UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____ to _____.
Commission file number: 000-50015
TierOne Corporation
(Exact name of Registrant as specified in its charter)
Wisconsin 04-3638672
- ---------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1235 "N" Street
Lincoln, Nebraska 68508
- ---------------------------------------- -----------------------
(Address of Principal Executive Offices) (Zip Code)
(402) 475-0521
-------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At November 5, 2003, the
registrant had 22,272,775 shares of common stock, $.01 par value per share,
outstanding.
PART I - FINANCIAL INFORMATION
Interim financial information required by Rule 10-01 of Regulation S-X and Item
303 of Regulation S-K is included in this Form 10-Q as referenced below.
Page
----
Item 1 - Financial Statements ........................................... 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk ..... 32
Item 4 - Controls and Procedures ........................................ 32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings .............................................. 33
Item 2 - Changes in Securities and Use of Proceeds ...................... 33
Item 3 - Defaults Upon Senior Securities ................................ 33
Item 4 - Submission of Matters to a Vote of Security Holders ............ 33
Item 5 - Other Information .............................................. 33
Item 6 - Exhibits and Reports on Form 8-K ............................... 34
Signatures .............................................................. 36
2
TierOne Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 2003 (Unaudited) and December 31, 2002
(dollars in thousands, except per share data)
September 30, 2003 December 31, 2002
------------------ -----------------
Assets
Cash and due from banks $ 30,603 $ 33,037
Federal funds sold 56,000 --
----------- -----------
Total cash and cash equivalents 86,603 33,037
Investment securities:
Held to maturity 146 157
Available for sale 33,860 30,546
Mortgage-backed securities, available for sale 19,151 30,369
Loans held for sale 15,824 8,504
Loans receivable, net 1,849,171 1,765,744
Federal Home Loan Bank stock 36,818 21,459
Premises and equipment, net 27,318 26,810
Accrued interest receivable 8,920 9,084
Other assets 20,624 19,825
----------- -----------
Total assets $ 2,098,435 $ 1,945,535
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 1,186,825 $ 1,128,880
Advances from Federal Home Loan Bank and other borrowings 521,733 418,329
Advance payments from borrowers for taxes, insurance and
other escrow funds 21,924 29,453
Accrued interest payable 4,645 6,812
Accrued expenses and other liabilities 21,676 22,165
----------- -----------
Total liabilities 1,756,803 1,605,639
----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
none issued -- --
Common stock, $0.01 par value; 60,000,000 shares authorized;
22,575,075 shares issued and outstanding 226 226
Additional paid-in capital 353,553 355,741
Retained earnings, substantially restricted 20,136 2,018
Unearned common stock held by Employee Stock
Ownership Plan (16,555) (17,684)
Unearned common stock held by Management
Recognition and Retention Plan (15,664) --
Accumulated other comprehensive loss, net (64) (405)
----------- -----------
Total shareholders' equity 341,632 339,896
Commitments and contingent liabilities
----------- -----------
Total liabilities and shareholders' equity $ 2,098,435 $ 1,945,535
=========== ===========
See accompanying notes to consolidated financial statements.
3
TierOne Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest income:
Loans receivable $ 26,608 $ 25,329 $ 80,774 $ 72,480
Investment and mortgage-backed securities 540 1,095 2,687 3,778
Other interest-earning assets 33 118 132 325
---------- ---------- ---------- ----------
Total interest income 27,181 26,542 83,593 76,583
---------- ---------- ---------- ----------
Interest expense:
Deposits 5,316 7,941 17,405 23,963
Advances from Federal Home Loan Bank and
other borrowings 4,802 3,323 13,396 9,347
---------- ---------- ---------- ----------
Total interest expense 10,118 11,264 30,801 33,310
---------- ---------- ---------- ----------
Net interest income 17,063 15,278 52,792 43,273
Provision for loan losses 1,106 1,262 2,793 2,469
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 15,957 14,016 49,999 40,804
---------- ---------- ---------- ----------
Other income:
Fees and service charges 3,048 1,119 4,627 4,598
Income (loss) from real estate operations, net (14) 224 (6) 583
Net gain (loss) on sales of:
Loans held for sale 2,618 806 7,226 2,120
Real estate owned (1) 4 (80) 3
Other operating income 860 761 2,266 1,893
---------- ---------- ---------- ----------
Total other income 6,511 2,914 14,033 9,197
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits 7,340 5,640 20,755 16,127
Occupancy, net 1,495 1,393 4,254 4,297
Data processing 432 358 1,250 1,070
Advertising 957 848 2,585 2,737
Other operating expense 2,164 1,794 6,379 5,512
---------- ---------- ---------- ----------
Total other expense 12,388 10,033 35,223 29,743
---------- ---------- ---------- ----------
Income before income taxes 10,080 6,897 28,809 20,258
Income tax expense 3,792 2,487 10,691 7,310
---------- ---------- ---------- ----------
Net income $ 6,288 $ 4,410 $ 18,118 $ 12,948
========== ========== ========== ==========
Net income per common share, basic* $ 0.31 -- $ 0.88 --
========== ========== ========== ==========
Net income per common share, diluted* $ 0.30 -- $ 0.87 --
========== ========== ========== ==========
Average common shares outstanding, basic (000's)* 20,497 -- 20,693 --
========== ========== ========== ==========
Average common shares outstanding, diluted (000's)* 20,806 -- 20,874 --
========== ========== ========== ==========
* Information applicable to post stock conversion period only. The Company
completed its initial public offering on October 1, 2002 and did not have
any stock outstanding prior thereto.
See accompanying notes to consolidated financial statements.
4
TierOne Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
Nine Months Ended September 30, 2003 (Unaudited)
(dollars in thousands)
Unearned
Unearned common stock
Retained common stock held by the
earnings, held by the Management
Additional substantially Employee Stock Recognition and
Common stock paid-in capital restricted Ownership Plan Retention Plan
------------ --------------- ------------- -------------- ---------------
Balance at December 31, 2002 $ 226 $ 355,741 $ 2,018 $ (17,684) $ --
--------- --------- --------- --------- ---------
Common stock earned by
employees in Employee
Stock Ownership Plan -- 1,010 -- 1,129 --
Common stock purchased by the
Management Recognition
and Retention Plan -- (3,198) -- -- (16,846)
Amortization of awards under the
Management Recognition
and Retention Plan -- -- -- -- 1,182
Comprehensive income:
Net income -- -- 18,118 -- --
Change in unrealized loss on
available for sale securities,
net of tax -- -- -- -- --
--------- --------- --------- --------- ---------
Total comprehensive income -- -- 18,118 -- --
--------- --------- --------- --------- ---------
Balance at September 30, 2003 $ 226 $ 353,553 $ 20,136 $ (16,555) $ (15,664)
========= ========= ========= ========= =========
Accumulated
other Total
comprehensive shareholders'
loss equity
------------- -------------
Balance at December 31, 2002 $ (405) $ 339,896
--------- ---------
Common stock earned by
employees in Employee
Stock Ownership Plan -- 2,139
Common stock purchased by the
Management Recognition
and Retention Plan -- (20,044)
Amortization of awards under the
Management Recognition
and Retention Plan -- 1,182
Comprehensive income:
Net income -- 18,118
Change in unrealized loss on
available for sale securities,
net of tax 341 341
--------- ---------
Total comprehensive income 341 18,459
--------- ---------
Balance at September 30, 2003 $ (64) $ 341,632
========= =========
See accompanying notes to consolidated financial statements.
