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 March 31, 2004
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 May 6, 2004, the registrant
had 19,441,620 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 ..................................... 20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk .... 35
Item 4 - Controls and Procedures ....................................... 35
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ............................................. 36
Item 2 - Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities ......................... 36
Item 3 - Defaults Upon Senior Securities ............................... 36
Item 4 - Submission of Matters to a Vote of Security Holders ........... 36
Item 5 - Other Information ............................................. 36
Item 6 - Exhibits and Reports on Form 8-K .............................. 37
Signatures .............................................................. 39
2
TierOne Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 2004 (Unaudited) and December 31, 2003
(Dollars in thousands, except per share data) March 31, 2004 December 31, 2003
=======================================================================================================
ASSETS
Cash and cash equivalents $ 26,149 $ 34,901
Investment securities:
Held to maturity, at cost which approximates fair value 138 142
Available for sale, at fair value 39,924 43,515
Mortgage-backed securities, available for sale, at fair value 14,368 15,712
Loans receivable:
Net loans (includes loans held for sale of $13,556 and $7,083 at
March 31, 2004 and December 31, 2003, respectively) 2,097,235 2,036,182
Allowance for loan losses (20,086) (19,586)
-------------------------------------------------------------------------------------------------------
Net loans after allowance for loan losses 2,077,149 2,016,596
-------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 37,466 37,143
Premises and equipment, net 27,663 27,587
Accrued interest receivable 9,550 9,678
Other assets 23,202 22,594
-------------------------------------------------------------------------------------------------------
Total assets $ 2,255,609 $ 2,207,868
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 1,314,973 $ 1,216,763
Advances from Federal Home Loan Bank and other borrowings 592,333 645,696
Advance payments from borrowers for taxes, insurance and
other escrow funds 21,100 22,206
Accrued interest payable 5,310 5,259
Accrued expenses and other liabilities 19,457 22,855
-------------------------------------------------------------------------------------------------------
Total liabilities 1,953,173 1,912,779
-------------------------------------------------------------------------------------------------------
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;
20,317,568 shares issued and outstanding at March 31, 2004
and December 31, 2003 226 226
Additional paid-in capital 354,544 354,054
Retained earnings, substantially restricted 30,958 25,833
Treasury stock, at cost; 2,257,507 shares at
March 31, 2004 and December 31, 2003 (53,613) (53,613)
Unallocated common stock held by Employee Stock
Ownership Plan (15,803) (16,179)
Unearned common stock held by Management
Recognition and Retention Plan (14,300) (14,982)
Accumulated other comprehensive income (loss), net 424 (250)
-------------------------------------------------------------------------------------------------------
Total shareholders' equity 302,436 295,089
-------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
-------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,255,609 $ 2,207,868
=======================================================================================================
See accompanying notes to consolidated financial statements.
3
TierOne Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
For the Three Months Ended
March 31,
==========================
(Dollars in thousands, except per share data) 2004 2003
===========================================================================================
Interest income:
Loans receivable $ 27,163 $ 26,793
Investment securities 927 1,032
Other interest-earning assets -- 99
-------------------------------------------------------------------------------------------
Total interest income 28,090 27,924
-------------------------------------------------------------------------------------------
Interest expense:
Deposits 5,655 6,223
Advances from Federal Home Loan Bank and other borrowings 4,687 4,064
-------------------------------------------------------------------------------------------
Total interest expense 10,342 10,287
-------------------------------------------------------------------------------------------
Net interest income 17,748 17,637
Provision for loan losses 934 1,172
-------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 16,814 16,465
-------------------------------------------------------------------------------------------
Noninterest income:
Fees and service charges 3,113 967
Loss from real estate operations, net (77) (18)
Net gain on sales of:
Loans held for sale 316 1,955
Real estate owned -- 14
Gain on pension plan curtailment 1,456 --
Other operating income 633 711
-------------------------------------------------------------------------------------------
Total noninterest income 5,441 3,629
-------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 7,864 6,319
Occupancy, net 1,466 1,431
Data processing 504 411
Advertising 693 724
Other operating expense 2,069 2,208
-------------------------------------------------------------------------------------------
Total noninterest expense 12,596 11,093
-------------------------------------------------------------------------------------------
Income before income taxes 9,659 9,001
-------------------------------------------------------------------------------------------
Income tax expense 3,599 3,306
-------------------------------------------------------------------------------------------
Net income $ 6,060 $ 5,695
===========================================================================================
Net income per common share, basic $ 0.34 $ 0.27
===========================================================================================
Net income per common share, diluted $ 0.33 $ 0.27
===========================================================================================
Dividends declared per common share $ 0.05 $ --
===========================================================================================
Average common shares outstanding, basic (000's) 17,939 20,826
===========================================================================================
Average common shares outstanding, diluted (000's) 18,332 20,826
===========================================================================================
See accompanying notes to consolidated financial statements.
4
TierOne Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
Three Months Ended March 31, 2004 and March 31, 2003 (Unaudited)
Unallocated
Retained Common Stock
Additional Earnings, Held by the
Common Paid-In Substantially Treasury Employee Stock
(Dollars in thousands) Stock Capital Restricted Stock Ownership Plan
=================================================================================================================
Balance at December 31, 2002 $226 $ 355,741 $ 2,018 $ -- $ (17,684)
-----------------------------------------------------------------------------------------------------------------
Common stock earned by
employees in Employee
Stock Ownership Plan -- 207 -- -- 376
Comprehensive income:
Net income -- -- 5,695 -- --
Change in unrealized loss on
available for sale securities,
net of tax and
reclassification adjustment -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 5,695 -- --
-----------------------------------------------------------------------------------------------------------------
Balance at March 31, 2003 $226 $ 355,948 $ 7,713 $ -- $ (17,308)
=================================================================================================================
Balance at December 31, 2003 $226 $ 354,054 $ 25,833 $ (53,613) $ (16,179)
-----------------------------------------------------------------------------------------------------------------
Common stock earned by
employees in Employee
Stock Ownership Plan -- 490 -- -- 376
Amortization of awards under
the Management Recognition
and Retention Plan -- -- -- -- --
Dividends paid ($.05 per common share) -- -- (935) -- --
Comprehensive income:
Net income -- -- 6,060 -- --
Change in additional minimum
pension liability, net of tax -- -- -- -- --
Change in unrealized gain on
available for sale securities,
net of tax and
reclassification adjustment -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 6,060 -- --
-----------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004 $226 $ 354,544 $ 30,958 $ (53,613 $ (15,803)
=================================================================================================================
Unearned
Common Stock
Held by the
Management Accumulated Other Total
Recognition and Comprehensive Shareholders'
(Dollars in thousands) Retention Plan Income (Loss), Net Equity
=============================================================================================
Balance at December 31, 2002 $ -- $ (405) $ 339,896
---------------------------------------------------------------------------------------------
Common stock earned by
employees in Employee
Stock Ownership Plan -- -- 583
Comprehensive income:
Net income -- -- 5,695
Change in unrealized loss on
available for sale securities,
net of tax and
reclassification adjustment -- (10) (10)
---------------------------------------------------------------------------------------------
Total comprehensive income -- (10) 5,685
---------------------------------------------------------------------------------------------
Balance at March 31, 2003 $ -- $ (415) $ 346,164
=============================================================================================
Balance at December 31, 2003 $ (14,982) $ (250) $ 295,089
---------------------------------------------------------------------------------------------
Common stock earned by
employees in Employee
Stock Ownership Plan -- -- 866
Amortization of awards under
the Management Recognition
and Retention Plan 682 -- 682
Dividends paid ($.05 per common share) -- -- (935)
Comprehensive income:
Net income -- -- 6,060
Change in additional minimum
pension liability, net of tax -- 452 452
Change in unrealized gain on
available for sale securities,
net of tax and
reclassification adjustment -- 222 222
---------------------------------------------------------------------------------------------
Total comprehensive income -- 674 6,734
---------------------------------------------------------------------------------------------
Balance at March 31, 2004 $ (14,300) $ 424 $ 302,436
=============================================================================================
See accompanying notes to consolidated financial statements.
