# UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 10-K

# [X]       Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act           of 1934

# For the fiscal year
ended December 31, 2005

# Commission File
Number: 005-78774

|TierOne Corporation                                   
|------------------------------------------------------
|(Exact name of registrant as specified in its charter)

|Wisconsin                                     | 04-3638672            
|--------------------------------------------- | ----------------------
|(State or Other Jurisdiction of Incorporation | (I.R.S. Employer      
|or Organization)                              | Identification Number)

# Registrants
Address: 1235 N Street, Lincoln, Nebraska 68508Registrants Telephone Number,
including area code: (402) 475-0521 Securities registered pursuant to Section 12(b) of
the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class
Common Stock, Par Value $0.01 Per Share

Indicate whether the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  |X|  NO  |  |

Indicate if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Act.  YES  |  |  NO  |X|

Indicate whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  YES  |X|  NO  |  |

Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the 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.  |  |

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer
(as defined in Rule 12b-2 of the Act). Large accelerated filer  |  |  Accelerated filer  |X|  
Non-accelerated filer  |  |

Indicate whether the registrant is a
shell company (as defined in Rule 12b-2 of the Act).  YES  |  |  NO  |X|

The aggregate market value of the
voting stock held by non-affiliates of the Registrant was $492,179,492 as of June 30,
2005. As of March 8, 2006, there were 18,152,773 issued and outstanding shares of the
Registrants common stock.

---

# Documents Incorporated
by Reference

Portions of the definitive Proxy
Statement for the Registrants Annual Meeting of Shareholders to be held May 17, 2006
are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14.

---

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# TierOne Corporation

# Form 10-K Index

|          
|----------
|Item 1.   
|Item 1A.  
|Item 1B.  
|Item 2.   
|Item 3.   
|Item 4.   
|          
|Item 5.   
|          
|Item 6.   
|Item 7.   
|          
|Item 7A.  
|Item 8.   
|Item 9.   
|          
|Item 9A.  
|Item 9B.  
|          
|Item 10.  
|Item 11.  
|Item 12.  
|          
|Item 13.  
|Item 14.  
|          
|Item 15.  
|Signatures

2

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# Safe Harbor Statement
under the Private Securities Litigation Reform Act of 1995

Statements
contained in this Annual Report on Form 10-K and the accompanying 2005 Annual Report which
are not historical facts may be forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward looking statements are
subject to risks and uncertainties which could cause actual results to differ materially
from those currently anticipated due to a number of factors. In addition to the risk
factors described in Item 1A. of this Annual Report on Form 10-K, factors which could
result in material variations include, but are not limited to:

| |  | Strength
of the United  States  economy in general and the strength of the local  economies in
which the Company  conducts its          operations;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Changes
in interest rates or other competitive factors which could affect net interest margins,
net interest income and noninterest income;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | Changes
in demand for loans, deposits and other financial services in the Company's market area;
| | - | ------------------------------------------------------------------------------------------------

| |  | Increases
in the levels of losses, customer bankruptcies, claims and assessments;
| | - | ---------------------------------------------------------------------------------

| |  | Unanticipated
issues associated with the execution of the Companys strategic plan;
| | - | -----------------------------------------------------------------------------------

| |  | Changes
in fiscal, monetary, regulatory, trade and tax policies and laws;
| | - | -------------------------------------------------------------------------

| |  | Increased
competitive challenges and expanding product and pricing pressures among financial
institutions;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | Changes
in accounting policies or procedures as may be required by various regulatory agencies;
| | - | -----------------------------------------------------------------------------------------------

| |  | Changes
in consumer spending and saving habits; and
| | - | ---------------------------------------------------

| |  | Other
factors discussed in documents filed by the Company with the Securities and Exchange
Commission from time to time.
| | - | ------------------------------------------------------------------------------------------------------------------------

These
factors should be considered in evaluating the forward-looking statements and undue
reliance should not be placed on such statements. The Company undertakes no obligation,
and disclaims any obligation, to update information contained in this Annual Report on
Form 10-K, including these forward-looking statements, to reflect events or circumstances
that occur after the date of the filing of this Annual Report on Form 10-K and the
accompanying 2005 Annual Report.

3

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# Part I

As
used in this report, unless the context otherwise requires, the terms we,
us, or our refer to TierOne Corporation and its wholly owned
subsidiary, TierOne Bank.

# Item 1. Business

# General

TierOne
Corporation (Company) is a Wisconsin corporation headquartered in Lincoln,
Nebraska. TierOne Corporation is the holding company for TierOne Bank (Bank).
The Bank has two wholly owned subsidiaries, TMS Corporation of the Americas
(TMS) and United Farm & Ranch Management, Inc. (UFARM). TMS is
the holding company of TierOne Investments and Insurance, Inc., a wholly owned subsidiary
that administers the sale of securities and insurance products, and TierOne Reinsurance
Company, a wholly owned subsidiary that reinsures credit life and disability insurance
policies. UFARM provides agricultural customers with professional farm and ranch management and
real estate brokerage services.

The
assets of the Company, on an unconsolidated basis, primarily consist of 100% of the
Banks common stock. The Company has no significant independent source of income and
therefore depends on cash distributions from the Bank to meet its funding requirements.

Our
results of operations are dependent primarily on net interest income, which is the
difference between the interest earned on our assets, primarily our loan and securities
portfolios, and our cost of funds, which consists of the interest paid on our deposits and
borrowings. Our net income is also affected by our provision for loan losses, noninterest
income, noninterest expense and income tax expense. Noninterest income generally includes
fees and service charges, debit card fees, net income from real estate operations, net
gain on sales of investment securities, loans held for sale and real estate owned and
other operating income. Noninterest expense consists of salaries and employee benefits,
occupancy(net), data processing, advertising and other operating expense. Our earnings are
significantly affected by general economic and competitive conditions, particularly
changes in market interest rates and U.S. Treasury yield curves, government policies and
actions of regulatory authorities.

# Market Area and
Competition

We
are a regional community bank offering a variety of financial products and services to
meet the needs of the customers we serve. Our deposit gathering is concentrated in the
communities surrounding our 68 banking offices located in Nebraska, seven counties in
southwest Iowa and two counties in northern Kansas (Primary Banking Market
Area). In addition to loans generated through our banking offices, our lending
efforts have been expanded to include nine loan production offices located in Arizona,
Colorado, Florida, Minnesota, Nevada and North Carolina whose sole purpose is to originate
commercial real estate and land and/or construction loans in their respective states.

We
face significant competition, both in generating loans as well as in attracting deposits.
Our market area is highly competitive and we face direct competition from a significant
number of financial service providers, many with a statewide or regional presence and, in
some cases, a national presence. In recent years, our market area has experienced
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 and associations, credit unions, mortgage brokers, mortgage-banking
companies and insurance companies. Our most direct competition for deposits has
historically come from commercial banks, savings banks and associations and credit unions.
In addition, we face increasing competition for deposits from non-bank institutions such
as brokerage firms and insurance companies in such instruments as short-term money market
funds, corporate and government securities funds, equity securities, mutual funds and
annuities.

4

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# Available Information

We
are a public company and are required to file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(SEC). We maintain a website at www.tieronebank.com and make available,
free of charge, copies of our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to such
documents as soon as reasonably practicable after the reports have been electronically
filed or furnished to the SEC. In addition, we provide our Code of Conduct and Ethics,
Audit Committee Charter, Compensation Committee Charter and Nominating and Corporate
Governance Committee Charter on our website. We are not including the
information contained on or available through our website as a part of, or incorporating
by reference into, this Annual Report on Form 10-K.

# Lending Activities

General.         We
originate loans to customers located in Nebraska, Iowa, Kansas, Arizona,
          Colorado, Florida, Minnesota, Nevada and North Carolina (Primary Lending
          Market Area). We also purchase loans and loan participation interests
from           financial institutions, loan correspondents and mortgage bankers located
          throughout the United States. At December 31, 2005 and 2004 approximately 22.2%
          and 29.2%, respectively, of our loan portfolio consisted of loans secured by
          properties located outside of our Primary Lending Market Area. In recent years,
          we have become a regional community bank by shifting our focus to construction,
          commercial real estate and land, business and consumer lending. These loans
          typically have relatively higher yields, adjustable interest rates and/or
          shorter terms to maturities than one-to-four family residential loans.

Loan
Approval Procedures and Authority. General lending policies and procedures
are established by our Asset/Liability Committee which is composed of the following
officers of the Bank: Chief Executive Officer, Chief Operating Officer, Director of
Lending, Director of Administration, Director of Retail Banking, Chief Financial Officer,
Controller and Senior Financial Analysis Manager. Our Board of Directors reviews and
approves lending policies and procedures established by the Asset/Liability Committee and
recommended to the Board of Directors. Under policies approved by the Board of Directors,
various officers or combinations of officers have loan approval authority, the specific
amounts and requirements being set forth for each loan type. For loan amounts in excess of
$10.0 million, approval of our Board of Directors is required.

Loan
Portfolio Composition. At December 31, 2005, our total loans receivable
amounted to $3.5 billion. In recent years, we have shifted the focus of our lending
strategy to place an increased emphasis on construction, business, commercial real estate
and land, consumer, multi-family residential and agricultural loans as well as warehouse
mortgage lines of credit. The types of loans that we may purchase and originate are
subject to federal and state laws and regulations. The interest rates we charge on loans
are affected by the demand for such loans and the supply of money available for lending
purposes and the rates offered by competitors. These factors are, in turn, affected by
general and local economic conditions, monetary policies of the Federal Government,
including the Board of Governors of the Federal Reserve System and legislative tax
policies.

Residential
Mortgage Lending. We offer both fixed- and adjustable-rate loans with
maturities of up to 40 years secured by one-to-four family properties. One-to-four family
residential mortgage loan originations are generally obtained from our in-house loan
representatives, from existing or past customers, from mortgage bankers and through
referrals from members of our local communities. We also originate and/or purchase from
correspondent lenders second mortgage loans in amounts up to 100% of the appraised value
of the collateral with maturities of up to 30 years.

We
currently originate fixed-rate, one-to-four family residential mortgage loans with terms
of up to 40 years. We sell substantially all newly originated fixed-rate, one-to-four
family residential loans in the secondary market on a servicing retained basis which
produces noninterest income in the form of net gains and losses on sales and loan
servicing fees.

5

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We
originate or purchase adjustable-rate, one-to-four family residential mortgage loans with
terms of up to 30 years and interest rates which generally adjust one to seven years from
the outset of the loan and thereafter annually for the duration of the loan. The interest
rates for such adjustable-rate loans are normally tied to indices such as the U.S.
Treasury CMT or LIBOR, plus a margin. Our adjustable-rate loans generally provide for
periodic caps (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, one-to-four family 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 one-to-four family residential mortgage loans in amounts up to 80% of the
lower of the appraised value or the selling price of the property and up to 100% if
private mortgage insurance is obtained. Mortgage loans originated by us generally include
due-on-sale provisions which provide us with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the property
without our consent. We require fire, casualty, title and, in certain cases, flood
insurance on properties securing mortgage loans made by us.

Multi-Family
Residential and Commercial Real Estate and Land Lending.We offer multi-family
residential and commercial real estate and land loans for both construction and permanent
financing collateralized by real property. These loans are generally used for business
purposes such as apartment buildings, office and retail facilities and land being held for
commercial and residential development. The properties securing these loans are generally
located in our Primary Lending Market Area and in selected areas outside of our Primary
Lending Market Area. We have increased our involvement in these lending categories as part
of our strategy to increase our investment in loans with relatively higher yields,
adjustable interest rates and/or shorter terms to maturity. We increased our capacity to
originate such loans during 2004 and 2005 with the hiring of several experienced real
estate lenders.

Our
underwriting procedures generally provide 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 Lending Market Area and 75%
of the value if it is outside our Primary Lending Market Area. Any loans exceeding
prescribed loan-to-value ratios must be reviewed by our Board of Directors and supported
by documentation of the relevant factors justifying the deviation from policy.

Loans
secured by commercial real estate and land and multi-family residential
properties generally involve larger principal amounts and a greater degree of risk than
one-to-four 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 originate most of our residential construction loans within our Primary
Lending Market Area typically through direct contact with home builders. At December 31,
2005, approximately 83.7% of our residential construction loans were located in our
Primary Lending Market Area. At December 31, 2005, approximately 70% of our residential
construction loans were for pre-sold houses. During the years ended December 31, 2005 and
2004, we purchased $589.5 million and $551.7 million, respectively, of residential
construction loans.

We
also originate commercial real estate construction loans as well as purchase
participation interests in such loans. We provide commercial construction loans to real
estate developers for the purpose of constructing a variety of commercial projects such as
retail facilities, industrial buildings and warehouses. These developers and builders have
experience in construction of the projects we finance.

6

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Commercial
construction lending involves a moderate level of risk, therefore, we closely monitor our
concentration in such loans. We also seek a broad diversification of project types,
borrowers and geographic areas to mitigate the level of risk associated with this lending
type.

Our
ability to originate both residential and commercial construction loans significantly increased
during 2004 and 2005 with the acquisition or opening of loan production offices in
Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. Additionally, we have,
in recent years, hired several experienced real estate loan officers to increase our
capabilities in both types of construction lending.

Risk
of loss on construction loans is dependent largely upon the accuracy of the initial
estimate of the propertys value when completed or developed compared to the
projected cost (including interest) of construction and other assumptions, including the
approximate time to sell or lease the properties. If the appraised collateral value proves to be
inaccurate, we may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.

Agricultural
Loans.Agricultural loans are made predominantly to farmers and ranchers in
our Primary Banking Market Area. Agricultural operating loans are made to
finance day-to-day operations, including crop and livestock production. Intermediate term
loans are used to purchase breeding livestock and machinery. Real estate loans are used to
purchase or refinance farm and ranchland.

Overall
credit worthiness is determined by evaluation of the borrower, including management
experience and skills, financial strength and the ability to service debt. Loans are
generally repaid using cash flows from agricultural activities and the sale of
agricultural commodities produced by the operation. Underwriting standards include maximum
advance rates on collateral, minimum cash flow coverage and review of the historical net
worth and cash flow trends of the operation.

Risk
of loss is related to the effects of the external risk factors such as adverse weather
conditions and poor commodity prices. The impact of external risk factors is significantly
affected by the borrowers ability to mitigate the effect of risk on the
borrowers operation. Commodity based agricultural chattel assets are relatively easy
to liquidate, there is also a stable demand for agricultural real estate. Lenders are
responsible for validating the existence, value and condition of the collateral. This
monitoring may include periodic on-site inspections and the use of borrowing base reports.

Warehouse
Mortgage Lines of Credit. We are actively involved in originating revolving
lines of credit to mortgage brokers. These lines are drawn upon by mortgage brokers to
fund the origination of one-to-four family residential mortgage loans. Prior to funding
the advance, the mortgage broker must have an approved commitment for the purchase of the
loan which reduces credit exposure associated with the line. The lines are repaid upon
sale of the mortgage loan to 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. Under such agreements, the loan purchaser agrees to hold the mortgage
documents issued by the mortgage brokers on our behalf and for our benefit until such time
that the purchaser remits to us the purchase price for such loans. As part of the
structure of the lines of credit, the mortgage brokers are required to maintain commercial
deposits with us, with the amount of such deposits depending upon the amount of the line
and other factors. The lines are structured with adjustable rates indexed to the Wall
Street Journal prime rate. Maximum amounts permitted to be advanced by us under existing
warehouse mortgage lines of credit range in amounts from $2.0 million to $40.0 million.

Business
Lending. Business loans are made predominantly to small and mid-sized
businesses located within our Primary Banking Market Area. The business lending products
we offer include lines of credit, receivable and inventory financing and equipment loans.
We have established minimum underwriting standards in regard to business loans which set
forth the criteria for sources of repayment, borrowers capacity to repay, specific
financial and collateral margins and financial enhancements such as guarantees. Generally,
the primary source of repayment is recurring cash flow of the borrower or cash flow from
the business.

7

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Business
loans generally involve a greater degree of risk than real estate loans, primarily because
collateral is more difficult to appraise, the collateral may be difficult to obtain or
liquidate following default and it is difficult to foresee the borrowers ability to
generate cash flows. These loans, however, typically offer relatively higher yields and
have shorter expected terms to maturity. The availability of business loans enables
potential depositors to establish full-service banking relationships with us.

Consumer
and Other Lending. Consumer loans are generally originated directly through
our network of 68 banking offices. We generally offer home equity loans, home improvement
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 the appraised value of the collateral. A portion of our
home improvement loans consist of participation interests we have purchased from a third
party. Under the terms of our third party arrangement, if any loan becomes more than 120
days past due, we can require the seller to repurchase such loan at a price equal to our
total investment in the loan, including any uncollected and accrued interest. We also
offer automobile loans in amounts up to $50,000 with maximum 72 month and 60 month terms
for new and used cars, respectively, and purchase price ratios of generally not more than
95% and 85% for new and used cars, respectively. Most of our automobile loans are obtained
through a network of 76 new and used automobile dealers located primarily in Lincoln and
Omaha, Nebraska. Although employees of the automobile dealership take the application, the
loan is made pursuant to our own underwriting standards and must be approved by one of our
authorized loan officers. Our consumer loan portfolio also includes manufactured housing,
recreational vehicle, boat, motorcycle and unsecured loans.

Unsecured
loans and loans secured by rapidly depreciating assets, such as automobiles, entail
greater risks than one-to-four family residential mortgage loans. In such cases,
repossessed collateral, if any, for a defaulted loan may not provide an adequate source of
repayment of the outstanding loan balance. Further, consumer loan collections on these
loans are dependent on the 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.

8

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Loan
Portfolio Composition.  The following table shows the composition of our loan portfolio
by type of loan at the dates indicated:

|                                          | At December 31,
|----------------------------------------- | ---------------
|
|Real estate loans:                        |                
|One-to-four family residential (1)        |                
|Second mortgage residential               |                
|Multi-family residential                  |                
|Commercial real estate and land           |                
|Residential construction                  |                
|Commercial construction                   |                
|Agriculture                               |                
|                                         
|Total real estate loans                   |                
|                                         
|Business                                  |                
|                                         
|Agriculture - operating                   |                
|                                         
|Warehouse mortgage lines of credit        |                
|                                         
|Consumer loans:                           |                
|Home equity                               |                
|Home equity line of credit                |                
|Home improvement                          |                
|Automobile                                |                
|Other                                     |                
|                                         
|Total consumer loans                      |                
|                                         
|Total loans                               |                
|                                         
|Unamortized premiums, discounts and       |                
|deferred loan fees                        |                
|Undisbursed portion of construction and   |                
|land development loans in process         |                
|                                         
|Net loans                                 |                
|Allowance for loan losses                 |                
|                                         
|Net loans after allowance for loan losses |                
|                                         
|(1) Includes loans held for sale          |                
|                                         

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Contractual
Terms to Final Maturities. The following table shows the scheduled
contractual maturities of our loans at December 31, 2005, 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 following amounts do not take
into account loan prepayments.

|                                                                                                                                                                                                                                                | Principal Payments Contractually Due in Years
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------
|
|Real estate loans:                                                                                                                                                                                                                              |                                              
|One-to-four family residential                                                                                                                                                                                                                  |                                              
|Second mortgage residential                                                                                                                                                                                                                     |                                              
|Multi-family residential                                                                                                                                                                                                                        |                                              
|Commercial real estate and land                                                                                                                                                                                                                 |                                              
|Agriculture                                                                                                                                                                                                                                     |                                              
|Residential construction                                                                                                                                                                                                                        |                                              
|Commercial construction                                                                                                                                                                                                                         |                                              
|                                                                                                                                                                                                                                               
|Total real estate loans                                                                                                                                                                                                                         |                                              
|                                                                                                                                                                                                                                               
|Business                                                                                                                                                                                                                                        |                                              
|Agriculture - operating                                                                                                                                                                                                                         |                                              
|Warehouse mortgage lines of credit                                                                                                                                                                                                              |                                              
|Consumer                                                                                                                                                                                                                                        |                                              
|                                                                                                                                                                                                                                               
|Total loans (1) (2)                                                                                                                                                                                                                             |                                              
|                                                                                                                                                                                                                                               
|(1)  Gross of unamortized premiums, discounts and deferred loan fees, undisbursed portion of construction and       land development loans in process and allowance for loan losses.                                                           
|(2)  Total loans due after one year from December 31, 2005 with fixed interest rates totaled $1.0 billion.
       Total loans due after one year from December 31, 2005 with floating or adjustable interest rates totaled        $1.2 billion.
|                                                                                                                                                                                                                                               

Originations,
Purchases and Sales of Loans. Our lending activities are subject to
underwriting standards and loan origination procedures established by our Asset/Liability
Committee and approved by our Board of Directors. Applications for mortgages and other
loans are 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 greatly expanded our capacity to directly originate loans through
the expansion of our loan production office network and the employment of a number of
experienced loan originators. We continue to use loan correspondents to originate
one-to-four family residential loans to supplement our origination efforts. A substantial
portion of such loans consists of fixed-rate, one-to-four family residential mortgage
loans which we sell into the secondary market on a servicing retained basis.

Although
we originate both adjustable-rate and fixed-rate loans, our ability to originate and
purchase fixed or adjustable-rate loans is dependent upon the relative customer demand for
such loans, which is affected by the current and expected future level of interest rates.
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.
The loans purchased for retention during 2005 consisted of construction, one-to-four
family residential, consumer (primarily home improvement loans and automobile financing),
multi-family residential, commercial real estate and land (including participation
interests), business and second mortgage residential loans.

Generally,
we originate adjustable-rate mortgage loans for retention in our portfolio. It is our
current policy to sell substantially all the fixed-rate, one-to-four family residential
mortgage loans we originate or purchase. Substantially all of the loans sold are
sold to either Fannie Mae (FNMA) or the Federal Home Loan Mortgage Corporation
(FHLMC) or the FHLBank Topeka (FHLBank) pursuant to the Mortgage
Partnership Finance Program. Upon receipt of an application to make a fixed-rate loan, we
typically enter into agreements to sell such loans to FNMA, FHLMC or the FHLBank pursuant
to forward sale commitments, with delivery being required in approximately 90 days. We
generally agree to deliver a somewhat smaller dollar amount of loans in the event that not
all the loans for which applications are submitted actually close. Loans are delivered
pursuant to such sale contracts upon their origination or purchase and are not aggregated
for sale as loan packages. As a result, we typically do not have a significant amount of
loans held for sale at any given point in time. We recognize, at the time of disposition,
the gain or loss on the sale of the loans. The gain or loss is based on the difference
between the net proceeds received and the carrying value of the loans sold excluding the
value of servicing rights retained.

10

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In
recent years, we have developed lending relationships with several financial institutions
and mortgage bankers pursuant to which we have purchased whole loans or loan participation
interests secured by properties located outside our Primary Lending Market Area. Our
purchases have consisted of construction loans or participation interests in such loans,
both residential and commercial, as well as commercial real estate and land, and were
originated under underwriting guidelines substantially identical to our own guidelines.
For loans in which we hold a participation interest we generally require the lead lender
to maintain anywhere from 5% to 50% interest in the loans. Prior to entering into such
relationships, we conduct on-site due diligence of each lender, including document review
as well as management interviews. We also conduct on-site inspections of selected
properties and of the market areas in which the properties are located. In addition, we
apply our own underwriting standards to each loan or loan participation we purchase. We
also review and underwrite, with respect to construction loans, the individual builders to
whom loans are being extended, establishing a limit as to the total amount that we will
lend to each such builder. We engage local independent inspectors to inspect the progress
of construction on properties securing such loans and base our disbursements on such
inspections. 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.

11

---

The
following table shows total loans originated, purchased, sold and repaid during the years
indicated:

|                                                                                                                         | Year Ended December 31,
|------------------------------------------------------------------------------------------------------------------------ | -----------------------
|
|Net loans after allowance for loan losses at                                                                             |                        
|beginning of year                                                                                                        |                        
|                                                                                                                        
|Loan originations:                                                                                                       |                        
|One-to-four family residential                                                                                           |                        
|Second mortgage residential                                                                                              |                        
|Multi-family residential                                                                                                 |                        
|Commercial real estate and land                                                                                          |                        
|Residential construction                                                                                                 |                        
|Commercial construction                                                                                                  |                        
|Agriculture                                                                                                              |                        
|Business                                                                                                                 |                        
|Agriculture - operating                                                                                                  |                        
|Warehouse mortgage lines of credit (1)                                                                                   |                        
|Consumer                                                                                                                 |                        
|                                                                                                                        
|Total loan originations                                                                                                  |                        
|                                                                                                                        
|Loan purchases:                                                                                                          |                        
|One-to-four family residential (2)                                                                                       |                        
|Second mortgage residential                                                                                              |                        
|Multi-family residential                                                                                                 |                        
|Commercial real estate and land                                                                                          |                        
|Residential construction                                                                                                 |                        
|Commercial construction                                                                                                  |                        
|Business                                                                                                                 |                        
|Consumer                                                                                                                 |                        
|                                                                                                                        
|Total loan purchases                                                                                                     |                        
|                                                                                                                        
|Total loan originations and purchases                                                                                    |                        
|                                                                                                                        
|Sales and loan principal repayments:                                                                                     |                        
|Loan sales:                                                                                                              |                        
|One-to-four family residential                                                                                           |                        
|Consumer                                                                                                                 |                        
|Loan principal repayments:                                                                                               |                        
|Real estate, business, agriculture-                                                                                      |                        
|operating and consumer                                                                                                   |                        
|Warehouse mortgage lines of credit (1)                                                                                   |                        
|                                                                                                                        
|Total loan sales and principal repayments                                                                                |                        
|                                                                                                                        
|Increase due to acquisition                                                                                              |                        
|Decrease due to other items (3)                                                                                          |                        
|                                                                                                                        
|Net loans after allowance for loan losses at                                                                             |                        
|end of year                                                                                                              |                        
|                                                                                                                        
|(1)  Reflects amounts advanced and repaid under such lines of credit during the years presented.                        
|(2)  Substantially all of these fixed-rate loans were acquired from mortgage bankers and sold to Fannie Mae, Freddie Mac
|or the FHLBank Topeka with servicing retained.                                                                          
|(3)  Other items consist of unamortized premiums, discounts and deferred loan fees, undisbursed portion of construction 
|and land development loans in process and changes in the allowance for loan losses.                                     
|                                                                                                                        

12

---

Loan
Servicing. In recent years, we began selling substantially all fixed-rate,
one-to-four family residential mortgage loans with servicing retained in order to develop
additional sources of noninterest income. Loan servicing includes collecting and remitting
loan payments, accounting for principal and interest, holding escrow funds for the payment
of real estate taxes and insurance premiums, contacting delinquent borrowers and
supervising foreclosures and property dispositions in the event of unremedied defaults.
The gross servicing fee income from loans sold is generally 0.25% to 0.50% of the total
balance of each loan serviced. At December 31, 2005 and 2004, we were servicing $1.2
billion and $1.1 billion, respectively, of loans for others, primarily consisting of
one-to-four family residential loans sold by us to investors.

Loan
Commitments. We generally issue written commitments to individual borrowers
and mortgage brokers for the purposes of originating and purchasing loans. These loan
commitments establish the terms and conditions under which we will fund the loans. At
December 31, 2005, we had issued commitments totaling $830.6 million, excluding the
undisbursed portion of construction and land development loans in process, to fund and
purchase loans, extend credit on commercial and consumer unused lines of credit and to
extend credit under unused warehouse mortgage lines of credit. These outstanding loan
commitments do not necessarily represent future cash requirements since many of the
commitments may expire without being drawn.

Derivative
Financial Instruments. We enter into commitments to fund loans in which the
interest rate on the loan is set prior to funding (rate lock commitments). Rate lock
commitments on mortgage loans that are intended to be sold are considered to be
derivatives under Statement of Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, and are recorded at
their fair value in other assets in the Consolidated Statements of Financial Condition.
Changes in fair value are recorded in the net gain or loss on loans held for sale category
in the Consolidated Statements of Income. Fair value is based on a quoted market price
that closely approximates the gain that would have been recognized if the loan commitment
was funded and sold at December 31, 2005. The amount of expected servicing rights is
excluded from the measurement of fair value. The measurement of fair value is also
adjusted for anticipated cancellation by the borrower of commitments that will never be
funded. We are exposed to interest rate risk as a result of rate lock commitments.

We
manage interest rate risk by entering into forward sale commitments, which are also
defined as derivatives under SFAS No. 133, and are recorded at their fair value in the
other liabilities category in the Consolidated Statements of Financial Condition, with
changes in fair value reported in net gain or loss on loans held for sale in the
Consolidated Statements of Income. Their fair value is based on a quoted premium or
penalty that would have been received or paid if we had exited the forward position at
December 31, 2005.

13

---

# Asset Quality

Reports
listing all delinquent loans, classified assets and real estate owned are reviewed by
management and our Board 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. In the event payment is not then
received or the loan not otherwise satisfied, letters and telephone calls generally are
made. If the loan is still not brought current or satisfied and it becomes necessary for
us to take legal action, which typically occurs after a loan is 90 days or more
delinquent, we will commence recovery proceedings against the property securing the loan.
If a legal action is instituted and the loan is not brought current, paid in full, or
refinanced before the recovery sale, the property securing the loan generally is sold and,
if purchased by us, becomes real estate owned or a repossessed asset.

