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 June 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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: As of August 12, 2003, a total
of 22,575,075 shares of the Registrant's common stock were issued and
outstanding.
PART I - FINANCIAL INFORMATION
Interim financial information required by Rule 10-01 of Regulation S-X and Item
303 of Regulation S-K is included in this Form 10-Q as referenced below.
Page
----
Item 1 - Financial Statements.................................................................... 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 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....................................................................... 34
Item 6 - Exhibits and Reports on Form 8-K........................................................ 34
Signatures ...................................................................................... 36
2
TierOne Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002
(dollars in thousands, except per share data)
June 30, 2003 December 31, 2002
------------- -----------------
Assets
Cash and due from banks $ 28,020 $ 33,037
Federal funds sold -- --
----------- -----------
Total cash and cash equivalents 28,020 33,037
Investment securities:
Held to maturity 150 157
Available for sale 47,126 30,546
Mortgage-backed securities, available for sale 91,648 30,369
Loans held for sale 17,220 8,504
Loans receivable, net 2,007,444 1,765,744
Federal Home Loan Bank stock 35,468 21,459
Premises and equipment, net 26,589 26,810
Accrued interest receivable 9,325 9,084
Other assets 19,288 19,825
----------- -----------
Total assets $ 2,282,278 $ 1,945,535
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 1,147,609 $ 1,128,880
Advances from Federal Home Loan Bank and other
borrowings 712,718 418,329
Advance payments from borrowers for taxes,
insurance and other escrow funds 32,725 29,453
Accrued interest payable 5,898 6,812
Accrued expenses and other liabilities 31,226 22,165
----------- -----------
Total liabilities 1,930,176 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 356,201 355,741
Retained earnings, substantially restricted 13,848 2,018
Unearned common stock held by Employee Stock
Ownership Plan (16,931) (17,684)
Unearned common stock held by Management
Recognition and Retention Plan (857) --
Accumulated other comprehensive loss, net (385) (405)
----------- -----------
Total shareholders' equity 352,102 339,896
Commitments and contingent liabilities
----------- -----------
Total liabilities and shareholders' equity $ 2,282,278 $ 1,945,535
=========== ===========
See accompanying notes to consolidated financial statements.
3
TierOne Corporation and Subsidiaries
Consolidated Statements of Income
(dollars in thousands, except per share data)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Interest income:
Loans receivable $ 27,373 $ 24,008 $ 54,166 $ 47,151
Investment securities 1,115 1,439 2,147 2,683
Other interest-earning assets -- 9 99 207
-------- -------- -------- --------
Total interest income 28,488 25,456 56,412 50,041
-------- -------- -------- --------
Interest expense:
Deposits 5,866 7,862 12,089 16,022
Advances from Federal Home Loan Bank and
other borrowings 4,530 3,105 8,594 6,024
-------- -------- -------- --------
Total interest expense 10,396 10,967 20,683 22,046
-------- -------- -------- --------
Net interest income 18,092 14,489 35,729 27,995
Provision for loan losses 515 643 1,687 1,207
-------- -------- -------- --------
Net interest income after provision
for loan losses 17,577 13,846 34,042 26,788
-------- -------- -------- --------
Other income:
Fees and service charges 612 1,663 1,579 3,479
Income from real estate operations, net 26 210 8 359
Net gain (loss) on sales of:
Loans held for sale 2,653 609 4,608 1,314
Real estate owned (93) (1) (79) (1)
Other operating income 695 562 1,406 1,132
-------- -------- -------- --------
Total other income 3,893 3,043 7,522 6,283
-------- -------- -------- --------
Other expense:
Salaries and employee benefits 7,096 5,342 13,415 10,487
Occupancy, net 1,328 1,467 2,759 2,904
Data processing 407 348 818 712
Advertising 904 942 1,628 1,889
Other operating expense 2,007 1,900 4,215 3,718
-------- -------- -------- --------
Total other expense 11,742 9,999 22,835 19,710
-------- -------- -------- --------
Income before income taxes 9,728 6,890 18,729 13,361
Income tax expense 3,593 2,487 6,899 4,823
-------- -------- -------- --------
Net income $ 6,135 $ 4,403 $ 11,830 $ 8,538
======== ======== ======== ========
Net income per common share, basic* $ 0.29 -- $ 0.57 --
======== ======== ======== ========
Net income per common share, diluted* $ 0.29 -- $ 0.57 --
======== ======== ======== ========
Average common shares outstanding, basic (000's)* 20,828 -- 20,824 --
======== ======== ======== ========
Average common shares outstanding, diluted (000's)* 21,012 -- 20,929 --
======== ======== ======== ========
* 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
Six Months Ended June 30, 2003 (Unaudited)
(dollars in thousands)
Unearned
Unearned common
common stock
stock held by the
held by the Management
Retained Employee Recognition Accumulated
Additional earnings, Stock and other Total
Common paid-in substantially Ownership Retention comprehensive shareholders'
stock capital restricted Plan Plan loss equity
--------- ---------- ------------- ----------- ----------- ------------- -------------
Balance at December 31, 2002 $ 226 $ 355,741 $ 2,018 $ (17,684) $ -- $ (405) $ 339,896
--------- --------- --------- --------- --------- --------- ---------
Common stock earned by
employees in Employee
Stock Ownership Plan -- 557 -- 753 -- -- 1,310
Common stock purchased by the
Management Recognition