5
TierOne Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003 (Unaudited)
March 31,
=======================
(Dollars in thousands) 2004 2003
======================================================================================================
Reconciliation of net income to net cash provided by operating activities:
Net income $ 6,060 $ 5,695
Adjustments to reconcile net income to net cash provided by
operating activities:
Net premium amortization of investment and mortgage-backed securities 56 5
Depreciation and amortization 634 670
Employee Stock Ownership Plan expense 866 583
Management Recognition and Retention Plan expense 682 --
Amortization of premiums on net loans 2,076 1,115
Federal Home Loan Bank stock dividend (323) --
Deferred income tax expense (benefit) 100 (97)
Provision for loan losses 934 1,172
Proceeds from sales of loans held for sale 48,339 140,590
Originations and purchases of loans held for sale (54,496) (141,005)
Net (gain) loss on sales of:
Loans held for sale (316) (1,955)
Real estate owned -- (14)
Changes in certain assets and liabilities:
Accrued interest receivable 128 (396)
Other assets 413 (43)
Accrued interest payable 51 (379)
Accrued expenses and other liabilities (3,398) 2,710
-------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,806 8,651
-------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment and mortgage-backed securities, available for sale -- (90,000)
Proceeds from maturities of investment securities, available for sale 3,900 2,000
Proceeds from principal repayments of investment
and mortgage-backed securities available for sale and held to maturity 1,324 3,684
Increase in loans receivable (57,775) (112,409)
Purchase of Federal Home Loan Bank stock -- (7,610)
Additions to premises and equipment (1,270) (1,999)
Proceeds from sale of real estate owned 457 597
-------------------------------------------------------------------------------------------------------
Net cash used in investing activities (53,364) (205,737)
-------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
TierOne Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Three Months Ended March 31, 2004 and 2003 (Unaudited)
March 31,
========================
(Dollars in thousands) 2004 2003
===========================================================================================================
Cash flows from financing activities:
Net increase in deposits $ 98,210 $ 26,169
Net advances (repayment) on Federal Home Loan Bank line of credit
and short-term advances and other borrowings (53,363) 38,786
Proceeds from Federal Home Loan Bank long-term advances and other borrowings -- 145,000
Repayments of Federal Home Loan Bank long-term advances and other borrowings -- (20,000)
Net increase (decrease) in advances from borrowers for taxes,
insurance and other escrow funds (1,106) 814
Dividends paid on common stock (935) --
------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 42,806 190,769
------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (8,752) (6,317)
Cash and cash equivalents at beginning of period 34,901 33,037
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,149 $ 26,720
===========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 10,291 $ 10,666
Income taxes, net of refunds $ 3,635 $ 436
===========================================================================================================
Noncash investing activities:
Transfers from loans to real estate owned and other assets through foreclosure $ 685 $ 675
===========================================================================================================
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 is the holding company for TierOne Bank
(the "Bank"). At March 31, 2004, TierOne Bank operated from 57 banking offices
located in Nebraska, Iowa and Kansas, three 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, a wholly owned subsidiary, which reinsures credit
life and disability insurance policies.
The accompanying interim consolidated financial statements as of March 31, 2004
and for the three months ended March 31, 2004 and March 31, 2003 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, 2003. The results of operations for the three months ended March
31, 2004 are not necessarily indicative of the results which may be expected for
the entire calendar year 2004.
8
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 3 - Earnings Per Share
Basic and diluted earnings per share ("EPS") data are based on the weighted
average number of common shares outstanding during each reporting period.
Employee Stock Ownership Plan ("ESOP") and 2003 Management Recognition and
Retention Plan ("MRRP") shares not committed to be released are not considered
to be outstanding for purposes of EPS calculations. The basic EPS calculation
excludes the dilutive effect of all common stock equivalents. Diluted EPS is
further adjusted for potential common shares that were dilutive and outstanding
during the reporting periods. The Company's potentially dilutive common shares
at March 31, 2004 represent shares issuable under its 2003 Stock Option Plan and
MRRP computed using the treasury stock method. All stock options awarded are
assumed to be 100% vested for purposes of the EPS computations.
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
========================== ===========================
(Dollars in thousands, except per share data) Basic Diluted Basic Diluted
===============================================================================================================
Net income $ 6,060 $ 6,060 $ 5,695 $ 5,695
---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding used in basic earnings per share
calculation 17,939,000 17,939,000 20,826,000 20,826,000
---------------------------------------------------------------------------------------------------------------
Common share equivalents - 2003 Stock Option Plan
and 2003 Management Recognition and Retention Plan
shares 393,000 --
---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding used in diluted earnings per share
calculation 18,332,000 20,826,000
---------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.34 $ 0.33 $ 0.27 $ 0.27
===============================================================================================================
9
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 4 - Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities at March 31, 2004 and December 31,
2003 are summarized in the following table.
