Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-50015
TIERONE CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Wisconsin 04-3638672
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1235 "N" Street
Lincoln, Nebraska 68508
- --------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 475-0521
Common Stock, $.01 par value
----------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months 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 Registrant's 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The aggregate market value of the 22,056,555 shares of the Registrant's Common
Stock held by non-affiliates (22,575,075 shares outstanding less 518,520 shares
held by affiliates), based upon the closing price of $14.00 for the Common Stock
on October 2, 2002, the date the Registrant's Common Stock commenced trading on
the Nasdaq Stock Market, was approximately $308.8 million. Shares of Common
Stock held by each executive officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded since such persons
may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Number of shares of Common Stock outstanding as of March 31, 2003: 22,575,075
DOCUMENTS INCORPORATED BY REFERENCE
Set forth below are the documents incorporated by reference and the part
of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 2002 are incorporated by reference into Part II, Items 5-8 and Part
IV, Item 15 of this Form 10-K.
(2) Portions of the definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-13 of
this Form 10-K.
PART I
Item 1. Business.
General
TierOne Corporation is a Wisconsin corporation headquartered in Lincoln,
Nebraska. TierOne Corporation became the bank holding company for TierOne Bank
in connection with the public stock conversion of TierOne Bank in October 2002.
TierOne Bank operates from 58 banking offices located in Nebraska, southwest
Iowa and northern Kansas and two loan production offices in Colorado. As of
December 31, 2002, we had $1.9 billion of total assets, $1.1 billion of deposits
and $339.9 million of shareholders' equity. Our shareholders' equity represented
17.5% of total assets as of December 31, 2002.
As used in this report, unless the context otherwise requires, the terms
"we," "us," or "our" refer to TierOne Corporation, a Wisconsin corporation, and
its wholly owned subsidiary, TierOne Bank, a federally chartered stock savings
bank.
Our principal business is gathering deposits from the general public in
our primary market area surrounding our 58 banking offices and investing those
deposits, together with funds generated from operations and borrowings, in loans
and investment securities. In the mid-1990s we revised our management strategy
and commenced efforts to evolve into a community bank. Highlights of our revised
management strategy, which is designed to increase our profitability, include:
o increasing the yield on our loan portfolio and reducing our exposure to
interest rate risk while maintaining high credit quality;
o growing our core deposits and reducing our costs of funds; and
o increasing other income through increased transaction fees, gains on loan
sales and fee income from non-traditional products such as annuities and
securities.
In recent years, we have significantly increased our emphasis on
commercial real estate and land loans, construction loans, warehouse mortgage
lines of credit and consumer loans. These loans typically have higher yields
compared to single-family residential mortgage loans and have adjustable rates
of interest and/or shorter terms to maturity. At December 31, 2002, our
commercial real estate and land loans, construction loans, warehouse mortgage
lines of credit and consumer loans amounted to $1.2 billion in the aggregate or
64.1% of our total loan portfolio at such date compared to an aggregate of
$928.1 million or 61.2% of our total loan portfolio at December 31, 2001. The
remainder of our loan portfolio consisted of one- to four-family residential
mortgage loans, multi-family residential mortgage loans and commercial business
loans which amounted to $686.5 million, or 35.9% of the total loan portfolio and
$588.9 million, or 38.8% of the total loan portfolio, at December 31, 2002 and
2001, respectively.
1
We originate loans to customers in Nebraska, Iowa, Kansas and Colorado.
However, due to relatively limited demand for certain loan products in our
primary market area of Nebraska, southwest Iowa and northern Kansas, we also
purchase loans and loan participation interests from financial institutions,
loan correspondents and brokers throughout the United States. At December 31,
2002, approximately 60.4% of our loan portfolio was secured by properties or
made to individuals located outside our primary market area. We purchase
adjustable-rate single-family residential mortgage loans for our portfolio while
selling newly originated fixed-rate single-family mortgage loans (with servicing
retained). Our loan sales produce non-interest income in the form of gains on
sales and loan servicing fees. We also have developed relationships with several
financial institutions from which we purchase commercial real estate and
construction loans or participation interests in such loans. In addition, we
originate warehouse mortgage lines of credit with a number of mortgage brokerage
firms located throughout the United States.
In order to effectively manage our diversifying loan portfolio, we have
hired a number of additional loan officers in recent years with experience in
construction, commercial real estate, consumer and business lending. We endeavor
to ensure that all of our loans, whether originated by us or purchased, are in
compliance with our own underwriting standards or standards which are
substantially similar to ours.
In addition to our loan activities, we focus on our deposit products,
particularly core deposits such as checking accounts, and the sale of other
products such as annuities and securities.
Our revenues are derived principally from interest on our loans, and to a
lesser extent, interest and dividends on our investment and mortgage-backed
securities, and non-interest income. Our primary sources of funds are deposits,
principal and interest payments on loans, investment securities, mortgage-backed
securities, advances from the Federal Home Loan Bank of Topeka and proceeds from
the sale of loans.
Forward-Looking Statements
In the normal course of business, TierOne Corporation, in an effort to
help keep our shareholders and the public informed about our operations, may
from time to time issue or make certain statements, either in writing or orally,
that are or contain forward-looking statements, as that term is defined in the
federal securities laws. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits from potential acquisitions,
projections involving anticipated revenues, earnings, profitability or other
aspects of operating results or other future developments in our affairs or the
industry in which we conduct business. These forward-looking statements, which
are based on various assumptions (some of which are beyond our control), may be
identified by reference to a future period or periods or by the use of
forward-looking terminology such as "anticipate," "believe," "commitment,"
"consider," "continue," "could," "encourage," "estimate," "expect," "intend,"
"in the event of," "may," "plan," "present," "propose," "prospect," "update,"
"whether," "will," "would," future or conditional verb tenses, similar terms,
variations on such terms or negatives of such terms. Although we believe that
the anticipated results or other
2
expectations reflected in such forward-looking statements are based on
reasonable assumptions, we can give no assurance that those results or
expectations will be attained. Actual results could differ materially from those
indicated in such statements due to risks, uncertainties and changes with
respect to a variety of factors, including, but not limited to, the following:
competitive pressure among depository and other financial institutions may
increase significantly; changes in the interest rate environment may reduce
interest margins and net interest income, as well as adversely affect loan
originations and sales activities and the value of certain assets, such as
investment securities; general economic or business conditions, either
nationally or in regions in which we do business, may be less favorable than
expected, resulting in, among other things, a deterioration in credit quality or
a reduced demand for credit; legislation or changes in regulatory requirements,
including without limitation, capital requirements, or accounting standards may
adversely affect us and the business in which we are engaged; adverse changes
may occur in the securities markets; our competitors may have greater financial
resources and develop products and technology that enable those competitors to
compete more successfully than us; and the growth and profitability of our
noninterest income may be less than expected.
We undertake no obligation to update forward-looking statements to reflect
events or circumstances occurring after the date of this report on Form 10-K.
Available Information
TierOne Corporation is a public company and files annual, quarterly and
special reports, proxy statements and other information with the Securities and
Exchange Commission. Our SEC filings are available to the public at the SEC's
web site at http://www.sec.gov. Members of the public may also read and copy any
document we file at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents by writing to
the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the Public Reference
Room. In addition, our stock is listed for trading on the Nasdaq National Market
and trades under the symbol "TONE." You may find additional information
regarding TierOne Corporation at www.nasdaq.com. In addition to the foregoing,
we maintain a web site at www.tieronebank.com. We make available on our Internet
web site copies of our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and any amendments to such documents as soon
as reasonably practicable after we file such material with or furnish such
documents to the SEC.
Market Area and Competition
We are a community-oriented 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 58 banking offices located in
Nebraska, seven counties in southwest Iowa and two counties in northern Kansas.
Although in the past we have invested primarily in residential loans secured by
mortgages on properties located in our primary market area, in recent years we
have increased our investment in commercial real estate, land and construction
loans secured by properties
3
located in other parts of the United States. The five largest concentrations of
loans outside our primary market area (excluding warehouse mortgage lines of
credit) are New York ($153.7 million or 8.0% of the total loan portfolio, which
consists primarily of loans secured by properties in the New York City
metropolitan area), California ($104.7 million or 5.5%), Washington State ($70.6
million or 3.7%), Colorado ($67.5 million or 3.5%) and Arizona ($59.2 million or
3.1%). We have also purchased pools aggregating $334.0 of adjustable-rate
single-family residential loans in order to increase the interest-rate
sensitivity of our loan portfolio.