and Retention Plan -- (97) -- -- (1,357) (1,454)
Amortization of awards under the
Management Recognition
and Retention Plan -- -- -- -- 500 500
Comprehensive income:
Net income -- -- 11,830 -- -- -- 11,830
Change in unrealized loss on
available for sale securities,
net of tax -- -- -- -- -- 20 20
--------- --------- --------- --------- --------- --------- ---------
Total comprehensive income -- -- 11,830 -- -- 20 11,850
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2003 $ 226 $ 356,201 $ 13,848 $ (16,931) $ (857) $ (385) $ 352,102
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
TierOne Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002 (Unaudited)
(dollars in thousands)
June 30,
------------------------
2003 2002
--------- ---------
Reconciliation of net income to net cash provided by (used in) operating
activities:
Net income $ 11,830 $ 8,538
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net amortization of investment and mortgage-backed securities 993 192
Depreciation and amortization 1,263 1,112
Employee Stock Ownership Plan expense 1,310 --
Management Recognition and Retention Plan expense 500 --
Amortization of premiums on loans receivable, net 2,286 81
Deferred income tax expense (benefit) 12 (292)
Provision for loan losses 1,687 1,207
Proceeds from sales of loans held for sale 311,123 170,090
Originations and purchases of loans held for sale (315,231) (165,342)
Net (gain) loss on sales of:
Loans held for sale (4,608) (1,314)
Real estate owned 79 1
Premises and equipment -- (6)
Changes in certain assets and liabilities:
Accrued interest receivable (241) (175)
Other assets 202 (2,418)
Accrued interest payable (914) (2,025)
Accrued expenses and other liabilities 9,061 (5,984)
--------- ---------
Net cash provided by operating activities 19,352 3,665
--------- ---------
Cash flows from investing activities:
Purchase of investment and mortgage-backed securities, available for sale (101,841) (40,005)
Proceeds from maturities of investment securities, available for sale 2,000 28,490
Proceeds from principal repayments of investment
and mortgage-backed securities 21,027 15,980
Increase in loans receivable (246,575) (16,492)
Sale of Federal Home Loan Bank stock -- 3,002
Purchase of Federal Home Loan Bank stock (14,009) (4,301)
Additions to premises and equipment (2,649) (6,156)
Proceeds from sale of premises and equipment -- 33
Proceeds from sale of real estate owned 2,742 88
--------- ---------
Net cash used in investing activities (339,305) (19,361)
--------- ---------
See accompanying notes to consolidated financial statements.
6
TierOne Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Six Months Ended June 30, 2003 and 2002 (Unaudited)
(dollars in thousands)
June 30,
-----------------------
2003 2002
--------- ---------
Cash flows from financing activities:
Net increase in deposits $ 18,729 $ 20,228
Net increase (decrease) in advance payments from borrowers for taxes,
insurance and other escrow funds 3,272 (3,727)
Proceeds from Federal Home Loan Bank advances 195,000 --
Repayments of Federal Home Loan Bank advances (20,017) (16)
Net advances (repayments) on Federal Home Loan Bank
line of credit and other borrowings 119,406 (9,900)
Purchase of common stock for Management Recognition and Retention Plan (1,454) --
--------- ---------
Net cash provided by financing activities 314,936 6,585
--------- ---------
Net decrease in cash and cash equivalents (5,017) (9,111)
Cash and cash equivalents at beginning of period 33,037 34,441
--------- ---------
Cash and cash equivalents at end of period $ 28,020 $ 25,330
========= =========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 21,597 $ 24,071
Income taxes, net of refunds $ 7,491 $ 4,907
========= =========
Noncash investing activities:
Transfers from loans to real estate owned and
other assets through foreclosure $ 946 $ 253
========= =========
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 bank 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 June 30, 2003, TierOne Bank
operated from 58 banking offices located in Nebraska, southwest Iowa and
northern Kansas, two loan production offices in Colorado and a loan production
office 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 June 30, 2003
and for the three and six-months ended June 30, 2003 and June 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 six-months ended
June 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. 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 June 30, 2003 represent shares
issuable under its stock option and MRRP plans. The dilutive effect of potential
common shares is 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 six-months ended June
30, 2003, since no shares were outstanding for the comparable periods in 2002.
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
-------------------------------- ------------------------------
Basic Diluted Basic Diluted
---------- ----------- ---------- -----------
(dollars in thousands)
Net income $ 6,135 $ 6,135 $ 11,830 $ 11,830
========== =========== ========== ===========
Weighted average number of common shares outstanding
used in basic earnings per share calculation 20,828,000 20,828,000 20,824,000 20,824,000
========== ==========
Common share equivalents - stock option and Management
Recognition and Retention Plan shares 183,642 104,938
----------- -----------
Weighted average number of common shares outstanding used
in diluted earnings per share calculation 21,012,000 20,929,000
=========== ===========
Earnings per share $ 0.29 $ 0.29 $ 0.57 $ 0.57
========== =========== ========== ===========
9
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 4 - Investment and Mortgage-Backed Securities
Investment securities at June 30, 2003 and December 31, 2002 are summarized
below.