March 31, 2004
=====================================================
Gross Unrealized
============================
Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
=================================================================================================
Held to maturity:
Municipal obligations $ 138 $ -- $ -- $ 138
=================================================================================================
Available for sale:
Mortgage-backed securities 14,199 169 -- 14,368
U.S. Government agency obligations 8,978 14 -- 8,992
Corporate securities 24,462 573 65 24,970
Asset Management Fund - ARM Fund 6,000 -- 38 5,962
-------------------------------------------------------------------------------------------------
Total investment and mortgage-backed
securities, available for sale $53,639 $ 756 $ 103 $54,292
=================================================================================================
December 31, 2003
=====================================================
Gross Unrealized
============================
Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
=================================================================================================
Held to maturity:
Municipal obligations $ 142 $ -- $ -- $ 142
=================================================================================================
Available for sale:
Mortgage-backed securities 15,542 201 31 15,712
U.S. Government agency obligations 12,877 13 4 12,886
Corporate securities 24,496 406 242 24,660
Asset Management Fund - ARM Fund 6,000 -- 31 5,969
-------------------------------------------------------------------------------------------------
Total investment and mortgage-backed
securities, available for sale $58,915 $ 620 $ 308 $59,227
=================================================================================================
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.
March 31, 2004 December 31, 2003
======================= ========================
(Dollars in thousands) Amount % Amount %
====================================================================================================
Real estate loans:
One-to-four family residential (1) $ 545,838 23.71% $ 559,134 25.20%
Second mortgage residential 240,901 10.47 258,121 11.63
Multi-family residential 104,955 4.56 99,078 4.47
Commercial real estate and land 442,657 19.23 449,152 20.25
Residential construction 289,046 12.56 245,782 11.08
Commercial construction 171,877 7.46 154,247 6.95
----------------------------------------------------------------------------------------------------
Total real estate loans 1,795,274 77.99 1,765,514 79.58
----------------------------------------------------------------------------------------------------
Business loans 82,601 3.59 64,522 2.91
----------------------------------------------------------------------------------------------------
Warehouse mortgage lines of credit 111,544 4.85 78,759 3.55
----------------------------------------------------------------------------------------------------
Consumer loans:
Home equity 33,462 1.45 33,874 1.53
Home equity line of credit 122,332 5.31 117,899 5.31
Home improvement 70,315 3.05 74,915 3.38
Automobile 66,731 2.91 67,351 3.04
Other 19,675 0.85 15,621 0.70
----------------------------------------------------------------------------------------------------
Total consumer loans 312,515 13.57 309,660 13.96
----------------------------------------------------------------------------------------------------
Total loans 2,301,934 100.00% 2,218,455 100.00%
----------------------------------------------------------------------------------------------------
Unamortized premiums, discounts and
deferred loan fees 8,790 10,790
Undisbursed portion of construction and
land development loans in process (213,489) (193,063)
----------------------------------------------------------------------------------------------------
Net loans 2,097,235 2,036,182
Allowance for loan losses (20,086) (19,586)
----------------------------------------------------------------------------------------------------
Net loans after allowance for loan losses $ 2,077,149 $ 2,016,596
====================================================================================================
(1) Includes loans held for sale $ 13,556 $ 7,083
====================================================================================================
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 Three Months Ended
March 31,
=================================
(Dollars in thousands) 2004 2003
==========================================================================================
Allowance for loan losses, beginning of period $ 19,586 $ 17,108
Provision for loan losses 934 1,172
Charge-offs (507) (345)
Recoveries on loans previously charged-off 73 49
------------------------------------------------------------------------------------------
Allowance for loan losses, end of period $ 20,086 $ 17,984
==========================================================================================
Allowance for loan losses as a percentage of net loans 0.96% 0.94%
==========================================================================================
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. Total impaired loans amounted to approximately $1.1 million
and $864,000 at March 31, 2004 and December 31, 2003, respectively. There was an
allowance for loan loss of $0 and $50,000 specifically allocated to impaired
loans at March 31, 2004 and December 31, 2003, respectively.
(Dollars in thousands) March 31, 2004 December 31, 2003
=======================================================================================================
Non-accruing loans:
One-to-four family residential $ 591 $ 1,461
Second mortgage residential 772 224
Multi-family residential -- --
Commercial real estate and land -- --
Residential construction 1,054 1,012
Commercial construction -- --
Business -- 219
Warehouse mortgage lines of credit -- --
Consumer 812 700
-------------------------------------------------------------------------------------------------------
Total non-accruing loans 3,229 3,616
Real estate owned, net (1) 906 678
-------------------------------------------------------------------------------------------------------
Total nonperforming assets 4,135 4,294
Troubled debt restructurings 1,073 468
-------------------------------------------------------------------------------------------------------
Total nonperforming assets and troubled debt restructurings $ 5,208 $ 4,762
=======================================================================================================
Total nonperforming loans as a percent of net loans 0.15% 0.18%
=======================================================================================================
Total nonperforming assets as a percent of total assets 0.18% 0.19%
=======================================================================================================
Total nonperforming assets and troubled debt restructurings
as a percent of total assets 0.23% 0.22%
=======================================================================================================
Allowance for loan losses as a percent of net loans 0.96% 0.96%
=======================================================================================================
Allowance for loan losses as a percent of nonperforming loans 622.05% 541.65%
=======================================================================================================
(1) 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 during the
periods presented is summarized in the following table.
Three Months Ended Year Ended
March 31, December 31,
====================== ======================
(Dollars in thousands) 2004 2003 2003 2002
===================================================================================================
Balance at beginning of period $ 8,705 $ 6,290 $ 6,290 $ 4,577
Mortgage servicing rights capitalized 611 1,719 7,346 6,302
Amortization expense (625) (1,246) (5,583) (2,619)
Valuation adjustment -- (590) 652 (1,970)
---------------------------------------------------------------------------------------------------
Balance at end of period $ 8,691 $ 6,173 $ 8,705 $ 6,290
---------------------------------------------------------------------------------------------------
The activity of the valuation allowance on mortgage servicing rights is
summarized in the following table for the periods presented.