Our corporate headquarters is located in Lincoln, Nebraska, which is the
state capital and home of the University of Nebraska-Lincoln. The region in
which our banking offices are located was once dominated by agriculture, but now
consists of a diverse blend of industries, urban centers, and significant
corporate investment. The region's population is 1.9 million persons and more
than 90% of the individuals in our primary market area live in Nebraska. The
region continues to experience a migration from rural communities to the Omaha
and Lincoln metropolitan areas, as well as other mid-sized regional growth
centers scattered throughout our primary market area. According to the 2000
Census, the median household income in Nebraska was approximately $37,900, while
the per capita income was approximately $19,800, in each case more than 45%
higher than the amounts at the time of the 1990 Census.
Even with a modest national slowdown, the state of the Nebraska economy
remains relatively resilient despite a growing state budget deficit and a severe
drought which has impacted several states throughout the Midwest. Nebraska
non-farm employment growth has been relatively consistent and continues to
experience modest gains despite more cyclical volatility in the national
economy. The trade and government sectors have exhibited the strongest growth
and have helped offset recent declines in manufacturing. Unemployment rates in
Nebraska have historically been two to three percentage points below national
averages. Net taxable retail sales in 2002 continue to grow to record levels but
lag previous years' growth rates. Motor vehicle sales, despite a slowdown in the
fourth quarter, remained strong during 2002. Sales of existing homes in
Nebraska's two leading urban markets (Omaha and Lincoln) remain at or near
record levels with major developments of new home construction underway in both
communities. Median home values of $109,200 in Omaha at December 31, 2001, the
latest available figures, are below national levels of $134,100 and
significantly less than the Minneapolis ($118,700), Dallas ($125,700), Denver
($145,400) and Chicago ($158,200) metropolitan areas. Major capital developments
along Omaha's riverfront and in Lincoln's downtown area combined with other
investment projects scattered throughout the primary market region are expected
to contribute to a modest, but growing regional economy for the foreseeable
future.
We expanded our physical presence in late 2002 with the opening of a loan
production office in Colorado Springs, Colorado and a second loan production
office in early 2003 in the Denver metropolitan area. These offices were
established to build upon our growing commercial real estate and construction
lending business and were located in metropolitan areas known for economic
growth and vitality. The Denver metropolitan area, with a 2000 Census population
of nearly 2.6 million people, has grown to become the 19th largest metropolitan
area in the United States and
4
ranks among the fastest growing metropolitan areas in the nation. Denver's
diverse economy is driven by telecommunications and biomedical technology; two
of the city's largest industries, with construction, real estate and retail
trade among the fastest growing. Unemployment in metropolitan Denver was 5.5% in
2002 and was nearly identical to national levels. The Colorado Springs
metropolitan area, with nearly 517,000 residents, grew more than 30.2% during
the 1990's nearly matching Denver's 30.4% growth rate during the same period.
While tourism remains one of the leading industries and contributed $1.2 billion
in 2002, electronics, high-technology and manufacturing have become major
sectors in Colorado Springs' growing economy. The presence of various military
installations has provided regional employment stability. Colorado Springs had
record average total employment in 2002 with unemployment levels slightly above
national levels of nearly 6.0%.
We face significant competition, both in generating loans as well as in
attracting deposits. Our primary market area is highly competitive and we face
direct competition from a significant number of financial service providers,
many with a state-wide or regional presence and, in some cases, a national
presence. In recent years, our market area has experienced continued
consolidation of the banking industry as locally based institutions have been
acquired by large regional and nationally based financial institutions.
Many of these financial service providers are significantly larger than us
and have greater financial resources. Our competition for loans comes
principally from commercial banks, savings banks, credit unions, mortgage
brokers, mortgage-banking companies and insurance companies. Our most direct
competition for deposits has historically come from savings associations,
commercial banks 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.
Lending Activities
Loan Portfolio Composition. A significant amount of our loan portfolio
continues to consist of first mortgage loans secured by single-family
residential properties. At December 31, 2002, our total loans receivable was
$1.9 billion, of which $573.2 million or 30.0% consisted of single-family
residential mortgage loans. Although the amount of such loans has remained
relatively stable (single-family residential loans totaled $502.5 million at
December 31, 2001), the percentage of our portfolio accounted for by such loans
has declined from 33.1% of our total loan portfolio at December 31, 2001 to
30.0% at December 31, 2002 as we have restructured our loan portfolio as a
result of our decision to increase our emphasis on commercial real estate and
land, commercial and residential construction and consumer lending as well as
warehouse mortgage lines of credit. In furtherance of our goals of increasing
the interest-rate sensitivity of the loans in our loan portfolio, we sell
essentially all newly originated fixed-rate single-family residential mortgage
loans. The emphasis on construction, commercial and multi-family real estate and
consumer lending has also allowed us to reduce the weighted average contractual
maturity of our loan portfolio. As a result of
5
implementing this strategy, at December 31, 2002, more than 68.8% of our total
loan portfolio had contractual maturities of 10 years or less while more than
68.2% of our total loan portfolio had adjustable interest rates.
As a result of the shift in emphasis, aggregate construction loans
(including undisbursed loans in process) have increased from $208.9 million or
13.8% of our total loan portfolio at December 31, 2001 to $299.3 million or
15.7% of our total loan portfolio at December 31, 2002. Our investment in
commercial real estate and land loans has also increased, from $258.3 million at
December 31, 2001 to $398.1 million at December 31, 2002. We also continued to
expand our involvement in providing warehouse mortgage lines of credit to
brokers. Such lending increased from $224.1 million or 14.8% of our total loan
portfolio at December 31, 2001 to $236.5 million or 12.4% of the total loan
portfolio at December 31, 2002. Warehouse mortgage lending advances in the
aggregate totaled $4.4 billion in 2002 compared to $3.8 billion in 2001 due to
the continued mortgage refinance activity.
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, among other things, economic conditions, monetary policies of
the federal government, including the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"), and legislative tax policies.
6
Loan Portfolio Composition. The following table shows the composition of
our loan portfolio by type of loan at the dates indicated.
December 31
-----------------------------------------------------------------------------
2002 2001 2000
---------------------- --------------------- ----------------------
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
(Dollars in Thousands)
Real estate loans:
One- to four-family residential(1) $ 573,209 30.00% $ 502,502 33.13% $ 565,441 46.75%
Multi-family residential 79,953 4.18 74,209 4.89 67,025 5.54
Commercial real estate and land 398,076 20.83 258,277 17.03 210,654 17.42
Residential construction 156,322 8.18 113,300 7.47 77,421 6.40
Commercial construction 143,020 7.49 95,614 6.30 46,187 3.82
---------- ----- ---------- ----- ---------- -----
Total real estate loans 1,350,580 70.68 1,043,902 68.82 966,728 79.93
---------- ----- ---------- ----- ---------- -----
Commercial business 33,375 1.75 12,193 0.80 2,755 0.23
Warehouse mortgage lines of credit 236,492 12.38 224,067 14.77 37,173 3.07
Consumer loans:
Home equity 37,522 1.96 45,398 2.99 57,264 4.74
Home equity line of credit 94,801 4.96 61,839 4.08 38,700 3.20
Home improvement 82,081 4.30 76,555 5.05 76,015 6.29
Automobile 60,707 3.18 42,547 2.80 22,496 1.86
Other 15,131 0.79 10,486 0.69 8,283 0.68
---------- ----- ---------- ----- ---------- -----
Total consumer loans 290,242 15.19 236,825 15.61 202,758 16.77
---------- ----- ---------- ----- ---------- -----
Total loans 1,910,689 100.00% 1,516,987 100.00% 1,209,414 100.00%
====== ====== ======
Less:
Unearned premiums and discounts 4,688 558 30
Discounts on loans acquired
through merger (174) (270) (336)
Undisbursed portion of
construction loans in process (123,331) (109,852) (70,625)
Deferred loan fees (516) (520) (462)
Allowance for loan losses (17,108) (13,464) (9,947)
---------- ---------- ----------
Net loans $1,774,248 $1,393,439 $1,128,074
========== ========== ==========
December 31
----------------------------------------------
1999 1998
--------------------- --------------------
Amount % Amount %
---------- ------ -------- -----
Real estate loans:
One- to four-family residential(1) $ 552,129 54.06% $507,586 55.69%
Multi-family residential 61,140 5.99 52,278 5.73
Commercial real estate and land 152,768 14.96 123,475 13.55
Residential construction 41,558 4.07 35,086 3.85
Commercial construction 6,800 0.66 7,220 0.79
---------- ------ -------- -----
Total real estate loans 814,395 79.74 725,645 79.61
---------- ------ -------- -----
Commercial business 1,956 0.19 1,781 0.20
Warehouse mortgage lines of credit 24,420 2.39 46,154 5.06
Consumer loans:
Home equity 43,683 4.28 35,477 3.89
Home equity line of credit 34,716 3.40 27,366 3.00
Home improvement 73,441 7.19 53,466 5.87
Automobile 20,966 2.05 15,251 1.67
Other 7,733 0.76 6,347 0.70
---------- ------ -------- -----
Total consumer loans 180,539 17.68 137,907 15.13
---------- ------ -------- -----
Total loans 1,021,310 100.00% 911,487 100.00%
====== ======
Less:
Unearned premiums and discounts 698 533
Discounts on loans acquired
through merger (453) (614)
Undisbursed portion of
construction loans in process (23,484) (16,125)
Deferred loan fees (337) (1,081)
Allowance for loan losses (8,860) (7,834)
---------- --------
Net loans $ 988,874 $886,366
========== ========
- ----------
(1) Includes loans held for sale of $8.5 million, $14.4 million, $3.7 million,
$2.0 million and $3.1 million at December 31, 2002, 2001, 2000, 1999 and
1998, respectively.
