TierOne 10-K 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
|(Exact name of registrant as specified in its charter)|
|(State or Other Jurisdiction of Incorporation||(I.R.S. Employer|
|or Organization)||Identification Number)|
Indicate whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES |X| NO | |
Indicate if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES | | NO |X|
Indicate 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
Indicate whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES | | NO |X|
The aggregate market value of the voting stock held by non-affiliates of the Registrant was $612,915,166 as of June 30, 2006. As of March 6, 2007, there were 18,057,813 issued and outstanding shares of the Registrants common stock.
Portions of the definitive Proxy Statement for the Registrants Annual Meeting of Shareholders to be held May 15, 2007 are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14.
|Unresolved Staff Comments||38|
|Submission of Matters to a Vote of Security Holders||39|
|Item 5.||Market for the Registrants Common Equity, Related Stockholder Matters|
|and Issuer Purchases of Equity Securities||40|
|Selected Financial Data||42|
|Managements Discussion and Analysis of Financial Condition and Results|
|Quantitative and Qualitative Disclosures About Market Risk||71|
|Financial Statements and Supplementary Data||72|
|Changes in and Disagreements With Accountants on Accounting and|
|Controls and Procedures||112|
|Item 10.||Directors, Executive Officers and Corporate Governance||115|
|Security Ownership of Certain Beneficial Owners and Management and|
|Related Stockholder Matters||115|
|Certain Relationships, Related Transactions and Director Independence||116|
|Principal Accountant Fees and Services||116|
|Item 15.||Exhibits and Financial Statement Schedules||117|
Statements contained in this Annual Report on Form 10-K and the accompanying 2006 Annual Report 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. In addition to the risk factors described in Item 1A. of this Annual Report on Form 10-K, 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 deposit flows, and in the demand for deposits, loans, investment products and other financial services in the markets we serve;|
|||Changes in the quality or composition of our loan portfolios;|
|||Changes in real estate values, which could impact the quality of the assets securing the loans in our portfolios;|
|||Borrower bankruptcies, claims and assessments;|
|||Unanticipated issues associated with the execution of our strategic plan, including issues associated with the growth of a more diversified loan portfolio;|
|||Our timely development of new lines of business and competitive products or services within our existing lines of business in a changing environment, and the acceptance of such products or services by our customers;|
|||Any interruption or breach of security resulting in failures or disruptions in customer account management, general ledger, deposit operations, lending or other systems;|
|||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 saving habits; and|
|||Other factors discussed in documents we may file 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 Annual Report on Form 10-K and the accompanying 2006 Annual Report, including these forward-looking statements, to reflect events or circumstances that occur after the date of the filing of this Annual Report on Form 10-K and the accompanying 2006 Annual Report.
As used in this report, unless the context otherwise requires, the terms we, us, or our refer to TierOne Corporation and its wholly owned subsidiary, TierOne Bank.
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. (d/b/a TierOne Financial), 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 assets of the Company, on an unconsolidated basis, primarily consist of 100% of the Banks common stock. The Company has no significant independent source of income and therefore depends on cash distributions from the Bank to meet its funding requirements.
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, 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, governmental policies and actions of regulatory authorities.
On August 27, 2004, we acquired all of the issued and outstanding capital stock of United Nebraska Financial Co. (UNFC), the holding company of United Nebraska Bank (UNB), headquartered in Grand Island, Nebraska. The purchase price of this acquisition was approximately $97.3 million. UNB had assets in excess of $500 million and 16 banking offices located in Nebraska. On November 1, 2004, we acquired all non-Indiana residential construction loan production offices from First Indiana Bank of Indianapolis, Indiana. The acquisition included the purchase of $134.4 million of outstanding residential construction loans against forward commitments of $264.5 million and four loan production offices located in Phoenix, Arizona; Orlando, Florida; and Charlotte and Raleigh, North Carolina. On June 2, 2006, we completed the purchase of Marine Banks only banking office in Omaha Nebraska. We acquired $8.1 million of deposits as a result of this transaction. On December 15, 2006, we sold our Plainville and Stockton, Kansas bank offices to Stockton National Bank of Stockton, Kansas. As a result of this sale, we transferred $21.7 million of deposits to the purchaser and recorded a gain on sale of $1.0 million.
We are a regional community bank offering a variety of financial products and services to meet the needs of the customers we serve. Our deposit gathering is concentrated in the communities surrounding our 69 banking offices located in Nebraska, seven counties in southwest Iowa and one county in northern Kansas (Primary Banking Market Area). We compete for customers by emphasizing convenience and service, and by offering a full range of traditional and non-traditional products and services. We offer 24-hour ATM banking at 68 of our banking offices and currently offer 33 ATM banking locations at supermarkets, convenience stores and shopping malls.
In addition to loans generated through our banking offices, our lending efforts have been expanded to include nine loan production offices located in Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina whose primary purpose is to originate commercial real estate and construction, land and land development and/or residential construction loans in their respective states.
We face significant competition, both in generating loans as well as in attracting deposits. Our market area is highly competitive and we face direct competition from a significant number of financial service providers, many with a statewide or regional presence and, in some cases, a national presence. Many of these financial service providers are significantly larger and have greater financial resources. Our competition for loans comes principally from commercial banks, savings banks and associations, credit unions, mortgage brokers, mortgage-banking companies and insurance companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and associations and credit unions. In addition, we face increasing competition for deposits from non-bank institutions such as brokerage firms and insurance companies in such instruments as short-term money market funds, corporate and government securities funds, equity securities, mutual funds and annuities.
We are a public company and are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (SEC). We maintain a website at www.tieronebank.com and make available, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to such documents as soon as reasonably practicable after the reports have been electronically filed or furnished to the SEC. In addition, we provide our Code of Conduct and Ethics, Audit Committee Charter, Compensation Committee Charter and Nominating and Corporate Governance Committee Charter on our website. We are not including the information contained on or available through our website as a part of, nor are we incorporating such information by reference, into this Annual Report on Form 10-K.
General. We originate loans to customers located in Nebraska, Iowa, Kansas, Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina (Primary Lending Market Area). Our Primary Lending Market Area is comprised of states in which we have banking or loan production offices. We also purchase loans and loan participation interests from financial institutions, loan correspondents and mortgage brokers located throughout the United States. At December 31, 2006 and 2005, approximately 20.8% and 22.2%, respectively, of our total loan portfolio consisted of loans secured by properties located outside of our Primary Lending Market Area. In recent years, we have become a regional community bank by shifting our focus to multi-family residential, commercial real estate, land and land development, construction, agricultural, business, warehouse mortgage lines of credit and consumer lending. These loans typically have relatively higher yields, adjustable interest rates and/or shorter terms to maturities. Such loans, however, generally involve a higher degree of risk than financing one-to-four family residential loans because collateral is more difficult to appraise, the collateral may be difficult to obtain or liquidate following an uncured default and it can be difficult to predict the borrowers ability to generate future cash flows.
Loan Approval Procedures and Authority. General lending policies and procedures are established by our Asset/Liability Committee which is composed of the following officers of the Bank: Chief Executive Officer, Chief Operating Officer, Director of Lending, Director of Administration, Director of Retail Banking, Chief Financial Officer, Controller and Senior Financial Analysis Manager. Our Board of Directors reviews and approves lending policies and procedures established by the Asset/Liability Committee and recommended to the Board of Directors. Under policies approved by the Board of Directors, various officers or combinations of officers have loan approval authority, the specific amounts and requirements being set forth for each loan type. Generally, for loan amounts in excess of $10.0 million, approval of our Board of Directors is required.
Loan Portfolio Composition. At December 31, 2006, our total loans receivable amounted to $3.7 billion. We have shifted the focus of our lending strategy to place an increased emphasis on multi-family residential, commercial real estate, land and land development, construction, agricultural, business, warehouse mortgage lines of credit and consumer lending. The types of loans that we may purchase and originate are subject to federal and state laws and regulations. The interest rates we charge on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by general and local economic conditions, monetary policies of the Federal Government, including the Board of Governors of the Federal Reserve System and legislative tax policies.
Residential Mortgage Lending. One-to-four family residential mortgage loan originations are generally obtained from our in-house loan representatives, from existing or past customers and from mortgage brokers. We also originate and/or purchase from correspondent lenders second mortgage loans in amounts up to 100% of the appraised value of the collateral with maturities of up to 30 years.
We currently originate fixed-rate, one-to-four family residential mortgage loans generally with terms of up to 30 years. We sell substantially all newly originated fixed-rate, one-to-four family residential loans into 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.
We originate or purchase adjustable-rate, one-to-four family residential mortgage loans with terms of up to 30 years and interest rates which generally adjust one to seven years from the outset of the loan and thereafter annually for the duration of the loan. The interest rates for such adjustable-rate loans are normally tied to indices such as the U.S. Treasury CMT or LIBOR, plus a margin. Our adjustable-rate loans generally provide for periodic caps (generally not more than 2.0%) on the increase or decrease in the interest rate at any adjustment date. The maximum amount the rate can increase or decrease from the initial rate during the life of the loan is 5.0% 6.0% over the start rate.
The origination or purchase of adjustable-rate, one-to-four family residential mortgage loans helps reduce our exposure to interest rate risk. However, adjustable-rate loans generally pose risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the risks associated with adjustable-rate loans but also limit the interest rate sensitivity of such loans.
Generally, we originate one-to-four family residential mortgage loans in amounts up to 80% of the lower of the appraised value or the selling price of the property and up to 100% if private mortgage insurance is obtained. Mortgage loans originated by us generally include due-on-sale provisions which provide us with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without our consent. We require fire, casualty, title and, in certain cases, flood insurance on properties securing mortgage loans made by us.
Multi-Family Residential, Commercial Real Estate and Land and Land Development Lending. We offer multi-family residential, commercial real estate and land and land development loans for permanent financing collateralized by real property. These loans are generally used for business purposes such as apartment buildings, office and retail facilities and land being held for commercial and residential development. The properties securing these loans are generally located in our Primary Lending Market Area. At December 31, 2006, 67.5%, 83.1% and 96.3% of our multi-family residential, commercial real estate and land and land development loans, respectively, were located within our Primary Lending Market Area. We have increased our involvement in these lending categories as part of our strategy to increase our investment in loans with relatively higher yields, adjustable interest rates and/or shorter terms to maturity. We increased our capacity to originate such loans during the past few years with the hiring of several experienced real estate lenders.
Our underwriting procedures generally provide that multi-family residential, commercial real estate and land and land development loans may be made in amounts up to 80% of the value of the property if it is located within our Primary Lending Market Area and 75% of the value if it is outside our Primary Lending Market Area. Loans exceeding prescribed loan-to-value ratios must be reviewed by our Board of Directors and supported by documentation of the relevant factors justifying the deviation from policy.
Loans secured by multi-family residential, commercial real estate and land and land development properties generally involve larger principal amounts and a greater degree of risk than one-to-four family residential mortgage loans. Payments on these loan types are often dependent on the successful operation or management of the properties. Repayment of such loans may be subject to adverse conditions in the real estate market or the economy and a concentration of loans in a geographic region may be subject to greater risk because of the potential for adverse economic conditions affecting that region. We seek to minimize these risks through our underwriting standards.
Construction Lending. We offer residential construction loans for either pre-sold houses (a purchase contract has been signed) or speculative houses (properties for which no buyer yet exists). We originate most of our residential construction loans within our Primary Lending Market Area typically through direct contact with home builders. At December 31, 2006, approximately 82.0% of our residential construction loans were located in our Primary Lending Market Area. At December 31, 2006, approximately 57.1% of our residential construction loans were for pre-sold houses. During the years ended December 31, 2006 and 2005, we purchased $161.5 million and $589.5 million, respectively, of residential construction loans.
We also originate commercial real estate construction loans as well as purchase participation interests in such loans. We provide commercial construction loans to real estate developers for the purpose of constructing a variety of commercial projects such as retail facilities, industrial buildings and warehouses. At December 31, 2006, 76.9% of our commercial construction loans were located in our Primary Lending Market Area.
Commercial construction lending involves a higher degree of risk than one-to-four family residential lending, therefore, we closely monitor our concentration in such loans. We also seek a broad diversification of project types, borrowers and geographic areas to reduce the level of risk associated with this lending type.
Our ability to originate both residential and commercial construction loans significantly increased during 2004, 2005 and 2006 with the acquisition or opening of loan production offices in Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. Additionally, we have, in recent years, hired several experienced real estate loan officers to increase our capabilities in both types of construction lending.
Risk of loss on construction loans is dependent largely upon the accuracy of the initial estimate of the propertys value when completed or developed compared to the projected cost (including interest) of construction and other assumptions, including the approximate time to build, sell or lease the properties. If the appraised collateral value proves to be inaccurate, we may be confronted with a project, when completed, having a value which is insufficient to assure full repayment.
Agricultural Loans. Agricultural loans are made predominantly to farmers and ranchers in Nebraska, Iowa and Kansas. At December 31, 2006, 97.9% of our agricultural loans were located in our Primary Lending Market Area. Agricultural operating loans are made to finance day-to-day operations, including crop and livestock production. Intermediate term loans are used to purchase breeding livestock and machinery. Real estate loans are used to purchase or refinance farm and ranchland.
Overall credit worthiness is determined by evaluation of the borrower, including management experience and skills, financial strength and the ability to service debt. Loans are generally repaid using cash flows from agricultural activities, including the sale of agricultural commodities, produced by the operation. Underwriting standards include maximum advance rates on collateral, minimum cash flow coverage and review of the historical net worth and cash flow trends of the operation.
Risk of loss is related to the effects of the external risk factors such as adverse weather conditions and poor commodity prices. The impact of external risk factors is significantly affected by the borrowers ability to mitigate the effect of risk on the borrowers operation. Commodity-based agricultural chattel assets are relatively easy to liquidate and there is also a stable demand for agricultural real estate. Our agricultural lenders are responsible for validating the existence, value and condition of the collateral. This monitoring may include periodic on-site inspections and the use of borrowing base reports.
Warehouse Mortgage Lines of Credit. We are actively involved in originating revolving lines of credit to mortgage brokers. These lines are drawn upon by mortgage brokers to fund the origination of one-to-four family residential mortgage loans. Prior to funding the advance, the mortgage broker must have an approved commitment for the purchase of the loan which reduces credit exposure associated with the line. The lines are repaid upon sale of the mortgage loan to a third party which usually occurs within 30 days of origination of the loan. In connection with extending the line of credit to the mortgage broker, we enter into agreements with the purchaser to which such mortgage broker intends to sell loans. Under such agreements, the loan purchaser agrees to hold the mortgage documents issued by the mortgage brokers on our behalf and for our benefit until such time that the purchaser remits to us the purchase price for such loans. As part of the structure of the lines of credit, the mortgage brokers are required to maintain commercial deposits with us, with the amount of such deposits dependent upon the amount of the line and other factors. The lines are structured with adjustable rates indexed to the Wall Street Journal prime rate. Maximum amounts permitted to be advanced by us under existing warehouse mortgage lines of credit range in amounts from $1.5 million to $40.0 million.