Delinquent Loans. The following table shows loans delinquent 30  89
days in our loan portfolio as of the dates indicated:

|                                    | At December 31,
|----------------------------------- | ---------------
|
|One-to-four family residential      |                
|Second mortgage residential         |                
|Commercial real estate and land     |                
|Residential construction            |                
|Agriculture                         |                
|Business                            |                
|Agriculture - operating             |                
|Consumer                            |                
|                                   
|Total delinquent loans              |                
|                                   
|Delinquent loans as a percentage of |                
|total loans                         |                
|                                   

14

---

Nonperforming
Loans and Real Estate Owned. The following table sets forth information
regarding nonperforming loans (90 or more days delinquent) and real estate owned. It is
our policy to cease accruing interest on loans contractually delinquent 90 days or more
and charge-off all accrued interest. We did not have any accruing loans 90 days or more
past due at the dates shown.

|                                                                                                          | At December 31,
|--------------------------------------------------------------------------------------------------------- | ---------------
|
|Nonperforming loans:                                                                                      |                
|One-to-four family residential                                                                            |                
|Second mortgage residential                                                                               |                
|Multi-family residential                                                                                  |                
|Commercial real estate and land                                                                           |                
|Residential construction                                                                                  |                
|Agriculture                                                                                               |                
|Business                                                                                                  |                
|Agriculture - operating                                                                                   |                
|Consumer                                                                                                  |                
|                                                                                                         
|Total nonperforming loans                                                                                 |                
|Real estate owned, net (1)                                                                                |                
|                                                                                                         
|Total nonperforming assets                                                                                |                
|Troubled debt restructurings                                                                              |                
|                                                                                                         
|Total nonperforming assets and                                                                            |                
|troubled debt restructurings                                                                              |                
|                                                                                                         
|Total nonperforming loans as a                                                                            |                
|percentage of net loans                                                                                   |                
|                                                                                                         
|Total nonperforming assets as a                                                                           |                
|percentage of total assets                                                                                |                
|                                                                                                         
|Total nonperforming assets and                                                                            |                
|troubled debt restructurings                                                                              |                
|as a percentage of total assets                                                                           |                
|                                                                                                         
|(1)  Real estate owned balances are shown net of related loss allowances. Includes both real property and
|other repossessed collateral consisting primarily of automobiles.                                        
|                                                                                                         

Included
in the preceding table, under nonperforming loans and troubled debt restructurings, are
impaired loans of $9.4 million and $6.1 million at December 31, 2005 and 2004,
respectively. At December 31, 2005, we classified four nonperforming loans totaling $4.2
million as impaired. Impaired loans at December 31, 2005 include three multi-family
residential loans which are seasoned loans for tax-advantaged affordable housing units
totaling $3.3 million and one commercial real estate and land loan totaling $915,000. We
had established an allowance for loan losses related to impaired loans of $1.1 million and
$464,000 at December 31, 2005 and 2004, respectively.

When
we acquire real estate owned property through foreclosure or deed in lieu of foreclosure,
it is initially recorded at the lower of the recorded investment in the corresponding loan
or the fair value of the related assets at the date of foreclosure, less costs to sell. If
there is a further deterioration in value, we provide for a specific valuation allowance
and charge operations for the decline in value. 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 as well as conduct inspections on such properties. Real estate owned
totaled $2.4 million and $382,000 at December 31, 2005 and 2004, respectively. Real estate
owned at December 31, 2005 includes a $1.6 million multi-family residential property
acquired in the United Nebraska Financial Co. (UNFC) transaction in 2004.

15

---

Classified
Assets. Federal regulations and our Asset Classification Policy require
that we utilize an internal asset classification system as a means of reporting problem
and potential problem assets. We have incorporated the Office of Thrift Supervisions
(OTS) internal asset classifications as a part of our credit monitoring
system. All assets are subject to classification. Asset quality ratings are divided into
three asset classifications: Pass (unclassified), special mention and classified (adverse
classification). Additionally, there are three adverse classifications:
substandard, doubtful and loss. A pass asset is
considered to be of sufficient quality to preclude a special mention or an adverse rating.
The special mention asset has potential weaknesses that deserve managements close
attention. If left uncorrected, these potential weaknesses may result in deterioration of
the repayment prospects for the asset or in our credit position at a future date.
Classified assets receive an adverse classification. An asset is considered
substandard if it is inadequately protected by the current net worth and
paying capacity of the borrower or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent
in those classified substandard with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly questionable and
improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. When we classify
one or more assets, or portions thereof, as substandard, doubtful
or loss, we establish a specific valuation allowance for loan losses in an
amount deemed prudent by management based on the specific facts of the asset.

Our
Asset Classification Committee reviews and classifies assets no less frequent than
quarterly and our Board of Directors reviews the asset classification reports on a
quarterly basis. The Asset Classification Committee is composed of the following officers
of the Bank: Chief Executive Officer, Chief Operating Officer, Director of Lending, Chief
Credit Officer, Director of Real Estate Lending, Chief Financial Officer, Controller,
Senior Financial Analysis Manager and External Reporting Manager.

Allowance
for Loan Losses.A provision for loan losses is charged to income when it is
determined by management to be required based on our 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. Our review includes a
quantitative analysis by loan category, using historical loss experience, classifying
loans pursuant to a grading system and consideration of a series of qualitative loss
factors. These loss factors are developed using our historical loan loss experience for
each group of loans as further adjusted for specific factors, including the following:

| |  | Trends
and levels of delinquent, nonperforming or "impaired" loans;
| | - | -------------------------------------------------------------------

| |  | Trends
and levels of charge-offs and recoveries;
| | - | ------------------------------------------------

| |  | Trends
in volume and underwriting terms or guarantees for loans;
| | - | ----------------------------------------------------------------

| |  | Impact
of changes in underwriting standards, risk tolerances or other changes in lending
practices;
| | - | ---------------------------------------------------------------------------------------------------

| |  | Changes
in the value of collateral securing loans;
| | - | --------------------------------------------------

| |  | Total
loans outstanding and the volume of loan originations;
| | - | ------------------------------------------------------------

| |  | Type,
size, terms and geographic concentration of loans held;
| | - | -------------------------------------------------------------

| |  | Changes
in qualifications or experience of the lending staff;
| | - | -------------------------------------------------------------

| |  | Changes
in local or national economic or industry conditions;
| | - | -------------------------------------------------------------

| |  | Number
of loans requiring heightened management oversight;
| | - | ----------------------------------------------------------

| |  | Changes
in credit concentration; and
| | - | ------------------------------------

16

---

| |  | Changes
in regulatory requirements.
| | - | -----------------------------------

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 each reporting 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
allowance for loan losses consists of two elements. The first element is an allocated
allowance established for specific loans identified by the credit review function that are
evaluated individually for impairment and are considered to be impaired. A loan is
considered impaired when, based on current information and events, it is probable that we
will be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. Impairment is measured by: (a)
the fair value of the collateral if the loan is collateral dependent; (b) the present
value of expected future cash flows; or (c) the loans observable market price. The
second element is an estimated allowance established for losses which are probable and
reasonable to estimate on each category of outstanding loans. While we utilize available
information to recognize probable losses on loans inherent in the portfolio, future
additions to the allowance may be necessary based on changes in economic conditions and
other factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our allowance for loan losses. Such agencies may
require us to recognize additions to the allowance based on their judgment of information
available to them at the time of their examination.

The
following table shows changes in our allowance for loan losses during the years presented:

|                                                       | At or For the Year Ended December 31,
|------------------------------------------------------ | -------------------------------------
|
|Allowance for loan losses at beginning of year         |                                      
|                                                      
|Allowance for loan losses acquired                     |                                      
|                                                      
|Charge-offs:                                           |                                      
|One-to-four family residential                         |                                      
|Second mortgage residential                            |                                      
|Multi-family residential                               |                                      
|Commercial real estate and land                        |                                      
|Residential construction                               |                                      
|Business                                               |                                      
|Agriculture - operating                                |                                      
|Warehouse mortgage lines of credit                     |                                      
|Consumer                                               |                                      
|                                                      
|Total charge-offs                                      |                                      
|Recoveries on loans previously charged-off             |                                      
|Provision for loan losses                              |                                      
|                                                      
|Allowance for loan losses at end of year               |                                      
|                                                      
|Allowance for loan losses as a percentage of net loans |                                      
|Allowance for loan losses as a                         |                                      
|percentage of nonperforming loans                      |                                      
|Ratio of net charge-offs during the year as a          |                                      
|percentage of average loans outstanding during         |                                      
|the year                                               |                                      
|                                                      

17

---

The
following table shows how our allowance for loan losses is allocated by type of loan at
each of the dates indicated:

|                                | At December 31,
|------------------------------- | ---------------
|
|
|One-to-four family residential  |                
|Second mortgage residential *   |                
|Multi-family residential        |                
|Commercial real estate and land |                
|Residential construction        |                
|Commercial construction         |                
|Agriculture                     |                
|Business                        |                
|Agriculture - operating         |                
|Warehouse mortgage lines        |                
|of credit                       |                
|Consumer                        |                
|Unallocated                     |                
|                               
|Total                           |                
|                               

|                                                                                              | At December 31,
|--------------------------------------------------------------------------------------------- | ---------------
|
|
|One-to-four family residential                                                                |                
|Second mortgage residential *                                                                 |                
|Multi-family residential                                                                      |                
|Commercial real estate and land                                                               |                
|Residential construction                                                                      |                
|Commercial construction                                                                       |                
|Agriculture                                                                                   |                
|Business                                                                                      |                
|Agriculture - operating                                                                       |                
|Warehouse mortgage lines                                                                      |                
|of credit                                                                                     |                
|Consumer                                                                                      |                
|Unallocated                                                                                   |                
|                                                                                             
|Total                                                                                         |                
|                                                                                             
|*  Second mortgage residential loans disclosed separately for 2003, 2004 and 2005 as we began
|analyzing this portfolio separately in 2003 due to our increased investment in such loans.   
|                                                                                             

18

---

# 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, time deposits of insured banks and savings institutions, bankers
acceptances, repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise authorized to make
directly. Historically, we have maintained liquid assets at a level considered to be
adequate to meet our normal daily activities.

Our
investment policy, as approved by our Board of Directors, requires management to maintain
adequate liquidity and to generate a favorable return on investment without incurring undue
interest rate and credit risk. We primarily utilize investments in securities for
liquidity management and as a method of deploying excess funding not utilized for loan
originations and purchases. We have invested in U.S. Government securities and agency
obligations, corporate securities, municipal obligations, agency equity securities, mutual
funds, U.S. Government sponsored agency issued mortgage-backed securities and
collateralized mortgage obligations. As required by SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, we have established an investment
portfolio of securities that are categorized as held to maturity or available for sale. We
do not currently maintain a portfolio of securities categorized as held for trading.
Substantially all of our investment securities are purchased for the available for sale
portfolio which totaled $102.6 million, or 3.2% of total assets, at December 31, 2005. At
such date, we had net unrealized losses with respect to such securities of $1.4 million.
At December 31, 2005, the held to maturity securities portfolio totaled $111,000.

At
December 31, 2005, our mortgage-backed security portfolio (all of which were classified as
available for sale) totaled $19.8 million, or 0.6% of total assets. Investments in
mortgage-backed securities involve a risk that actual prepayments will be greater than
estimated prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such instruments
thereby changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such securities are
redeemed by the issuer. In addition, the fair 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.
FHLMC is a private corporation chartered by the U.S. Government. FHLMC issues
participation certificates backed principally by conventional mortgage loans. FHLMC
guarantees the timely payment of interest and the ultimate return of principal on
participation certificates. FNMA is a private corporation chartered by the U.S. Congress
with a mandate to establish a secondary market for mortgage loans. FNMA guarantees the
timely payment of principal and interest on FNMA securities. FHLMC and FNMA securities are
not backed by the full faith and credit of the U.S. Government, but because FHLMC and FNMA
are U.S. Government-sponsored enterprises, these securities are considered to be among the
highest quality investments with minimal credit risks.

19

---

The
following table sets forth certain information relating to our available for sale
investment securities portfolio at the dates indicated:

|                                 | At December 31,
|-------------------------------- | ---------------
|
|
|U.S. Government securities and   |                
|agency obligations               |                
|Corporate securities             |                
|Municipal obligations            |                
|Agency equity securities         |                
|Asset Management Fund - ARM Fund |                
|                                
|Total investment securities      |                
|FHLBank Topeka stock             |                
|                                
|Total investment securities and  |                
|FHLBank Topeka stock             |                
|                                

The
following table sets forth the amount of investment securities which mature during each of
the years indicated and the weighted average yields for each range of maturities at
December 31, 2005. No tax-exempt yields have been adjusted to a tax-equivalent basis.

|                                                  | Maturing During the Year Ending December 31,
|------------------------------------------------- | --------------------------------------------
|
|Bonds and other debt securities:                  |                                             
|U.S. Government securities and agency obligations |                                             
|Balance                                           |                                             
|Weighted average yield                            |                                             
|Corporate securities                              |                                             
|Balance                                           |                                             
|Weighted average yield                            |                                             
|Municipal obligations                             |                                             
|Balance                                           |                                             
|Weighted average yield                            |                                             
|Equity Securities:                                |                                             
|Asset Management Fund - ARM Fund                  |                                             
|Balance                                           |                                             
|Weighted average yield                            |                                             
|Agency equity securities                          |                                             
|Balance                                           |                                             
|Weighted average yield                            |                                             
|FHLBank Topeka stock                              |                                             
|Balance                                           |                                             
|Weighted average yield                            |                                             
|                                                 
|Total carrying value                              |                                             
|                                                 
|Weighted average yield                            |                                             
|                                                 

20

---

The
following table sets forth the composition of our mortgage-backed securities portfolio at
the dates indicated:

|                                 | At December 31,
|-------------------------------- | ---------------
|
|
|Fixed-rate:                      |                
|FHLMC                            |                
|FNMA                             |                
|GNMA                             |                
|FHLMC/FNMA CMOs                  |                
|Private CMOs                     |                
|                                
|Total fixed-rate                 |                
|                                
|Adjustable-rate:                 |                
|GNMA                             |                
|FNMA                             |                
|FHLMC                            |                
|                                
|Total adjustable-rate            |                
|                                
|Total mortgage-backed securities |                
|                                

Information
regarding the contractual maturities and weighted average yield of our mortgage-backed
securities portfolio at December 31, 2005 is presented below. Due to repayments of the
underlying loans, the actual maturities  of mortgage-backed securities generally are less
than the scheduled maturities.

|                       | Maturing During the Year Ending December 31,
|---------------------- | --------------------------------------------
|
|Fixed rate:            |                                             
|FHLMC                  |                                             
|Balance                |                                             
|Weighted average yield |                                             
|FNMA                   |                                             
|Balance                |                                             
|Weighted average yield |                                             
|GNMA                   |                                             
|Balance                |                                             
|Weighted average yield |                                             
|FHLMC/FNMA CMOs        |                                             
|Balance                |                                             
|Weighted average yield |                                             
|Adjustable Rate:       |                                             
|FHLMC                  |                                             
|Balance                |                                             
|Weighted average yield |                                             
|FNMA                   |                                             
|Balance                |                                             
|Weighted average yield |                                             
|GNMA                   |                                             
|Balance                |                                             
|Weighted average yield |                                             
|                      
|Total carrying value   |                                             
|                      
|Weighted average yield |                                             
|                      

21

---

At
December 31, 2005, all unrealized losses related to investment and mortgage-backed
securities are considered temporary in nature. An impairment is deemed temporary if the
positive evidence indicating that an investments carrying amount is recoverable
within a reasonable time period outweighs negative evidence to the contrary. Investment
and mortgage-backed securities with unrealized losses at December 31, 2005, are summarized
in the following table:

|                                      | Less than 12 Months | 12 Months or Longer | Total
|------------------------------------- | ------------------- | ------------------- | -----
|
|U.S. Government securities and        |                     |                     |      
|agency obligations                    |                     |                     | $    
|Corporate securities                  |                     |                     |      
|Municipal obligations                 |                     |                     |      
|Agency equity securities              |                     |                     |      
|Asset Management Fund - ARM Fund      |                     |                     |      
|Mortgage-backed securities            |                     |                     |      
|                                     
|Total temporarily impaired securities |                     |                     | $    
|                                     

We
believe all unrealized losses as of December 31, 2005 to be market related, with no
permanent sector or issuer credit concerns or impairments. The unrealized losses
are believed to be temporarily, not permanently, impaired in value.

22

---

# Sources of Funds

General.          Our
primary sources of funds are deposits; amortization of loans, loan           prepayments
and maturity of loans; repayment, maturity or sale of investment and
          mortgage-backed securities; and other funds provided from operations. While
          scheduled payments from the amortization of loans and mortgage-backed
securities           and maturing investment securities are relatively predictable
sources of funds,           deposit flows and loan prepayments can be greatly influenced
by general interest           rates, economic conditions and competition. We utilize
FHLBank advances and           other borrowings and brokered time deposits as additional
funding sources.

Deposits.          As
a regional community bank, we offer a variety of products designed to attract both short-term and long-term deposits from the
          general public. Our product offerings consist of checking (both interest- and
          noninterest-bearing), money market, savings, time deposits and individual
          retirement accounts. We also use brokered time deposits as an
          additional source of funds for our loan origination and purchase activity. At
          December 31, 2005 and 2004, we had brokered time deposits of $78.0 million and
          $124.6 million, respectively.

The
following table shows the distribution of, and certain other information relating to, our
deposits by type of deposit, as of the dates indicated:

|                                                                                                          | At December 31,
|--------------------------------------------------------------------------------------------------------- | ---------------
|
|
|Time deposits:                                                                                            |                
|0.00% - 0.99%                                                                                             |                
|1.00% - 1.99%                                                                                             |                
|2.00% - 2.99%                                                                                             |                
|3.00% - 3.99%                                                                                             |                
|4.00% - 4.99%                                                                                             |                
|5.00% - 5.99%                                                                                             |                
|6.00% - 6.99%                                                                                             |                
|                                                                                                         
|Total time deposits (1)                                                                                   |                
|                                                                                                         
|Transaction accounts:                                                                                     |                
|Noninterest-bearing checking                                                                              |                
|Savings                                                                                                   |                
|Interest-bearing checking                                                                                 |                
|Money market                                                                                              |                
|                                                                                                         
|Total transaction accounts                                                                                |                
|                                                                                                         
|Total deposits                                                                                            |                
|                                                                                                         
|(1)  Includes $78.0 million, $124.6 million and $65.5 million, respectively, of brokered time deposits at
|December 31, 2005, 2004 and 2003.                                                                        
|                                                                                                         

23

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The
following table shows the average balance of each type of deposit and the average rate
paid on each type of deposit for the years indicated:

|                                | Year Ended December 31,
|------------------------------- | -----------------------
|
|
|Savings                         |                        
|Interest-bearing checking       |                        
|Money market                    |                        
|Time deposits                   |                        
|                               
|Total interest-bearing deposits |                        
|                               
|Noninterest-bearing checking    |                        
|                               
|Total deposits                  |                        
|                               

The
following table shows our savings flows during the years indicated:

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|
|Total deposits             |                        
|Total withdrawals          |                        
|Interest credited          |                        
|                          
|Total increase in deposits |                        
|                          

The following
table presents, by various interest rate categories and maturities, the amount of time
deposits at December 31, 2005:

|                                      | Balance at December 31, 2005
Maturing in the 12 Months Ending December 31,
|------------------------------------- | --------------------------------------------------------------------------
|
|Time deposits:                        |                                                                           
|0.00% - 0.99%                         |                                                                           
|1.00% - 1.99%                         |                                                                           
|2.00% - 2.99%                         |                                                                           
|3.00% - 3.99%                         |                                                                           
|4.00% - 4.99%                         |                                                                           
|5.00% - 5.99%                         |                                                                           
|6.00% - 6.99%                         |                                                                           
|                                     
|Total time deposits (1)               |                                                                           
|                                     
|(1)  Includes brokered time deposits.
|                                     

24

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The following
table shows the maturities of our time deposits exceeding $100,000 at December 31, 2005 by
the time remaining to maturity. There are no brokered time deposits included in the
following table as no individual brokered time deposit exceeded $100,000 at December 31,
2005.

|(Dollars in thousands)                 | Amount | Weighted Average Rate
|-------------------------------------- | ------ | ---------------------
|Quarter ending:                        |        |                      
|March 31, 2006                         |        |                      
|June 30, 2006                          |        |                      
|September 30, 2006                     |        |                      
|December 31, 2006                      |        |                      
|After December 31, 2006                |        |                      
|                                      
|Total time deposits exceeding $100,000 |        |                      
|                                      

Borrowings.        We
utilize advances from the FHLBank as an alternative to retail deposits to           fund
our operations as part of our operating strategy. The FHLBank is part of a
          system of 12 regional Federal Home Loan Banks, each subject to
          Federal Housing Finance Board supervision and regulation, that function as
a           central reserve bank providing credit to financial institutions. As a
condition           of membership in the FHLBank we are required to own stock of the
FHLBank. Our           FHLBank advances are collateralized by our qualifying residential,
multi-family           residential and commercial real estate mortgages, residential
construction,           commercial construction and agricultural real estate loans, and
secondarily by           our investment in capital stock of the FHLBank. FHLBank advances
are made           pursuant to several different credit programs, each of which has its
own           interest rate and range of maturities. The maximum amount that the FHLBank
will           advance to member institutions, including us, fluctuates from time to time
in           accordance with the policies of the FHLBank. At December 31, 2005, we had
$747.1           million in outstanding FHLBank advances. For additional information see
          Regulation  Federal Home Loan Bank.

On
April 26, 2004, we formed TierOne Capital Trust I, (TierOne Capital Trust)
which issued capital securities (Trust Preferred Securities) to investors. The
proceeds from the sale of the Trust Preferred Securities were used to purchase $30.9
million of junior subordinated debentures (debentures). The debentures are
callable at par in June 2009 and mature in June 2034. Our obligation under the debentures
constitutes a full and unconditional guarantee of TierOne Capital Trusts obligations
under the Trust Preferred Securities. In accordance with Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities (FIN 46R), the
trust is not consolidated and related amounts are treated as debt of the Company.

In
connection with our acquisition of UNFC on August 27, 2004, we assumed $7.0 million of
variable rate debentures that had been issued on November 28, 2001 by United Nebraska
Capital Trust, a trust formed by UNFC. The debentures are callable at par in December
2006, are due December 8, 2031 and are the sole asset of the United Nebraska Capital
Trust. Our obligation under the debentures constitutes a full and unconditional guarantee
of United Nebraska Capital Trusts obligations under the Trust Preferred Securities.
In accordance with FIN 46R, United Nebraska Capital Trust is not consolidated and related
amounts are treated as debt of the Company.

25

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The
following table shows certain information regarding our borrowings at or for the dates
indicated:

|                                                  | At or For the Year Ended December 31,
|------------------------------------------------- | -------------------------------------
|
|FHLBank Topeka advances:                          |                                      
|Average balance outstanding during the year       |                                      
|Maximum amount outstanding at any                 |                                      
|month-end during the year                         |                                      
|Balance outstanding at end of the year            |                                      
|Average interest rate during the year             |                                      
|Weighted average interest rate at end of the year |                                      
|                                                 
|Other borrowings:                                 |                                      
|Average balance outstanding during the year       |                                      
|Maximum amount outstanding at any                 |                                      
|month-end during the year                         |                                      
|Balance outstanding at end of the year            |                                      
|Average interest rate during the year             |                                      
|Weighted average interest rate at end of the year |                                      
|                                                 

For
more information regarding our borrowings, see Note 13  FHLBank Topeka
Advances and Other Borrowings included in Item 8. Financial Statements and
Supplementary Data in Part II of this Annual Report on Form 10-K.

26

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# Subsidiary Activities

TierOne
Bank is the wholly owned subsidiary of TierOne Corporation. TMS Corporation of the
Americas is the wholly owned subsidiary of TierOne Bank and holds all of the stock of
TierOne Investments and Insurance, Inc. and TierOne Reinsurance Company. TierOne
Investments and Insurance, Inc. provides a wide selection of investment and insurance
products, equity securities, mutual funds and annuities. These products are made available
to consumers via licensed representatives in our banking offices. TierOne Reinsurance
Company reinsures credit life and disability insurance which is sold in conjunction with
the origination of consumer loans by TierOne Bank. United Farm & Ranch Management,
Inc. is a wholly owned subsidiary of TierOne Bank that provides agricultural customers with
professional farm and ranch management and real estate brokerage services.

# Personnel

As
of December 31, 2005 and 2004, we had 772 and 724 full-time equivalent employees,
respectively. Employees are not represented by a collective bargaining unit and we
consider our relationship with our employees to be good.

# Regulation and
Supervision

Set
forth below is a brief description of certain laws and regulations which are applicable to
the Company and the Bank. The description of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, does not purport to be
complete and is qualified in its entirety by reference to the applicable laws and
regulations.

General.         The
Bank, as a federally chartered stock savings bank, is subject to OTS
          regulations, examinations and reporting requirements. The Bank is also subject
          to regulation and examination by the Federal Deposit Insurance Corporation
          (FDIC), which insures the deposits of the Bank to the maximum
extent           permitted by law and requirements established by the Board of Governors
of the           Federal Reserve System.  The investment and lending authority of
savings           institutions is prescribed by federal laws and regulations and such
institutions           are prohibited from engaging in any activities not permitted by
such laws and           regulations. Such regulation and supervision primarily is
intended for the           protection of depositors and not for the purpose of protecting
shareholders.

The
OTS regularly examines the Bank and prepares reports for consideration by our Board of
Directors on any deficiencies that it may find in the Banks operations. The FDIC
also has the authority to examine the Bank in its role as the administrator of the Savings
Association Insurance Fund (SAIF). The Banks relationship with its
depositors and borrowers is also regulated to a great extent by both federal, and to a
lesser extent, state laws, especially in such matters as the ownership of savings accounts
and the form and content of the Banks mortgage requirements. The OTS enforcement
authority over all savings institutions and their holding companies includes, among other
things, the ability to assess civil money penalties, to issue cease and desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with the OTS. Any change in such laws or regulations, whether by
the FDIC, the OTS or the Congress, could have a material adverse impact on our operations.

Savings
and Loan Holding Company Regulation. The Company, a Wisconsin corporation
and the holding company for the Bank, is a registered savings and loan holding company
under the Home Owners Loan Act (HOLA). The HOLA generally permits a
savings and loan holding company to engage in activities which are unrelated to the
operation of a savings and loan association, provided the holding company controls only
one savings and loan association and such association meets the Qualified Thrift Lender
Test. The Company currently controls only one savings and loan association, the Bank,
which at December 31, 2005, met the Qualified Thrift Lender Test.

27

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Generally,
the HOLA prohibits a savings and loan holding company, such as us, directly or indirectly,
from: (a) acquiring control (as defined) of a savings institution (or holding company
thereof) without prior OTS approval; (b) acquiring more than 5% of the voting shares of a
savings institution (or holding company thereof) which is not a subsidiary, subject to
certain exceptions, without prior OTS approval; (c) acquiring through a merger,
consolidation or purchase of assets of another savings institution (or holding company
thereof) or acquiring all or substantially all of the assets of another savings
institution (or holding company thereof) without prior OTS approval; or (d) acquiring
control of an uninsured institution. A savings and loan holding company may not acquire,
as a separate subsidiary, a savings institution which has its principal offices outside of
the state where the principal offices of its subsidiary institution is located, except:
(a) in the case of certain emergency acquisitions approved by the FDIC; (b) if the holding
company controlled (as defined) such savings institution as of March 5, 1987; or (c) when
the laws of the state in which the savings institution to be acquired is located
specifically authorize such an acquisition. No director or officer of a savings and loan
holding company or person owning or controlling more than 25% of such holding
companys voting shares may, except with the prior approval of the OTS, acquire
control of any savings institution which is not a subsidiary of such holding company.

Federal
Deposit Insurance Corporation. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are backed by
the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to
conduct examinations of, and to require reporting by, insured institutions. It also may
prohibit any insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority
to initiate enforcement actions against savings institutions after giving the OTS an
opportunity to take such action.

Under
current FDIC regulations, SAIF-insured institutions are assigned one of three capital
groups which are based solely on the level of an institutions capital 
well capitalized, adequately capitalized and
undercapitalized  which are defined in the same manner as the
regulations establishing the prompt corrective action system discussed below. These three
groups are then divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are considered to be
of substantial supervisory concern.

The
Financing Corporation (FICO), established by the Competitive Equality Banking
Act of 1987, is a mixed-ownership government corporation whose purpose is to function as a
financing vehicle for the Federal Savings & Loan Insurance Corporation. The FICO has
assessment authority, separate from the FDICs authority to assess risk-based
premiums for deposit insurance, to collect funds from FDIC-insured institutions sufficient
to pay interest on FICO bonds. The FDIC acts as a collection agent for the FICO. The FICO
assessment rate, currently .0132% of insured deposits, is adjusted quarterly. These
assessments will continue until the FICO bonds mature in 2019.

The
FDIC may terminate the deposit insurance of any insured depository institution, including
the Bank, if it determines after a hearing that the institution has engaged or is engaging
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, order or any condition imposed
by an agreement with the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the institution
at the time of the termination, less subsequent withdrawals, shall continue to be insured
for a period of six months to two years, as determined by the FDIC. Management is aware of
no existing circumstances which would result in termination of the Banks deposit
insurance.

Regulatory
Capital Requirements.Pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), the OTS adopted regulations implementing new
capital standards applicable to all savings associations, including the Bank. Such capital
standards require that savings associations maintain: (a) capital of not less than 1.5% of
adjusted total assets (Tangible Capital); (b) core (Tier 1) capital of not less than 4% of
adjusted total assets; and (c) total risk-based capital of not less than 8% of
risk-weighted assets. As of December 31, 2005, the Bank met all regulatory capital
requirements. The OTS is authorized to impose capital requirements in excess of those
standards on individual institutions on a case-by-case basis.

28

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Under
the tangible capital requirement, a savings bank must maintain tangible capital in an
amount equal to at least 1.5% of adjusted total assets. Tangible capital is defined as
core capital less all intangible assets (including supervisory goodwill), plus a specified
amount of purchased mortgage servicing rights.