7
Contractual Terms to Final Maturities. The following table shows the
scheduled contractual maturities of our loans as of December 31, 2002, before
giving effect to net items. 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 amounts shown below do not take into account loan prepayments.
One- to Commercial
Four-Family Multi-family Real Estate Residential Commercial
Residential Residential and Land Construction Construction
----------- ------------ ----------- ------------ ------------
(In Thousands)
Amounts due after December 31, 2002 in:
One year or less $ 1,098 $ 16,163 $ 38,494 $ 129,447 $ 39,526
After one year through two years 894 8,042 32,706 12,265 33,480
After two years through three years 1,225 479 20,095 -- 3,200
After three years through five years 5,153 8,024 49,114 -- 24,675
After five years through ten years 39,455 36,113 237,542 -- 34,755
After ten years through fifteen years 37,726 11,132 16,958 371 7,384
After fifteen years 487,658 -- 3,167 14,239 --
---------- ---------- ---------- ---------- ----------
Total(1) $ 573,209 $ 79,953 $ 398,076 $ 156,322 $ 143,020
========== ========== ========== ========== ==========
Commercial Warehouse
Business Mortgage Lines
Loans of Credit Consumer Total
---------- -------------- ---------- ----------
(In Thousands)
Amounts due after December 31, 2002 in:
One year or less $ 8,275 $ 236,492 $ 22,352 $ 491,847
After one year through two years 8,639 -- 23,346 119,372
After two years through three years 5,269 -- 19,714 49,982
After three years through five years 6,308 -- 185,108 278,382
After five years through ten years 3,611 -- 23,648 375,124
After ten years through fifteen years 1,152 -- 15,668 90,391
After fifteen years 121 -- 406 505,591
---------- ---------- ---------- ----------
Total(1) $ 33,375 $ 236,492 $ 290,242 $1,910,689
========== ========== ========== ==========
- ----------
(1) Gross of loans in process, deferred fees, premiums and discounts, and
allowance for loan losses.
The following table shows the dollar amount of all loans, including loans
held for sale, before net items, due after one year from December 31, 2002 as
shown in the preceding table, which have fixed interest rates or which have
floating or adjustable interest rates.
Floating or
Fixed-Rate Adjustable-Rate Total
---------- --------------- ----------
(In Thousands)
One- to four-family residential $ 112,218 $ 459,893 $ 572,111
Multi-family residential 20,501 43,289 63,790
Commercial real estate and land 96,696 262,886 359,582
Residential construction 9,112 17,763 26,875
Commercial construction 61,258 42,235 103,493
Commercial business 14,512 10,589 25,101
Consumer 193,248 74,642 267,890
---------- ---------- ----------
Total $ 507,545 $ 911,297 $1,418,842
========== ========== ==========
8
Origination, Purchase, Sale and Servicing of Loans. Our lending activities
are subject to underwriting standards and loan origination procedures
established by our Board of Directors and management. Applications for mortgages
and other loans are taken at our banking and loan production offices. In the
past, we relied on a network of loan correspondents and brokers to originate a
substantial part of our loans. In recent years we have substantially expanded
our capacity to originate loans in-house through the hiring of a number of
experienced loan originators. We continue to use loan correspondents to
originate single-family residential loans for us. A substantial portion of such
loans consists of fixed-rate single-family residential mortgage loans which we
sell into the secondary market with servicing retained.
Although we originate both adjustable-rate and fixed-rate loans, our
ability to originate and purchase fixed or adjustable-rate loans is dependent
upon the relative customer demand for such loans, which is affected by the
current and expected future level of interest rates. The recent decline in
interest rates has increased our customer demand for fixed-rate loans. In order
to implement our strategy of building a mortgage loan portfolio that consists
primarily of adjustable-rate loans, our purchase activity has increased in
recent years. During the year ended December 31, 2002, we purchased a total of
$334.0 million of adjustable-rate single-family residential mortgage loans while
we originated an aggregate of $15.7 million of such loans. The loans purchased
for retention during this period consisted primarily of pools of adjustable-rate
jumbo single-family residential mortgage loans (loans in excess of secondary
market size limits of $322,700), commercial real estate and residential
construction loans and participation interests in such loans and consumer loans
(primarily home improvement loans and indirect automobile financing).
Generally, we originate adjustable-rate mortgage loans for our portfolio.
While we have in the past retained fixed-rate single-family loans, it is
currently our policy to sell substantially all the single-family fixed-rate
mortgage loans we originate or purchase. Substantially all of the loans sold are
sold to either Fannie Mae or Freddie Mac or the Federal Home Loan Bank of Topeka
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 Fannie Mae, Freddie Mac or the Federal Home Loan Bank of
Topeka 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. During 2002, we increased our purchases of fixed-rate
single-family residential mortgage loans for immediate sale when we decided to
increase the size of our servicing portfolio. While we purchased $15.6 million
of such loans in 2000, in 2001 and 2002 such purchases increased to $196.3
million and $339.2 million, respectively.
In recent years, we have developed primary lending relationships with
several financial institutions pursuant to which we have purchased whole loans
or loan participation interests secured
9
by properties located outside our market area. Most of such loans have consisted
of construction loans or participation interests in such loans, both residential
and commercial, as well as commercial real estate, and were originated under
underwriting guidelines substantially identical to our own guidelines. We
generally require the lead lender to maintain an interest in the loans, anywhere
from 5% to 50%, while our participation interest does not exceed 95%. Prior to
entering into such relationships, we conducted 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 market areas in which
the properties are located. In addition, we review each loan or loan
participation presented for purchase by the correspondent lender by applying our
own underwriting guidelines. 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. With respect to construction loans, we engage local inspectors to
inspect the progress of construction on properties securing such loans. We also
generally visit the lenders every three to six months to conduct follow-up
inspections of the lenders' operations as well as to review the collateral
property securing the loans or participations purchased by us. Of the primary
relationships, the first is with a mortgage broker in the Charleston and
Columbia, South Carolina markets. Pursuant to the relationship with this
mortgage broker, we have purchased loans made to local builders to finance the
construction of residential properties. Under the terms of our arrangement, the
mortgage broker shares 50% of any losses incurred on the loans purchased under
this arrangement and we service these loans. The second relationship is with a
financial institution headquartered in Birmingham, Alabama and involves the
purchase of generally a 50% loan participation interest in residential
construction loans and to a lesser extent, acquisition, development and
construction loans extended to builders. To date, the loans have been secured by
properties located in or surrounding Birmingham, Alabama, Atlanta, Georgia and
Jacksonville, Florida. A third relationship is with a financial institution in
Spokane, Washington, pursuant to which we have acquired participation interests,
generally 80% or less, primarily in commercial real estate, and to a lesser
extent, commercial construction loans. Most of the loans are secured by office
buildings, retail facilities and hotels located in various urban areas of Oregon
and Washington State including Portland, Oregon and Seattle and Spokane,
Washington. A substantial portion of loans purchased from the financial
institution in Spokane, Washington occurred in March 2002 and consisted of a 75%
to 80% participation interest in 25 commercial real estate loans totaling $54.0
million (with respect to our interest). We entered into a fourth relationship
with a life and health insurance company located in Portland, Oregon to purchase
up to a 95% participation interest in permanent loans secured by commercial real
estate located throughout the United States. In September 2002, we purchased 19
loans totaling $12.6 million (with respect to our interest) from this company. A
second transaction with this company was closed in December 2002 with the
purchase of 51 loans totaling $46.0 million. The loans in these packages are
secured by properties located primarily in California and Texas. At December 31,
2002, we held $293.4 million of loans and participations acquired through such
relationships. We have not incurred any losses on loans purchased through such
relationships as of December 31, 2002.