Business Lending. Business loans are made predominantly to small- and mid-sized businesses located within Nebraska, Iowa and Kansas. At December 31, 2006, 97.7% of our business loans were located in our Primary Lending Market Area. The business lending products we offer include lines of credit, receivable and inventory financing and equipment loans. We have established minimum underwriting standards in regard to business loans which set forth the criteria for sources of repayment, borrowers capacity to repay, specific financial and collateral margins and financial enhancements such as guarantees. Generally, the primary source of repayment is cash flow from the business and the financial strength of the borrower.
Business loans generally involve a greater degree of risk than real estate loans, primarily because collateral is more difficult to appraise, the collateral may be difficult to obtain or liquidate following default and it is difficult to foresee the borrowers ability to generate cash flows. These loans, however, typically offer relatively higher yields and have shorter expected terms to maturity. The availability of business loans enables potential depositors to establish full-service banking relationships with us.
Consumer and Other Lending. Consumer loans are generally originated directly through our network of banking offices. We generally offer home equity loans, home improvement loans and home equity lines of credit in amounts up to $100,000 with a term of 15 years or less and a loan-to-value ratio up to 100% of the appraised value of the collateral. A portion of our home improvement loans consist of participation interests we have purchased from a third party. Under the terms of our third party arrangement, if any loan becomes more than 120 days past due, we can require the seller to repurchase such loan at a price equal to our total investment in the loan, including any uncollected and accrued interest. We also offer automobile loans in amounts up to $50,000 with maximum 72 month and 60 month terms for new and used cars, respectively, and purchase price ratios of generally not more than 95% and 85% for new and used cars, respectively. Most of our automobile loans are obtained through a network of 80 new and used automobile dealers located primarily in Lincoln and Omaha, Nebraska. Although employees of the automobile dealership take the application, the loan is made pursuant to our underwriting standards and must be approved by one of our authorized loan officers. Our consumer loan portfolio also includes manufactured housing, recreational vehicle, boat, motorcycle and unsecured loans.
Unsecured loans and loans secured by rapidly depreciating assets, such as automobiles, entail greater risks than one-to-four family residential mortgage loans. In such cases, repossessed collateral, if any, for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Further, consumer loan collections on these loans are dependent on the borrowers continuing financial stability and, therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Finally, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.
Loan Portfolio Composition. The following table shows the composition of our loan portfolio by type of loanat the dates indicated:
|At December 31,|
|(Dollars in thousands)
|Real estate loans:|
|One-to-four family residential (1)||$||339,080||$||384,722||$||418,270||$||559,134||$||547,619|
|Second mortgage residential||120,510||160,208||255,222||258,121||25,590|
|Commercial real estate||396,620||402,504||444,269||353,177||331,478|
|Land and land development||494,887||289,916||152,845||95,975||66,598|
|Total real estate loans||2,841,466||2,756,082||2,363,364||1,765,514||1,350,580|
|Agriculture - operating||94,455||72,518||71,223||--||--|
|Warehouse mortgage lines of credit||112,645||95,174||132,928||78,759||236,492|
|Home equity lines of credit||130,071||141,021||142,725||117,899||94,801|
|Total consumer loans||413,000||407,113||379,020||309,660||290,242|
|Unamortized premiums, discounts and|
|deferred loan fees||5,602||4,778||7,228||10,790||3,998|
|Loans in process||(637,677||)||(668,587||)||(441,452||)||(193,063||)||(123,331||)|
|Allowance for loan losses||(33,129||)||(30,870||)||(26,831||)||(19,586||)||(17,108||)|
|Net loans after allowance for loan losses||$||3,017,031||$||2,813,800||$||2,628,155||$||2,016,596||$||1,774,248|
|(1) Includes loans held for sale||$||19,285||$||8,666||$||11,956||$||7,083||$||8,504|
Loan Portfolio Concentration by State. The following table details the concentration of our total loan portfolio by state at the dates indicated:
|At December 31,|
|(Dollars in thousands)
|Within Our Primary Lending Market Area:|
|Total within our primary lending market area||2,916,384||79.20||2,728,290||77.76|
|Outside our Primary Lending Market Area:|
|Total outside our primary lending market area||765,851||20.80||780,189||22.24|
No individual state in the Other States category comprises more than one percent of total loans at December 31, 2006. Our total loans in Florida at December 31, 2006 were $317.5 million, a decrease of $191.3 million, or 37.6%, compared to $508.8 million at December 31, 2005. During 2006, we reduced the volume of residential construction loans we purchase from mortgage brokers in the state of Florida. This decision was made in order to manage our concentration of loans within the state of Florida. Our total loans in Nevada increased $220.3 million, or 673.6%, to $253.0 million at December 31, 2006 compared to $32.7 million at December 31, 2005. This increase was primarily attributable to the opening of our loan production office in Las Vegas, Nevada which originates residential construction and land and land development loans. The Nevada loan production office opened in late December 2005.
Contractual Terms to Final Maturities. The following table shows the scheduled contractual maturities of our loans at December 31, 2006. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. The following amounts do not take into account loan prepayments.
|Principal Payments Contractually Due in Years
|(Dollars in thousands)
||2008 - 2011
||2012 - 2016
|Real estate loans:|
|One-to-four family residential||$||693||$||11,148||$||10,811||$||316,428||$||339,080|
|Second mortgage residential||437||4,962||14,458||100,653||120,510|
|Commercial real estate||28,648||118,567||225,042||24,363||396,620|
|Land and land development||259,040||226,003||9,705||139||494,887|
|Total real estate loans||1,134,637||761,385||413,735||531,709||2,841,466|
|Agriculture - operating||69,998||22,311||1,861||285||94,455|
|Warehouse mortgage lines of credit||112,645||--||--||--||112,645|
|Total loans (1) (2)||$||1,464,930||$||1,141,087||$||479,169||$||597,049||$||3,682,235|
|(1) Gross of unamortized premiums, discounts and deferred loan fees, loans in process and allowance for loan losses.|
|(2) Total loans due after one year from December 31, 2006 with fixed interest rates totaled $1.0 billion.
Total loans due after one year from December 31, 2006 with floating or adjustable interest rates totaled $1.2 billion.
Originations, Purchases and Sales of Loans. Our lending activities are subject to underwriting standards and loan origination procedures established by our Asset/Liability Committee and approved by our Board of Directors. Applications for mortgages and other loans are primarily taken at our banking and loan production offices. In the past, we have relied on a network of loan correspondents and mortgage brokers to originate a substantial part of our loans. In recent years we have greatly expanded our capacity to originate loans through the expansion of our loan production office network and the employment of a number of experienced loan officers. We also use loan correspondents and mortgage brokers to originate one-to-four family residential loans to supplement our origination efforts. A substantial portion of such loans consists of fixed-rate, one-to-four family residential mortgage loans which we sell into the secondary market on a servicing retained basis.
Although we originate both adjustable-rate and fixed-rate loans, our ability to originate and purchase fixed- or adjustable-rate loans is dependent upon customer demand for such loans, which is affected by the current and expected future level of interest rates. In order to maintain a mortgage loan portfolio that consists primarily of adjustable-rate loans, we purchase loans to supplement our loan origination activity. The loans purchased for retention during 2006 consisted of construction, one-to-four family residential, consumer (primarily home improvement loans and automobile financing), business, multi-family residential, land and land development (including participation interests) and second mortgage residential loans.
Generally, we originate adjustable-rate mortgage loans for retention in our portfolio. It is our current policy to sell substantially all the fixed-rate, one-to-four family residential mortgage loans we originate or purchase. Substantially all fixed-rate loans sold are sold to either Fannie Mae (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC) or the FHLBank Topeka (FHLBank) pursuant to the Mortgage Partnership Finance Program. Upon receipt of an application to make a fixed-rate loan, we typically enter into agreements to sell such loans to FNMA, FHLMC or the FHLBank pursuant to forward sale commitments, with delivery being required in approximately 90 days. We generally agree to deliver a somewhat smaller dollar amount of loans in the event that not all the loans for which applications are submitted actually close. Loans are delivered pursuant to such sale contracts upon their origination or purchase and are not aggregated for sale as loan packages. As a result, we typically do not have a significant amount of loans held for sale at any given point in time. We recognize, at the time of disposition, the gain or loss on the sale of the loans. The gain or loss is based on the difference between the net proceeds received and the carrying value of the loans sold excluding the value of servicing rights retained.
In recent years, we have developed lending relationships with several financial institutions and mortgage brokers pursuant to which we have purchased whole loans or loan participation interests secured by properties located outside our Primary Lending Market Area. Our purchases have consisted of construction loans or participation interests in such loans, both residential and commercial, as well as commercial real estate and land and land development loans, and were originated under underwriting guidelines similar to our guidelines. For loans in which we hold a participation interest we generally require the lead lender to maintain anywhere from 5% to 50% interest in the loans. Prior to entering into such relationships, we conduct on-site due diligence of each lender, including document review as well as management interviews. We also conduct on-site inspections of selected properties and of the market areas in which the properties are located. We also review and underwrite, with respect to construction loans, the individual builders to whom loans are being extended, establishing a limit as to the total amount that we will lend to each such builder. We engage local independent inspectors to inspect the progress of construction on properties securing such loans and base our disbursements on such inspections.
Loan Portfolio Activity. The following table shows total loans originated, purchased, sold and repaid during the years indicated:
|Year Ended December 31,|
|(Dollars in thousands)
|Net loans after allowance for loan losses at|
|beginning of year||$||2,813,800||$||2,628,155||$||2,016,596|
|One-to-four family residential||161,672||150,744||145,655|
|Second mortgage residential||2,988||3,867||3,361|
|Commercial real estate||56,612||44,905||91,347|
|Land and land development||316,344||176,553||76,101|
|Agriculture - operating||235,845||188,591||37,432|
|Warehouse mortgage lines of credit (1)||2,946,983||3,640,622||3,145,266|
|Total loan originations||5,035,067||5,519,022||4,249,196|
|One-to-four family residential (2)||115,827||191,725||192,163|
|Second mortgage residential||1,649||1,191||122,069|
|Commercial real estate||--||81||10,588|
|Land and land development||7,917||34,088||34,337|
|Total loan purchases||484,135||1,055,012||1,050,479|
|Total loan originations and purchases||5,519,202||6,574,034||5,299,675|
|Sales and loan principal repayments:|
|One-to-four family residential||(242,991||)||(254,578||)||(280,990||)|
|Loan principal repayments:|
|Real estate, business, agriculture-|
|operating and consumer||(2,166,909||)||(2,224,703||)||(1,349,928||)|
|Warehouse mortgage lines of credit (1)||(2,929,512||)||(3,678,376||)||(3,091,097||)|
|Total loan sales and principal repayments||(5,343,833||)||(6,162,434||)||(4,726,056||)|
|Increase due to acquisition||--||--||304,300|
|Increase (decrease) due to other items (3)||27,862||(225,955||)||(266,360||)|
|Net loans after allowance for loan losses at|
|end of year||$||3,017,031||$||2,813,800||$||2,628,155|
|(1) Reflects amounts advanced and repaid under such lines of credit during the years presented.|
|(2) Substantially all of these fixed-rate loans were acquired from mortgage brokers and sold to Fannie Mae, Freddie Mac or the FHLBank Topeka with servicing retained.|
|(3) Other items consist of unamortized premiums, discounts and deferred loan fees, loans in process and changes in the allowance for loan losses.|
Loan Servicing. We sell substantially all fixed-rate, one-to-four family residential mortgage loans with servicing retained in order to develop additional sources of noninterest income. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, holding escrow funds for the payment of real estate taxes and insurance premiums, contacting delinquent borrowers and supervising foreclosures and property dispositions in the event of unremedied defaults. The gross servicing fee income from loans sold is generally 0.25% to 0.50% of the total balance of each loan serviced. At December 31, 2006 and 2005, we were servicing $1.3 billion and $1.2 billion, respectively, of loans for others, primarily consisting of one-to-four family residential loans sold by us in the secondary market.
Loan Commitments. We generally issue written commitments to individual borrowers and mortgage brokers for the purposes of originating and purchasing loans. These loan commitments establish the terms and conditions under which we will fund the loans. At December 31, 2006, we had issued commitments totaling $865.9 million, excluding loans in process, to fund and purchase loans, extend credit on commercial and consumer unused lines of credit and to extend credit under unused warehouse mortgage lines of credit. These outstanding loan commitments do not necessarily represent future cash requirements since many of the commitments may expire without being drawn.
Reports listing all delinquent loans, classified assets and real estate owned are reviewed by management and our Board of Directors no less frequently than quarterly. The procedures we take with respect to delinquencies vary depending on the nature of the loan, period and cause of delinquency and whether the borrower is habitually delinquent. When a borrower fails to make a required payment on a loan, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. In the event payment is not then received or the loan not otherwise satisfied, letters and telephone calls generally are made. If the loan is still not brought current or satisfied and it becomes necessary for us to take legal action, which typically occurs after a loan is 90 days or more delinquent, we will commence recovery proceedings against the property securing the loan. If a legal action is instituted and the loan is not brought current, paid in full, or refinanced before the recovery sale, the property securing the loan generally is sold and, if purchased by us, becomes real estate owned or a repossessed asset.
Delinquent Loans. The following table shows loans delinquent 30 89 days in our loan portfolio as of the dates indicated:
|At December 31,|
|(Dollars in thousands)
|One-to-four family residential||$||1,532||$||2,081||$||8,203||$||1,844||$||3,677|
|Second mortgage residential||2,085||1,844||1,426||1,051||86|
|Commercial real estate||728||269||643||68||--|
|Land and land development||144||2,373||--||74||--|
|Agriculture - operating||47||180||566||--||--|
|Total delinquent loans||$||27,662||$||23,776||$||17,057||$||8,609||$||6,520|
|Delinquent loans as a percentage of|
|net loans before allowance for loan losses||0.91||%||0.84||%||0.64||%||0.42||%||0.36||%|
Nonperforming Loans and Real Estate Owned. The following table sets forth information regarding nonperforming loans (90 or more days delinquent) and real estate owned. It is our policy to cease accruing interest on loans contractually delinquent 90 days or more and charge-off all accrued interest. We did not have any accruing loans 90 days or more past due at the dates shown.
|At December 31,|
|(Dollars in thousands)
|One-to-four family residential||$||1,611||$||1,902||$||1,914||$||1,461||$||981|
|Second mortgage residential||234||609||739||224||180|
|Commercial real estate||324||1,007||707||--||3,795|
|Land and land development||4,696||915||--||--||--|
|Agriculture - operating||139||308||1||--||--|
|Total nonperforming loans||30,050||14,405||10,232||3,616||5,489|
|Real estate owned, net (1)||5,264||2,446||382||678||1,967|
|Total nonperforming assets||35,314||16,851||10,614||4,294||7,456|
|Troubled debt restructurings||8,904||5,180||3,469||468||209|
|Total nonperforming assets and|
|troubled debt restructurings||$||44,218||$||22,031||$||14,083||$||4,762||$||7,665|
|Total nonperforming loans as a|
|percentage of net loans||0.99||%||0.51||%||0.39||%||0.18||%||0.31||%|
|Total nonperforming assets as a|
|percentage of total assets||1.03||%||0.52||%||0.35||%||0.19||%||0.38||%|
|Total nonperforming assets and|
|troubled debt restructurings|
|as a percentage of total assets||1.29||%||0.68||%||0.46||%||0.22||%||0.39||%|
|(1) Real estate owned balances are shown net of related loss allowances. Includes both real property and other repossessed collateral consisting primarily of automobiles.|
At December 31, 2006, our nonperforming residential construction loans totaled $18.1 million of which $13.7 million were located in Florida. Approximately $9.4 million of our nonperforming residential construction loans in Florida were located in the Cape Coral area of Lee County. Working with a local Florida-based mortgage brokerage firm, we acquired nine- to 18-month residential construction loans for individual homebuyers who represented to us their intention to build a second or retirement home in the Cape Coral area. Each borrower possessed a strong credit score which met FNMA or other secondary market underwriting guidelines and had also obtained a contractual commitment for permanent financing with third-party lenders upon the completion of the residence. We have not purchased residential construction loans in the Cape Coral area since December 31, 2005. A substantial increase in the number of residential construction building permit applications, coupled with other contributing factors in the Cape Coral area in 2006, resulted in delays affecting the commencement of construction. In some cases, these delays extended beyond the original term of the residential construction loan. As a result of these factors, some borrowers in the Cape Coral area have not kept current on their contractual loan payment obligation and are now 90 or more days delinquent. This backlog of residential construction permits awaiting issuance has recently improved and the City of Cape Corals permit issuance process has returned to its normal four- to six-week time frame. As a result, residential builders are actively constructing homes for our borrowers. At December 31, 2006, we had 535 residential construction loan commitments in the Cape Coral area which amounted to $144.9 million with disbursed funds totaling $84.2 million. Since December 2006, our Cape Coral residential construction loans have continued to decline as borrowers pay off loans.
