OR
Commission file number: 000-50015
| TierOne Corporation |
| (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) |
| Wisconsin |
04-3638672 |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer 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 a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer Accelerated filer X Non-accelerated filer
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
As of November 2, 2006, there were 18,171,727 issued and outstanding shares of the Registrant’s common stock.
| Page | ||
Item 1 - |
Financial Statements | 3 |
Item 2 - |
Management’s Discussion and Analysis of Financial Condition | |
| and Results of Operations | 31 | |
Item 3 - |
Quantitative and Qualitative Disclosures About Market Risk | 50 |
Item 4 - |
Controls and Procedures | 50 |
| Item 1 - | Legal Proceedings | 51 |
Item 1A - |
Risk Factors | 51 |
Item 2 - |
Unregistered Sales of Equity Securities and Use of Proceeds | 51 |
Item 3 - |
Defaults Upon Senior Securities | 52 |
Item 4 - |
Submission of Matters to a Vote of Security Holders | 52 |
Item 5 - |
Other Information | 52 |
Item 6 - |
Exhibits | 52 |
Signatures |
53 | |
Exhibit Index |
54 |
2
| (Dollars in thousands, except per share data) |
September 30, 2006 | December 31, 2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Cash and due from banks | $ | 61,350 | $ | 83,534 | ||||
| Federal funds sold | -- | 4,500 | ||||||
| Total cash and cash equivalents | 61,350 | 88,034 | ||||||
| Investment securities: | ||||||||
| Held to maturity, at cost which approximates fair value | 95 | 111 | ||||||
| Available for sale, at fair value | 114,633 | 102,614 | ||||||
| Mortgage-backed securities, available for sale, at fair value | 14,217 | 19,752 | ||||||
| Loans receivable: | ||||||||
| Net loans (includes loans held for sale of $16,690 and $8,666 at | ||||||||
| September 30, 2006 and December 31, 2005, respectively) | 2,983,627 | 2,844,670 | ||||||
| Allowance for loan losses | (32,359 | ) | (30,870 | ) | ||||
| Net loans after allowance for loan losses | 2,951,268 | 2,813,800 | ||||||
| FHLBank Topeka stock, at cost | 61,051 | 58,491 | ||||||
| Premises and equipment, net | 39,766 | 39,509 | ||||||
| Accrued interest receivable | 23,104 | 19,190 | ||||||
| Goodwill | 42,228 | 42,283 | ||||||
| Other intangible assets, net | 8,815 | 10,041 | ||||||
| Other assets | 34,459 | 28,450 | ||||||
| Total assets | $ | 3,350,986 | $ | 3,222,275 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Liabilities: | ||||||||
| Deposits | $ | 1,979,082 | $ | 2,038,319 | ||||
| Deposits held for sale | 24,970 | -- | ||||||
| Total deposits | 2,004,052 | 2,038,319 | ||||||
| FHLBank Topeka advances and other borrowings | 948,217 | 814,924 | ||||||
| Advance payments from borrowers for taxes, insurance and | ||||||||
| other escrow funds | 18,991 | 24,864 | ||||||
| Accrued interest payable | 6,418 | 7,289 | ||||||
| Accrued expenses and other liabilities | 28,159 | 28,012 | ||||||
| Total liabilities | 3,005,837 | 2,913,408 | ||||||
| Stockholders’ 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; | ||||||||
| 18,172,673 and 18,150,773 shares issued and outstanding at | ||||||||
| September 30, 2006 and December 31, 2005, respectively | 226 | 226 | ||||||
| Additional paid-in capital | 356,737 | 358,587 | ||||||
| Retained earnings, substantially restricted | 102,386 | 75,282 | ||||||
| Treasury stock, at cost; 4,402,402 and 4,424,302 shares at | ||||||||
| September 30, 2006 and December 31, 2005, respectively | (101,309 | ) | (101,584 | ) | ||||
| Unallocated common stock held by Employee Stock | ||||||||
| Ownership Plan | (12,040 | ) | (13,169 | ) | ||||
| Unearned common stock held by Management Recognition | ||||||||
| and Retention Plan | -- | (9,368 | ) | |||||
| Accumulated other comprehensive loss, net | (851 | ) | (1,107 | ) | ||||
| Total stockholders’ equity | 345,149 | 308,867 | ||||||
| Total liabilities and stockholders’ equity | $ | 3,350,986 | $ | 3,222,275 | ||||
See accompanying notes to consolidated financial statements.
3
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands, except per share data) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Interest income: | ||||||||||||||
| Loans receivable | $ | 57,562 | $ | 44,208 | $ | 158,333 | $ | 122,303 | ||||||
| Investment securities | 2,424 | 2,001 | 6,601 | 6,131 | ||||||||||
| Other interest-earning assets | 3 | -- | 79 | -- | ||||||||||
| Total interest income | 59,989 | 46,209 | 165,013 | 128,434 | ||||||||||
| Interest expense: | ||||||||||||||
| Deposits | 15,614 | 10,909 | 43,023 | 29,740 | ||||||||||
| FHLBank Topeka advances and other borrowings | 10,234 | 8,604 | 27,309 | 21,961 | ||||||||||
| Total interest expense | 25,848 | 19,513 | 70,332 | 51,701 | ||||||||||
| Net interest income | 34,141 | 26,696 | 94,681 | 76,733 | ||||||||||
| Provision for loan losses | 1,148 | 1,691 | 4,290 | 4,402 | ||||||||||
| Net interest income after provision for loan losses | 32,993 | 25,005 | 90,391 | 72,331 | ||||||||||
| Noninterest income: | ||||||||||||||
| Fees and service charges | 5,585 | 5,291 | 16,268 | 15,306 | ||||||||||
| Debit card fees | 702 | 543 | 2,003 | 1,531 | ||||||||||
| Income (loss) from real estate operations, net | (55 | ) | 14 | (120 | ) | 6 | ||||||||
| Net gain (loss) on sales of: | ||||||||||||||
| Investment securities | -- | 1 | 21 | 14 | ||||||||||
| Loans held for sale | 396 | 552 | 1,566 | 1,525 | ||||||||||
| Real estate owned | (2 | ) | (1 | ) | (66 | ) | 49 | |||||||
| Other operating income | 303 | 204 | 858 | 486 | ||||||||||
| Total noninterest income | 6,929 | 6,604 | 20,530 | 18,917 | ||||||||||
| Noninterest expense: | ||||||||||||||
| Salaries and employee benefits | 12,526 | 10,457 | 36,469 | 30,861 | ||||||||||
| Occupancy, net | 2,311 | 2,186 | 6,685 | 6,312 | ||||||||||
| Data processing | 547 | 517 | 1,648 | 1,510 | ||||||||||
| Advertising | 1,177 | 944 | 3,638 | 3,152 | ||||||||||
| Other operating expense | 4,550 | 3,847 | 13,008 | 11,852 | ||||||||||
| Total noninterest expense | 21,111 | 17,951 | 61,448 | 53,687 | ||||||||||
| Income before income taxes | 18,811 | 13,658 | 49,473 | 37,561 | ||||||||||
| Income tax expense | 7,294 | 5,095 | 19,047 | 14,212 | ||||||||||
| Net income | $ | 11,517 | $ | 8,563 | $ | 30,426 | $ | 23,349 | ||||||
| Net income per common share, basic | $ | 0.70 | $ | 0.53 | $ | 1.85 | $ | 1.44 | ||||||
| Net income per common share, diluted | $ | 0.67 | $ | 0.51 | $ | 1.78 | $ | 1.40 | ||||||
| Dividends declared per common share | $ | 0.07 | $ | 0.06 | $ | 0.20 | $ | 0.17 | ||||||
| Average common shares outstanding, basic (000's) | 16,557 | 16,226 | 16,470 | 16,191 | ||||||||||
| Average common shares outstanding, diluted (000's) | 17,228 | 16,728 | 17,130 | 16,637 | ||||||||||
See accompanying notes to consolidated financial statements.
4
| (Dollars in thousands) |
Common Stock |
Additional Paid-In Capital |
Retained Earnings, Substantially Restricted |
Treasury Stock |
Unallocated Common Stock Held by the Employee Stock Ownership Plan |
Unearned Common Stock Held by the Management Recognition and Retention Plan |
Accumulated Other Comprehensive Loss, Net |
Total Stockholders’ Equity | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2004 |
$ | 226 | $ | 355,986 | $ | 46,263 | $ | (98,254 | ) | $ | (14,674 | ) | $ | (12,229 | ) | $ | (295 | ) | $ | 277,023 | ||||||
| Common stock earned by employees | ||||||||||||||||||||||||||
| in Employee Stock Ownership Plan | -- | 1,737 | -- | -- | 1,129 | -- | -- | 2,866 | ||||||||||||||||||
| Amortization of awards under the | ||||||||||||||||||||||||||
| Management Recognition and | ||||||||||||||||||||||||||
| Retention Plan | -- | 190 | -- | -- | -- | 2,155 | -- | 2,345 | ||||||||||||||||||
| Treasury stock reissued under 2003 | ||||||||||||||||||||||||||
| Stock Option Plan | -- | (34 | ) | -- | 149 | -- | -- | -- | 115 | |||||||||||||||||
| Repurchase of common stock | ||||||||||||||||||||||||||
| (147,571 shares) | -- | -- | -- | (3,566 | ) | -- | -- | -- | (3,566 | ) | ||||||||||||||||
| Dividends paid ($0.17 per common share) | -- | -- | (2,836 | ) | -- | -- | -- | -- | (2,836 | ) | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net income | -- | -- | 23,349 | -- | -- | -- | -- | 23,349 | ||||||||||||||||||
| Change in unrealized loss on | ||||||||||||||||||||||||||
| available for sale securities, net of | ||||||||||||||||||||||||||
| tax and reclassification adjustment | -- | -- | -- | -- | -- | -- | (739 | ) | (739 | ) | ||||||||||||||||
| Total comprehensive income | -- | -- | 23,349 | -- | -- | -- | (739 | ) | 22,610 | |||||||||||||||||
| Balance at September 30, 2005 | $ | 226 | $ | 357,879 | $ | 66,776 | $ | (101,671 | ) | $ | (13,545 | ) | $ | (10,074 | ) | $ | (1,034 | ) | $ | 298,557 | ||||||
| Balance at December 31, 2005 | $ | 226 | $ | 358,587 | $ | 75,282 | $ | (101,584 | ) | $ | (13,169 | ) | $ | (9,368 | ) | $ | (1,107 | ) | $ | 308,867 | ||||||
| Common stock earned by employees | ||||||||||||||||||||||||||
| in Employee Stock Ownership Plan | -- | 2,576 | -- | -- | 1,129 | -- | -- | 3,705 | ||||||||||||||||||
| Transfer of unearned common stock held | ||||||||||||||||||||||||||
| by the Management Recognition and | ||||||||||||||||||||||||||
| Retention Plan upon adoption of | ||||||||||||||||||||||||||
| SFAS No. 123(R) | -- | (9,368 | ) | -- | -- | -- | 9,368 | -- | -- | |||||||||||||||||
| Amortization of awards under the | ||||||||||||||||||||||||||
| Management Recognition and | ||||||||||||||||||||||||||
| Retention Plan | -- | 2,178 | -- | -- | -- | -- | -- | 2,178 | ||||||||||||||||||
| Amortization of stock options under | ||||||||||||||||||||||||||
| 2003 Stock Option Plan upon | ||||||||||||||||||||||||||
| adoption of SFAS No. 123(R) | -- | 1,261 | -- | -- | -- | -- | -- | 1,261 | ||||||||||||||||||
| Repurchase of common stock | ||||||||||||||||||||||||||
| (21,724 shares) | -- | -- | -- | (728 | ) | -- | -- | -- | (728 | ) | ||||||||||||||||
| Treasury stock reissued under 2003 | ||||||||||||||||||||||||||
| Stock Option Plan | -- | (216 | ) | -- | 1,003 | -- | -- | -- | 787 | |||||||||||||||||
| Excess tax benefit realized from stock- | ||||||||||||||||||||||||||
| based compensation plans | -- | 939 | -- | -- | -- | -- | -- | 939 | ||||||||||||||||||
| Tax benefit realized from certain costs | ||||||||||||||||||||||||||
| deducted in mutual to stock conversion | -- | 780 | -- | -- | -- | -- | -- | 780 | ||||||||||||||||||
| Dividends paid ($0.20 per common share) | -- | -- | (3,322 | ) | -- | -- | -- | -- | (3,322 | ) | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net income | -- | -- | 30,426 | -- | -- | -- | -- | 30,426 | ||||||||||||||||||
| Change in unrealized loss on | ||||||||||||||||||||||||||
| available for sale securities, net of | ||||||||||||||||||||||||||
| tax and reclassification adjustment | -- | -- | -- | -- | -- | -- | 256 | 256 | ||||||||||||||||||
| Total comprehensive income | -- | -- | 30,426 | -- | -- | -- | 256 | 30,682 | ||||||||||||||||||
| Balance at September 30, 2006 | $ | 226 | $ | 356,737 | $ | 102,386 | $ | (101,309 | ) | $ | (12,040 | ) | $ | -- | $ | (851 | ) | $ | 345,149 | |||||||
See accompanying notes to consolidated financial statements.