Three Months Ended Year Ended
March 31, December 31,
====================== ======================
(Dollars in thousands) 2004 2003 2003 2002
===================================================================================================
Balance at beginning of period $ 1,668 $ 2,320 $ 2,320 $ 350
Changes in mortgage servicing valuation reserve -- 590 (652) 1,970
---------------------------------------------------------------------------------------------------
Balance at end of period $ 1,668 $ 2,910 $ 1,668 $ 2,320
---------------------------------------------------------------------------------------------------
The following table compares the key assumptions used in measuring the fair
values of mortgage servicing rights at March 31, 2004 and December 31, 2003:
(Dollars in thousands) March 31, 2004 December 31, 2003
============================================================================================
Serviced loan portfolio balance $970,150 $956,744
Fair value $9,574 $9,173
Prepayment speed 6.00% - 81.42% 7.56% - 76.44%
Weighted average prepayment speed 22.02% 23.08%
Fair value with 10% adverse change $9,065 $8,673
Fair value with 20% adverse change $8,605 $8,218
Discount rate 9.00% - 15.00% 9.00% - 15.00%
Weighted average discount rate 10.88% 10.74%
Fair value with 10% adverse change $9,299 $8,863
Fair value with 20% adverse change $9,041 $8,575
14
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 9 - Stock Based Benefit Plans
The Company established the 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.
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:
March 31, 2004
==========================================================================================
Common shares authorized to be awarded by the Management Recognition
and Retention Plan 903,003
Common shares awarded by Management Recognition and Retention Plan (764,850)
Common shares forfeited --
------------------------------------------------------------------------------------------
Shares available for award at March 31, 2004 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 months ended March 31, 2004 was $682,000.
The Company established the 2003 Stock Option Plan ("SOP") under which 2,257,508
shares of Company common stock are reserved for the grant of stock options to
directors, officers and employees. Stock options awarded under the SOP 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. At March
31, 2004, 1,852,750 stock options had been granted at an exercise price of
$17.83. There were no stock options exercised or forfeited during the three
months ended March 31, 2004.
At March 31, 2004, no outstanding options were exercisable, the weighted-average
remaining contractual life of outstanding options was 9.06 years, and there were
404,758 shares remaining available for future grants under the terms of the SOP.
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. See Note
15
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
11 for a discussion of a proposed new statement issued by the Financial
Accounting Standards Board ("FASB") which would result in a change in the
accounting for equity-based compensation.
Pursuant to FASB Statement No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), pro forma net income and pro forma EPS 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 Three Months Ended
(Dollars in thousands, except per share data) March 31, 2004 March 31, 2003
==============================================================================================================
Net income (as reported) $6,060 $5,695
Add: stock-based employee compensation expense
included in reported net income, net of related tax effects 443 --
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (715) --
--------------------------------------------------------------------------------------------------------------
Pro forma net income $5,788 $5,695
==============================================================================================================
Basic earnings per share (as reported) $ 0.34 $ 0.27
Pro forma basic earnings per share 0.32 0.27
Diluted earnings per share (as reported) 0.33 0.27
Pro forma diluted earnings per share 0.32 0.27
==============================================================================================================
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 - Defined Benefit Pension Plan
On March 31, 2004, the Company merged its single-employer defined benefit
pension plan and transferred all pension plan assets and future plan obligations
to an unrelated third party plan. This transaction resulted in a $1.5 million
pre-tax gain for the three months ended March 31, 2004 from the curtailment of
the liability associated with the plan.
17
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 11 - Recent Accounting Pronouncements
For discussion regarding accounting pronouncements, interpretations, exposure
drafts, etc. and their impact on the Company, reference is made to "Recent
Accounting Pronouncements" in the Company's Annual Report to Shareholders for
the year ended December 31, 2003. The following discussion identifies accounting
guidance issued during 2004.
In March 2004, the FASB issued Staff Accounting Bulletin No. 105 ("SAB 105"),
Loan Commitments Accounted for as Derivative Instruments. The requirements of
SAB 105 require entities that enter into mortgage loan commitments to disclose
their accounting policy for such commitments and include the methods and
assumptions used to estimate the fair value of loan commitments in the financial
statements. Additionally, any hedging strategy associated with mortgage loan
commitments is required to be disclosed. The requirements of SAB 105 must be
applied to mortgage loan commitments that are accounted for as derivatives and
are entered into after March 31, 2004. SAB 105 permits entities to continue
using previously applied accounting policies to loan commitments entered into on
or before March 31, 2004. The adoption of SAB 105 will not have a material
impact on the Company's consolidated financial statements.
On March 31, 2004, the FASB published an Exposure Draft, Share-Based Payment, an
Amendment of FASB Statements No. 123 and No. 95 (the "Exposure Draft"). FASB is
proposing, among other things, amendments to SFAS No. 123 and thus, the manner
in which share-based compensation, such as stock options, will be accounted for
by both public and non-public companies. For public companies, the cost of
employee services received in exchange for equity instruments including options
and restricted stock awards generally would be measured at fair value at the
grant date. The grant date fair value would be estimated using option-pricing
models adjusted for the unique characteristics of those options and instruments
(unless observable market prices for the same or similar options are available).
The cost would be recognized over the requisite service period (often the
vesting period). The cost of employee services received in exchange for
liabilities would be measured initially at the fair value (rather than the
previously allowed intrinsic value under APB Opinion No. 25, Accounting for
Stock Issued to Employees) of the liabilities and would be remeasured
subsequently at each reporting date through settlement date.
The proposed changes in accounting would replace existing requirements under
SFAS No. 123, Accounting for Stock-Based Compensation, and would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25 which did not require companies to expense options. Under the terms of
the Exposure Draft, the accounting for similar transactions involving parties
other than employees or the accounting for employee stock ownership plans that
are subject to AICPA Statement of Position 93-6, Employers' Accounting for
Employee Stock Ownership Plans, would remain unchanged.
18
TierOne Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
The Exposure Draft provides that the proposed statement would be applied to
public entities prospectively for fiscal years beginning after December 31,
2004, as if all share-based compensation awards vesting, granted, modified, or
settled after December 15, 1994 had been accounted for using the fair
value-based method of accounting.
The FASB is soliciting comments on the Exposure Draft through June 30, 2004 and
is expected to issue the final statement in the fourth quarter of 2004.
19
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
stock savings bank headquartered in Lincoln, Nebraska. Established in 1907, the
Bank offers customers a wide variety of full-service consumer and commercial
banking products and services through a geographically diverse network of 57
banking offices located in Nebraska, Iowa and Kansas, three loan production
offices located in Colorado and one loan production office located in Minnesota.
Product offerings include residential and commercial real estate loans;
consumer, construction and business loans; warehouse mortgage 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. Noninterest income, noninterest
expense and provisions for loan losses also affect results of operations.
Noninterest income consists primarily of fees and service charges related to
deposit and lending activities and gains on loans held for sale. Noninterest
expense consists of compensation and employee benefits, office occupancy and
equipment, data processing, advertising 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.