5
TierOne Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002 (Unaudited)
(dollars in thousands)
September 30,
------------------------
2003 2002
--------- ---------
Reconciliation of net income to net cash provided by (used in) operating
activities:
Net income $ 18,118 $ 12,948
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net premium amortization of investment and mortgage-backed securities 2,234 236
Depreciation and amortization 1,876 1,678
Employee Stock Ownership Plan expense 2,139 --
Management Recognition and Retention Plan expense 1,182 --
Amortization of premiums on loans receivable, net 4,582 229
Deferred income tax benefit (640) (654)
Provision for loan losses 2,793 2,469
Proceeds from sales of loans held for sale 564,200 277,491
Originations and purchases of loans held for sale (564,294) (298,062)
Net (gain) loss on sales of:
Loans held for sale (7,226) (2,120)
Real estate owned 80 (3)
Premises and equipment 7 (206)
Changes in certain assets and liabilities:
Accrued interest receivable 164 (185)
Other assets (180) (4,336)
Accrued interest payable (2,167) (3,241)
Accrued expenses and other liabilities (489) (2,609)
--------- ---------
Net cash provided by (used in) operating activities 22,379 (16,365)
--------- ---------
Cash flows from investing activities:
Purchase of investment and mortgage-backed securities, available for sale (108,486) (67,786)
Proceeds from maturities of investment securities, available for sale 22,000 67,554
Proceeds from principal repayments of investment
and mortgage-backed securities 38,917 22,013
Proceeds from sale of mortgage-back securities, available for sale 53,775 --
Increase in loans receivable (96,185) (217,401)
Sale of Federal Home Loan Bank stock -- 3,102
Purchase of Federal Home Loan Bank stock (15,359) (7,896)
Additions to premises and equipment (4,001) (8,596)
Proceeds from sale of premises and equipment 3 408
Proceeds from sale of real estate owned 6,747 886
--------- ---------
Net cash used in investing activities (102,589) (207,716)
--------- ---------
See accompanying notes to consolidated financial statements.
6
TierOne Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Nine Months Ended September 30, 2003 and 2002 (Unaudited)
(dollars in thousands)
September 30,
------------------------
2003 2002
--------- ---------
Cash flows from financing activities:
Net increase in deposits $ 57,945 $ 72,568
Net increase (decrease) in advance payments from borrowers for taxes,
insurance and other escrow funds (7,529) 1,098
Proceeds from Federal Home Loan Bank advances 195,000 50,000
Repayments of Federal Home Loan Bank advances (30,017) (16)
Net repayments on Federal Home Loan Bank line of credit
and other borrowings (61,579) (76,300)
Proceeds from stock subscription -- 213,333
Purchase of common stock for Management Recognition and Retention Plan (20,044) --
--------- ---------
Net cash provided by financing activities 133,776 260,683
--------- ---------
Net increase in cash and cash equivalents 53,566 36,602
Cash and cash equivalents at beginning of period 33,037 34,441
--------- ---------
Cash and cash equivalents at end of period $ 86,603 $ 71,043
========= =========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 32,968 $ 36,551
========= =========
Income taxes, net of refunds $ 10,618 $ 7,734
========= =========
Noncash investing activities:
Transfers from loans to real estate owned and
other assets through foreclosure $ 5,383 $ 949
========= =========
See accompanying notes to consolidated financial statements.
7
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 - Basis of Presentation
TierOne Corporation (the "Company") is a Wisconsin corporation headquartered in
Lincoln, Nebraska. TierOne Corporation became the holding company for TierOne
Bank (the "Bank") in connection with the mutual to stock conversion of TierOne
Bank which was completed in October 2002. At September 30, 2003, TierOne Bank
operated from 57 banking offices located in Nebraska, southwest Iowa and
northern Kansas, two loan production offices located in Colorado and one loan
production office located in Minnesota.
Note 2 - Basis of Consolidation
The consolidated financial statements include the accounts of the Bank and its
wholly owned subsidiary, TMS Corporation of the Americas ("TMS"). TMS is the
holding company of TierOne Investments and Insurance, Inc., a wholly owned
subsidiary that administers the sale of insurance and securities products, and
TierOne Reinsurance Company, which reinsures credit life and disability
insurance policies.
The accompanying interim consolidated financial statements as of September 30,
2003 and for the three and nine months ended September 30, 2003 and September
30, 2002 have not been audited by independent auditors. All significant
intercompany accounts and transactions have been eliminated in consolidation. In
the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation. The interim consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report to Shareholders for
the year ended December 31, 2002. The results of operations for the three and
nine-months ended September 30, 2003 are not necessarily indicative of the
results which may be expected for the entire calendar year 2003.
8
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 3 - Earnings Per Share
Basic and diluted earnings per share data are based on the weighted average
number of common shares outstanding during each period. Employee Stock Ownership
Plan ("ESOP") and Management Recognition and Retention Plan ("MRRP") shares not
committed to be released are not considered to be outstanding for purposes of
earnings per share calculations. The basic earnings per share calculation
excludes the dilutive effect of all common stock equivalents. Diluted earnings
per share are further adjusted for potential common shares that were dilutive
and outstanding during the periods. The Company's potentially dilutive common
shares at September 30, 2003 represent shares issuable under its stock option
and MRRP plans computed using the treasury stock method. All stock options are
assumed to be 100% vested for purposes of the earnings per share computations.
Earnings per share are presented only for the three and nine-months ended
September 30, 2003 since no shares were outstanding for the comparable periods
in 2002.
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
----------------------------- -----------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
(dollars in thousands)
Net income $ 6,288 $ 6,288 $ 18,118 $ 18,118
============ ============ ============ ============
Weighted average number of
common shares outstanding used in
basic earnings per share calculation 20,497,000 20,497,000 20,693,000 20,693,000
============ ============
Common share equivalents - stock
option and MRRP shares 309,000 181,000
------------ ------------
Weighted average number of
common shares outstanding used in
diluted earnings per share
calculation 20,806,000 20,874,000
============ ============
Earnings per share $ 0.31 $ 0.30 $ 0.88 $ 0.87
============ ============ ============ ============
9
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 4 - Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities at September 30, 2003 and December 31,
2002 are summarized below.