5
| Nine months ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 | ||||||
| Reconciliation of net income to net cash provided by operating activities: | ||||||||
| Net income | $ | 30,426 | $ | 23,349 | ||||
| Adjustments to reconcile net income to net cash provided by | ||||||||
| operating activities: | ||||||||
| Net premium amortization of investment and mortgage-backed securities | 33 | 436 | ||||||
| Depreciation and amortization | 2,781 | 2,707 | ||||||
| Amortization of intangible assets | 1,328 | 1,394 | ||||||
| Amortization of discount on FHLBank Topeka advances | (191 | ) | (191 | ) | ||||
| Employee Stock Ownership Plan compensation expense | 3,705 | 2,866 | ||||||
| 2003 Management Recognition and Retention Plan employee compensation expense | 2,178 | 2,345 | ||||||
| 2003 Stock Option Plan employee compensation expense | 1,261 | -- | ||||||
| Amortization of premiums (accretion of discounts) on net loans | (1,582 | ) | 2,857 | |||||
| FHLBank Topeka stock dividend | (2,560 | ) | (1,937 | ) | ||||
| Deferred income tax expense | 417 | 487 | ||||||
| Provision for loan losses | 4,290 | 4,402 | ||||||
| Proceeds from sales of loans held for sale | 184,161 | 197,104 | ||||||
| Originations and purchases of loans held for sale | (190,619 | ) | (195,240 | ) | ||||
| Excess tax benefits from stock-based compensation plans | (939 | ) | -- | |||||
| Net (gain) loss on sales of: | ||||||||
| Investment securities | (21 | ) | (14 | ) | ||||
| Loans held for sale | (1,566 | ) | (1,525 | ) | ||||
| Real estate owned | 66 | (49 | ) | |||||
| Premises and equipment | (110 | ) | 21 | |||||
| Changes in certain assets and liabilities: | ||||||||
| Accrued interest receivable | (3,914 | ) | (3,095 | ) | ||||
| Other assets | (1,772 | ) | (706 | ) | ||||
| Accrued interest payable | (908 | ) | 620 | |||||
| Accrued expenses and other liabilities | 1,086 | 371 | ||||||
| Net cash provided by operating activities | 27,550 | 36,202 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of investment and mortgage-backed securities, available for sale | (59,685 | ) | (3,460 | ) | ||||
| Proceeds from sale of investment and mortgage-backed securities, available for sale | 2,297 | 3,230 | ||||||
| Proceeds from maturities of investment securities, available for sale | 45,780 | 15,255 | ||||||
| Proceeds from principal repayments of investment and mortgage-backed | ||||||||
| securities, available for sale and held to maturity | 5,536 | 12,987 | ||||||
| Increase in loans receivable | (140,162 | ) | (238,838 | ) | ||||
| Purchase of FHLBank Topeka stock | -- | (1,522 | ) | |||||
| Additions to premises and equipment | (3,934 | ) | (2,295 | ) | ||||
| Proceeds from sale of premises and equipment | 367 | 133 | ||||||
| Proceeds from sale of real estate owned | 5,085 | 852 | ||||||
| Marine Bank branch purchase - net of cash acquired | 7,568 | -- | ||||||
| Net cash used in investing activities | (137,148 | ) | (213,658 | ) | ||||
See accompanying notes to consolidated financial statements.
6
| Nine months ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 | ||||||
| Cash flows from financing activities: | ||||||||
| Net increase (decrease) in deposits | $ | (42,373 | ) | $ | 68,695 | |||
| Net advances (repayment) on FHLBank Topeka line of credit and | ||||||||
| short-term advances and other borrowings | 43,637 | (64,863 | ) | |||||
| Proceeds from FHLBank Topeka long-term advances and other borrowings | 390,000 | 250,000 | ||||||
| Repayments of FHLBank Topeka long-term advances and other borrowings | (300,153 | ) | (70,435 | ) | ||||
| Net decrease in advances from borrowers for taxes, insurance and | ||||||||
| other escrow funds | (5,873 | ) | (7,371 | ) | ||||
| Repurchase of common stock | (728 | ) | (3,566 | ) | ||||
| Dividends paid on common stock | (3,322 | ) | (2,836 | ) | ||||
| Excess tax benefit realized from the exercise of stock options | 130 | -- | ||||||
| Excess tax benefit realized from the vesting of Management Recognition and | ||||||||
| Retention Plan shares | 809 | -- | ||||||
| Proceeds from the exercise of stock options | 787 | 115 | ||||||
| Net cash provided by financing activities | 82,914 | 169,739 | ||||||
| Net decrease in cash and cash equivalents | (26,684 | ) | (7,717 | ) | ||||
| Cash and cash equivalents at beginning of period | 88,034 | 70,030 | ||||||
| Cash and cash equivalents at end of period | $ | 61,350 | $ | 62,313 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during period for: | ||||||||
| Interest | $ | 72,148 | $ | 51,081 | ||||
| Income taxes, net of refunds | $ | 18,354 | $ | 14,081 | ||||
| Noncash investing activities: | ||||||||
| Transfers from loans to real estate owned and other assets through foreclosure | $ | 8,011 | $ | 2,954 | ||||
See accompanying notes to consolidated financial statements.
7
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
TierOne Corporation (“Company”) is a Wisconsin corporation headquartered in Lincoln, Nebraska. TierOne Corporation is the holding company for TierOne Bank (“Bank”). The Bank has two wholly owned subsidiaries, TMS Corporation of the Americas (“TMS”) and United Farm & Ranch Management, Inc. (“UFARM”). TMS is the holding company of TierOne Investments and Insurance, Inc., a wholly owned subsidiary that administers the sale of securities and insurance products, and TierOne Reinsurance Company, a wholly owned subsidiary that reinsures credit life and disability insurance policies. UFARM provides agricultural customers with professional farm and ranch management and real estate brokerage services. The accompanying unaudited consolidated financial statements include the accounts of the Bank and its wholly owned subsidiaries.
The accompanying interim consolidated financial statements as of September 30, 2006 and for the three and nine months ended September 30, 2006 and 2005 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 of the financial position and operating results for interim periods. The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”), and do not include all of the information and notes required for complete, audited financial statements. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results which may be expected for the entire calendar year 2006.
As used in this report, unless the context otherwise requires, the terms “we,” “us,” or “our” refer to the Company and the Bank.
8
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Various elements of our accounting policies, by nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policies with respect to the methodologies used to determine the allowance for loan losses, judgments regarding goodwill and other intangible assets, valuation of mortgage servicing rights, valuation and measurement of derivatives and commitments and evaluation of investment and mortgage-backed securities for impairment are our most critical accounting policies because they are important to the presentation of our financial condition and results of operations, involve a high degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in our reported financial condition and results of operations.
Allowance for Loan Losses. We have identified the allowance for loan losses as a critical accounting policy where amounts are subject to material variation. This policy is significantly affected by our judgment and uncertainties and there is a likelihood that materially different amounts could 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:
| • | Assigning individual loans to specific risk levels (pass, special mention, substandard, doubtful and loss); |
| • | Valuing the underlying collateral securing the loans; |
| • | 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 |
| • | 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, in management’s belief, 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:
| • | Trends and levels of delinquent, nonperforming or “impaired” loans; |
| • | Trends and levels of charge-offs and recoveries; |
| • | Trends in volume and underwriting terms or guarantees for loans; |
| • | Impact of changes in underwriting standards, risk tolerances or other changes in lending practices; |
| • | Changes in the value of collateral securing loans; |
9
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
| • | Total loans outstanding and the volume of loan originations; |
| • | Type, size, terms and geographic concentration of loans held; |
| • | Changes in qualifications or experience of the lending staff; |
| • | Changes in local or national economic or industry conditions; |
| • | Number of loans requiring heightened management oversight; |
| • | Changes in credit concentrations; and |
| • | Changes in regulatory requirements. |
This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur.
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:
| • | The fair value of the collateral if the loan is collateral dependent; |
| • | The present value of expected future cash flows; or |
| • | 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 make changes to the allowance based on their judgment of information available to them at the time of their examination.
Goodwill and Other Intangible Assets. Goodwill represents the excess price paid over the fair value of the tangible and intangible assets and liabilities acquired in connection with the August 27, 2004 acquisition of United Nebraska Financial Co. (“UNFC”). There was no goodwill recorded in connection with our Marine Bank branch purchase on June 2, 2006. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible balances are not being amortized, but are tested for impairment annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their residual values and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
10
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
We have identified a single reporting unit for purposes of goodwill impairment testing. The impairment test is therefore performed on a consolidated basis. We perform our goodwill impairment analysis on an annual basis during the third quarter. Additional impairment analysis may be performed if circumstances or events occur which may have an impact on the fair value of our goodwill. Generally, fair value represents a multiple of earnings or discounted projected cash flows. Potential impairment is indicated when the carrying value of the entity, including goodwill, exceeds its fair value. If the potential for impairment exists, the fair value of the entity is subsequently measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the entity’s goodwill. Impairment loss is recognized for any excess of the carrying value of the entity’s goodwill over the implied fair value. We performed our impairment analysis as of September 30, 2006 and concluded that no potential impairment of goodwill existed as the fair value of our goodwill exceeded its carrying value.
The value of core deposit intangible assets acquired in connection with the UNFC and Marine Bank transactions, which is subject to amortization, is included in the Consolidated Statements of Financial Condition as other intangible assets. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition, account runoff, alternative funding costs, deposit servicing costs and discount rates. The core deposit intangible assets have been estimated to have nine- to ten-year lives. Core deposit intangible assets are amortized using an accelerated method of amortization which is recorded in other operating expense.
We review our core deposit intangible assets for impairment whenever events or changes in circumstances indicate that we may not recover our investment in the underlying assets or liabilities which gave rise to these intangible assets.
Mortgage Servicing Rights. We capitalize the estimated value of mortgage servicing rights upon the sale of loans. The estimated value takes into consideration contractually known amounts, such as loan balance, term and interest rate. These estimates are impacted by loan prepayment speeds, servicing costs and discount rates used to compute a present value of the cash flow stream. We evaluate the fair value of mortgage servicing rights on a quarterly basis using current prepayment speed, cash flow and discount rate estimates. Changes in these estimates impact fair value and could require us to record a valuation allowance or recovery. The fair value of mortgage servicing rights is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of mortgage servicing rights. Generally, as interest rates decline, prepayments accelerate with increased refinance activity, which results in a decrease in the fair value of mortgage servicing rights. As interest rates rise, prepayments generally slow, which results in an increase in the fair value of mortgage servicing rights. All assumptions are reviewed for reasonableness on a quarterly basis and adjusted as necessary to reflect current and anticipated market conditions. Thus, any measurement of fair value is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if applied at a different point in time.
11
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Derivatives and Commitments. We account for our derivatives and hedging activities in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities and SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities.
In the normal course of business, we enter into contractual commitments, including loan commitments and rate lock commitments to extend credit to finance residential mortgages. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the time frame established by us. Interest rate risk arises on these commitments and subsequently closed loans if interest rates increase or decrease between the time of the interest rate lock and the delivery of the loan to the investor. Loan commitments related to mortgage loans that are intended to be sold are considered derivatives in accordance with the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 105, Application of Accounting Principles to Loan Commitments. Accordingly, the fair value of these derivatives at the end of the reporting period is based on a quoted market price that closely approximates the amount that would have been recognized if the loan commitment was funded and sold.
To mitigate the effect of interest rate risk inherent in providing loan commitments, we hedge our commitments by entering into mandatory or best efforts delivery forward loan sale contracts. These forward contracts are marked-to-market through earnings and are not designated as accounting hedges under SFAS No. 133. The change in the fair value of loan commitments and the change in the fair value of forward sales contracts generally move in opposite directions and, accordingly, the impact of changes in these valuations on net income during the loan commitment period is generally inconsequential.
Although the forward loan sale contracts also serve as an economic hedge on loans held for sale, forward contracts have not been designated as accounting hedges under SFAS No. 133 and, accordingly, loans held for sale are accounted for at the lower of cost or market in accordance with SFAS No. 65, Accounting for Certain Mortgage Banking Activities.
Investment and Mortgage-Backed Securities. We evaluate all securities for impairment on a quarterly basis. An impairment charge in the Consolidated Statements of Income is recognized when the decline in the fair value of investment securities below their cost basis is judged to be other-than-temporary. We consider various factors in determining whether we should recognize an impairment charge, including, but not limited to, the length of time and extent to which the fair value has been less than its cost basis and our ability and intent to hold the investment security for a period of time sufficient to allow for any anticipated recovery in fair value.
12
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Effective January 1, 2006, we adopted SFAS No. 123(R) Share-Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) requires that compensation expense related to stock-based payment transactions be recognized in the financial statements and that expense be measured based on the fair value of the equity or liability instrument issued. SFAS No. 123(R) also requires that forfeitures be estimated over the vesting period of the instrument. We adopted SFAS No. 123(R) using the modified-prospective method and have applied this method to the accounting for our stock options and restricted shares. Under the modified-prospective method, stock-based employee compensation expense recognized after adoption includes: (a) stock-based expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and (b) stock-based employee compensation expense for all awards granted subsequent to January 1, 2006, based on grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Prior to January 1, 2006, as permitted by SFAS No. 123, we accounted for stock-based payments to employees using Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and, therefore recorded no stock-based employee compensation expense for employee stock options. Results for periods prior to January 1, 2006 have not been restated.
Had stock-based employee compensation expense for our 2003 Stock Option Plan (“SOP”) and Employee Stock Ownership Plan (“ESOP”) been determined based on a calculated fair value using the Black-Scholes model at the grant date for awards subsequent to the distribution, consistent with the recognition provisions of SFAS No. 123(R), our net income and earnings per share would have been impacted as follows for the three and nine month periods ended September 30, 2005:
| (Dollars in thousands, except per share data) |
Three Months Ended September 30, 2005 |
Nine Months Ended September 30, 2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| Net income (as reported) | $ | 8,563 | $ | 23,349 | ||||
| Add: stock-based employee compensation expense | ||||||||
| included in reported net income, net of related tax effects | 467 | 1,401 | ||||||
| Deduct: total stock-based employee compensation expense | ||||||||
| determined under the fair value based method for all awards, | ||||||||
| net of related tax effects | (740 | ) | (2,220 | ) | ||||
| Pro forma net income | $ | 8,290 | $ | 22,530 | ||||
| Basic earnings per share (as reported) | $ | 0.53 | $ | 1.44 | ||||
| Pro forma basic earnings per share | $ | 0.51 | $ | 1.39 | ||||
| Diluted earnings per share (as reported) | $ | 0.51 | $ | 1.40 | ||||
| Pro forma diluted earnings per share | $ | 0.50 | $ | 1.36 | ||||
13
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Amounts recognized in the financial statements with respect to our ESOP and stock-based employee compensation plans are presented in the following table:
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Stock-based employee compensation expense: | ||||||||||||||
| Employee Stock Ownership Plan expense | $ | 1,232 | $ | 1,014 | $ | 3,611 | $ | 2,810 | ||||||
| Management Recognition and Retention Plan expense | 726 | 718 | 2,178 | 2,155 | ||||||||||
| 2003 Stock Option Plan expense | 420 | -- | 1,261 | -- | ||||||||||
| Amount of stock-based compensation expense, | ||||||||||||||
| before income tax benefit | $ | 2,378 | $ | 1,732 | $ | 7,050 | $ | 4,965 | ||||||
| Amount of related income tax benefit recognized | $ | 514 | $ | 383 | $ | 1,521 | $ | 1,149 | ||||||
Employee Stock Ownership Plan. Concurrent with the conversion from mutual to stock ownership in October 2002, we established an ESOP for the benefit of our employees. The ESOP is a qualified pension plan under Internal Revenue Service guidelines which covers all full-time employees who have completed 1,000 hours of service. Upon formation, the ESOP purchased 1,806,006 shares of common stock issued in the initial public offering with the proceeds of an $18,060,060 loan from the Company.