At December 31, 2002, we were servicing $730.1 million of loans for
others, primarily consisting of fixed-rate loans sold by us to investors. In
recent years, we began selling substantially
10
all loans with servicing retained in order to develop additional sources of
non-interest income. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagees, supervising foreclosures and property dispositions in the event of
unremedied defaults, remitting certain insurance and tax payments on behalf of
the borrowers and generally administering the loans. The gross servicing fee
income from loans sold is generally 0.25% to 0.50% of the total balance of each
loan serviced.
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 $38.2 million at December 31, 2002),
although we are permitted to lend 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. At December 31, 2002,
our three largest credit relationships with an individual borrower and related
entities consisted of either commercial construction loans or land acquisition
and development loans that total $20.2 million, $17.5 million, and $15.0
million, respectively. The largest credit relationship consists of two
construction loans (a first mortgage of $16.2 million and a second mortgage of
$4.0 million) to build a 184 unit apartment complex in Des Moines, Iowa. The
second largest relationship consists of a construction loan to acquire the land
and build a specialized for-profit cardiac hospital in Lincoln, Nebraska, while
the third relationship is a land acquisition loan to acquire and develop a 557
acre parcel of land in Lincoln, Nebraska. Each of these relationships was
performing in accordance with its terms and conditions as of December 31, 2002.
For more information regarding these loans, see "Lending Activities -
Construction Lending" and "- Multi-Family Residential Real Estate, Commercial
Real Estate and Land Lending."
11
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31
-------------------------------------------------
2002 2001 2000
----------- ----------- -----------
(In Thousands)
Loan originations:
One- to four-family residential:
Adjustable-rate $ 15,647 $ 15,099 $ 19,654
Fixed-rate 224,530 190,952 50,611
Multi-family residential 6,243 14,360 4,300
Commercial real estate and land 75,889 54,017 59,670
Residential construction 100,599 73,539 69,518
Commercial construction 69,793 66,270 35,210
Commercial business 38,340 14,701 2,287
Warehouse mortgage lines of credit(1) 4,427,554 3,841,872 1,311,926
Consumer 133,379 99,086 86,034
----------- ----------- -----------
Total loan originations 5,091,974 4,369,896 1,639,210
----------- ----------- -----------
Loan purchases:
One- to four-family residential:
Adjustable-rate 333,999 134,349 132,981
Fixed-rate(2) 339,173 196,303 15,631
Multi-family residential 19,696 -- 6,025
Commercial real estate and land 120,291 22,208 15,364
Residential construction 97,949 41,413 27,461
Commercial construction 14,200 9,655 14,927
Commercial business -- -- 262
Consumer 85,249 73,891 32,173
----------- ----------- -----------
Total loan purchases 1,010,557 477,819 244,824
----------- ----------- -----------
Total loan originations and
purchases 6,102,531 4,847,715 1,884,034
----------- ----------- -----------
Sales and loan principal repayments:
Loan sales:
One- to four-family residential (565,585) (359,010) (60,942)
Consumer (2,129) (1,171) (815)
Loan principal repayments:
Mortgage (545,312) (380,038) (239,134)
Warehouse mortgage lines of
credit(1) (4,415,441) (3,654,978) (1,299,172)
Consumer (180,362) (144,945) (95,940)
----------- ----------- -----------
Total loan sales and principal
repayments (5,708,829) (4,540,142) (1,696,003)
----------- ----------- -----------
Decrease due to other items, net(3) (12,893) (42,208) (48,831)
----------- ----------- -----------
Net increase in loan portfolio $ 380,809 $ 265,365 $ 139,200
=========== =========== ===========
- ----------
(1) Reflects amounts advanced and repaid under such lines of credit during the
periods presented.
(2) Substantially all of these loans were acquired from loan brokers and sold
to Fannie Mae, Freddie Mac and the Federal Home Loan Bank of Topeka with
servicing retained.
(3) Other items consist of loans in process, deferred fees, premiums and
discounts, and the allowance for loan losses.
Multi-Family Residential Real Estate, Commercial Real Estate and Land
Lending. We invest in multi-family residential real estate loans that are
secured by multi-family housing units and in commercial real estate loans that
are secured by properties generally used for business purposes, such as office
buildings and retail facilities, and land being held for commercial and
residential
12
development. The properties securing these loans are located primarily in
Lincoln and Omaha, Nebraska and in selected areas outside of our primary market
area. In the past, many of these loans were secured by properties in California,
Colorado and Arizona. In recent years, our focus has shifted toward Oregon and
Washington State. We have increased our involvement in this lending category as
part of our strategy to increase our investment in higher yielding and shorter
term loans. We have also increased our capacity to originate such loans
internally with the hiring of several experienced commercial real estate lenders
as well as the opening of new commercial real estate loan production offices in
Colorado Springs and Denver, Colorado.
Our underwriting procedures provide generally that commercial real estate
loans (as well as multi-family, land and commercial construction loans) may be
made in amounts up to 80% of the value of the property if it is located within
our primary market area and 75% of the value if it is outside our primary market
area. Any loan exceeding such loan-to-value ratio must be supported by
documentation of the relevant factors justifying the deviation which is reviewed
by the Board of Directors on a quarterly basis. The total of commercial real
estate loans exceeding established loan to value limits may not exceed 30% of
our risk-based capital. At December 31, 2002, commercial real estate and land,
multi-family and commercial construction loans exceeding our loan-to-value
guidelines totaled $53.5 million or 21% of our risk-based capital. In addition,
the total of all commercial and multi-family residential real estate, commercial
construction and land loans cannot exceed 50% of our total loan portfolio.
Furthermore, no more than 40% of such loans can be secured by properties located
in any one market area. Such loans are currently originated with adjustable
rates tied to the one year United States Treasury bill adjusted to a constant
maturity ("CMT") with terms of nine or ten years and with interest rates which
initially adjust three or five years after origination and every three or five
years thereafter. The loans have 20 or 25 year amortization schedules and
require payment of the remaining principal at maturity. We establish for each
loan an interest rate floor and ceiling. However, our loans do not have any
limit on the increase or decrease in the interest rate that may be effected at
the time of adjustment other than such floor and ceiling limits. All commercial
and multi-family residential loans are underwritten by our centralized loan
underwriting department. In underwriting these loans, we consider all aspects of
the ability and the credit profile of each borrower to repay the debt. We
consider the borrower's income, probable continuation of income and credit
history. Loans in excess of $10.0 million must be presented to and approved by
our Board of Directors. We have generally required that the properties securing
these real estate loans have debt service coverage ratios (the ratio of earnings
before debt service to debt service) of at least 125%. Personal guarantees are
often required. In addition, we require that security instruments contain
affirmative language concerning the prospective borrower's responsibility for
compliance with laws and regulations (including environmental, health and
safety) and for protecting the environmental conditions of the security
property. A phase one environmental assessment report, prepared in conformance
with our environmental risk policy, is obtained if the loan is in excess of $1.0
million or if there is any indication of possible contamination at the security
property.