Gross Unrealized
------------------------
September 30, 2003 Amortized Cost Gains Losses Fair Value
- -------------------------------------- -------------- -------- -------- ----------
(dollars in thousands)
Held to Maturity:
Municipal obligations $ 146 $ -- $ -- $ 146
Available for Sale:
Mortgage-backed securities 18,897 254 -- 19,151
U.S. Government agency obligations 3,900 24 -- 3,924
Corporate securities 24,073 421 527 23,967
Asset Management Fund - ARM Fund 6,000 -- 31 5,969
-------- -------- -------- --------
$ 53,016 $ 699 $ 558 $ 53,157
======== ======== ======== ========
Gross Unrealized
------------------------
December 31, 2002 Amortized Cost Gains Losses Fair Value
- -------------------------------------- -------------- -------- -------- ----------
(dollars in thousands)
Held to Maturity:
Municipal obligations $ 157 $ -- $ -- $ 157
Available for Sale:
Mortgage-backed securities 29,881 488 -- 30,369
U.S. Government agency obligations 2,000 -- -- 2,000
Corporate securities 23,418 16 888 22,546
Asset Management Fund - ARM Fund 6,000 -- -- 6,000
-------- -------- -------- --------
$ 61,456 $ 504 $ 888 $ 61,072
======== ======== ======== ========
10
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 5 - Loan Portfolio Composition
The following table shows the composition of our loan portfolio by type of loan
at the dates indicated.
September 30, 2003 December 31, 2002
--------------------- ---------------------
Amount % Amount %
- ----------------------------------------------------------- ------ ----------- ------
(dollars in thousands)
Real estate loans:
One-to-four family residential (1) $ 666,971 32.45% $ 573,209 30.00%
Multi-family residential 73,629 3.58% 79,953 4.18%
Commercial real estate and land 424,536 20.66% 398,076 20.83%
Residential construction 214,659 10.44% 156,322 8.18%
Commercial construction 177,462 8.64% 143,020 7.49%
----------- ------ ----------- ------
Total real estate loans 1,557,257 75.77% 1,350,580 70.68%
----------- ------ ----------- ------
Commercial business loans 68,986 3.36% 33,375 1.75%
----------- ------ ----------- ------
Warehouse mortgage lines of credit 117,857 5.73% 236,492 12.38%
----------- ------ ----------- ------
Consumer loans:
Home equity 33,591 1.64% 37,522 1.96%
Home equity line of credit 113,848 5.54% 94,801 4.96%
Home improvement 77,919 3.79% 82,081 4.30%
Automobile 67,201 3.27% 60,707 3.18%
Other 18,496 0.90% 15,131 0.79%
----------- ------ ----------- ------
Total consumer loans 311,055 15.14% 290,242 15.19%
----------- ------ ----------- ------
Total loans 2,055,155 100.00% 1,910,689 100.00%
====== ======
Less:
Unamortized premiums and discounts 11,158 4,688
Discounts on loans acquired through merger (95) (174)
Undisbursed portion of construction and
land loans in process (181,652) (123,331)
Deferred loan fees (785) (516)
Allowance for loan losses (18,786) (17,108)
----------- -----------
Net loans $ 1,864,995 $ 1,774,248
=========== ===========
(1) Includes loans held for sale $ 15,824 $ 8,504
=========== ===========
11
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 6 - Allowance for Loan Losses
The following table sets forth the activity in the allowance for loan losses
during the periods indicated.
At or for the At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(dollars in thousands) (dollars in thousands)
Allowance for loan losses, beginning of period $ 18,326 $ 14,319 $ 17,108 $ 13,464
Provision for loan losses 1,106 1,262 2,793 2,469
Charge-offs (678) (462) (1,232) (839)
Recoveries on loans previously charged off 32 35 117 60
-------- -------- -------- --------
Allowance for loan losses, end of period $ 18,786 $ 15,154 $ 18,786 $ 15,154
======== ======== ======== ========
Allowance for loan losses as a percent of loans (1) 1.00% 0.92% 1.00% 0.92%
(1) Loans for the purposes of the calculation are comprised of net loans from
the loan composition table plus the allowance for loan losses.
12
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 7 - Nonperforming Assets
The following table sets forth information with respect to nonperforming assets
and troubled debt restructurings at the dates indicated. It is our policy to
cease accruing interest on loans 90 days or more past due and to charge off
accrued interest.
September 30, 2003 December 31, 2002
------------------ -----------------
(dollars in thousands)
Non-accruing loans:
One-to-four family residential $ 1,890 $ 1,161
Multi-family residential -- --
Commercial real estate and land 37 3,795
Residential construction -- 106
Commercial construction -- --
Commercial business loans -- --
Warehouse mortgage lines of credit -- --
Consumer 541 427
-------- --------
Total non-accruing loans 2,468 5,489
Real estate owned, net (1) 523 1,967
-------- --------
Total nonperforming assets 2,991 7,456
Troubled debt restructurings and impaired loans (2) 3,146 209
-------- --------
Total $ 6,137 $ 7,665
======== ========
Allowance for loan losses as a percent of nonperforming loans 761.18% 311.68%
Total nonperforming loans as a percent of loans (3) 0.13% 0.31%
Total nonperforming assets as a percent of total assets 0.14% 0.38%
Allowance for loan losses as a percent of loans (3) 1.00% 0.96%
(1) Real estate owned balances are shown net of related loss allowances.
Includes both real property and other repossessed collateral consisting
primarily of automobiles.
(2) At September 30, 2003 there was a $2.9 million performing warehouse
mortgage line of credit loan that was classified as impaired under the
requirements of SFAS No. 114 and $257,000 of troubled debt restructurings.
At October 31, 2003 the above warehouse line of credit loan had paid down
to $1.1 million.
(3) Loans for the purposes of the calculation are comprised of net loans from
the loan composition table plus the allowance for loan losses.
13
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 8 - Mortgage Servicing Rights
Mortgage servicing rights are included in the consolidated balance sheets under
the caption "Other Assets." The activity of mortgage servicing rights is
summarized as follows for the following periods:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(dollars in thousands)
Balance at beginning of period $ 5,253 $ 5,664 $ 6,290 $ 4,577
Mortgage servicing rights capitalized 2,747 1,333 6,575 3,480
Amortization expense (2,068) (607) (4,977) (1,207)
Valuation adjustment 1,000 (1,160) (956) (1,620)
-------- -------- -------- --------
Balance at end of period $ 6,932 $ 5,230 $ 6,932 $ 5,230
======== ======== ======== ========
The activity of the valuation allowance on mortgage servicing rights is
summarized as follows for the following periods:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(dollars in thousands)
Balance at beginning of period $ 4,276 $ 810 $ 2,320 $ 350
Changes in mortgage servicing
valuation reserve (1,000) 1,160 956 1,620
-------- -------- -------- --------
Ending balance $ 3,276 $ 1,970 $ 3,276 $ 1,970
======== ======== ======== ========
The following table compares the key assumptions used in measuring the fair
values of mortgage servicing rights at September 30, 2003 and December 31, 2002:
September 30, 2003 December 31, 2002
------------------ ------------------
(dollars in thousands)
Serviced loan portfolio balance $916,286 $726,431
Fair value of mortgage servicing rights $6,932 $6,290
Prepayment speed 10.9% - 99.0% 9.2% - 74.0%
Weighted average prepayment speed 41.6% 29.9%
Fair value with 10% adverse change $6,443 $5,894
Fair value with 20% adverse change $6,000 $5,545
Discount rate 9.0% - 15.0% 9.0% - 15.0%
Weighted average discount rate 10.0% 9.9%
Fair value with 10% adverse change $6,674 $6,143
Fair value with 20% adverse change $6,437 $6,004
14
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 9 - Stock Based Benefit Plans
The Company has established the 2003 MRRP which is a stock-based incentive plan
that was approved by the shareholders at the Company's Annual Meeting of
Shareholders held April 23, 2003.