We account for our ESOP in accordance with Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans. Accordingly, expense is recognized based on the market value (average stock price) of shares scheduled to be released from the ESOP trust. As shares are committed to be released from collateral, we report employee compensation expense equal to the average market price of the shares and the shares become outstanding for earnings per share (“EPS”) computations. Our contributions and dividends on allocated and unallocated ESOP shares are used to pay down the loan. Accordingly, we have recorded the obligation with an offsetting amount of unearned compensation in stockholders’ equity in the accompanying Consolidated Statements of Financial Condition.
| At or for the Three Months Ended September 30, |
At or for the Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Employee Stock Ownership Plan compensation expense | $ | 1,232 | $ | 1,014 | $ | 3,611 | $ | 2,810 | ||||||
| Employee Stock Ownership Plan shares allocated to employees | 489,127 | 338,626 | 489,127 | 338,626 | ||||||||||
| Employee Stock Ownership Plan shares unallocated | 1,316,879 | 1,467,380 | 1,316,879 | 1,467,380 | ||||||||||
| Fair value of Employee Stock Ownership Plan unallocated shares | $ | 44,682 | $ | 38,607 | $ | 44,682 | $ | 38,607 | ||||||
14
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
2003 Management Recognition and Retention Plan. We established the 2003 Management Recognition and Retention Plan (“MRRP”) which is a stock-based incentive plan that was approved by our shareholders at our 2003 Annual Meeting of Shareholders. The shares awarded by the MRRP vest to participants at the rate of 20% per year. Employee compensation expense for this plan is being recorded over a 60-month period, using the straight-line amortization method adjusted for forfeitures, and is based on the market price of our stock as of the date the awards were made. Shareholders approved 903,003 shares to be granted under the MRRP and 100,653 shares are still available for future grants as of September 30, 2006. The following table summarizes shares of our common stock that were subject to award and have been granted pursuant to the MRRP at September 30, 2006:
| Number of Shares |
Weighted Average Fair Value at Grant Date | |||||||
|---|---|---|---|---|---|---|---|---|
| Shares outstanding at December 31, 2005 | 489,160 | $ | 18.21 | |||||
| Shares granted | -- | -- | ||||||
| Shares vested | (152,720 | ) | 17.83 | |||||
| Shares forfeited | -- | -- | ||||||
| Shares outstanding at September 30, 2006 | 336,440 | $ | 18.38 | |||||
Employee compensation expense related to the MRRP totaled $726,000 and $718,000 for the three months ended September 30, 2006 and 2005, respectively, and $2.2 million for the nine months ended September 30, 2006 and 2005, respectively. As of September 30, 2006, we had $4.9 million of total unrecognized employee compensation expense related to unvested MRRP shares. These expenses are expected to be recognized over a weighted average period of 1.8 years. There were no MRRP shares granted, vested or forfeited during the three months ended September 30, 2006. Excess tax benefits of $809,000 were realized during the nine months ended September 30, 2006 as a result of the vesting of 152,720 MRRP shares.
2003 Stock Option Plan. We established the SOP under which 2,257,508 shares of our common stock were 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. Employee compensation expense for this plan is being recorded over a 60-month period, using the straight-line amortization method adjusted for forfeitures, and is based on the fair value of our stock options as of the date the awards were made. The exercise price of the options is equal to the market price of the common stock on the grant date. Shareholders approved 2,257,508 stock options to be granted under the SOP and 359,758 of these stock options remain available for future grants as of September 30, 2006.
15
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The fair value of each option was estimated on the date of the grant using the Black-Scholes model. The dividend yield was calculated based on the annual dividends paid and the 12-month average closing stock price at the time of the grant. Expected volatility was based on historical volatility of our stock price. We have utilized historical experience to determine the expected life of the stock options and to estimate future forfeitures. All inputs into the Black-Scholes model are estimates at the time of the grant. Actual results in the future could materially differ from these estimates; however, such results would not impact future reported net income.
The following table details the inputs into the Black-Scholes model for stock options granted during the years ended December 31, 2004 and 2003. There were no stock options granted during the year ended December 31, 2005 or the nine months ended September 30, 2006.
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Dividend yield | 1.00 | % | 1.00 | % | ||||
| Expected volatility | 22.60 | % | 13.20 | % | ||||
| Risk-free interest rate | 4.00 | % | 3.50 | % | ||||
| Expected life of stock options | 8 years | 10 years | ||||||
| Weighted average fair value of stock options granted | $ | 7.12 | $ | 4.51 | ||||
The following table details stock options issued, exercised and forfeited during the nine months ended September 30, 2006:
| (Dollars in thousands, except per share data) |
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (In Years) |
Average Intrinsic Value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Stock options outstanding at December 31, 2005 | 1,864,750 | $ | 17.92 | |||||||||||
| Stock options granted | -- | -- | ||||||||||||
| Stock options exercised | (43,624 | ) | 18.04 | |||||||||||
| Stock options forfeited | (2,500 | ) | 17.83 | |||||||||||
| Stock options outstanding at September 30, 2006 | 1,818,626 | $ | 17.92 | 6.6 | $ | 29,120 | ||||||||
| Stock options exercisable at September 30, 2006 | 1,056,526 | $ | 17.86 | 6.6 | $ | 16,978 | ||||||||
16
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The following table details the intrinsic value, cash received and tax benefit realized from the exercise of stock options during the three and nine months ended September 30, 2006 and 2005:
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Intrinsic value (market value on the exercise date less the strike price) |
$ | 509 | $ | 57 | $ | 683 | $ | 64 | ||||||
| Cash received from the exercise of stock options | 566 | 98 | 787 | 115 | ||||||||||
| Tax benefit realized from the exercise of stock options | 84 | 20 | 140 | 22 | ||||||||||
At September 30, 2006, there was $2.7 million of total unrecognized compensation expense related to unvested stock options that will be expensed over a weighted average period of 1.7 years.
17
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Goodwill had a net carrying amount of $42.2 million at September 30, 2006, a decrease of $55,000, or 0.1%, compared to $42.3 million at December 31, 2005. The decrease in goodwill at September 30, 2006 was the result of a realized tax benefit associated with the UNFC acquisition. Goodwill represents the excess price paid over the fair value of the tangible and intangible assets and liabilities acquired in connection with the August 27, 2004 acquisition of UNFC. On June 2, 2006, we completed the purchase of Marine Bank’s only banking office in Omaha, Nebraska. We acquired $8.1 million of deposits and recorded a core deposit intangible asset of $102,000 as a result of this transaction. There was no goodwill recorded in connection with our Marine Bank branch purchase. We evaluate goodwill for impairment annually in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. There have been no changes in the carrying amount of goodwill during the nine months ended September 30, 2006 due to impairment as we are not aware of any facts or circumstances that would indicate our carrying value exceeded fair value.
Our only identifiable other intangible asset is the value of core deposits acquired as part of the UNFC and Marine Bank transactions. The core deposit intangible assets have been estimated to have nine- to ten-year lives. Core deposit intangible assets are amortized using an accelerated method of amortization which is recorded in other operating expense.
The changes in the net carrying amounts of other intangible assets for the three and nine months ended September 30, 2006 and 2005 are as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Balance at beginning of period | $ | 9,257 | $ | 10,942 | $ | 10,041 | $ | 11,877 | ||||||
| Additions | -- | -- | 102 | -- | ||||||||||
| Amortization expense | (442 | ) | (459 | ) | (1,328 | ) | (1,394 | ) | ||||||
| Balance at end of period | $ | 8,815 | $ | 10,483 | $ | 8,815 | $ | 10,483 | ||||||
Estimated amortization expense for core deposit intangible assets for the year ending December 31, 2006 and five years thereafter is as follows:
| (Dollars in thousands) |
Core Deposit Intangible Asset | ||||
|---|---|---|---|---|---|
| Estimated Amortization Expense | |||||
| For the Year Ending: | |||||
| December 31, 2006 | $ | 1,753 | |||
| December 31, 2007 | 1,647 | ||||
| December 31, 2008 | 1,513 | ||||
| December 31, 2009 | 1,373 | ||||
| December 31, 2010 | 1,222 | ||||
| December 31, 2011 | 1,052 | ||||
18
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The carrying value, gross unrealized gains and losses and fair value of investment and mortgage-backed securities by major security category at September 30, 2006 and December 31, 2005 are as follows:
| September 30, 2006 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Unrealized | ||||||||||||||
| (Dollars in thousands) |
Amortized Cost |
Gains |
Losses |
Fair Value | ||||||||||
| Held to maturity: | ||||||||||||||
| Municipal obligations | $ | 95 | $ | -- | $ | -- | $ | 95 | ||||||
| Available for sale: | ||||||||||||||
| Mortgage-backed securities | 14,480 | 53 | 316 | 14,217 | ||||||||||
| U.S. Government securities and agency obligations | 86,256 | 9 | 770 | 85,495 | ||||||||||
| Corporate securities | 6,249 | 5 | 119 | 6,135 | ||||||||||
| Municipal obligations | 16,675 | 22 | 73 | 16,624 | ||||||||||
| Agency equity securities | 547 | -- | 16 | 531 | ||||||||||
| Asset Management Fund - ARM Fund | 6,000 | -- | 152 | 5,848 | ||||||||||
| Total investment and mortgage-backed | ||||||||||||||
| securities, available for sale | $ | 130,207 | $ | 89 | $ | 1,446 | $ | 128,850 | ||||||
| December 31, 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Unrealized | ||||||||||||||
| (Dollars in thousands) |
Amortized Cost |
Gains |
Losses |
Fair Value | ||||||||||
| Held to maturity: | ||||||||||||||
| Municipal obligations | $ | 111 | $ | -- | $ | -- | $ | 111 | ||||||
| Available for sale: | ||||||||||||||
| Mortgage-backed securities | 20,087 | 83 | 418 | 19,752 | ||||||||||
| U.S. Government securities and agency obligations | 68,949 | 7 | 1,195 | 67,761 | ||||||||||
| Corporate securities | 10,249 | 79 | 64 | 10,264 | ||||||||||
| Municipal obligations | 18,301 | 32 | 113 | 18,220 | ||||||||||
| Agency equity securities | 546 | 1 | 26 | 521 | ||||||||||
| Asset Management Fund - ARM Fund | 6,000 | -- | 152 | 5,848 | ||||||||||
| Total investment and mortgage-backed | ||||||||||||||
| securities, available for sale | $ | 124,132 | $ | 202 | $ | 1,968 | $ | 122,366 | ||||||
We believe all unrealized losses as of September 30, 2006 to be market related, with no permanent sector or issuer credit concerns or impairments. We had 130 securities with unrealized losses totaling $1.3 million for 12 consecutive months or longer as of September 30, 2006. The unrealized losses are believed to be temporarily, not permanently, impaired in value. An impairment is deemed temporary if the positive evidence indicating that an investment’s carrying amount is recoverable within a reasonable time period outweighs negative evidence to the contrary. As of September 30, 2006, we have the ability and intent to hold these securities until maturity.
19
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Loans receivable at September 30, 2006 and December 31, 2005 are summarized in the following table:
| September 30, 2006 |
December 31, 2005 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
Amount |
% |
Amount |
% | ||||||||||
| Real estate loans: | ||||||||||||||
| One-to-four family residential (1) | $ | 350,040 | 9.68 | % | $ | 384,722 | 10.96 | |||||||
| Second mortgage residential | 127,207 | 3.52 | 160,208 | 4.57 | ||||||||||
| Multi-family residential | 146,063 | 4.04 | 166,579 | 4.75 | ||||||||||
| Commercial real estate and land | 837,375 | 23.15 | 692,420 | 19.74 | ||||||||||
| Residential construction | 870,932 | 24.07 | 943,378 | 26.89 | ||||||||||
| Commercial construction | 413,562 | 11.43 | 351,767 | 10.03 | ||||||||||
| Agriculture | 67,609 | 1.87 | 57,008 | 1.62 | ||||||||||
| Total real estate loans | 2,812,788 | 77.76 | 2,756,082 | 78.56 | ||||||||||
| Business | 198,535 | 5.49 | 177,592 | 5.06 | ||||||||||
| Agriculture - operating | 88,163 | 2.43 | 72,518 | 2.07 | ||||||||||
| Warehouse mortgage lines of credit | 104,798 | 2.90 | 95,174 | 2.71 | ||||||||||
| Consumer loans: | ||||||||||||||
| Home equity | 69,837 | 1.93 | 61,600 | 1.75 | ||||||||||
| Home equity lines of credit | 132,912 | 3.68 | 141,021 | 4.02 | ||||||||||
| Home improvement | 59,672 | 1.65 | 69,165 | 1.97 | ||||||||||
| Automobile | 87,986 | 2.43 | 85,515 | 2.44 | ||||||||||
| Other | 62,728 | 1.73 | 49,812 | 1.42 | ||||||||||
| Total consumer loans | 413,135 | 11.42 | 407,113 | 11.60 | ||||||||||
| Total loans | 3,617,419 | 100.00 | % | 3,508,479 | 100.00 | % | ||||||||
| Unamortized premiums, discounts and | ||||||||||||||
| deferred loan fees | 4,527 | 4,778 | ||||||||||||
| Undisbursed portion of construction and | ||||||||||||||
| land development loans in process | (638,319 | ) | (668,587 | ) | ||||||||||
| Net loans | 2,983,627 | 2,844,670 | ||||||||||||
| Allowance for loan losses | (32,359 | ) | (30,870 | ) | ||||||||||
| Net loans after allowance for loan losses | $ | 2,951,268 | $ | 2,813,800 | ||||||||||
| (1) Includes loans held for sale | $ | 16,690 | $ | 8,666 | ||||||||||
20
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The activity in the allowance for loan losses during the three and nine months ended September 30, 2006 and 2005 is summarized in the following table:
| At or for the Three Months Ended September 30, |
At or for the Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Allowance for loan losses at | ||||||||||||||
| beginning of period | $ | 32,159 | $ | 28,347 | $ | 30,870 | $ | 26,831 | ||||||
| Provision for loan losses | 1,148 | 1,691 | 4,290 | 4,402 | ||||||||||
| Charge-offs | (1,006 | ) | (830 | ) | (3,024 | ) | (2,306 | ) | ||||||
| Recoveries on loans previously charged-off | 58 | 239 | 223 | 520 | ||||||||||
| Allowance for loan losses at end of period | $ | 32,359 | $ | 29,447 | $ | 32,359 | $ | 29,447 | ||||||
| Allowance for loan losses as a | ||||||||||||||
| percentage of net loans | 1.08 | % | 1.02 | % | 1.08 | % | 1.02 | % | ||||||
21
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 8 – Nonperforming Assets
The following table sets forth information with respect to nonperforming assets and troubled debt restructurings at September 30, 2006 and December 31, 2005. It is our policy to cease accruing interest on loans 90 days or more past due and to charge off accrued interest. Included in the following table, under nonperforming loans and troubled debt restructurings, are impaired loans of $3.7 million and $4.2 million at September 30, 2006 and December 31, 2005, respectively. Our allowance for loan losses specifically allocated to impaired loans totaled $301,000 and $1.1 million at September 30, 2006 and December 31, 2005, respectively.