Our nonperforming land and land development loans at December 31, 2006 primarily consist of three loans totaling $4.6 million. These loans primarily relate to the development of land for the purpose of constructing residential homes.
Interest income that would have been recognized had nonperforming loans and troubled debt restructurings been current or in accordance with their original terms approximates $1.8 million and $802,000 for the years ended December 31, 2006 and 2005, respectively.
Impaired Loans. Included in the preceding table, under nonperforming loans and troubled debt restructurings, are impaired loans of $3.8 million and $4.2 million at December 31, 2006 and 2005, respectively. The average balance of impaired and restructured loans for the years ended December 31, 2006 and 2005 totaled $11.4 million and $7.1 million, respectively. Interest recognized on impaired and restructured loans for the years ended December 31, 2006 and 2005 was $725,000 and $603,000, respectively. At December 31, 2006, impaired loans consisted primarily of 12 business loans totaling $2.0 million, six residential construction loans totaling $459,000 and $1.1 million of consumer loans. We had established an allowance for loan losses related to impaired loans of $152,000 and $1.1 million at December 31, 2006 and 2005, respectively.
Real Estate Owned. When we acquire real estate owned property through foreclosure or deed in lieu of foreclosure, it is initially recorded at the lower of the recorded investment in the corresponding loan or the fair value of the related assets at the date of foreclosure, less costs to sell. If there is a further deterioration in value, we provide for a specific valuation allowance and charge operations for the decline in value. We generally obtain an appraisal or brokers price opinion on all real estate subject to foreclosure proceedings prior to the time of foreclosure. It is our policy to require appraisals on a periodic basis on foreclosed properties as well as conduct inspections of such properties.
Real Estate Owned Activity. The following table sets forth the activity of our real estate owned for the periods indicated:
|Year Ended December 31,|
|(Dollars in thousands)
|Balance at beginning of period||$||2,446||$||382||$||678|
|Loan foreclosures and other additions||10,495||3,486||3,104|
|Provisions for losses||(370||)||(73||)||(23||)|
|Gain (loss) on disposal||(135||)||85||189|
|Balance at end of period||$||5,264||$||2,446||$||382|
At December 31, 2006, real estate owned consisted primarily of three commercial properties totaling $4.4 million and nine residential properties totaling $778,000.
Classified Assets. Federal regulations and our Asset Classification Policy require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated the Office of Thrift Supervisions (OTS) internal asset classifications as a part of our credit monitoring system. All assets are subject to classification. Asset quality ratings are divided into three asset classifications: Pass (unclassified), special mention and classified (adverse classification). Additionally, there are three adverse classifications: substandard, doubtful and loss. A pass asset is considered to be of sufficient quality to preclude a special mention or an adverse rating. The special mention asset has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in our credit position at a future date. Classified assets receive an adverse classification. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When we classify one or more assets, or portions thereof, as substandard, doubtful or loss, we establish a valuation allowance for loan losses in an amount deemed prudent by management based on the specific facts of the asset.
Our Asset Classification Committee reviews and classifies assets no less frequently than quarterly and our Board of Directors reviews the asset classification reports on a quarterly basis. The Asset Classification Committee is composed of the following officers of the Bank: Chief Executive Officer, Chief Operating Officer, Director of Lending, Chief Credit Officer, Director of Real Estate Lending, Chief Financial Officer, Controller, Director of Corporate Banking, Senior Financial Analysis Manager and External Reporting Manager.
Allowance for Loan Losses. A provision for loan losses is charged to earnings when it is determined by management to be required based on our analysis. The allowance for loan losses is maintained at a level to cover all known and inherent losses in the loan portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the loan portfolio no less frequently than quarterly in order to identify those inherent losses and to assess the overall collection probability of the portfolio. Our 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. These loss factors are developed using our historical loan loss experience for each group of loans as further adjusted for specific factors, including the following:
|||Trends and levels of delinquent, nonperforming or "impaired" loans;|
|||Trends and levels of charge-offs and recoveries;|
|||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;|
|||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 concentration; and|
|||Changes in regulatory requirements.|
Management believes that, based on information currently available to us at this time, our allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonable to estimate at each reporting date. Actual losses are dependent upon future events and, as such, further changes to the level of allowances for loan losses may become necessary.
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: (a) the fair value of the collateral if the loan is collateral dependent; (b) the present value of expected future cash flows; or (c) the loans 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 we utilize available information to recognize probable losses on loans inherent in the portfolio, future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgment of information available to them at the time of their examination.
Allowance for Loan Losses. The following table shows changes in our allowance for loan losses during the years presented:
|At or For the Year Ended December 31,|
|(Dollars in thousands)
|Allowance for loan losses at beginning of year||$||30,870||$||26,831||$||19,586||$||17,108||$||13,464|
|Allowance for loan losses acquired||--||--||4,221||--||--|
|One-to-four family residential||(6||)||(11||)||(16||)||(6||)||(16||)|
|Second mortgage residential||(389||)||(402||)||(520||)||(107||)||(21||)|
|Commercial real estate||(14||)||(7||)||--||(330||)||--|
|Land and land development||(532||)||--||--||--||--|
|Agriculture - operating||(227||)||--||(64||)||--||--|
|Warehouse mortgage lines of credit||--||--||(20||)||(110||)||--|
|Recoveries on loans previously charged-off||313||666||373||146||103|
|Provision for loan losses||6,053||6,436||4,887||4,271||4,695|
|Allowance for loan losses at end of year||$||33,129||$||30,870||$||26,831||$||19,586||$||17,108|
|Allowance for loan losses as a percentage of net loans||1.09||%||1.09||%||1.01||%||0.96||%||0.96||%|
|Allowance for loan losses as a|
|percentage of nonperforming loans||110.25||%||214.30||%||262.23||%||541.65||%||311.68||%|
|Ratio of net charge-offs during the year as a|
|percentage of average loans outstanding during|
Allowance for Loan Losses by Loan Type. The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated:
|At December 31,|
|(Dollars in thousands)
as a % of
as a % of
as a % of
|One-to-four family residential||$||339||9.21||%||$||740||10.96||%||$||805||13.54||%|
|Second mortgage residential *||904||3.27||1,502||4.57||2,369||8.26|
|Commercial real estate||4,708||10.77||5,376||11.47||6,041||14.38|
|Land and land development||4,387||13.44||3,363||8.27||1,282||4.95|
|Agriculture - operating||1,185||2.56||941||2.07||990||2.31|
|Warehouse mortgage lines|
|At December 31,|
|(Dollars in thousands)
as a % of
as a % of
|One-to-four family residential||$||1,069||25.20||%||$||1,071||30.00||%|
|Second mortgage residential *||2,343||11.63||--||--|
|Commercial real estate||4,579||15.92||5,732||17.35|
|Land and land development||903||4.33||611||3.48|
|Agriculture - operating||--||--||--||--|
|Warehouse mortgage lines|
|* Second mortgage residential loans disclosed separately for 2003, 2004, 2005 and 2006 as we began analyzing this portfolio separately in 2003 due to our increased investment in such loans.|
Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, time deposits of insured banks and savings institutions, bankers acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Historically, we have maintained liquid assets at a level considered to be adequate to meet our normal daily activities.
Our investment policy, as approved by our Board of Directors, requires management to maintain adequate liquidity and to generate a favorable return on investment without incurring undue interest rate and credit risk. We primarily utilize investments in securities for liquidity management and as a method of deploying excess funding not utilized for loan originations and purchases. We have invested in U.S. Government securities and agency obligations, corporate securities, municipal obligations, agency equity securities, mutual funds, U.S. Government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations. As required by SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, we have established an investment portfolio of securities that are categorized as held to maturity or available for sale. We do not currently maintain a portfolio of securities categorized as held for trading. Substantially all of our investment securities are purchased for the available for sale portfolio which totaled $105.0 million, or 3.1% of total assets, at December 31, 2006. At such date, we had net unrealized losses with respect to such securities of $963,000. At December 31, 2006, the held to maturity securities portfolio totaled $90,000.
At December 31, 2006, our mortgage-backed security portfolio (all of which were classified as available for sale) totaled $12.3 million, or 0.4% of total assets. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event the issuer redeems such securities. In addition, the fair value of such securities may be adversely affected by changes in interest rates.
The Government National Mortgage Association (GNMA) is a government agency within the Department of Housing and Urban Development which is intended to help finance government-assisted housing programs. GNMA securities are backed by loans insured by the Federal Housing Administration, or guaranteed by the Veterans Administration. The timely payment of principal and interest on GNMA securities is guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. FHLMC is a private corporation chartered by the U.S. Government. FHLMC issues participation certificates backed principally by conventional mortgage loans. FHLMC guarantees the timely payment of interest and the ultimate return of principal on participation certificates. FNMA is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. FNMA guarantees the timely payment of principal and interest on FNMA securities. FHLMC and FNMA securities are not backed by the full faith and credit of the U.S. Government, but because FHLMC and FNMA are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks.
Investment Securities Portfolio Composition. The following table sets forth certain information relating to our available for sale investment securities portfolio at the dates indicated:
|At December 31,|
|(Dollars in thousands)
|U.S. Government securities and|
|Agency equity securities||547||537||546||521||3,763||3,823|
|Asset Management Fund - ARM Fund||6,000||5,836||6,000||5,848||6,000||5,927|
|Total investment securities||105,963||105,000||104,045||102,614||128,100||127,757|
|FHLBank Topeka stock||62,022||62,022||58,491||58,491||54,284||54,284|
|Total investment securities and|
|FHLBank Topeka stock||$||167,985||$||167,022||$||162,536||$||161,105||$||182,384||$||182,041|
Investment Security Maturity and Yield. The following table sets forth the amount of available for sale investment securities which mature during each of the years indicated and the weighted average yields for each range of maturities at December 31, 2006. No tax-exempt yields have been adjusted to a tax-equivalent basis.
|Maturing During the Year Ending December 31,
|(Dollars in thousands)
|Bonds and other debt securities:|
|U.S. Government securities and agency obligations|
|Weighted average yield||3.43||%||3.85||%||4.22||%||--||3.62||%|
|Weighted average yield||4.91||%||5.83||%||--||--||5.78||%|
|Weighted average yield||3.91||%||4.27||%||4.45||%||5.21||%||4.42||%|
|Asset Management Fund - ARM Fund|
|Weighted average yield||5.23||%||--||--||--||5.23||%|
|Agency equity securities|
|Weighted average yield||5.99||%||--||--||--||5.99||%|
|FHLBank Topeka stock|
|Weighted average yield||6.37||%||--||--||--||6.37||%|
|Total fair value||$||119,965||$||26,642||$||19,365||$||1,050||$||167,022|
|Weighted average yield||5.06||%||4.28||%||4.33||%||5.21||%||4.85||%|
Mortgage-Backed Securities Portfolio Composition. The following table sets forth the composition of our mortgage-backed securities portfolio at the dates indicated:
|At December 31,|
|(Dollars in thousands)
|Total mortgage-backed securities||$||12,476||$||12,272||$||20,087||$||19,752||$||36,286||$||36,175|
Mortgage-Backed Security Maturity and Yield. Information regarding the contractual maturities and weighted average yield of our mortgage-backed securities portfolio at December 31, 2006 is presented below. Due to repayments of the underlying loans, the actual maturities of mortgage-backed securities generally are less than the scheduled maturities.
|Maturing During the Year Ending December 31,|
|(Dollars in thousands)
||2008 - 2011
|Weighted average yield||--||3.72||%||8.05||%||3.90||%|
|Weighted average yield||--||4.80||%||5.79||%||5.12||%|
|Weighted average yield||--||10.00||%||5.57||%||5.58||%|
|Weighted average yield||--||4.81||%||3.86||%||3.95||%|
|Weighted average yield||--||--||6.39||%||6.39||%|
|Weighted average yield||--||--||6.81||%||6.81||%|
|Weighted average yield||--||--||5.78||%||5.78||%|
|Total fair value||$||--||$||2,315||$||9,957||$||12,272|
|Weighted average yield||--||4.31||%||4.93||%||4.81||%|
Unrealized Losses. At December 31, 2006 and 2005, all unrealized losses related to investment and mortgage-backed securities are considered temporary in nature. Impairment is deemed temporary if the positive evidence indicating that an investments carrying amount is recoverable within a reasonable time period outweighs negative evidence to the contrary. Investment and mortgage-backed securities with unrealized losses at December 31, 2006 and 2005, are summarized in the following tables:
|Less than 12 Months
||12 Months or Longer
|(Dollars in thousands)
|At December 31, 2006:|
|U.S. Government securities and|
|Agency equity securities||6||--||525||10||531||10|
|Asset Management Fund - ARM Fund||--||--||5,836||164||5,836||164|
|Total temporarily impaired securities||$||9,134||$||176||$||61,669||$||1,065||$||70,803||$||1,241|
At December 31, 2005:
|U.S. Government securities and|
|Agency equity securities||509||26||--||--||509||26|
|Asset Management Fund - ARM Fund||--||--||5,848||152||5,848||152|
|Total temporarily impaired securities||$||20,486||$||251||$||81,974||$||1,717||$||102,460||$||1,968|
We believe all unrealized losses at December 31, 2006 and 2005 to be market related, with no permanent sector or issuer credit concerns or impairments. The unrealized losses are believed to be temporarily, not permanently, impaired in value.
General. Our primary sources of funds are deposits; amortization of loans, loan prepayments and maturity of loans; 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. We utilize FHLBank advances and other borrowings and brokered time deposits as additional funding sources.