Our commercial real estate loan portfolio, including land loans, at
December 31, 2002 was $398.1 million, or 20.8% of total loans, and our
multi-family residential real estate loan portfolio
13
at such date was $80.0 million, or 4.2% of total loans. Of the aggregate of such
portfolios, $322.1 million related to loans secured by properties outside our
primary market area. The average size of our commercial real estate,
multi-family residential real estate and land loans at December 31, 2002 was
$1.2 million, $1.3 million and $724,000, respectively. The largest multi-family
or commercial real estate loan at December 31, 2002 was a $10.0 million
participation interest which we purchased in 2001 in a $50.2 million two-year
credit facility issued by a local financial institution to a locally based and
nationally recognized golf course developer. The loan is secured by liens on 10
golf courses developed by the borrower. In addition, the principals have issued
personal guarantees. At December 31, 2002, $9.7 million of our participation
interest had been disbursed. This loan was performing in accordance with its
terms at December 31, 2002.
In recent periods we have increased our lending to finance the acquisition
of land for residential and commercial real estate projects. Such land loans
totaled $66.6 million at December 31, 2002 ($53.7 million of which had been
disbursed at such date). The largest of these loans at such date totaled $15.0
million and consists of a loan made in 2001 to a joint venture to acquire and
complete the infrastructure development of a 557 acre parcel of land in Lincoln,
Nebraska. This mixed-use project includes 740 residential lots, 14 acres for the
construction of multi-family residential units, 50 acres for the construction of
office and retail space and 68 acres for light industrial use. The majority
joint venture partner is a financial institution which has pledged a $1.0
million letter of credit against which we can draw in the event of default. The
other joint venture partner has given us a personal guarantee with respect to
40% of the loan principal. At December 31, 2002, $11.8 million had been
disbursed. The borrower is currently selling the residential and commercial
lots. The loan has a seven year term, interest only. The loan was performing in
accordance with its terms at December 31, 2002.
Loans secured by commercial and multi-family residential real estate
properties generally involve larger principal amounts and a greater degree of
risk than single-family residential mortgage loans. Payments on loans secured by
multi-family and commercial real estate properties 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 have also during recent years
become involved in commercial real estate construction as well as purchasing
residential construction loans or participation interests in such loans.
Approximately 53% of our residential construction loans are for pre-sold houses.
As part of the increased emphasis on construction lending, we hired several
experienced loan originators in order to increase our capabilities in this
lending area.
14
We originate our residential construction loans within our primary market
area typically through direct contact with home builders. Most of such loans
involve properties located in the Omaha and Lincoln, Nebraska metropolitan
areas. During the past few years, we have become involved in purchasing
residential construction loans and participation interests in such loans secured
by properties outside our primary market area, generally in Columbia and
Charleston, South Carolina, Atlanta, Georgia, and Birmingham, Alabama. Whether
we originate or purchase residential construction loans, we review all plans,
specifications and cost estimates and require that the contractor be known by us
to be reputable. The amount of construction advances to be made, together with
the sum of previous disbursements, may not exceed the percentage of completion
of the construction. Such loans generally have terms not exceeding 12 months,
have loan-to-value ratios of 90% or less of the appraised value upon completion
and do not require the amortization of the principal during the term of the
loan. The loans are made with adjustable rates of interest based on the Wall
Street Journal prime rate. At December 31, 2002, residential construction loans
(including participation interests) totaled $156.3 million (including
undisbursed loans in process), or 8.2% of our total loan portfolio. Of such
amount, $86.6 million related to loans secured by properties outside our primary
market area. The average loan size of our residential construction loans was
$218,000 at December 31, 2002.
We have increased significantly our involvement in commercial construction
lending during the last two years. As a result of such efforts, commercial
construction loans totaled $143.0 million (including undisbursed loans in
process) at December 31, 2002, or 7.5% of total loans, as compared to $95.6
million or 6.3% of total loans at December 31, 2001. The average loan size of
our commercial construction loans was $4.8 million at December 31, 2002. At
December 31, 2002, $30.1 million of our commercial construction loans were
secured by properties outside our primary market area. Most of such loans are
extended to build office buildings, hotels or apartment buildings. However,
during the past year, we have extended loans for substantially larger amounts
than was our past practice. A significant portion of our commercial construction
portfolio is accounted for by two loans. During 2001, we extended a $17.5
million two year construction loan to a limited liability company formed by
local physicians to acquire the land and build a 59 bed specialized for-profit
cardiac hospital located in Lincoln, Nebraska. Under the original terms of the
loan, we required the doctors who were to be the members of the limited
liability company to make a $7.4 million equity contribution, payable over the
construction period to the limited liability company. These amounts are pledged
to us as further security for the loan. At December 31, 2002, $14.0 million had
been disbursed. We also extended in 2001 a $16.2 million first mortgage loan to
construct a 184 unit upscale apartment complex located in Des Moines, Iowa. In
October 2002, additional financing was provided in the amount of $4.0 million
secured by a second mortgage loan on the 184 unit apartment complex. At December
31, 2002, we had disbursed $16.2 million and $1.9 million of the first and
second mortgages, respectively. Both loans mature in September 2003. We have
obtained personal guarantees from the borrower and there is a commitment in
place for financing from a permanent lender. Both loans were performing in
accordance with their terms at December 31, 2002.
15
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction
and other assumptions, including the estimated time to sell residential
properties. If the estimate of value proves to be inaccurate, we may be
confronted with a project, when completed, having a value which is insufficient
to assure full repayment.
Warehouse Mortgage Lines of Credit. In recent years, we have become
actively involved in originating revolving lines of credit to mortgage brokers.
The lines are drawn upon by such companies to fund the origination of one- to
four-family loans. Prior to funding the advance, the mortgage broker must have
an approved commitment for the purchase of the loan which in turn reduces credit
exposure associated with the line. The lines are repaid upon completion of the
sale of the mortgage loan to third parties 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 each company to which such
mortgage broker intends to sell loans which are being funded with the line of
credit from us. Under such agreements, the loan purchaser agrees to hold the
mortgage documents issued by the mortgage brokers on behalf of and for our
benefit until such time that the purchasers remit to us the purchase price for
such loans. The lines are structured with adjustable rates tied to the Wall
Street Journal prime rate plus or minus a margin with a floor on the interest
rate. We fund a portion of the advances using short-term borrowings from the
Federal Home Loan Bank. Maximum amounts permitted to be advanced by us under
existing warehouse mortgage lines of credit range in amount from $2.5 million to
$47.0 million. With respect to our largest line of credit, we arranged
participation interests aggregating $17.0 million to two other financial
institutions before extending a $30.0 million line of credit in order to limit
our risk and to ensure compliance with our loans-to-one borrower regulatory
limitation. At December 31, 2002, the largest outstanding amount under an
individual warehouse mortgage line was $27.8 million. This lending area
increased during 2002 due to the strength of the mortgage market resulting in
large part from the low interest rate environment. Outstanding balances under
warehouse mortgage lines of credit totaled $236.5 million and $224.1 million or
12.4% and 14.8% of the total loan portfolio at December 31, 2002, and 2001,
respectively. 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 depending upon the amount of the line and other factors.
Single-Family Mortgage Lending. We offer both fixed-rate and
adjustable-rate loans with maturities of up to 30 years secured by single-family
residences. Single-family mortgage loan originations are generally obtained from
our in-house loan representatives, from existing or past customers, from
mortgage brokers, and through referrals from members of our local communities.
Due to the limited demand at the present time in our market area for
adjustable-rate loans, we have determined to maintain the portfolio's size while
increasing its interest sensitivity through the purchase of pools of
adjustable-rate mortgage loans. At December 31, 2002, our single-family mortgage
loans totaled $573.2 million, or 30.0% of total loans. Of the single-family
residential
16
mortgage loans outstanding at that date, approximately 80.2% had adjustable
rates. The majority of such loans are secured by properties located outside our
primary market area.
We currently originate or purchase adjustable-rate single-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 indexed to a specified index, generally an index based
on the rate paid on the one year U.S. Treasury CMT, plus a margin. Our
adjustable-rate loans generally provide for periodic caps (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% to 6%.