As of September 30, 2003, the following table summarizes shares of the Company's
common stock which were subject to award and were granted in April 2003 pursuant
to the MRRP:
September 30, 2003
------------------
Common shares authorized to be awarded by MRRP 903,003
Common shares awarded by MRRP (764,850)
Common shares forfeited --
--------
Shares available for award at September 30, 2003 138,153
========
The shares awarded by the MRRP vest to the participants at the rate of 20% per
year. As a result, expense for this plan is being recorded over a 60-month
period and is based on the market value of the Company's stock as of the date
the awards were made. The remaining unamortized cost of the MRRP shares acquired
to date is reflected as a reduction in shareholders' equity. Expense under this
plan for the three and nine-months ended September 30, 2003 was $682,000 and
$1.2 million, respectively. During the quarter ended September 30, 2003, the
Company completed the purchase of 903,003 shares of the Company's common stock
to fund the MRRP.
The Company also established the 2003 Stock Option Plan under which 2,257,508
shares of Company common stock are reserved for the grant of stock options to
directors, officers and employees. The Compensation Committee of the Board of
Directors determines the date the options are first exercisable and expire.
Stock options awarded under the Stock Option Plan vest to participants at the
rate of 20% per year. The exercise price of the options is equal to the fair
market value of the common stock on the grant date. The following is an analysis
of the stock option activity for the period ended September 30, 2003:
Number of Shares Exercise Price Per Share
---------------- ------------------------
Outstanding at December 31, 2002 -- --
Common stock options granted 1,852,750 $ 17.83
Common stock options exercised -- --
Common stock options forfeited -- --
--------- ---------
Common stock options outstanding at September 30, 2003 1,852,750 $ 17.83
========= =========
15
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
At September 30, 2003, no outstanding options were exercisable, the
weighted-average remaining contractual life of outstanding options was 9.57
years, and there were 404,758 shares available for future grants. At September
30, 2003, the average exercise price on outstanding options was $17.83.
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25). Under the provisions of APB No. 25, since the exercise price of the
Company's employees' stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. Compensation
expense for shares granted under the MRRP is ratably recognized over the period
of service, usually the vesting period, based on the fair value of the stock on
the date of grant.
Pursuant to Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation (FAS No. 123), pro forma net income and
pro forma earnings per share are presented in the following table as if the fair
value method of accounting for stock-based compensation plans had been utilized:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
-------------------- ---------------------
(dollars in thousands, except per share data)
Net income (as reported) $ 6,288 $18,118
Add: stock-based employee compensation expense
included in reported net income, net of related tax effects 443 768
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (715) (1,239)
------- -------
Pro forma net income $ 6,016 $17,647
======= =======
Basic earnings per share (as reported) 0.31 0.88
Pro forma basic earnings per share 0.29 0.85
Diluted earnings per share (as reported) 0.30 0.87
Pro forma diluted earnings per share 0.29 0.85
The pro forma results above may not be representative of the effect on net
income in future periods.
The fair value of the option grants was estimated using the Black Scholes option
value model, with the following assumptions: dividend yield of 1.00%, expected
volatility of 13.2%, risk-free interest rate of 3.5% and an original expected
life of ten years for all options granted.
16
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 10 - Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities.
Interpretation No. 46 clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties ("variable
interest entities"). Variable interest entities ("VIE") are required to be
consolidated by their primary beneficiaries if they do not effectively disperse
risks among parties involved. The primary beneficiary of a VIE is the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected residual returns, or both, as a result of holding variable interests.
Interpretation No. 46 also requires new disclosures about VIEs. The
implementation date has been deferred until December 31, 2003 for calendar year
companies. On October 31, 2003, FASB issued an exposure draft of a proposed
interpretation modifying Interpretation No. 46. The proposed clarifications and
modifications would apply to periods ending after December 31, 2003. Management
does not anticipate a material impact on the Company's consolidated financial
statements from the adoption of this interpretation.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("SFAS No. 149")
which is effective for hedging relationships entered into or modified after June
30, 2003. SFAS No. 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. The Company adopted SFAS No. 149 on
July 1, 2003. The adoption did not have a material impact on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity in its balance sheet. The Company adopted SFAS No. 150 on July 1,
2003. The adoption did not have a material impact on the Company's consolidated
financial statements.
17
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Bank, a subsidiary of the Company, is a $2.1 billion federally chartered
savings bank headquartered in Lincoln, Nebraska. Established in 1907, the Bank
offers a wide variety of full-service consumer and commercial banking products
and services to customers through a geographically diverse network of 57 banking
offices located in Nebraska, Iowa and Kansas, two loan production offices
located in Colorado and one loan production office located in Minnesota.
Effective July 11, 2003, the Bank reduced the total number of banking offices to
57 following the closing of its West Point, Nebraska office. Product offerings
include residential and commercial real estate loans; consumer, construction and
business loans; lines of credit; consumer and business checking and savings
plans; investment and insurance services; and telephone and internet banking.
The Company's results of operations depend, to a large extent, on net interest
income, which is the difference between the income earned on its loan and
investment securities portfolios and the cost of funds, consisting of the
interest paid on deposits and borrowings. Provisions for loan losses, loan sale
activities and loan servicing also affect results of operations. Non-interest
expense consists of compensation and employee benefit expense, office occupancy
and equipment expense, data processing, advertising expense and other operating
expense. Our results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities. Future changes in
applicable law, regulations or government policies may materially impact our
financial condition and results of operations.
As used in this report, unless the context otherwise requires, the terms "we,"
"us," or "our" refer to the Company and its wholly owned subsidiary, the Bank.
18
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
In the normal course of business, in an effort to help keep our shareholders and
the public informed about the Company's operations, we 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 our operating results or other future developments in our affairs or
the industry in which we may 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 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 origination and sales activities and the value of certain
assets, such as investment securities and mortgage servicing rights; 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 non-interest 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 Form 10-Q.
19
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
We have identified the evaluation of the allowance for loan losses as a critical
accounting policy where amounts are sensitive to material variation. This policy
is significantly affected by our judgment and uncertainties and there is a
likelihood that materially different amounts would be reported under different,
but reasonably plausible, conditions or assumptions. The allowance for loan
losses is considered a critical accounting estimate because there is a large
degree of judgment in (i) assigning individual loans to specific risk levels
(pass, special mention, substandard, doubtful and loss), (ii) valuing the
underlying collateral securing the loans, (iii) determining the appropriate
reserve factor to be applied to specific risk levels for special mention loans
and those adversely classified (substandard, doubtful and loss) and (iv)
determining reserve factors to be applied to pass loans based upon loan type. We
establish provisions for loan losses, which are charges to our operating
results, in order to maintain a level of total allowance for loan losses that
management believes covers all known and inherent losses that are both probable
and reasonably estimable at each reporting date. Management performs reviews no
less than quarterly in order to identify these inherent losses and to assess the
overall collection probability for the loan portfolio. Our reviews consist of a
quantitative analysis by loan category, using historical loss experience, and
consideration of a series of qualitative loss factors. For each primary type of
loan, we establish a loss factor reflecting our estimate of the known and
inherent losses in each loan type using both quantitative analysis as well as
qualitative factors. Our evaluation process includes, among other things, an
analysis of delinquency trends, nonperforming loan trends, the levels of
charge-offs and recoveries, prior loss experience, total loans outstanding, the
volume of loan originations, the type, size, terms and geographic concentration
of loans held by us, the value of collateral securing loans, the number of loans
requiring heightened management oversight, general economic conditions and loan
loss information from other institutions. The amount of the allowance for loan
losses is only an estimate and actual losses may vary from these estimates.