On March 31, 2004, the Company announced it had entered into a definitive
agreement to acquire United Nebraska Financial Co. ("UNFC"), the holding company
of United Nebraska Bank ("UNB") headquartered in Grand Island, Nebraska. The
reported assets of UNFC also include an investment in a national bank subsidiary
in suburban Phoenix, Arizona, United Arizona Bank ("UAB"), which will be sold
prior to the completion of the transaction. The Company will pay $97.3 million
in cash, subject to a post-closing adjustment, to acquire UNFC. The purchase
price represents approximately 1.9 times UNFC's December 31, 2003 stated book
value of $51.8 million. At December 31, 2003, UNB operated from 16 banking
offices located in Broken Bow, Burwell, Callaway, Columbus, Grand Island,
Holdrege, Lexington, North Platte, Omaha, O'Neill and Ord, Nebraska. At December
31, 2003, UNB had total assets of $513.6 million, total loans of $292.8 million
and total deposits of $422.5 million. Completion of the acquisition is subject
to various conditions precedent, including the sale of UAB and certain other
assets and the receipt of all required regulatory approvals. The Company has
submitted all required regulatory filings to obtain the necessary approvals.
20
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of 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, a Wisconsin corporation, and our
wholly owned subsidiary, TierOne Bank, a federally chartered stock savings bank.
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.
21
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies
Allowance for Loan Losses
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:
o Assigning individual loans to specific risk levels (pass, special
mention, substandard, doubtful and loss);
o Valuing the underlying collateral securing the loans;
o 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
o 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 reviews the loan
portfolio no less frequently than quarterly in order to identify those inherent
losses and to assess the overall collection probability of the loan portfolio.
Management's review includes a quantitative analysis by loan category, using
historical loss experience, classifying loans pursuant to a grading system and
consideration of a series of qualitative loss factors. The evaluation process
includes, among other things:
o An analysis of delinquency trends;
o Nonperforming loan trends;
o Levels of charge-offs and recoveries;
o Prior loss experience;
o Total loans outstanding;
o Volume of loan originations;
o Type, size, terms and geographic concentration of loans held by us;
o Value of collateral securing loans;
o Number of loans requiring heightened management oversight; and
o General economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available or as
future events change.
22
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The allowance for loan losses consists of two elements. The first element is an
allocated allowance established for specific loans identified by the credit
review function that are evaluated individually for impairment and are
considered to be impaired. A loan is considered impaired when, based on current
information and events, it is probable that we will be unable to collect the
scheduled payments of principal and interest when due according to the
contractual terms of the loan agreement. Impairment is measured by:
o The fair value of the collateral if the loan is collateral
dependent;
o The present value of expected future cash flows; or
o The loan's observable market price.
The second element is an estimated allowance established for losses which are
probable and reasonable to estimate on each category of outstanding loans. While
management uses available information to recognize probable losses on loans
inherent in the portfolio, future additions to the allowance may be necessary
based on changes in economic conditions and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review our allowance for loan losses. Such agencies may require us
to recognize additions to the allowance based on their judgment of information
available to them at the time of their examination.
23
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of Financial Condition at March 31, 2004 and December 31, 2003
Our total assets were $2.3 billion at March 31, 2004, a $47.7 million, or 2.2%,
increase from December 31, 2003, due to an increase in net loans. Our available
for sale investment securities amounted to $39.9 million at March 31, 2004, a
$3.6 million, or 8.3%, decrease from December 31, 2003. The decrease in our
available for sale investment securities was primarily due to the maturity of a
security during the three months ended March 31, 2004. Our mortgage-backed
securities portfolio, all of which is available for sale, amounted to $14.4
million at March 31, 2004, a $1.3 million, or 8.6%, decrease from December 31,
2003. The decrease in our mortgage-backed securities portfolio is the result of
principal payments received in the amount of $1.3 million during the three
months ended March 31, 2004.
Net loans, including loans held for sale, totaled $2.1 billion at March 31,
2004, a $61.1 million, or 3.0%, increase from December 31, 2003. At March 31,
2004 our one-to-four family residential loans, including loans held for sale,
totaled $545.8 million, a $13.3 million, or 2.4%, decrease compared to December
31, 2003. During the three months ended March 31, 2004, we purchased $27.5
million of adjustable-rate first mortgage loans secured by one-to-four family
residential properties located in geographically diverse markets across the
United States in an effort to reinvest proceeds from loan prepayments. Second
mortgage residential loans totaled $240.9 million at March 31, 2004, a $17.2
million, or 6.7%, decrease from December 31, 2003. The decrease in second
mortgage residential loans is primarily the result of principal payments and
prepayments. Commercial real estate and land loans amounted to $442.7 million, a
$6.5 million, or 1.4%, decrease compared to $449.2 million at December 31, 2003.
Our residential construction loans totaled $289.0 million, a $43.3 million, or
17.6%, increase compared to $245.8 million at December 31, 2003. Commercial
construction loans increased $17.6 million, or 11.4%, to $171.9 million compared
to $154.2 million at December 31, 2003. Warehouse mortgage lines of credit
amounted to $111.5 million, a $32.8 million, or 41.6%, increase at March 31,
2004 compared to $78.8 million at December 31, 2003. The increase in our
warehouse mortgage lines of credit was primarily attributable to an increased
level of mortgage refinancing during the three months ended March 31, 2004. Our
consumer loan portfolio totaled $312.5 million at March 31, 2004, a $2.9
million, or 0.9%, increase compared to $309.7 million at December 31, 2003.
Our total liabilities were $2.0 billion at March 31, 2004, a $40.4 million, or
2.1%, increase compared to December 31, 2003. Our total deposits increased by
$98.2 million to $1.3 billion at March 31, 2004 compared to December 31, 2003.
Time deposits increased $81.9 million, or 14.0%, to $667.6 million at March 31,
2004 compared to $585.8 million at December 31, 2003. The increase in time
deposits was attributable to a marketing promotion offering a 14-month time
deposit yielding 3.0%. Included in our time deposits at March 31, 2004 are $65.5
million of brokered time deposits. We utilized brokered time deposits as an
alternative source of funds for loan origination and purchase activity. Our
interest-bearing checking accounts totaled $301.7 million, a $6.6 million, or
2.2%,
24
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
increase compared to $295.1 million at December 31, 2003. Noninterest-bearing
checking accounts increased $5.0 million, or 11.0%, to $50.3 million at March
31, 2004 compared to $45.3 million at December 31, 2003. Our money market
accounts totaled $274.1 million, a $3.1 million, or 1.2%, increase compared to
December 31, 2003. Our Federal Home Loan Bank ("FHLB") advances and other
borrowings amounted to $592.3 million at March 31, 2004, a $53.4 million, or
8.3%, decrease from December 31, 2003 as we determined to use repayments on
securities and deposits to fund our lending activities.