Deposits. As a regional community bank, we offer a variety of deposit products designed to attract both short-term and long-term deposits from the general public. Our product offerings consist of checking (both interest- and noninterest-bearing), money market, savings, time deposits and individual retirement accounts. We also use brokered time deposits as an additional source of funds for our loan origination and purchase activity. During 2006, deposits generated through our retail banking facilities increased $105.6 million and we acquired $8.1 million in deposits related to the Marine Bank transaction. Offsetting our 2006 increase in deposits was a transfer of $21.7 million of deposits to the purchaser of our Plainville and Stockton, Kansas bank offices and the maturing of $78.0 million of brokered time deposits which existed at December 31, 2005. As a result, net deposits increased $14.0 million, or 0.7% to $2.1 billion at December 31, 2006. At December 31, 2005 and 2004, we had brokered time deposits of $78.0 million and $124.6 million, respectively. We did not have any brokered time deposits at December 31, 2006.
Deposit Composition. The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated:
|At December 31,|
|(Dollars in thousands)
|0.00% - 0.99%||$||--||--||%||$||161||0.01||%||$||979||0.05||%|
|1.00% - 1.99%||542||0.03||53,915||2.65||263,662||14.14|
|2.00% - 2.99%||27,594||1.34||134,712||6.60||324,732||17.41|
|3.00% - 3.99%||151,499||7.38||702,599||34.47||261,869||14.04|
|4.00% - 4.99%||348,777||16.99||208,277||10.22||102,531||5.50|
|5.00% - 5.99%||592,013||28.85||6,375||0.31||12,803||0.69|
|6.00% - 6.99%||128||0.01||53||0.00||1,219||0.07|
|Total time deposits (1)||1,120,553||54.60||1,106,092||54.26||967,795||51.90|
|Total transaction accounts||931,790||45.40||932,227||45.74||896,966||48.10|
|(1) Includes $78.0 million and $124.6 million, respectively, of brokered time deposits at December 31, 2005 and 2004.
We did not have any brokered time deposits at December 31, 2006.
Deposit Average Balances and Average Rates Paid. The following table shows the average balance of each type of deposit and the average rate paid on each type of deposit for the years indicated:
|Year Ended December 31,|
|(Dollars in thousands)
|Total interest-bearing deposits||1,891,856||3.18||1,829,555||2.29||1,408,054||1.88|
Deposit Account Activity. The following table shows our deposit flows during the years indicated:
|Year Ended December 31,|
|(Dollars in thousands)
|Total increase in deposits||14,024||173,558||647,998|
|Deposits acquired in Marine Bank transaction||(8,106||)||--||--|
|Deposits transferred due to Kansas|
|branch sale transaction||21,740||--||--|
|Deposits acquired in United Nebraska|
|Financial Co. acquisition||--||--||(430,099||)|
|Net increase in deposits||$||27,658||$||173,558||$||217,899|
Time Deposit Maturity. The following table presents, by various interest rate categories and maturities, the amount of time deposits at December 31, 2006:
|Balance at December 31, 2006|
Maturing in the 12 Months Ending December 31,
|(Dollars in thousands)
|1.00% - 1.99%||$||526||$||16||$||--||$||--||$||542|
|2.00% - 2.99%||23,083||4,022||477||12||27,594|
|3.00% - 3.99%||79,432||43,264||26,699||2,104||151,499|
|4.00% - 4.99%||312,891||21,869||6,028||7,989||348,777|
|5.00% - 5.99%||574,562||14,121||1,440||1,890||592,013|
|6.00% - 6.99%||128||--||--||--||128|
|Total time deposits||$||990,622||$||83,292||$||34,644||$||11,995||$||1,120,553|
Time Deposits Exceeding $100,000. The following table shows the maturities of our time deposits exceeding $100,000 at December 31, 2006 by the time remaining to maturity. There are no brokered time deposits included in the following table as we did not have any brokered time deposits at December 31, 2006.
|(Dollars in thousands)
|March 31, 2007||$||41,287||4.58||%|
|June 30, 2007||54,847||5.06|
|September 30, 2007||82,151||5.24|
|December 31, 2007||35,644||5.15|
|After December 31, 2007||20,880||4.63|
|Total time deposits exceeding $100,000||$||234,809||5.01||%|
Borrowings. We utilize advances from the FHLBank as an alternative to retail deposits to fund our operations as part of our operating strategy. The FHLBank is part of a system of 12 regional Federal Home Loan Banks, each subject to Federal Housing Finance Board supervision and regulation, that function as a central reserve bank providing credit to financial institutions. As a condition of membership in the FHLBank we are required to own stock of the FHLBank. Our FHLBank advances are collateralized by our qualifying residential, multi-family residential and commercial real estate mortgages, residential construction, commercial construction and agricultural real estate loans, and secondarily by our investment in capital stock of the FHLBank. FHLBank advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLBank will advance to member institutions, including us, fluctuates from time to time in accordance with the policies of the FHLBank. At December 31, 2006 and 2005, we had $907.2 million and $747.1 million, respectively, in outstanding FHLBank advances.
On April 26, 2004, we formed TierOne Capital Trust I (TierOne Capital Trust), which issued capital securities (Trust Preferred Securities) to investors. The proceeds from the sale of the Trust Preferred Securities were used to purchase $30.9 million of our junior subordinated debentures (debentures). The debentures are callable at par in June 2009 and mature in June 2034. Our obligation under the debentures constitutes a full and unconditional guarantee of TierOne Capital Trusts obligations under the Trust Preferred Securities. In accordance with Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities (FIN 46R), the trust is not consolidated and related amounts are treated as debt of the Company.
In connection with our acquisition of UNFC on August 27, 2004, we assumed $7.0 million of variable rate debentures that had been issued on November 28, 2001 by United Nebraska Capital Trust, a trust formed by UNFC. We exercised our right to call and retire these debentures in December 2006.
FHLBank Advances and Other Borrowings. The following table shows certain information regarding our borrowings at or for the dates indicated:
|At or For the Year Ended December 31,|
|(Dollars in thousands)
|FHLBank Topeka advances:|
|Average balance outstanding during the year||$||824,101||$||766,265||$||625,724|
|Maximum amount outstanding at any|
|month-end during the year||$||907,920||$||890,354||$||781,064|
|Balance outstanding at end of the year||$||907,164||$||747,125||$||781,064|
|Average interest rate during the year||4.07||%||3.55||%||3.20||%|
|Weighted average interest rate at end of the year||4.29||%||3.60||%||3.19||%|
|Average balance outstanding during the year||$||69,400||$||68,330||$||35,963|
|Maximum amount outstanding at any|
|month-end during the year||$||84,403||$||74,511||$||65,502|
|Balance outstanding at end of the year||$||55,212||$||67,799||$||60,602|
|Average interest rate during the year||6.17||%||4.74||%||3.63||%|
|Weighted average interest rate at end of the year||6.12||%||5.60||%||4.04||%|
For more information regarding our borrowings, see Note 13 FHLBank Topeka Advances and Other Borrowings included in Item 8. Financial Statements and Supplementary Data in Part II of this Annual Report on Form 10-K.
TierOne Bank is the wholly owned subsidiary of TierOne Corporation. TMS Corporation of the Americas is the wholly owned subsidiary of TierOne Bank and holds all of the stock of TierOne Investments and Insurance, Inc. (d/b/a TierOne Financial) and TierOne Reinsurance Company. TierOne Financial provides a wide selection of investment and insurance products, equity securities, mutual funds and annuities. These products are made available to consumers via licensed representatives in our banking offices. TierOne Reinsurance Company reinsures credit life and disability insurance which is sold in conjunction with the origination of consumer loans by TierOne Bank. United Farm & Ranch Management, Inc. is a wholly owned subsidiary of TierOne Bank that provides agricultural customers with professional farm and ranch management and real estate brokerage services.
As of December 31, 2006, 2005 and 2004, we had 850, 772 and 724 full-time equivalent employees, respectively. Employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.
The following is not intended to be a complete discussion but is intended to be a summary of some of the more significant provisions of laws and regulations which are applicable to the Company and the Bank. This regulatory framework is intended to protect depositors, federal deposit insurance funds and the banking system as a whole, and not to protect security holders. To the extent that the information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. Additionally, such statutes, regulations and policies are continually under review by Congress and state legislatures, and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank, including changes in interpretations, could have a material effect on our business.
General. The Bank, as a federally chartered stock savings bank, is subject to OTS regulations, examinations and reporting requirements. The Bank is also subject to regulation and examination by the Federal Deposit Insurance Corporation (FDIC), which insures the deposits of the Bank to the maximum extent permitted by law and requirements established by the Board of Governors of the Federal Reserve System. The investment and lending authority of savings institutions is prescribed by federal laws and regulations and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Such regulation and supervision primarily is intended for the protection of depositors and not for the purpose of protecting stockholders.
The OTS regularly examines the Bank and prepares reports for consideration by our Board of Directors on any deficiencies that it may find in the Banks operations. The FDIC also has the authority to examine the Bank in its role as the administrator of the Deposit Insurance Fund. The Banks relationship with its depositors and borrowers is also regulated to a great extent by both federal, and to a lesser extent, state laws, especially in such matters as the ownership of deposit accounts and the form and content of the Banks mortgage requirements. The OTS enforcement authority over all savings institutions and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Any change in such laws or regulations, whether by the FDIC, the OTS or the Congress, could have a material adverse impact on our operations.
Deposit Insurance Assessments. On February 15, 2006, President Bush signed the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (Reform Act), which contains comprehensive deposit insurance reform provisions. The legislation merged the Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund, eliminated any disparities in bank and thrift risk-based premium assessments, reduced the administrative burden of maintaining and operating two separate funds and established certain new insurance coverage limits and a mechanism for possible periodic increases. The legislation also gave the FDIC greater discretion to identify the relative risks all institutions present to the Deposit Insurance Fund and set risk-based premiums.
Major provisions in the legislation include:
|||Merging the Bank Insurance Fund and Savings Association Insurance Fund into the Deposit Insurance Fund, which became effective March 31, 2006;|
|||Maintaining basic deposit and municipal account insurance coverage at $100,000 but providing for a new basic insurance coverage for retirement accounts of $250,000. Insurance coverage for basic deposit and retirement accounts could be increased for inflation every five years in $10,000 increments beginning in 2011;|
|||Providing the FDIC with the ability to set the designated reserve ratio within a range of between 1.15% and 1.50%, rather then maintaining 1.25% at all times regardless of prevailing economic conditions;|
|||Providing a one-time assessment credit of $4.7 billion to banks and savings associations in existence on December 31, 1996, which may be used to offset future premiums with certain limitations;|
|||Requiring the payment of dividends of 100% of the amount that the Deposit Insurance Fund exceeds 1.5% of the estimated insured deposits and the payment of 50% of the amount that the Deposit Insurance Fund exceeds 1.35% of the estimated insured deposits (when the reserve is greater than 1.35% but no more than 1.5%); and|
|||Providing for a new risk-based assessment system and allowing the FDIC to establish separate risk-based assessment systems for large and small members of the Deposit Insurance Fund.|
All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation (FICO), a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds (referred to as FICO bonds) were issued to capitalize the Federal Savings and Loan Insurance Corporation. The FICO has assessment authority, separate from the FDICs authority to assess risk-based premiums for deposit insurance, to collect funds from FDIC-insured institutions sufficient to pay interest on FICO bonds. The FDIC acts as a collection agent for the FICO. The FICO assessment rate effective for the first quarter of 2007 is 1.22 cents annually per $100 of assessable deposits. These assessments will continue until the FICO bonds mature in 2019.
Regulatory Capital Requirements. Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the OTS adopted regulations implementing new capital standards applicable to all savings associations, including the Bank. Such capital standards require that savings associations maintain: (a) capital of not less than 1.5% of adjusted total assets (Tangible Capital); (b) core (Tier 1) capital of not less than 4% of adjusted total assets; and (c) total risk-based capital of not less than 8% of risk-weighted assets. As of December 31, 2006, the Bank met all regulatory capital requirements. The OTS is authorized to impose capital requirements in excess of those standards on individual institutions on a case-by-case basis.
Under the tangible capital requirement, a savings bank must maintain tangible capital in an amount equal to at least 1.5% of adjusted total assets. Tangible capital is defined as core capital less all intangible assets and goodwill plus a specified amount of purchased mortgage servicing rights.
Under the Core (Tier 1) capital requirement adopted by the OTS, savings banks must maintain core capital in an amount equal to at least 4.0% of adjusted total assets. Core (Tier 1) capital consists of: common stockholders equity (including retained earnings), non-cumulative perpetual preferred stock, certain non-withdrawable and pledged deposits; and minority interests in the equity accounts of consolidated subsidiaries plus purchased mortgage servicing rights valued at the lower of 90% of fair value, 90% of original cost or the current amortized book value as determined in conformity with U.S. generally accepted accounting principles (GAAP) and goodwill, less non-qualifying intangible assets.
Under the risk-based capital requirement, a savings bank must maintain total capital (which is defined as core capital plus supplementary capital) equal to at least 8.0% of risk-weighted assets. A savings bank must calculate its risk-weighted assets by multiplying each asset and off-balance sheet item by various risk factors, which range from 0% for cash and securities issued by the United States Government or its agencies to 100% for repossessed assets or loans more than 90 days past due. Supplementary capital may include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock and general allowances for loan losses. The allowance for loan losses includable in supplementary capital is limited to 1.25% of risk-weighted assets. The amount of supplementary capital that can be included is limited to 100% of core capital.
Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital, in addition to the adjustments required for calculating core capital. However, in calculating regulatory capital, institutions can add back unrealized losses and deduct unrealized gains net of taxes, on debt securities reported as a separate component of capital calculated according to GAAP.
OTS regulations establish special capitalization requirements for savings banks that own service corporations and other subsidiaries, including subsidiary savings banks. According to these regulations, certain subsidiaries are consolidated for capital purposes and others are excluded from assets and capital. In determining compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks, engaged solely in mortgage-banking activities or engaged in certain other activities solely as agent for its customers are includable subsidiaries that are consolidated for capital purposes in proportion to the Banks level of ownership, including the assets of includable subsidiaries in which the Bank has a minority interest that is not consolidated for GAAP purposes. For excludable subsidiaries, the debt and equity investments in such subsidiaries are deducted from assets and capital. At December 31, 2006, the Bank had $1.2 million of investments subject to a deduction from tangible capital.
Under current OTS policy, savings institutions must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, savings institutions should add back any unrealized losses and deduct any unrealized gains, net of income taxes, on securities reported as a separate component of capital calculated according to GAAP.
The OTS and the FDIC generally are authorized to take enforcement action against a savings bank that fails to meet its capital requirements, which action may include restrictions on operations and banking activities, the imposition of a capital directive, a cease-and-desist order, civil money penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. In addition, under current regulatory policy, a savings bank that fails to meet its capital requirements is prohibited from paying any dividends.
At December 31, 2006, the Bank exceeded all of its regulatory capital requirements. For more information see Note 18 Regulatory Capital Requirements included in Item 8. Financial Statements and Supplementary Data, in Part II of this Annual Report on Form 10-K.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) provides for expanded regulation of depository institutions and their affiliates, including parent holding companies. FDICIA further provides the OTS with broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying management fees to controlling persons if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements.