Gross Unrealized
------------------------
June 30, 2003 Amortized Cost Gains Losses Fair Value
-------------- -------- --------- ----------
(dollars in thousands)
Held to Maturity:
Municipal obligations $ 150 $ -- $ -- $ 150
Available for Sale:
Mortgage-backed securities 91,786 354 492 91,648
Corporate securities 41,341 285 505 41,121
Asset Management Fund - ARM Fund 6,000 5 -- 6,005
-------- -------- -------- --------
$139,277 $ 644 $ 997 $138,924
======== ======== ======== ========
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.
June 30, 2003 December 31, 2002
-------------------------------- ----------------------------------
Amount % Amount %
----------- ------------- ----------- ---------
(dollars in thousands)
Real estate loans:
One-to-four family residential (1) $ 706,500 32.45% $ 573,209 30.00%
Multi-family residential 70,939 3.26% 79,953 4.18%
Commercial real estate and land 410,715 18.86% 398,076 20.83%
Residential construction 193,660 8.90% 156,322 8.18%
Commercial construction 132,941 6.11% 143,020 7.49%
----------- ------------- ----------- ---------
Total real estate loans 1,514,755 69.58% 1,350,580 70.68%
----------- ------------- ----------- ---------
Commercial business 52,976 2.43% 33,375 1.75%
----------- ------------- ----------- ---------
Warehouse mortgage lines of credit 307,865 14.14% 236,492 12.38%
----------- ------------- ----------- ---------
Consumer loans:
Home equity 33,446 1.53% 37,522 1.96%
Home equity line of credit 108,627 4.99% 94,801 4.96%
Home improvement 77,639 3.57% 82,081 4.30%
Automobile 65,780 3.02% 60,707 3.18%
Other 16,066 0.74% 15,131 0.79%
----------- ------------- ----------- ---------
Total consumer loans 301,558 13.85% 290,242 15.19%
----------- ------------- ----------- ---------
Total loans 2,177,154 100.00% 1,910,689 100.00%
============= =========
Less:
Unamortized premiums and discounts 10,238 4,688
Discounts on loans acquired through merger (108) (174)
Undisbursed portion of construction and
land loans in process (143,809) (123,331)
Deferred loan fees (485) (516)
Allowance for loan losses (18,326) (17,108)
----------- -----------
Net loans $ 2,024,664 $ 1,774,248
=========== ===========
(1) Includes loans held for sale $ 17,220 $ 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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(dollars in thousands) (dollars in thousands)
Allowance for loan losses, beginning of period $ 17,984 $ 13,843 $ 17,108 $ 13,464
Provision for loan losses 515 643 1,687 1,207
Charge-offs (209) (174) (554) (378)
Recoveries on loans previously charged off 36 7 85 26
-------- -------- -------- --------
Allowance for loan losses, end of period $ 18,326 $ 14,319 $ 18,326 $ 14,319
======== ======== ======== ========
Allowance for loan losses as a percent of
net loans, exclusive of allowance for loan losses 0.90% 1.01% 0.90% 1.01%
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 all
accrued interest.
June 30, December 31,
2003 2002
------ ------
(dollars in thousands)
Non-accruing loans:
One-to-four family residential $1,719 $1,161
Multi-family residential -- --
Commercial real estate and land 4,009 3,795
Residential construction 290 106
Commercial construction -- --
Commercial business loans -- --
Warehouse mortgage lines of credit -- --
Consumer 370 427
------ ------
Total non-accruing loans 6,388 5,489
Real estate owned, net (1) 48 1,967
------ ------
Total nonperforming assets 6,436 7,456
Troubled debt restructurings 240 209
------ ------
Total nonperforming assets and troubled debt restructurings $6,676 $7,665
====== ======
Allowance for loan losses as a percent of nonperforming loans 286.88% 311.68%
Total nonperforming loans as a percent of net loans, exclusive
of allowance for loan losses 0.31% 0.31%
Total nonperforming assets as a percent of total assets 0.28% 0.38%
Allowance for loan losses as a percent of net loans,
exclusive of allowance for loan losses 0.90% 0.96%
(1) Balances at June 30, 2003 also include the disposition of a previously
reported $1.4 million real estate owned property. Real estate owned
balances are shown net of related loss allowances. Includes both real
property and other repossessed collateral consisting primarily of
automobiles.
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 Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
(dollars in thousands)
Balance at beginning of period $ 6,173 $ 5,398 $ 6,290 $ 4,577
Mortgage servicing rights capitalized 2,109 1,033 3,828 2,148
Amortization expense (1,663) (307) (2,909) (601)
Valuation adjustment (1,366) (460) (1,956) (460)
------- ------- ------- -------
Balance at end of period $ 5,253 $ 5,664 $ 5,253 $ 5,664
======= ======= ======= =======
The activity of the valuation allowance on mortgage servicing rights is
summarized as follows for the following periods:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
(dollars in thousands)
Balance at beginning of period $ 2,910 $ 350 $ 2,320 $ 350
Amounts charged to operations 1,366 460 1,956 460
------- ----- ------- -----
Ending balance $ 4,276 $ 810 $ 4,276 $ 810
======= ===== ======= =====
The following table compares the key assumptions used in measuring the fair
values of mortgage servicing rights at June 30, 2003 and December 31, 2002:
June 30, 2003 December 31, 2002
------------------ -----------------
(dollars in thousands)
Serviced loan portfolio balance $830,364 $726,431
Fair value of mortgage servicing rights $5,253 $6,290
Prepayment speed 13.9% - 100.0% 9.2% - 74.0%
Weighted average prepayment speed 51.6% 29.9%
Fair value with 10% adverse change $4,816 $5,894
Fair value with 20% adverse change $4,487 $5,545
Discount rate 9.0% - 15.0% 9.0% - 15.0%
Weighted average discount rate 10.1% 9.9%
Fair value with 10% adverse change $5,109 $6,143
Fair value with 20% adverse change $5,032 $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 Management Recognition and Retention Plan
and Trust Agreement ("MRRP"), which is a stock-based incentive plan. The MRRP
was approved by the shareholders at the Company's Annual Meeting of Shareholders
held April 23, 2003.