At March 31, 2004, shareholders' equity totaled $302.4 million, an increase of
$7.3 million from December 31, 2003. The increase in shareholders' equity
primarily reflects net income for the three months ended March 31, 2004 of $6.1
million, $866,000 related to common stock earned by participants in the ESOP and
$682,000 related to the amortization of awards under the MRRP. The increase in
shareholders' equity was partially offset by $935,000 in dividends paid to the
Company's shareholders. The first quarterly dividend was $0.05 per common share
paid on March 31, 2004 to shareholders of record at the close of business on
March 15, 2004.
Comparison of Operating Results for the Three Months Ended March 31, 2004 and
March 31, 2003
General. Net income for the three months ended March 31, 2004 was $6.1 million,
or $0.33 per diluted share ($0.34 per basic share), compared to net income of
$5.7 million, or $0.27 per diluted and basic share, for the three months ended
March 31, 2003. Net income increased during the three months ended March 31,
2004 primarily due to a gain recognized on the curtailment of the Company's
defined benefit pension plan and increased interest income on loans receivable
which was partially offset by increased salaries and employee benefits expense.
The average interest rate spread declined to 3.01% for the three months ended
March 31, 2004 compared to 3.17% for the three months ended March 31, 2003. Net
interest margin declined to 3.35% for the three months ended March 31, 2004
compared to 3.70% for the three months ended March 31, 2003. The decline in the
average interest rate spread and net interest margin for the three months ended
March 31, 2004 reflected the continued compression on net interest income of
historically low interest rates which have resulted in continued high levels of
prepayments on higher yielding loans. The ratio of average interest-earning
assets to average interest-bearing liabilities decreased to 117.23% for the
three months ended March 31, 2004 compared to 124.74% for the three months ended
March 31, 2003. This decrease was the result of a $66.0 million decline in the
average balance of net interest-earning assets resulting from the Company's
stock purchases to fund the shareholder-approved MRRP and fulfill the Company's
first stock buyback program during the last eight months of 2003.
Interest Income. Our total interest income for the three months ended March 31,
2004 was $28.1 million, a $166,000, or 0.6%, increase compared to $27.9 million
for the three months ended March 31, 2003. The average balances of loans
receivable during the three months ended March 31, 2004
25
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
and March 31, 2003 were $2.0 billion and $1.8 billion, respectively. The
weighted average yield earned on the loan portfolio was 5.36% and 6.04% for the
three months ended March 31, 2004 and March 31, 2003, respectively. The declines
in the yields on loans receivable during the three months ended March 31, 2004
compared to the three months ended March 31, 2003 was the result of a high level
of refinancing activity that occurred throughout 2003 due to a historically low
interest rate environment.
Interest Expense. Our total interest expense for both three month periods ended
March 31, 2004 and March 31, 2003 was $10.3 million. The average balance of our
interest-bearing deposits increased $115.3 million, or 10.5%, to $1.2 billion
for the quarter ended March 31, 2004 compared to $1.1 billion for the quarter
ended March 31, 2003. Additionally, the average rate paid on interest-bearing
deposits decreased to 1.86% for the three months ended March 31, 2004 compared
to 2.27% for the three months ended March 31, 2003, a decrease of 41 basis
points. Interest expense on FHLB advances and other borrowings increased
$623,000 to $4.7 million for the three months ended March 31, 2004 compared to
$4.1 million during the three months ended March 31, 2003. Additionally, the
average rate paid on FHLB advances and other borrowings was 3.14% for the three
months ended March 31, 2004 compared to 3.79% for the three months ended March
31, 2003, a decrease of 65 basis points.
26
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 table shows 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 March 31,
========================================================================
2004 2003
================================== ====================================
Average Average Average Average
(Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
======================================================================================================================
Interest-earning assets:
Federal funds sold $ -- $ -- --% $ 32,759 $ 99 1.21%
Investment securities (1) 80,420 796 3.96 57,797 544 3.76
Mortgage-backed securities (1) 15,100 131 3.47 39,156 488 4.99
Loans receivable (2) 2,025,969 27,163 5.36 1,775,506 26,793 6.04
----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,121,489 28,090 5.30% 1,905,218 27,924 5.86%
Noninterest-earning assets 88,988 84,491
----------------------------------------------------------------------------------------------------------------------
Total assets $2,210,477 $1,989,709
======================================================================================================================
Interest-bearing liabilities:
Interest-bearing checking accounts $ 296,153 $ 574 0.78% $ 298,053 $ 834 1.12%
Savings accounts 20,414 16 0.31 16,854 30 0.71
Money market accounts 268,854 652 0.97 272,610 967 1.42
Time deposits 628,083 4,413 2.81 510,729 4,392 3.44
----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,213,504 5,655 1.86 1,098,246 6,223 2.27
Federal Home Loan Bank
advances and other borrowings 596,135 4,687 3.14 429,102 4,064 3.79
----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,809,639 10,342 2.29% 1,527,348 10,287 2.69%
Noninterest-bearing accounts 47,486 40,401
Other liabilities 56,241 79,128
----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,913,366 1,646,877
Shareholders' equity 297,111 342,832
----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,210,477 $1,989,709
======================================================================================================================
Net interest-earning assets $ 311,850 $ 377,870
Net interest income; average
interest rate spread $17,748 3.01% $17,637 3.17%
Net interest margin (3) 3.35% 3.70%
Average interest-earning assets to average
interest-bearing liabilities 117.23% 124.74%
======================================================================================================================
(1) Includes securities available for sale and held to maturity. Investment
securities also include Federal Home Loan Bank stock.
(2) Includes nonaccrual loans during the respective periods. Calculated net of
unamortized premiums, discounts and deferred fees, undisbursed portion of
loans in process and allowance for loan losses.
(3) Equals net interest income (annualized) divided by average
interest-earning assets.