The origination or purchase of adjustable-rate residential mortgage loans
helps reduce our exposure to increases in interest rates. However,
adjustable-rate loans generally pose credit 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 single-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 97% if private mortgage insurance is obtained. Mortgage
loans originated by us generally include due-on-sale clauses 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.
Due-on-sale clauses are an important means of adjusting the yields on our
fixed-rate mortgage loan portfolio and we have generally exercised our rights
under these clauses. We require fire, casualty, title and, in certain cases,
flood insurance on properties securing real estate loans made by us.
Consumer and Other Lending. Consumer loans, consisting primarily of home
equity, home improvement and automobile loans amounted to $290.2 million or
15.2% of our total loan portfolio at December 31, 2002. We generally offer home
equity loans and 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 value. We also offer home
improvement loans in amounts up to $100,000 with a term of 15 years or less and
a loan-to-value ratio up to 100% of value. A substantial portion of our home
improvement loans consist of participation interests we have purchased from a
third party. Under the terms of our arrangements with this third party, if any
loan becomes more than 120 days past due, we can require the seller to
re-purchase such loan at a price equal to our total investment in the loan,
including any uncollected and accrued interest. During 2002, we purchased $35.8
million of such loans and at December 31, 2002, we held $60.8 million of loans
purchased under such arrangement. We also offer automobile loans in amounts up
to $50,000 with 72 month and 60 month terms for new and used cars, respectively,
and purchase price ratios of not more than 95% for new cars and not more than
85% for used cars. Most of our automobile loans are obtained through a network
of 49 new and used automobile dealers located primarily in Lincoln and Omaha,
Nebraska. During 2002, we
17
purchased approximately $32.5 million of such loans. Although employees of the
automobile dealership take the application, the loans are made pursuant to our
own underwriting standards and must be approved by one of our authorized loan
officers. Upon closing of the loan by the dealer, the loan is purchased by us.
During 2000, we hired the members of an experienced lending group from another
financial institution which specialized in such lending. Our consumer loans also
include loans on recreational vehicles, boat loans, motorcycle loans, unsecured
loans, loans on deposit accounts and student loans.
Unsecured loans and loans secured by rapidly depreciating assets, such as
automobiles, entail greater risks than single-family residential mortgage loans.
In such cases, repossessed collateral 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 borrower's 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. At December 31, 2002, our consumer loans 90 days or more
delinquent totaled $427,000.
Commercial Business Lending. At December 31, 2002, we had $33.4 million in
commercial business loans which amounted to 1.8% of total loans receivable. Our
commercial business loans are made predominantly to small to mid-sized
businesses located within our primary market area. The largest credits consist
of two loans extended to a construction and excavation company located in
Lincoln, Nebraska. The loans are revolving credit lines with an aggregate
maximum of $16.5 million of which $6.5 million was disbursed as of December 31,
2002. We are increasing our focus on such lending in conjunction with our
overall increased emphasis on commercial real estate lending, including hiring
experienced commercial business lending officers. Although we currently
anticipate that commercial lending activity will increase in the future, we do
not expect it to become a significant part of our overall lending activity in
the near future.
Loan Approval Procedures and Authority. Our Board of Directors establishes
the lending policies and procedures for us. All general lending policies are set
on an ongoing basis by the Asset/Liability Committee composed of the following
officers of TierOne Bank: Chief Executive Officer; Chief Operating Officer;
Directors of: Lending, Administration, Retail Banking and Finance; Marketing
Officer and Controller. Under policies established by the Asset/Liability
Committee, various officers or combinations of officers have loan approval
authority, the specific amounts and requirements being set forth for each loan
type. For loan amounts in excess of $10.0 million, approval of our Board of
Directors is required.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis. These
reports include information regarding all loans 30 days or more delinquent and
all real estate owned. These reports are provided to the Board
18
of Directors. 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. We generally send the
borrower a written notice of non-payment after the loan is first past due. Our
underwriting guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment. When contact is made with the borrower at any
time prior to foreclosure, we will attempt to obtain full payment, work out a
repayment schedule with the borrower to avoid foreclosure or, in some instances,
accept a deed in lieu of foreclosure. In the event payment is not then received
or the loan not otherwise satisfied, additional 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 foreclosure proceedings
against any real property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the property securing the loan generally is sold at
foreclosure and, if purchased by us, becomes real estate owned.
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
Supervision's internal asset classifications as a part of our credit monitoring
system. We currently classify problem and potential problem assets as
"substandard," "doubtful" or "loss" assets. 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.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention."
When we classify one or more assets, or portions thereof, as
"substandard", "doubtful" or "loss", we establish a specific valuation allowance
for loan losses in an amount deemed prudent by management based on the specific
facts of the asset. In addition to these specific valuation allowances, we
establish a general valuation allowance to absorb losses which exist in the loan
portfolio but which have not been specifically identified. To quantify this
general valuation allowance, we segregate the loan portfolio by loan type and
apply loss factors to develop our allowance levels. These loss factors are
developed using our historical loan loss experience for each group of loans as
further adjusted for specific documented factors, including the following:
o Trends and levels of delinquent or "impaired" loans;
19
o Trends and levels of charge-offs;
o Trends in volume and underwriting terms or guarantees for the loans;
o Impact of changes in underwriting standards, risk tolerances, or
other changes in lending practices;
o Changes in qualifications or experience in lending staff;
o Local or national changes in economic or industry conditions; and
o Changes in credit concentration
When loss factors are not available from our own experience, we utilize
loss experience from other institutions as a starting point. This peer group
information is only utilized if the other institutions possesses similar
portfolio size, composition and risk factors.
Although 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
reasonably estimable at such date, actual losses are dependent upon future
events and, as such, further additions to the level of allowances for loan
losses may become necessary.
The Asset Classification Committee is composed of the following officers
of TierOne Bank: Chief Executive Officer; Chief Operating Officer; Directors of
Lending and Finance; Assistant Director of Lending; Controller and Chief Credit
Officer. The Asset Classification Committee reviews and classifies assets on a
monthly basis and the Board of Directors reviews the results of the reports on a
quarterly basis. At December 31, 2002 and 2001, we had $7.5 million and $1.8
million, respectively, of assets classified as "substandard" which consisted of
real estate owned, non-accrual single-family residential mortgage and consumer
loans. Non-accrual loans are those loans 90 days or more delinquent. At December
31, 2002 and 2001, included in loans 90 days or more delinquent were $5.5
million and $1.7 million, respectively, of substandard assets. At such dates, we
had no loans classified as "doubtful" or "loss." In addition, as of December 31,
2002 and 2001, we had $18.1 million and $0, respectively, of loans designated
"special mention."
20
Delinquent Loans. The following table shows the delinquencies in our loan
portfolio as of the dates indicated.
December 31, 2002 December 31, 2001
------------------------------------------- ---------------------------------------------
30-89 90 or More Days 30-89 90 or More Days
Days Overdue Overdue Days Overdue Overdue
-------------------- -------------------- ---------------------- --------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
One- to four-family residential 26 $3,763 11 $1,161 40 $6,632 14 $ 898
Multi-family residential -- -- -- -- -- -- -- --
Commercial real estate and land -- -- 2 3,795 -- -- -- --
Residential construction 2 258 1 106 -- -- -- --
Commercial construction -- -- -- -- -- -- -- --
Commercial business -- -- -- -- -- -- -- --
Warehouse mortgage lines of credit -- -- -- -- -- -- -- --
Consumer loans 209 2,499 39 427 204 2,694 89 767
------ ------ ------ ------ ------ ------ ------ ------
Total delinquent loans 237 $6,520 53 $5,489 244 $9,326 103 $1,665
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to total loans 0.34% 0.29% 0.61% 0.11%
====== ====== ====== ======
21
Non-Accrual Loans and Real Estate Owned. The following table sets forth
information regarding non-accrual loans and real estate owned. At December 31,
2002, nonperforming loans consisted of 12 single-family residential loans with
an average balance of $106,000 and 39 consumer loans with an average balance of
$11,000. At such date, real estate owned totaled $2.0 million consisting of nine
single-family residential properties and repossessed automobiles. Troubled debt
restructurings consisted of six loans with an average balance of $35,000 at
December 31, 2002. Such restructured loans were performing in accordance with
their terms at such date. It is our policy to cease accruing interest on loans
90 days or more past due and to charge off all accrued interest. For the years
ended December 31, 2002 and 2001, the amount of interest income not recognized
on non-accrual loans was $290,000 and $86,000, respectively. Total impaired
loans, amounted to approximately $4.0 million and $345,000 at December 31, 2002
and 2001, respectively.