The following table summarizes shares of the Company's common stock awarded by
the MRRP at June 30, 2003, all of which were granted in April 2003:
June 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 June 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 of
the award. 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 a six-months ended June 30, 2003 was $500,000. Through June 30,
2003 the Company had purchased 76,087 shares.
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
June 30, 2003.
Exercise Price
Number of Shares 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 June 30, 2003 1,852,750 $ 17.83
=========== =========
15
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
At June 30, 2003, no outstanding options were exercisable, the weighted-average
remaining contractual life of outstanding options was 9.83 years, and there were
404,758 shares available for future grants. At June 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 APB No. 25, as 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 Six Months Ended
June 30, 2003 June 30, 2003
------------------ ----------------
(dollars in thousands, except per share data)
Net income (as reported) $ 6,135 $ 11,830
Deduct: stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax (199) (199)
--------- ---------
Pro forma net income $ 5,936 $ 11,631
========= =========
Basic earnings per share (as reported) 0.29 0.57
Pro forma basic earnings per share 0.28 0.56
Diluted earnings per share (as reported) 0.29 0.57
Pro forma diluted earnings per share 0.28 0.56
The pro forma results above may not be representative of the effect reported in
net income for 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 Company does
not believe that Interpretation No. 46 will have a material effect on its
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 $2.3 billion federally chartered
savings bank headquartered in Lincoln, Nebraska. Established in 1907, the Bank
offers a wide variety of full-service consumer and commercial banking products
and services to customers through a geographically diverse network of 58 banking
offices in Nebraska, Iowa and Kansas, two loan production offices in Colorado
and a loan production office 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 financing; consumer, construction and business loans;
lines of credit; consumer and business checking and savings plans; investment
and insurance services; and telephone and internet banking access.
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 principally consists of compensation and employee benefits, office
occupancy and equipment expense, data processing, advertising and business
promotion and other expense. Our results of operations are also significantly
affected by general economic and competitive conditions, particularly changes in
interest rates, government policies and actions of regulatory authorities.
Future changes in applicable law, regulations or government policies may
materially impact our financial condition and results of operations.
As used in this report, unless the context otherwise requires, the terms "we,"
"us," or "our" refer to TierOne Corporation and our wholly owned subsidiary
TierOne Bank, a federally chartered stock savings 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 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 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 June 30, 2003 and December 31, 2002
Our total assets were $2.3 billion at June 30, 2003, a $336.7 million, or 17.3%,
increase from December 31, 2002. Our available for sale investment securities
amounted to $47.1 million at June 30, 2003, a $16.6 million, or 54.3%, increase
from December 31, 2002 primarily due to security purchases of $17.9 million
partially offset by $2.0 million of maturities during the six months ended June
30, 2003. Our mortgage-backed securities portfolio, all of which is available
for sale, amounted to $91.6 million at June 30, 2003, a $61.3 million, or
201.8%, increase from December 31, 2002. During the three months ended March 31,
2003, we purchased two Federal National Mortgage Association ("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.
Net loans receivable, including loans held for sale, totaled $2.0 billion at
June 30, 2003, a $250.4 million, or 14.1%, increase from December 31, 2002. At
June 30, 2003 our one-to-four family residential loans, including loans held for
sale, were $706.5 million, a $133.3 million, or 23.3%, increase compared to
December 31, 2002. During the six months ended June 30, 2003, we purchased for
our portfolio $182.0 million of hybrid adjustable-rate first mortgage and $112.7
million of fixed-rate second mortgage loans secured by one-to-four family
residential properties in geographically diverse markets across the United
States. Our residential construction loans totaled $193.7 million, a $37.3
million, or 23.9%, increase as compared to $156.3 million at December 31, 2002.
Warehouse mortgage lines of credit amounted to $307.9 million, a $71.4 million,
or 30.2%, increase at June 30, 2003 as compared to $236.5 million at December
31, 2002. The warehouse mortgage lines of credit lending area continues to
experience increased volume due in large part to refinancing activity resulting
from the existing low interest rate environment.
Our total deposits increased by $18.7 million to $1.1 billion at June 30, 2003
as compared to December 31, 2002 as we continued our efforts to increase the
level of our core deposits. At June 30, 2003, our interest-bearing checking
accounts totaled $290.7 million compared to $290.2 million at December 31, 2002.