20
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Financial Condition at September 30, 2003 and December 31, 2002
Our total assets were $2.1 billion at September 30, 2003, a $152.9 million, or
7.9%, increase from December 31, 2002, due primarily to increases in net loans
receivable, cash and cash equivalents. Our available for sale investment
securities amounted to $33.9 million at September 30, 2003, a $3.3 million, or
10.8%, increase from December 31, 2002 primarily due to security purchases
totaling $24.5 million partially offset by $22.0 million of maturities during
the nine months ended September 30, 2003. Our mortgage-backed securities
portfolio, all of which is available for sale, amounted to $19.2 million at
September 30, 2003, a $11.2 million, or 36.9%, decrease from December 31, 2002.
During the three months ended March 31, 2003, we purchased two Fannie Mae
("FNMA") fixed-rate mortgage-backed security pools in an effort to grow our
investment and mortgage-backed securities portfolios while further diversifying
our asset base. Due to higher than projected prepayment speeds which resulted in
negative yields, these two FNMA mortgage-backed security pools were sold during
the quarter ended September 30, 2003. Our federal funds sold of $56.0 million at
September 30, 2003 is primarily a result of the sale of the two FNMA
mortgage-backed security pools.
Net loans receivable, including loans held for sale, totaled $1.9 billion at
September 30, 2003, a $90.7 million, or 5.1%, increase from December 31, 2002.
At September 30, 2003 our one-to-four family residential loans, including loans
held for sale, were $667.0 million, a $93.8 million, or 16.4%, increase compared
to December 31, 2002. During the nine months ended September 30, 2003, we
purchased for our portfolio $182.0 million of hybrid adjustable-rate first
mortgage and $201.8 million of fixed-rate second mortgage loans secured by
one-to-four family residential properties in geographically diverse markets
across the United States in an effort to reinvest proceeds from loan
prepayments. Commercial real estate and land loans were $424.5 million, a $26.5
million, or 6.6%, increase as compared to $398.1 million at December 31, 2002.
Our residential construction loans totaled $214.7 million, a $58.3 million, or
37.3%, increase as compared to $156.3 million at December 31, 2002. Warehouse
mortgage lines of credit amounted to $117.9 million, a $118.6 million, or 50.2%,
decrease at September 30, 2003 as compared to $236.5 million at December 31,
2002. The decrease in the warehouse mortgage lines of credit portfolio is
primarily the result of decreased refinancing activity.
Our total deposits increased by $57.9 million to $1.2 billion at September 30,
2003 as compared to December 31, 2002 as we continued our efforts to increase
the level of our core deposits. Our non-interest-bearing checking accounts
amounted to $43.4 million, a $7.6 million, or 21.2%, increase as compared to
$35.8 million at December 31, 2002. Our money market accounts totaled $278.2
million, a $7.9 million, or 2.9%, increase compared to December 31, 2002. Our
certificates of deposit increased $40.0 million, or 7.7%, to $556.7 million at
September 30, 2003 as compared to $516.7 million at December 31, 2002. During
the quarter ended September 30, 2003 we acquired $42.0 million of brokered
deposits as an alternative source of funds. Our Federal Home Loan Bank ("FHLB")
advances and other borrowings amounted to $521.7 million at September 30, 2003,
a
21
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
$103.4 million, or 24.7%, increase from December 31, 2002.
At September 30, 2003, shareholders' equity totaled $341.6 million, an increase
of $1.7 million from December 31, 2002. The year-to-date increase in
shareholders' equity reflects 2003 earnings offset by shares purchased by the
Company to fund the MRRP and net of amortization related to our stock-based
compensation plans. On October 13, 2003, the Company announced that its Board of
Directors authorized the repurchase of up to ten percent, or 2,257,508 shares,
of the Company's outstanding common stock as part of a stock repurchase program.
The repurchased shares are to be held as treasury stock and will be available
for general corporate purposes. As of November 5, 2003, the Company had
repurchased 302,300 shares at a weighted average cost of $23.07 per share.
Comparison of Operating Results for the Three and Nine Months Ended September
30, 2003 and September 30, 2002
General. Net income increased by $1.9 million, or 42.6%, to $6.3 million for the
three months ended September 30, 2003 compared to $4.4 million for the three
months ended September 30, 2002. For the nine months ended September 30, 2003,
our net income increased $5.2 million, or 39.9%, to $18.1 million compared to
$12.9 million for the same period in 2002. Net income increased during 2003 due
primarily to increased interest income on loans combined with reductions in the
average rates paid on deposits and borrowings. The average interest rate spread
declined to 2.84% and 3.07% for the three and nine months ended September 30,
2003, respectively, compared to 3.34% and 3.36% for the three and nine months
ended September 30, 2002, respectively. Net interest margin declined to 3.25%
and 3.52% for the three and nine months ended September 30, 2003, respectively,
compared to 3.76% and 3.75% for the three and nine months ended September 30,
2002, respectively. The decline in the average interest rate spread and net
interest margin for the three and nine months ended September 30, 2003 was
primarily attributable to the low interest rate environment existing during such
periods and the resulting prepayment and refinancing of higher yielding assets
at lower current rates. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 120.89% and 121.91% for the three and
nine months ended September 30, 2003, respectively, compared to 115.31% and
113.55% for the three and nine months ended September 30, 2002, respectively.
Interest Income. Our total interest income for the three months ended September
30, 2003 was $27.2 million, a $639,000 or 2.4%, increase compared to $26.5
million for the three months ended September 30, 2002. For the nine months ended
September 30, 2003 our total interest income was $83.6 million, a $7.0 million,
or 9.2%, increase compared to $76.6 million for the nine months ended September
30, 2002. The increase in total interest income during 2003 was the result of an
increase in the average balance of interest-earning assets partially offset by
declining yields on investment securities, mortgage-backed securities and loans
receivable. The average balance of loans receivable during the three months
ended September 30, 2003 and September 30, 2002 was $1.9 billion and
22
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
$1.5 billion, respectively. The average balance of loans receivable during the
nine months ended September 30, 2003 and September 30, 2002 was $1.9 billion and
$1.4 billion, respectively. The weighted average yield earned on the loan
portfolio was 5.49% and 6.73% for the three months ended September 30, 2003 and
September 30, 2002, respectively. The weighted average yield on the loan
portfolio for the nine month periods ended September 30, 2003 and September 30,
2002 was 5.82% and 6.85%, respectively. The declines in the yields on loans
receivable during the quarter and nine months ended September 30, 2003 compared
to the same periods in 2002 reflected the lower interest rate environment.