| (Dollars in thousands) |
September 30, 2006 |
December 31, 2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| Nonperforming loans: | ||||||||
| One-to-four family residential | $ | 1,590 | $ | 1,902 | ||||
| Second mortgage residential | 414 | 609 | ||||||
| Multi-family residential | 553 | 5,731 | ||||||
| Commercial real estate and land | 3,244 | 1,922 | ||||||
| Residential construction | 10,014 | 1,840 | ||||||
| Agriculture | -- | 113 | ||||||
| Business | 2,675 | 526 | ||||||
| Agriculture - operating | 115 | 308 | ||||||
| Consumer | 1,275 | 1,454 | ||||||
| Total nonperforming loans | 19,880 | 14,405 | ||||||
| Real estate owned, net (1) | 4,984 | 2,446 | ||||||
| Total nonperforming assets | 24,864 | 16,851 | ||||||
| Troubled debt restructurings | 8,437 | 5,180 | ||||||
| Total nonperforming assets and troubled debt restructurings | $ | 33,301 | $ | 22,031 | ||||
| Total nonperforming loans as a percentage of net loans | 0.67 | % | 0.51 | % | ||||
| Total nonperforming assets as a percentage of total assets | 0.74 | % | 0.52 | % | ||||
| Total nonperforming assets and troubled debt restructurings | ||||||||
| as a percentage of total assets | 0.99 | % | 0.68 | % | ||||
| Allowance for loan losses as a percentage of net loans | 1.08 | % | 1.09 | % | ||||
| Allowance for loan losses as a percentage of nonperforming loans | 162.77 | % | 214.30 | % | ||||
| (1) Real estate owned balances are shown net of related loss allowances. Includes both real | ||||||||
| property and other repossessed collateral consisting primarily of automobiles. | ||||||||
22
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The balance of capitalized mortgage servicing rights, net of valuation allowances, included in other assets at September 30, 2006 and December 31, 2005 was $12.4 million and $11.7 million, respectively. The fair values of these rights were approximately $16.2 million and $15.0 million at September 30, 2006 and December 31, 2005, respectively. The following are the key assumptions used in measuring the fair values of capitalized mortgage servicing rights and the sensitivity of the fair values to changes in those assumptions:
| (Dollars in thousands) |
September 30, 2006 |
December 31, 2005 |
|---|---|---|
| Serviced loan portfolio balance | $1,278,493 | $1,201,759 |
| Fair value | $16,175 | $14,954 |
| Prepayment speed | 9.00% - 29.80% | 9.00% - 26.40% |
| Weighted average prepayment speed | 12.18% | 11.52% |
| Fair value with 10% adverse change | $15,554 | $14,405 |
| Fair value with 20% adverse change | $14,953 | $13,847 |
| Discount rate | 10.00% - 14.00% | 10.00% - 15.00% |
| Weighted average discount rate | 11.36% | 11.40% |
| Fair value with 10% adverse change | $15,629 | $14,453 |
| Fair value with 20% adverse change | $15,091 | $13,942 |
The sensitivity of the fair values is hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, in the table, the effect of a variation in a particular assumption on the fair value of the capitalized mortgage servicing rights is calculated without changing any other assumption. In reality, changes in one assumption may result in changes in another that might magnify or counteract the sensitivities.
The following table summarizes activity in capitalized mortgage servicing rights, including amortization expense:
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Balance at beginning of period | $ | 12,069 | $ | 10,745 | $ | 11,713 | $ | 10,505 | ||||||
| Mortgage servicing rights capitalized | 975 | 841 | 2,654 | 2,425 | ||||||||||
| Amortization expense | (677 | ) | (778 | ) | (2,000 | ) | (2,119 | ) | ||||||
| Valuation adjustment | -- | 74 | -- | 71 | ||||||||||
| Balance at end of period | $ | 12,367 | $ | 10,882 | $ | 12,367 | $ | 10,882 | ||||||
23
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The valuation allowance on mortgage servicing rights is summarized in the following table for the three and nine months ended September 30, 2006 and 2005:
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Balance at beginning of period | $ | -- | $ | 803 | $ | -- | $ | 800 | ||||||
| Changes in mortgage servicing valuation reserve | -- | (74 | ) | -- | (71 | ) | ||||||||
| Balance at end of period | $ | -- | $ | 729 | $ | -- | $ | 729 | ||||||
We evaluate the fair value of mortgage servicing rights on a quarterly basis using current prepayment speeds, cash flow and discount rate estimates. Changes in these estimates impact fair value and could require us to record a valuation allowance or recovery. During the year ended December 31, 2005, the balance of our mortgage servicing rights valuation allowance was recaptured into earnings. Our evaluation of mortgage servicing rights at September 30, 2006 indicated that no valuation allowance was necessary. There was a valuation allowance established for capitalized mortgage servicing rights of $729,000 at September 30, 2005. The amortization expense and valuation adjustment are recorded as a reduction of fees and service charges in the accompanying Consolidated Statements of Income.
24
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Deposits at September 30, 2006 and December 31, 2005 are summarized in the following table:
| September 30, 2006 |
December 31, 2005 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
Weighted Average Rates |
Amount |
Weighted Average Rates |
Amount | ||||||||||
Transaction accounts: |
||||||||||||||
| Noninterest-bearing checking | -- | % | $ | 128,286 | -- | % | $ | 138,578 | ||||||
| Savings | 0.49 | 47,907 | 0.57 | 57,037 | ||||||||||
| Interest-bearing checking | 1.15 | 343,705 | 1.12 | 398,094 | ||||||||||
| Money market | 2.97 | 396,307 | 2.31 | 338,518 | ||||||||||
| Total transaction accounts | 1.74 | 916,205 | 1.35 | 932,227 | ||||||||||
| Total transaction accounts as a | ||||||||||||||
| percentage of total deposits | 45.72 | % | 45.74 | % | ||||||||||
| Time deposits: | ||||||||||||||
| 0.00% to 2.99% | 58,055 | 188,788 | ||||||||||||
| 3.00% to 4.99% | 621,369 | 910,876 | ||||||||||||
| 5.00% to 6.99% | 408,423 | 6,428 | ||||||||||||
| Total time deposits | 4.56 | 1,087,847 | 3.52 | 1,106,092 | ||||||||||
| Total time deposits as a | ||||||||||||||
| percentage of total deposits | 54.28 | % | 54.26 | % | ||||||||||
| Total deposits | 3.27 | % | $ | 2,004,052 | 2.53 | % | $ | 2,038,319 | ||||||
The scheduled maturities of time deposits at September 30, 2006 are presented in the following table:
| (Dollars in thousands) |
Amount |
Percent | ||||||
|---|---|---|---|---|---|---|---|---|
Amount Maturing During the 12 Months Ending: |
||||||||
September 30, 2007 | $ | 913,965 | 84.02 | % | ||||
| September 30, 2008 | 121,014 | 11.12 | ||||||
| September 30, 2009 | 41,040 | 3.77 | ||||||
| Thereafter | 11,828 | 1.09 | ||||||
| Total time deposits | $ | 1,087,847 | 100.00 | % | ||||
25
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
At September 30, 2006 and December 31, 2005, we were indebted on notes as shown in the following table:
| (Dollars in thousands) |
September 30, 2006 |
December 31, 2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| Permanent fixed-rate notes payable to | ||||||||
| the FHLBank Topeka | $ | 21,780 | $ | 66,301 | ||||
| Convertible fixed-rate notes payable to | ||||||||
| the FHLBank Topeka | 815,000 | 680,824 | ||||||
| Line of credit with the FHLBank Topeka | 42,000 | -- | ||||||
| Retail repurchase agreements | 31,509 | 29,871 | ||||||
| Junior subordinated debentures | 37,928 | 37,928 | ||||||
| Total FHLBank Topeka advances and | ||||||||
| other borrowings | $ | 948,217 | $ | 814,924 | ||||
| Weighted average interest rate | 4.39 | % | 3.77 | % | ||||
The convertible fixed-rate notes are convertible to adjustable-rate notes at the option of the FHLBank Topeka (“FHLBank”). The line of credit with the FHLBank expires in November 2006. We expect the line of credit agreement to be renewed in the ordinary course of business due to our current blanket collateral agreement with the FHLBank.
26
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
On September 25, 2006, we entered into a Purchase and Assumption Agreement to sell our Plainville and Stockton, Kansas deposits and bank offices to Stockton National Bank of Stockton, Kansas. Inclusive in the premium to be paid on the sold deposits is the transfer of certain other items, including premises and equipment and accrued interest payable, at net book value on the date of the sale. This sale is subject to regulatory approval and is expected to close in December 2006.
| (Dollars in thousands) |
September 30, 2006 | ||||
|---|---|---|---|---|---|
| Assets held for sale: | |||||
| Cash | $ | 110 | |||
| Premises and equipment, net | 67 | ||||
| Total assets held for sale | $ | 177 | |||
| Liabilities held for sale: | |||||
| Deposit accounts: | |||||
| Noninterest-bearing checking | $ | 520 | |||
| Savings | 319 | ||||
| Interest-bearing checking | 3,118 | ||||
| Money market | 3,270 | ||||
| Time deposits | 17,743 | ||||
| Total deposits held for sale | 24,970 | ||||
| Accrued interest payable | 37 | ||||
| Total liabilities held for sale | $ | 25,007 | |||
27
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
For a discussion regarding accounting pronouncements, interpretations, exposure drafts and other formal accounting guidance and the impact of these on our financial condition and results of operations, reference is made to our Annual Report on Form 10-K for the year ended December 31, 2005. The following discussion identifies certain recently issued accounting guidance.
In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140, (“SFAS No. 155”), to address issues which had arisen related to SFAS Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Under SFAS No. 155, companies may elect to measure at fair value entire financial instruments containing embedded derivatives that would otherwise have to be accounted for separately. Additionally, SFAS No. 155 provides the following: (a) requires companies to identify interests in securitized financial assets that are freestanding derivatives or contain embedded derivatives that would have to be accounted for separately; (b) clarifies which interest- and principal-only strips are subject to SFAS No. 133; and (c) amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”), to eliminate the prohibition of a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement (new basis) event after the beginning of a company’s first fiscal year beginning after September 15, 2006. We do not anticipate that the adoption of SFAS No. 155 will have a material impact on our Consolidated Statement of Financial Condition or Consolidated Statement of Income.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets – an Amendment of FASB Statement No. 140 (“SFAS No. 156”). SFAS No. 156 amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 has the following requirements: (a) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; (b) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practical; (c) permits an entity to choose either the amortization method or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities; (d) at its initial adoption, permits a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available for sale securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, provided that the available for sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and (e) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective as of a company’s first fiscal year beginning after September 15, 2006. We are evaluating the impact that SFAS No. 156 may have on our consolidated financial statements.
28
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. This statement clarifies that market participant assumptions include assumptions about risk. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine. This statement also clarifies that market participant assumptions should also include assumptions about the effect of a restriction on the sale or use of an asset. This statement clarifies that fair value measurement for a liability should reflect nonperformance risk (the risk that the obligation will not be fulfilled). This statement expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs and the effect of the measurements on earnings (or changes in net assets) for the period. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are evaluating the impact that SFAS No. 157 may have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in its statement of financial position. The funded status is measured as the difference between the assets at fair value and benefit obligation (the projected benefit obligation for pension plans or the accumulated benefit obligation for other postretirement benefit plans). An employer is also required to measure the funded status of a plan as of the date of its year-end statement of financial position with changes in the funded status recognized through comprehensive income. SFAS No. 158 also requires certain disclosures regarding the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits and the transition asset or obligation. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. We do not anticipate that the adoption of SFAS No. 158 will have a material impact on our Consolidated Statement of Financial Condition or Consolidated Statement of Income.
29
TierOne Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (“FIN 48”)", which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are evaluating the impact that FIN 48 may have on our consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (“SAB 108”).” SAB 108 addresses how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. The effects of prior year uncorrected errors include the potential accumulation of improper amounts that may result in a material misstatement on the balance sheet or the reversal of prior period errors in the current period that result in material misstatement of the current period income statement amounts. Adjustments to current or prior period financial statements would be required in the event that after application of various approaches for assessing materiality of a misstatement in current period financial statements and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB 108 will be applicable to all financial statements issued after November 15, 2006. We do not anticipate that the adoption of SAB 108 will have a material impact on our Consolidated Statement of Financial Condition or Consolidated Statement of Income.
30
TierOne Bank (“Bank”), a subsidiary of TierOne Corporation (“Company”), is a $3.4 billion federally chartered stock savings bank headquartered in Lincoln, Nebraska. Established in 1907, the Bank offers customers a wide variety of full-service consumer, commercial and agricultural banking products and services through a network of 70 banking offices located in Nebraska, Iowa and Kansas and nine loan production offices located in Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. Product offerings include residential, commercial and agricultural real estate loans; consumer, construction, business and agricultural operating loans; warehouse mortgage lines of credit; consumer and business checking and savings plans; investment and insurance services; and telephone and internet banking.
Our results of operations are dependent primarily on net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and our cost of funds, which consists of the interest paid on our deposits and borrowings. Our net income is also affected by our provision for loan losses, noninterest income, noninterest expense and income tax expense. Noninterest income generally includes fees and service charges, debit card fees, net income from real estate operations, net gain on sales of investment securities, loans held for sale and real estate owned and other operating income. Noninterest expense consists of salaries and employee benefits, occupancy (net), data processing, advertising and other operating expense. Our earnings are significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities.