Our non-interest-bearing checking accounts amounted to $46.1 million, a $10.3
million, or 28.7%, increase as compared to $35.8 million at December 31, 2002.
Our money market accounts totaled $277.6 million, a $7.3 million, or 2.7%,
increase compared to December 31, 2002. Our certificates of deposit declined
$2.4 million, or 0.5%, to $514.3 million at June 30, 2003 as compared to $516.7
million at December 31, 2002. Our Federal Home Loan Bank (FHLB) advances and
other borrowings amounted to $712.7 million at June 30, 2003, a $294.4 million,
or 70.4%, increase from December 31, 2002. We have utilized FHLB advances as the
primary funding source for growing our loan portfolio and investment and
mortgage-backed securities portfolios.
Our shareholders' equity increased by $12.2 million to $352.1 million at June
30, 2003 compared to $339.9 million at December 31, 2002 primarily reflecting
$11.8 million in net income earned for the six months ended June 30, 2003.
21
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Operating Results for the Three and Six Months Ended June 30, 2003
and June 30, 2002
General. Net income increased by $1.7 million, or 39.3%, to $6.1 million for the
three months ended June 30, 2003 compared to $4.4 million for the three months
ended June 30, 2002. For the six months ended June 30, 2003, our net income
increased $3.3 million, or 38.6%, to $11.8 million compared to $8.5 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. Average interest rate spread declined to 3.11%
and 3.16% for the three and six months ended June 30, 2003, respectively,
compared to 3.58% and 3.44% for the three and six months ended June 30, 2002,
respectively. Net interest margin declined to 3.57% and 3.65% for the three and
six months ended June 30, 2003, respectively, compared to 3.88% and 3.76% for
the three and six months ended June 30, 2002, respectively. The decline in the
average interest rate spread and net interest margin for the three and six
months ended June 30, 2003 is primarily attributable to the continued low
interest rate environment which has fueled a high level of refinancing activity.
The ratio of average interest-earning assets to average interest-bearing
liabilities increased to 122.41% and 123.12% for the three and six months ended
June 30, 2003, respectively, compared to 110.04% and 110.92% for the three and
six months ended June 30, 2002, respectively.
Interest Income. Our total interest income for the three months ended June 30,
2003 was $28.5 million, a $3.0 million, or 11.9%, increase compared to $25.5
million for the three months ended June 30, 2002. For the six months ended June
30, 2003 our total interest income was $56.4 million, a $6.4 million, or 12.7%,
increase compared to $50.0 million for the six months ended June 30, 2002. The
increase in total interest income during the first half of 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 (including loans
held for sale) during the three months ended June 30, 2003 and June 30, 2002 was
$1.9 billion and $1.4 billion, respectively. The average balance of loans
receivable (including loans held for sale) during the six months ended June 30,
2003 and June 30, 2002 was $1.8 billion and $1.4 billion, respectively. The
weighted average yield earned on the loan portfolio was 5.90% and 6.97% for the
three months ended June 30, 2003 and June 30, 2002, respectively. The weighted
average yield on the loan portfolio for the six month periods ended June 30,
2003 and June 30, 2002 was 6.00% and 6.95%, respectively. The declines in the
yields on loans receivable during the first half of 2003 reflected the lower
interest rate environment which continued to fuel a high level of refinance
activity.
22
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Interest Expense. Our total interest expense for the three and six months ended
June 30, 2003 was $10.4 million and $20.7 million, respectively, compared to
$11.0 million and $22.0 million for the three and six months ended June 30,
2002, respectively. The primary reason for the decrease in our interest expense
during the 2003 periods was a reduction in the average interest cost of deposits
to 2.13% and 2.20% during the three and six month period ended June 30, 2003,
respectively, compared to 2.90% and 2.97% during the same periods in 2002. The
average interest cost of our certificates of deposit was 3.33% and 3.38% for the
three and six months ended June 30, 2003, respectively, as compared to 3.92% and
4.03% for the same periods in 2002. The average rates on our interest-bearing
checking accounts, money market accounts and savings accounts also declined
during the three and six months ended June 30, 2003 as compared with the same
periods in 2002. Interest expense on FHLB advances and other borrowings
increased $1.4 million and $2.6 million during the three and six months ended
June 30, 2003 as compared with the same periods in 2002 due to a higher average
balance of borrowings as the Bank continued to fund loan and investment
securities portfolio growth primarily through additional borrowings. The
increased cost of borrowings was partially offset by a decline in the average
cost of borrowings from 4.59% and 4.56% for the three and six months ended June
30, 2002, respectively, to 3.27% and 3.50% for the three and six months ended
June 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, and the net interest margin. Tax-exempt income and yields
have not been adjusted to a tax-equivalent basis. All average balances are based
on monthly balances. Management does not believe that the monthly averages
differ significantly from what the daily averages would be.