27
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 assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in rate (change in rate multiplied by prior year volume) and (ii)
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 March 31, 2004
Compared to
Three Months Ended March 31, 2003
==========================================
Increase (Decrease) Due to Total
========================== Increase
(Dollars in thousands) Rate Volume (Decrease)
======================================================================================================
Interest income:
Federal funds sold $ (50) $ (49) $ (99)
Investment securities 30 222 252
Mortgage-backed securities (118) (239) (357)
Loans receivable (1) (3,193) 3,563 370
------------------------------------------------------------------------------------------------------
Total interest income (3,331) 3,497 166
------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing checking accounts (255) (5) (260)
Savings accounts (19) 5 (14)
Money market accounts (302) (13) (315)
Time deposits (886) 907 21
------------------------------------------------------------------------------------------------------
Total deposits (1,462) 894 (568)
Federal Home Loan Bank advances and other borrowings (777) 1,400 623
------------------------------------------------------------------------------------------------------
Total interest expense (2,239) 2,294 55
------------------------------------------------------------------------------------------------------
Net change in net interest income $(1,092) $ 1,203 $ 111
======================================================================================================
(1) Calculated net of unamortized premiums, discounts and deferred fees,
undisbursed portion of loans in process and allowance for loan losses.
28
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 $934,000 for
the three months ended March 31, 2004 compared to $1.2 million for the three
months ended March 31, 2003. Our portfolio of commercial real estate and land,
construction (residential and commercial), business and consumer loans totaled
$1.3 billion at March 31, 2004, an increase of $242.5 million, or 23.0%,
compared to $1.1 billion at March 31, 2003. 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 March 31, 2004, our total nonperforming
assets amounted to $4.1 million, or 0.18% of total assets, compared to $4.3
million, or 0.19% of total assets, at December 31, 2003. There were no material
changes in non-accruing loans or real estate owned during the three months ended
March 31, 2004. During the three months ended March 31, 2004 and March 31, 2003,
we charged-off, net of recoveries, $434,000 and $296,000, respectively,
primarily related to consumer loans. At March 31, 2004, December 31, 2003 and
March 31, 2003 our allowance for loan losses amounted to 0.96%, 0.96% and 0.94%,
respectively, of net loans.
Noninterest Income. Our noninterest income increased by $1.8 million, or 49.9%,
to $5.4 million for the three months ended March 31, 2004 compared to $3.6
million for the three months ended March 31, 2003. The increase during the three
month period ended March 31, 2004 compared to the same period in 2003 was
primarily the result of the Company's decision to merge its defined benefit
pension plan with an unrelated third party plan. On March 31, 2004, the Company
merged its single-employer defined benefit pension plan and transferred all
pension plan assets and future plan obligations to an unrelated third party
plan. This transaction resulted in a $1.5 million gain for the three months
ended March 31, 2004 from the curtailment of the liability associated with the
defined benefit pension plan. Additionally, deposit account and debit card fees
increased $798,000 during the three months ended March 31, 2004 when compared to
the same period in 2003 primarily as a result of an increased number of core
deposit relationships. Amortization expense related to our mortgage servicing
rights portfolio decreased $620,000 during the three months ended March 31, 2004
compared to the three months ended March 31, 2003. The decrease in mortgage
servicing rights amortization expense was attributable to a stabilized interest
rate environment and decreased loan prepayment and refinancing activity when
compared to the same period in 2003. We made no additional impairment charges
related to mortgage servicing rights during the three months ended March 31,
2004 whereas we recorded impairment charges of $590,000 during the three month
period ended March 31, 2003. Amortization expense, impairment charges and
impairment recapture related to mortgage servicing rights are recorded as
adjustments to fee and service charge income. The aforementioned increases in
noninterest income were partially offset by a $1.6 million decrease in gains on
loans held for sale resulting from decreased refinancing activity compared to
the same period in 2003.
29
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Noninterest Expense. Our noninterest expense increased by $1.5 million, or
13.5%, to $12.6 million for the three months ended March 31, 2004 compared to
$11.1 million for the three months ended March 31, 2003. The increase during the
three months period ended March 31, 2004 compared to the three month period
ended March 31, 2003 resulted primarily from $682,000 in compensation expense
relating to the Company's MRRP, a $591,000 increase in compensation expense
relating to annual salary adjustments and staff additions and a $275,000
increase in compensation expense associated with the Company's ESOP.
Income Tax Expense. Our income tax expense increased by $293,000 to $3.6 million
for the three months ended March 31, 2004 compared to the same period in 2003.
The effective income tax rate for the three months ended March 31, 2004 was
37.3% compared to 36.7% for the three months ended March 31, 2003. The increase
in the effective tax rate for the three months ended March 31, 2004 compared to
the same period in 2003 was primarily attributable to the partially
non-deductible nature of certain expenses related to the Company's ESOP.
30
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity
Our primary sources of funds are deposits, amortization of loans, loan
prepayments and maturity of loans, mortgage-backed securities and other
investments and other funds provided by 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 interest rates, economic
conditions and competition. Additionally, we utilize outside borrowings,
primarily from the FHLB and, more recently, brokered time deposits, as
additional funding sources.
We use our liquidity to fund existing and future loan commitments, maturing time
deposits and demand deposit withdrawals, to invest in other interest-earning
assets and to meet operating expenses. At March 31, 2004, we had time deposits
maturing within the next 12 months totaling $327.5 million. Based upon
historical experience, we anticipate that a significant portion of the maturing
time deposits will be redeposited with us.
In addition to cash flow from loan and securities payments and prepayments, we
have additional borrowing capacity available to fund our asset growth. We have
increased our utilization of borrowings as a cost efficient compliment to
deposits as a source of funds. The average balance of our FHLB advances and
other borrowings was $596.1 million and $429.1 million for the three months
ended March 31, 2004 and March 31, 2003, 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 pledged qualifying
residential, multi-family residential and commercial real estate mortgages,
residential construction and commercial construction loans as collateral for
such advances. Other qualifying collateral can be pledged in the event
additional borrowing capacity is required.
On April 26, 2004, we completed the issuance of $30.0 million of floating-rate
trust preferred securities. The proceeds from the issuance of these securities,
which are callable at par in 2009 and will mature in 2034, will be used for
general corporate purposes, including funding common stock repurchases.