As used in this report, unless the context otherwise requires, the terms “we,” “us,” or “our” refer to the Company and the Bank.
31
Statements contained in this Quarterly Report on Form 10-Q, which are not historical facts, may be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors. Factors that could result in material variations include, but are not limited to:
| • | Strength of the United States economy in general and the strength of the local economies in which we conduct our operations; |
| • | Changes in interest rates or other competitive factors which could affect net interest margins, net interest income and noninterest income; |
| • | Changes in the demand for loans, deposits and other financial services in our market area; |
| • | Increases in the levels of losses, customer bankruptcies, claims and assessments; |
| • | Unanticipated issues associated with the execution of our strategic plan; |
| • | Changes in fiscal, monetary, regulatory, trade and tax policies and laws; |
| • | Increased competitive challenges and expanding product and pricing pressures among financial institutions; |
| • | Changes in accounting policies or procedures as may be required by various regulatory agencies; |
| • | Changes in consumer spending and savings habits; |
| • | Unanticipated issues associated with the construction of a new banking office in Papillion, Nebraska and the sale of two banking offices in Plainville and Stockton, Kansas; and |
| • | Other factors discussed in documents (including this report) filed with the Securities and Exchange Commission from time to time. |
These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation, and disclaim any obligation, to update information contained in this Quarterly Report on Form 10-Q, including these forward-looking statements, to reflect events or circumstances that occur after the date of the filing of this Quarterly Report on Form 10-Q.
32
General. Our total assets were $3.4 billion at September 30, 2006, an increase of $128.7 million, or 4.0%, compared to $3.2 billion at December 31, 2005. The increase was primarily the result of a $139.0 million increase in net loans.
Investment and Mortgage-Backed Securities. Our available for sale investment securities totaled $114.6 million at September 30, 2006, an increase of $12.0 million, or 11.7%, compared to $102.6 million at December 31, 2005. The increase in our available for sale investment securities was attributable to security purchases of $59.7 million partially offset by $48.1 million in proceeds received from maturing and sold investment securities. Our mortgage-backed securities, all of which are recorded as available for sale, totaled $14.2 million at September 30, 2006, a decrease of $5.5 million, or 28.0%, compared to $19.8 million at December 31, 2005. The decrease in our mortgage-backed securities was the result of $5.5 million of principal payments received during the nine months ended September 30, 2006.
Loans Receivable. Net loans totaled $3.0 billion at September 30, 2006, an increase of $139.0 million, or 4.9%, compared to $2.8 billion at December 31, 2005. During the nine months ended September 30, 2006, we originated $3.8 billion of loans and purchased $381.0 million of loans. These increases were partially offset by $3.9 billion of principal repayments and $184.2 million of loan sales.
| (Dollars in thousands) |
September 30, 2006 |
December 31, 2005 |
Increase (Decrease) |
% Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| One-to-four family residential (1) | $ | 350,040 | $ | 384,722 | $ | (34,682 | ) | (9.01 | )% | |||||
| Second mortgage residential | 127,207 | 160,208 | (33,001 | ) | (20.60 | ) | ||||||||
| Multi-family residential | 146,063 | 166,579 | (20,516 | ) | (12.32 | ) | ||||||||
| Commercial real estate and land | 837,375 | 692,420 | 144,955 | 20.93 | ||||||||||
| Residential construction | 870,932 | 943,378 | (72,446 | ) | (7.68 | ) | ||||||||
| Commercial construction | 413,562 | 351,767 | 61,795 | 17.57 | ||||||||||
| Agriculture | 67,609 | 57,008 | 10,601 | 18.60 | ||||||||||
| Business | 198,535 | 177,592 | 20,943 | 11.79 | ||||||||||
| Agriculture - operating | 88,163 | 72,518 | 15,645 | 21.57 | ||||||||||
| Warehouse mortgage lines of credit | 104,798 | 95,174 | 9,624 | 10.11 | ||||||||||
| Consumer | 413,135 | 407,113 | 6,022 | 1.48 | ||||||||||
| Total loans | 3,617,419 | 3,508,479 | 108,940 | 3.11 | ||||||||||
| Unamortized premiums, discounts | ||||||||||||||
| and deferred loan fees | 4,527 | 4,778 | (251 | ) | (5.25 | ) | ||||||||
| Undisbursed portion of construction and | ||||||||||||||
| land development loans in process | (638,319 | ) | (668,587 | ) | 30,268 | (4.53 | ) | |||||||
| Net loans | $ | 2,983,627 | $ | 2,844,670 | $ | 138,957 | 4.88 | % | ||||||
| (1) Includes loans held for sale | ||||||||||||||
33
The increase in our commercial real estate and land and commercial construction loan portfolios was primarily attributable to loan origination activity related to our loan production offices (located in Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina) that are strategically positioned in high growth areas of the United States. The increase in business loans at September 30, 2006 was primarily the result of expanded lending capabilities resulting from the addition of commercial banking personnel specializing in corporate banking. The decline in our one-to-four family residential loan portfolio was primarily the result of decreased demand for adjustable-rate residential loans as borrowers migrate to fixed-rate loans. Generally, we originate adjustable-rate, one-to-four family residential mortgage loans for retention in our portfolio. We sell substantially all newly originated fixed-rate, one-to-four family residential mortgage loans in the secondary market on a servicing retained basis which produces noninterest income in the form of net gains and losses on sales and loan servicing fees. The decrease in our second mortgage loan portfolio was primarily the result of loan repayments and prepayments.
Allowance for Loan Losses. Our allowance for loan losses increased $1.5 million, or 4.8%, to $32.4 million at September 30, 2006 compared to $30.9 million at December 31, 2005. Our allowance for loan losses as a percentage of nonperforming loans was 162.77% at September 30, 2006 compared to 214.30% at December 31, 2005. Our ratio of the allowance for loan losses to net loans was 1.08% and 1.09% at September 30, 2006 and December 31, 2005, respectively.
Premises and Equipment. Premises and equipment increased $257,000, or 0.7%, to $39.8 million at September 30, 2006 compared to $39.5 million at December 31, 2005. The increase was attributable to $3.9 million in asset additions which were partially offset by depreciation and amortization expense of $2.8 million for the nine months ended September 30, 2006. Significant additions during the nine months ended September 30, 2006 included new, full-service banking facilities opened in Omaha and Hastings, Nebraska.
FHLBank Topeka Stock. FHLBank Topeka (“FHLBank”) stock totaled $61.1 million at September 30, 2006, an increase of $2.6 million, or 4.4%, compared to $58.5 million at December 31, 2005. The increase is attributable to FHLBank stock dividends received during the nine months ended September 30, 2006.
Goodwill and Other Intangible Assets. Goodwill totaled $42.2 million at September 30, 2006 and $42.3 million at December 31, 2005 and relates to the 2004 acquisition of United Nebraska Financial Co. (“UNFC”). The decrease in goodwill at September 30, 2006 was the result of a relized tax benefit associated with the UNFC acquisition. Other intangible assets totaled $8.8 million at September 30, 2006, a decrease of $1.2 million, or 12.2%, compared to $10.0 million at December 31, 2005 and relates to the core deposit intangible assets recorded as a result of the UNFC acquisition and the Marine Bank transaction. The decrease was attributable to $1.3 million in amortization partially offset by a $102,000 core deposit intangible asset recorded in conjunction with the Marine Bank transaction.
Other Assets. Other assets increased $6.0 million, or 21.1%, to $34.5 million at September 30, 2006 compared to $28.5 million at December 31, 2005. At September 30, 2006, the largest item recorded in other assets was net mortgage servicing assets of $12.4 million. The remainder consisted of prepaid expenses, miscellaneous receivables and other assets.
34
Liabilities and Stockholders’ Equity
General. Our total liabilities were $3.0 billion at September 30, 2006, an increase of $92.4 million, or 3.2%, compared to $2.9 billion at December 31, 2005. We utilized FHLBank advances to fund lending activities during the nine months ended September 30, 2006.
Deposits. Deposits declined $34.3 million, or 1.7%, to $2.0 billion at September 30, 2006.
| (Dollars in thousands) |
September 30, 2006 |
December 31, 2005 |
Increase (Decrease) |
% Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Noninterest-bearing checking | $ | 128,286 | $ | 138,578 | $ | (10,292 | ) | (7.43 | )% | |||||
| Savings | 47,907 | 57,037 | (9,130 | ) | (16.01 | ) | ||||||||
| Interest-bearing checking | 343,705 | 398,094 | (54,389 | ) | (13.66 | ) | ||||||||
| Money market | 396,307 | 338,518 | 57,789 | 17.07 | ||||||||||
| Time deposits | 1,074,693 | 1,028,128 | 46,565 | 4.53 | ||||||||||
| Total retail deposits | 1,990,898 | 1,960,355 | 30,543 | 1.56 | ||||||||||
| Brokered time deposits | 13,154 | 77,964 | (64,810 | ) | (83.13 | ) | ||||||||
| Total deposits | $ | 2,004,052 | $ | 2,038,319 | $ | (34,267 | ) | (1.68 | )% | |||||
The decline in deposits was primarily attributable to $64.8 million of brokered time deposits which matured during the nine months ended September 30, 2006 partially offset by a $22.4 million increase in retail generated deposits and $8.1 million of deposits acquired in the Marine Bank transaction. Our brokered time deposits totaled $13.2 million at September 30, 2006 compared to $78.0 million at December 31, 2005. The weighted average inerest rate of our time deposits was 4.56% at September 30, 2006 compared to 3.52% at December 31, 2005. Our transaction accounts (checking, savings and money market) totaled $916.2 million at September 30, 2006, a decrease of $16.0 million, or 1.7%, compared to $932.2 million at December 31, 2005. The weighted average interest rate of our transaction accounts was 1.74% at September 30, 2006 compared to 1.35% at December 31, 2005. The increase in our money market accounts and time deposits is primarily the result of customers migrating to these accounts from lower-costing deposit accounts due to a rising interest rate environment.
FHLBank Advances and Other Borrowings. Our FHLBank advances and other borrowings totaled $948.2 million at September 30, 2006, an increase of $133.3 million, or 16.4%, compared to $814.9 million at December 31, 2005. The increase in FHLBank advances and other borrowings at September 30, 2006 was primarily attributable to borrowing an additional $390.0 million of advances from the FHLBank and an outstanding balance on our FHLBank line of credit of $42.0 million at September 30, 2006 partially offset by the repayment of $300.2 million of FHLBank advances. We utilized FHLBank advances as our primary funding source for loan origination and purchase activity during the nine months ended September 30, 2006. The weighted average interest rate on our FHLBank advances and other borrowings was 4.39% at September 30, 2006, an increase of 62 basis points compared to 3.77% at December 31, 2005.
35
Stockholders’ Equity. At September 30, 2006, stockholders’ equity totaled $345.1 million, an increase of $36.3 million, or 11.8%, compared to $308.9 million at December 31, 2005. The increase in stockholders’ equity primarily reflects net income of $30.4 million during the nine months ended September 30, 2006, $3.7 million related to common stock earned by participants in the Employee Stock Ownership Plan (“ESOP”), $2.2 million related to amortization of awards under the 2003 Management Recognition and Retention Plan (“MRRP”) and $1.3 million related to amortization of stock options under the 2003 Stock Option Plan (“SOP”). These increases were partially offset by $3.3 million in cash dividends paid to our stockholders. We paid cash dividends of $0.06 per common share on March 31, 2006 to shareholders of record on March 15, 2006 and $0.07 per common share on June 30, 2006 and September 29, 2006 to shareholders of record on June 15, 2006 and September 15, 2006.
On July 27, 2004, we announced that our Board of Directors had authorized the repurchase of up to 1,828,581 shares of our outstanding common stock. There is no stated expiration date for this authorization. We repurchased 21,724 shares of our outstanding common stock to support employee benefit programs during the nine months ended September 30, 2006. After accounting for earlier repurchases, at September 30, 2006, the total remaining common stock repurchase authority was 1,658,319 shares. For further discussion regarding our common stock repurchases, see Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds”.
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2006 and 2005
Net Income. Net income for the three months ended September 30, 2006 was $11.5 million, or $0.67 per diluted share ($0.70 per basic share), compared to net income of $8.6 million, or $0.51 per diluted share ($0.53 per basic share), for the three months ended September 30, 2005. Net income for the nine months ended September 30, 2006 was $30.4 million, or $1.78 per diluted share ($1.85 per basic share), compared to net income of $23.3 million, or $1.40 per diluted share ($1.44 per basic share), for the nine months ended September 30, 2005.
Net Interest Income. Net interest income is the most significant component of our earnings and consists of interest income on interest-earning assets offset by interest expense on interest-bearing liabilities. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume relates to the level of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin refers to net interest income divided by total interest-earning assets and is influenced by the level and mix of interest-earning assets and interest-bearing liabilities. Net interest income before provision for loan losses totaled $34.1 million for the three months ended September 30, 2006, an increase of $7.4 million, or 27.9%, compared to $26.7 million for the three months ended September 30, 2005. For the nine months ended September 30, 2006, our net interest income totaled $94.7 million, an increase of $17.9 million, or 23.4%, compared to $76.7 million for the nine months ended September 30, 2005. The increase in net interest income was attributable to a continued increase in the average yield on our net loan portfolio supplemented by a $2.7 million prepayment fee collected on a commercial real estate loan during the three months ended September 30, 2006.
36
Our average interest rate spread for the three months ended September 30, 2006 and 2005 was 4.03% and 3.29%, respectively. The increase in our average interest rate spread was attributable to the increase in the yield earned on our interest-earning assets, primarily our net loan portfolio, being greater than the increase in our average rate paid on interest-bearing liabilities. The average yield on interest-earning assets was 7.73% for the three months ended September 30, 2006, a 159 basis point increase compared to 6.14% for the three months ended September 30, 2005. The average yield on interest-earning assets was 7.17% for the nine months ended September 30, 2006, a 127 basis point increase compared to 5.90% for the nine months ended September 30, 2005. The increase in the average yield earned on interest-earning assets was primarily related to an increase in the average yield earned on loans receivable. Our average yield earned on loans receivable for the three months ended September 30, 2006 and 2005 was 7.90% and 6.29%, respectively. Our average yield earned on loans receivable for the nine months ended September 30, 2006 and 2005 was 7.32% and 6.04%, respectively. This increase was primarily the result of our lending strategy to focus on loans with relatively higher yields, adjustable interest rates and/or shorter terms to maturity. Our average rate paid on interest bearing liabilities was 3.70% for the three months ended September 30, 2006, an increase of 85 basis points compared to 2.85% for the three months ended September 30, 2005. Our average rate paid on interest bearing liabilities was 3.39% for the nine months ended September 30, 2006, an increase of 78 basis points compared to 2.61% for the nine months ended September 30, 2005.