Three Months Ended June 30,
--------------------------------------------------------------------------------------
2003 2002
------------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ------------ ----------- ------------ ----------- -----------
(dollars in thousands)
Interest-earning assets:
Fed funds sold $ -- $ -- -- $ 991 $ 4 1.61%
Investment securities (1) 73,807 674 3.65% 80,862 947 4.68%
Mortgage-backed securities (1) 97,572 441 1.81% 32,850 497 6.05%
Loans receivable (2) 1,854,530 27,373 5.90% 1,377,339 24,008 6.97%
----------- ----------- ----------- ----------
Total interest-earning assets 2,025,909 28,488 5.62% 1,492,042 25,456 6.82%
----------- --------- ---------- -------
Non-interest-earning assets 83,701 63,791
----------- -----------
Total assets $ 2,109,610 $ 1,555,833
=========== ===========
Interest-bearing liabilities:
Interest-bearing checking accounts $ 295,709 $ 654 0.88% $ 270,887 $ 1,267 1.87%
Regular savings accounts 18,523 27 0.58% 14,549 48 1.32%
Money market accounts 276,280 927 1.34% 281,583 1,469 2.09%
Certificate accounts 510,749 4,258 3.33% 518,158 5,078 3.92%
----------- ----------- ----------- ----------
Total interest-bearing deposits 1,101,261 5,866 2.13% 1,085,177 7,862 2.90%
FHLB advances and other borrowings 553,722 4,530 3.27% 270,674 3,105 4.59%
----------- ----------- ----------- ----------
Total interest-bearing liabilities 1,654,983 10,396 2.51% 1,355,851 10,967 3.24%
----------- --------- ---------- -------
Non-interest-bearing accounts 44,643 28,186
Other liabilities 61,283 43,827
----------- -----------
Total liabilities 1,760,909 1,427,864
Shareholders' equity 348,701 127,969
----------- -----------
Total liabilities and shareholders' equity $ 2,109,610 $ 1,555,833
=========== ===========
Net interest-earning assets $ 370,926 $ 136,191
=========== ===========
Net interest income; average
interest rate spread $ 18,092 3.11% $ 14,489 3.58%
=========== ========= ========== =======
Net interest margin (3) 3.57% 3.88%
========= =======
Average interest-earning assets to average
interest-bearing liabilities 122.41% 110.04%
========= =======
(1) Includes securities available for sale and held to maturity. Investment
securities also include Federal Home Loan Bank 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.
(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
Six Months Ended June 30,
--------------------------------------------------------------------------------------
2003 2002
------------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ------------ ----------- ------------ ----------- -----------
(dollars in thousands)
Interest-earning assets:
Fed funds sold $ 16,289 $ 99 1.21% $ 23,054 $ 197 1.71%
Investment securities (1) 66,075 1,218 3.69% 74,019 1,626 4.39%
Mortgage-backed securities (1) 68,179 929 2.73% 36,678 1,067 5.82%
Loans receivable (2) 1,807,014 54,166 6.00% 1,356,129 47,151 6.95%
---------- -------- ---------- --------
Total interest-earning assets 1,957,557 56,412 5.76% 1,489,880 50,041 6.72%
-------- ------ -------- ------
Non-interest-earning assets 84,152 48,410
---------- ----------
Total assets $2,041,709 $1,538,290
========== ==========
Interest-bearing liabilities:
Interest-bearing checking accounts $ 296,247 $ 1,488 1.00% $ 254,860 $ 2,403 1.89%
Regular savings accounts 17,659 57 0.65% 14,041 91 1.30%
Money market accounts 273,178 1,894 1.39% 286,901 2,973 2.07%
Certificate accounts 511,217 8,650 3.38% 523,472 10,555 4.03%
---------- -------- ------ ---------- -------- ------
Total interest-bearing deposits 1,098,301 12,089 2.20% 1,079,274 16,022 2.97%
FHLB advances and other borrowings 491,615 8,594 3.50% 263,961 6,024 4.56%
---------- -------- ---------- --------
Total interest-bearing
liabilities 1,589,916 20,683 2.60% 1,343,235 22,046 3.28%
-------- ------ -------- ------
Non-interest-bearing accounts 42,150 27,153
Other liabilities 63,933 42,007
---------- ----------
Total liabilities 1,695,999 1,412,395
Shareholders' equity 345,710 125,895
---------- ----------
Total liabilities and shareholders' equity $2,041,709 $1,538,290
========== ==========
Net interest-earning assets $ 367,641 $ 146,645
========== ==========
Net interest income; average
interest rate spread $ 35,729 3.16% $ 27,995 3.44%
======== ====== ======== ======
Net interest margin (3) 3.65% 3.76%
====== ======
Average interest-earning assets to
average interest-bearing liabilities 123.12% 110.92%
====== ======
(1) Includes securities available for sale and held to maturity. Investment
securities also includes Federal Home Loan Bank 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.
(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 volume of interest-related assets and liabilities
affected our interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by prior year volume) and (2) changes in volume (change in
volume multiplied by prior year rate). The combined effect of changes in both
rate and volume has been allocated proportionately to the change due to rate and
the change due to volume.
