Board to regulate federally-insured savings institutions. At such time, we had
$30.0 million of supervisory goodwill remaining from three supervisory mergers
we completed in 1982. At the time of these mergers, the U.S. Government agreed
we could include the supervisory goodwill as capital for purposes of meeting our
supervisory capital requirements. The regulatory goodwill was to be amortized
over a 25-year period. As a result of regulations adopted by the Office of
Thrift Supervision implementing FIRREA, we had to immediately exclude all of our
supervisory goodwill from the calculation of our tangible capital and had to
phase the inclusion of this goodwill out of the calculation of our core and
risk-based capital requirements over a five-year period. We believe that FIRREA
and the adoption of the capital regulations by the Office of Thrift Supervision
constituted a breach by the U.S. Government of its contractual commitment
regarding the regulatory capital treatment of our supervisory goodwill. As a
result, we commenced litigation against the U.S. Government, as discussed below,
seeking damages for this breach of contract.
Our case was initially stayed pending resolution on appeal of a series of
cases (United States v. Winstar Corporation) (the "Winstar Cases"). In July
1996, the U.S. Supreme Court ruled in the Winstar Cases that when the U.S.
Congress changed the accounting for supervisory goodwill specified in FIRREA, it
breached its contractual agreements with these institutions regarding the
treatment of supervisory goodwill. The Claims Court issued a case management
order in all cases similar to the Winstar Cases, including ours. Pursuant to the
case management order, we filed a motion for partial summary judgment with
respect to the U.S. Government's liability to us for breach of contract. The
U.S. Government, in response, filed a motion for summary judgment, denying any
liability to us. On November 19, 2002, Judge Sarah Wilson of the United States
Court of Federal Claims entered an order finding that genuine issues of material
fact exist regarding liability and both parties' cross-motions for partial
summary judgement were denied. On March 4, 2003, an order was entered by judge
Lawrence Margolis setting a four-day trial to commence on May 19, 2003 which
will be limited solely to issues of liability.
52
Under the terms of the case management order, we and the U.S. Government
commenced discovery in 2000. Discovery was recently completed, including the
submission of expert witness testimony by both the U.S. Government and us. We
are claiming damages under two alternative theories. First, we are claiming lost
profits damages of $66.7 million due to, among other things, lost profits, lost
franchise value and "wounded bank" damages. Alternatively, we have claimed
damages of $28.5 million for the cost of replacement capital. The U.S.
Government's experts have countered, stating that we have not suffered any
damages and in fact benefitted from FIRREA since we reduced the number of our
banking offices and took other steps which reduced our operating costs.
The U.S. Government's current litigation strategy is to argue that no
damages have been suffered and therefore it will not settle any of the pending
goodwill cases. As a consequence, claimants, including us, will be required to
proceed to trial to pursue our damage claims. There can be no assurance as to
the type or amount of damages, if any, that we may recover or the timing, if we
are successful, for receipt by us of any damages from the U.S. Government.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters.
The information required herein is incorporated by reference from the
inside back cover of the Company's 2002 Annual Report to Stockholders ("Annual
Report") and from Part III, Item 12 hereof.
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from page 10
of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is incorporated by reference from pages 11
to 25 of the Annual Report.
53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required herein is incorporated by reference from pages 13
to 15 of the Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages 27
to 50 of the Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Company.
The information required by Item 10 of Form 10-K with respect to
identification of directors and executive officers is incorporated by reference
from pages 2-5 and 16 in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held April 23, 2003 (the "Proxy Statement"), as
filed with the Securities and Exchange Commission on March 11, 2003.
Item 11. Executive Compensation.
The information required by Item 11 of Form 10-K is incorporated by
reference from pages 5-14 in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by Item 403 of Regulation S-K is incorporated by
reference from pages 15 and 16 in the Proxy Statement.
Equity Compensation Plan Information. The Registrant did not have any
equity compensation plans or individual compensation arrangements (whether with
employees or non-employees, such as directors), in effect as of December 31,
2002.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 of Form 10-K is incorporated by
reference from page 12 in the Proxy Statement.
54
Item 14. Controls and Procedures.