Our net interest margin (net interest income (annualized) divided by average interest-earning assets) increased to 4.40% for the three months ended September 30, 2006 compared to 3.55% for the three months ended September 30, 2005. Our net interest margin was 4.11% for the nine months ended September 30, 2006 compared to 3.52% for the nine months ended September 30, 2005. The increase in our net interest margin for the three and nine month periods ended September 30, 2006 was primarily the result of increases in the average yield earned and average balance of loans receivable. The average balance of our total interest-earning assets was $3.1 billion for the three months ended September 30, 2006, an increase of $94.7 million, or 3.1%, compared to $3.0 billion for the three months ended September 30, 2005. The average balance of our total interest-earning assets was $3.1 billion for the nine months ended September 30, 2006, an increase of $165.7 million, or 5.7%, compared to $2.9 billion for the nine months ended September 30, 2005. We anticipate that average interest rate spread and net interest margin compression may occur during the remainder of 2006 due to increased deposit interest costs and refinancing of our FHLBank advances and other borrowings resulting from a rising interest rate environment.
Excluding the receipt of the $2.7 million loan prepayment fee, our average interest rate spread would have been 3.69% and 3.67%, respectively, for the three and nine months ended September 30, 2006. Our net interest margin would have been 4.06% and 4.00%, respectively, for the three and nine months ended September 30, 2006 after excluding the loan prepayment fee.
37
Average Balances, Net Interest Income, Yields Earned and Cost of Funds. The following tables show for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, net interest margin and average interest rate spread. All average balances are based on daily balances.
| Three Months Ended September 30, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 |
2005 | |||||||||||||||||||
| (Dollars in thousands) |
Average Balance |
Interest |
Average Yield/Rate |
Average Balance |
Interest |
Average Yield/Rate | ||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||
| Federal funds sold | $ | 196 | $ | 3 | 5.22 | % | $ | -- | $ | -- | -% | |||||||||
| Investment securities (1) | 173,854 | 2,270 | 5.22 | 170,991 | 1,766 | 4.13 | ||||||||||||||
| Mortgage-backed securities (1) | 15,216 | 154 | 4.05 | 25,790 | 235 | 3.64 | ||||||||||||||
| Loans receivable (2) | 2,915,168 | 57,562 | 7.90 | 2,813,000 | 44,208 | 6.29 | ||||||||||||||
| Total interest-earning assets | 3,104,434 | 59,989 | 7.73 | % | 3,009,781 | 46,209 | 6.14 | % | ||||||||||||
| Noninterest-earning assets | 205,375 | 193,769 | ||||||||||||||||||
| Total assets | $ | 3,309,809 | $ | 3,203,550 | ||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||
| Interest-bearing checking accounts | $ | 348,943 | $ | 1,024 | 1.17 | % | $ | 367,277 | $ | 680 | 0.74 | % | ||||||||
| Savings accounts | 50,167 | 62 | 0.49 | 65,710 | 96 | 0.58 | ||||||||||||||
| Money market accounts | 404,707 | 2,997 | 2.96 | 317,998 | 1,333 | 1.68 | ||||||||||||||
| Time deposits | 1,075,525 | 11,531 | 4.29 | 1,069,554 | 8,800 | 3.29 | ||||||||||||||
| Total interest-bearing deposits | 1,879,342 | 15,614 | 3.32 | 1,820,539 | 10,909 | 2.40 | ||||||||||||||
| FHLBank Topeka advances and | ||||||||||||||||||||
| other borrowings | 918,183 | 10,234 | 4.46 | 916,955 | 8,604 | 3.75 | ||||||||||||||
| Total interest-bearing liabilities | 2,797,525 | 25,848 | 3.70 | % | 2,737,494 | 19,513 | 2.85 | % | ||||||||||||
| Noninterest-bearing accounts | 118,654 | 110,838 | ||||||||||||||||||
| Other liabilities | 57,393 | 61,252 | ||||||||||||||||||
| Total liabilities | 2,973,572 | 2,909,584 | ||||||||||||||||||
| Stockholders’ equity | 336,237 | 293,966 | ||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 3,309,809 | $ | 3,203,550 | ||||||||||||||||
| Net interest-earning assets | $ | 306,909 | $ | 272,287 | ||||||||||||||||
| Net interest income; average | ||||||||||||||||||||
| interest rate spread | $ | 34,141 | 4.03 | % | $ | 26,696 | 3.29 | % | ||||||||||||
| Net interest margin (3) | 4.40 | % | 3.55 | % | ||||||||||||||||
| Average interest-earning assets to average | ||||||||||||||||||||
| interest-bearing liabilities | 110.97 | % | 109.95 | % | ||||||||||||||||
|
(1)
Includes securities available for sale and held to maturity. Investment securities also
include FHLBank Topeka stock. (2) Includes nonperforming loans during the respective periods. Calculated net of unamortized premiums, discounts and deferred fees, undisbursed portion of construction and land development loans in process and allowance for loan losses. (3) Equals net interest income (annualized) divided by average interest-earning assets. |
38
| Nine Months Ended September 30, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 |
2005 | |||||||||||||||||||
| (Dollars in thousands) |
Average Balance |
Interest |
Average Yield/Rate |
Average Balance |
Interest |
Average Yield/Rate | ||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||
| Federal funds sold | $ | 2,425 | $ | 79 | 4.34 | % | $ | -- | $ | -- | -% | |||||||||
| Investment securities (1) | 165,612 | 6,083 | 4.90 | 175,096 | 5,303 | 4.04 | ||||||||||||||
| Mortgage-backed securities (1) | 17,139 | 518 | 4.03 | 30,114 | 828 | 3.67 | ||||||||||||||
| Loans receivable (2) | 2,883,940 | 158,333 | 7.32 | 2,698,221 | 122,303 | 6.04 | ||||||||||||||
| Total interest-earning assets | 3,069,116 | 165,013 | 7.17 | % | 2,903,431 | 128,434 | 5.90 | % | ||||||||||||
| Noninterest-earning assets | 203,920 | 194,639 | ||||||||||||||||||
| Total assets | $ | 3,273,036 | $ | 3,098,070 | ||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||
| Interest-bearing checking accounts | $ | 367,387 | $ | 3,151 | 1.14 | % | $ | 385,612 | $ | 1,992 | 0.69 | % | ||||||||
| Savings accounts | 53,395 | 206 | 0.51 | 71,849 | 323 | 0.60 | ||||||||||||||
| Money market accounts | 395,792 | 8,194 | 2.76 | 314,424 | 3,510 | 1.49 | ||||||||||||||
| Time deposits | 1,075,444 | 31,472 | 3.90 | 1,049,236 | 23,915 | 3.04 | ||||||||||||||
| Total interest-bearing deposits | 1,892,018 | 43,023 | 3.03 | 1,821,121 | 29,740 | 2.18 | ||||||||||||||
| FHLBank Topeka advances and | ||||||||||||||||||||
| other borrowings | 877,945 | 27,309 | 4.15 | 816,754 | 21,961 | 3.59 | ||||||||||||||
| Total interest-bearing liabilities | 2,769,963 | 70,332 | 3.39 | % | 2,637,875 | 51,701 | 2.61 | % | ||||||||||||
| Noninterest-bearing accounts | 118,116 | 111,491 | ||||||||||||||||||
| Other liabilities | 59,974 | 62,099 | ||||||||||||||||||
| Total liabilities | 2,948,053 | 2,811,465 | ||||||||||||||||||
| Stockholders’ equity | 324,983 | 286,605 | ||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 3,273,036 | $ | 3,098,070 | ||||||||||||||||
| Net interest-earning assets | $ | 299,153 | $ | 265,556 | ||||||||||||||||
| Net interest income; average | ||||||||||||||||||||
| interest rate spread | $ | 94,681 | 3.78 | % | $ | 76,733 | 3.29 | % | ||||||||||||
| Net interest margin (3) | 4.11 | % | 3.52 | % | ||||||||||||||||
| Average interest-earning assets to average | ||||||||||||||||||||
| interest-bearing liabilities | 110.80 | % | 110.07 | % | ||||||||||||||||
|
(1)
Includes securities available for sale and held to maturity. Investment securities also
include FHLBank Topeka stock. (2) Includes nonperforming loans during the respective periods. Calculated net of unamortized premiums, discounts and deferred fees, undisbursed portion of construction and land development loans in process and allowance for loan losses. (3) Equals net interest income (annualized) divided by average interest-earning assets. |
39
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in the volume of interest-related assets and liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in rate (change in rate multiplied by prior year volume), and (2) changes in volume (change in volume multiplied by prior year rate). The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
| Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 |
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to |
Increase (Decrease) Due to |
|||||||||||||||||||
| (Dollars in thousands) |
Rate |
Volume |
Total Increase (Decrease) |
Rate |
Volume |
Total Increase (Decrease) | ||||||||||||||
| Interest income: | ||||||||||||||||||||
| Federal funds sold | $ | -- | $ | 3 | $ | 3 | $ | -- | $ | 79 | $ | 79 | ||||||||
| Investment securities | 474 | 30 | 504 | 1,436 | (656 | ) | 780 | |||||||||||||
| Mortgage-backed securities | 24 | (105 | ) | (81 | ) | 178 | (488 | ) | (310 | ) | ||||||||||
| Loans receivable (1) | 11,694 | 1,660 | 13,354 | 27,197 | 8,833 | 36,030 | ||||||||||||||
| Total interest income | 12,192 | 1,588 | 13,780 | 28,811 | 7,768 | 36,579 | ||||||||||||||
| Interest expense: | ||||||||||||||||||||
| Interest-bearing | ||||||||||||||||||||
| checking accounts | 379 | (35 | ) | 344 | 1,394 | (235 | ) | 1,159 | ||||||||||||
| Savings accounts | (13 | ) | (21 | ) | (34 | ) | (43 | ) | (74 | ) | (117 | ) | ||||||||
| Money market accounts | 1,226 | 438 | 1,664 | 3,593 | 1,091 | 4,684 | ||||||||||||||
| Time deposits | 2,682 | 49 | 2,731 | 6,944 | 613 | 7,557 | ||||||||||||||
| Total interest expense | ||||||||||||||||||||
| on deposits | 4,274 | 431 | 4,705 | 11,888 | 1,395 | 13,283 | ||||||||||||||
| FHLBank Topeka advances and | ||||||||||||||||||||
| other borrowings | 1,618 | 12 | 1,630 | 3,613 | 1,735 | 5,348 | ||||||||||||||
| Total interest expense | 5,892 | 443 | 6,335 | 15,501 | 3,130 | 18,631 | ||||||||||||||
| Net change in net interest income | $ | 6,300 | $ | 1,145 | $ | 7,445 | $ | 13,310 | $ | 4,638 | $ | 17,948 | ||||||||
|
(1)
Calculated net of unamortized premiums, discounts and deferred fees, undisbursed portion
of construction and land development loans in process and allowance for loan losses. |
Interest Income. Our total interest income for the three months ended September 30, 2006 was $60.0 million, an increase of $13.8 million, or 29.8%, compared to $46.2 million for the three months ended September 30, 2005. Interest income on loans receivable totaled $57.6 million for the three months ended September 30, 2006, an increase of $13.4 million, or 30.2%, compared to $44.2 million for the three months ended September 30, 2005. The average balance of loans receivable increased $102.2 million, or 3.6%, to $2.9 billion for the three months ended September 30, 2006 compared to $2.8 billion for the three months ended September 30, 2005. The average yield earned on loans receivable increased to 7.90% for the three months ended September 30, 2006 compared to 6.29% for the three months ended September 30, 2005.
40
For the nine months ended September 30, 2006 our total interest income was $165.0 million, an increase of $36.6 million, or 28.5%, compared to $128.4 million for the nine months ended September 30, 2005. Interest income on loans receivable totaled $158.3 million for the nine months ended September 30, 2006, an increase of $36.0 million, or 29.5%, compared to $122.3 million for the nine months ended September 30, 2005. The average balance of loans receivable totaled $2.9 billion for the nine months ended September 30, 2006, an increase of $185.7 million, or 6.9%, compared to $2.7 billion for the nine months ended September 30, 2005. The average yield earned on the loan portfolio was 7.32% and 6.04% for the nine months ended September 30, 2006 and 2005, respectively.
The increase in total interest income for the three and nine month periods ended September 30, 2006 was primarily attributable to an increase in interest income on loans receivable. The increase in interest income on loans receivable was primarily attributable to an increase in the average yield earned. The increase in the average yield earned and average balance of loans receivable was primarily the result of our lending strategy to focus on and sustain our holdings of loans with relatively higher yields, adjustable interest rates and/or shorter terms to maturity.
Interest Expense. Our total interest expense for the three months ended September 30, 2006 was $25.8 million, an increase of $6.3 million, or 32.5%, compared to $19.5 million for the three months ended September 30, 2005. Interest expense on deposits totaled $15.6 million for the three months ended September 30, 2006, an increase of $4.7 million, or 43.1%, compared to $10.9 million for the three months ended September 30, 2005. Interest expense on FHLBank advances and other borrowings increased $1.6 million, or 18.9%, to $10.2 million for the three months ended September 30, 2006 compared to $8.6 million for the three months ended September 30, 2005. The average rate paid on interest-bearing deposits was 3.32% and 2.40% for the three months ended September 30, 2006 and 2005, respectively. The average rate paid on FHLBank advances and other borrowings increased to 4.46% for the three months ended September 30, 2006 compared to 3.75% for the three months ended September 30, 2005. Additionally, the average balance of our interest-bearing liabilities totaled $2.8 billion for the three months ended September 30, 2006, an increase of $60.0 million, or 2.2%, compared to $2.7 billion for the three months ended September 30, 2005. The average balance of our interest-bearing deposits increased $58.8 million, or 3.2%, to $1.9 billion for the three months ended September 30, 2006 compared to $1.8 billion for the three months ended September 30, 2005. The average balance of our FHLBank advances and other borrowings totaled $918.2 million for the three months ended September 30, 2006, an increase of $1.2 million, or 0.1%, compared to $917.0 million for the three months ended September 30, 2005.