Under FDICIA, an institution is deemed to be: (a)well capitalized if its risk-based capital ratio is 10.0% or more, its Tier 1 risk-based capital ratio is 6.0% or more, its core (Tier 1) capital ratio is 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure; (b) adequately capitalized if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of well capitalized; (c) undercapitalized if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances); (d) significantly undercapitalized if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%; or (e) critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan which meets specified requirements with its appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution that is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions.
At December 31, 2006, the Bank met the standards for a well capitalized institution.
Safety and Soundness Guidelines. The OTS and the other federal bank regulatory agencies have established guidelines for safety and soundness, addressing operational and managerial standards, as well as compensation matters for insured financial institutions. Institutions failing to meet these standards may be required to submit compliance plans to their appropriate federal regulators. The OTS and the other agencies have also established guidelines regarding asset quality and earnings standards for insured institutions. The Bank believes that it is in compliance with these guidelines and standards.
Capital Distributions. OTS regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution. A savings institution must file an application for OTS approval of the capital distribution if any of the following occur or would occur as a result of the capital distribution: (a) the total capital distributions for the applicable calendar year exceed the sum of the institutions net income for that year to date plus the institutions retained net income for the preceding two years; (b) the institution would not be at least adequately capitalized following the distribution; (c) the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition; or (d) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a holding company (as well as certain other institutions) must still file a notice with the OTS at least 30 days before the board of directors declares a dividend or approves a capital distribution.
Branching by Federal Savings Institutions. OTS policy permits interstate branching to the full extent permitted by statute (which is essentially unlimited). Generally, federal law prohibits federal savings institutions from establishing, retaining or operating a branch outside the state in which the federal institution has its home office unless the institution meets the Internal Revenue Service (IRS) domestic building and loan test (generally, 60% of a thrifts assets must be housing-related) (IRS Test). The IRS Test requirement does not apply if: (a) the branch(es) result(s) from an emergency acquisition of a troubled savings institution (however, if the troubled savings institution is acquired by a bank holding company, does not have its home office in the state of the bank holding company bank subsidiary and does not qualify under the IRS Test, its branching is limited to the branching laws for state-chartered banks in the state where the savings institution is located); (b) the law of the state where the branch would be located would permit the branch to be established if the federal savings institution were chartered by the state in which its home office is located; or (c) the branch was operated lawfully as a branch under state law prior to the savings institutions reorganization to a federal charter.
Furthermore, the OTS will evaluate a branching applicants record of compliance with the Community Reinvestment Act of 1977 (CRA). An unsatisfactory CRA record may be the basis for denial of a branching application.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions have a responsibility under the CRA and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institutions discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institutions failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the fair lending laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The Banks current CRA rating is satisfactory.
Loans-to-One Borrower Limitations. As a federal savings bank, we are limited in the amount of loans we can make to any one borrower. This amount is equal to 15% of our unimpaired capital and surplus (this amount was approximately $54.1 million at December 31, 2006), although we are permitted to lend up to an additional 10% of unimpaired capital and surplus if the loans are secured by readily marketable securities. Our aggregate loans to any one borrower have been within these limits for the year ended December 31, 2006.
Qualified Thrift Lender Test. All savings institutions are required to meet a qualified thrift lender test (QTL Test) to avoid certain restrictions on their operations. Under Section 2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings institution can comply with the QTL Test by either qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code or by meeting the second criteria of the QTL Test set forth in Section 10(m) of the HOLA. A savings institution that does not meet the QTL Test must either convert to a bank charter or comply with the following restrictions on its operations: (a) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (b) the branching powers of the institution shall be restricted to those of a national bank; (c) the institution shall not be eligible to obtain any new advances from its FHLBank other than special liquidity advances with the approval of the OTS; and (d) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings institution ceases to be a qualified thrift lender, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLBank advances (subject to safety and soundness considerations).
Currently, the portion of the QTL Test that is based on Section 10(m) of the HOLA rather than the Internal Revenue Code requires that 65% of an institutions portfolio assets (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); stock issued by the FHLBank and direct or indirect obligations of the FDIC. Small business loans, credit card loans and student loans are also included without limitation as qualified investments. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institutions portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of loans for personal, family and household purposes (other than credit card loans and educational loans); and stock issued by FNMA or FHLMC. Portfolio assets consist of total assets minus the sum of: (a) goodwill and other intangible assets; (b) property used by the savings institution to conduct its business; and (c) liquid assets up to 20% of the institutions total assets. At December 31, 2006, approximately 70.4% of the portfolio assets of the Bank were qualified thrift investments.
Federal Reserve System. The Bank is subject to various regulations promulgated by the Federal Reserve, including, among others, Regulation B (Equal Credit Opportunity), Regulation D (Reserves), Regulation E (Electronic Funds Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds), and Regulation DD (Truth in Savings). Regulation D requires noninterest-bearing reserve maintenance in the form of either vault cash or funds on deposit at Federal Reserve Bank of Kansas City or another designated depository institution in an amount calculated by formula. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. At December 31, 2006, the Bank was in compliance with these reserve requirements.
Savings banks are authorized to borrow from a Federal Reserve Bank (FRB) discount window, but FRB regulations require savings banks to exhaust other reasonable alternative sources of funds, including FHLBank advances, before borrowing from a Federal Reserve Bank.
Affiliate Restrictions. Section 11 of the HOLA provides that transactions between an insured subsidiary of a holding company and an affiliate thereof will be subject to the restrictions that apply to transactions between banks that are members of the Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act.
Generally, Section 23A and 23B and OTS regulations issued in connection therewith limit the extent to which a savings institution or its subsidiaries may engage in certain covered transactions with affiliates to an amount equal to 10% of the institutions capital and surplus, in the case of covered transactions with any one affiliate, and to an amount equal to 20% of such capital and surplus, in the case of covered transactions with all affiliates. Section 23B applies to covered transactions and certain other transactions and requires that all such transactions be on terms and under circumstances that are substantially the same, or at least as favorable to the savings institution or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A covered transaction is defined to include a loan or extension of credit to an affiliate; a purchase of investment securities issued by an affiliate; a purchase of assets from an affiliate, with certain exceptions; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Section 23B transactions also apply to the provision of services and the sale of assets by a savings association to an affiliate.
In addition, under OTS regulations, a savings institution may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies; a savings institution may not purchase or invest in securities of an affiliate other than shares of a subsidiary; a savings institution and its subsidiaries may not purchase a low-quality asset from an affiliate; and covered transactions and certain other transactions between a savings institution or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each loan or extension of credit by a savings institution to an affiliate must be secured by collateral with a fair value of at least 100% (depending on the type of collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings institution subsidiaries of savings institutions from treatment as affiliates, except to the extent that the OTS or the FRB decides to treat such subsidiaries as affiliates. The regulation also requires savings institutions to make and retain records that reflect affiliate transactions in reasonable detail, and provides that certain classes of savings institutions may be required to give the OTS prior notice of affiliate transactions.
The U.S.A. Patriot Act. In December 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) became effective. The USA Patriot Act is designed to combat money laundering and terrorist financing while protecting the United States financial system. The USA Patriot Act imposes enhanced policy, record keeping and due diligence requirements on domestic financial institutions. The USA Patriot Act also amended the Bank Secrecy Act to facilitate access to customer account information by government officials while immunizing banks from liability for releasing such information. Among other requirements, Title III of the USA Patriot Act and related OTS regulations impose the following requirements with respect to financial institutions:
|||Establishment of anti-money laundering programs;|
|||Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time;|
|||Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering; and|
|||Prohibition on correspondent accounts for foreign shell banks and compliance with record keeping obligations with respect to correspondent accounts of foreign banks.|
In addition, bank regulators are directed to consider a holding companys effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.
In addition to other information contained in this Annual Report on Form 10-K, the following risk factors should be considered in evaluating our business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition and/or results of operations.
Since we are a holding company with no significant assets other than the Bank, we currently depend upon dividends from the Bank for a substantial portion of our revenues. These dividends are the primary funding source for the dividends we pay on our common stock. Our ability to pay dividends will continue to depend in large part upon our receipt of dividends or other capital distributions from the Bank. Various state and federal laws and regulations limit the amount of dividends that a bank may pay to a parent holding company. In addition, our right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary may be subject to prior claims of the subsidiarys creditors. In the event the Bank is unable to pay dividends to the Company, we may not be able to service our debt, pay our obligations or pay dividends on our common stock. The inability to receive dividends from the Bank could therefore have a material adverse effect on our business, our financial condition and our results of operations.
Our operating results are affected by national and local economic and competitive conditions, including changes in market interest rates, the strength of the local economy, governmental policies of the communities in which we do business and actions of regulatory authorities. A decline in the local or national economy could adversely affect our financial condition and results of operations. Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows:
|||A decline in the demand for the products and services we offer;|
|||An increase in nonperforming loans and loan charge-offs;|
|||An increase in provisions for loan losses;|
|||An increase in losses on real estate owned (acquired through foreclosure); and|
|||A migration from low-yielding or noninterest bearing deposits to higher-yielding deposit products such as time deposits.|
At December 31, 2006, $1.8 billion, or 47.6%, of our total loans consisted of multi-family residential, commercial real estate, land and land development, commercial construction and business loans. This portfolio of loans has grown is recent years and we intend to continue our emphasis in these types of lending. These types of loans generally expose a lender to a greater risk of non-payment and loss than one-to-four family residential mortgage loans because repayment of such loans is dependent upon the successful operation of the property and the income stream of the borrowers. Additionally, these types of loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. Also, many of the Banks commercial borrowers have more than one loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage loan.
At December 31, 2006, $781.0 million, or 21.2%, of our total loans consisted of residential construction loans. Our portfolio of residential construction loans has increased dramatically over the past three years as a result of our emphasis on loans with relatively higher yields, adjustable interest rates and/or shorter terms to maturity. Risk of loss on a residential construction loan is dependent largely upon the accuracy of the initial estimate of the propertys value when completed compared to the projected cost (including interest) of construction and other assumptions, including the approximate time to sell the property. Our ability to continue to originate and/or purchase residential construction loans may be impaired by adverse changes in local and regional economic conditions in the real estate markets, or by acts of nature. Due to the concentration of real estate collateral, these events could have a material adverse impact on the value of collateral, resulting in delinquencies and/or losses. Customer demand for loans secured by real estate could be reduced by a weaker economy, an increase in unemployment, a decrease in real estate values or an increase in interest rates.
At December 31, 2006, we had 535 residential construction loan commitments in the Cape Coral area of Lee County in Florida totaling $144.9 million with disbursed funds totaling $84.2 million. At December 31, 2006, $13.7 million of our nonperforming residential construction loans were located in Florida. Approximately $9.4 million of our nonperforming residential construction loans in Florida were located in the Cape Coral area of Lee County. Working with a local Florida-based mortgage brokerage firm, we acquired nine- to 18-month residential construction loans for individual homebuyers who represented to us their intention to build a second or retirement home in the Cape Coral area. A substantial increase in the number of residential construction building permit applications, coupled with other contributing factors in the Cape Coral area in 2006, resulted in delays affecting the commencement of construction. In some cases, these delays extended beyond the original term of the residential construction loan. As a result of these factors, some borrowers in the Cape Coral area have not kept current on their contractual loan payment obligation and are now 90 or more days delinquent.
The Board of Governors of the Federal Reserve System, also known as the Federal Reserve Board, regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which impact our net interest margin, and can significantly affect the value of financial instruments such as debt securities and mortgage servicing rights. Its policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve Board policies are beyond our control and difficult to predict or anticipate.
The amount of income taxes we are required to pay on our earnings is based on federal and state legislation and regulations. We have provided for current and deferred income taxes in our financial statements, based on our results of operations, business activity, and interpretations of tax statutes. We may take filing positions or follow tax strategies that may be subject to challenge by federal and state taxing authorities. Our net income and earnings per share may be reduced if a federal, state or local authority assessed charges for taxes that have not been provided for in our consolidated financial statements.
When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, a significant increase in market interest rates could adversely affect net interest income. Conversely, a significant decrease in market interest rates could result in increased net interest income. We seek to manage our exposure to interest rate fluctuations, however, changes in market interest rates are neither predictable nor controllable and may have an adverse impact on our financial condition and results of operations.
Prevailing interest rates may significantly affect the overall demand for loans and could also impact the extent to which borrowers repay and refinance loans. Loan prepayments and refinancings, as well as prepayments of mortgage-backed securities, may increase in a declining interest rate environment. Call provisions associated with our investment in U.S. government securities and agency obligations and corporate securities may also negatively impact net interest income in a declining interest rate environment. Such prepayment, refinancing and security call activity may negatively impact the yield of our loan portfolio and investment and mortgage-backed security portfolios, as we would reinvest the prepaid funds in a lower interest rate environment. Additionally, adjustable-rate mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that limit the amount interest rates can increase or decrease at repricing dates.
In a decreasing interest rate environment, our level of core deposits may decline if our depositors seek higher-yielding instruments or other investment products we are unwilling to offer. This may increase our cost of funds and decrease our net interest margin to the extent that alternative funding sources are utilized to fund our business activities. In an increasing interest rate environment, depositors tend to prefer higher-yielding time deposits which could adversely affect our net interest income if rates were to subsequently decline.
An inadequate allowance for loan losses could adversely affect our results of operations. We are exposed to the risk that our customers may be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure full repayment. We evaluate the collectibility of our loan portfolio and provide for an allowance for loan losses which is based on our historical loan loss experience for each group of loans as further adjusted for specific factors.
If our evaluation is incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to our allowance for loan losses. Increases in the allowance for loan losses result in an expense for the period. If, as a result of general economic conditions or a decrease in asset quality, management determines that additional increases in the allowance for loan losses are warranted, we may incur additional expenses. We can make no assurances that our allowance for loan losses will be adequate to cover loan losses inherent in our portfolio.
Our loans are primarily secured by real estate, including regional concentrations of loans in areas of the United States that are susceptible to tornados, earthquakes, hurricanes or other natural disasters. If a natural disaster were to occur in one of our major market areas, loan losses could occur that are not incorporated in the existing allowance for loan losses.
If we are forced to foreclose on a defaulted mortgage loan to recover our investment, we may be subject to environmental liabilities related to the underlying real property. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on properties under our ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that we would not be fully liable for the entire cost of any removal, remediation or other clean-up on the acquired property, that the cost of removal and clean-up would not exceed the value of the property or that costs could be recovered from any third party. Additionally, it may be difficult or impossible to sell the property prior to or following any environmental remediation.
Our cost of funds may increase because of general economic conditions, unfavorable conditions in capital markets, interest rates and competitive pressures. We have traditionally obtained funds primarily through deposits and borrowings. Generally, deposits are a preferable source of funds than borrowings because interest rates paid for deposits are typically less than interest rates charged for borrowings. If deposit growth is inadequate to fund our operations, we may have to rely on borrowings as a source of funds. Relying on borrowings as a primary funding source may have an adverse impact on our net interest margin.