The following table shows the amounts of our nonperforming assets at the
dates indicated. We did not have any accruing loans 90 days or more past due at
the dates shown.
December 31
--------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family residential $1,161 $ 898 $1,009 $1,312 $1,101
Multi-family residential -- -- -- -- 672
Commercial real estate and land 3,795 -- 2,703 -- --
Residential construction 106 -- 380 -- --
Commercial construction -- -- -- -- --
Commercial business -- -- -- -- --
Warehouse mortgage lines of credit -- -- -- -- --
Consumer 427 767 416 239 52
------ ------ ------ ------ ------
Total non-accruing loans 5,489 1,665 4,508 1,551 1,825
Real estate owned, net (1) 1,967 168 807 352 540
------ ------ ------ ------ ------
Total nonperforming assets $7,456 $1,833 $5,315 $1,903 $2,365
====== ====== ====== ====== ======
Troubled debt restructurings $ 209 $ 345 $ 185 $ 127 $ 127
Total nonperforming assets and troubled
debt restructurings $7,665 $2,178 $5,500 $2,030 $2,492
====== ====== ====== ====== ======
Total nonperforming loans as a percent of
net loans, exclusive of allowance for
loan losses 0.31% 0.12% 0.40% 0.16% 0.20%
====== ====== ====== ====== ======
Total nonperforming assets as a percent of
total assets 0.38% 0.12% 0.39% 0.15% 0.21%
====== ====== ====== ====== ======
Total nonperforming assets and troubled
debt restructurings as a percent of total
assets 0.39% 0.14% 0.40% 0.16% 0.22%
====== ====== ====== ====== ======
- ----------
(1) Real estate owned balances are shown net of related loss allowances.
Includes both real property and other repossessed collateral consisting
primarily of automobiles.
22
When we acquire 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. Thereafter, if there is a further deterioration
in value, we provide for a specific valuation allowance and charge operations
for the diminution in value. It is our policy to obtain an appraisal or broker's
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 and conduct inspections on foreclosed properties.
Allowance for Loan Losses. A provision for loan losses is charged to
income when it is determined by management to be required based on its analysis.
The allowance 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. Management's review includes a
quantitative analysis by loan category, using historical loss experience,
classifying loans pursuant to a grading system and consideration of a series of
qualitative loss factors. The evaluation process includes, among other things,
an analysis of delinquency trends, nonperforming loan trends, the level of
charge-offs and recoveries, prior loss experience, the type, size and geographic
concentration of loans, the value of collateral securing the loan, the number of
loans requiring heightened management oversight, prevailing local and national
economic conditions and loan loss data of comparable institutions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available or as
future events change.
The allowance for loan losses is maintained at a level believed, to the
best of management's knowledge, to cover all known and inherent losses in the
portfolio that are both probable and reasonable to estimate at each reporting
date. The allowance for loan losses consists of two elements. The first element
is an allocated allowance established for specific loans identified by the
Company's 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 the Company 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 (i)
the fair value of the collateral if the loan is collateral dependent, (ii) the
present value of expected future cash flows, or (iii) the loan's obtainable
market price. The second element is an estimated allowance established for
losses which are probable and reasonable to estimate on each of the Company's
categories 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 the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgment of information available to them at the
time of their examination.
23
The following table shows changes in our allowance for loan losses during
the periods presented.
At or For the Year Ended December 31
-------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Net loans, exclusive of allowance for loan
losses $1,791,356 $1,406,903 $1,138,021 $ 997,734 $ 894,200
Average net loans outstanding 1,469,785 1,228,956 1,109,365 926,748 864,848
Allowance for loan losses, beginning of period 13,464 9,947 8,860 7,834 7,160
Provision for loan losses 4,695 3,997 1,273 1,132 832
Charge-offs:
One- to four-family residential 37 37 61 4 3
Multi-family -- -- -- -- --
Commercial real estate and land -- 1 -- -- 80
Residential construction -- -- -- -- --
Commercial construction -- -- -- -- --
Commercial business 99 -- -- -- --
Warehouse mortgage lines of credit -- -- -- -- --
Consumer(1) 1,018 458 137 117 90
---------- ---------- ---------- ---------- ----------
Total charge-offs 1,154 496 198 121 173
---------- ---------- ---------- ---------- ----------
Recoveries on loans previously charged off 103 16 12 15 15
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, end of period $ 17,108 $ 13,464 $ 9,947 $ 8,860 $ 7,834
========== ========== ========== ========== ==========
Allowance for loan losses as a percent of
net loans, exclusive of allowance for loan
losses 0.96% 0.96% 0.87% 0.89% 0.88%
========== ========== ========== ========== ==========
Allowance for loan losses as a percent of
nonperforming loans 311.68% 808.65% 220.65% 571.24% 429.26%
========== ========== ========== ========== ==========
Ratio of net charge-offs during the period
to average loans outstanding during the
period 0.08% 0.04% 0.02% 0.01% 0.02%
========== ========== ========== ========== ==========
- ----------
(1) Includes, for the year ended December 31, 2002, charge-offs of home equity
loans, home improvement loans, auto loans, recreation vehicle loans,
equity lines of credit and other loans of $94,000, $68,000, $708,000,
$23,000, $39,000 and $86,000, respectively.
24
The following table shows how our allowance for loan losses is allocated
by type of loan at each of the dates indicated.
December 31
------------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
Loan Loan Loan
Category Category Category
Amount as a % Amount as a % Amount as a %
of of Total of of Total of of Total
Allowance Loans Allowance Loans Allowance Loans
--------- -------- --------- -------- --------- --------
(Dollars in Thousands)
One- to four-family residential $ 1,071 30.00% $ 976 33.13% $ 813 46.75%
Multi-family residential 1,740 4.18 1,715 4.89 1,395 5.54
Commercial real estate and
land 6,343 20.83 3,876 17.03 3,316 17.42
Residential construction 1,051 8.18 597 7.47 353 6.40
Commercial construction 1,259 7.49 586 6.30 235 3.82
Commercial business 400 1.75 146 0.80 33 0.23
Warehouse mortgage lines of
credit 473 12.38 448 14.77 74 3.07
Consumer 4,771 15.19 4,736 15.61 3,447 16.77
Unallocated -- -- 384 -- 281 --
------- ------ ------- ------ ------- ------
Total $17,108 100.00% $13,464 100.00% $ 9,947 100.00%
======= ====== ======= ====== ======= ======
December 31
--------------------------------------------------
1999 1998
---------------------- ----------------------
Loan Loan
Category Category
Amount as a % Amount as a %
of of Total of of Total
Allowance Loans Allowance Loans
--------- -------- --------- --------
One- to four-family residential $ 899 54.06% $ 892 55.69%
Multi-family residential 1,440 5.99 1,329 5.73
Commercial real estate and
land 2,723 14.96 2,377 13.55
Residential construction 214 4.07 195 3.85
Commercial construction 40 0.66 45 0.79
Commercial business 14 0.19 14 0.20
Warehouse mortgage lines of
credit 56 2.39 114 5.06
Consumer 3,474 17.68 2,868 15.13
Unallocated -- -- -- --
------- ------ ------- ------
Total $ 8,860 100.00% $ 7,834 100.00%
======= ====== ======= ======
25
Investment Activities
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, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets 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 the Board of Directors, requires
management to maintain adequate liquidity, generate a favorable return on
investments without incurring undue interest rate and credit risk and to
complement our lending activities. We primarily utilize investments in
securities for liquidity management and as a method of deploying excess funding
not utilized for loan originations. We have invested primarily in U.S.
Government and agency securities, corporate commercial paper, mutual funds, U.S.