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
Compared to Compared to
Three Months Ended June 30, 2002 Six Months Ended June 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 $ (2) $ (2) $ (4) $ (49) $ (49) $ (98)
Investment securities (195) (78) (273) (245) (163) (408)
Mortgage-backed securities (529) 473 (56) (753) 615 (138)
Loans receivable (4,069) 7,434 3,365 (7,134) 14,149 7,015
------- ------- ------- ------- -------- -------
Total interest income (4,795) 7,827 3,032 (8,181) 14,552 6,371
------- ------- ------- ------- -------- -------
Interest expense:
Interest-bearing checking accounts (720) 107 (613) (1,258) 343 (915)
Savings accounts (32) 11 (21) (53) 19 (34)
Money market accounts (515) (27) (542) (943) (136) (1,079)
Certificate accounts (748) (72) (820) (1,663) (242) (1,905)
------- ------- ------- ------- -------- -------
Total deposits (2,015) 19 (1,996) (3,917) (16) (3,933)
FHLB advances and other borrowings (1,091) 2,516 1,425 (1,669) 4,239 2,570
------- ------- ------- ------- -------- -------
Total interest expense (3,106) 2,535 (571) (5,586) 4,223 (1,363)
------- ------- ------- ------- -------- -------
Net change in net interest income $(1,689) $ 5,292 $ 3,603 $(2,595) $ 10,329 $ 7,734
======= ======= ======= ======= ======== =======
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 $515,000 for
the three months ended June 30, 2003 as compared to $643,000 for the three
months ended June 30, 2002. For the six months ended June 30, 2003, our
provision for loan losses was $1.7 million as compared to $1.2 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 $1.1 billion at June 30, 2003, an increase of $205.4
million, or 23.2%, as compared to June 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 June 30, 2003, our total nonperforming
assets amounted to $6.4 million, or 0.28% of total assets, as compared to $7.5
million, or 0.38% of total assets, at December 31, 2002. During the three and
six months ended June 30, 2003, we charged-off, net of recoveries, $173,000 and
$469,000, respectively, of loans, primarily related to consumer loans. At June
30, 2003, our allowance for loan losses amounted to 286.88% of nonperforming
loans and 0.90% of net loans exclusive of the allowance for loan losses.
Other Income. Our other income increased by $850,000 or 27.9%, to $3.9 million
for the three months ended June 30, 2003 as compared to $3.0 million for the
three months ended June 30, 2002. For the six months ended June 30, 2003, other
income amounted to $7.5 million, a $1.2 million, or 19.7%, increase compared to
$6.3 million for the same period in 2002. The increase during the three month
period ended June 30, 2003 was primarily the result of a $2.0 million increase
in gains on loans held for sale, a $616,000 increase in loan fees and a $482,000
increase in checking account fees offset in large part by a $1.4 million
increase in the amortization of mortgage servicing rights and a $906,000
increase in mortgage servicing rights impairment charges. Amortization expense
and impairment charges related to mortgage servicing rights are recorded as a
reduction to fee and service charge income. For the six months ended June 30,
2003, the increase in other income was attributable to a $3.3 million increase
in gains on loans held for sale, a $1.1 million increase in loan fees and a
$826,000 increase in checking account fees partially offset by a $2.3 million
increase in amortization of mortgage servicing rights and a $1.5 million
increase in mortgage servicing rights impairment charges. The increase in our
mortgage servicing rights valuation allowance was deemed necessary due to the
sustained low interest rate environment which has resulted in a continued high
level of mortgage refinancing activity. Total deposit account fees and charges,
driven by continued growth in new core deposit relationships, rose 39.4% and
37.4%, to $1.7 million and $3.0 million, respectively, for the three and six
months ended June 30, 2003 as compared to the same periods in 2002.
27
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Other Expense. Our other expense increased by $1.7 million, or 17.4%, to $11.7
million for the three months ended June 30, 2003 as compared to $10.0 million
for the three months ended June 30, 2002. For the six months ended June 30,
2003, other expense totaled $22.8 million, a $3.1 million, or 15.9%, increase
compared to $19.7 million during the same period in 2002. This increase during
the six month period ended June 30, 2003 resulted primarily from a $1.3 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 $1.1 million increase in
compensation expense related to salary increases and continued additions of
business line personnel and a $500,000 expense related to the MRRP.
Income Tax Expense. Our income tax expense increased by $1.1 million to $3.6
million and by $2.1 million to $6.9 million for the three and six months ended
June 30, 2003, respectively. The effective income tax rate for the three and six
months ended June 30, 2003 was 36.9% and 36.8%, respectively, as compared to
36.1% for both the three and six months ended June 30, 2002.
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, amortization of loans and
investment securities, loan and investment security prepayments and maturities
and other funds provided from operations. While scheduled payments from the
amortization of loans and mortgage-backed securities and maturing investment
securities are relatively predictable sources of funds, deposit flows and loan
prepayments can be greatly influenced by general interest rates, economic
conditions and competition. Excess funds are maintained in short-term,
interest-bearing assets that provide additional liquidity. We also utilize
outside borrowings, primarily from the FHLBank Topeka (formerly known as the
Federal Home Loan Bank of Topeka), as an additional funding source.
We use our liquidity to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets and to meet operating expenses. At June 30, 2003,
we had certificates of deposit maturing within the next 12 months amounting to
$291.1 million. Based upon historical experience, we anticipate that a
significant portion of the maturing certificates of deposit will be redeposited
with us.