Under
the Core (Tier 1) capital requirement adopted by the OTS, savings banks must maintain
core capital in an amount equal to at least 3.0% of adjusted total assets.
Core (Tier 1) capital consists of: common stockholders equity (including retained
earnings), non-cumulative perpetual preferred stock, certain non-withdrawable and pledged
deposits; and minority interests in the equity accounts of consolidated subsidiaries plus
purchased mortgage servicing rights valued at the lower of 90% of fair value, 90% of
original cost or the current amortized book value as determined in conformity with U.S. generally accepted
accounting principles (GAAP), and qualifying supervisory goodwill, less non-qualifying
intangible assets.

Under
the risk-based capital requirement, a savings bank must maintain total capital (which is
defined as core capital plus supplementary capital) equal to at least 8.0% of
risk-weighted assets. A savings bank must calculate its risk-weighted assets by
multiplying each asset and off-balance sheet item by various risk factors, which range
from 0% for cash and securities issued by the United States Government or its agencies to
100% for repossessed assets or loans more than 90 days past due. Supplementary capital may
include, among other items, cumulative perpetual preferred stock, perpetual subordinated
debt, mandatory convertible subordinated debt, intermediate-term preferred stock and
general allowances for loan losses. The allowance for loan losses includable in
supplementary capital is limited to 1.25% of risk-weighted assets. The amount of
supplementary capital that can be included is limited to 100% of core capital.

Certain
exclusions from capital and assets are required to be made for the purpose of calculating
total capital, in addition to the adjustments required for calculating core capital. Such
exclusions consist of equity investments (as defined by regulation) and that portion of
land loans and non-residential construction loans in excess of an 80% loan-to-value ratio
and reciprocal holdings of qualifying capital instruments. However, in calculating
regulatory capital, institutions can add back unrealized losses and deduct unrealized
gains net of taxes, on debt securities reported as a separate component of capital
calculated according to GAAP.

OTS
regulations establish special capitalization requirements for savings banks that own
service corporations and other subsidiaries, including subsidiary savings banks. According
to these regulations, certain subsidiaries are consolidated for capital purposes and
others are excluded from assets and capital. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for national
banks, engaged solely in mortgage-banking activities or engaged in certain other
activities solely as agent for its customers are includable subsidiaries that
are consolidated for capital purposes in proportion to the Banks level of ownership,
including the assets of includable subsidiaries in which the Bank has a minority interest
that is not consolidated for GAAP purposes. For excludable subsidiaries, the debt and
equity investments in such subsidiaries are deducted from assets and capital. At December
31, 2005, the Bank had $1.4 million of investments subject to a deduction from tangible
capital.

Under
current OTS policy, savings institutions must value securities available for sale at
amortized cost for regulatory capital purposes. This means that in computing regulatory
capital, savings institutions should add back any unrealized losses and deduct any
unrealized gains, net of income taxes, on debt securities reported as a separate component
of capital calculated according to GAAP.

The
OTS and the FDIC generally are authorized to take enforcement action against a savings
bank that fails to meet its capital requirements, which action may include restrictions on
operations and banking activities, the imposition of a capital directive, a
cease-and-desist order, civil money penalties or harsher measures such as the appointment
of a receiver or conservator or a forced merger into another institution. In addition,
under current regulatory policy, a savings bank that fails to meet its capital
requirements is prohibited from paying any dividends.

At
December 31, 2005, the Bank exceeded all of its regulatory capital requirements. For more
information see Note 17  Regulatory Capital Requirements included
in Item 8. Financial Statements and Supplementary Data, in Part II of this Annual Report
on Form 10-K.

29

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Prompt
Corrective Action. The Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA) provides for expanded regulation of depository
institutions and their affiliates, including parent holding companies. FDICIA further
provides the OTS with broad powers to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends upon
whether the institution in question is well capitalized, adequately
capitalized, undercapitalized, significantly
undercapitalized or critically undercapitalized. All institutions,
regardless of their capital levels, are restricted from making any capital distribution or
paying management fees to controlling persons if the institution would thereafter fail to
satisfy the minimum levels for any of its capital requirements.

Under
FDICIA, an institution is deemed to be: (a)well capitalized if its risk-based
capital ratio is 10.0% or more, its Tier 1 risk-based capital ratio is 6.0% or more, its
core (Tier 1) capital ratio is 5.0% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital measure;
(b) adequately capitalized if it has a total risk-based capital ratio of 8.0%
or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition
of well capitalized; (c) undercapitalized if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is
less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances); (d) significantly undercapitalized if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is
less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%; or (e)
critically undercapitalized if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%. Under specified circumstances, a federal
banking agency may reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized institution to
comply with supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as critically
undercapitalized).

An
institution generally must file a written capital restoration plan which meets specified
requirements with its appropriate federal banking agency within 45 days of the date that
the institution receives notice or is deemed to have notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. A federal banking agency
must provide the institution with written notice of approval or disapproval within 60 days
after receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must concurrently
submit a performance guaranty by each company that controls the institution. In addition,
undercapitalized institutions are subject to various regulatory restrictions, and the
appropriate federal banking agency also may take any number of discretionary supervisory
actions.

At
December 31, 2005, the Bank met the standards for a well capitalized
institution.

Safety
and Soundness Guidelines. The OTS and the other federal bank regulatory
agencies have established guidelines for safety and soundness, addressing operational and
managerial standards, as well as compensation matters for insured financial institutions.
Institutions failing to meet these standards may be required to submit compliance plans to
their appropriate federal regulators. The OTS and the other agencies have also established
guidelines regarding asset quality and earnings standards for insured institutions. The
Bank believes that it is in compliance with these guidelines and standards.

Capital
Distributions. OTS regulations govern capital distributions by savings
institutions, which include cash dividends, stock repurchases and other transactions
charged to the capital account of a savings institution to make capital distributions. A
savings institution must file an application for OTS approval of the capital distribution
if any of the following occur or would occur as a result of the capital distribution: (a)
the total capital distributions for the applicable calendar year exceed the sum of the
institutions net income for that year to date plus the institutions retained
net income for the preceding two years; (b) the institution would not be at least
adequately capitalized following the distribution; (c) the distribution would violate any
applicable statute, regulation, agreement or OTS-imposed condition; or (d) the institution
is not eligible for expedited treatment of its filings. If an application is not required
to be filed, savings institutions which are a subsidiary of a holding company (as well as
certain other institutions) must still file a notice with the OTS at least 30 days before
the board of directors declares a dividend or approves a capital distribution.

30

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Branching
by Federal Savings Institutions. OTS policy permits interstate branching to
the full extent permitted by statute (which is essentially unlimited). Generally, federal
law prohibits federal savings institutions from establishing, retaining or operating a
branch outside the state in which the federal institution has its home office unless the
institution meets the Internal Revenue Service (IRS) domestic building and
loan test (generally, 60% of a thrifts assets must be housing-related) (IRS
Test). The IRS Test requirement does not apply if: (a) the branch(es) result(s) from
an emergency acquisition of a troubled savings institution (however, if the troubled
savings institution is acquired by a bank holding company, does not have its home office
in the state of the bank holding company bank subsidiary and does not qualify under the
IRS Test, its branching is limited to the branching laws for state-chartered banks in the
state where the savings institution is located); (b) the law of the state where the branch
would be located would permit the branch to be established if the federal savings
institution were chartered by the state in which its home office is located; or (c) the
branch was operated lawfully as a branch under state law prior to the savings
institutions reorganization to a federal charter.

Furthermore,
the OTS will evaluate a branching applicants record of compliance with the Community
Reinvestment Act of 1977 (CRA). An unsatisfactory CRA record may be the basis
for denial of a branching application.

Community
Reinvestment Act and the Fair Lending Laws. Savings institutions have a
responsibility under the CRA and related regulations of the OTS to help meet the credit
needs of their communities, including low- and moderate-income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial institutions, nor
does it limit an institutions discretion to develop the types of products and
services that it believes are best suited to its particular community, consistent with the
CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institutions failure to comply with the provisions
of the CRA could, at a minimum, result in regulatory restrictions on its activities, and
failure to comply with the fair lending laws could result in enforcement actions by the
OTS, as well as other federal regulatory agencies and the Department of Justice. The
Banks current CRA rating is satisfactory.

Loans-to-One
Borrower Limitations. As a federal savings bank, we are limited in the
amount of loans we can make to any one borrower. This amount is equal to 15% of our
unimpaired capital and surplus (this amount was approximately $45.4 million at December
31, 2005), although we are permitted to lend up to an additional 10% of unimpaired capital
and surplus if the loans are secured by readily marketable securities. Our aggregate loans
to any one borrower have been within these limits for the year ended December 31, 2005.

Qualified
Thrift Lender Test. All savings institutions are required to meet a
qualified thrift lender test (QTL Test) to avoid certain restrictions on their
operations. Under Section 2303 of the Economic Growth and Regulatory Paperwork Reduction
Act of 1996, a savings institution can comply with the QTL Test by either qualifying as a
domestic building and loan association as defined in Section 7701(a)(19) of the Internal
Revenue Code or by meeting the second criteria of the QTL Test set forth in Section 10(m)
of the HOLA. A savings institution that does not meet the QTL Test must either convert to
a bank charter or comply with the following restrictions on its operations: (a) the
institution may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national bank; (b) the
branching powers of the institution shall be restricted to those of a national bank; (c)
the institution shall not be eligible to obtain any new advances from its FHLBank other
than special liquidity advances with the approval of the OTS; and (d) payment of dividends
by the institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the savings institution
ceases to be a qualified thrift lender, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any outstanding
FHLBank advances (subject to safety and soundness considerations).

Currently,
the portion of the QTL Test that is based on Section 10(m) of the HOLA rather than the
Internal Revenue Code requires that 65% of an institutions portfolio
assets (as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify without limit
for inclusion as part of the 65% requirement are loans made to purchase, refinance,
construct, improve or repair domestic residential housing and manufactured housing; home
equity loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); stock issued by the FHLBank and direct or
indirect obligations of the FDIC. Small business loans, credit card loans and student
loans are also included without limitation as qualified investments. In addition, the
following assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institutions portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of loans for
personal, family and household purposes (other than credit card loans and educational
loans); and stock issued by FNMA or FHLMC. Portfolio assets consist of total assets minus
the sum of: (a) goodwill and other intangible assets; (b) property used by the savings
institution to conduct its business; and (c) liquid assets up to 20% of the
institutions total assets. At December 31, 2005, approximately 73.3% of the
portfolio assets of the Bank were qualified thrift investments.

31

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Federal
Reserve System. The Bank is subject to various regulations promulgated by
the Federal Reserve, including, among others, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Funds Transfers), Regulation Z (Truth in
Lending), Regulation CC (Availability of Funds), and Regulation DD (Truth in Savings).
Regulation D requires noninterest-bearing reserve maintenance in the form of either vault
cash or funds on deposit at Federal Reserve Bank of Kansas City or another designated
depository institution in an amount calculated by formula. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity
requirements. At December 31, 2005, the Bank was in compliance with these reserve
requirements.

Savings
banks are authorized to borrow from a Federal Reserve Bank (FRB) discount window,
but FRB regulations require savings banks to exhaust other reasonable alternative sources
of funds, including FHLBank advances, before borrowing from a Federal Reserve Bank.

Affiliate
Restrictions. Section 11 of the HOLA provides that transactions between an
insured subsidiary of a holding company and an affiliate thereof will be subject to the
restrictions that apply to transactions between banks that are members of the Federal
Reserve System and their affiliates pursuant to Sections 23A and 23B of the Federal
Reserve Act.

Generally,
Section 23A and 23B and OTS regulations issued in connection therewith limit the extent to
which a savings institution or its subsidiaries may engage in certain covered
transactions with affiliates to an amount equal to 10% of the institutions
capital and surplus, in the case of covered transactions with any one affiliate, and to an
amount equal to 20% of such capital and surplus, in the case of covered transactions with
all affiliates. Section 23B applies to covered transactions and certain other
transactions and requires that all such transactions be on terms and under circumstances
that are substantially the same, or at least as favorable to the savings institution or
its subsidiary, as those prevailing at the time for comparable transactions with
nonaffiliated companies. A covered transaction is defined to include a loan or
extension of credit to an affiliate; a purchase of investment securities issued by an
affiliate; a purchase of assets from an affiliate, with certain exceptions; the acceptance
of securities issued by an affiliate as collateral for a loan or extension of credit to
any party; or the issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. Section 23B transactions also apply to the provision of services and the sale
of assets by a savings association to an affiliate.

In
addition, under OTS regulations, a savings institution may not make a loan or extension of
credit to an affiliate unless the affiliate is engaged only in activities permissible for
bank holding companies; a savings institution may not purchase or invest in securities of
an affiliate other than shares of a subsidiary; a savings institution and its subsidiaries
may not purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings institution or its subsidiaries and an
affiliate must be on terms and conditions that are consistent with safe and sound banking
practices. With certain exceptions, each loan or extension of credit by a savings
institution to an affiliate must be secured by collateral with a fair value of at least
100% (depending on the type of collateral) of the amount of the loan or extension
of credit.

The
OTS regulation generally excludes all non-bank and non-savings institution subsidiaries of
savings institutions from treatment as affiliates, except to the extent that the OTS or
the FRB decides to treat such subsidiaries as affiliates. The regulation also requires
savings institutions to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings institutions may be
required to give the OTS prior notice of affiliate transactions.

32

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The
Sarbanes-Oxley Act. In July 2002, the Sarbanes-Oxley Act of 2002
(SOA) was enacted in response to public concerns regarding corporate
accountability. The goals of the SOA are to increase corporate responsibility, to provide
enhanced penalties for accounting and auditing improprieties at publicly traded companies
and to protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to securities laws. The SOA represents a comprehensive revision of
laws affecting corporate governance, accounting obligations and corporate reporting. The
SOA generally applies to all companies that file or are required to file periodic reports
with the SEC under the Securities Act of 1934, as amended.

The
U.S.A. Patriot Act. In December 2001, the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(USA Patriot Act) became effective. The USA Patriot Act is designed to combat
money laundering and terrorist financing while protecting the United States financial
system. The USA Patriot Act imposes enhanced policy, record keeping and due diligence
requirements on domestic financial institutions. The USA Patriot Act also amended the Bank
Secrecy Act to facilitate access to customer account information by government officials
while immunizing banks from liability for releasing such information. Among other
requirements, Title III of the USA Patriot Act and related OTS regulations impose the
following requirements with respect to financial institutions:

| |  | Establishment
of anti-money laundering programs;
| | - | ------------------------------------------------

| |  | Establishment
of a program specifying procedures for obtaining identifying information from customers
seeking to open new accounts, including verifying the identity of customers within a
reasonable period of time;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Establishment
of enhanced due diligence policies, procedures and controls designed to detect and report
money laundering; and
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | Prohibition
on correspondent accounts for foreign shell banks and compliance with record keeping
obligations with respect to correspondent accounts of foreign banks.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, bank regulators are directed to consider a holding companys effectiveness
in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act
applications.

33

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# Item 1A. Risk Factors

In
addition to other information contained in this Annual Report on Form 10-K, the following
risk factors should be considered in evaluating our business. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also
may adversely affect our business, financial condition and/or results of operations.

If
the interest payments on our interest-bearing liabilities increase relative to the
interest we earn on our interest-earning assets, our net interest income may
decline. When interest-bearing liabilities mature or reprice more quickly
than interest-earning assets, a significant increase in market interest rates could
adversely affect net interest income. Conversely, a significant decrease in market
interest rates could result in increased net interest income. We seek to manage our
exposure to interest rate fluctuations, however, changes in market interest rates are
neither predictable or controllable and may have an adverse impact on our earnings and
financial condition.

Prevailing
interest rates may significantly affect the overall demand for loans and could also impact
the extent to which borrowers repay and refinance loans. Loan prepayments and refinancings, as well as prepayments
of mortgage-backed securities, may increase in a declining interest rate environment. Call provisions associated with our investment in U.S.
government securities and agency obligations and corporate securities may also negatively
impact net interest income in a declining interest rate environment. Such prepayment,
refinancing and security call activity may negatively impact the yield of our loan
portfolio and investment and mortgage-backed security portfolios as we would reinvest the
prepaid funds in a lower interest rate environment. Additionally, adjustable-rate mortgage
loans and mortgage-backed securities generally contain interim and lifetime caps that
limit the amount interest rates can increase or decrease at repricing dates.

In
a low interest rate environment, our level of core deposits may decline if our depositors
seek higher yielding instruments or other investment products we are unable to offer. This
may increase our cost of funds and decrease our net interest margin to the extent that
alternative funding sources are utilized to fund our business activities. In an increasing
interest rate environment, depositors tend to prefer longer term, higher costing time
deposits which could adversely affect our net interest income if rates were to
subsequently decline.

Our
focus on loans with relatively higher yields, adjustable interest rates and/or shorter
terms to maturity increases our exposure to credit risk.  These loans
include second mortgage residential, multi-family residential, commercial real estate and
land, construction, business, agricultural, warehouse mortgage lines of credit and
consumer loans. These loans generally involve a greater degree of risk than
fully-underwritten one-to-four family residential loans and typically have higher
principal payments. Repayment of multi-family residential, commercial real estate and
land, construction and agricultural loans generally is dependent upon sufficient income
from the property to cover operating expenses and debt service. Our investment in
construction loans significantly increased during the years ended December 31, 2005 and
2004. Risk of loss on construction loans is dependent largely upon the accuracy of the
initial estimate of the propertys value when completed or developed compared to the
projected cost (including interest) of the construction and other assumptions, including
the approximate time to sell or lease the properties. Additionally, changes in the local economies in which loan
collateral resides, which is outside of the control of the lender and borrower, could also
affect the value of the collateral for the loan or the future cash flow of the affected
property and result in a higher level of nonperforming loans.

An
inadequate allowance for loan losses could adversely affect our results of operations. We
are exposed to the risk that our customers may be unable to repay their loans according
to their terms and that any collateral securing the payment of their loans may not be
sufficient to assure full repayment. We evaluate the collectibility of our loan portfolio
and provide an allowance for loan losses which is based on our historical loan loss
experience for each group of loans as further adjusted for specific factors, including
the following:

| |  | Trends
and levels of delinquent, nonperforming or "impaired" loans;
| | - | -------------------------------------------------------------------

| |  | Trends
and levels of charge-offs and recoveries;
| | - | ------------------------------------------------

| |  | Trends
in volume and underwriting terms or guarantees for loans;
| | - | ----------------------------------------------------------------

| |  | Impact
of changes in underwriting standards, risk tolerances or other changes in lending
practices;
| | - | ---------------------------------------------------------------------------------------------------

| |  | Changes
in the value of collateral securing loans;
| | - | --------------------------------------------------

34

---

| |  | Total
loans outstanding and the volume of loan originations;
| | - | ------------------------------------------------------------

| |  | Type,
size, terms and geographic concentration of loans held;
| | - | -------------------------------------------------------------

| |  | Changes
in qualifications or experience of the lending staff;
| | - | -------------------------------------------------------------

| |  | Changes
in local or national economic or industry conditions;
| | - | -------------------------------------------------------------

| |  | Number
of loans requiring heightened management oversight;
| | - | ----------------------------------------------------------

| |  | Changes
in credit concentration; and
| | - | ------------------------------------

| |  | Changes
in regulatory requirements.
| | - | -----------------------------------

If
our evaluation is incorrect and borrower defaults cause losses exceeding our allowance for
loan losses, our results of operations could be significantly and adversely affected. We
can make no assurances that our allowance for loan losses will be adequate to cover loan
losses inherent in our portfolio.

Competition
could result in our loan portfolios and deposit base declining. We face
increasing competition both in making loans and in attracting deposits. Our market area
has a high density of financial institutions, some of which have greater financial
resources, name recognition and market presence than us, and all of which are our
competitors. Particularly intense competition exists for deposits and in all of the
lending products we currently offer. Our competition for loans comes primarily from
commercial banks, savings banks, savings and loan associations, mortgage banking
companies, insurance companies, finance companies and credit unions. Our most direct
competition for deposits historically has come from commercial banks, savings banks,
savings and loan associations and credit unions. In addition, we face competition for
deposits from products offered by brokerage firms, insurance companies and other financial
intermediaries, such as money market and other mutual funds and annuities. As a result of
the competitive environment in which we operate, no assurances can be given that we will
be able to continue to increase our loan portfolio and deposit base.

If
economic conditions decline, our financial condition and results of operations could be
adversely affected. Our operating results are affected by national and
local economic and competitive conditions, including changes in market interest rates, the
strength of the local economy, governmental policies of the communities in which we do
business and actions of regulatory authorities. A decline in the local or national economy
could adversely affect our financial condition and results of operations, including
through a decreased demand for loans or increased competition for loans, increased
nonperforming loans and loan losses and resulting additional provisions for loan losses
and for losses on real estate owned.

Negative
conditions in the real estate markets where collateral for our mortgage loans are located
could adversely affect our borrowers ability to repay and the value of the
collateral. Real estate values are affected by various factors, including changes in
general or regional economic conditions, governmental rules or policies and natural
disasters.

Legislative
and regulatory issues could adversely affect our financial condition and results of
operations. We are subject to extensive regulation, supervision and
examination by the OTS as our primary federal regulator, and by the FDIC, which insures
our deposits. As a member of the FHLBank, we must also comply with applicable regulations
of the Federal Housing Finance Board and the FHLBank. Regulation by these agencies is
intended primarily for the protection of our depositors and the deposit insurance fund and
not for the benefit of our shareholders. Our activities are also regulated under consumer
protections laws applicable to our lending, deposit and other activities. A sufficient
claim against us under these laws could have a material adverse affect on our financial
condition and results of operations.

# Item 1B. Unresolved
Staff Comments

Not applicable.

# Item 2. Properties

We
currently operate 68 banking offices in Nebraska (56), Iowa (9) and Kansas (3) of which 52
are owned by us and 16 are under operating leases. Additionally, we operate three loan
production offices located in Colorado, two loan production offices located in North
Carolina and one loan production office in each of Arizona, Florida, Minnesota and Nevada
all of which are under operating leases. We own our corporate headquarters located in
Lincoln, Nebraska.

35

---

For
further information regarding our properties, see Note 18  Lease
Commitments included in Item 8. Financial Statements and Supplementary Data, in
Part II of this Annual Report on Form 10-K.

# Item 3. Legal Proceedings

Except
litigation relating to certain goodwill claims against the United States
(U.S.) described below, we are not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be immaterial
to our consolidated financial condition or consolidated results of operations.

In
August 1995, we commenced litigation in the United States Court of
Federal Claims (Claims Court) claiming that the U.S. breached its contract
with us and has unlawfully taken our property without just compensation or due process of
law. As described below, our claims arose from changes to the rules for computing our
regulatory capital that were required by the adoption of the FIRREA.

Pursuant
to FIRREA, which became effective in December 1989, the OTS was created as the successor
to the Federal Home Loan Bank Board (FHLBB) to regulate federally-insured
savings institutions. At such time, we had $30.0 million of supervisory goodwill remaining
from three supervisory mergers we completed in 1982. At the time of these mergers, the
FHLBB agreed we could include the supervisory goodwill as capital for purposes of meeting
our regulatory capital requirements. The regulatory goodwill was to be amortized over a
25-year period. As a result of regulations adopted by the OTS implementing FIRREA, we had
to exclude immediately all of our supervisory goodwill from the calculation of our
tangible capital and had to phase out the inclusion of this goodwill in the calculation of
our core and risk-based capital requirements over a five-year period. We believe that the
adoption of the capital regulations by the OTS implementing FIRREA constituted a breach by
the U.S. of its contractual commitment regarding the regulatory capital treatment of our
supervisory goodwill.

Our
case was initially stayed pending resolution on appeal of a series of cases (United
States v. Winstar Corporation) (Winstar Cases). In July 1996, the United
States Supreme Court ruled in the Winstar Cases that FIRREAs provisions changing the
accounting for supervisory goodwill constituted a breach of FHLBB contractual agreements
with these institutions regarding the treatment of supervisory goodwill.

On
May 19, 2003, a four-day trial related solely to issues of liability commenced in the U.S.
Court of Federal Claims in Washington D.C. On November 6, 2003, the Court held the U.S.
liable to the Bank for breach of contract with regard to one of three supervisory mergers,
but absolved the U.S. of liability in connection with the other two merger transactions. A
motion for reconsideration of the Courts liability decision with respect to the one
merger on which we prevailed was filed by the U.S. and was subsequently denied by the
Court of Federal Claims on April 28, 2004. We subsequently filed a motion for
reconsideration concerning the portion of the Courts liability ruling absolving the
government of liability in the other two transactions, which was based on an opinion
issued by the United States Court of Appeals for the Federal Circuit in March 2005. The
Court of Federal Claims denied our motion for reconsideration by order entered October 20,
2005.

Discovery
on the issue of damages has been completed, including the submission of written opinions
and depositions of expert witnesses for both the U.S. and the Bank. To conform to the
Court of Federal Claims ruling finding the U.S. liable on only one of the three
claims, we now seek a reduced amount of lost profit damages in the amount of $29.6 million
which correspond to the percentage that the amount of remaining supervisory goodwill in
the one supervisory merger as to which the Court held the government breached its contract
bears in relation to the entire amount of remaining goodwill at the time of the breach. On
January 7, 2005, the U.S. filed a motion for summary judgment contending that we could not
recover damages as a matter of law. In an order entered on November 15, 2005, the Court
denied the governments motion for summary judgment on our lost profits damage
claim, but granted the governments motion with respect to our alternate damage
calculation, which sought $13.1 million for the cost to replace the value of the lost
goodwill.

36

---

At
the trial court level, only the issue regarding the amount of damages remains to be
determined. In an order entered January 6, 2006, the Court scheduled the trial on our lost
profits damages claim to begin on May 22, 2006, and to continue for eight business days.
We are currently in the process of preparing for trial.

The
U.S. continues its litigation strategy of claiming that no damages have been suffered and
therefore it will not settle most of the pending goodwill cases, including ours. There can
be no assurance as to the type or amount of damages, if any, that we may recover or the
timing, if we are successful, for receipt by us of any damages from the U.S. Government.

# Item 4.  Submission of
Matters to a Vote of Security Holders

Not Applicable.

37

---

# PART II

# Item 5.  Market for the
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Our
common stock trades on the Nasdaq National Market under the symbol TONE. As of
December 31, 2005, we had 1,619 shareholders of record which does not include those
persons or entities holding stock in nominee or street name through brokerage
firms or others. The following table shows the high and low bid prices of our common stock
during the periods indicated as well as the period end closing sales price and the
dividend paid each quarter.

|               | 2005 | 2004
|-------------- | ---- | ----
|               |      |     
|
|               |      |     
|First Quarter  |      |     
|Second Quarter |      |     
|Third Quarter  |      |     
|Fourth Quarter |      |     
|               |      |     

The
following table details our purchases of common stock during the three months ended
December 31, 2005:

|                                     | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs* | Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs
|------------------------------------ | -------------------------------- | ---------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------------
|October 2005                         |                                  |                              |                                                                                   |                                                                           
|Beginning Date - October 1, 2005     |                                  |                             
|Ending Date - October 31, 2005       |                                  |                              |                                                                                   | 967                                                                       
|November 2005                        |                                  |                             
|Beginning Date - November 1, 2005    |                                  |                             
|Ending Date - November 30, 2005      |                                  |                              |                                                                                   | --                                                                        
|December 2005                        |                                  |                             
|Beginning Date - December 1, 2005    |                                  |                             
|Ending Date - December 31, 2005      |                                  |                              |                                                                                   | --                                                                        
|                                    
|Total shares purchased during the    |                                  |                             
|three months ended December 31, 2005 |                                  |                              |                                                                                   | 967                                                                       
|                                    

|* | Information
related to our publicly announced plan authorizing purchases of common stock during the
three months ended December 31, 2005, is as follows:
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|Date Purchase Plan Announced | Approved for Purchase | Expiration Date of Purchase Plan
|---------------------------- | --------------------- | --------------------------------
|July 27, 2004                | 1,828,581             | No stated expiration date       
|                            

38

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# Item 6. Selected
Financial Data

|                                                                                                                                  | At or For the Year Ended December 31,
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
|
|Selected Statement of Income Data:                                                                                                |                                      
|Total interest income                                                                                                             |                                      
|Total interest expense                                                                                                            |                                      
|                                                                                                                                 
|Net interest income                                                                                                               |                                      
|Provision for loan losses                                                                                                         |                                      
|                                                                                                                                 
|Net interest income after provision                                                                                               |                                      
|for loan losses                                                                                                                   |                                      
|                                                                                                                                 
|Total noninterest income                                                                                                          |                                      
|Total noninterest expense                                                                                                         |                                      
|                                                                                                                                 
|Income before income taxes                                                                                                        |                                      
|Income tax expense                                                                                                                |                                      
|                                                                                                                                 
|Net income                                                                                                                        |                                      
|                                                                                                                                 
|Net income per common share, basic                                                                                                |                                      
|Net income per common share, diluted                                                                                              |                                      
|Dividends declared per common share                                                                                               |                                      
|                                                                                                                                 
|Selected Financial Condition Data:                                                                                                |                                      
|Total assets                                                                                                                      |                                      
|Cash and cash equivalents                                                                                                         |                                      
|Investment securities                                                                                                             |                                      
|Mortgage-backed securities                                                                                                        |                                      
|Net loans after allowance for loan losses                                                                                         |                                      
|Deposits                                                                                                                          |                                      
|FHLBank Topeka advances and                                                                                                       |                                      
|other borrowings                                                                                                                  |                                      
|Stockholders equity                                                                                                              |                                      
|                                                                                                                                 
|Selected Operating Ratios:                                                                                                        |                                      
|Average yield on interest-earning assets                                                                                          |                                      
|Average rate on interest-bearing liabilities                                                                                      |                                      
|Average interest rate spread                                                                                                      |                                      
|Net interest margin                                                                                                               |                                      
|Average interest-earning assets to                                                                                                |                                      
|average interest-bearing liabilities                                                                                              |                                      
|Net interest income after provision for                                                                                           |                                      
|loan losses to noninterest expense                                                                                                |                                      
|Total noninterest expense to average assets                                                                                       |                                      
|Efficiency ratio (2)                                                                                                              |                                      
|Return on average assets                                                                                                          |                                      
|Return on average equity                                                                                                          |                                      
|Average equity to average assets                                                                                                  |                                      
|Return on tangible equity (3)                                                                                                     |                                      
|                                                                                                                                 
|(1)  Information applicable to post stock conversion period only. We completed our initial public offering on October 1, 2002.   
|(2)  Efficiency ratio is calculated as total noninterest expense, less amortization expense of intangible assets, as a percentage
|of the sum of net interest income and noninterest income.                                                                        
|(3)  Return on tangible equity is calculated as annualized net income as a percentage of average stockholders                   
|adjusted for goodwill and other intangible assets.                                                                               
|                                                                                                                                 

39

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# Item 7.  Managements
Discussion and Analysis of Financial Condition and Results of Operations

# Our Management Strategy

In
an effort to increase our profitability, we implemented an evolutionary plan to grow and
diversify our operations to become a regional community bank. In our Primary Banking
Market Area we have endeavored to position ourselves as a local alternative to national
and super-regional competitors. In addition, we have availed ourselves of additional loan
opportunities outside our Primary Banking Market Area and have selectively entered into
relationships with other financial institutions throughout the United States to purchase
whole loans or participation interests in loans, particularly commercial real estate and
land and construction loans. Additionally, we have opened or
acquired loan production offices in high growth cities of the United States in an effort
to strategically supplement our loan origination activities.