The banking and financial services businesses in our market areas are highly competitive. Our market area has a high density of financial institutions, some of which have greater financial resources, name recognition and market presence than us, and all of which are our competitors. Competition within the banking, mortgage and finance industries may limit our ability to attract and retain customers. Our competition for loans comes primarily from commercial banks, savings banks, savings and loan associations, mortgage banking companies, insurance companies, finance companies and credit unions. Our most direct competition for deposits historically has come from commercial banks, savings banks, savings and loan associations and credit unions. In addition, we face competition for deposits from products offered by brokerage firms, insurance companies and other financial intermediaries, such as money market and other mutual funds and annuities. If we are unable to attract and retain customers, our loan and deposit growth may be inhibited which could have an adverse impact on our financial condition and results of operations.
We are subject to extensive regulation, supervision and examination by the OTS as our primary federal regulator, and by the FDIC, which insures our deposits. As a member of the FHLBank, we must also comply with applicable regulations of the Federal Housing Finance Board and the FHLBank. Regulation by these agencies is intended primarily for the protection of our depositors and the Deposit Insurance Fund and not for the benefit of our stockholders. Our activities are also regulated under consumer protections laws applicable to our lending, deposit and other activities. A sufficient claim against us under these laws could have a material adverse affect on our financial condition and results of operations.
We may enter into transactions to acquire other banks or financial institutions from time to time that further our business strategy. Acquisitions involve numerous risks including lower than expected performance or higher than expected costs, difficulties in the integration of operations, services, products and personnel, the diversion of managements attention from other business matters, changes in relationships with customers and the potential loss of key employees. Any acquisition would be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approvals. We may not be successful in identifying acquisition candidates, integrating acquired institutions or preventing deposit erosion or loan quality deterioration at acquired institutions. There can be no assurance that we will be successful in completing future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired institutions into our operations. Our ability to grow may be limited if we are unable to successfully make future acquisitions.
We depend on the services of existing management personnel to carry out our business and investment strategies. It is critical that we are able to attract and retain management and other qualified personnel. Competition for qualified personnel is significant in our geographical market areas. The loss of services of any management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our financial condition and results of operations.
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology. Any failure, interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, loan servicing and loan origination systems. We can make no assurances that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. Any failure or interruption could have a material adverse effect on our business, financial condition and results of operations. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services. We can make no assurances that we could negotiate terms that are favorable to us, or could obtain comparable services without the need to expend substantial resources.
Our stock price can fluctuate in response to a variety of factors, including actual or anticipated variations in quarterly operating results; changes in our stockholder dividend policy; recommendations of securities analysts; and news media reports relating to trends, concerns and other issues in the financial services industry. Other factors that may influence our stock price include products or services offered by our competitors; operating and stock price performance of other companies that investors or analysts deem comparable to us; and changes in governmental regulations.
General market fluctuations, industry factors and general economic conditions and political conditions and events, such as future terrorist activities, economic slowdowns or recessions, interest rate changes or credit loss trends, also could cause our stock price to decline regardless of our operating results.
Effective internal and disclosure controls are necessary for us to provide reliable financial reports, to effectively prevent fraud and to operate successfully as a public company. If we were unable to provide accurate and reliable financial reports or prevent fraud, our reputation and results of operations would be adversely effected. As part of our ongoing monitoring of internal controls, we may discover material weaknesses or significant deficiencies in our internal controls as defined under standards adopted by the Public Company Accounting Oversight Board (PCAOB) that require remediation. Under PCAOB standards, a material weakness is a significant deficiency or combination of significant deficiencies, which results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A significant deficiency is a control deficiency or combination of control deficiencies, that adversely affect a companys ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is a more than remote likelihood that a misstatement of a companys annual or interim financial statements that is more than inconsequential will not be prevented or detected.
Any failure to maintain effective internal and disclosure controls, or to make necessary improvements in such controls in a timely manner, could harm operating results or cause us to fail in meeting our financial reporting obligations. Such a failure could have an impact on our ability to remain listed on the NASDAQ Global Select Market. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on our stock price.
We currently operate 69 banking offices in Nebraska (59), Iowa (9) and Kansas (1) of which 51 are owned by us and 18 are under operating leases. Additionally, we operate three loan production offices located in Colorado, two loan production offices located in North Carolina and one loan production office in each of Arizona, Florida, Minnesota and Nevada all of which are under operating leases. We own our corporate headquarters located in Lincoln, Nebraska.
For further information regarding our properties, see Note 19 Lease Commitments included in Item 8. Financial Statements and Supplementary Data, in Part II of this Annual Report on Form 10-K.
Except litigation relating to certain goodwill claims against the United States (U.S.) described below, we are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to our consolidated financial statements.
In August 1995, we commenced litigation in the United States Court of Federal Claims (Claims Court) claiming that the U.S. breached its contract with us and has unlawfully taken our property without just compensation or due process of law. As described below, our claims arose from changes to the rules for computing our regulatory capital that were required by the adoption of the FIRREA.
Pursuant to FIRREA, which became effective in December 1989, the OTS was created as the successor to the Federal Home Loan Bank Board (FHLBB) to regulate federally-insured savings institutions. At such time, we had $30.0 million of supervisory goodwill remaining from three supervisory mergers we completed in 1982. At the time of these mergers, the FHLBB agreed we could include the supervisory goodwill as capital for purposes of meeting our regulatory capital requirements. The regulatory goodwill was to be amortized over a 25-year period. As a result of regulations adopted by the OTS implementing FIRREA, we had to exclude immediately all of our supervisory goodwill from the calculation of our tangible capital and had to phase out the inclusion of this goodwill in the calculation of our core and risk-based capital requirements over a five-year period. We believe that the adoption of the capital regulations by the OTS implementing FIRREA constituted a breach by the U.S. of its contractual commitment regarding the regulatory capital treatment of our supervisory goodwill.
Our case was initially stayed pending resolution on appeal of a series of cases (United States v. Winstar Corporation) (Winstar Cases). In July 1996, the United States Supreme Court ruled in the Winstar Cases that FIRREAs provisions changing the accounting for supervisory goodwill constituted a breach of FHLBB contractual agreements with these institutions regarding the treatment of supervisory goodwill.
On May 19, 2003, a four-day trial related solely to issues of liability commenced in the U.S. Court of Federal Claims in Washington D.C. On November 6, 2003, the Court held the U.S. liable to the Bank for breach of contract with regard to one of three supervisory mergers, but absolved the U.S. of liability in connection with the other two merger transactions. A motion for reconsideration of the Courts liability decision with respect to the one merger on which we prevailed was filed by the U.S. and was subsequently denied by the Court of Federal Claims on April 28, 2004. We subsequently filed a motion for reconsideration concerning the portion of the Courts liability ruling absolving the government of liability in the other two transactions. Based on an opinion issued in another case by this Court, we filed a motion for reconsideration in the United States Court of Appeals for the Federal Circuit in March 2005. The Court of Federal Claims denied our motion for reconsideration by order entered October 20, 2005.
To conform to the Court of Federal Claims ruling finding the U.S. liable on only one of the three claims, we sought a reduced amount of damages which corresponded to the amount of remaining supervisory goodwill in the one supervisory merger as to which the Court held the government breached its contract bore in relation to the entire amount of remaining goodwill at the time of the breach.
On May 22, 2006, a nine-day trial related solely to the issue of damages associated with our lost profits claim commenced in the Court of Federal Claims. On October 31, 2006, the Court issued an opinion finding the U.S. liable to the Bank for lost franchise value and awarded the Bank $4.5 million in damages. Consistent with rulings in all but one of the Winstar-related cases, the Court did not find the U.S. liable to the Bank for lost profits. The Courts ruling was appealed to the United States Court of Appeals for the Federal Circuit by the U.S. on December 29, 2006. The Bank has subsequently filed a cross-appeal seeking review of earlier liability rulings which absolved the U.S. of liability in connection with the two other merger transactions and reduced the amount of the Banks potential recovery. The Court of Appeals has established a timetable requiring all legal briefs on appeal to be submitted to the Court during the second quarter of 2007. There can be no assurance as to the type or amount of damages, if any, that we may recover or the timing, if we are successful, for receipt by us of any damages from the U.S. Government.
Common Stock Price Summary. Our common stock trades on the NASDAQ Global Select Market under the symbol TONE. As of December 31, 2006, we had 1,564 stockholders of record, which does not include those persons or entities holding stock in nominee or street name through brokerage firms or others. The following table shows the high and low bid prices of our common stock during the periods indicated as well as the period end closing sales price and the dividend paid each quarter.
Common Stock Repurchase Activity. The following table details our purchases of common stock during the three months ended December 31, 2006:
Number of Shares
|Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
of Shares that May
Yet Be Purchased
Under Plans or
|Beginning Date - October 1, 2006|
|Ending Date - October 31, 2006||946||$||31.85||946||1,657,373|
|Beginning Date - November 1, 2006|
|Ending Date - November 30, 2006||110,500||31.19||110,500||1,546,873|
|Beginning Date - December 1, 2006|
|Ending Date - December 31, 2006||19,814||31.33||19,814||1,527,059|
|Total shares purchased during the|
|three months ended December 31, 2006||131,260||$||31.22||131,260|
|*||Information related to our publicly announced plan authorizing purchases of common stock during the three months ended December 31, 2006, is as follows:|
|Expiration Date of Purchase Plan|
|July 27, 2004||1,828,581||No stated expiration date|
Performance Graph. We completed our initial public offering on October 1, 2002, during which we sold an aggregate of 22,075,075 shares of our common stock at a price of $10.00 per share. The following graph represents $100.00 invested in our common stock at the $14.00 per share closing price of the common stock on October 2, 2002, the date our common stock commenced trading on the NASDAQ, and assumes the reinvestment of all dividends. The graph demonstrates comparison of the cumulative total returns for the common stock of TierOne Corporation, the Russell 2000 Index and the SNL Securities $1B $5B Thrift Index for the periods indicated.
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C under the Securities Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
|Source: SNL Financial LC, Charlottesville, VA © 2007|
|At or For the Year Ended December 31,|
|(Dollars in thousands, except per share data)
|Selected Statement of Income Data:|
|Total interest income||$||223,887||$||177,343||$||124,980||$||110,820||$||104,941|
|Total interest expense||98,019||72,428||47,769||40,871||44,221|
|Net interest income||125,868||104,915||77,211||69,949||60,720|
|Provision for loan losses||6,053||6,436||4,887||4,271||4,695|
|Net interest income after provision|
|for loan losses||119,815||98,479||72,324||65,678||56,025|
|Total noninterest income||29,084||26,585||23,905||19,859||13,111|
|Total noninterest expense||81,769||72,450||58,212||47,520||45,669|
|Income before income taxes||67,130||52,614||38,017||38,017||23,467|
|Income tax expense||25,815||19,782||14,152||14,202||8,501|
|Net income per common share, basic||$||2.50||$||2.02||$||1.42||$||1.18||$||0.10||(1)|
|Net income per common share, diluted||$||2.41||$||1.97||$||1.39||$||1.16||$||0.10||(1)|
|Dividends declared per common share||$||0.27||$||0.23||$||0.20||$||--||$||--|
|Selected Financial Condition Data:|
|Cash and cash equivalents||86,808||88,034||70,030||34,901||33,037|
|Net loans after allowance for loan losses||3,017,031||2,813,800||2,628,155||2,016,596||1,774,248|
|FHLBank Topeka advances and|
|Selected Operating Ratios:|
|Average yield on interest-earning assets||7.24||%||6.05||%||5.33||%||5.51||%||6.60||%|
|Average rate on interest-bearing liabilities||3.52||%||2.72||%||2.31||%||2.46||%||3.23||%|
|Average interest rate spread (2)||3.72||%||3.33||%||3.02||%||3.05||%||3.37||%|
|Net interest margin (2)||4.07||%||3.58||%||3.29||%||3.48||%||3.82||%|
|Average interest-earning assets to|
|average interest-bearing liabilities||110.95||%||110.10||%||113.29||%||120.94||%||116.28||%|
|Net interest income after provision for|
|loan losses to noninterest expense||146.53||%||135.93||%||124.24||%||138.21||%||122.68||%|
|Total noninterest expense to average assets(3)||2.48||%||2.31||%||2.35||%||2.26||%||2.75||%|
|Efficiency ratio (3)(4)||51.64||%||53.70||%||56.95||%||52.91||%||61.86||%|
|Return on average assets (3)||1.25||%||1.05||%||0.96||%||1.13||%||0.90||%|
|Return on average equity (3)||12.48||%||11.28||%||8.53||%||7.04||%||7.80||%|
|Average equity to average assets (3)||10.04||%||9.29||%||11.29||%||16.11||%||11.56||%|
|Return on tangible equity (3)(5)||14.59||%||13.58||%||9.08||%||7.04||%||7.80||%|
|(1) Information applicable to post stock conversion period only. We completed our initial public offering on October 1, 2002.
(2) Excluding the receipt of a $2.7 million loan prepayment fee, our average interest rate spread and net interest margin would
have been 3.63% and 3.99%, respectively, for the year ended December 31, 2006.
(3) Employee stock options were expensed beginning January 1, 2006.
(4) 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.
(5) Return on tangible equity is calculated as annualized net income as a percentage of average stockholders' equity
adjusted for goodwill and other intangible assets.
As a regional community bank, our goal is to enhance stockholder value while focusing on building a solid banking franchise. We focus on growing our core businesses of mortgage and business lending and retail banking while striving to maintain asset quality and control expenses. We seek to provide returns to our stockholders through increased dividends and stock repurchases. We have been successful in achieving our goal of enhancing stockholder value over the past several years.
During 2006, we achieved record net income and earnings per share as we continued to execute our business model. Our total loan portfolio increased during the year ended December 31, 2006. This increase was primarily the result of strong loan origination volume, primarily in our land and land development, business and commercial construction loan portfolios. Our deposit balance at December 31, 2006 was relatively unchanged when compared to December 31, 2005, however, we have experienced an increase in deposits generated by our retail banking offices which was offset by the maturity during 2006 of all brokered time deposits that existed at December 31, 2005. Our FHLBank advances and other borrowings increased during 2006 as we utilized borrowings as our primary funding source for loan growth. Net income for 2006 increased compared to the prior year. This increase was primarily the result of an increase in net interest income. The increase in interest income was primarily the result of an increase in the average yield earned on interest-earning assets. The increase in net interest income was partially offset by an increase in interest expense. The increase in interest expense was primarily the result of an increase in the average rate paid on interest-bearing liabilities.
|||Record net income of $41.3 million;|
|||Record diluted earnings per common share of $2.41;|
|||Total assets increased 6.5% to $3.4 billion;|
|||Net loans increased $205.5 million to $3.1 billion;|
|||Total loan originations, excluding warehouse mortgage lines of credit, totaled $2.1 billion;|
|||Retail-generated deposits increased $105.6 million;|
|||The number of transaction accounts increased 3.0% during 2006 to nearly 128,600;|
|||Interest income increased $46.5 million or 26.2%;|
|||We opened two new banking offices, relocated a banking office and acquired a banking office;|
|||We increased our quarterly cash dividend to $0.07 per common share; and|
|||We received a favorable opinion, which is now on appeal, from the United States Court of Federal Claims awarding us $4.5 million in damages related to a breach of contract lawsuit filed in 1995 against the federal government.|
In an effort to increase our profitability, we implemented a plan to grow and diversify our operations to become a regional community bank. In our Primary Banking Market Area we have endeavored to position ourselves as a local alternative to national and super-regional competitors. In addition, we have availed ourselves of additional loan opportunities outside our Primary Banking Market Area and have selectively entered into relationships with other financial institutions throughout the United States to purchase whole loans or participation interests in loans, particularly commercial real estate, land and land development and construction loans. Additionally, we have opened or acquired loan production offices in high growth cities of the United States in an effort to strategically supplement our loan origination activities.