In addition to cash flow from loan and investment and mortgage-backed securities
payments and prepayments, as well as from sales of available for sale
securities, 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 $553.7 million and $270.7 million for three months ended June 30,
2003 and June 30, 2002, respectively. The average balance of our borrowings was
$491.6 million and $264.0 million for the six months ended June 30, 2003 and
June 30, 2002, respectively. To date, substantially all of our borrowings have
consisted of advances from the FHLBank Topeka. Pursuant to blanket collateral
agreements with the FHLBank Topeka, the Company has pledged qualifying
one-to-four family residential, multi-family, commercial real estate, second
mortgage, construction loans and mortgage-backed securities 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 June 30, 2003, the maximum total amount of such recourse was
approximately $8.3 million. Based on historical experience, at June 30, 2003, we
had established a reserve of $514,000 with respect to this recourse obligation.
In addition, we have not had, and have no intention to have, any significant
transactions, arrangements or other relationships with any unconsolidated,
limited purpose entities that could materially affect our liquidity or capital
resources. We have not traded, and do not intend to trade, in commodity
contracts.
We anticipate that we will continue to have sufficient funds and alternative
funding sources to meet our current commitments.
29
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Regulatory Capital
At June 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 June 30, 2003 are set forth below:
Required Capital Actual Capital Excess Capital
------------------------ ------------------------ -----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars in thousands)
Tangible capital $ 34,182 1.50% $ 250,854 11.01% $ 216,672 9.51%
Core capital 91,151 4.00% 250,854 11.01% 159,703 7.01%
Risk-based capital 151,179 8.00% 269,180 14.24% 118,001 6.24%
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) for
the three and six months ended June 30, 2003 and June 30, 2002.
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Selected Operating Ratios:
Average yield on interest-earning assets 5.62% 6.82% 5.76% 6.72%
Average rate on interest-bearing liabilities 2.51% 3.24% 2.60% 3.28%
Average interest rate spread 3.11% 3.58% 3.16% 3.44%
Net interest margin 3.57% 3.88% 3.65% 3.76%
Average interest-earning assets to average
interest-bearing liabilities 122.41% 110.04% 123.12% 110.92%
Net interest income after provision for loan
losses to non-interest expense 149.69% 138.47% 149.08% 135.91%
Total non-interest expense to average assets 2.23% 2.57% 2.24% 2.56%
Efficiency ratio (1) 53.41% 57.03% 52.80% 57.50%
Return on average assets 1.16% 1.13% 1.16% 1.11%
Return on average equity 7.04% 13.76% 6.84% 13.56%
Average equity to average assets 16.53% 8.23% 16.93% 8.18%
Other Ratios:
Nonperforming loans as a percent of net loans 0.31% 0.31% 0.31% 0.31%
Nonperfoming assets to total assets 0.28% 0.29% 0.28% 0.29%
Allowance for loan losses to total
nonperforming loans 286.88% 329.32% 286.88% 329.32%
Allowance for loan losses as a percent of net
loans, exclusive of allowance for loan losses 0.90% 1.01% 0.90% 1.01%
(1) Efficiency ratio is calculated as total other expense divided by the sum
of net interest income and total other income.
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 commenced, as scheduled, and at the conclusion of the trial
on May 23, 2003, the judge directed that both parties simultaneously file
post-trial briefs by June 20, 2003. The court has indicated that a decision with
regard to liability of the U.S. Government for damages could be issued within 90
days following submission of post-trial briefs. We are currently awaiting this
decision from the court.
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.
On April 23, 2003, TierOne Corporation held its first Annual Meeting of
Shareholders to obtain approval for four proxy proposals submitted on behalf of
the Company's Board of Directors. Shareholders of record as of February 24, 2003
received proxy materials and were considered eligible to vote for these
proposals. Following is a brief summary of each proposal and the result of the
vote.
1. The following directors were elected by the requisite plurality of the
votes cast to serve on the Company's Board of Directors for the term
indicated: LaVern F. Roschewski (one-year), Ann Lindley Spence (one-year),
James A. Laphen (two-year), Campbell R. McConnell (two-year), Gilbert G.
Lundstrom (three-year) and Joyce Person Pocras (three-year). There was no
solicitation in oppostion to the Board's nominees.
BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- ---------- ---------- -----------
2. To adopt the 2003 Stock Option Plan 12,556,644 1,240,970 37,654 5,492,519
3. To adopt the 2003 Management
Recognition and Retention Plan
and Trust Agreement 12,330,761 1,463,051 41,456 5,492,519
4. To ratify the appointment of KPMG LLP as
the independent auditors for the
year ended December 31, 2003 18,684,280 600,214 43,293 N/A
33
Item 5 - Other Information.
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K.
(a) 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) Reports on Form 8-K:
Date Item and Description
------------------------------- --------------------------------------------------------------
April 23, 2003 Item 9. On April 22, 2003, the Company issued a
press release reporting its earnings for the three
months ended March 31, 2003.
April 25, 2003 Item 5. On April 23, 2003 the Company issued a
press release announcing the results of the Company's
first annual meeting of shareholders held on April 23, 2003.
In addition, on April 25, 2003, the Company announced
that it would purchase shares of common stock in open
market transactions to fund the 2003 Management
Recognition and Retention Plan and Trust Agreement.
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.
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: August 12, 2003 By: /s/ Gilbert G. Lundstrom
---------------------------------------
Gilbert G. Lundstrom
Chairman of the Board and Chief
Executive Officer
Date: August 12, 2003 By: /s/ Eugene B. Witkowicz
---------------------------------------
Eugene B. Witkowicz
Executive Vice President and
Chief Financial Officer
36