Interest Expense. Our total interest expense for the three and nine months ended
September 30, 2003 was $10.1 million and $30.8 million, respectively, compared
to $11.3 million and $33.3 million for the three and nine months ended September
30, 2002, respectively. The primary reason for the decrease in our interest
expense during the 2003 periods was a reduction in the average cost of deposits
to 1.90% and 2.10% during the three and nine month periods ended September 30,
2003, respectively, compared to 2.86% and 2.93% during the same respective
periods in 2002. The average rates on our interest-bearing checking accounts,
money market accounts, savings accounts and certificates of deposit declined
during the three and nine months ended September 30, 2003 as compared with the
same periods in 2002. Interest expense on FHLB advances and other borrowings
increased $1.5 million and $4.0 million during the three and nine months ended
September 30, 2003, respectively, as compared with the same periods in 2002 due
to a higher average balance of borrowings as the Bank continued to fund the loan
portfolio growth. The increased cost of borrowings was partially offset by a
decline in the average cost of borrowings from 4.48% and 4.72% for the three and
nine months ended September 30, 2002, respectively, to 3.10% and 3.34% for the
three and nine months ended September 30, 2003, respectively.
23
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Average Balances, Net Interest Income, and Yields Earned and Cost of Funds. The
following tables detail for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, interest rate spread and net interest margin. All average
balances are based on monthly balances. Management does not believe that the
monthly averages differ significantly from what the daily averages would be.
Three Months Ended September 30,
---------------------------------------------------------------------------
2003 2002
------------------------------------ -----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- -------- ---------- ---------- -------- ----------
(dollars in thousands)
Interest-earning assets:
Fed funds sold $ 13,075 $ 33 1.01% $ 26,430 $ 113 1.71%
Investment securities (1) 74,019 716 3.87% 57,612 628 4.36%
Mortgage-backed securities (1) 75,541 (176) -0.93% 35,258 472 5.35%
Loans receivable (2) 1,939,650 26,608 5.49% 1,504,440 25,329 6.73%
---------- -------- ---------- --------
Total interest-earning assets 2,102,285 27,181 5.17% 1,623,740 26,542 6.54%
-------- -------- -------- --------
Non-interest-earning assets 87,649 56,261
---------- ----------
Total assets $2,189,934 $1,680,001
========== ==========
Interest-bearing liabilities:
Interest-bearing checking accounts $ 290,481 $ 561 0.77% $ 283,773 $ 1,223 1.72%
Regular savings accounts 19,239 17 0.35% 15,626 50 1.28%
Money market accounts 278,869 712 1.02% 286,073 1,418 1.98%
Certificate accounts 531,701 4,026 3.03% 525,944 5,250 3.99%
---------- -------- ---------- --------
Total interest-bearing deposits 1,120,290 5,316 1.90% 1,111,416 7,941 2.86%
FHLB advances and other borrowings 618,699 4,802 3.10% 296,786 3,323 4.48%
---------- -------- ---------- --------
Total interest-bearing liabilities 1,738,989 10,118 2.33% 1,408,202 11,264 3.20%
-------- -------- -------- --------
Non-interest-bearing accounts 46,527 31,293
Other liabilities 57,004 107,998
---------- ----------
Total liabilities 1,842,520 1,547,493
Shareholders' equity 347,414 132,508
---------- ----------
Total liabilities and shareholders' equity $2,189,934 $1,680,001
========== ==========
Net interest-earning assets $ 363,296 $ 215,538
========== ==========
Net interest income; average
interest rate spread $ 17,063 2.84% $ 15,278 3.34%
======== ======== ======== ========
Net interest margin (3) 3.25% 3.76%
======== ========
Average interest-earning assets to average
interest-bearing liabilities 120.89% 115.31%
======== ========
(1) Includes securities available for sale and held to maturity. Investment
securities also include FHLB stock.
(2) Includes non-accrual loans during the respective periods. Calculated net
of deferred fees and discounts, loans in process and allowance for loan
losses. This category also includes loans held for sale.
(3) Equals net interest income (annualized) divided by average
interest-earning assets.
24
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Nine Months Ended September 30,
---------------------------------------------------------------------------
2003 2002
------------------------------------ -----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- -------- ---------- ---------- -------- ----------
(dollars in thousands)
Interest-earning assets:
Fed funds sold $ 15,206 $ 132 1.16% $ 24,006 $ 310 1.72%
Investment securities (1) 67,585 1,934 3.82% 67,639 2,254 4.44%
Mortgage-backed securities (1) 66,607 753 1.51% 36,728 1,539 5.59%
Loans receivable (2) 1,851,738 80,774 5.82% 1,410,569 72,480 6.85%
---------- -------- ---------- --------
Total interest-earning assets 2,001,136 83,593 5.57% 1,538,942 76,583 6.64%
-------- -------- -------- --------
Non-interest-earning assets 85,202 52,137
---------- ----------
Total assets $2,086,338 $1,591,079
========== ==========
Interest-bearing liabilities:
Interest-bearing checking accounts $ 294,494 $ 2,049 0.93% $ 264,046 $ 3,627 1.83%
Regular savings accounts 18,166 74 0.54% 14,580 140 1.28%
Money market accounts 275,013 2,606 1.26% 287,419 4,391 2.04%
Certificate accounts 519,101 12,676 3.26% 525,283 15,805 4.01%
---------- -------- ---------- --------
Total interest-bearing deposits 1,106,774 17,405 2.10% 1,091,328 23,963 2.93%
FHLB advances and other borrowings 534,700 13,396 3.34% 263,964 9,347 4.72%
---------- -------- ---------- --------
Total interest-bearing liabilities 1,641,474 30,801 2.50% 1,355,292 33,310 3.28%
-------- -------- -------- --------
Non-interest-bearing accounts 43,507 28,608
Other liabilities 55,604 79,090
---------- ----------
Total liabilities 1,740,585 1,462,990
Shareholders' equity 345,753 128,089
---------- ----------
Total liabilities and shareholders' equity $2,086,338 $1,591,079
========== ==========
Net interest-earning assets $ 359,662 $ 183,650
========== ==========
Net interest income; average
interest rate spread $ 52,792 3.07% $ 43,273 3.36%
======== ======== ======== ========
Net interest margin (3) 3.52% 3.75%
======== ========
Average interest-earning assets to average
interest-bearing liabilities 121.91% 113.55%
======== ========
(1) Includes securities available for sale and held to maturity. Investment
securities also includes FHLB stock.
(2) Includes non-accrual loans during the respective periods. Calculated net
of deferred fees and discounts, loans in process and and allowance for
loan losses. This category also includes loans held for sale.
(3) Equals net interest income (annualized) divided by average
interest-earning assets.