Our total interest expense for the nine months ended September 30, 2006 was $70.3 million, an increase of $18.6 million, or 36.0%, compared to $51.7 million for the nine months ended September 30, 2005. Interest expense on deposits totaled $43.0 million for the nine months ended September 30, 2006, an increase of $13.3 million, or 44.7%, compared to $29.7 million for the nine months ended September 30, 2005. Interest expense on FHLBank advances and other borrowings increased $5.3 million, or 24.4%, to $27.3 million for the nine months ended September 30, 2006 compared to $22.0 million for the nine months ended September 30, 2005. The average rate paid on interest-bearing deposits was 3.03% and 2.18% for the nine months ended September 30, 2006 and 2005, respectively. The average rate paid on FHLBank advances and other borrowings increased to 4.15% for the nine months ended September 30, 2006 compared to 3.59% for the nine months ended September 30, 2005. Additionally, the average balance of our interest-bearing liabilities totaled $2.8 billion for the nine months ended September 30, 2006, an increase of $132.1 million, or 5.0%, compared to $2.6 billion for the nine months ended September 30, 2005. The average balance of our interest-bearing deposits increased $70.9 million, or 3.9%, to $1.9 billion for the nine months ended September 30, 2006 compared to $1.8 billion for the nine months ended September 30, 2005. The average balance of our FHLBank advances and other borrowings totaled $877.9 million for the nine months ended September 30, 2006, an increase of $61.2 million, or 7.5%, compared to $816.8 million for the nine months ended September 30, 2005.
41
The increase in interest expense was attributable to an increase in the average rate paid on interest-bearing liabilities. This increase was primarily the result of a series of interest rate increases set by the Federal Reserve Board throughout 2005 and 2006 that has affected the rate we pay on interest bearing deposits and borrowings.
Provision for Loan Losses. We establish provisions for loan losses 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 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 (See Note 2 to the Consolidated Financial Statements, “Critical Accounting Policies – Allowance for Loan Losses”).
We made a provision for loan losses of $1.1 million for the three months ended September 30, 2006 compared to $1.7 million for the three months ended September 30, 2005, a decrease of $543,000, or 32.1%. The decrease in our provision for loan losses during the three months ended September 30, 2006 compared to the three months ended September 30, 2005 was primarily attributable to a decline in the outstanding balance of our residential construction loan portfolio. For the nine months ended September 30, 2006 our provision for loan losses totaled $4.3 million, a decrease of $112,000, or 2.5%, compared to $4.4 million for the nine months ended September 30, 2005. At September 30, 2006 our nonperforming loans totaled $19.9 million, or 0.67% of net loans, compared to $14.4 million, or 0.51% of net loans, at December 31, 2005. The increase in nonperforming loans and assets related primarily to increases of $8.2 million in nonperforming residential construction loans, $2.5 million in real estate owned and $2.1 million in nonperforming business loans partially offset by a $5.2 million decline in nonperforming multi-family residential loans. Our focus on loans with relatively higher yields, adjustable interest rates and/or shorter terms to maturity also subjects us to a potentially higher degree of credit risk. Our loan delinquency rate (30 or more days delinquent) at September 30, 2006 as a percentage of total loans was 1.72% compared to 1.09% at December 31, 2005. We anticipate that the level of loan delinquencies may continue to increase for the foreseeable future. During the three months ended September 30, 2006 and 2005, we charged-off, net of recoveries, $948,000 and $591,000, respectively. For the nine months ended September 30, 2006 and 2005, we charged-off, net of recoveries, $2.8 million and $1.8 million, respectively. Charge-offs during the nine months ended September 30, 2006 consisted primarily of one commercial real estate and land loan and 10 business loans combined with consumer-related loans. At September 30, 2006 and December 31, 2005, our allowance for loan losses amounted to 1.08% and 1.09%, respectively, of net loans.
42
Noninterest Income. Noninterest income for the three months ended September 30, 2006 was $6.9 million, an increase of $325,000, or 4.9%, compared to $6.6 million for the three months ended September 30, 2005.
| Three Months Ended September 30, |
Increase | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
(Decrease) |
% Change | ||||||||||
| Deposit account fees and service charges | $ | 3,933 | $ | 3,763 | $ | 170 | 4.52 | % | ||||||
| Debit card fees | 702 | 543 | 159 | 29.28 | ||||||||||
| Lending fees and service charges | 796 | 794 | 2 | 0.25 | ||||||||||
| Mortgage servicing rights valuation adjustments | -- | 74 | (74 | ) | (100.00 | ) | ||||||||
| Commissions and management fee income | 856 | 660 | 196 | 29.70 | ||||||||||
| Income (loss) from real estate operations, net | (55 | ) | 14 | (69 | ) | (492.86 | ) | |||||||
| Net gain (loss) on sales of: | ||||||||||||||
| Investment securities | -- | 1 | (1 | ) | (100.00 | ) | ||||||||
| Loans held for sale | 396 | 552 | (156 | ) | (28.26 | ) | ||||||||
| Real estate owned | (2 | ) | (1 | ) | (1 | ) | 100.00 | |||||||
| Other operating income | 303 | 204 | 99 | 48.53 | ||||||||||
| Total noninterest income | $ | 6,929 | $ | 6,604 | $ | 325 | 4.92 | % | ||||||
Noninterest income for the nine months ended September 30, 2006 was $20.5 million, an increase of $1.6 million, or 8.5%, compared to $18.9 million for the nine months ended September 30, 2005.
| Nine Months Ended September 30, |
Increase | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
(Decrease) |
% Change | ||||||||||
| Deposit account fees and service charges | $ | 11,082 | $ | 10,077 | $ | 1,005 | 9.97 | % | ||||||
| Debit card fees | 2,003 | 1,531 | 472 | 30.83 | ||||||||||
| Lending fees and service charges | 2,480 | 2,371 | 109 | 4.60 | ||||||||||
| Mortgage servicing rights valuation adjustments | -- | 71 | (71 | ) | (100.00 | ) | ||||||||
| Commissions and management fee income | 2,706 | 2,787 | (81 | ) | (2.91 | ) | ||||||||
| Income (loss) from real estate operations, net | (120 | ) | 6 | (126 | ) | (2,100.00 | ) | |||||||
| Net gain (loss) on sales of: | ||||||||||||||
| Investment securities | 21 | 14 | 7 | 50.00 | ||||||||||
| Loans held for sale | 1,566 | 1,525 | 41 | 2.69 | ||||||||||
| Real estate owned | (66 | ) | 49 | (115 | ) | (234.69 | ) | |||||||
| Other operating income | 858 | 486 | 372 | 76.54 | ||||||||||
| Total noninterest income | $ | 20,530 | $ | 18,917 | $ | 1,613 | 8.53 | % | ||||||
43
Growth in noninterest income during the three and nine months ended September 30, 2006 compared to the three and nine months ended September 30, 2005 was primarily attributable to the increase in deposit account and debit card fees. The increase in deposit account and debit card fees was largely due to an increase in the number of transaction accounts. There were no other significant changes within noninterest income during the three and nine months ended September 30, 2006 compared to the three and nine months ended September 30, 2005.
Noninterest Expense. Our noninterest expense increased by $3.2 million, or 17.6%, to $21.1 million for the three months ended September 30, 2006 compared to $18.0 million for the three months ended September 30, 2005.
| Three Months Ended September 30, |
Increase | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
(Decrease) |
% Change | ||||||||||
| Employee compensation | $ | 8,170 | $ | 7,150 | $ | 1,020 | 14.27 | % | ||||||
| Employee benefits | 1,395 | 1,067 | 328 | 30.74 | ||||||||||
| Payroll taxes | 583 | 508 | 75 | 14.76 | ||||||||||
| Management Recognition and Retention Plan | 726 | 718 | 8 | 1.11 | ||||||||||
| Employee Stock Ownership Plan | 1,232 | 1,014 | 218 | 21.50 | ||||||||||
| 2003 Stock Option Plan | 420 | -- | 420 | 100.00 | ||||||||||
| Occupancy, net | 2,311 | 2,186 | 125 | 5.72 | ||||||||||
| Data processing | 547 | 517 | 30 | 5.80 | ||||||||||
| Advertising | 1,177 | 944 | 233 | 24.68 | ||||||||||
| Core deposit intangible asset amortization | 442 | 459 | (17 | ) | (3.70 | ) | ||||||||
| Professional services | 272 | 511 | (239 | ) | (46.77 | ) | ||||||||
| Other | 3,836 | 2,877 | 959 | 33.33 | ||||||||||
| Total noninterest expense | $ | 21,111 | $ | 17,951 | $ | 3,160 | 17.60 | % | ||||||
Our noninterest expense increased by $7.8 million, or 14.5%, to $61.4 million for the nine months ended September 30, 2006 compared to $53.7 million for the nine months ended September 30, 2005.
| Nine Months Ended September 30, |
Increase | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
2006 |
2005 |
(Decrease) |
% Change | ||||||||||
| Employee compensation | $ | 23,304 | $ | 20,943 | $ | 2,361 | 11.27 | % | ||||||
| Employee benefits | 4,036 | 3,203 | 833 | 26.01 | ||||||||||
| Payroll taxes | 2,079 | 1,750 | 329 | 18.80 | ||||||||||
| Management Recognition and Retention Plan | 2,178 | 2,155 | 23 | 1.07 | ||||||||||
| Employee Stock Ownership Plan | 3,611 | 2,810 | 801 | 28.51 | ||||||||||
| 2003 Stock Option Plan | 1,261 | -- | 1,261 | 100.00 | ||||||||||
| Occupancy, net | 6,685 | 6,312 | 373 | 5.91 | ||||||||||
| Data processing | 1,648 | 1,510 | 138 | 9.14 | ||||||||||
| Advertising | 3,638 | 3,152 | 486 | 15.42 | ||||||||||
| Core deposit intangible asset amortization | 1,329 | 1,394 | (65 | ) | (4.66 | ) | ||||||||
| Professional services | 608 | 1,279 | (671 | ) | (52.46 | ) | ||||||||
| Other | 11,071 | 9,179 | 1,892 | 20.61 | ||||||||||
| Total noninterest expense | $ | 61,448 | $ | 53,687 | $ | 7,761 | 14.46 | % | ||||||
44
The increase in noninterest expense during the three and nine months periods ended September 30, 2006 compared to the three and nine months ended September 30, 2005 was primarily attributable to increases in employee compensation, employee benefits and payroll taxes. The increase in employee compensation, employee benefits and payroll taxes resulted from continued personnel growth and annual salary increases as well as charges related to the expensing of employee stock options. At September 30, 2006 we had 832 full-time equivalent employees compared to 755 full-time equivalent employees at September 30, 2005. In accordance with SFAS No. 123(R), Share-Based Payment, we began expensing stock options on January 1, 2006 using the modified-prospective application method. Included in other noninterest expense for the three and nine months ended September 30, 2006 is $596,000 related to the preparation and trial of the damage portion of the goodwill claims we have pursued against the United States as disclosed in our December 31, 2005 Annual Report on Form 10-K. The increase in noninterest expense for the three and nine months ended September 30, 2006 was partially offset by a reduction in professional service fees related to the integration of the UNFC acquisition and the implementation of Sarbanes-Oxley compliance in 2005.
Income Tax Expense. Our income tax expense increased by $2.2 million, or 43.2%, to $7.3 million for the three months ended September 30, 2006 compared to $5.1 million for the three months ended September 30, 2005. For the nine months ended September 30, 2006, our income tax expense totaled $19.0 million, an increase of $4.8 million, or 34.0%, compared to $14.2 million for the nine months ended September 30, 2005. The increase in income tax expense for the three and nine months ended September 30, 2006 compared to the same periods in 2005 was primarily due to an increase in net income. The effective income tax rate for the three months ended September 30, 2006 was 38.8% compared to 37.3% for the three months ended September 30, 2005. Our effective income tax rate for the nine months ended September 30, 2006 was 38.5% compared to 37.8% for the nine months ended September 30, 2005.
45
Our primary sources of funds are deposits; amortization of loans; loan prepayments and maturity of loans; FHLBank advances; repayment, maturity or sale of investment and mortgage-backed securities; 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. Additionally, we utilize other borrowings and brokered time deposits as additional funding sources.
Deposits, particularly core deposits, provide a more preferable source of funding than FHLBank advances and other borrowings. However, to the extent that competitive or market factors do not allow us to meet our funding needs with deposits alone, FHLBank advances and other borrowings provide a readily available alternative source of liquidity. Deposits decreased $34.3 million, or 1.7%, to $2.0 billion at September 30, 2006 compared to December 31, 2005. At September 30, 2006, we had time deposits maturing within the next 12 months amounting to $914.0 million. Based upon historical experience, we anticipate that a significant portion of the maturing time deposits will be renewed with us.
In addition to cash flows generated by loan and securities payments and prepayments, we have additional borrowing capacity to fund our asset growth. We continue to utilize borrowings as a cost efficient addition to deposits as a source of funds. The average balance of our FHLBank advances and other borrowings was $877.9 million for the nine months ended September 30, 2006 compared to $834.6 million for the year ended December 31, 2005 and $816.8 million for the nine months ended September 30, 2005. To date, substantially all of our borrowings have consisted of FHLBank advances. Pursuant to blanket collateral agreements with the FHLBank, we have pledged qualifying residential, multi-family residential and commercial real estate mortgages, residential construction, commercial construction and agricultural real estate loans as collateral for our FHLBank advances.