31
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance
Sheet Arrangements
We use our liquidity to fund existing and future loan commitments, maturing time
deposits and demand deposit withdrawals, to invest in other interest-earning
assets and to meet operating expenses. At March 31, 2004, we had the following
contractual obligations and lending commitments:
Due In
=========================================================
Total at
(Dollars in thousands) March 31, 2004 1 Year 1-3 Years 3-5 Years After 5 Years
========================================================================================================================
Contractual obligations:
Federal Home Loan Bank advances
and other borrowings $ 592,333 $ 71,984 $ 110,000 $ 85,349 $ 325,000
Recourse obligations on assets 11,548 11,548 -- -- --
Purchase investment securities 1,081 1,081 -- -- --
Annual rental commitments under non-
cancellable operating leases 2,677 569 731 529 848
------------------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 607,639 $ 85,182 $ 110,731 $ 85,878 $ 325,848
========================================================================================================================
Lending commitments:
Commitments to originate loans $ 89,703 $ 89,703 $ -- $ -- $ --
Commitments to sell loans (74,739) (74,739) -- -- --
Commitments to purchase loans 98,120 98,120
Undisbursed portion of loans in process 213,489 213,489 -- -- --
Standby letters of credit 532 532 -- -- --
Unused lines of credit:
Warehouse mortgage lines of credit 474,664 474,664 -- -- --
Business loans 41,529 41,529 -- -- --
Consumer loans 101,045 101,045 -- -- --
------------------------------------------------------------------------------------------------------------------------
Total lending commitments and unused
lines of credit $ 944,343 $ 944,343 $ -- $ -- $ --
------------------------------------------------------------------------------------------------------------------------
We have not used any significant off-balance sheet financing arrangements for
liquidity purposes or otherwise. 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 and recourse
obligations related to loan sales. At March 31, 2004, the maximum total dollar
amount of such recourse was approximately $10.8 million. Based on historical
experience, at March 31, 2004, we had established a liability of
32
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
$652,000 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. We have
not traded in commodity contracts.
We anticipate that we will continue to have sufficient funds and alternative
funding sources to meet our current commitments.
Regulatory Capital
At March 31, 2004, 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 March 31, 2004 are set forth in the following table:
Required Capital Actual Capital Excess Capital
===================== ===================== =======================
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
=====================================================================================================
Tangible capital $ 33,725 1.50% $251,414 11.18% $217,689 9.68%
Tier 1 (core) capital 89,934 4.00% 251,414 11.18% 161,480 7.18%
Total risk-based capital 156,916 8.00% 271,500 13.84% 114,584 5.84%
The Bank remains classified as a "well capitalized" financial institution under
Federal regulatory guidelines.
33
TierOne Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Selected Operating Ratios
Selected operating and other ratios (annualized where appropriate) at or for the
three months ended March 31, 2004 and March 31, 2003 are presented in the
following table:
At or for the
Three Months Ended
March 31,
=======================
2004 2003
================================================================================
Selected Operating Ratios:
Average yield on interest-earning assets 5.30% 5.86%
Average rate on interest-bearing liabilities 2.29% 2.69%
Average interest rate spread 3.01% 3.17%
Net interest margin 3.35% 3.70%
Average interest-earning assets to average
interest-bearing liabilities 117.23% 124.74%
Net interest income after provision for loan
losses to noninterest expense 133.49% 148.43%
Total noninterest expense to average assets 2.28% 2.23%
Efficiency ratio (1) 54.32% 52.16%
Return on average assets 1.10% 1.14%
Return on average equity 8.16% 6.64%
Average equity to average assets 13.44% 17.23%
Other Ratios:
Nonperforming loans as a percent of net loans 0.15% 0.27%
Nonperfoming assets as a percent of total assets 0.18% 0.33%
Allowance for loan losses as a percent of
nonperforming loans 622.05% 351.46%
Allowance for loan losses as a percent of net loans 0.96% 0.94%
(1) Efficiency ratio is calculated as total other expense divided by the sum
of net interest income and total other income.
34
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, 2003. There has
been no material change in our asset and liability position or the market value
of our equity since December 31, 2003.
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.
35
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
There have been no changes with respect to legal proceedings during the three
months ended March 31, 2004. Disclosures regarding legal proceedings are
incorporated by reference to "Business of TierOne Bank - Legal Proceedings" in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
On January 21, 2004, the Company's Board of Directors authorized and the Company
subsequently announced a stock repurchase plan providing for the repurchase of
up to 2,031,757 shares of the Company's outstanding common stock in open market
or privately negotiated transactions. Unless terminated earlier by resolution of
the Company's Board of Director's, the plan will expire when the Company has
repurchased all shares authorized for repurchase under the plan. No shares were
repurchased under the plan during the three month period ended March 31, 2004.
As of March 31, 2004, the Company had the authority remaining to repurchase
2,031,757 shares under the plan.
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.
36
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* (4)
10.14 TierOne Bank Deferred Compensation Plan* (3)
10.15 2003 Stock Option Plan* (2)
10.16 TierOne Corporation 2003 Management Recognition and Retention Plan and Trust Agreement* (2)
14 Code of Conduct and Ethics (4)
22 Subsidiaries of the Registrant - Reference is made to "Item 1. Business - Subsidiaries" of the
Form 10-K for the required information --
31.1 Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed Herewith
31.2 Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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
==================================================================================================================================
* Denotes management compensation plan or arrangement.
(1) Incorporated by reference from TierOne Corporation's Registration
Statement on Form S-1, filed on April 3, 2002, as amended and declared
effective on August 12, 2002 (File No. 333-85838).
(2) Incorporated by reference from TierOne Corporation's Definitive Proxy
Statement filed by TierOne Corporation with the SEC on March 11, 2003.
(3) Incorporated by reference from TierOne Corporation's Annual Report on Form
10-K for the year ended December 31, 2002 filed by TierOne Corporation
with the SEC on March 28, 2003.
(4) Incorporated by reference from TierOne Corporation's Annual Report on Form
10-K for the year ended December 31, 2003 filed by TierOne Corporation
with the SEC on March 12, 2004.
37
(b) The following reports on Form 8-K were filed by the Registrant during the
three months ended March 31, 2004:
Date Item and Description
----------------- ------------------------------------------------------------
January 29, 2004 Item 12. On January 28, 2004 the Company issued a press
release reporting its earnings for the three months and year
ending December 31, 2003.
March 2, 2004 Item 9. On March 1, 2004 the Company issued a
press release announcing that the Company had
initiated a quarterly cash dividend policy and declared
its first dividend of $0.05 per common share to
shareholders of record on March 15, 2004.
March 31, 2004 Item 9. On March 31, 2004 the Company issued a press
release announcing it had entered into a definitive
agreement to acquire United Nebraska Financial Co.,
the holding company of United Nebraska Bank
headquartered in Grand Island, Nebraska.
38
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: May 6, 2004 By:/s/ Gilbert G. Lundstrom
---------------------------------------------
Gilbert G. Lundstrom
Chairman of the Board and Chief Executive Officer
Date: May 6, 2004 By:/s/ Eugene B. Witkowicz
----------------------------------------------
Eugene B. Witkowicz
Executive Vice President and
Chief Financial Officer
39