Highlights of our long-term
management strategy are as follows:

| |  | Continuing
Our Controlled Growth and Expanding Our Franchise. We have increased our
total assets in each of the past five years. During this previous five-year period, total
assets have increased by $1.9 billion to $3.2 billion. In addition, we believe that our
conversion from mutual to stock form in October 2002 facilitated our ability to expand
our franchise. We have also executed a strategic acquisition plan designed to strengthen
market share in our Primary Banking Market Area as well as to build our lending presence
in growing metropolitan areas outside of our Primary Banking Market Area.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Building
Our Loan Portfolio to Increase Yields and/or Reduce Interest Rate Risk. We
have focused on increasing our holdings of loans with relatively higher yields,
adjustable interest rates and/or shorter terms to maturity. At December 31, 2005, our
second mortgage residential, multi-family residential, commercial real estate and land,
construction, business, agricultural, warehouse mortgage lines of credit and consumer
loans amounted to $3.1 billion in the aggregate or 89.0% of our total loan portfolio.
This compares to $667.7 million, or 55.2%, of total loans at December 31, 2000. We
generally sell fixed-rate, one-to-four family residential loans into the secondary
market, with servicing retained.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Emphasizing
Growth of Our Core Deposits and Minimizing Our Cost of Funds. Our core
deposits, consisting of checking, money market and savings accounts, have increased from
$487.2 million at December 31, 2000 to $932.2 million at December 31, 2005. We continue
our emphasis on increasing the number of core checking account relationships, which
during the five-year period ended December 31, 2005, have grown by 159.1% from 36,700 to
95,100. Establishment of additional core relationships, including consumer and business
banking relationships, provide new opportunities to sell other profitable products and
services and increase market share. Our average rate paid on interest-bearing deposits
for the years ended December 31, 2005 and 2000 was 2.29% and 5.03%, respectively.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increasing
Our Fee Income and Expanding Our Products and Services.Noninterest income
increased by $20.0 million, or 304.3%, to $26.6 million for the year ended December 31,
2005 compared to $6.6 million for the year ended December 31, 2000. The increase
primarily reflects increased fee income due largely to an increase in the number of core
deposit accounts. We have been pro-active in our efforts to increase noninterest income,
largely by increasing the number of customers that we serve in our Primary Banking Market
Area as well as increasing the number of our financial products that our customers
utilize. We expect our employees to cross-sell our financial products and services to
customers and we provide them with economic incentives to do so. Our efforts have also
included redesigning a number of our banking offices to be retail sales centers, which
have a floor plan we believe is more conducive to cross-selling of products. We
consistently search for new products and services that serve the needs of our customers.
In the past five years, we have introduced on-line banking, a High Performancechecking
program, indirect automobile lending, business checking and an expanded business loan
program.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

---

| |  | Maintaining
Asset Quality and Efficiency. We believe that superior asset quality and
efficiency is key to long-term financial success. We have sought to maintain a high level
of asset quality and moderate credit risk by using underwriting standards which we
believe are conservative. Although we are an acquirer of mortgage loans and participation
interests in loans from outside our Primary Lending Market Area, we generally apply our
own underwriting standards to all such loans. Total nonperforming assets have remained
relatively low as our asset base has grown and diversified. Our ratio of nonperforming
assets to total assets at December 31, 2005 was 0.52% compared to 0.39% at December 31,
2000. We also continually strive to enhance operational efficiencies to improve financial
performance. As a result, our efficiency ratio has improved to 53.70% for the year ended
December 31, 2005 compared to 58.74% for the year ended December 31, 2001.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Critical Accounting
Policies

See
Note 1  Summary of Significant Accounting Policies included in
Item 8. Financial Statements and Supplementary Data, in Part II of this Annual Report on
Form 10-K for a summary of our significant accounting policies. Various elements of our
accounting policies, by nature, are inherently subject to estimation techniques, valuation
assumptions and other subjective assessments. Our policies with respect to the
methodologies used to determine the allowance for loan losses, judgments regarding
goodwill and other intangible assets, valuation of mortgage servicing rights, valuation
and measurement of derivatives and commitments and evaluation of investment and
mortgage-backed securities for impairment are our most critical accounting policies
because they are important to the presentation of our financial condition and results of
operations, involve a higher degree of complexity and require management to make difficult
and subjective judgments which often require assumptions or estimates about highly
uncertain matters. The use of different judgments, assumptions and estimates could result
in material differences in our results of operations or financial condition.

Allowance
for Loan Losses. We have identified  the allowance for
loan losses as a critical accounting policy where amounts are sensitive to material
variation. This policy is significantly affected by our judgment and uncertainties and
there is a likelihood that materially different amounts could be reported under different,
but reasonably plausible, conditions or assumptions. The allowance for loan losses is
considered a critical accounting estimate because there is a large degree of judgment in:

| |  | Assigning
individual loans to specific risk levels (pass, special mention, substandard, doubtful
and loss);
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Valuing
the underlying collateral securing the loans;
| | - | -----------------------------------------------------

| |  | Determining
the appropriate reserve factor to be applied to specific risk levels for special mention
loans and those adversely classified (substandard, doubtful and loss); and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Determining
reserve factors to be applied to pass loans based upon loan type.
| | - | -----------------------------------------------------------------------------

We
establish provisions for loan losses, which are charges to our operating results, in order
to maintain a level of total allowance for loan losses that, in managements belief,
covers all known and inherent losses that are both probable and reasonably estimable at
each reporting date. Management reviews the loan portfolio no less frequently than
quarterly in order to identify those inherent losses and to assess the overall collection
probability of the loan portfolio. Managements review includes a quantitative
analysis by loan category, using historical loss experience, classifying loans pursuant to
a grading system and consideration of a series of qualitative loss factors. The evaluation
process includes, among other things:

| |  | Trends
and levels of delinquent, nonperforming or "impaired" loans;
| | - | -------------------------------------------------------------------

| |  | Trends
and levels of charge-offs and recoveries;
| | - | ------------------------------------------------

| |  | Trends
in volume and underwriting terms or guarantees for loans;
| | - | ----------------------------------------------------------------

| |  | Impact
of changes in underwriting standards, risk tolerances or other changes in lending
practices;
| | - | ---------------------------------------------------------------------------------------------------

| |  | Changes
in the value of collateral securing loans;
| | - | --------------------------------------------------

| |  | Total
loans outstanding and the volume of loan originations;
| | - | ------------------------------------------------------------

| |  | Type,
size, terms and geographic concentration of loans held;
| | - | -------------------------------------------------------------

| |  | Changes
in qualifications or experience of the lending staff;
| | - | -------------------------------------------------------------

| |  | Changes
in local or national economic or industry conditions;
| | - | -------------------------------------------------------------

| |  | Number
of loans requiring heightened management oversight;
| | - | ----------------------------------------------------------

41

---

| |  | Changes
in credit concentration; and
| | - | ------------------------------------

| |  | Changes
in regulatory requirements.
| | - | -----------------------------------

This
evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available or as future events change.

The
allowance for loan losses consists of two elements. The first element is an allocated
allowance established for specific loans identified by the credit review function that are
evaluated individually for impairment and are considered to be impaired. A loan is
considered impaired when, based on current information and events, it is probable that we
will be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. Impairment is measured by:

| |  | The
fair value of the collateral if the loan is collateral dependent;
| | - | ---------------------------------------------------------------------

| |  | The
present value of expected future cash flows; or
| | - | ---------------------------------------------------

| |  | The
loans observable market price.
| | - | -----------------------------------

The
second element is an estimated allowance established for losses which are probable and
reasonable to estimate on each category of outstanding loans. While management uses
available information to recognize probable losses on loans inherent in the portfolio,
future additions to the allowance may be necessary based on changes in economic conditions
and other factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our allowance for loan losses. Such agencies may
require us to recognize additions to the allowance based on their judgment of information
available to them at the time of their examination.

Goodwill
and Other Intangible Assets. Goodwill represents the excess price paid over
the fair value of the tangible and intangible assets and liabilities acquired in
connection with the August 27, 2004 acquisition of UNFC. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible
balances are not being amortized, but are tested for impairment annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires intangible assets with
estimated useful lives to be amortized over their respective estimated useful lives to
their residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.

Our
policy is to evaluate annually the carrying value of our reporting unit goodwill and
identifiable assets not subject to amortization. Goodwill was established in connection
with the UNFC acquisition and was supported by third-party valuations as of August 27,
2004.

We
have identified a single reporting unit for purposes of goodwill impairment testing. The
impairment test is therefore performed on a consolidated basis. We perform our goodwill
impairment analysis on an annual basis during the third quarter. Additional impairment
analysis may be performed if circumstances or events occur which may have an impact on the
fair value of our goodwill. Generally, fair value represents a multiple of earnings or
discounted projected cash flows. Potential impairment is indicated when the carrying value
of the entity, including goodwill, exceeds its fair value. If potential for impairment
exists, the fair value of the entity is subsequently measured against the fair value of
its underlying assets and liabilities, excluding goodwill, to estimate an implied fair
value of the entitys goodwill. Impairment loss is recognized for any excess of the
carrying value of the entitys goodwill over the implied fair value. We performed our
impairment analysis as of September 30, 2005 and concluded that no potential impairment of
goodwill existed as the fair value of our goodwill exceeded its carrying value.

The
value of core deposit intangible assets acquired in connection with the UNFC transaction
are included in the Consolidated Statements of Financial Condition as other intangible
assets. Determining the amount of identifiable intangible assets and their average lives
involves multiple assumptions and estimates and is typically determined by performing a
discounted cash flow analysis, which involves a combination of any or all of the following
assumptions: customer attrition, account runoff, alternative funding costs, deposit
servicing costs and discount rates. The core deposit intangible has been estimated to have
a 10-year life with an accelerated rate of amortization.

42

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We
review our identifiable intangible assets for impairment whenever events or changes in
circumstances indicate that we may not recover our investment in the underlying assets or
liabilities which gave rise to the identifiable intangible assets. For the years ended
December 31, 2005 and 2004, no events or circumstances triggered an impairment charge
against our core deposit intangible assets.

Mortgage
Servicing Rights.We capitalize the estimated value of mortgage servicing
rights upon the sale of loans. The estimated value takes into consideration contractually
known amounts, such as loan balance, term and interest rate. These estimates are impacted
by loan prepayment speeds, servicing costs and discount rates used to present value the
cash flow stream. We evaluate the fair value of mortgage servicing rights on a quarterly
basis using current prepayment speed, cash flow and discount rate estimates. Changes in
these estimates impact fair value and could require us to record a valuation allowance or
recovery. The fair value of mortgage servicing rights is highly sensitive to changes in
assumptions. Changes in prepayment speed assumptions have the most significant impact on
the fair value of mortgage servicing rights. Generally, as interest rates decline,
prepayments accelerate with increased refinance activity, which results in a decrease in
the fair value. As interest rates rise, prepayments generally slow, which results in an
increase in the fair value. All assumptions are reviewed for reasonableness on a quarterly
basis and adjusted as necessary to reflect current and anticipated market conditions.
Thus, any measurement of fair value is limited by the conditions existing and the
assumptions utilized as of a particular point in time, and those assumptions may not be
appropriate if applied at a different point in time.

Derivatives
and Commitments.We account for our derivatives and hedging activities in
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activity, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities and SFAS No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities.

In
the normal course of business, we enter into contractual commitments, including loan
commitments and rate lock commitments to extend credit to finance residential mortgages.
These commitments, which contain fixed expiration dates, offer the borrower an interest
rate guarantee provided the loan meets underwriting guidelines and closes within the time
frame established by us. Interest rate risk arises on these commitments and subsequently
closed loans if interest rates increase or decrease between the time of the interest rate
lock and the delivery of the loan to the investor. Loan commitments related to mortgage
loans that are intended to be sold are considered derivatives in accordance with the
guidance of SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles
to Loan Commitments. Accordingly, the fair value of these derivatives at the end of
the reporting period is based on a quoted market price that closely approximates the
amount that would have been recognized if the loan commitment was funded and sold.

To
mitigate the effect of interest rate risk inherent in providing loan commitments, we hedge
our commitments by entering into mandatory or best efforts delivery forward sale contracts. These
forward contracts are marked-to-market through earnings and are not designated as
accounting hedges under SFAS No. 133. The change in the fair value of loan commitments and
the change in the fair value of forward sales contracts generally move in opposite
directions and, accordingly, the impact of changes in these valuations on net income
during the loan commitment period is generally inconsequential.

Although
the forward loan sale contracts also serve as an economic hedge of loans held for sale,
forward contracts have not been designated as accounting hedges under SFAS No. 133 and,
accordingly, loans held for sale are accounted for at the lower of cost or market in
accordance with SFAS No. 65, Accounting for Certain Mortgage Banking Activities.

43

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Investment
Securities. We evaluate our available for sale and held to maturity
investment securities for impairment on a quarterly basis. An impairment charge in the
Consolidated Statements of Income is recognized when the decline in the fair value of
investment securities below their cost basis is judged to be other-than-temporary. Various
factors are utilized in determining whether we should recognize an impairment charge,
including, but not limited to, the length of time and extent to which the fair value has
been less than its cost basis and our ability and intent to hold the investment security
for a period of time sufficient to allow for any anticipated recovery in fair value.

44

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# Comparison of Financial
Condition at December 31, 2005 and 2004

Assets.          At
December 31, 2005, our total assets were $3.2 billion, an increase of $174.2
          million, or 5.7%, compared to $3.0 billion at December 31, 2004. The increase
in           total assets during 2005 was primarily the result of a $189.7 million
increase           in net loans and an $18.0 million increase in cash and cash
equivalents           partially offset by a $41.6 million decrease in investment and
mortgage-backed           securities.

Investment
Securities. Our available for sale investment securities totaled $102.6
million at December 31, 2005, a $25.1 million, or 19.7%, decrease compared to $127.8
million at December 31, 2004. The decrease in our available for sale investment securities
was primarily the result of $24.4 million of maturities and securities sales resulting in
$3.2 million in sales proceeds partially offset by security purchases of $4.5 million.

Mortgage-Backed
Securities. Our mortgage-backed securities portfolio decreased $16.4
million, or 45.4%, to $19.8 million at December 31, 2005 compared to $36.2 million at
December 31, 2004. The decrease was primarily the result of $15.9 million in principal
payments received.

Loans
Receivable. Net loans increased $189.7 million, or 7.1%, to $2.8 billion at
December 31, 2005 compared to $2.7 billion at December 31, 2004. During 2005, we
originated $5.5 billion of loans and purchased $1.1 billion of loans which was partially
offset by $5.9 billion of principal repayments and $259.4 million of loan sales.

|                                        | At December 31,
|--------------------------------------- | ---------------
|
|One-to-four family residential (1)      |                
|Second mortgage residential             |                
|Multi-family residential                |                
|Commercial real estate and land         |                
|Residential construction                |                
|Commercial construction                 |                
|Agriculture                             |                
|Business                                |                
|Agriculture - operating                 |                
|Warehouse mortgage lines of credit      |                
|Consumer                                |                
|                                       
|Total loans                             |                
|                                       
|Unamortized premiums, discounts         |                
|and deferred loan fees                  |                
|Undisbursed portion of construction and |                
|land development loans in process       |                
|                                       
|Net loans                               |                
|                                       
|(1)  Includes loans held for sale.     
|                                       

The
increases in multi-family residential, commercial real estate and land, construction,
business and consumer loans is primarily the result of our ongoing strategy to build a
loan portfolio to increase yields and reduce interest rate risk by focusing on loans with
relatively higher yields, adjustable interest rates and/or shorter terms to maturity. The
increases in our residential and commercial construction loans reflects our increased
origination capabilities realized through the opening of nine loan production offices in
Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. The decrease in our
one-to-four family residential loans is primarily the result of decreased demand for
adjustable-rate residential mortgage loans. Generally, we originate adjustable-rate
mortgage loans for retention in our portfolio while selling substantially all fixed-rate,
one-to-four family residential loans. The decline in our second mortgage residential
portfolio is primarily the result of loan repayments and prepayments. The decline in our
warehouse mortgage lines of credit reflects a reduction in mortgage financing activity
during the fourth quarter of 2005.

45

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Allowance
for Loan Losses.The allowance for loan losses increased $4.0 million, or
15.1%, to $30.9 million at December 31, 2005 compared to $26.8 million at December 31,
2004. We made a provision for loan losses of $6.4 million for the year ended December 31,
2005 compared to $4.9 million during the year ended December 31, 2004, an increase of $1.5
million or 31.7%. Nonperforming loans increased $4.2 million, or 40.8%, to $14.4 million
at December 31, 2005 compared to $10.2 million at December 31, 2004. The increase in
nonperforming loans is primarily the result of three multi-family residential loans
totaling $3.3 million and one commercial real estate and land loan of $915,000 being
classified as impaired at December 31, 2005. Net charge-offs were $2.4 million during the
year ended December 31, 2005, an increase of $534,000, or 28.7%, compared to net
charge-offs of $1.9 million during the year ended December 31, 2004. Our allowance for
loan losses as a percentage of nonperforming loans declined to 214.30% at December 31,
2005 compared to 262.23% at December 31, 2004. The ratio of the allowance for loan losses
to net loans increased to 1.09% at December 31, 2005 compared to 1.01% at December 31,
2004. The increase is primarily attributable to the three multi-family residential and one
commercial real estate and land loans previously discussed.

Premises
and Equipment. Premises and equipment increased $1.3 million, or 3.4%, to
$39.5 million at December 31, 2005 compared to $38.2 million at December 31, 2004. The
increase is attributable to $5.7 million in asset additions which was partially offset by
depreciation and amortization expense of $3.6 million. Significant additions during 2005
included property acquired for the construction of new, full-service banking facilities in
Omaha and Hastings, Nebraska which are expected to be completed during early 2006.

FHLBank
Stock. FHLBank stock totaled $58.5 million at December 31, 2005, an
increase of $4.2 million, or 7.8%, compared to $54.3 million at December 31, 2004.

Goodwill
and Other Intangible Assets. Goodwill totaled $42.3 million at December 31,
2005 and 2004 and relates to the 2004 acquisition of UNFC.  Other intangible assets
declined $1.8 million, or 15.5%, to $10.0 million at December 31, 2005 compared to $11.9
million at December 31, 2004. This amount relates to core deposit intangible assets
recorded as a result of the UNFC acquisition. The decline was related to amortization
during the year ended December 31, 2005.

Other
Assets. Other assets increased $4.8 million, or 20.6%, to $28.5 million at
December 31, 2005 compared to $23.6 million at December 31, 2004. At December 31, 2005,
the largest item recorded in other assets was net servicing assets of $11.7 million. The
remainder consists of prepaid expenses, miscellaneous receivables and other miscellaneous
assets.

Deposits.        Total
deposits increased $173.6 million, or 9.3%, to $2.0 billion at December           31,
2005 compared to $1.9 billion at December 31, 2004.

|                             | At December 31,
|---------------------------- | ---------------
|
|Noninterest-bearing checking |                
|Savings                      |                
|Interest-bearing checking    |                
|Money market                 |                
|Time deposits                |                
|                            
|Total deposits               |                
|                            

46

---

Our
retail generated time deposits increased $185.0 million, or 21.9%, to $1.0 billion at
December 31, 2005 compared to $843.2 million at December 31, 2004. The increase in retail
generated time deposits was partially offset by a $46.7 million, or 37.4%, decline in
brokered time deposits. Our brokered time deposits totaled $78.0 million at December 31,
2005 compared to $124.6 million at December 31, 2004. The increase in our time deposits
during 2005 was the result of a rising interest rate environment and marketing promotions
designed to attract new deposit accounts and establish new customer relationships. The
weighted average rate of our time deposits was 3.52% at December 31, 2005 compared to
2.77% at December 31, 2004. Our transaction accounts (checking, savings and money market)
totaled $932.2 million at December 31, 2005, an increase of $35.3 million, or 3.9%,
compared to $897.0 million at December 31, 2004.

FHLBank
Advances and Other Borrowings. Our FHLBank advances and other borrowings
totaled $814.9 million at December 31, 2005, a decrease of $26.7 million, or 3.2%,
compared to $841.7 million at December 31, 2004. The weighted average interest rate on our
FHLBank advances and other borrowings was 3.77% at December 31, 2005, an increase of 52
basis points compared to 3.25% at December 31, 2004. During 2005, we utilized our
increased deposits, investment and mortgage-backed security repayments and income from
operations to fund loan originations and purchases.

Accrued
Expenses and Other Liabilities. Our accrued expenses and other liabilities
totaled $28.0 million at December 31, 2005, a decrease of $3.7 million, or 11.8%, compared
to $31.8 million at December 31, 2004. The primary items comprising accrued expenses and
other liabilities are accrued taxes payable, deferred compensation agreements, loan
servicing payments, end-lender loan payments associated with our warehouse mortgage lines
of credit and other miscellaneous accrued expenses.

Stockholders
Equity. At December 31, 2005, stockholders equity totaled $308.9
million, an increase of $31.8 million, or 11.5%, compared to $277.0 million at December
31, 2004. The increase in stockholders equity primarily reflects net income of $32.8
million during the year ended December 31, 2005, $4.0 million related to common stock
earned by participants in the Employee Stock Ownership Plan (ESOP) and $3.1
million related to amortization of awards under the 2003 Management Recognition and
Retention Plan (MRRP). These increases were partially offset by the repurchase
of 148,538 shares of our outstanding common stock at a cost of $3.6 million and $3.8
million in cash dividends paid to our stockholders.

We
paid cash dividends of $0.05 per common share on March 31, 2005 to shareholders of record
on March 15, 2005 and $0.06 per common share on June 30, 2005, September 30, 2005 and
December 31, 2005 to shareholders of record on June 15, 2005, September 15, 2005 and
December 15, 2005, respectively.

On
July 27, 2004, we announced that our Board of Directors had authorized the repurchase of
up to 1,828,581 shares of our outstanding common stock. There is no stated expiration date
for this authorization. We repurchased 148,538 shares of our outstanding common shares
under this authorization during the year ended December 31, 2005. There were no
repurchases under this authorization during the year ended December 31, 2004. At December
31, 2005, the total remaining common stock repurchase authority under this authorization
is 1,680,043 shares.

# Comparison of Financial
Condition at December 31, 2004 and 2003

Assets.         Our
total assets were $3.0 billion at December 31, 2004, an $840.2 million, or
          38.1%, increase from December 31, 2003. The increase in total assets during
2004           was primarily the result of $304.3 million in net loans and $149.6 million
of           investment securities and FHLBank stock acquired from the UNFC acquisition
in           August 2004. Additionally, we purchased $134.4 million of residential
          construction loans from First Indiana Bank during the quarter ended December
31,           2004. Goodwill recorded in conjunction with the UNFC acquisition totaled
$42.3           million at December 31, 2004.

Investment
Securities. Our available for sale investment securities totaled $127.8
million at December 31, 2004, an $84.2 million, or 193.6%, increase compared to $43.5
million at December 31, 2003. The increase in our available for sale investment securities
was primarily due to $118.5 million of securities acquired from UNFC and security
purchases of $14.0 million partially offset by maturities of $28.4 million and the sale of
six securities resulting in $16.8 million in proceeds (including $461,000 in net gains on
sales which includes a $135,000 impairment on FNMA equity securities).

47

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Mortgage-Backed
Securities. Our mortgage-backed securities portfolio increased $20.5
million, or 130.2%, to $36.2 million at December 31, 2004 compared to $15.7 million at
December 31, 2003. The increase was primarily the result of $29.8 million of
mortgage-backed securities acquired from UNFC partially offset by $9.0 million of
principal payments received.

Loans
Receivable. Net loans increased $618.8 million, or 30.4%, to $2.7 billion
at December 31, 2004 compared to $2.0 billion at December 31, 2003. The primary reason for
the increase in net loans was $304.3 million of net loans acquired from UNFC and $134.4
million of residential construction loans acquired from First Indiana Bank. Additionally,
we originated $4.2 billion of loans and purchased $1.1 billion of loans during 2004 which
was offset by $4.4 billion of principal repayments and $285.0 million of loan sales. The
loan sales were primarily long-term, fixed-rate one-to-four family residential mortgages
that are sold as a means of limiting interest-rate risk, while generating gains on sale of
loans and servicing fee income in the future.

Allowance
for Loan Losses. The allowance for loan losses increased $7.2 million, or
37.0%, to $26.8 million at December 31, 2004 compared to $19.6 million at December 31,
2003. We acquired $4.2 million of allowance for loan losses as a result of the UNFC
acquisition. Net charge-offs were $1.9 million during the year ended December 31, 2004, an
increase of $70,000, or 3.9%, compared to net charge-offs of $1.8 million during the year
ended December 31, 2003. We made a provision for loan losses of $4.9 million for the year
ended December 31, 2004, an increase of $616,000, or 14.4%, compared to $4.3 million for
the year ended December 31, 2003. Our allowance for loan losses as a percentage of
nonperforming loans declined to 262.23% at December 31, 2004 compared to 541.65% at
December 31, 2003. The ratio of the allowance for loan losses to net loans increased to
1.01% at December 31, 2004 compared to 0.96% at December 31, 2003.

Premises
and Equipment. Premises and equipment increased to $38.2 million at
December 31, 2004 compared to $27.6 million at December 31, 2003, a $10.6 million or 38.5%
increase. The primary reason for the increase was $7.9 million of assets acquired from
UNFC and purchases of $5.9 million partially offset by depreciation and amortization of
$3.2 million during the year ended December 31, 2004.

Goodwill
and Other Intangible Assets. We recorded $42.3 million of goodwill
during 2004 related to the UNFC acquisition. We did not have any goodwill at
December 31, 2003. Goodwill is subject to periodic impairment analysis which will be
completed annually beginning in 2005. Additionally, other intangible assets totaled $11.9
million at December 31, 2004. This amount related to core deposit intangible assets
recorded as a result of the UNFC acquisition.

Other
Assets. Other assets increased $1.0 million, or 4.5%, to $23.6 million at
December 31, 2004 compared to $22.6 million at December 31, 2003. At December 31, 2004,
the largest item recorded in other assets was net servicing assets of $10.5 million. The
remainder consists of prepaid expenses, miscellaneous receivables and other miscellaneous
assets.

Deposits.         Total
deposits increased $648.0 million, or 53.3%, to $1.9 billion at December           31,
2004 compared to $1.2 billion at December 31, 2003. The increase in deposits           at
December 31, 2004 was due to an increase of $382.0 million in time deposits           and
an increase of $266.0 million in core deposits (checking, money market and
          savings accounts). The primary reason for our increase in time and core
deposits           was the acquisition of UNFC. Time deposits totaled $967.8 million at
December           31, 2004, an increase of $382.0 million, or 65.2%, compared to $585.8
million at           December 31, 2003. At December 31, 2004, our interest-bearing and
          noninterest-bearing checking accounts totaled $526.3 million in the aggregate,
a           $185.9 million, or 54.6%, increase from an aggregate of $340.4 million at
          December 31, 2003. Brokered time deposits totaled $124.6 million at December
31,           2004 compared to $65.5 at December 31, 2003.

FHLBank
Advances and Other Borrowings. Our FHLBank advances and other borrowings
totaled $841.7 million at December 31, 2004, an increase of $196.0 million, or 30.4%,
compared to $645.7 million at December 31, 2003. We utilized FHLBank advances to fund loan
originations and purchases and to fund the UNFC acquisition. The issuance of $30.0 million
of trust preferred securities at a variable interest rate indexed to the three-month LIBOR
rate was completed during the second quarter of 2004. The securities, which are callable
at par in June 2009 and mature in June 2034, were issued to provide funding for common
stock repurchases and other general corporate purposes. At December 31, 2004, the weighted
average cost of our FHLBank advances and other borrowings was 3.25% compared to 3.01% at
December 31, 2003.