46
We have sufficient liquidity to fund existing and future loan commitments, to fund maturing time deposits and demand deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. At September 30, 2006, we had the following contractual obligations (excluding bank deposits and interest) and lending commitments:
| Due In | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
Total at September 30, 2006 |
1 Year |
1-3 Years |
3-5 Years |
After 5 Years | ||||||||||||
| Contractual obligations: | |||||||||||||||||
| FHLBank Topeka advances | |||||||||||||||||
| and other borrowings | $ | 948,217 | $ | 85,529 | $ | 80,400 | $ | 40,000 | $ | 742,288 | |||||||
| Recourse obligations on assets | 16,889 | 16,889 | -- | -- | -- | ||||||||||||
| Annual rental commitments under non- | |||||||||||||||||
| cancellable operating leases | 4,272 | 984 | 1,491 | 590 | 1,207 | ||||||||||||
| Total contractual obligations | 969,378 | 103,402 | 81,891 | 40,590 | 743,495 | ||||||||||||
| Lending commitments: | |||||||||||||||||
| Commitments to originate loans | $ | 185,262 | $ | 185,262 | $ | -- | $ | -- | $ | -- | |||||||
| Commitments to sell loans | (42,271 | ) | (42,271 | ) | -- | -- | -- | ||||||||||
| Commitments to purchase loans | 38,391 | 38,391 | -- | -- | -- | ||||||||||||
| Undisbursed portion of construction and | |||||||||||||||||
| land development loans in process | 638,319 | 364,282 | 274,037 | -- | -- | ||||||||||||
| Standby letters of credit | 1,960 | 1,960 | -- | -- | -- | ||||||||||||
| Unused lines of credit: | |||||||||||||||||
| Warehouse mortgage lines of credit | 358,202 | 358,202 | -- | -- | -- | ||||||||||||
| Business loans | 224,237 | 224,237 | -- | -- | -- | ||||||||||||
| Consumer loans | 134,465 | 134,465 | -- | -- | -- | ||||||||||||
| Total lending commitments and | |||||||||||||||||
| unused lines of credit | 1,538,565 | 1,264,528 | 274,037 | -- | -- | ||||||||||||
| Total contractual obligations, lending | |||||||||||||||||
| commitments and unused lines of credit | $ | 2,507,943 | $ | 1,367,930 | $ | 355,928 | $ | 40,590 | $ | 743,495 | |||||||
We have not used, and have no intention to use, 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 September 30, 2006, the maximum total dollar amount of such recourse was approximately $16.9 million. Based on historical experience, at September 30, 2006, we had established a liability of $743,000 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, special purpose entities.
47
We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures that have been established by regulation to ensure capital adequacy require that we maintain minimum capital amounts and ratios (set forth in the following table). Our primary regulatory agency, the Office of Thrift Supervision (“OTS”), requires that we maintain minimum ratios of tangible capital (as defined in the regulations) of 1.5%, core capital (as defined) of 4.0% and total risk-based capital (as defined) of 8.0%. As of September 30, 2006, we exceed all capital requirements to which we are subject.
As of September 30, 2006 and December 31, 2005, the most recent notifications from the OTS categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that we believe have changed the Bank’s category. The actual capital amounts and ratios as of September 30, 2006 and December 31, 2005 are presented in the following table:
| Actual |
For Capital Adequacy Purposes |
To be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio | ||||||||||||||
| As of September 30, 2006: | ||||||||||||||||||||
| Total risk-based capital | ||||||||||||||||||||
| (to risk-weighted assets) | $ | 345,632 | 11.7 | % | $ | 236,797 | 8.0 | % | $ | 295,996 | 10.0 | % | ||||||||
| Tier 1 capital (to adjusted | ||||||||||||||||||||
| tangible assets) | 313,273 | 9.5 | 131,973 | 4.0 | 164,966 | 5.0 | ||||||||||||||
| Tangible capital (to | ||||||||||||||||||||
| tangible assets) | 313,273 | 9.5 | 49,490 | 1.5 | N/A | N/A | ||||||||||||||
| Tier 1 capital (to risk- | ||||||||||||||||||||
| weighted assets) | 313,273 | 10.6 | 118,398 | 4.0 | 177,598 | 6.0 | ||||||||||||||
| As of December 31, 2005: | ||||||||||||||||||||
| Total risk-based capital | ||||||||||||||||||||
| (to risk-weighted assets) | $ | 302,822 | 11.0 | % | $ | 220,252 | 8.0 | % | $ | 275,315 | 10.0 | % | ||||||||
| Tier 1 capital (to adjusted | ||||||||||||||||||||
| tangible assets) | 271,952 | 8.6 | 126,695 | 4.0 | 158,369 | 5.0 | ||||||||||||||
| Tangible capital (to | ||||||||||||||||||||
| tangible assets) | 271,952 | 8.6 | 47,511 | 1.5 | N/A | N/A | ||||||||||||||
| Tier 1 capital (to risk- | ||||||||||||||||||||
| weighted assets) | 271,952 | 9.9 | 110,126 | 4.0 | 165,189 | 6.0 | ||||||||||||||
48
| At or For the Three Months Ended September 30, |
At or For the Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands except per share data) |
2006 |
2005 |
2006 |
2005 | ||||||||||
| Selected Statement of Income Data: | ||||||||||||||
| Total interest income | $ | 59,989 | $ | 46,209 | $ | 165,013 | $ | 128,434 | ||||||
| Total interest expense | 25,848 | 19,513 | 70,332 | 51,701 | ||||||||||
| Net interest income | 34,141 | 26,696 | 94,681 | 76,733 | ||||||||||
| Provision for loan losses | 1,148 | 1,691 | 4,290 | 4,402 | ||||||||||
| Net interest income after provision | ||||||||||||||
| for loan losses | 32,993 | 25,005 | 90,391 | 72,331 | ||||||||||
| Total noninterest income | 6,929 | 6,604 | 20,530 | 18,917 | ||||||||||
| Total noninterest expense | 21,111 | 17,951 | 61,448 | 53,687 | ||||||||||
| Income before income taxes | 18,811 | 13,658 | 49,473 | 37,561 | ||||||||||
| Income tax expense | 7,294 | 5,095 | 19,047 | 14,212 | ||||||||||
| Net income | $ | 11,517 | $ | 8,563 | $ | 30,426 | $ | 23,349 | ||||||
| Net income per common share, basic | $ | 0.70 | $ | 0.53 | $ | 1.85 | $ | 1.44 | ||||||
| Net income per common share, diluted | $ | 0.67 | $ | 0.51 | $ | 1.78 | $ | 1.40 | ||||||
| Dividends declared per common share | $ | 0.07 | $ | 0.06 | $ | 0.20 | $ | 0.17 | ||||||
| Selected Financial Condition Data: | ||||||||||||||
| Total assets | $ | 3,350,986 | $ | 3,246,300 | $ | 3,350,986 | $ | 3,246,300 | ||||||
| Cash and cash equivalents | 61,350 | 62,313 | 61,350 | 62,313 | ||||||||||
| Investment securities | 114,728 | 111,420 | 114,728 | 111,420 | ||||||||||
| Mortgage-backed securities | 14,217 | 23,003 | 14,217 | 23,003 | ||||||||||
| Net loans after allowance for loan losses | 2,951,268 | 2,856,440 | 2,951,268 | 2,856,440 | ||||||||||
| Deposits | 2,004,052 | 1,933,456 | 2,004,052 | 1,933,456 | ||||||||||
| FHLBank Topeka advances and | ||||||||||||||
| other borrowings | 948,217 | 956,177 | 948,217 | 956,177 | ||||||||||
| Stockholders’ equity | 345,149 | 298,557 | 345,149 | 298,557 | ||||||||||
| Selected Operating Ratios: | ||||||||||||||
| Average yield on interest-earning assets | 7.73 | % | 6.14 | % | 7.17 | % | 5.90 | % | ||||||
| Average rate on interest-bearing liabilities | 3.70 | % | 2.85 | % | 3.39 | % | 2.61 | % | ||||||
| Average interest rate spread (1) | 4.03 | % | 3.29 | % | 3.78 | % | 3.29 | % | ||||||
| Net interest margin (1) | 4.40 | % | 3.55 | % | 4.11 | % | 3.52 | % | ||||||
| Average interest-earning assets to | ||||||||||||||
| average interest-bearing liabilities | 110.97 | % | 109.95 | % | 110.80 | % | 110.07 | % | ||||||
| Net interest income after provision for | ||||||||||||||
| loan losses to noninterest expense | 156.28 | % | 139.30 | % | 147.10 | % | 134.73 | % | ||||||
| Total noninterest expense to average assets | 2.55 | % | 2.24 | % | 2.50 | % | 2.31 | % | ||||||
| Efficiency ratio (2) | 50.33 | % | 52.53 | % | 52.18 | % | 54.67 | % | ||||||
| Return on average assets | 1.39 | % | 1.07 | % | 1.24 | % | 1.00 | % | ||||||
| Return on average equity | 13.70 | % | 11.65 | % | 12.48 | % | 10.86 | % | ||||||
| Average equity to average assets | 10.16 | % | 9.18 | % | 9.93 | % | 9.25 | % | ||||||
| Return on tangible equity (3) | 15.98 | % | 13.98 | % | 14.66 | % | 13.12 | % | ||||||
|
(1)
Excluding the receipt of the $2.7 million loan prepayment fee, our average interest rate
spread would have been 3.69% and 3.67% for the three and nine months ended September 30, 2006. Our net interest margin would have been 4.06% and 4.00% for the three and nine months ended September 2006 after excluding the loan prepayment fee. (2) Efficiency ratio is calculated as total noninterest expense, less amortization expense of intangible assets, as a percentage of the sum of net interest income and noninterest income. (3) Return on tangible equity is calculated as annualized net income as a percentage of average stockholders' equity djusted for goodwill and other intangible assets. |
49
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 interest rates , see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management” and “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2005. There has been no material change in our market risk position since our prior disclosures.
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation 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 were effective as of the date of such evaluation to ensure that material information relating to us, including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this report was being prepared. There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
50
Except litigation relating to certain goodwill claims against the United States (“U.S.”) described below, there have been no substantive changes with respect to legal proceedings during the nine months ended September 30, 2006. Disclosures regarding legal proceedings are incorporated by reference to Part I, Item 3, “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2005.
On May 22, 2006, a nine-day trial commenced in the United States Court of Federal Claims (“Court”) to address our damage claim against the U.S. for breach of contract caused by the federal government’s enactment of the Financial Institution Reform, Recovery and Enforcement Act of 1989.
On October 31, 2006, the Court issued an opinion awarding $4.5 million to the Bank in connection with its damage claims against the U.S. This recent opinion by the Court is not final and both parties retain the right to appeal. Until the appellate process is completed or the judgment otherwise becomes final, there can be no assurance as to the amount or timing of the ultimate recovery.
There were no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.
The following table details the Company’s purchases of common stock during the three months ended September 30, 2006:
| Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs* |
Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| July 2006 | ||||||||||||||
| Beginning Date - July 1, 2006 | ||||||||||||||
| Ending Date - July 31, 2006 | -- | $ | -- | -- | 1,667,064 | |||||||||
| August 2006 | ||||||||||||||
| Beginning Date - August 1, 2006 | ||||||||||||||
| Ending Date - August 31, 2006 | 8,745 | 34.30 | -- | 1,658,319 | ||||||||||
| September 2006 | ||||||||||||||
| Beginning Date - September 1, 2006 | ||||||||||||||
| Ending Date - September 30, 2006 | -- | -- | -- | 1,658,319 | ||||||||||
| Total shares purchased during the three | ||||||||||||||
| months ended September 30,2006 | 8,745 | $ | 34.30 | |||||||||||
51
* Information related to our publicly announced plan authorizing purchases of common stock during the three months ended September 30, 2006, is as follows:
| Date Purchase Plan Announced |
Number of Shares Approved for Purchase |
Expiration Date of Purchase Plan |
|---|---|---|
| July 27, 2004 | 1,828,581 | No stated expiration date |
There are no matters required to be reported under this item.
There are no matters required to be reported under this item.
There are no matters required to be reported under this item.
The exhibits filed or incorporated as part of this Form 10-Q are specified in the Exhibit Index.
52
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TIERONE CORPORATION | |
Date: November 2, 2006 |
By: /s/ Gilbert G. Lundstrom |
| Gilbert G. Lundstrom | |
| Chairman of the Board and Chief Executive Officer | |
Date: November 2, 2006 |
By: /s/ Eugene B. Witkowicz |
| Eugene B. Witkowicz | |
| Executive Vice President and | |
| Chief Financial Officer |
53
| No. | Exhibits |
| 10.1 | Amended and Restated Employment Agreement between TierOne Bank and Gilbert G. Lundstrom (Incorporated by reference from Exhibit 10.1 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.2 | Amended and Restated Employment Agreement between TierOne Bank and James A. Laphen (Incorporated by reference from Exhibit 10.2 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.3 | Amended and Restated Employment Agreement between TierOne Corporation and Gilbert G. Lundstrom (Incorporated by reference from Exhibit 10.3 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.4 | Amended and Restated Employment Agreement between TierOne Corporation and James A. Laphen (Incorporated by reference from Exhibit 10.4 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.5 | Form of Amended and Restated Three-Year Change in Control Agreement among TierOne Bank, TierOne Corporation and certain executive officers (Incorporated by reference from Exhibit 10.5 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.6 | Form of Amended and Restated Two-Year Change in Control Agreement among TierOne Bank, TierOne Corporation and certain executive officers and non-executive officers (Incorporated by reference from Exhibit 10.6 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.7 | TierOne Bank Amended and Restated Employee Severance Plan (Incorporated by reference from Exhibit 10.7 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.8 | Amended and Restated 1993 Supplemental Retirement Plan Agreement between TierOne Bank and Gilbert G. Lundstrom (Incorporated by reference from Exhibit 10.8 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.9 | Amended and Restated Supplemental Executive Retirement Plan for the TierOne Bank Savings Plan (Incorporated by reference from Exhibit 10.9 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.10 | Amended and Restated Supplemental Executive Retirement Plan for the TierOne Corporation Employee Stock Ownership Plan (Incorporated by reference from Exhibit 10.10 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.11 | TierOne Bank Amended and Restated Deferred Compensation Plan (Incorporated by reference from Exhibit 10.11 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.12 | TierOne Bank Fourth Amended and Restated Consultation Plan for Directors (Incorporated by reference from Exhibit 10.12 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.13 | TierOne Corporation Amended and Restated 2003 Stock Option Plan (Incorporated by reference from Exhibit 10.13 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.14 | TierOne Corporation Amended and Restated 2003 Recognition and Retention Plan and Trust Agreement (Incorporated by reference from Exhibit 10.14 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 10.15 | Form of Trust Agreement for Deferred Compensation and Supplemental Retirement Plans of TierOne Corporation and TierOne Bank (Incorporated by reference from Exhibit 10.15 of TierOne Corporation’s Form 8-K filed on August 2, 2006) |
| 31.1 | Section 302 Certification of the Chief Executive Officer |
| 31.2 | Section 302 Certification of the Chief Financial Officer |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
54