Government sponsored agency issued mortgage-backed securities and collateralized
mortgage obligations. As required by SFAS No. 115, 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. The majority of our investment securities are
purchased for the available for sale portfolio which totaled $30.5 million, or
1.6% of total assets, at December 31, 2002. At such date, we had net unrealized
losses with respect to such securities of $872,000. At December 31, 2002, the
held to maturity securities portfolio totaled $157,000.
At December 31, 2002, we had invested $29.9 million in mortgage-backed
securities, or 1.5% of total assets, all of which were classified as available
for sale. Of such amount, $13.1 million were issued by Fannie Mae, $12.8 million
were issued by the Government National Mortgage Association ("GNMA") and
$552,000 were issued by Freddie Mac. Of the $29.9 million of mortgage-backed
securities, $22.1 million had adjustable-rates with maximum interest rate
adjustments of 1.0% to 2.0% annually and up to 5.0% to 6.0% over the life of the
security. 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 such securities are redeemed by
the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
The 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. Freddie Mac
26
is a private corporation chartered by the U.S. Government. Freddie Mac issues
participation certificates backed principally by conventional mortgage loans.
Freddie Mac guarantees the timely payment of interest and the ultimate return of
principal on participation certificates. Fannie Mae is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for mortgage loans. Fannie Mae guarantees the timely payment of principal and
interest on Fannie Mae securities. Freddie Mac and Fannie Mae securities are not
backed by the full faith and credit of the U.S. Government, but because Freddie
Mac and Fannie Mae are U.S. Government-sponsored enterprises, these securities
are considered to be among the highest quality investments with minimal credit
risks.
Collateralized mortgage obligations are typically issued by
special-purpose entities, such as private issuers or government agencies, which
may be organized in a variety of legal forms, such as a trust, a corporation, or
a partnership. Substantially all of the collateralized mortgage obligations held
in our portfolio consist of senior sequential tranches, primarily investments in
the first tranche of the collateralized mortgage obligations. By purchasing
senior sequential tranches, management attempts to ensure the cash flow
associated with such an investment. While non_agency private issues are somewhat
less liquid than collateralized mortgage obligations issued by GNMA, Fannie Mae
or Freddie Mac, they generally have a higher yield than agency insured or
guaranteed collateralized mortgage obligations, such higher yield reflecting in
part the lack of guarantee or protection and, thus, the potentially higher risk
of loss or default associated with such assets.
27
The following table sets forth certain information relating to our
investment securities portfolio (excluding mortgage-backed securities) at the
dates indicated.
December 31
---------------------------------------------------------------------------------------
2002 2001 2000
----------------------- ------------------------ ------------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- -------- --------
(In Thousands)
U.S. government agency obligations $ 2,000 $ 2,000 $ 26,691 $ 26,691 $ 76,500 $ 76,230
Corporate securities 23,418 22,546 12,214 11,833 8,978 8,705
Municipal obligations 157 157 221 221 195 195
Asset Management Fund-ARM Fund 6,000 6,000 6,000 6,000 -- --
-------- -------- -------- -------- -------- --------
Total investment securities 31,575 30,703 45,126 44,745 85,673 85,130
FHLB stock 21,459 21,459 14,836 14,836 15,160 15,160
-------- -------- -------- -------- -------- --------
Total investment securities and
FHLB stock $ 53,034 $ 52,162 $ 59,962 $ 59,581 $100,833 $100,290
======== ======== ======== ======== ======== ========
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities) which mature during each of the periods
indicated and the weighted average yields for each range of maturities at
December 31, 2002. No tax-exempt yields have been adjusted to a tax-equivalent
basis.
Amounts at December 31, 2002 Which Mature In
--------------------------------------------------------------------------------------
Over One
Weighted Year Weighted Over Five Weighted Over Weighted
One Year Average Through Average Through Average Ten Average
or Less Yield Five Years Yield Ten Years Yield Years Yield
-------- -------- ---------- -------- --------- -------- ------- --------
(Dollars in Thousands)
Bonds and other debt securities:
U.S. government agency obligations $ -- $ 2,000 3.13% $ -- $ --
Corporate securities 9,916 3.44% 4,990 5.81 -- 8,512 2.62%
Municipal obligations -- -- 157 8.25% --
Equity securities: -- -- -- --
Asset Management Fund-ARM Fund 6,000 2.43 -- -- --
FHLB stock(1) 21,459 3.50 -- -- --
------- ---- ------- ---- ------- ---- ------- ----
Total investment securities and FHLB
stock $37,375 3.31% $ 6,990 5.04% $ 157 8.25% $ 8,512 2.62%
======= ==== ======= ==== ======= ==== ======= ====
(1) As a member of the Federal Home Loan Bank of Topeka, we are required to
maintain our investment in FHLB stock, which has no stated maturity.
28
The following table sets forth the composition of our mortgage-backed
securities portfolio at each of the dates indicated.
December 31
-------------------------------------
2002 2001 2000
------- ------- -------
(In Thousands)
Fixed-rate:
FHLMC $ 148 $ 233 $ 349
FNMA 4,132 6,228 9,648
FHLMC/FNMA CMOs -- 3,101 387
Private CMOs 3,492 7,582 8,314
------- ------- -------
Total fixed-rate 7,772 17,144 18,698
------- ------- -------
Adjustable-rate:
GNMA 12,786 4,608 7,058
FNMA 8,919 23,441 41,990
FHLMC 404 595 1,266
------- ------- -------
Total adjustable-rate 22,109 28,644 50,314
------- ------- -------
Total mortgage-backed securities $29,881 $45,788 $69,012
======= ======= =======
Information regarding the contractual maturities and weighted average
yield of our mortgage-backed securities portfolio at December 31, 2002 is
presented below. Due to repayments of the underlying loans, the actual
maturities of mortgage-backed securities generally are substantially less than
the scheduled maturities.
Amounts at December 31, 2002 Which Mature In
----------------------------------------------------------------------------
Weighted Over One Weighted Weighted
One Year Average through Average Over Five Average
or Less Yield Five Years Yield Years Yield
-------- -------- ---------- -------- --------- --------
(Dollars in Thousands)
Fixed-rate:
FHLMC $ -- --% $ -- --% $ 148 8.50%
FNMA -- -- 26 8.00 4,106 6.17
Private CMOs -- -- 9 8.59 3,483 6.47
------- ------- ---- ------- ----
Total fixed-rate -- -- 35 8.15 7,737 6.35
------- ------- ---- ------- ----
Adjustable-rate:
GNMA -- -- -- -- 12,786 4.36
FNMA -- -- -- -- 8,919 5.95
FHLMC -- -- -- -- 404 5.90
------- ------- ---- ------- ----
Total adjustable-rate -- -- -- -- 22,109 5.03
------- ---- ------- ---- ------- ----
Total $ -- --% $ 35 8.15% $29,846 5.37%
======= ==== ======= ==== ======= ====
29
The following table sets forth the purchases, sales and principal
repayments of our mortgage-backed securities during the periods indicated.
At or For the
Year Ended December 31
-----------------------------------------------
2002 2001 2000
--------- --------- ---------
(Dollars in Thousands)
Mortgage-backed securities at beginning of period $ 45,788 $ 69,012 $ 155,047
Purchases 19,706 11,628 --
Repayments (35,485) (34,810) (27,213)
Sales -- -- (59,528)
Amortizations of premiums and discounts, net (128) (42) 706
--------- --------- ---------
Mortgage-backed securities at end of period $ 29,881 $ 45,788 $ 69,012
========= ========= =========
Weighted average yield at end of period 5.37% 6.14% 6.66%
========= ========= =========
Sources of Funds
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and Federal Home Loan Bank advances
are the primary sources of our funds for use in lending, investing and for other
general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposits consist of checking (both interest-bearing and
noninterest-bearing), money market, savings, certificate accounts and individual
retirement accounts. At December 31, 2002, more than 54% of the funds deposited
with us are in core deposits (deposits other than certificates of deposit).
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Our deposits are obtained predominantly from the areas where our
banking offices are located. We have historically relied primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect our ability to attract and retain
deposits.
We use traditional means of advertising our deposit products, including
broadcast and print media, and generally do not solicit deposits from outside
our market area. In recent years, we have expanded our marketing efforts to
include direct mailings in an effort to attract new checking relationships. This
marketing strategy has resulted in a significant increase in core deposits,
particularly checking accounts, a