Highlights of our long-term management strategy are as follows:
|||Continuing Our Controlled Growth and Expanding Our Franchise. We have increased our total assets in each of the past five years. During this previous five-year period, total assets have increased by $1.9 billion to $3.4 billion. In addition, we believe that our conversion from mutual to stock form in October 2002 facilitated our ability to expand our franchise. We have also executed a strategic acquisition plan designed to strengthen market share in our Primary Banking Market Area as well as to build our lending presence in growing metropolitan areas outside of our Primary Banking Market Area.|
|||Building a Quality Loan Portfolio to Increase Yields and/or Reduce Interest Rate Risk. We have focused on increasing our holdings of quality loans with relatively higher yields, adjustable interest rates and/or shorter terms to maturity. At December 31, 2006, our second mortgage residential, multi-family residential, commercial real estate, land and land development, construction, business, agricultural, warehouse mortgage lines of credit and consumer loans amounted to $3.3 billion in the aggregate or 90.8% of our total loan portfolio. This compares to $1.0 billion, or 66.9%, of total loans at December 31, 2001. We have sought to maintain a high level of asset quality and moderate credit risk by utilizing loan underwriting standards which we believe are conservative. Although we are an acquirer of loans and participation interests in loans from outside our Primary Lending Market Area, we generally apply our own underwriting standards to all such loans. Our nonperforming loans as a percentage of net loans at December 31, 2006 were 0.99% compared to 0.12% at December 31, 2001. While our nonperforming loan ratio has generally trended upward in the past five years due in part to our strategy of increasing yields, we remain focused on minimizing credit risk through our loan origination, monitoring and recovery processes.|
|||Emphasizing Growth of Our Core Deposits and Minimizing Our Cost of Funds. Our core deposits, consisting of checking, money market and savings accounts, have increased from $560.9 million at December 31, 2001 to $931.8 million at December 31, 2006. We continue our emphasis on increasing the number of core checking account relationships, which during the five-year period ended December 31, 2006, have grown by 111.9% from 46,900 to 99,400. The establishment of additional core relationships, including consumer and business banking relationships, provides new opportunities to sell other profitable products and services and increase market share.|
|||Increasing Our Fee Income and Expanding Our Products and Services.Noninterest income increased by $17.8 million, or 157.7%, to $29.1 million for the year ended December 31, 2006 compared to $11.3 million for the year ended December 31, 2001. The increase primarily reflects increased fee income due largely to an increase in the number of core deposit accounts. We have been pro-active in our efforts to increase noninterest income, largely by increasing the number of customers that we serve in our Primary Banking Market Area as well as increasing the number of our financial products that we offer our customers. We expect our employees to cross-sell our financial products and services to customers and we provide them with economic incentives to do so. Our efforts have also included redesigning a number of our banking offices to be retail sales centers, which have a floor plan we believe is more conducive to cross-selling of products. We continually search for new products and services that serve the needs of our customers. In the past five years, we have introduced on-line banking, farm and ranch management services, cash management services, business checking and an expanded business loan program.|
|||Improving Brand Awareness and Perception. Our success in continuing to build a profitable market share in the areas we serve is partially driven by our ability to positively extend the reach of our corporate identity through increased public awareness and market perception. In our competitive environment, where consumers and businesses are offered a multitude of choices for banking services, a strong corporate brand enhances our ability to be among the candidates when a final selection is made. This is achieved through a comprehensive, consistent and sustainable marketing program, an effective delivery of competitive products and services and a well-trained and knowledgeable workforce. While building brand awareness and perception is important throughout the entire market region, special emphasis has and will be placed in growing metropolitan and economically vibrant regional growth center market areas.|
See Note 1 Summary of Significant Accounting Policies included in Item 8. Financial Statements and Supplementary Data, in Part II of this Annual Report on Form 10-K for a summary of our significant accounting policies. 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 recognize income, determine the allowance for loan losses, evaluating investment and mortgage-backed securities for impairment, evaluating goodwill and other intangible assets, valuation of mortgage servicing rights, valuation and measurement of derivatives and commitments, valuation of real estate owned and income taxes are our most critical accounting policies because they are important to the presentation of our financial condition and results of operations, involve a higher 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 financial condition and results of operations.
Income Recognition. We recognize interest income by methods that conform to GAAP. In the event management believes collection of all or a portion of contractual interest on a loan has become doubtful, which generally occurs after a loan is contractually delinquent 90 days or more, we discontinue the accrual of interest and charge-off all previously accrued interest. Interest received on nonperforming loans is included in income only if principal recovery is reasonably assured. A nonperforming loan is restored to accrual status when it is brought current, has performed in accordance with its contractual terms for a reasonable period of time and the collectibility of the total contractual principal and interest is no longer in doubt.
Allowance for Loan Losses. We have identified the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation. This policy is significantly affected by our judgment and uncertainties and there is a likelihood that materially different amounts 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 managements 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. Managements 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. 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 loans observable market price.|
The second element is an estimated allowance established for losses that are probable and reasonable to estimate on each category of outstanding loans. While management uses available information to recognize probable losses on loans inherent in the portfolio, future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgment of information available to them at the time of their examination.
Investment Securities. We evaluate our available for sale and held to maturity investment 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. Various factors are utilized 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.
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 UNFC. There was no goodwill recorded in connection with our Marine Bank branch purchase on June 2, 2006. In accordance with 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 intangible assets with estimated useful lives to 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.
Our policy is to evaluate annually the carrying value of our reporting unit goodwill and identifiable assets not subject to amortization. Goodwill was established in connection with the UNFC acquisition .
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 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 entitys goodwill. Impairment loss is recognized for any excess of the carrying value of the entitys 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. Core deposit intangible assets are amortized using an accelerated method of amortization which is recorded in the Consolidated Statements of Income as 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 the identifiable intangible assets. For the years ended December 31, 2006, 2005 and 2004, no events or circumstances triggered an impairment charge against our core deposit 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 present value 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. As interest rates rise, prepayments generally slow, which results in an increase in the fair value. 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.
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 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 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 of 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.
Real Estate Owned. Property and other assets acquired through foreclosure of defaulted mortgage or other collateralized loans are carried at the lower of cost or fair value, less estimated costs to sell the property and other assets. The fair value of real estate owned is generally determined from appraisals obtained by independent appraisers. Development and improvement costs relating to such property are capitalized to the extent they are deemed to be recoverable.
An allowance for losses on real estate and other assets owned is designed to include amounts for estimated losses as a result of impairment in value of real property after repossession. We review our real estate owned for impairment in value whenever events or circumstances indicate that the carrying value of the property or other assets may not be recoverable.
Income Taxes. We estimate income taxes payable based on the amount we expect to owe various tax authorities. Accrued income taxes represent the net estimated amount due to, or to be received from, taxing authorities. In estimating accrued income taxes, we assess the relative merits and risks of the appropriate tax treatment of transactions, taking into account the applicable statutory, judicial and regulatory guidance in the context of our tax position. Although we utilize current information to record income taxes, underlying assumptions may change over time as a result of unanticipated events or circumstances.
We utilize estimates of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future pre-tax income should prove nonexistent or less than the amount of temporary differences giving rise to the net deferred tax assets within the tax years to which they may be applied, the assets will not be realized and our net income will be adversely affected.
General.Our total assets were $3.4 billion at December 31, 2006, an increase of $208.9 million, or 6.5%, compared to $3.2 billion at December 31, 2005. The increase is primarily the result of a $205.5 million increase in net loans.
Investment Securities. Our available for sale investment securities totaled $105.0 million at December 31, 2006, an increase of $2.4 million, or 2.3%, compared to $102.6 million at December 31, 2005. During 2006 we had security purchases of $94.5 million which were partially offset by $92.8 million in proceeds from maturing and sold investment securities. The securities purchased during 2006 were primarily U.S. Treasury securities that were purchased to collateralize deposits.
Mortgage-Backed Securities. Our mortgage-backed securities, all of which are recorded as available for sale, totaled $12.3 million at December 31, 2006, a decrease of $7.5 million, or 37.9%, compared to $19.8 million at December 31, 2005. The decrease in our mortgage-backed securities was the result of $7.5 million of principal payments received during the year ended December 31, 2006.
Loans Receivable. Net loans totaled $3.1 billion at December 31, 2006, an increase of $205.5 million, or 7.2%, compared to $2.8 billion at December 31, 2005. During the year ended December 31, 2006, we originated $2.1 billion of loans (exclusive of warehouse mortgage lines of credit) and purchased $484.1 million of loans. These increases were partially offset by $2.2 billion of principal repayments (exclusive of warehouse mortgage lines of credit) and $247.4 million of loan sales.
|At December 31,|
|(Dollars in thousands)
|One-to-four family residential (1)||$||339,080||$||384,722||$||(45,642||)||(11.86||) %|
|Second mortgage residential||120,510||160,208||(39,698||)||(24.78||)|
|Commercial real estate||396,620||402,504||(5,884||)||(1.46||)|
|Land and land development||494,887||289,916||204,971||70.70|
|Agriculture - operating||94,455||72,518||21,937||30.25|
|Warehouse mortgage lines of credit||112,645||95,174||17,471||18.36|
|Unamortized premiums, discounts|
|and deferred loan fees||5,602||4,778||824||17.25|
|Loans in process:|
|Land and land development||(122,640||)||(84,811||)||(37,829||)||44.60|
|(1) Includes loans held for sale|
We continue to execute our ongoing strategy of building a loan portfolio to increase yields and reduce interest rate risk by focusing on loans with relatively higher yields, adjustable interest rates and/or shorter terms to maturity. The increase in our land and land development 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 was primarily the result of expanded lending capabilities resulting from the addition of commercial banking personnel specializing in corporate banking. The increase in our agricultural real estate and agriculture-operating loans was primarily the result of expanded lending opportunities resulting from the addition of lending personnel with agricultural lending expertise. The increase in our warehouse mortgage lines of credit reflected increased mortgage financing activity during the latter portion of 2006 due to a short-term decrease in mortgage interest rates. During 2006 we reduced the volume of residential construction loans we purchase from mortgage brokers in the state of Florida. This reduction resulted in a decline in our residential construction loans at December 31, 2006. Our one-to-four family residential loan portfolio declined primarily due to a decreased demand for adjustable-rate residential loans as borrowers have migrated to fixed-rate loans. Generally, we originate adjustable-rate, one-to-four family residential 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 servicing fees. The decrease in our second mortgage loan portfolio was primarily the result of loan repayments and prepayments. The decline in our multi-family residential and commercial real estate loan portfolios was primarily the result of refinancing activity as borrowers have migrated to fixed-rate loan products. Our consumer loan portfolio remained relatively unchanged at December 31, 2006 compared to December 31, 2005.
Allowance for Loan Losses. Our allowance for loan losses increased $2.3 million, or 7.3%, to $33.1 million at December 31, 2006 compared to $30.9 million at December 31, 2005. Our allowance for loan losses as a percentage of nonperforming loans was 110.25% at December 31, 2006 compared to 214.30% at December 31, 2005. Our ratio of the allowance for loan losses to net loans was 1.09% at both December 31, 2006 and 2005.
Nonperforming loans increased $15.6 million, or 108.6%, to $30.1 million at December 31, 2006 compared to $14.4 million at December 31, 2005. The increase in nonperforming loans at December 31, 2006 was primarily attributable to residential construction and land and land development loans. The increase in our nonperforming residential construction loans was primarily related to properties in the Cape Coral area of Lee County in Florida. At December 31, 2006, residential construction loan commitments in the Cape Coral area amounted to $144.9 million with disbursed funds totaling $84.2 million. Nonperforming loans (those loans 90 or more days delinquent) related to the Cape Coral area totaled $9.4 million at December 31, 2006. A substantial increase in the number of residential construction building permit applications, coupled with other contributing factors in the Cape Coral area in 2006, resulted in delays affecting the commencement of construction. In some cases, these delays extended beyond the original term of the residential construction loan. As a result of these factors, some borrowers in the Cape Coral area have not kept current on their contractual loan payment obligations and are now 90 or more days delinquent. This backlog of residential construction permits awaiting issuance has recently improved and the City of Cape Corals permit issuance process has returned to its normal four- to six-week time frame. As a result, residential builders are actively constructing homes for our borrowers. Additionally, our loans in the Cape Coral area continue to decline as borrowers pay off loans. We have not purchased residential construction loans in the Cape Coral area since December 31, 2005. The increase in our nonperforming land and land development loans relates to three loans totaling $4.6 million that primarily involve the development of land for the purpose of constructing residential homes. We believe that our allowance for loan losses is adequate to cover loan losses inherent in our loan portfolio at December 31, 2006.
FHLBank Topeka Stock. FHLBank stock totaled $62.0 million at December 31, 2006, an increase of $3.5 million, or 6.0%, compared to $58.5 million at December 31, 2005. The increase was attributable to FHLBank stock dividends received during the year ended December 31, 2006.
Premises and Equipment. Premises and equipment increased $312,000, or 0.8%, to $39.8 million at December 31, 2006 compared to $39.5 million at December 31, 2005. The increase was attributable to $5.0 million in asset additions which were partially offset by depreciation and amortization of $3.8 million during the year ended December 31, 2006. Significant additions during the year ended December 31, 2006 included new, full-service banking facilities opened in Omaha, Hastings and Papillion, Nebraska.
Goodwill. Goodwill totaled $42.2 million at December 31, 2006, a decrease of $55,000, or 0.1%, compared to $42.3 million at December 31, 2005. Our goodwill at December 31, 2006 and 2005 relates to the 2004 acquisition of UNFC. There was no goodwill recorded in connection with our Marine Bank branch purchase in June 2006. The decrease in goodwill was the result of a realized tax benefit associated with the UNFC acquisition.
Other Intangible Assets. Our other intangible assets declined $1.7 million, or 16.4%, to $8.4 million at December 31, 2006 compared to $10.0 million at December 31, 2005 and relates to core deposit intangible assets recorded as a result of the UNFC acquisition and the Marine Bank transaction. The decrease was attributable to $1.8 million of 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 21.2%, to $34.5 million at December 31, 2006 compared to $28.5 million at December 31, 2005. At December 31, 2006, the largest item recorded in other assets was net mortgage servicing assets of $12.5 million. The remainder consisted of prepaid expenses, miscellaneous receivables and other miscellaneous assets.
General. Our total liabilities were $3.1 billion at December 31, 2006, an increase of $164.5 million, or 5.6%, compared to $2.9 billion at December 31, 2005. We primarily utilized FHLBank advances to fund lending growth during the year ended December 31, 2006.