25
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Rate/Volume Analysis. The following table shows the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities affected our interest income and expense during the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to
(1) changes in rate (change in rate multiplied by prior year volume) and (2)
changes in volume (change in volume multiplied by prior year rate). The combined
effect of changes in both rate and volume has been allocated proportionately.
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
Compared to Compared to
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
-------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due To Total Due To Total
---------------------- Increase ---------------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease)
--------- --------- ---------- --------- --------- ----------
(dollars in thousands)
Interest income:
Federal funds sold $ (36) $ (44) $ (80) $ (84) $ (94) $ (178)
Investment securities (77) 165 88 (318) (2) (320)
Mortgage-backed securities (875) 227 (648) (2,478) 1,692 (786)
Loans receivable (5,201) 6,480 1,279 (23,472) 31,766 8,294
--------- --------- --------- --------- --------- ---------
Total interest income (6,189) 6,828 639 (26,352) 33,362 7,010
--------- --------- --------- --------- --------- ---------
Interest expense:
Interest-bearing checking accounts (690) 28 (662) (2,482) 904 (1,578)
Savings accounts (43) 10 (33) (132) 66 (66)
Money market accounts (671) (35) (706) (1,604) (181) (1,785)
Certificate accounts (1,280) 56 (1,224) (2,929) (200) (3,129)
--------- --------- --------- --------- --------- ---------
Total deposits (2,684) 59 (2,625) (7,147) 589 (6,558)
FHLB advances and other borrowings (1,268) 2,747 1,479 (6,661) 10,710 4,049
--------- --------- --------- --------- --------- ---------
Total interest expense (3,952) 2,806 (1,146) (13,808) 11,299 (2,509)
--------- --------- --------- --------- --------- ---------
Net change in net interest income $ (2,237) $ 4,022 $ 1,785 $ (12,544) $ 22,063 $ 9,519
========= ========= ========= ========= ========= =========
26
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Provision for Loan Losses. We made a provision for loan losses of $1.1 million
for the three months ended September 30, 2003 as compared to $1.3 million for
the three months ended September 30, 2002. For the nine months ended September
30, 2003, our provision for loan losses was $2.8 million as compared to $2.5
million for the same period in 2002. Our portfolio of commercial real estate and
land loans, construction loans (residential and commercial), commercial business
loans and consumer loans totaled $1.2 billion at September 30, 2003, an increase
of $273.6 million, or 29.6%, as compared to September 30, 2002. These loans are
deemed to have higher levels of known and inherent losses than one-to-four
family residential loans due to, among other things, the nature of the
collateral and the dependency on economic conditions for successful completion
or operation of the project. As such, we have made provisions in order to
maintain the allowance for loan losses at a level we believe, to the best of our
knowledge, covers all known and inherent losses in the portfolio that are both
probable and reasonable to estimate at the relevant date. At September 30, 2003,
our total nonperforming assets amounted to $3.0 million, or 0.14% of total
assets, as compared to $7.5 million, or 0.38% of total assets, at December 31,
2002. The decline in nonperforming assets at September 30, 2003 is primarily
attributable to the disposition of a commercial real estate property acquired
through foreclosure during the period. During the three and nine months ended
September 30, 2003, we charged-off, net of recoveries, $646,000 and $1.1
million, respectively, of loans, primarily related to consumer loans. At
September 30, 2003, our allowance for loan losses amounted to 1.00% of loans.
Loans for purposes of the calculation are comprised of net loans from the loan
composition table plus the allowance for loan losses.
Other Income. Our other income increased by $3.6 million or 123.4%, to $6.5
million for the three months ended September 30, 2003 as compared to $2.9
million for the three months ended September 30, 2002. For the nine months ended
September 30, 2003, other income amounted to $14.0 million, a $4.8 million, or
52.6%, increase compared to $9.2 million for the same period in 2002. The
increase during the three month period ended September 30, 2003 as compared to
the same period in 2002 was primarily the result of a $1.8 million increase in
gain on sales of loans, a $800,000 increase in loan fees and a $358,000 increase
in deposit account fees and charges offset by $2.1 million in amortization of
mortgage servicing rights. Additionally, we recaptured $1.0 million of mortgage
servicing right impairments during the three month period ended September 30,
2003 due to an increase in the valuation of our mortgage servicing rights
portfolio as compared to the quarter ended September 30, 2002 in which we
recorded $1.2 million of mortgage servicing rights impairment charges.
Amortization expense, impairment charges and impairment recapture related to
mortgage servicing rights are recorded as adjustments to fee and service charge
income. For the nine months ended September 30, 2003, the increase in other
income was attributable to a $5.1 million increase in gains on loans held for
sale, a $1.9 million increase in loan fees and a $1.2 million increase in
deposit account fees and charges. Growth in other income was partially offset by
a $3.1 million increase in amortization of mortgage servicing rights net of
impairment. Total deposit account fees and charges, driven by continued growth
in new core deposit relationships, rose 23.1% and 31.5%, to $1.9 million and
$4.9 million, respectively, for the three and nine months ended
27
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 2003 as compared to $1.6 million and $3.8 million, respectively,
for the same periods in 2002.
Other Expense. Our other expense increased by $2.4 million, or 23.5%, to $12.4
million for the three months ended September 30, 2003 as compared to $10.0
million for the three months ended September 30, 2002. For the nine months ended
September 30, 2003, other expense totaled $35.2 million, a $5.5 million, or
18.4%, increase compared to $29.7 million during the same period in 2002. The
increase during the nine month period ended September 30, 2003 resulted
primarily from a $2.1 million expense associated with the Company's ESOP which
was implemented in October 2002 as part of the Bank's mutual to stock
conversion, a $1.4 million increase in compensation expense related to salary
increases and continued additions of business line personnel and a $1.2 million
expense related to the MRRP.
Income Tax Expense. Our income tax expense increased by $1.3 million to $3.8
million and by $3.4 million to $10.7 million for the three and nine months ended
September 30, 2003, respectively. The effective income tax rate for the three
and nine months ended September 30, 2003 was 37.6% and 37.1%, respectively, as
compared to 36.1% for both the three and nine months ended September 30, 2002.
The increase in the 2003 effective tax rate was primarily attributable to the
partial non-deductible nature of certain expenses related to the Company's ESOP.
28
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Commitments
Our primary sources of funds are from deposits; borrowings from the FHLB; loan,
investment and mortgage-backed security payments, prepayments and maturities;
and other funds provided from operations. During the quarter ended September 30,
2003, we acquired brokered deposits as an additional source of funds. While
scheduled payments from loans and mortgage-backed securities and maturing
investment securities are relatively predictable sources of funds, deposit flows
and loan prepayments can be greatly influenced by general interest rates,
economic conditions and competition. Excess funds are maintained in short-term,
interest-bearing assets that provide additional liquidity.
We use our liquidity to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets and to meet operating expenses. At September 30,
2003, we had certificates of deposit maturing within the next 12 months
amounting to $300.1 million. Based upon historical experience, we anticipate
that a significant portion of the maturing certificates will remain on deposit.