48

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Accrued
Expenses and Other Liabilities. Our accrued expenses and other liabilities
totaled $31.8 million at December 31, 2004, an increase of $8.9 million, or 39.0%,
compared to $22.9 million at December 31, 2003. The primary items comprising accrued
expenses and other liabilities are accrued taxes payable, deferred compensation
agreements, loan servicing payments, end-lender loan payments associated with our
warehouse mortgage lines of credit and other miscellaneous accrued expenses.

Stockholders
Equity. Our stockholders equity totaled $277.0 million at December
31, 2004 compared to $295.1 million at December 31, 2003, a decrease of $18.1 million or
6.1%. The decline in stockholders equity was attributable to the repurchase of
2,031,757 shares of our outstanding common stock in connection with a Board of Directors
authorized stock repurchase program at an average purchase price of $21.99 per share and
$3.4 million in dividends paid to our shareholders partially offset by net income of $23.9
million for the year ended December 31, 2004, $3.4 million related to common stock earned
by participants in the ESOP and $2.8 million related to the amortization of common stock
awards under the MRRP.

# Comparison of Operating
Results for the Years Ended December 31, 2005 and 2004

General.         Our
results of operations for the year ended December 31, 2005 were affected by           our
August 2004 acquisition of UNFC and the acquisition in November 2004 of four
          loan production offices from First Indiana Bank, which included $134.4 million
          of outstanding residential construction loans against forward commitments of
          $264.5 million. Our results of operations for the year ended December 31, 2005
          include a full-year of operating results from the UNFC and First Indiana
          transactions. The UNFC transaction was completed in August 2004, thus, our
          results of operations for the year ended December 31, 2004 include four months
          of results related to the UNFC transaction. The First Indiana Bank transaction
          was completed in November 2004 and contributed only two months of results for
          the year ended December 31, 2004.

Net
Income. Our net income for the year ended December 31, 2005 was $32.8
million, or $1.97 per diluted share ($2.02 per basic share), compared to net income of
$23.9 million, or $1.39 per diluted share ($1.42 per basic share), for the year ended
December 31, 2004.

Net
Interest Income. Net interest income is the most significant component of
our earnings and consists primarily of interest income on interest-earning assets,
primarily loans receivable and investment and mortgage-backed securities, offset by
interest expense on interest-bearing liabilities, primarily deposits and borrowed funds.
Changes in net interest income result from changes in volume, net interest spread and net
interest margin. Volume relates to the level of interest-earning assets and
interest-bearing liabilities. Net interest spread refers to the difference between the
yield on interest-earning assets and the rate paid on interest-bearing liabilities. Net
interest margin refers to net interest income divided by total interest-earning assets and
is influenced by the level and mix of interest-earning assets and interest-bearing
liabilities. Net interest income before provision for loan losses totaled $104.9 million
for the year ended December 31, 2005, an increase of $27.7 million, or 35.9%, compared to
$77.2 million for the year ended December 31, 2004. The increase in net interest income is
primarily due to increases in the average balance of and average yield earned on loans
receivable.

Our
average interest rate spread for the years ended December 31, 2005 and 2004 was 3.33% and
3.02%, respectively. The increase in our average interest rate spread is attributable to
our increase in the yield earned on interest-earning assets being greater than the
increase in our average rate paid on interest-bearing liabilities. The average yield on
interest-earning assets was 6.05% for the year ended December 31, 2005 compared to 5.33%
for the year ended December 31, 2004. The increase in the average yield earned on
interest-earning assets was primarily related to an increase in the average yield earned
on loans receivable. Our average yield earned on loans receivable for the years ended
December 31, 2005 and 2004 was 6.19% and 5.42%, respectively. This increase was primarily
the result of our lending strategy to focus on loans with relatively higher yields,
adjustable interest rates and/or shorter terms to maturity. Our average rate paid on
interest bearing liabilities was 2.72% for the year ended December 31, 2005 compared to
2.31% for the year ended December 31, 2004.

49

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Our
net interest margin (net interest income divided by average interest-earning assets)
increased to 3.58% for the year ended December 31, 2005 compared to 3.29% for the year
ended December 31, 2004. The increase in our net interest margin was the result of
increases in the average balance and average yield of interest-earning assets. The average
balance of our total interest-earning assets was $2.9 billion for the year ended December
31, 2005, an increase of $588.6 million, or 25.1%, compared to $2.3 billion for the year
ended December 31, 2004.

Average
Balances, Net Interest Income, and Yields Earned and Rates Paid. The
following table shows for the years indicated the total dollar amount of interest from
average interest-earning assets and the resulting yields, as well as the interest expense
on average interest-bearing liabilities, expressed both in dollars and rates, and the net
interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent
basis. All average balances are based on daily balances.

|                                                                                                                                      | Year Ended December 31,
|------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|Interest-earning assets:                                                                                                              |                        
|Federal funds sold                                                                                                                    |                        
|Investment securities (1)                                                                                                             |                        
|Mortgage-backed securities (1)                                                                                                        |                        
|Loans receivable (2)                                                                                                                  |                        
|                                                                                                                                     
|Total interest-earning assets                                                                                                         |                        
|Noninterest-earning assets                                                                                                            |                        
|                                                                                                                                     
|Total assets                                                                                                                          |                        
|                                                                                                                                     
|Interest-bearing liabilities:                                                                                                         |                        
|Interest-bearing checking accounts                                                                                                    |                        
|Savings accounts                                                                                                                      |                        
|Money market accounts                                                                                                                 |                        
|Time deposits                                                                                                                         |                        
|                                                                                                                                     
|Total interest-bearing deposits                                                                                                       |                        
|FHLBank Topeka advances and                                                                                                           |                        
|other borrowings                                                                                                                      |                        
|                                                                                                                                     
|Total interest-bearing liabilities                                                                                                    |                        
|Noninterest-bearing accounts                                                                                                          |                        
|Other liabilities                                                                                                                     |                        
|                                                                                                                                     
|Total liabilities                                                                                                                     |                        
|Stockholders equity                                                                                                                  |                        
|                                                                                                                                     
|Total liabilities and                                                                                                                 |                        
|stockholders equity                                                                                                                  |                        
|                                                                                                                                     
|Net interest-earnings assets                                                                                                          |                        
|Net interest income; average                                                                                                          |                        
|interest rate spread                                                                                                                  |                        
|Net interest margin (3)                                                                                                               |                        
|Average interest-earning assets to                                                                                                    |                        
|average interest-bearing liabilities                                                                                                  |                        
|                                                                                                                                     
|(1)  Includes securities available for sale and held to maturity. Investment securities also include FHLBank Topeka stock.           
|(2)  Includes nonperforming loans during the respective periods. Calculated net of unamortized premiums, discounts and deferred fees,
|undisbursed portion of construction and land development loans in process and allowance for loan losses.                             
|(3)  Equals net interest income divided by average interest-earning assets.                                                          
|                                                                                                                                     

50

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Rate/Volume
Analysis. The following table shows the extent to which changes in interest
rates and changes in the volume of interest-related assets and liabilities affected our
interest income and expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is provided on
changes attributable to: (1) changes in rate (change in rate multiplied by prior year
volume), and (2) changes in volume (change in volume multiplied by prior year rate). The
combined effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.

|                                                                                                                      | 2005 vs. 2004 | 2004 vs. 2003
|--------------------------------------------------------------------------------------------------------------------- | ------------- | -------------
|
|
|Interest income:                                                                                                      |               |              
|Federal funds sold                                                                                                    |               |              
|Investment securities                                                                                                 |               |              
|Mortgage-backed securities                                                                                            |               |              
|Loans receivable (1)                                                                                                  |               |              
|                                                                                                                     
|Total interest income                                                                                                 |               |              
|                                                                                                                     
|Interest expense:                                                                                                     |               |              
|Interest-bearing                                                                                                      |               |              
|checking accounts                                                                                                     |               |              
|Savings accounts                                                                                                      |               |              
|Money market accounts                                                                                                 |               |              
|Time deposits                                                                                                         |               |              
|                                                                                                                     
|Total deposits                                                                                                        |               |              
|FHLBank Topeka advances and                                                                                           |               |              
|other borrowings                                                                                                      |               |              
|                                                                                                                     
|Total interest expense                                                                                                |               |              
|                                                                                                                     
|Net change in net interest income                                                                                     |               |              
|                                                                                                                     
|(1)  Calculated net of uamortized premiums, discounts and deferred fees, undisbursed portion of construction and land
|development loans in process and allowance for loan losses.                                                          
|                                                                                                                     

Interest
Income. Our total interest income for the year ended December 31, 2005 was
$177.3 million, an increase of $52.4 million, or 41.9%, compared to $125.0 million for the
year ended December 31, 2004. The increase in total interest income was primarily
attributable to an increase in interest income on loans receivable. Interest income on
loans receivable totaled $169.2 million for the year ended December 31, 2005, an increase
of $49.6 million, or 41.5%, compared to $119.6 million for the year ended December 31,
2004. The increase in interest income on loans receivable for the year ended December 31,
2005 was primarily attributable to an increase in the average balance of loans receivable
of $527.8 million, or 23.9%, to $2.7 billion for the year ended December 31, 2005 compared
to $2.2 billion for the year ended December 31, 2004. Additionally, the average yield
earned on loans receivable increased to 6.19% for the year ended December 31, 2005
compared to 5.42% for the year ended December 31, 2004. The increase in the average yield
earned on loans receivable was the result of our strategy to grow our loan portfolio
holdings of loans with relatively higher yields, adjustable interest rates and/or shorter
terms to maturity.

Interest
Expense. Our total interest expense for the year ended December 31, 2005
totaled $72.4 million, a $24.7 million, or 51.6%, increase compared to $47.8 million for
the year ended December 31, 2004. Interest expense on deposits was $41.9 million for the
year ended December 31, 2005, an increase of $15.5 million, or 58.6%, compared to $26.5
million for the year ended December 31, 2004. Interest expense on FHLBank advances and
other borrowings increased $9.2 million, or 43.0%, to $30.5 million for the year ended
December 31, 2005 compared to $21.3 million for the year ended December 31, 2004. The
increase in interest expense during 2005 was the result of an increase in the average
balance of interest-bearing liabilities and a series of interest rate increases set forth
by the Federal Reserve Board which affects the rates we pay on interest-bearing
liabilities. The primary reasons for the increase in interest expense was a $421.5 million
increase in the average balance of interest-bearing deposits and a 41 basis point increase
in the average rate paid on interest-bearing deposits. The average rate paid on
interest-bearing deposits was 2.29% and 1.88% for the years ended December 31, 2005 and
2004, respectively. Additionally, the average balance of our FHLBank advances and other
borrowings increased $172.9 million, or 26.1%, to $834.6 million for the year ended
December 31, 2005 compared to $661.7 million for the year ended December 31, 2004. The
average rate paid on FHLBank advances and other borrowings increased to 3.65% for the year
ended December 31, 2005 compared to 3.22% for the year ended December 31, 2004.

51

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Provision
for Loan Losses. We establish provisions for loan losses in order to
maintain the allowance for loan losses at a level we believe, to the best of our
knowledge, covers all known and inherent losses in the portfolio that are both probable
and reasonable to estimate at each reporting date. Management performs reviews no less
than quarterly in order to identify these inherent losses and to assess the overall
collection probability for the loan portfolio. Our reviews consist of a quantitative
analysis by loan category, using historical loss experience, and consideration of a series
of qualitative loss factors.

We
made a provision for loan losses of $6.4 million for the year ended December 31, 2005
compared to $4.9 million for the year ended December 31, 2004, an increase of $1.5
million, or 31.7%. At December 31, 2005 our nonperforming loans totaled $14.4 million, or
0.51% of net loans, compared to $10.2 million, or 0.39% of net loans, at December 31,
2004. The increase in nonperforming loans during 2005 was primarily attributable to
payment defaults on seasoned loans for tax-advantaged affordable housing units and one
commercial real estate and land loan which were classified as impaired at December 31,
2005. Our loan delinquency rate (30 days or more delinquent) at December 31, 2005 as a
percentage of total loans was 1.09% compared to 0.88% at December 31, 2004. During the
years ended December 31, 2005 and 2004, we charged-off, net of recoveries, $2.4 million
and $1.9 million, respectively. The majority of loans charged off during 2005 were
consumer-related loans, primarily automobile loans, and one multi-family residential loan
acquired in the UNFC acquisition. At December 31, 2005 and 2004, our allowance for loan
losses amounted to 1.09% and 1.01%, respectively, of net loans.

Noninterest
Income. Our noninterest income totaled $26.6 million for the year ended
December 31, 2005, an increase of $2.7 million, or 11.2%, compared to $23.9 million for
the year ended December 31, 2004.

|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|
|Deposit account fees and service charges        |                        
|Lending fees and service charges                |                        
|Mortgage servicing rights valuation adjustments |                        
|Commissions and management fee income           |                        
|Debit card related fees and service charges     |                        
|Loss from real estate operations                |                        
|Net gain on sales of:                           |                        
|Investment securities                           |                        
|Loans held for sale                             |                        
|Real estate owned                               |                        
|Gain on pension plan curtailment                |                        
|Other operating income                          |                        
|                                               
|Total noninterest income                        |                        
|                                               

52

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The
increase in deposit account and debit card fees and service charges is largely due to an
increase in the number of transaction accounts and increased service fee rates on our
depository products. The increase in our lending fees and service charges is primarily
attributable to our increased lending volumes and our increased loan origination
capabilities supplemented by our nine loan production offices. During 2005, the balance of
our mortgage servicing rights valuation allowance was recaptured into earnings. Increases
in noninterest income during the year ended December 31, 2005 were partially offset by a
one-time gain during the year ended December 31, 2004 from the merger of our defined
benefit pension plan with an unrelated third party plan.

Noninterest
Expense. Our noninterest expense for the year ended December 31, 2005 was
$72.5 million, an increase of $14.2 million, or 24.5%, compared to $58.2 million for the
year ended December 31, 2004.

|                                          | Year Ended December 31,
|----------------------------------------- | -----------------------
|
|Employee compensation                     |                        
|Management Recognition and Retention Plan |                        
|Employee Stock Ownership Plan             |                        
|Employee benefits                         |                        
|Payroll taxes                             |                        
|Occupancy, net                            |                        
|Data processing                           |                        
|Advertising                               |                        
|Core deposit intangible amortization      |                        
|Professional services                     |                        
|Other                                     |                        
|                                         
|Total noninterest expense                 |                        
|                                         

The
increase in employee compensation and benefits and payroll taxes is attributable to an
increased number of lending and support personnel and normal salary increases. At December
31, 2005 we had 772 full-time equivalent employees compared to 724 full-time equivalent
employees at December 31, 2004. The increases in noninterest expense were, in large part,
related to the August 2004 UNFC acquisition.

Income
Tax Expense. Our income tax expense increased by $5.6 million, or 39.8%, to
$19.8 million for the year ended December 31, 2005 compared to $14.2 million for the year
ended December 31, 2004. The increase in income tax expense for the year ended December
31, 2005 compared to the same period in 2004 was primarily due to an increase in net
income and an increase in our effective income tax rate. The effective income tax rate for
the year ended December 31, 2005 was 37.6% compared to 37.2% for the year ended December
31, 2004.

# Comparison of Operating
Results for the Years Ended December 31, 2004 and 2003

Net
Income. Our net income was $23.9 million, or $1.39 per diluted share ($1.42
per basic share) for the year ended December 31, 2004 compared to net income of $23.8
million, or $1.16 per diluted share ($1.18 per basic share) for the year ended December
31, 2003.

Net
Interest Income. Net interest income before provision for loan losses was
$77.2 million and $69.9 million for the years ended December 31, 2004 and 2003,
respectively. Our average interest rate spread for the years ended December 31, 2004 and
2003 was 3.02% and 3.05%, respectively. Our net interest margin (net interest income
divided by average interest-earning assets) for the same periods was 3.29% and 3.48%,
respectively. The declines in our average interest rate spread for the year ended December
31, 2004 when compared to the year ended December 31, 2003 was primarily attributable to
continued industry-wide compression in interest rates combined with the impact of the
repayment and refinancing of higher yielding loans. The primary reasons for the decline in
our net interest margin during the year ended December 31, 2004 were our stock repurchases
and goodwill associated with the acquisition of UNFC. The use of funds for stock
repurchases and goodwill associated with the acquisition of UNFC negatively affected net
interest margin because those funds could have been used toward interest-earning
activities (purchase of investment securities and/or origination or purchase of loans) or
to reduce our outstanding FHLBank advances or other borrowings. Our stock repurchases and
goodwill associated with the acquisition of UNFC were the primary factors resulting in our
ratio of average interest-earning assets to average interest-bearing liabilities declining
to 113.29% for the year ended December 31, 2004 compared to 120.94% for the year ended
December 31, 2003

53

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Interest
Income. Our total interest income for the year ended December 31, 2004 was
$125.0 million, an increase of $14.2 million, or 12.8%, compared to $110.8 million for the
year ended December 31, 2003. Interest income on loans receivable increased $12.7 million,
or 11.9%, to $119.6 million for the year ended December 31, 2004 compared to $106.9
million for the year ended December 31, 2003. The increase in interest income for the year
ended December 31, 2004 was the result of an increase in the average balance of loans
receivable of $343.8 million, or 18.5%, to $2.2 billion for the year ended December 31,
2004 compared to $1.9 billon for the year ended December 31, 2003. The increase in the
average balance of loans receivable was partially offset by a decline in the average yield
earned on loans receivable from 5.75% for the year ended December 31, 2003 to 5.42% for
the year ended December 31, 2004. The decline in the average yield earned on loans
receivable was primarily the result of a high level of repayment and refinancing activity
that occurred throughout 2003 and 2004 due to a historically low interest rate
environment. Interest income from investment and mortgage-backed securities totaled $5.4
million for the year ended December 31, 2004, an increase of $1.7 million, or 46.9%,
compared to $3.7 million for the year ended December 31, 2003. The increase in interest
income on investment and mortgage-backed securities is primarily attributable to an $11.0
million increase in the aggregate average balance of investment and mortgage-backed
securities for the year ended December 31, 2004 compared to the year ended December 31,
2003. This increase is primarily the result of $149.6 million of investment and
mortgage-backed securities and FHLBank stock acquired in the UNFC acquisition.

Interest
Expense. Our total interest expense for the year ended December 31, 2004
was $47.8 million, an increase of $6.9 million, or 16.9%, compared to $40.9 million for
the year ended December 31, 2003. Interest expense on deposits totaled $26.5 million for
the year ended December 31, 2004, an increase of $3.6 million, or 15.9%, compared to $22.8
million for the year ended December 31, 2003. Interest expense on FHLBank advances and
other borrowings increased $3.3 million, or 18.2%, to $21.3 million for the year ended
December 31, 2004 compared to $18.0 million for the year ended December 31, 2003. The
primary reason for the increase in interest expense was a $286.2 million increase in the
average balance of interest-bearing deposits which was partially offset by a 16 basis
point decline in the average rate paid on interest-bearing deposits. The average rate paid
on interest-bearing deposits was 1.88% for the year ended December 31, 2004 compared to
2.04% for the year ended December 31, 2003. The increase in the average balance of
interest-bearing deposits is primarily the result of the UNFC acquisition and our
continued emphasis on growing our deposit balances. Additionally, the average balance of
our FHLBank advances and other borrowings increased $119.7 million, or 22.1%, to $661.7
million for the year ended December 31, 2004 compared to $542.0 million for the year ended
December 31, 2003. The average rate paid on FHLBank advances and other borrowings declined
to 3.22% for the year ended December 31, 2004 compared to 3.33% for the year ended
December 31, 2003. We utilized FHLBank advances and other borrowings during 2004 as our
primary funding source for loan portfolio growth and the UNFC acquisition.

Provision
for Loan Losses. We made a provision for loan losses of $4.9 million for
the year ended December 31, 2004, an increase of $616,000, or 14.4%, compared to $4.3
million for the year ended December 31, 2003. Our portfolio of commercial real estate and
land loans, multi-family loans, construction loans (residential and commercial),
agriculture (real estate and operating), business and consumer loans totaled $2.3 billion
at December 31, 2004, an increase of $960.3 million, or 72.6%, compared to $1.3 billion at
December 31, 2003. These loans are deemed to have higher levels of known and inherent
losses than one-to-four family residential loans due to, among other things, the nature of
the collateral and the dependency on economic conditions for successful completion or
operation of the project. As such, we have made provisions in order to maintain the
allowance for loan losses at a level that we believe, to the best of our knowledge, covers
all known and inherent losses in the portfolio that are both probable and reasonable to
estimate at the relevant date. At December 31, 2004, our total nonperforming loans totaled
$10.2 million or 0.39% of net loans, compared to $3.6 million, or 0.18% of net loans, at
December 31, 2003. At December 31, 2004 our non-performing assets amounted to $10.6
million, or 0.35% of total assets, compared to $4.3 million, or 0.19% of total assets, at
December 31, 2003. The increase in nonperforming loans and nonperforming assets at
December 31, 2004 was primarily attributable to loans assumed in the UNFC acquisition, the
largest such loan being a $2.4 million multi-family residential loan. During the years
ended December 31, 2004 and 2003 we charged-off, net of recoveries, $1.9 million and $1.8
million, respectively. For the years ended December 31, 2004 and 2003, approximately 63.6%
and 70.6%, respectively, of our charge-offs related to consumer loans, in particular
automobile loans. At December 31, 2004, our allowance for loan losses amounted to 262.2%
of non-performing loans compared to 541.7% at December 31, 2003. Our allowance for loan
losses as a percentage of net loans was 1.01% and 0.96% at December 31, 2004 and 2003,
respectively. We believe that the allowance for loan losses at December 31, 2004 was at a
level to cover the known and inherent losses in our loan portfolio that were both probable
and reasonably estimable based upon the facts and circumstances known at that date. No
assurance can be made that additional provisions may not be needed in future periods,
which could adversely effect results of operations.

54

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Noninterest
Income. Our noninterest income increased by $4.0 million, or 20.4%, to
$23.9 million for the year ended December 31, 2004 compared to $19.9 million for the year
ended December 31, 2003. The increase in noninterest income during the year ended December
31, 2004 was primarily the result of a $3.9 million increase in deposit fees, a $2.9
million reduction in mortgage servicing right amortization due to decreased payoffs, a
$1.5 million gain associated with the merger of the Banks defined benefit pension
plan with an unrelated third party plan, a $1.2 million increase in fees associated with
loans and non-deposit related services and a $461,000 gain on sale of investment
securities (includes a $135,000 impairment on FNMA equity securities) which were partially
offset by a $5.8 million decline in gains on loans held for sale.

During
the year ended December 31, 2004, normal amortization expense related to our mortgage
servicing rights portfolio totaled $1.5 million, an increase of $187,000, or 14.7%,
compared to $1.3 million for the year ended December 31, 2003. Amortization expense
related to prepayments of loans totaled $1.4 million for the year ended December 31, 2004,
a decrease of $2.9 million, or 67.1%, compared to $4.3 million for the year ended December
31, 2003. Amortization expense during the year ended December 31, 2004 was partially
offset by an $868,000 net recapture of the mortgage servicing valuation reserve due to
stabilization of interest rates resulting in reduced prepayment speeds. Our mortgage
servicing right valuation allowance totaled $800,000 and $1.7 million at December 31, 2004
and 2003, respectively. Amortization expense, impairment charges and impairment recapture
related to mortgage servicing rights are recorded as adjustments to fee and service charge
income.

Noninterest
Expense. Our noninterest expense increased $10.7 million, or 22.5%, to
$58.2 million for the year ended December 31, 2004 compared to $47.5 million for the year
ended December 31, 2003. During the year ended December 31, 2004, personnel growth and the
UNFC acquisition contributed to a $5.2 million increase in compensation expense, a $2.8
million increase in other operating expense and a $1.3 million increase in occupancy
expense. Additionally, expense related to the our MRRP and ESOP increased $1.2 million
during the year ended December 31, 2004. Included in other operating expense for the year
ended December 31, 2004 was $623,000 in amortization expense related to our core deposit
intangible asset recorded as a result of the UNFC acquisition.

Income
Tax Expense. Our income tax expense decreased $50,000, or 0.4%, to $14.2
million for the year ended December 31, 2004. The decrease in income tax primarily
reflects an increase in interest income on tax-exempt investment securities and loans
receivable during the year ended December 31, 2004. Our effective income tax rate for the
years ended December 31, 2004 and 2003 was 37.2% and 37.4%, respectively.

# Asset and Liability
Management

Market
risk is the risk of loss from adverse changes in market prices and interest rates. Our
market risk arises primarily from the interest rate risk that is inherent in our lending
and deposit taking activities. The results of operations for financial institutions may be
materially and adversely affected by changes in economic conditions, including rapid
changes in interest rates, declines in real estate market values and the monetary and
fiscal policies of the federal government. Our net interest income and the net present
value of our assets, liabilities and off-balance sheet contracts are subject to
fluctuations in interest rates. When interest-earnings assets such as loans are funded by
interest-bearing liabilities such as deposits, FHLBank advances and other borrowings, a
changing interest rate environment may have a significant effect on our financial
condition and results of operations. To that end, we actively manage our interest rate
risk exposure. Additionally, our loan portfolio is subject to credit risk. We manage
credit risk primarily through our loan underwriting and oversight policies.

55

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The
principal objectives of our interest rate risk management function are to evaluate the
interest rate risk inherent in certain balance sheet accounts, determine the level of risk
appropriate given our business strategy, operating environment, capital and liquidity
requirements and performance objectives and manage the risk consistent with guidelines
approved by our Board of Directors. Through such management, we seek to reduce the
vulnerability of our operations to changes in interest rates. The extent of the movement
in interest rates is an uncertainty that could have a negative impact on our future
earnings. Our Board of Directors has established an Asset/Liability Committee, comprised
of executive management, which is responsible for development and oversight of our
asset/liability policies and monitoring our interest rate risk position. The
Asset/Liability Committee meets on a monthly basis and reports trends and interest rate
risk positions to our Board of Directors on a quarterly basis.

We
utilize the following strategies to manage interest rate risk: (a) emphasizing the
origination for portfolio retention of loans with relatively higher yields, adjustable
interest rates and/or shorter terms to maturity; (b) holding shorter term and/or
adjustable-rate investment and mortgage-backed securities; (c) attempting to reduce the
overall interest rate sensitivity of liabilities by emphasizing core and longer-term
deposits; and (d) extending the maturities on borrowings. Additionally, we generally sell
originated fixed-rate, one-to-four family residential loans into the secondary market with
servicing retained.

Our
interest rate sensitivity is monitored by management through the use of financial modeling
software which estimates the change in our net portfolio value (NPV) over a
range of interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the fair value of assets
in the same scenario. The OTS produces a similar analysis using its own model, based upon
data submitted in our quarterly Thrift Financial Reports, the results of which may vary
from our internal model primarily due to differences in assumptions utilized, including
estimated loan prepayment speeds, reinvestment rates and deposit turnover rates.

The
following table sets forth our NPV as of December 31, 2005, as calculated by the OTS:

| | Net Portfolio Value | NPV as a % of Portfolio
Value of Assets
| | ------------------- | ---------------------------------------
|
|
| | 300                 |                                        
| | 200                 |                                        
| | 100                 |                                        
| | Static              |                                        
| | -100                |                                        
| | -200                |                                        
|

Due
to our recognition of the need to control our interest rate exposure, we have focused on
loans with relatively higher yields, adjustable interest rates and shorter terms to
maturity which are less subject to interest rate risk and primarily consist of second
mortgage residential, multi-family residential, commercial real estate and land,
construction, agricultural, business, warehouse mortgage lines of credit and consumer
loans.

Certain
shortcomings are inherent in the methodology used in the above interest rate risk
measurements. Modeling changes in NPV require the making of certain assumptions which may
or may not reflect the manner in which actual yields and costs respond to changes in
market interest rates. In this regard, the NPV model presented assumes that the
composition of our interest sensitive assets and liabilities existing at the beginning of
a period remains constant over the period being measured and also assumes that a
particular change in the interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the NPV measurements and net interest income models provide an
indication of our interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the effect of
changes in market interest rates on our net interest income and will differ from actual
results.

56

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The
following table sets forth the estimated maturity/repricing and the resulting gap between
our interest-earning assets and interest-bearing liabilities at December 31, 2005. The
estimated maturity/repricing amounts reflect contractual maturities and amortizations,
assumed loan prepayments based on our historical experience and estimated deposit account
decay rates. Management believes these assumptions and estimates are reasonable, but there
can be no assurance in this regard.

|                                                                                                               | Maturity / Repricing During the Year Ended December 31,
|-------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------
|
|Interest-earning assets(1):                                                                                    |                                                        
|Federal funds sold                                                                                             |                                                        
|Investment securities (2)                                                                                      |                                                        
|Mortgage-backed securities (2)                                                                                 |                                                        
|Net loans (3)                                                                                                  |                                                        
|FHLBank Topeka stock                                                                                           |                                                        
|                                                                                                              
|Total interest-earning assets                                                                                  |                                                        
|                                                                                                              
|Interest-bearing liabilities:                                                                                  |                                                        
|Savings accounts                                                                                               |                                                        
|Interest-bearing checking accounts                                                                             |                                                        
|Money market accounts                                                                                          |                                                        
|Time deposits                                                                                                  |                                                        
|FHLBank Topeka advances and                                                                                    |                                                        
|other borrowings                                                                                               |                                                        
|                                                                                                              
|Total interest-bearing liabilities                                                                             |                                                        
|                                                                                                              
|Interest sensitivity gap                                                                                       |                                                        
|                                                                                                              
|Cumulative interest sensitivity gap                                                                            |                                                        
|                                                                                                              
|Cumulative interest sensitivity gap as                                                                         |                                                        
|a percentage of total assets                                                                                   |                                                        
|                                                                                                              
|Cumulative net interest-earnings assets                                                                        |                                                        
|a percentage of cumulative interest-                                                                           |                                                        
|bearing liabilities                                                                                            |                                                        
|                                                                                                              
|(1)  Interest earnings assets are included in the period in which the balances are expected to be redeployed  
|and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.
|(2)  Includes available for sale investment and mortgage-backed securities at amortized cost.                 
|(3)  For purposes of the gap analysis, loans receivable includes loans held for sale and nonperforming loans. 
|                                                                                                              

57

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# Liquidity and Capital
Resources

Our
primary sources of funds are deposits; amortization of loans, loan prepayments and
maturity of loans; repayment, maturity or sale of investment and mortgage-backed
securities; and other funds provided from operations. While scheduled payments from the
amortization of loans and mortgage-backed securities and maturing investment securities
are relatively predictable sources of funds, deposit flows and loan prepayments can be
greatly influenced by general interest rates, economic conditions and competition. We
utilize FHLBank advances and other borrowings and brokered time deposits as additional
funding sources.