Deposits. During 2006, deposits generated through our retail banking facilities increased $105.6 million and we acquired $8.1 million in deposits related to the Marine Bank transaction. Offsetting our 2006 increase in deposits was a transfer of $21.7 million of deposits to the purchaser of our Plainville and Stockton, Kansas bank offices and the maturing of $78.0 million of brokered time deposits which existed at December 31, 2005. As a result, net deposits increased $14.0 million, or 0.7%, to $2.1 billion at December 31, 2006.
|(Dollars in thousands)
|Total retail deposits||2,052,343||1,960,355||91,988||4.69|
|Brokered time deposits||--||77,964||(77,964||)||(100.00||)|
Our transaction accounts (checking, savings and money market) totaled $931.8 million at December 31, 2006, a decrease of $437,000 compared to $932.2 million at December 31, 2005. The number of transaction accounts increased by 3,700 accounts, or 3.0%, to 128,600 transaction accounts. The weighted average interest rate of our transaction accounts was 1.68% at December 31, 2006 compared to 1.35% at December 31, 2005. The weighted average interest rate of our time deposits was 4.81% at December 31, 2006 compared to 3.52% at December 31, 2005. The increase in our money market accounts and time deposits was primarily the result of customers migrating to these accounts from lower-yielding deposit accounts due to a rising interest rate environment.
FHLBank Advances and Other Borrowings. Our FHLBank advances and other borrowings totaled $962.4 million at December 31, 2006, an increase of $147.5 million, or 18.1%, compared to $814.9 million at December 31, 2005. We utilized FHLBank advances as our primary funding source for loan growth during the year ended December 31, 2006. The increase in FHLBank advances and other borrowings at December 31, 2006 was primarily attributable to borrowing an additional $440.0 million of convertible fixed-rate advances from the FHLBank and an increase in the outstanding balance on our FHLBank line of credit to $72.5 million at December 31, 2006. These new advances were partially offset by the repayment of $352.2 million of FHLBank advances. The weighted average interest rate on FHLBank advances executed in 2006 was 4.28%. The weighted average interest rate on FHLBank advances which matured or were called by the FHLBank in 2006 was 3.08%. The weighted average interest rate on our FHLBank advances and other borrowings was 4.40% at December 31, 2006, an increase of 63 basis points compared to 3.77% at December 31, 2005.
Accrued Expenses and Other Liabilities. Our accrued expenses and other liabilities totaled $29.3 million at December 31, 2006, an increase of $1.3 million, or 4.8%, compared to $28.0 million at December 31, 2005. The primary items comprising accrued expenses and other liabilities are accrued taxes payable, deferred compensation agreements, loan servicing payments and other miscellaneous accrued expenses.
Stockholders Equity. At December 31, 2006, stockholders equity totaled $353.3 million, an increase of $44.4 million, or 14.4%, compared to $308.9 million at December 31, 2005. The increase in stockholders equity primarily reflected net income of $41.3 million during the year ended December 31, 2006, $4.9 million related to common stock earned by participants in the Employee Stock Ownership Plan (ESOP), $2.9 million related to amortization of awards under the 2003 Management Recognition and Retention Plan (MRRP) and $1.7 million related to amortization of stock options under the 2003 Stock Option Plan (SOP). These increases were partially offset by $4.8 million in stock repurchases and $4.5 million in cash dividends paid to our stockholders. We paid cash dividends of $0.06 per common share on March 31, 2006 to stockholders of record on March 15, 2006 and $0.07 per common share on June 30, 2006, September 29, 2006 and December 29, 2006 to stockholders of record on June 15, 2006, September 15, 2006 and December 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 152,984 shares of our outstanding common stock during the year ended December 31, 2006. The weighted average price paid per common share was $31.54 for the year ended December 31, 2006. After accounting for earlier repurchases, at December 31, 2006, the total remaining common stock repurchase authority was 1,527,059 shares. For further discussion regarding our common stock repurchases, see Part II, Item 5 Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Assets. At December 31, 2005, our total assets were $3.2 billion, an increase of $174.2 million, or 5.7%, compared to $3.0 billion at December 31, 2004. The increase in total assets during 2005 was primarily the result of a $189.7 million increase in net loans and an $18.0 million increase in cash and cash equivalents partially offset by a $41.6 million decrease in investment and mortgage-backed securities.
Investment Securities. Our available for sale investment securities totaled $102.6 million at December 31, 2005, a $25.1 million, or 19.7%, decrease compared to $127.8 million at December 31, 2004. The decrease in our available for sale investment securities was primarily the result of $24.4 million of maturities and securities sales resulting in $3.2 million in sales proceeds partially offset by security purchases of $4.5 million.
Mortgage-Backed Securities. Our mortgage-backed securities portfolio decreased $16.4 million, or 45.4%, to $19.8 million at December 31, 2005 compared to $36.2 million at December 31, 2004. The decrease was primarily the result of $15.9 million in principal payments received.
Loans Receivable. Net loans increased $189.7 million, or 7.1%, to $2.8 billion at December 31, 2005 compared to $2.7 billion at December 31, 2004. During 2005, we originated $5.5 billion of loans and purchased $1.1 billion of loans which were partially offset by $5.9 billion of principal repayments and $259.4 million of loan sales.
|At December 31,|
|(Dollars in thousands)
|One-to-four family residential (1)||$||384,722||$||418,270||$||(33,548||)||(8.02||) %|
|Second mortgage residential||160,208||255,222||(95,014||)||(37.23||)|
|Commercial real estate and land||692,420||597,114||95,306||15.96|
|Agriculture - operating||72,518||71,223||1,295||1.82|
|Warehouse mortgage lines of credit||95,174||132,928||(37,754||)||(28.40||)|
|Unamortized premiums, discounts|
|and deferred loan fees||4,778||7,228||(2,450||)||(33.90||)|
|Loans in process||(668,587||)||(441,452||)||(227,135||)||51.45|
|(1) Includes loans held for sale|
The increases in multi-family residential, commercial real estate and land, construction, business and consumer loans were primarily the result of our ongoing strategy to build a loan portfolio to increase yields and reduce interest rate risk by focusing on loans with relatively higher yields, adjustable interest rates and/or shorter terms to maturity. The increases in our residential and commercial construction loans reflected our increased origination capabilities realized through the opening of nine loan production offices in Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. The decrease in our one-to-four family residential loans was primarily the result of decreased demand for adjustable-rate residential mortgage loans. Generally, we originate adjustable-rate mortgage loans for retention in our portfolio while selling substantially all fixed-rate, one-to-four family residential loans. The decline in our second mortgage residential portfolio was primarily the result of loan repayments and prepayments. The decline in our warehouse mortgage lines of credit reflected a reduction in mortgage financing activity during the fourth quarter of 2005.
Allowance for Loan Losses. The allowance for loan losses increased $4.0 million, or 15.1%, to $30.9 million at December 31, 2005 compared to $26.8 million at December 31, 2004. We made a provision for loan losses of $6.4 million for the year ended December 31, 2005 compared to $4.9 million during the year ended December 31, 2004, an increase of $1.5 million or 31.7%. Nonperforming loans increased $4.2 million, or 40.8%, to $14.4 million at December 31, 2005 compared to $10.2 million at December 31, 2004. The increase in nonperforming loans was primarily the result of three multi-family residential loans totaling $3.3 million and one commercial real estate and land loan of $915,000 being classified as impaired at December 31, 2005. Net charge-offs were $2.4 million during the year ended December 31, 2005, an increase of $534,000, or 28.7%, compared to net charge-offs of $1.9 million during the year ended December 31, 2004. Our allowance for loan losses as a percentage of nonperforming loans declined to 214.30% at December 31, 2005 compared to 262.23% at December 31, 2004. The ratio of the allowance for loan losses to net loans increased to 1.09% at December 31, 2005 compared to 1.01% at December 31, 2004.
Premises and Equipment. Premises and equipment increased $1.3 million, or 3.4%, to $39.5 million at December 31, 2005 compared to $38.2 million at December 31, 2004. The increase was attributable to $5.7 million in asset additions which were partially offset by depreciation and amortization expense of $3.6 million. Significant additions during 2005 included property acquired for the construction of new, full-service banking facilities in Omaha and Hastings, Nebraska which were completed in 2006.
FHLBank Stock. FHLBank stock totaled $58.5 million at December 31, 2005, an increase of $4.2 million, or 7.8%, compared to $54.3 million at December 31, 2004.
Goodwill and Other Intangible Assets. Goodwill totaled $42.3 million at December 31, 2005 and 2004 and related to the 2004 acquisition of UNFC. Other intangible assets declined $1.8 million, or 15.5%, to $10.0 million at December 31, 2005 compared to $11.9 million at December 31, 2004. This amount related to core deposit intangible assets recorded as a result of the UNFC acquisition. The decline was related to amortization during the year ended December 31, 2005.
Other Assets. Other assets increased $4.8 million, or 20.6%, to $28.5 million at December 31, 2005 compared to $23.6 million at December 31, 2004. At December 31, 2005, the largest item recorded in other assets was net servicing assets of $11.7 million. The remainder consisted of prepaid expenses, miscellaneous receivables and other miscellaneous assets.
Deposits. Total deposits increased $173.6 million, or 9.3%, to $2.0 billion at December 31, 2005 compared to $1.9 billion at December 31, 2004.
|At December 31,|
|(Dollars in thousands)
Our retail generated time deposits increased $185.0 million, or 21.9%, to $1.0 billion at December 31, 2005 compared to $843.2 million at December 31, 2004. The increase in retail generated time deposits was partially offset by a $46.7 million, or 37.4%, decline in brokered time deposits. Our brokered time deposits totaled $78.0 million at December 31, 2005 compared to $124.6 million at December 31, 2004. The increase in our time deposits during 2005 was the result of a rising interest rate environment and marketing promotions designed to attract new deposit accounts and establish new customer relationships. The weighted average rate of our time deposits was 3.52% at December 31, 2005 compared to 2.77% at December 31, 2004. Our transaction accounts (checking, savings and money market) totaled $932.2 million at December 31, 2005, an increase of $35.3 million, or 3.9%, compared to $897.0 million at December 31, 2004.
FHLBank Advances and Other Borrowings. Our FHLBank advances and other borrowings totaled $814.9 million at December 31, 2005, a decrease of $26.7 million, or 3.2%, compared to $841.7 million at December 31, 2004. The weighted average interest rate on our FHLBank advances and other borrowings was 3.77% at December 31, 2005, an increase of 52 basis points compared to 3.25% at December 31, 2004. During 2005, we utilized our increased deposits, investment and mortgage-backed security repayments and income from operations to fund loan originations and purchases.
Accrued Expenses and Other Liabilities. Our accrued expenses and other liabilities totaled $28.0 million at December 31, 2005, a decrease of $3.7 million, or 11.8%, compared to $31.8 million at December 31, 2004. The primary items comprising accrued expenses and other liabilities were accrued taxes payable, deferred compensation agreements, loan servicing payments, end-lender loan payments associated with our warehouse mortgage lines of credit and other miscellaneous accrued expenses.
Stockholders Equity. At December 31, 2005, stockholders equity totaled $308.9 million, an increase of $31.8 million, or 11.5%, compared to $277.0 million at December 31, 2004. The increase in stockholders equity primarily reflected net income of $32.8 million during the year ended December 31, 2005, $4.0 million related to common stock earned by participants in the ESOP and $3.1 million related to amortization of awards under the MRRP. These increases were partially offset by the repurchase of 148,538 shares of our outstanding common stock at a cost of $3.6 million and $3.8 million in cash dividends paid to our stockholders.
We paid cash dividends of $0.05 per common share on March 31, 2005 to stockholders of record on March 15, 2005 and $0.06 per common share on June 30, 2005, September 30, 2005 and December 31, 2005 to stockholders of record on June 15, 2005, September 15, 2005 and December 15, 2005, respectively.
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 148,538 shares of our outstanding common shares under this authorization during the year ended December 31, 2005. There were no repurchases under this authorization during the year ended December 31, 2004. At December 31, 2005, the total remaining common stock repurchase authority under this authorization is 1,680,043 shares.
Net Income. Net income for the year ended December 31, 2006 was $41.3 million, or $2.41 per diluted share ($2.50 per basic share), compared to net income of $32.8 million, or $1.97 per diluted share ($2.02 per basic share), for the year ended December 31, 2005. Contributing to the increases in net income and earnings per share for the year ended December 31, 2006 was a $2.7 million pre-tax prepayment fee on a commercial real estate loan and a $1.0 million pre-tax gain on sale of two north-central Kansas bank offices and related deposits. Offsetting the positive effect of these two items were expenses related to employee stock options. Employee stock option expenses impacted earnings per share by $0.06 for the year ended December 31, 2006. We began expensing employee stock options in the first quarter of 2006 following the implementation of new accounting guidelines.
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 $125.9 million for the year ended December 31, 2006, an increase of $21.0 million, or 20.0%, compared to $104.9 million for the year ended December 31, 2005. The increase in net interest income was attributable to a continued increase in the average yield on our net loan portfolio, partially offset by an increase in our funding cost, supplemented by a $2.7 million prepayment fee collected on a commercial real estate loan during the year ended December 31, 2006.
Our average interest rate spread for the years ended December 31, 2006 and 2005 was 3.72% and 3.33%, 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 7.24% for the year ended December 31, 2006, a 119 basis point increase compared to 6.05% for the year ended December 31, 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 years ended December 31, 2006 and 2005 was 7.39% and 6.19%, 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 3.52% for the year ended December 31, 2006, an increase of 80 basis points compared to 2.72% for the year ended December 31, 2005. The increase in the average rate paid on interest-bearing liabilities was primarily the result of customers migrating to higher-yielding deposit products such as time deposits and money market accounts coupled with increased borrowing costs associated with FHLBank advances. These increases were primarily the result of a series of interest rate increases set by the Federal Reserve Board throughout 2005 and the first half of 2006 that has affected the rate we pay on interest-bearing deposits and borrowings.
Our net interest margin (net interest income divided by average interest-earning assets) increased to 4.07% for the year ended December 31, 2006 compared to 3.58% for the year ended December 31, 2005. The increase in our net interest margin for the year ended December 31, 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 year ended December 31, 2006, an increase of $157.0 million, or 5.4%, compared to $2.9 billion for the year ended December 31, 2005. We anticipate that average interest rate spread and net interest margin compression may occur during 2007 due to increased deposit interest costs and refinancing of our FHLBank advances and other borrowings.
Excluding the receipt of the $2.7 million pre-tax loan prepayment fee, our average interest rate spread would have been 3.63% for the year ended December 31, 2006. Our net interest margin would have been 3.99% for the year ended December 31, 2006.
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the years indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on daily balances.
|Year Ended December 31,|
|(Dollars in thousands)
|Federal funds sold||$||1,934||$||85||4.40||%||$||25||$||1||4.00||%||$||2,192||$||31||1.42||%|
|Investment securities (1)||167,587||8,422||5.03||%||173,012||7,143||4.13||%||115,687||4,540||3.92||%|
|Mortgage-backed securities (1)||16,200||653||4.03||%||27,961||1,022||3.66||%||22,341||837||3.75||%|
|Loans receivable (2)||2,904,606||214,727||7.39||%||2,732,360|