In addition to cash flow from loan and investment and mortgage-backed securities
payments and prepayments, as well as from sales of available for sale securities
and loans held for sale, we have additional borrowing capacity available to fund
our liquidity needs. We have increased our utilization of borrowings as a cost
efficient addition to deposits as a source of funds. The average balance of our
borrowings was $618.7 million and $296.8 million for the three months ended
September 30, 2003 and September 30, 2002, respectively. The average balance of
our borrowings was $534.7 million and $264.0 million for the nine months ended
September 30, 2003 and September 30, 2002, respectively. To date, substantially
all of our borrowings have consisted of advances from the FHLB. Pursuant to
blanket collateral agreements with the FHLB, the Bank has pledged qualifying
one-to-four family residential, multi-family, commercial real estate, second
mortgage and construction loans as collateral for such advances.
We have not used, and have no present intention to use, any significant
off-balance sheet financing arrangements for liquidity purposes. Our primary
financial instruments with off-balance sheet risk are limited to loan servicing
for others, our obligations to fund loans to customers pursuant to existing
commitments and commitments to purchase and sell mortgage loans. In addition, we
have certain risks due to limited recourse arrangements on loans serviced for
others. At September 30, 2003, the maximum total amount of such recourse was
approximately $10.1 million. Based on historical experience, at September 30,
2003, we had established a reserve of $627,000 with respect to this recourse
obligation. In addition, we have not had, and have no intention to have, any
significant transactions, arrangements or other relationships with any
unconsolidated, limited purpose entities that could materially affect our
liquidity or capital resources. We have not traded, and do not intend to trade,
in commodity contracts.
29
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
We anticipate that we will continue to have sufficient funds and alternative
funding sources to meet our current commitments.
Regulatory Capital
At September 30, 2003, the Bank's regulatory capital exceeded regulatory limits
set by the Office of Thrift Supervision. The current regulatory requirements and
the Bank's actual levels at September 30, 2003 are set forth below:
Required Capital Actual Capital Excess Capital
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
Tangible capital $ 31,371 1.50% $ 258,059 12.34% $ 226,688 10.84%
Core capital 83,657 4.00% 258,059 12.34% 174,402 8.34%
Risk-based capital 142,888 8.00% 276,845 15.50% 133,957 7.50%
In meeting governmental guidelines, the Bank remains classified as a "well
capitalized" financial institution.
30
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Selected Operating Ratios
Set forth below are selected operating ratios (annualized where appropriate) as
of or for the three and nine months ended September 30, 2003 and September 30,
2002.
As Of Or For The As Of Or For The
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Selected Operating Ratios:
Average yield on interest-earning assets 5.17% 6.54% 5.57% 6.64%
Average rate on interest-bearing liabilities 2.33% 3.20% 2.50% 3.28%
Average interest rate spread 2.84% 3.34% 3.07% 3.36%
Net interest margin 3.25% 3.76% 3.52% 3.75%
Average interest-earning assets to average
interest-bearing liabilities 120.89% 115.31% 121.91% 113.55%
Net interest income after provision for loan
losses to non-interest expense 128.81% 139.70% 141.95% 137.19%
Total non-interest expense to average assets 2.26% 2.39% 2.25% 2.49%
Efficiency ratio (1) 52.55% 55.15% 52.71% 56.69%
Return on average assets 1.15% 1.05% 1.16% 1.09%
Return on average equity 7.24% 13.31% 6.99% 13.48%
Average equity to average assets 15.86% 7.89% 16.57% 8.05%
Other Ratios:
Nonperforming loans as a percent of loans (2) 0.13% 0.20% 0.13% 0.20%
Nonperfoming assets to total assets 0.14% 0.19% 0.14% 0.19%
Allowance for loan losses to total
nonperforming loans 761.18% 458.10% 761.18% 458.10%
Allowance for loan losses as a percent of loans (2) 1.00% 0.92% 1.00% 0.92%
(1) Efficiency ratio is calculated as total other expense divided by the sum
of net interest income and total other income.
(2) Loans for purposes of the calculation are comprised of net loans from the
loan composition table plus the allowance for loan losses.
31
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.
For a discussion of our asset and liability management policies as well as the
methods used to manage our exposure to the risk of loss from adverse changes in
market prices and rates market, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - How We Manage Our Risks" and -
"Quantitative and Qualitative Disclosures About Market Risk" in the Company's
Annual Report to Shareholders for the year ended December 31, 2002. There has
been no material change in our asset and liability position or the market value
of our equity since December 31, 2002.
Item 4 - Controls and Procedures.
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
With respect to the Bank's ongoing litigation regarding its goodwill claims
against the U.S. Government, reference is made to "Business of TierOne Bank -
Legal Proceedings" in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002. On May 19, 2003, a four-day trial related solely to
issues of liability was held. On November 6, 2003 the Court rendered a decision
finding the U.S. Government liable to the Bank for breach of contract with
regard to one of three claims and the Court dismissed the breach of contract
complaint on the remaining two claims. At this time, the issue of damages and
the amount thereof, if any, remains to be determined in subsequent judicial
proceedings.
Item 2 - Changes in Securities and Use of Proceeds.
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities.
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders.
There are no matters required to be reported under this item.
Item 5 - Other Information.
There are no matters required to be reported under this item.
33
Item 6 - Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Form 10-Q 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 Plan (1)
10.12 Amended and Restated Consultation Plan for Directors (1)
10.13 TierOne Bank Management Incentive Compensation Plan (2)
10.14 TierOne Bank Deferred Compensation Plan (2)
10.15 TierOne Corporation 2003 Stock Option Plan (3)
10.16 TierOne Corporation 2003 Management Recognition and Retention Plan and Trust Agreement (3)
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed Herewith
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed Herewith
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed Herewith
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed Herewith
- --------------------------------------------------------------------------------
(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).
(2) Incorporated by reference from TierOne Corporation's Annual Report on Form
10-K for the year ended December 31, 2002 filed on March 28, 2003.
(3) Incorporated by reference from TierOne Corporation's Definitive Proxy
Statement for the Annual Meeting of Shareholders filed on March 11, 2003.
34
(b) The following reports on Form 8-K were filed by the Registrant during the
three months ended September 30, 2003 and through the date hereof:
Date Item and Description
- ------------------ ------------------------------------------------------
July 21, 2003 Item 9. On July 18, 2003 the Company issued a press
release reporting its earnings for the three and six
months ending June 30, 2003. Filed under Item 9
pursuant to SEC directions in effect at the time of
filing.
October 15, 2003 Item 9. On October 13, 2003 the Company issued a press
release announcing that the Company's Board of
Directors has authorized the repurchase of up to ten
percent, or 2,257,508 shares, of the Company's
outstanding common stock.
October 22, 2003 Item 12. On October 20, 2003 the Company issued a press
release reporting its earnings for the three and nine
months ending September 30, 2003.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TIERONE CORPORATION
Date: November 7, 2003 By: /s/ Gilbert G. Lundstrom
-----------------------------------------
Gilbert G. Lundstrom
Chairman of the Board and Chief Executive
Officer
Date: November 7, 2003 By: /s/ Eugene B. Witkowicz
-----------------------------------------
Eugene B. Witkowicz
Executive Vice President and
Chief Financial Officer
36