Deposits,
particularly core deposits, provide a more preferable source of funding than FHLBank
advances and other borrowings. However, to the extent that competitive or market factors
do not allow us to meet our funding needs with deposits alone, FHLBank advances and other
borrowings provide a readily available alternative source of liquidity. Deposits increased
$173.6 million, or 9.3%, to $2.0 billion at December 31, 2005 compared to $1.9 billion at
December 31, 2004. The increase in deposits was primarily used to fund loan origination
and purchase activities. At December 31, 2005, we had time deposits maturing within the
next 12 months amounting to $880.5 million. Based upon historical experience, we
anticipate that a significant portion of the maturing time deposits will be redeposited
with us.

In
addition to cash flows generated by loan and securities payments and prepayments, we have
additional borrowing capacity to fund our asset growth. We continue to utilize borrowings
as a cost efficient addition to deposits as a source of funds. The average balance of our
FHLBank advances and other borrowings was $834.6 million for the year ended December 31,
2005 compared to $661.7 million for the year ended December 31, 2004. To date,
substantially all of our borrowings have consisted of FHLBank advances. Pursuant to
blanket collateral agreements with the FHLBank, we have pledged qualifying residential,
multi-family residential and commercial real estate mortgages, residential construction,
commercial construction and agricultural real estate loans with carrying values totaling
approximately $1.7 billion and $1.6 billion at December 31, 2005 and 2004, respectively.
Other qualifying collateral can be pledged in the event additional borrowing capacity is
required.

58

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# Aggregate Contractual
Obligations and Off-Balance Sheet Arrangements

We
have sufficient liquidity to fund existing and future loan commitments, to fund maturing time
deposits and demand deposit withdrawals, to invest in other interest-earning assets and
to meet operating expenses. At December 31, 2005, we had the following contractual
obligations (excluding bank deposits and interest) and lending commitments:

|                                        | Total at | Due In
|--------------------------------------- | -------- | ------
|
|Contractual obligations:                |          |       
|FHLBank Topeka advances and             |          |       
|other borrowings                        |          |       
|Recourse obligations on assets          |          |       
|Purchase investment securities          |          |       
|Annual rental commitments under non-    |          |       
|cancelable operating leases             |          |       
|                                       
|Total contractual obligations           |          |       
|                                       
|Lending commitments:                    |          |       
|Commitments to originate loans          |          |       
|Commitments to sell loans               |          |       
|Commitments to purchase loans           |          |       
|Undisbursed portion of construction and |          |       
|land development loans in process       |          |       
|Standby letters of credit               |          |       
|Unused lines of credit:                 |          |       
|Warehouse mortgage lines of credit      |          |       
|Business loans                          |          |       
|Consumer loans                          |          |       
|                                       
|Total lending commitments and           |          |       
|unused lines of credit                  |          |       
|                                       
|Total contractual obligations, lending  |          |       
|commitments and unused lines of credit  |          |       
|                                       

We
have not used, and have no intention to use, any significant off-balance sheet financing
arrangements for liquidity purposes or otherwise. Our primary financial instruments with
off-balance sheet risk are limited to loan servicing for others, our obligations to fund
loans to customers pursuant to existing commitments and commitments to purchase and sell
mortgage loans. In addition, we have certain risks due to limited recourse arrangements on
loans serviced for others and recourse obligations related to loan sales. At December 31,
2005, the maximum total dollar amount of such recourse was approximately $15.4 million.
Based on historical experience, at December 31, 2005, we had established a liability of
$732,000 with respect to this recourse obligation. In addition, we have not had, and have
no intention to have, any significant transactions, arrangements or other relationships
with any unconsolidated, limited purpose entities.

For
more information regarding our contractual obligations, commitments, contingent
liabilities and off-balance sheet arrangements see Note 20  Commitments,
Contingencies and Financial Instruments with Off-Balance Sheet Risk included in
Item 8. Financial Statements and Supplementary Data, in Part II of this Annual Report on
Form 10-K.

59

---

# Impact of Inflation and
Changing Prices

The
financial statements, accompanying notes, and related financial data presented in Item 8.
Financial Statements and Supplementary Data in Part II of this Annual Report on Form 10-K
have been prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without considering the
changes in purchasing power of money over time due to inflation. The impact of inflation
is reflected in increased cost of our operations. Most of our assets and liabilities are
monetary in nature; therefore, the impact of interest rates has a greater impact on its
performance than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of goods and
services.

# Recent Accounting
Pronouncements

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
123 (revised 2004), Share Based Payment,(SFAS No. 123(R)), which
requires the cost resulting from stock options to be measured at fair value and recognized
in earnings. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123) and supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, which
permitted the recognition of compensation expense using the intrinsic value method. SFAS
No. 123(R) requires companies to recognize all share-based payments, which include stock
options and restricted stock, in compensation expense over the requisite service period of
the share-based payment award. The fair value of a share-based payment award will be
computed on the grant date and cannot be remeasured in future periods. Additionally,
forfeitures will need to be estimated on the grant date and subsequent revisions to
forfeitures should be reported as a cumulative effect of a change in accounting estimate
in the period in which the revision occurs. Modified share-based payment awards will be
treated as an exchange of the original award for a new award. The incremental fair value
of the modified award will be recorded as compensation expense on the date of the
modification or over the remaining requisite service period. SFAS No. 123(R) also requires
significant additional disclosures for share-based payment awards. SFAS No. 123(R) became
effective July 1, 2005. However, on April 15, 2005, the SEC issued a press release
announcing the amendment of the compliance date for SFAS No. 123(R) to be no later than
the beginning of the first fiscal year beginning after June 15, 2005.

We
adopted SFAS No. 123(R) on January 1, 2006 using the modified-prospective application
method. Adoption of SFAS No. 123(R) will not affect our financial condition or cash flows,
but will impact our results of operations and EPS. The estimated impact of SFAS No. 123(R)
is provided in Note 1  Summary of Significant Accounting Policies
which is included in Item 8. Financial Statements and Supplementary Data in Part II of
this Annual Report on Form 10-K. The estimated impact may not be representative of the
effects on our results of operations and earnings per share for future years due to
changes in market conditions and the number of stock options outstanding but it does
provide the potential impact based on current facts and circumstances.

In
June 2005, FASB issued SFAS No. 154, Reporting Accounting Changes and Error Corrections(SFAS No. 154). SFAS No. 154 requires retrospective application for
voluntary changes in accounting principle unless it is impracticable to do so. SFAS No.
154s retrospective application requirement replaces APB Opinion No. 20s
requirement to recognize most voluntary changes in accounting principle by including in
net income of the period of the change the cumulative effect of changing to the new
accounting principle. If the cumulative effect of the change in accounting principle can
be determined, but it is impractical to determine the specific effects of an accounting
change on one or more prior periods presented, the change in accounting policy will have
to be applied to balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable, with a corresponding adjustment
made to the opening balance of retained earnings or other components of equity (e.g.,
accumulated other comprehensive income) for that period. If it is impractical to
determine the cumulative effect of applying a change in accounting principle, the new
accounting principle is to be applied prospectively from the earliest date practicable. If
retrospective application for all prior periods is impracticable, the method used to
report the change and the reason should be
disclosed. The requirements of SFAS No. 154 are effective for accounting changes made in
fiscal years beginning after December 15, 2005.

60

---

# Item 7A. Quantitative
and Qualitative Disclosures About Market Risk

The
information required herein is incorporated by reference from Asset and Liability
Management and Impact of Inflation and Changing Prices included in Item
7. Managements Discussion and Analysis of Financial Condition and Results of
Operations in Part II of this Annual Report on Form 10-K.

61

---

# Item 8. Financial
Statements and Supplementary Data

# Report of Independent
Registered Public Accounting Firm

The Board of Directors and
StockholdersTierOne Corporation:

We
have audited the accompanying consolidated statements of financial condition of TierOne
Corporation and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of income, stockholders equity, and cash flows for each of
the years in the three-year period ended December 31, 2005. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of TierOne Corporation and subsidiaries as
of December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of TierOne Corporations internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission, and our report dated March 8,
2006 expressed an unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial reporting.

# /s/ KPMG LLP

Lincoln, NebraskaMarch 8, 2006

62

---

# TierOne Corporation
and Subsidiaries Consolidated Statements of Financial Condition

|                                                                                     | At December 31,
|------------------------------------------------------------------------------------ | ---------------
|
|ASSETS                                                                               |                
|Cash and due from banks                                                              |                
|Federal funds sold                                                                   |                
|                                                                                    
|Total cash and cash equivalents                                                      |                
|                                                                                    
|Investment securities:                                                               |                
|Held to maturity, at cost which approximates fair value                              |                
|Available for sale, at fair value                                                    |                
|Mortgage-backed securities, available for sale, at fair value                        |                
|Loans receivable:                                                                    |                
|Net loans (includes loans held for sale of $8,666 and $11,956 at                     |                
|December 31, 2005 and 2004, respectively)                                            |                
|Allowance for loan losses                                                            |                
|                                                                                    
|Net loans after allowance for loan losses                                            |                
|                                                                                    
|FHLBank Topeka stock, at cost                                                        |                
|Premises and equipment, net                                                          |                
|Accrued interest receivable                                                          |                
|Goodwill                                                                             |                
|Other intangible assets, net                                                         |                
|Other assets                                                                         |                
|                                                                                    
|Total assets                                                                         |                
|                                                                                    
|LIABILITIES AND STOCKHOLDERS EQUITY                                                 |                
|Liabilities:                                                                         |                
|Deposits                                                                             |                
|FHLBank Topeka advances and other borrowings                                         |                
|Advance payments from borrowers for taxes, insurance and other escrow funds          |                
|Accrued interest payable                                                             |                
|Accrued expenses and other liabilities                                               |                
|                                                                                    
|Total liabilities                                                                    |                
|                                                                                    
|Stockholders equity:                                                                |                
|Preferred stock, $0.01 par value. 10,000,000 shares authorized; none issued          |                
|Common stock, $0.01 par value. 60,000,000 shares authorized; 18,150,773 and          |                
|18,287,811 shares issued and outstanding at December 31, 2005 and 2004, respectively |                
|Additional paid-in capital                                                           |                
|Retained earnings, substantially restricted                                          |                
|Treasury stock, at cost; 4,424,302 and 4,287,264 shares at                           |                
|December 31, 2005 and 2004, respectively                                             |                
|Unallocated common stock held by Employee Stock Ownership Plan                       |                
|Unearned common stock held by Management Recognition and Retention Plan              |                
|Accumulated other comprehensive loss, net                                            |                
|                                                                                    
|Total stockholders equity                                                           |                
|                                                                                    
|Total liabilities and stockholders equity                                           |                
|                                                                                    

See accompanying notes to
consolidated financial statements.

63

---

# TierOne Corporation
and Subsidiaries Consolidated
Statements of Income

|                                                    | Year Ended December 31,
|--------------------------------------------------- | -----------------------
|
|Interest income:                                    |                        
|Loans receivable                                    |                        
|Investment securities                               |                        
|Other interest-earning assets                       |                        
|                                                   
|Total interest income                               |                        
|                                                   
|Interest expense:                                   |                        
|Deposits                                            |                        
|Advances from FHLBank Topeka and other borrowings   |                        
|                                                   
|Total interest expense                              |                        
|                                                   
|Net interest income                                 |                        
|Provision for loan losses                           |                        
|                                                   
|Net interest income after provision for loan losses |                        
|                                                   
|Noninterest income:                                 |                        
|Fees and service charges                            |                        
|Debit card fees                                     |                        
|Loss from real estate operations, net               |                        
|Net gain (loss) on sales of:                        |                        
|Investment securities                               |                        
|Loans held for sale                                 |                        
|Real estate owned                                   |                        
|Gain on pension plan curtailment                    |                        
|Other operating income                              |                        
|                                                   
|Total noninterest income                            |                        
|                                                   
|Noninterest expense:                                |                        
|Salaries and employee benefits                      |                        
|Occupancy, net                                      |                        
|Data processing                                     |                        
|Advertising                                         |                        
|Other operating expense                             |                        
|                                                   
|Total noninterest expense                           |                        
|                                                   
|Income before income taxes                          |                        
|Income tax expense                                  |                        
|                                                   
|Net income                                          |                        
|                                                   
|Net income per common share, basic                  |                        
|                                                   
|Net income per common share, diluted                |                        
|                                                   
|Dividends declared per common share                 |                        
|                                                   
|Average common shares outstanding, basic (000's)    |                        
|                                                   
|Average common shares outstanding, diluted (000's)  |                        
|                                                   

See accompanying notes to
consolidated financial statements.

64

---

# TierOne Corporation
and Subsidiaries  Consolidated Statements of Changes in Stockholders Equity

|(Dollars in thousands)                  | Common Stock | AdditionalPaid-InCapital | Retained Earnings,SubstantiallyRestricted | TreasuryStock | UnallocatedCommon StockHeld by theEmployee StockOwnership Plan | UnearnedCommon StockHeld by theManagementRecognition andRetention Plan | Accumulated OtherComprehensiveIncome (Loss), Net | Total StockholdersEquity
|--------------------------------------- | ------------ | ------------------------ | ----------------------------------------- | ------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------ | -------------------------
|Balance at December 31, 2002            |              |                          | $                                         | 226           |                                                                | $                                                                      | 355,741                                          |                          
|                                       
|Common stock earned by                  |              |                         
|employees in Employee                   |              |                         
|Stock Ownership Plan                    |              |                          |                                           | --            |                                                                |                                                                        | 1,511                                            |                          
|Common stock purchased by the           |              |                         
|Management Recognition and              |              |                         
|Retention Plan                          |              |                          |                                           | --            |                                                                |                                                                        | (3,198                                           | )                        
|Amortization of awards under the        |              |                         
|Management Recognition and              |              |                         
|Retention Plan                          |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Repurchase of common stock              |              |                         
|(2,257,507 shares)                      |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Comprehensive income:                   |              |                         
|Net income                              |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Additional minimum pension              |              |                         
|liability, net of tax                   |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Change in unrealized loss on            |              |                         
|available for sale securities,          |              |                         
|net of tax and                          |              |                         
|reclassification adjustment             |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|                                       
|Total comprehensive income              |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|                                       
|Balance at December 31, 2003            |              |                          |                                           | 226           |                                                                |                                                                        | 354,054                                          |                          
|                                       
|Common stock earned by                  |              |                         
|employees in Employee                   |              |                         
|Stock Ownership Plan                    |              |                          |                                           | --            |                                                                |                                                                        | 1,859                                            |                          
|Amortization of awards under the        |              |                         
|Management Recognition and              |              |                         
|Retention Plan                          |              |                          |                                           | --            |                                                                |                                                                        | 83                                               |                          
|Treasury stock reissued under           |              |                         
|stock option plan                       |              |                          |                                           | --            |                                                                |                                                                        | (10                                              | )                        
|Repurchase of common stock              |              |                         
|(2,031,757 shares)                      |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Dividends paid ($0.20 per common share) |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Comprehensive income:                   |              |                         
|Net income                              |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Additional minimum pension              |              |                         
|liability, net of tax                   |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Change in unrealized gain  on           |              |                         
|available for sale securities,          |              |                         
|net of tax and                          |              |                         
|reclassification adjustment             |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|                                       
|Total comprehensive income              |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|                                       
|Balance at December 31, 2004            |              |                          | $                                         | 226           |                                                                | $                                                                      | 355,986                                          |                          
|                                       

See accompanying notes to
consolidated financial statements.

65

---

# TierOne Corporation
and SubsidiariesConsolidated Statements of Changes in Stockholders Equity
(Continued)

|(Dollars in thousands)                  | Common Stock | AdditionalPaid-InCapital | Retained Earnings,SubstantiallyRestricted | TreasuryStock | UnallocatedCommon StockHeld by theEmployee StockOwnership Plan | UnearnedCommon StockHeld by theManagementRecognition andRetention Plan | Accumulated OtherComprehensiveIncome (Loss), Net | Total StockholdersEquity
|--------------------------------------- | ------------ | ------------------------ | ----------------------------------------- | ------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------ | -------------------------
|Balance at December 31, 2004            |              |                          | $                                         | 226           |                                                                | $                                                                      | 355,986                                          |                          
|                                       
|Common stock earned by                  |              |                         
|employees in Employee                   |              |                         
|Stock Ownership Plan                    |              |                          |                                           | --            |                                                                |                                                                        | 2,446                                            |                          
|Amortization of awards under            |              |                         
|the Management Recognition              |              |                         
|and Retention Plan                      |              |                          |                                           | --            |                                                                |                                                                        | 214                                              |                          
|Treasury stock reissued under           |              |                         
|stock option plan                       |              |                          |                                           | --            |                                                                |                                                                        | (59                                              | )                        
|Repurchase of common                    |              |                         
|stock (148,538 shares)                  |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Dividends paid ($0.23 per common share) |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Comprehensive income:                   |              |                         
|Net income                              |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|Change in unrealized loss on            |              |                         
|available for sale securities,          |              |                         
|net of tax and                          |              |                         
|reclassification adjustment             |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|                                       
|Total comprehensive income              |              |                          |                                           | --            |                                                                |                                                                        | --                                               |                          
|                                       
|Balance at December 31, 2005            |              |                          | $                                         | 226           |                                                                | $                                                                      | 358,587                                          |                          
|                                       

66

---

# TierOne Corporation
and SubsidiariesConsolidated Statements of Cash Flows

|                                                                                    | Year Ended December 31,
|----------------------------------------------------------------------------------- | -----------------------
|
|Reconciliation of net income to net cash provided by operating activities:          |                        
|Net income                                                                          |                        
|Adjustments to reconcile net income to net cash provided by                         |                        
|operating activities:                                                               |                        
|Net premium amortization of investment and mortgage-backed securities               |                        
|Depreciation and amortization                                                       |                        
|Amortization of intangible assets                                                   |                        
|Amortization of discount on FHLBank Topeka advances                                 |                        
|Employee Stock Ownership Plan expense                                               |                        
|Management Recognition and Retention Plan expense                                   |                        
|Amortization of premiums on net loans                                               |                        
|FHLBank Topeka stock dividend                                                       |                        
|Deferred income tax expense (benefit)                                               |                        
|Provision for loan losses                                                           |                        
|Proceeds from sales of loans held for sale                                          |                        
|Originations and purchases of loans held for sale                                   |                        
|Net (gain) loss on sales of:                                                        |                        
|Investment securities                                                               |                        
|Loss on impairment of securities                                                    |                        
|Loans held for sale                                                                 |                        
|Real estate owned                                                                   |                        
|Premises and equipment                                                              |                        
|Changes in certain assets and liabilities:                                          |                        
|Accrued interest receivable                                                         |                        
|Other assets                                                                        |                        
|Accrued interest payable                                                            |                        
|Accrued expenses and other liabilities                                              |                        
|                                                                                   
|Net cash provided by operating activities                                           |                        
|                                                                                   
|Cash flows from investing activities:                                               |                        
|Acquisition of United Nebraska Financial Co., net of cash acquired                  |                        
|Purchase of investment and mortgage-backed securities,                              |                        
|available for sale and held to maturity                                             |                        
|Proceeds from sale of investment and mortgage-backed securities, available for sale |                        
|Proceeds from maturities of investment securities, available for sale               |                        
|Proceeds from principal repayments of investment                                    |                        
|and mortgage-backed securities available for sale and held to maturity              |                        
|Increase in loans receivable                                                        |                        
|Purchase of FHLBank Topeka stock                                                    |                        
|Sale of FHLBank Topeka stock                                                        |                        
|Additions to premises and equipment                                                 |                        
|Proceeds from sale of premises and equipment                                        |                        
|Proceeds from sale of real estate owned                                             |                        
|                                                                                   
|Net cash used in investing activities                                               |                        
|                                                                                   

67

---

# TierOne Corporation
and SubsidiariesConsolidated Statements of Cash Flows (Continued)

|                                                                               | Year Ended December 31,
|------------------------------------------------------------------------------ | -----------------------
|
|Cash flows from financing activities:                                          |                        
|Net increase in deposits                                                       |                        
|Net (repayment) advances on FHLBank Topeka line of credit                      |                        
|and short-term advances and other borrowings                                   |                        
|Proceeds from FHLBank Topeka long-term advances and other borrowings           |                        
|Repayments of FHLBank Topeka long-term advances and other borrowings           |                        
|Proceeds from junior subordinated debentures                                   |                        
|Net (decrease) increase in advances from borrowers for taxes,                  |                        
|insurance and other escrow funds                                               |                        
|Repurchase of common stock                                                     |                        
|Dividends paid on common stock                                                 |                        
|Proceeds from the exercise of stock options                                    |                        
|Purchase of common stock for Management Recognition and Retention Plan         |                        
|                                                                              
|Net cash provided by financing activities                                      |                        
|                                                                              
|Net increase in cash and cash equivalents                                      |                        
|Cash and cash equivalents at beginning of year                                 |                        
|                                                                              
|Cash and cash equivalents at end of year                                       |                        
|                                                                              
|Supplemental disclosures of cash flow information:                             |                        
|Cash paid for:                                                                 |                        
|Interest                                                                       |                        
|Income taxes, net of refunds                                                   |                        
|                                                                              
|Noncash investing activities:                                                  |                        
|Transfers from loans to real estate owned and other assets through foreclosure |                        
|Loss on impairment of securities                                               |                        
|                                                                              

See accompanying notes to
consolidated financial statements.

68

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 1. Summary of
Significant Accounting Policies

Organization. TierOne
Corporation (Company) is a Wisconsin           corporation, incorporated in
2002 for the purpose of becoming the holding           company for TierOne Bank (Bank),
a federal savings bank. On           October 1, 2002, the Bank converted from
mutual to stock form of ownership.           On the same date, the Company acquired all
of the issued and outstanding capital           stock of the Bank with a portion of the
proceeds from the Companys initial           public offering.

As
used in this report, unless the context otherwise requires, the terms we,
us, or our refer to TierOne Corporation and its wholly owned
subsidiary, TierOne Bank.

Basis
of Consolidation. The consolidated financial statements include the
accounts of the Company, its wholly owned subsidiary, the Bank, and the Banks wholly
owned subsidiaries, TMS Corporation of the Americas (TMS) and United Farm
& Ranch Management (UFARM).  TMS is the holding company of TierOne
Investments and Insurance, Inc., a company that administers the sale of insurance and
securities products, and TierOne Reinsurance Company, which reinsures credit life and
disability insurance policies. UFARM provides agricultural customers with professional farm and
ranch real estate management and real estate brokerage services.

Investment
and Mortgage-Backed Securities. We classify our investment securities
portfolio between securities we intend to hold to maturity and those securities available
for sale.

Securities
classified as held to maturity are securities we have the ability and positive intent to
hold to maturity regardless of changes in market condition, liquidity needs or changes in
general economic conditions. These securities are stated at cost, adjusted for
amortization of premiums and accretion of discounts over the period to maturity using the
interest method.

Securities
classified as available for sale are securities we intend to hold for an indefinite period
of time, but not necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including movements in interest
rates, changes in the maturity mix of our assets and liabilities, liquidity needs,
regulatory capital considerations and other factors. These securities are carried at fair
value with unrealized gains or losses reported as increases or decreases in cumulative
other comprehensive income, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are included in
earnings. Unrealized losses for securities classified as held to maturity and available
for sale judged to be other than temporary are charged to operations.

Accounting
for Derivatives and Hedging Activities. We account for our derivatives and
hedging activities in accordance with Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activity, as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities and SFAS No. 149,
Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities.
These Statements establish accounting and reporting standards for derivative instruments
and hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or liabilities
in the statements of financial condition and measure them at fair value. If certain
conditions are met, an entity may elect to designate a derivative as follows: (a) a
hedge of the exposure to changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment; or (b) a hedge of the exposure to variable cash
flows of a forecasted transaction. These Statements generally provide for matching the
timing of the recognition of the gain or loss on derivatives designated as hedging
instruments with the recognition of the changes in the fair value of the item being
hedged. Depending on the type of hedge, such recognition will be either net income or
other comprehensive income. For a derivative not qualified for hedge accounting under SFAS
No. 133, changes in fair value will be recognized in net income in the period of change.

Loans
Receivable. Net loans are stated at unpaid principal balances, plus/minus
unamortized premiums, discounts and deferred loan origination fees and costs and the
undisbursed portion of loans in process. Interest on loans is credited to income as
earned. Interest is not accrued on loans contractually delinquent 90 days or more.
Premiums or discounts on loans are amortized into income over the life of the loan using
the interest method. Loan origination fees received in excess of certain direct
origination costs are deferred and amortized into income over the contractual life of the
loan using the interest method or recognized when the loan is sold or paid off.
Additionally, accrual of interest and amortization of deferred loan fees on problem loans
are excluded from income when, in the opinion of management, such suspension is warranted.
Income is subsequently recognized only to the extent cash payments are received and, in
managements judgment, the borrowers ability to make periodic interest and
principal payments has returned to normal, in which case the loan is returned to accrual
status.

69

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Loans
Held for Sale. Upon origination or purchase, we designate certain loans
receivable as held for sale as we do not intend to hold such loans through maturity. Loans
held for sale generally consist of fixed-rate, one-to-four family residential loans and
are carried at the lower of cost or market value, determined on an aggregate basis. Gains
or losses on such loans are recognized utilizing the specific identification method.

Provision
and Allowance for Loan Losses. A provision for loan losses is charged to
income when it is determined to be required based on our 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. We review the loan
portfolio no less frequently than quarterly in order to identify those inherent losses and
to assess the overall collection probability of the portfolio. Our review includes a
quantitative analysis by loan category, using historical loss experience, classifying
loans pursuant to a grading system and consideration of a series of qualitative loss
factors. 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, total loans outstanding, the volume of loan originations, the type, size,
terms and geographic concentration of loans held by us, the value of collateral securing
loans, the number of loans requiring heightened oversight and general economic conditions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available or as future events change.

The
allowance for loan losses consists of two elements. The first element is an allocated
allowance established for specific loans identified by our credit review function that are
evaluated individually for impairment and are considered to be impaired. A loan is
considered impaired when, based on current information and events, it is probable that we
will be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. Impairment is measured by:
(a) the fair value of the collateral if the loan is collateral dependent;
(b) the present value of expected future cash flows; or (c) the loans
observable market price. The second element is an allowance established for losses which
are probable and reasonable to estimate on each of our categories of outstanding loans.
While we use available information to recognize probable losses on loans inherent in the
portfolio, future additions to the allowance may be necessary based on changes in economic
conditions and other factors. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review our allowance for loan losses. Such
agencies may require us to recognize additions to the allowance for loan losses based on
their judgment of information available to them at the time of their examination.

Goodwill
and Intangible Assets. Goodwill represents the excess price paid over the
fair value of the tangible and intangible assets and liabilities acquired from United
Nebraska Financial Co. (UNFC) on August 27, 2004, the date of the acquisition.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and
indefinite-lived intangibles balances are not being amortized, but are tested for
impairment annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires intangible assets with estimated useful lives be amortized over their respective
estimated useful lives to their residual values, and reviewed for impairment in accordance
with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

We
have identified a single reporting unit for purposes of goodwill impairment testing. The
impairment test is therefore performed on a consolidated basis. We perform our goodwill
impairment analysis on an annual basis during the third quarter. Additional impairment
analysis may be performed if circumstances or events occur which may have an impact on the
fair value of our goodwill. Generally, fair value represents a multiple of earnings or
discounted projected cash flows. Potential impairment is indicated when the carrying value
of the entity, including goodwill, exceeds its fair value. If potential for impairment
exists, the fair value of the entity is subsequently measured against the fair value of
its underlying assets and liabilities, excluding goodwill, to estimate an implied fair
value of the entitys goodwill. Impairment loss is recognized for any excess of the
carrying value of the entitys goodwill over the implied fair value. We performed our
impairment analysis as of September 30, 2005 and concluded that no potential impairment of
goodwill existed since the fair value of our goodwill exceeded its carrying value.

70

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Our
only identifiable intangible asset is the value of the core deposits acquired as part of
the UNFC transaction. Determining the amount of identifiable intangible assets and their
average lives involves multiple assumptions and estimates and is typically determined by
performing a discounted cash flow analysis, which involves a combination of any or all of
the following assumptions: customer attrition, account runoff, alternative funding costs,
deposit servicing costs and discount rates. The core deposit intangible has been estimated
to have a 10-year life with an accelerated rate of amortization.

We
review our identifiable intangible assets for impairment whenever events or changes in
circumstances indicate that we may not recover our investment in the underlying assets or
liabilities which gave rise to the identifiable intangible assets. For the years ended
December 31, 2005 and 2004, no events or circumstances triggered an impairment charge
against our core deposit intangible assets.