Quarterly evaluation of the Company's Disclosure Controls and Internal
Controls. Within the 90 days prior to the date of this Annual Report on Form
10-K, we evaluated the effectiveness of the design and operation of our
"disclosure controls and procedures" ("Disclosure Controls") in accordance with
the provisions of Rules 13a-14 and 13a-15 of the Securities Exchange Act of 1934
(the "Exchange Act"). This evaluation ("Controls Evaluation") was done under the
supervision and with the participation of management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Disclosure Controls 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 Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC'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 CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls. Our management, including
the CEO and CFO, does not expect that our Disclosure Controls or our "internal
controls and procedures for financial reporting" ("Internal Controls" ) will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within TierOne Corporation have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have
concluded that, subject to the limitations noted above, the Disclosure Controls
are effective to timely alert management to material information relating to
TierOne Corporation, including our consolidated subsidiaries, during the period
for which its periodic reports are being prepared.
55
In accord with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this Annual Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Contents
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for the Years Ended December 31, 2002,
2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
56
(c) Exhibits
(2) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
No. Exhibits Location
------------- ------------------------------------------------------------------------------------- --------------
3.1 Articles of Incorporation of TierOne Corporation (1)
3.2 Bylaws of TierOne Corporation (1)
4.0 Form of Stock Certificate of TierOne Corporation (1)
10.1 Employment Agreement between TierOne Bank and Gilbert G. Lundstrom* (1)
10.2 Employment Agreement between TierOne Bank and James A. Laphen* (1)
10.3 Form of Employment Agreement between TierOne Corporation and Gilbert G. Lundstrom* (1)
10.4 Form of Employment Agreement between TierOne Corporation and James A. Laphen* (1)
10.5 Supplemental Retirement Plan* (1)
10.6 Form of Change in Control Agreement between TierOne Bank and certain executive officers* (1)
10.7 Form of Change in Control Agreement between TierOne Bank and certain executive officers* (1)
10.8 Form of TierOne Bank Employee Severance Plan* (1)
10.9 Form of Employee Stock Ownership Plan Supplemental Executive Retirement Plan* (1)
10.10 Form of 401(k) Plan Supplemental Executive Retirement Plan* (1)
10.11 Director's Deferred Compensation Program* (1)
10.12 Amended and Restated Consultation Plan for Directors* (1)
10.13 TierOne Bank Management Incentive Compensation Plan* Filed herewith
10.14 TierOne Bank Deferred Compensation Plan* Filed herewith
13 Annual Report to Shareholders Filed herewith
22 Subsidiaries of the Registrant - Reference is made to "Item 1.
Business - Subsidiaries" of this Form 10-K for the required
information --
23 Consent of KPMG LLP Filed herewith
99.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 Filed herewith
99.2 Certification of Executive Vice President and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 Filed herewith
- ----------
* Denotes management compensation plan or arrangement.
(1) Incorporated by reference from TierOne Corporation'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).
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Gilbert G. Lundstrom
--------------------------------
Gilbert G. Lundstrom
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Name Title Date
- ------------------------------ ------------------------------- --------------
/s/ Gilbert G. Lundstrom Chairman of the Board and Chief March 26, 2003
- ------------------------------ Executive Officer
Gilbert G. Lundstrom (principal executive officer)
/s/ James A. Laphen Director, President and Chief March 26, 2003
- ------------------------------ Operating Officer
James A. Laphen
/s/ Eugene B. Witkowicz Executive Vice President, Chief Financial March 26, 2003
- ------------------------------ Officer and Corporate Secretary (principal
Eugene B. Witkowicz accounting officer)
/s/ Campbell R. McConnell Director March 26, 2003
- ------------------------------
Campbell R. McConnell
/s/ Joyce Person Pocras Director March 26, 2003
- ------------------------------
Joyce Person Pocras
/s/ LaVern F. Roschewski Director March 26, 2003
- ------------------------------
LaVern F. Roschewski
58
Name Title Date
- ------------------------------ ------------------------------- --------------
/s/ Ann Lindley Spence Director March 26, 2003
- ------------------------------
Ann Lindley Spence
59
CERTIFICATION
I, Gilbert G. Lundstrom, Chairman of the Board and Chief Executive Officer
of TierOne Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of TierOne Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual
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
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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
60
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
annual 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: March 26, 2003
/s/ Gilbert G. Lundstrom
-----------------------------
Gilbert G. Lundstrom
Chairman of the Board and
Chief Executive Officer
61
CERTIFICATION
I, Eugene B. Witkowicz, Executive Vice President and Chief Financial
Officer of TierOne Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of TierOne Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual
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
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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
62
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
annual 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: March 26, 2003 /s/ Eugene B. Witkowicz
------------------------------------
Eugene B. Witkowicz
Executive Vice President and
Chief Financial Officer
63