Mortgage
Servicing Rights. The right to service loans for others are obtained by the
sale of loans sold servicing retained or by direct purchase of such rights. Servicing
assets are recognized as separate assets when rights are acquired through purchase or
through the sale of loans classified as held for sale. Capitalized mortgage servicing
rights are reported in other assets and are amortized to other income in proportion to,
and over the period of, the estimated future net servicing income for the underlying
financial assets. These assets are evaluated for impairment based upon the fair value of
the rights as compared to amortized costs. Impairment is determined by stratifying rights
by predominant characteristics, including interest rates and terms. Fair value is
determined using prices for similar assets with similar characteristics, when available,
or based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance for an individual stratum, to the extent that
fair value is less than the capitalized amount for the stratum. The amortization expense
and valuation adjustment is recorded as a reduction of fees and service charges in the
accompanying Consolidated Statements of Income.

Transfers
of Financial Assets. Transfers of financial assets are accounted for as
sales when control over the assets has been surrendered. Control over transferred assets
is deemed to be surrendered when: (a) the assets have been isolated; (b) the
transferee obtains the right (free of conditions that constrain it from taking advantage
of that right) to pledge or exchange the transferred assets; and (c) we do not
maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity. We have not had any significant transactions, arrangements or
other relationships with any special purpose entities.

Estimates.          The
preparation of consolidated financial statements in conformity with U.S.
          generally accepted accounting principles (GAAP) requires management
          to make estimates and assumptions that affect the reported amount of assets and
          liabilities at the date of the statement of financial condition, and the
          reported amounts of revenues and expenses during the reporting period. Actual
          results could differ from these estimates.

Real
Estate Owned. Real estate acquired through foreclosure is considered to be
held for sale and is initially recorded at estimated fair value.
Subsequent to foreclosure, these assets are carried at the lower of carrying value or fair
value, less selling costs. Changes in the valuation allowances for unrealized gains and
losses and income and operating expenses are included in other income of the current
period.

Premises
and Equipment. Premises and equipment are recorded at cost and include
expenditures for new facilities and equipment and items that substantially increase the
useful lives of existing buildings and equipment. Expenditures for normal repairs and
maintenance are charged to earnings as incurred. When facilities or equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation are removed from
the respective accounts and the resulting gain or loss is recorded in income.

71

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Income
Taxes. We file a consolidated federal income tax return on a calendar-year
basis. Deferred income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

Earnings
Per Share. We compute and present earnings per share (EPS) in
accordance with SFAS No. 128, Earnings Per Share. The difference between the
weighted average shares outstanding and diluted shares outstanding is due to the dilutive
effect of stock options and other stock based compensation plans for the years presented.
Basic EPS is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Employee Stock Ownership Plan (ESOP) and
Management Recognition and Retention Plan (MRRP) shares not committed to be
released are not considered to be outstanding for purposes of EPS calculations. The basic
EPS calculation excludes the dilutive effect of all common stock equivalents. Diluted EPS
reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Potentially dilutive common
shares at December 31, 2005 represent shares issuable under our stock option and MRRP
plans. All stock options awarded are assumed to be 100% vested for purposes of the EPS
calculations.

We
account for stock options in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. Under the provisions of
APB No. 25, since the exercise price of our stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized. Pursuant to
SFAS No. 123, Accounting for Stock-Based Compensation, pro forma net income and pro
forma EPS are presented in the following table as if the fair value method of accounting
for stock-based compensation plans had been utilized.

|                                                                                                               | Year Ended December 31,
|-------------------------------------------------------------------------------------------------------------- | -----------------------
|
|Net income (as reported)                                                                                       |                        
|Add:  Stock-based employee compensation expense                                                                |                        
|included in reported net income,                                                                               |                        
|net of related tax effects                                                                                     |                        
|Less:  Total stock-based employee compensation                                                                 |                        
|expense determined under the fair value based                                                                  |                        
|method for all awards, net of related tax effects                                                              |                        
|                                                                                                              
|Pro forma net income                                                                                           |                        
|                                                                                                              
|Basic earnings per share (as reported)                                                                         |                        
|Pro forma basic earnings per share                                                                             |                        
|Diluted earnings per share (as reported)                                                                       |                        
|Pro forma diluted earnings per share                                                                           |                        
|                                                                                                              
|The pro forma results above may not be representative of the effect reported in net income for future periods.
|                                                                                                              

The
fair value of each option grant is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants during the years ended
December 31, 2004 and 2003, respectively: dividend yield of 1.0% and 1.0%; expected
volatility of 22.6% and 13.2%; risk-free interest rates of 4.0% and 3.5%; and an expected
life of 8.0 years and 10.0 years. There were no stock options granted during the year
ended December 31, 2005.

72

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Comprehensive
Income. Comprehensive income consists of net income, net unrealized gains
(losses) on securities and an additional minimum pension liability and is reported, net of
tax, in the Consolidated Statements of Changes in Stockholders Equity. Increases
(decreases) in other comprehensive income are net of related income taxes (benefit) of
($500,000), ($25,000) and $84,000 for the years ended December 31, 2005, 2004 and
2003, respectively. Reclassification adjustments for realized gross gains (losses)
included in income, were approximately ($57,000), $171,000 and $118,000, net of tax
(expense) benefit of approximately $20,000, ($60,000) and ($41,000), respectively, for the
years ended December 31, 2005, 2004 and 2003, respectively.

Cash
and Cash Equivalents. For purposes of the Consolidated Statement of Cash
Flows, cash and cash equivalents include cash on hand, federal funds sold and due from
banks.

Reclassifications.           Certain
prior years amounts have been reclassified to conform to the 2005           presentation.

# 2. Industry Segment
Information

Our
activities are considered to be a single industry segment for financial reporting
purposes. We are engaged in the business of commercial and retail banking, investment
management, insurance and farm and ranch management and real estate brokerage services
with operations conducted through 68 banking offices located in Nebraska, Iowa and Kansas
and nine loan production offices located in Arizona, Colorado, Florida, Minnesota, Nevada
and North Carolina. Substantially all income is derived from a diverse base of commercial,
mortgage and retail lending activities and investments.

# 3. Earnings Per Share

Basic
and diluted EPS data are based on the weighted average number of common shares outstanding
during each reporting period. ESOP and MRRP shares not committed to be released are not
considered to be outstanding for purposes of EPS calculations. The basic EPS calculation
excludes the dilutive effect of all common stock equivalents. Diluted EPS are further
adjusted for potential common shares that were dilutive and outstanding during the
reporting period. Our potentially dilutive common shares at December 31, 2005 represent
shares issuable under its 2003 Stock Option Plan and MRRP computed using the treasury
stock method. All stock options are assumed to be 100% vested for purposes of the EPS
computations.

|                                                          | Year Ended
December 31, 2005 | Year Ended
December 31, 2004
|--------------------------------------------------------- | ---------------------------- | ----------------------------
|
|Net income                                                |                              |                             
|                                                         
|Weighted average number of common shares outstanding      |                              |                             
|used in basic earnings per share calculation (in 000's)   |                              |                             
|                                                         
|Common share equivalents - stock option and               |                              |                             
|MRRP shares (in 000's)                                    |                              |                             
|                                                         
|Weighted average number of common shares outstanding      |                              |                             
|used in diluted earnings per share calculation (in 000's) |                              |                             
|                                                         
|Earnings per share                                        |                              |                             
|                                                         

73

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 4. Investment and
Mortgage-Backed Securities

The
carrying value, gross unrealized gains and losses, and fair value of investment and
mortgage-backed securities by major security category at December 31, 2005 and 2004
are as follows:

|                                                  | At December 31, 2005
|------------------------------------------------- | --------------------
|
|
|Held to maturity:                                 |                     
|Municipal obligations                             |                     
|                                                 
|Available for sale:                               |                     
|Mortgage-backed securities                        |                     
|U.S. Government securities and agency obligations |                     
|Corporate securities                              |                     
|Municipal obligations                             |                     
|Agency equity securities                          |                     
|Asset Management Fund - ARM Fund                  |                     
|                                                 
|Total investment and mortgage-backed              |                     
|securities, available for sale                    |                     
|                                                 
|                                                 
|
|
|
|Held to maturity:                                 |                     
|Municipal obligations                             |                     
|                                                 
|Available for sale:                               |                     
|Mortgage-backed securities                        |                     
|U.S. Government securities and agency obligations |                     
|Corporate securities                              |                     
|Municipal obligations                             |                     
|Agency equity securities                          |                     
|Asset Management Fund - ARM Fund                  |                     
|                                                 
|Total investment and mortgage-backed              |                     
|securities, available for sale                    |                     
|                                                 

74

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
carrying and estimated fair value of investment securities at December 31, 2005, by
contractual maturity, are shown in the following table. Actual maturities may differ from
the contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

|                            | At December 31, 2005
|--------------------------- | --------------------
|
|
|Amount maturing in:         |                     
|2006                        |                     
|2007 - 2010                 |                     
|2011 - 2015                 |                     
|After 2015                  |                     
|                           
|Total investment securities |                     
|                           

There
were no sales of investment securities held to maturity during the three years ended
December 31, 2005. Proceeds from the sale of investment securities available for sale
totaled $3.2 million and $16.8 million for the years ended December 31, 2005 and 2004,
respectively. Gross realized gains on the sale of investment securities were $14,000 and
$596,000 for the years ended December 31, 2005 and 2004, respectively. There were no
losses on the sale of investment securities during the year ended December 31, 2005.
Realized losses on the sale of investment securities were $135,000 for the year ended
December 31, 2004. There were no sales of available for sale investment securities during
the year ended December 31, 2003. Proceeds from the sale of mortgage-backed securities
were approximately $53.8 million for the year ended December 31, 2003, resulting in gross
realized gains of approximately $25,000 and gross realized losses of approximately
$25,000. There were no sales of mortgage-backed securities during the years ended December
31, 2005 and 2004.

At
December 31, 2005 and 2004, investment and mortgage-backed securities with fair
values of approximately $100.4 million and $100.8 million, respectively, were pledged to
secure public deposits.

Investment
and mortgage-backed securities with unrealized losses at December 31, 2005 are summarized
in the following table:

|                                      | Less Than 12 Months | 12 Months or Longer | Total
|------------------------------------- | ------------------- | ------------------- | -----
|
|U.S. Government securities and        |                     |                     |      
|agency obligations                    |                     |                     | $    
|Corporate securities                  |                     |                     |      
|Municipal obligations                 |                     |                     |      
|Agency equity securities              |                     |                     |      
|Asset Management Fund - ARM Fund      |                     |                     |      
|Mortgage-backed securities            |                     |                     |      
|                                     
|Total temporarily impaired securities |                     |                     | $    
|                                     

We
believe all unrealized losses as of December 31, 2005 to be market related, with no
permanent sector or issuer credit concerns or impairments. We had 112 securities with
unrealized losses for 12 consecutive months or longer as of December 31, 2005. The
unrealized losses are believed to be temporarily, not permanently, impaired in value. An
impairment is deemed temporary if the positive evidence indicating that an
investments carrying amount is recoverable within a reasonable time period outweighs
negative evidence to the contrary.

75

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 5. Loans Receivable

Loans
receivable at December 31, 2005 and 2004 are summarized in the following table:

|                                          | At December 31,
|----------------------------------------- | ---------------
|
|Real estate loans:                        |                
|One-to-four family residential (1)        |                
|Second mortgage residential               |                
|Multi-family residential                  |                
|Commercial real estate and land           |                
|Residential construction                  |                
|Commercial construction                   |                
|Agriculture                               |                
|                                         
|Total real estate loans                   |                
|                                         
|Business                                  |                
|                                         
|Agriculture - operating                   |                
|                                         
|Warehouse mortgage lines of credit        |                
|                                         
|Consumer loans:                           |                
|Home equity                               |                
|Home equity lines of credit               |                
|Home improvement                          |                
|Automobile                                |                
|Other                                     |                
|                                         
|Total consumer loans                      |                
|                                         
|Total loans                               |                
|                                         
|Unamortized premiums, discounts and       |                
|deferred loan fees                        |                
|Undisbursed portion of construction and   |                
|land development loans in process         |                
|                                         
|Net loans                                 |                
|Allowance for loan losses                 |                
|                                         
|Net loans after allowance for loan losses |                
|                                         
|(1) Includes loans held for sale          |                
|                                         

Concentration
of Credit Risk.Our loans are exposed to credit risk from the possibility
that customers may default on their financial obligations to us. Credit risk arises
predominantly with respect to loans. Concentrations of credit risk exist if a number of
customers are engaged in similar activities, are located in the same geographic region or
have similar economic characteristics such that their ability to meet contractual
obligations could be similarly affected by changes in economic, political or other
conditions. Concentrations of credit risk indicate a related sensitivity of our
performance to developments affecting a particular customer, industry or geographic
location.

76

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

At
December 31, 2005 and 2004 our second mortgage residential, multi-family residential,
commercial real estate and land, construction, agricultural, business and consumer loans
totaled $3.1 billion and $2.7 billion, respectively. These loan types are considered by
management to be of greater risk of collectibility than one-to-four family residential
loans. Additionally, at December 31, 2005, we had $74.4 million of interest-only
one-to-four family residential loans.

Our
primary lending market area consists of Nebraska, Iowa, Kansas, Arizona, Colorado,
Florida, Minnesota, Nevada and North Carolina. Our Asset/Liability and Asset
Classification Committees are responsible for setting guidelines related to loan
concentrations and monitoring such concentrations to limit potential exposure for material
losses. At December 31, 2005 and 2004, approximately 22.2% and 29.2%, respectively,
of total loans were secured by properties or made to individuals located outside of our
primary lending market area.

Allowance
for loan losses. The activity in the allowance for loan losses is
summarized in the following table:

|                                           | Year Ended December 31,
|------------------------------------------ | -----------------------
|
|Balance at beginning of year               |                        
|Allowance for loan losses acquired         |                        
|Provision for loan losses                  |                        
|Charge-offs                                |                        
|Recoveries on loans previously charged-off |                        
|                                          
|Balance at end of year                     |                        
|                                          

Nonperforming
assets and troubled debt restructurings. Nonperforming assets consist of
nonperforming loans, troubled debt restructurings and real estate owned. Nonperforming
loans are loans on which interest recognition has been suspended until realized because of
doubts as to the borrowers ability to repay principal and interest. Troubled debt
restructurings are loans where the terms have been modified to provide a reduction or
deferral of interest or principal because of a deterioration in the borrowers
financial position.

|                                                                               | At December 31,
|------------------------------------------------------------------------------ | ---------------
|
|Nonperforming loans (1)                                                        |                
|Real estate owned, net (2)                                                     |                
|                                                                              
|Total nonperforming assets                                                     |                
|Troubled debt restructurings                                                   |                
|                                                                              
|Total nonperforming assets and                                                 |                
|troubled debt restructurings                                                   |                
|                                                                              
|(1)  Includes all loans 90 or more days delinquent and all uncollected accrued
|interest is fully reserved.                                                   
|(2)  Real estate owned balances are shown net of related loss allowances.     
|                                                                              

Average
balance of impaired and restructured loans for the years ended December 31, 2005, 2004
and 2003 totaled $7.1 million, $1.6 million and $3.0 million, respectively. Interest
recognized on such loans for the year ended December 31, 2005 approximated $603,000.
Additional interest income that would have been recorded for the year ended December 31,
2005 if nonperforming loans and troubled debt restructurings had been current or in
accordance with their original terms approximates $802,000.

77

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

We
serviced loans for others amounting to approximately $1.2 billion and $1.1 billion at
December 31, 2005 and 2004, respectively. Loans serviced for others are not included
in the accompanying Consolidated Statements of Financial Condition. Servicing loans for
others consists of collecting mortgage payments, maintaining escrow accounts, disbursing
payments to investors and conducting foreclosure processing. In connection with these
loans serviced for others, we held borrowers escrow balances of approximately $15.5
million and $13.4 million at December 31, 2005 and 2004, respectively.

Loans
serviced for others include approximately $596.3 million and $584.2 million of unpaid
principal balances of residential real estate loans at December 31, 2005 and 2004,
respectively, for which we have retained a limited amount of recourse obligation. We
have certain risks due to limited recourse arrangements on loans serviced for others and
recourse obligations related to loan sales. The maximum total dollar amount of such
recourse was approximately $15.4 million and $15.9 million at December 31, 2005 and
2004, respectively. We have established a liability for this recourse obligation, which is
based on our historical loss experience, in the amount of approximately $732,000 and
$720,000 at December 31, 2005 and 2004, respectively. This liability is included in
accrued expenses and other liabilities.

# 6. Mortgage Servicing
Rights

The
balance of capitalized mortgage servicing rights, net of valuation allowances, included in
other assets at December 31, 2005 and 2004, was $11.7 million and $10.5 million,
respectively. The fair values of these rights were approximately $15.0 million and $11.5
million at December 31, 2005 and 2004, respectively. The following are the key assumptions
used in measuring the fair values of capitalized mortgage servicing rights and the
sensitivity of the fair values to changes in those assumptions:

|                                   | At December 31,
|---------------------------------- | ---------------
|
|Serviced loan portfolio balance    |                
|Fair value                         |                
|Prepayment speed                   |                
|Weighted average prepayment speed  |                
|Fair value with 10% adverse change |                
|Fair value with 20% adverse change |                
|Discount rate                      |                
|Weighted average discount rate     |                
|Fair value with 10% adverse change |                
|Fair value with 20% adverse change |                

The
sensitivity of the fair values is hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in the table, the effect of a variation in a
particular assumption on the fair value of the capitalized mortgage servicing rights is
calculated without changing any other assumption. In reality, changes in one assumption
may result in changes in another which might magnify or counteract the sensitivities.

78

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
following table summarizes activity in capitalized mortgage servicing rights, including
amortization expense:

|                                      | Year Ended December 31,
|------------------------------------- | -----------------------
|
|Balance at beginning of year          |                        
|Mortgage servicing rights acquired    |                        
|Mortgage servicing rights capitalized |                        
|Amortization expense                  |                        
|Valuation adjustment                  |                        
|                                     
|Balance at end of year                |                        
|                                     

The
estimated future amortization expense on capitalized mortgage servicing rights for each of
the years ending December 31, 2006 through 2010 is approximately $2.7 million, $2.2
million, $1.7 million, $1.2 million and $943,000, respectively. These projections are
based on existing asset balances and the existing interest rate environment at
December 31, 2005. The amount of amortization expense in any given period may be
significantly different depending upon changes in mortgage interest rates and market
conditions.

We
evaluate the fair value of mortgage servicing rights on a quarterly basis using current
prepayment speeds, cash flow and discount rate estimates. Changes in these estimates
impact fair value and could require us to record a valuation allowance or recovery. During
the year ended December 31, 2005, the balance of our mortgage servicing rights valuation
allowance was recaptured into earnings. There was a valuation allowance established for
capitalized mortgage servicing rights of $800,000 at December 31, 2004. The
amortization expense and valuation adjustment is recorded as a reduction of fees and
service charges in the accompanying Consolidated Statements of Income.

# 7. Accrued Interest
Receivable

Accrued
interest receivable at December 31, 2005 and 2004 is summarized in the following
table:

|                                          | At December 31,
|----------------------------------------- | ---------------
|
|Loans receivable                          |                
|Investment and mortgage-backed securities |                
|                                         
|Total accrued interest receivable         |                
|                                         

# 8. FHLBank Topeka Stock

We
are a member of the FHLBank Topeka (FHLBank) and are required to purchase and
hold stock to collateralize our borrowings. Our investment in FHLBank stock is carried at
cost, which represents redemption value. We were required to hold approximately $49.3
million and $50.8 million of FHLBank stock at December 31, 2005 and 2004,
respectively.

# 9. Real Estate Owned

Real
estate owned, included in other assets in the Consolidated Statements of Financial
Condition, at December 31, 2005 and 2004 aggregating $2.4 million and $347,000,
respectively, is recorded net of a valuation allowance of $44,000 and $8,000,
respectively. The increase in real estate owned at December 31, 2005 is primarily related
to one multi-family residential loan totaling $1.6 million acquired in the UNFC
acquisition.

79

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 10. Premises and
Equipment

Premises
and equipment at December 31, 2005 and 2004 are summarized in the following table:

|                                           | At December 31, | Useful
|------------------------------------------ | --------------- | ------
|
|Land                                       |                 |       
|Buildings and improvements                 |                 |       
|Leasehold improvements                     |                 |       
|Furniture, fixtures, and equipment         |                 |       
|Computer equipment                         |                 |       
|Vehicles                                   |                 |       
|                                          
|Total cost basis of premises and equipment |                 |       
|Accumulated depreciation and amortization  |                 |       
|                                          
|Total premises and equipment, net          |                 |       
|                                          

80

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 11. Goodwill and
Acquired Intangible Assets

Goodwill
represents the excess price paid over the fair value of the tangible and intangible assets
and liabilities acquired in connection with the August 27, 2004 acquisition of UNFC. The
changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2004
are as follows:

|                                  | At December 31,
|--------------------------------- | ---------------
|
|Balance at beginning of year      |                
|Additions to goodwill during year |                
|Impairment losses during year     |                
|                                 
|Balance at end of year            |                
|                                 

Our
only identifiable intangible asset is the value of the core deposits acquired as part of
the UNFC transaction. The changes in the carrying amount of acquired intangible assets for
the years ended December 31, 2005 and 2004 are as follows:

|                             | Year Ended December 31,
|---------------------------- | -----------------------
|
|Balance at beginning of year |                        
|Additions during year        |                        
|Amortization expense         |                        
|                            
|Balance at end of year       |                        
|                            

Amortization
expense related to our core deposit intangible assets for the year ended December 31, 2005 and estimates for
the five years thereafter are as follows:

|(Dollars in thousands)               | Core DepositIntangible Assets
|------------------------------------ | -----------------------------
|Aggregate amortization expense:      |                              
|For the year ended December 31, 2005 |                              
|Estimated amortization expense:      |                              
|For the year ended December 31, 2006 |                              
|For the year ended December 31, 2007 |                              
|For the year ended December 31, 2008 |                              
|For the year ended December 31, 2009 |                              
|For the year ended December 31, 2010 |                              
|                                    

81

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 12. Deposits

Deposits
at December 31, 2005 and 2004 are summarized in the following table:

|                                | At December 31,
|------------------------------- | ---------------
|
|
|Transaction accounts:           |                
|Noninterest-bearing checking    |                
|Savings                         |                
|Interest-bearing checking       |                
|Money market                    |                
|                               
|Total transaction accounts      |                
|                               
|Total transaction accounts as a |                
|percentage of total deposits    |                
|                               
|Time deposits:                  |                
|0.00% to 2.99%                  |                
|3.00% to 4.99%                  |                
|5.00% to 6.99%                  |                
|                               
|Total time deposits             |                
|                               
|Total time deposits as a        |                
|percentage of total deposits    |                
|                               
|Total deposits                  |                
|                               

The
scheduled maturities of time deposits at December 31, 2005 are shown in the following
table:

|(Dollars in thousands) | Amount | Percent
|---------------------- | ------ | -------
|2006                   |        |        
|2007                   |        |        
|2008                   |        |        
|Thereafter             |        |        
|                      
|Total time deposits    |        |        
|                      

At
December 31, 2005 and 2004, time deposits of $100,000 or more approximated $233.1
million and $169.1 million, respectively. Deposits are insured up to $100,000 by the
Federal Deposit Insurance Corporation and are backed by the full faith and credit of the
U.S. Government.

82

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Interest expense, by each category of
deposits, for the years ended December 31, 2005, 2004 and 2003 is as follows:

|                                   | Year Ended December 31,
|---------------------------------- | -----------------------
|
|Savings                            |                        
|Interest-bearing checking          |                        
|Money market                       |                        
|Time deposits                      |                        
|                                  
|Total interest expense on deposits |                        
|                                  

# 13. FHLBank Topeka
Advances and Other Borrowings

At
December 31, 2005 and 2004, we were indebted on notes as shown in the following
table:

|                                       | Original | Interest | At December 31,
|-------------------------------------- | -------- | -------- | ---------------
|
|Permanent fixed-rate notes             |          |          |                
|payable to the FHLBank Topeka:         |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|Convertible fixed-rate notes           |          |         
|payable to the FHLBank Topeka:         |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|                                       |          |          |                
|Line of credit with the FHLBank Topeka |          |          |                
|Adjustable-rate note payable           |          |         
|to the FHLBank Topeka                  |          |          |                
|Retail repurchase agreements           |          |          |                
|Junior subordinated debentures         |          |          |                
|                                      
|Total FHLBank Topeka advances and      |          |         
|other borrowings                       |          |          |                
|                                      
|Weighted average interest rate         |          |          |                
|                                      

The
convertible fixed-rate notes are convertible to adjustable-rate notes at the option of the
FHLBank, with call dates ranging from January 2006 to August 2008. The line of credit
with the FHLBank expires in November 2006. We expect the line of credit agreement
with the FHLBank to be renewed in the ordinary course of business.

83

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

On
April 26, 2004, we formed TierOne Capital Trust I (TierOne Capital Trust)
which issued capital securities (Trust Preferred Securities) to investors. The
proceeds from the sale of the Trust Preferred Securities were used to purchase $30.9
million of junior subordinated debentures (debentures). The debentures are
callable at par in June 2009 and mature in June 2034. Our obligation under the debentures
constitutes a full and unconditional guarantee of TierOne Capital Trusts obligations
under the Trust Preferred Securities. In accordance with Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities (FIN 46R), the
trust is not consolidated and related amounts are treated as debt of the Company.

In
connection with our acquisition of UNFC on August 27, 2004, we assumed $7.0 million of
variable rate debentures that had been issued on November 28, 2001 by United Nebraska
Capital Trust, a trust formed by UNFC. The debentures are callable at par in December
2006, are due December 8, 2031 and are the sole asset of the United Nebraska Capital
Trust. Our obligation under the debentures constitutes a full and unconditional guarantee
of United Nebraska Capital Trusts obligations under the Trust Preferred Securities.
In accordance with FIN 46R, United Nebraska Capital Trust is not consolidated and related
amounts are treated as debt of the Company.

Pursuant
to blanket collateral agreements with the FHLBank, such advances are secured by our
qualifying residential, multi-family residential and commercial real estate mortgages,
residential construction, commercial construction and agricultural real estate loans with
carrying values totaling approximately $1.7 billion and $1.6 billion at December 31,
2005 and 2004, respectively. Other qualifying collateral can be pledged in the event
additional borrowing capacity is required.

# 14. Income Taxes

Income
tax expense for the years ended December 31, 2005, 2004 and 2003 consists of the
following components:

|                                 | Year Ended December 31,
|-------------------------------- | -----------------------
|
|Federal:                         |                        
|Current                          |                        
|Deferred                         |                        
|                                
|Total federal income tax expense |                        
|                                
|State:                           |                        
|Current                          |                        
|Deferred                         |                        
|                                
|Total state income tax expense   |                        
|                                
|Total income tax expense         |                        
|                                

84

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Our
actual income tax expense differs from the expected income tax expense (computed by
applying the statutory 35% federal tax rate to income before income tax expense) as shown
in the following table:

|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|
|Expected income tax expense                     |                        
|Increase (decrease) resulting from:             |                        
|Employee Stock Ownership Plan                   |                        
|State income taxes, net of federal tax benefits |                        
|Tax-exempt interest income                      |                        
|Other                                           |                        
|                                               
|Total income tax expense                        |                        
|                                               
|Effective tax rate                              |                        
|                                               

The
significant items comprising our net deferred income tax asset (liability) at
December 31, 2005 and 2004 are shown in the following table:

|                                          | At December 31,
|----------------------------------------- | ---------------
|
|Deferred tax liabilities:                 |                
|Deferred fees on loans                    |                
|FHLBank Topeka stock                      |                
|Premises and equipment                    |                
|Mortgage servicing rights                 |                
|Other intangible assets                   |                
|Other                                     |                
|                                         
|Deferred tax liabilities                  |                
|                                         
|Deferred tax assets:                      |                
|Net unrealized losses on securities       |                
|Deferred compensation                     |                
|Management Recognition and Retention Plan |                
|Allowance for loan losses                 |                
|Discounts on purchased loans              |                
|Vacation expense                          |                
|Other                                     |                
|                                         
|Deferred tax assets                       |                
|                                         
|Net deferred income tax asset (liability) |                
|                                         

There
was no valuation allowance for deferred tax assets considered necessary at
December 31, 2005 and 2004. In assessing the realizability of our deferred tax
assets, we consider whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversals of deferred
tax liabilities, projected taxable income, carryback opportunities and tax planning
strategies in making the assessment of the amount of the valuation allowance. The net
deferred tax asset at December 31, 2005 is included in other assets in the Consolidated
Statements of Financial Condition. Conversely, the net deferred tax liability at December
31, 2004 is included in accrued expenses and other liabilities in the Consolidated
Statements of Financial Condition.

85

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Income
taxes payable as of December 31, 2005 and 2004 were approximately $3.2 million and
$2.6 million, respectively, and are included in accrued expenses and other liabilities in
the Consolidated Statements of Financial Condition.

Our
retained earnings at December 31, 2005 and 2004 include approximately $7.7 million, for
which no federal income tax liability has been provided. Such amount represents the bad
debt reserve for tax purposes which were accumulated in tax years through the year ended
December 31, 1987 (the base year). These amounts represent allocations of income to bad
debt deductions for tax purposes only. Reductions of the remaining allocated retained
earnings for purposes other than tax bad debt losses will create taxable income, which
will be subject to the then corporate income tax rate. The Small Business Protection Act,
passed by Congress in 1996, requires that savings and loan associations recapture into
taxable income bad debt reserves, which were accumulated in taxable years after December
31, 1987 and which exceeded certain guidelines.

# 15. Employee Benefit
Plans

Retirement
Plan. We previously had a qualified, noncontributory defined benefit
pension plan covering substantially all full-time employees who were at least
21 years of age and had completed one year of service (at least
1,000 hours) as of December 31, 2002. On March 31, 2004, we merged our
single-employer defined benefit pension plan and transferred all pension plan assets and
future plan obligations to an unrelated third party plan. This transaction resulted in a
$1.5 million pre-tax gain for the year ended December 31, 2004 from the curtailment of the
liability associated with the plan.

Savings
Plan. We sponsor a defined contribution 401(k) profit sharing plan. At
December 31, 2005 and 2004, we contributed 50% of each participants
contribution up to a maximum of 6% of the participants eligible salary, as defined
by the plan. Plan expenses, net of forfeitures, for the years ended December 31,
2005, 2004 and 2003 were $604,000, $522,000 and $526,000, respectively, and are included
in salaries and employee benefits in the accompanying Consolidated Statements of Income.

Deferred
Compensation Agreements. We have deferred compensation agreements with
certain officers and directors. These agreements, which include the Supplemental Executive
Retirement Plan and the deferred compensation program for directors and officers,
generally include certain requirements such as continued employment for a specified
period, availability for consulting services and agreements not to compete after
retirement. These deferred compensation arrangements, which are partially funded,
represent only a promise to pay amounts in the future and the assets to fund such promises
are subject to the claims of our creditors. The expense related to the agreements was
approximately $1.0 million, $837,000 and $690,000 for the years ended December 31,
2005, 2004 and 2003, respectively. The liability, which is included in accrued expenses
and other liabilities, is as shown in the following table:

|                                             | At December 31,
|-------------------------------------------- | ---------------
|
|Deferred compensation agreements - officers  |                
|Deferred compensation agreements - directors |                
|Supplemental Executive Retirement Plan       |                
|                                            
|Total deferred compensation agreements       |                
|                                            

Management
Incentive Compensation Plan. We have a management incentive compensation
plan designed to award officers and key employees, as determined by our Board of
Directors, an incentive for effectively operating the Company. This plan provides for
payments equal to a percentage of salaries for meeting certain organizational and
individual performance targets. Expense related to this plan totaled approximately $1.6
million, $1.3 million and $1.2 million for the years ended December 31, 2005, 2004
and 2003, respectively. The liability for this plan is included in accrued expenses and
other liabilities.

86

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 16. Stock Based Benefit
Plans

Employee
Stock Ownership Plan.Concurrent with the conversion from mutual to stock
ownership, we established an ESOP for the benefit of our employees. The ESOP is a
qualified pension plan under Internal Revenue Service guidelines which covers all
full-time employees who have completed 1,000 hours of service. Upon formation, the
ESOP purchased 1,806,006 shares of common stock issued in the initial public offering with
the proceeds of an $18,060,060 loan from the Company.

We
account for our ESOP in accordance with Statement of Position 93-6, Employers
Accounting for Employee Stock Ownership Plans. Accordingly, expense is recognized
based on the market value (average stock price) of shares scheduled to be released from the
ESOP trust. As shares are committed to be released from collateral, we report compensation
expense equal to the average market price of the shares and the shares become outstanding
for EPS computations. Our contributions and dividends on allocated and unallocated ESOP
shares are used to pay down the loan. Accordingly, we have recorded the obligation with an
offsetting amount of unearned compensation in stockholders equity in the
accompanying Consolidated Statements of Financial Condition.

|                                                               | At or for the Year Ended December 31,
|-------------------------------------------------------------- | -------------------------------------
|
|Employee Stock Ownership Plan compensation expense             |                                      
|Employee Stock Ownership Plan shares allocated to employees    |                                      
|Employeee Stock Ownership Plan shares unallocated              |                                      
|Fair value of Employee Stock Ownership Plan unallocated shares |                                      
|                                                              

Management
Recognition and Retention Plan.We established the 2003 MRRP which is a
stock-based incentive plan that was approved by our shareholders at our 2003 Annual
Meeting of Shareholders held April 23, 2003. The shares awarded by the MRRP vest to
participants at the rate of 20% per year. As a result, expense for this plan is being
recorded over a 60-month period and is based on the market value of our stock as of the
date the awards were made. The remaining unamortized cost of the MRRP shares acquired to
date is reflected as a reduction in stockholders equity. Shareholders approved
903,003 shares to be granted under the MRRP.

|                                                  | Year Ended December 31,
|------------------------------------------------- | -----------------------
|
|Shares outstanding at beginning of year           |                        
|Shares granted                                    |                        
|Shares vested                                     |                        
|Shares forfeited                                  |                        
|                                                 
|Shares outstanding at end of year                 |                        
|                                                 
|Management Recognition and Retention Plan expense |                        
|                                                 

87

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Stock
Option Plan.We established the 2003 Stock Option Plan under which
2,257,508 shares of our common stock were reserved for the grant of stock options to
directors, officers and employees. Stock options awarded under the Stock Option Plan vest
to participants at the rate of 20% per year. The exercise price of the options is equal to
the fair market value of the common stock on the grant date.

|                                                                     | Options Outstanding | Remaining Contractual Life | Options Exercisable
|-------------------------------------------------------------------- | ------------------- | -------------------------- | -------------------
|Stock options issued and outstanding at an exercise price of $17.83  |                     |                            |                    
|Stock options issued and outstanding  at an exercise price of $22.40 |                     |                            |                    
|                                                                    
|Stock options outstanding at December 31, 2005                       |                     |                            |                    
|                                                                    
|Weighted average exercise price                                      |                     |                            | $                  
|                                                                    
|Stock options remaining for future grants                            |                     |                            |                    
|                                                                    

The
following table details stock options issued, exercised and forfeited since inception of
the plan:

|                                               | Number of Shares | Weighted Average Exercise Price
|---------------------------------------------- | ---------------- | -------------------------------
|Stock options outstanding at December 31, 2002 |                  |                                
|Stock options issued                           |                  |                                
|Stock options exercised                        |                  |                                
|Stock options forfeited                        |                  |                                
|                                              
|Stock options outstanding at December 31, 2003 |                  |                                
|                                              
|Stock options issued                           |                  |                                
|Stock options exercised                        |                  |                                
|Stock options forfeited                        |                  |                                
|                                              
|Stock options outstanding at December 31, 2004 |                  |                                
|                                              
|Stock options issued                           |                  |                                
|Stock options exercised                        |                  |                                
|Stock options forfeited                        |                  |                                
|                                              
|Stock options outstanding at December 31, 2005 |                  |                                
|                                              

88

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 17. Regulatory
Capital Requirements

In
connection with our conversion to a Federally-chartered stock savings bank, we
established a liquidation account in an amount equal to our retained earnings on March
31, 2002. The liquidation account is maintained for the benefit of eligible account
holders and supplemental eligible account holders who have continued to maintain their
deposit accounts after the conversion. The liquidation account is reduced annually to the
extent that eligible account holders and supplemental eligible account holders have
reduced their qualifying deposits as of each anniversary date. Subsequent increases will
not restore an eligible account holders or a supplemental eligible account holders
interest in the liquidation account. In the event of a complete liquidation, each
eligible account holder and supplemental eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.

We
are subject to various regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a
direct material adverse effect on our financial condition and results of operations. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, we
must meet specific capital guidelines that involve quantitative measures of our assets,
liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.

Quantitative
measures that have been established by regulation to ensure capital adequacy require that
we maintain minimum capital amounts and ratios (set forth in the following table). Our
primary regulatory agency, the Office of Thrift Supervision (OTS), requires
that we maintain minimum ratios of tangible capital (as defined in the regulations) of
1.5%, core capital (as defined) of 4.0% and total risk-based capital (as defined) of 8.0%.
We believe, as of December 31, 2005, that we exceed all capital requirements to which
we are subject.

As
of December 31, 2005 and 2004, the most recent notifications from the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since the notification that we
believe have changed the Banks category.

The
actual capital amounts and ratios as of December 31, 2005 and 2004 are presented in
the following table:

|                            | Actual | For Capital
Adequacy Purposes | To be Well Capitalized
Under Prompt Corrective
Action Provisions
|--------------------------- | ------ | ----------------------------- | ----------------------------------------------------------------
|
|As of December 31, 2005:    |        |                               |                                                                 
|Total risk-based capital    |        |                              
|(to risk-weighted assets)   |        |                               | $                                                               
|Tier 1 capital (to adjusted |        |                              
|tangible assets)            |        |                               |                                                                 
|Tangible capital (to        |        |                              
|tangible assets)            |        |                               |                                                                 
|Tier 1 capital (to risk-    |        |                              
|weighted assets)            |        |                               |                                                                 
|As of December 31, 2004:    |        |                              
|Total risk-based capital    |        |                              
|(to risk-weighted assets)   |        |                               | $                                                               
|Tier 1 capital (to adjusted |        |                              
|tangible assets)            |        |                               |                                                                 
|Tangible capital (to        |        |                              
|tangible assets)            |        |                               |                                                                 
|Tier 1 capital (to risk-    |        |                              
|weighted assets)            |        |                               |                                                                 
|                           

89

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

We
believe that with respect to the current regulations, the Bank will continue to meet its
minimum capital requirements for the foreseeable future. However, events beyond our
control, such as increased interest rates or a downturn in the economy in areas where the
Bank conducts business or makes loans, could adversely affect future earnings and,
consequently, the ability of the Bank to meet its future minimum capital requirements.

The
following table shows a reconciliation between the Banks capital calculated in
accordance with GAAP and consolidated Bank regulatory capital amounts as presented in the
previous table:

|                                             | At December 31, 2005
|-------------------------------------------- | --------------------
|
|Bank GAAP capital                            |                     
|Add:                                         |                     
|Allowance for loan losses                    |                     
|Net unrealized loss on available             |                     
|for sale securities                          |                     
|Less:                                        |                     
|Investment in nonincludable subsidiaries     |                     
|Goodwill and certain other intangible assets |                     
|net of associated deferred tax benefits      |                     
|                                            
|Bank regulatory capital                      |                     
|                                            
|                                            
|
|
|Bank GAAP capital                            |                     
|Add:                                         |                     
|Allowance for loan losses                    |                     
|Net unrealized loss on available             |                     
|for sale securities                          |                     
|Less:                                        |                     
|Investment in nonincludable subsidiaries     |                     
|Goodwill and certain other intangible assets |                     
|net of associated deferred tax benefits      |                     
|Disallowed mortgage servicing asset          |                     
|                                            
|Bank regulatory capital                      |                     
|                                            

90

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 18. Lease Commitments

At
December 31, 2005, 2004 and 2003, we were obligated under noncancelable operating
leases for office space and equipment. Certain leases contain escalation clauses providing
for increased rental rates based primarily on increases in real estate taxes or in the
average consumer price index. Net rent expense under operating leases, included in
occupancy expense, was approximately $974,000, $795,000 and $614,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.

The
approximate future minimum rental payments projected under the remaining terms of the
leases are as follows for the years ending December 31:

|(Dollars in thousands)           | Amount
|-------------------------------- | ------
|2006                             |       
|2007                             |       
|2008                             |       
|2009                             |       
|2010                             |       
|Thereafter                       |       
|                                
|Total minimum lease payments due |       
|                                

# 19. Fair Value of
Financial Instruments

The
following methods and assumptions were used in estimating fair value disclosure for
financial instruments.

General
Assumptions. We assume the book value of short-term financial instruments,
defined as any items that mature or reprice within six months or less, approximate
their fair value. Short-term financial instruments consist of cash and cash equivalents,
accrued interest receivable, advances from borrowers for taxes and insurance and accrued
interest payable.

Investment
and Mortgage-Backed Securities. For investment and mortgage-backed
securities, fair value equals quoted market price, if available, or quotations received
from securities dealers. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities, adjusted for differences
between the quoted securities and the securities being valued.

Investment
in FHLBank Stock, FHLBank Advances and Other Borrowings. The fair value of
FHLBank stock is equivalent to its carrying amount due to it only being redeemable at par
value with the FHLBank. The fair value of FHLBank advances and other borrowings is the
estimated fair value of similar advances and borrowings with comparable maturities at
interest rates currently offered by the FHLBank.

Loans
Receivable. Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as commercial, business,
mortgage and real estate, consumer and other. Each loan category is further segmented into
fixed- and adjustable-rate interest terms and by performing and nonperforming categories.

The
fair value of performing loans is estimated by discounting the future contractual cash
flows using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. The fair value of
nonperforming loans approximates their carrying value.

Deposits.          The
fair value of noninterest-bearing checking, savings, interest-bearing           checking,
and money market accounts is the amount payable on demand. The fair           value of
fixed maturity time deposits is based on the discounted value of           contractual
cash flows. The discount rate is estimated using the rates currently           offered
for deposits of similar remaining maturities.

91

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Commitments
to Originate Loans. The fair value of commitments to originate loans is
estimated using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.

The
estimated fair values of our financial instruments at December 31, 2005 and 2004 are
presented in the following table. Since the fair value of forward loan sales, loan
purchase commitments and loan origination commitments are not significant, these
disclosures are not included in this table.

|                            | At December 31,
|--------------------------- | ---------------
|
|
|Financial assets:           |                
|Cash and cash equivalents   |                
|Investment securities       |                
|Mortgage-backed securities  |                
|Net loans after allowance   |                
|for loan losses             |                
|Accrued interest receivable |                
|FHLBank Topeka stock        |                
|Financial liabilities:      |                
|Deposits                    |                
|FHLBank Topeka advances     |                
|and other borrowings        |                
|Advances from borrowers for |                
|taxes, insurance, and other |                
|escrow funds                |                
|Accrued interest payable    |                

Limitations.         The
fair value of a financial instrument is the current amount that would be
          exchanged between willing parties, other than in a forced liquidation. Fair
          value is best determined based upon quoted market prices. However, in many
          instances, there are no quoted market prices for various financial instruments.
          In cases where quoted market prices are not available, fair values are based on
          estimates using present value or other valuation techniques. Those techniques
          are significantly affected by the assumptions used, including the discount rate
          and estimates of future cash flows. Accordingly, the fair value estimates may
          not be realized in an immediate settlement of the instrument.           SFAS No. 107,
Disclosures About Fair Value of Financial           Instruments, excludes
certain financial instruments and all           nonfinancial instruments from its
disclosure requirements. Accordingly, the           aggregate fair value amounts
presented may not necessarily represent the           underlying fair value of the
Company.

92

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 20. Commitments,
Contingencies, and Financial Instruments with Off-Balance Sheet Risk

The
consolidated financial statements do not reflect various commitments, contingencies and
financial instruments with off-balance sheet risk, which arise in the normal course of
business. These commitments, contingencies and financial instruments, which represent
credit risk, interest rate risk and liquidity risk, consist of commitments to extend
credit, unsecured lending and litigation arising in the normal course of business.

At
December 31, 2005 and 2004, we had commitments to originate fixed-rate loans of
approximately $57.1 million and $36.0 million, respectively, and adjustable-rate loans of
approximately $76.2 million and $35.4 million, respectively. Commitments, which are
disbursed subject to certain limitations, extend over periods of time with the majority of
executed commitments disbursed within a 12-month period. Fixed-rate commitments carried
interest rates ranging from 5.00% to 17.26% and 4.24% to 12.46% at December 31, 2005
and 2004, respectively.

Commitments
to extend credit are agreements to lend to customers as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. We evaluate each
customers creditworthiness on a case-by-case basis. The same credit policies are
used in both granting lines of credit and on-balance sheet instruments. At
December 31, 2005 and 2004, we had commitments to lend under unused warehouse
mortgage lines of credit of approximately $392.3 million and $439.6 million, respectively.
We also had commitments to lend customers unused consumer lines of credit at
December 31, 2005 and 2004 of approximately $132.6 million and $120.4 million,
respectively. In addition, at December 31, 2005 and 2004, we had commitments to lend
to customers pursuant to unused commercial lines of credit of approximately $132.3 million
and $136.4 million, respectively.

At
December 31, 2005 and 2004, outstanding commitments to purchase mortgage loans
aggregated approximately $38.3 million and $60.4 million, respectively, and commitments to
sell mortgage loans aggregated approximately $27.1 million and $36.8 million,
respectively. These commitments to sell extend over varying periods of time with the
majority being settled within a 60-day period.

We
have employment agreements with two key executives. The employment agreements provide for
annual base salaries, participation in retirement and executive benefit plans and other
fringe benefits applicable to executive personnel. These employment agreements provide for
three-year terms which are extended daily thereafter.

We
are party to litigation and claims arising in the normal course of business. We believe
that, after consultation with legal counsel, any liability arising from such litigation
and claims will not be material to our Consolidated Statements of Financial Condition or
Consolidated Statements of Income.

Information
pertaining to the notional and fair values of our derivative financial instruments is
presented in the following table:

|                              | At December 31,
|----------------------------- | ---------------
|
|
|Forward loan sale commitments |                
|Derivative loan commitments   |                

The
fair value of these derivative financial instruments is recorded in our Statements of
Financial Condition at December 31, 2005 and 2004.

93

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 21. Condensed Parent
Company Financial Statements

The
following represents the condensed Statements of Financial Condition at
December 31, 2005 and 2004 and condensed Statements of Income and Cash Flows for the
years ended December 31, 2005, 2004 and 2003 for TierOne Corporation, the parent company.

# Statements of
Financial Condition                                             (Parent Company Only)

|                                            | At December 31,
|------------------------------------------- | ---------------
|
|Assets                                      |                
|Cash in subsidiary bank                     |                
|Investment securities, available for sale   |                
|Investment in subsidiary bank               |                
|Note receivable from subsidiary bank        |                
|Accrued interest receivable                 |                
|Prepaid expenses and other assets           |                
|                                           
|Total assets                                |                
|                                           
|Liabilities and Stockholders Equity        |                
|Liabilities:                                |                
|Junior subordinated debentures              |                
|Accrued interest payable                    |                
|Accrued taxes and other liabilities         |                
|                                           
|Total liabilities                           |                
|                                           
|Stockholders equity:                       |                
|Common stock                                |                
|Additional paid-in capital                  |                
|Retained earnings, substantially restricted |                
|Treasury stock                              |                
|Unallocated common stock held by the        |                
|Employee Stock Ownership Plan               |                
|Unearned common stock held by the           |                
|Management Recognition and Retention Plan   |                
|Accumulated other comprehensive loss, net   |                
|                                           
|Total stockholders equity                  |                
|                                           
|Total liabilities and stockholders equity  |                
|                                           

94

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# Statements of Income
                                          (Parent Company Only)

|                                                               | Year Ended December 31,
|-------------------------------------------------------------- | -----------------------
|
|Interest on investment securities                              |                        
|Interest on subsidiary bank note receivable                    |                        
|Gain on sale of investment securities, available for sale      |                        
|Other income                                                   |                        
|Interest expense - junior subordinated debentures              |                        
|Other expense                                                  |                        
|                                                              
|Net (loss) income before income tax (expense) benefit          |                        
|and equity in earnings of subsidiary bank                      |                        
|Income tax benefit (expense)                                   |                        
|                                                              
|Net income (loss) before equity in earnings of subsidiary bank |                        
|Equity in earnings of subsidiary bank                          |                        
|                                                              
|Net income                                                     |                        
|                                                              

95

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# Statements of Cash
Flows                                                  (Parent Company Only)

|                                                                    | Year Ended December 31,
|------------------------------------------------------------------- | -----------------------
|
|Reconciliation of net income to net cash provided by                |                        
|(used in) operating activities:                                     |                        
|Net income                                                          |                        
|Adjustments to reconcile net income to net cash provided by         |                        
|(used in) operating activities                                      |                        
|Net premium amortization of investment securities                   |                        
|Equity in earnings of subsidiary bank                               |                        
|Deferred income tax expense                                         |                        
|Net gain on sales of investment securities                          |                        
|Changes in certain assets and liabilities:                          |                        
|Tax benefit receivable                                              |                        
|Accrued interest receivable                                         |                        
|Other assets                                                        |                        
|Accrued interest payable                                            |                        
|Accrued expenses and other liabilities                              |                        
|                                                                   
|Net cash (used in) provided by operating activities                 |                        
|                                                                   
|Cash from investing activities:                                     |                        
|Acquisition of United Nebraska Financial Co., net of cash acquired  |                        
|Purchase of investment securities, available for sale               |                        
|Proceeds from maturity of investment securities, available for sale |                        
|Proceeds from sale of investment securities, available for sale     |                        
|Dividends received from subsidiary bank                             |                        
|Investment in subsidiary bank                                       |                        
|Net repayment on note receivable from subsidiary bank               |                        
|                                                                   
|Net cash provided by investing activities                           |                        
|                                                                   
|Cash flows from financing activities:                               |                        
|Proceeds from junior subordinated debentures                        |                        
|Repurchase of common stock for treasury                             |                        
|Dividends paid on common stock                                      |                        
|Purchase of common stock for Management                             |                        
|Recognition and Retention Plan                                      |                        
|Treasury stock reissued under stock option plan                     |                        
|                                                                   
|Net cash used in financing activities                               |                        
|                                                                   
|Net increase in cash in subsidiary bank                             |                        
|Cash in subsidiary bank at beginning of year                        |                        
|                                                                   
|Cash in subsidiary bank at end of year                              |                        
|                                                                   

96

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 22. Quarterly Financial
Information (Unaudited)

|                                    | Quarter Ended
|----------------------------------- | -------------
|
|Total interest income               |              
|Total interest expense              |              
|                                   
|Net interest income                 |              
|Provision for loan losses           |              
|                                   
|Net interest income after           |              
|provision for loan losses           |              
|                                   
|Noninterest income                  |              
|Noninterest expense                 |              
|Income tax expense                  |              
|                                   
|Net income                          |              
|                                   
|Basic earnings per share            |              
|Diluted earnings per share          |              
|Dividends declared per common share |              
|                                   
|                                   
|
|
|Total interest income               |              
|Total interest expense              |              
|                                   
|Net interest income                 |              
|Provision for loan losses           |              
|                                   
|Net interest income after           |              
|provision for loan losses           |              
|                                   
|Noninterest income                  |              
|Noninterest expense                 |              
|Income tax expense                  |              
|                                   
|Net income                          |              
|                                   
|Basic earnings per share            |              
|Diluted earnings per share          |              
|Dividends declared per common share |              
|                                   

97

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# Item 9.  Changes in and
Disagreements With Accountants on Accounting and Financial Disclosure

There
are no changes in or disagreement with our accountants to report.

# Item 9A. Controls and
Procedures

# Evaluation of Disclosure
Controls and Procedures

Our
management has evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer the effectiveness of the design and operation of our disclosure controls
and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange
Act of 1934) as of the end of the period covered by this report. Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of the date of such evaluation to ensure that
material information relating to us, including our consolidated subsidiaries, was made
known to them by others within those entities, particularly during the period in which
this report was being prepared. There was no change in our internal control over financial
reporting that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control over
financial reporting.

# Managements Report
on Internal Control Over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934, as amended. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Under
the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, an evaluation was conducted of the
effectiveness of our internal control over financial reporting as of December 31, 2005
using the criteria set forth in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, our management believes that, as of December 31, 2005, our internal control
over financial reporting was effective based on those criteria.

98

---

# Report of Independent
Registered Public Accounting Firm

The Board of Directors
and StockholdersTierOne Corporation:

We
have audited managements assessment, included in the accompanying Managements
Report on Internal Control over Financial Reporting, that TierOne Corporation maintained
effective internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). TierOne
Corporations management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over
financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.

A
companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In
our opinion, managements assessment that TierOne Corporation maintained effective
internal control over financial reporting as of December 31, 2005, is fairly stated,
in all material respects, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also, in our opinion, TierOne Corporation maintained,
in all material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statement of financial condition of
TierOne Corporation and subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of income, stockholders equity, and cash flows for
each of the years in the three-year period ended December 31, 2005, and our report
dated March 8, 2006 expressed an unqualified opinion on those consolidated financial
statements.

# /s/ KPMG LLP

Lincoln,NebraskaMarch 8,
2006

99

---

# Changes in Internal
Control Over Financial Reporting

There
were no changes in our internal control over financial reporting that occurred during the
quarter ended December 31, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

# Item 9B. Other
Information

None.

100

---

# PART III

# Item 10. Directors and
Executive Officers of the Registrant

The
information required by Item 10 of Form 10-K with respect to identification of directors
and executive officers is incorporated by reference from Information With Respect to
Nominees for Director, Continuing Directors and Executive Officers and Section
16(a) Beneficial Ownership Reporting Compliance in the Companys definitive
Proxy Statement for the Annual Meeting of Stockholders (Proxy Statement) to be
held May 17, 2006, which will be filed with the Securities and Exchange Commission prior
to April 30, 2006.

We
have adopted a Code of Conduct and Ethics that applies to our Chief Executive Officer and
Chief Financial Officer, as well as other officers and employees of the Company and the
Bank. A copy of the Code of Conduct and Ethics, (included as an exhibit to this Annual
Report on Form 10-K and filed with the Securities and Exchange Commission), may also be
found on the our website at www.tieronebank.com. We intend to satisfy the
disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers
from, the Code of Conduct and Ethics by posting such information on our website.

# Item 11. Executive
Compensation

The
information required by Item 11 of Form 10-K is incorporated by reference from
Management Compensation in the Proxy Statement.

The
reports of the Audit Committee and Compensation Committee included in the Proxy Statement
should not be deemed to be filed or incorporated by reference into this filing or any
other filing by the Company under the Exchange Act or Securities Act of 1933 except to the
extent the Company specifically incorporates said reports herein or therein by reference
thereto.

# Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The
information required by Item 403 of Regulation S-K is incorporated by reference from
Beneficial Ownership of Common Stock by Certain Beneficial Owners and
Management in the Proxy Statement.

Equity
Compensation Plan Information. The following table sets forth certain
information for all equity compensation plans and individual compensation arrangements
(whether with employees or non-employees, such as directors), in effect as of December
31, 2005:

|Plan Category             | Number of Shares to be Issued Upon the Exercise of Outstanding Options, Restricted Stock Grants, Warrants and Rights | Weighted-Average Exercise Price ofOutstanding OptionsRestricted Stock Grants,Warrants and Rights | Number of RemainingAvailable for Future Issuance(Excluding Shares Reflected inthe First Column)
|------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------
|Equity compensation plans |                                                                                                                      |                                                                                                  |                                                                                                
|plans approved by         |                                                                                                                      |                                                                                                  |                                                                                                
|security holders          |                                                                                                                      |                                                                                                 
|Equity compensation plans |                                                                                                                      |                                                                                                 
|not approved by security  |                                                                                                                      |                                                                                                 
|holders                   |                                                                                                                      |                                                                                                  |                                                                                                
|                         
|Total                     |                                                                                                                      |                                                                                                  |                                                                                                
|                         

101

---

# Item 13. Certain
Relationships and Related Transactions

The
information required by Item 13 of Form 10-K is incorporated by reference from
Management Compensation  Transactions with Certain Related Persons in
the Proxy Statement.

# Item 14. Principal
Accountant Fees and Services

The
information required by Item 14 of Form 10-K is incorporated by reference from
Ratification of Appointment of Auditors in the Proxy Statement.

102

---

# PART IV

# Item 15. Exhibits and
Financial Statement Schedules

| | (1)
Financial Statements
| | ------------------------

| | The
following financial statements of the registrant and its subsidiaries are filed as part
of this document under Item 8. Financial Statements and Supplementary Data, and
are incorporated herein by this reference:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Financial Condition at December 31, 2005 and 2004;
| | - | -----------------------------------------------------------------------------

| |  | Consolidated
Statements of Income for the years ended December 31, 2005, 2004 and 2003;
| | - | ---------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Changes in Stockholders Equity for the years ended December 31, 2005, 2004
and 2003;
| | - | ----------------------------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003;
| | - | -------------------------------------------------------------------------------------------

| |  | Notes
to Consolidated Financial Statements; and
| | - | -----------------------------------------------

| |  | Report
of Independent Registered Public Accounting Firm
| | - | -------------------------------------------------------

| | (2)
Financial Statement Schedules
| | ---------------------------------

| | All
schedules are omitted because they are not required or are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3)
Exhibits
| | ------------

| | The
exhibits filed or incorporated by reference herewith are as specified in the Exhibit
Index.
| | -----------------------------------------------------------------------------------------------

103

---

# SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                    | TIERONE CORPORATION                              
|------------------- | -------------------------------------------------
|Date: March 8, 2006 | By:/s/ Gilbert G. Lundstrom                      
|                    | Gilbert G. Lundstrom                             
|                    | Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following person
on behalf of the Registrant and in the capacities and on the date indicated.

|Date: March 8, 2006 | By:/s/ Gilbert G. Lundstrom                      
|------------------- | -------------------------------------------------
|                    | Gilbert G. Lundstrom                             
|                    | Chairman of the Board and Chief Executive Officer
|Date: March 8, 2006 | By:/s/ James A. Laphen                           
|                    | James A. Laphen                                  
|                    | Chief Operating Officer and Director             
|Date: March 8, 2006 | By:/s/ Eugene B. Witkowicz                       
|                    | Eugene B. Witkowicz                              
|                    | Chief Financial Officer and Corporate Secretary  
|                    | (Principal Accounting Officer)                   
|Date: March 8, 2006 | By:/s/ Campbell R. McConnell                     
|                    | Campbell R. McConnell                            
|                    | Director                                         
|Date: March 8, 2006 | By:/s/ Joyce Person Pocras                       
|                    | Joyce Person Pocras                              
|                    | Director                                         
|Date: March 8, 2006 | By:/s/ Ann Lindley Spence                        
|                    | Ann Lindley Spence                               
|                    | Director                                         
|Date: March 8, 2006 | By:/s/ Charles W. Hoskins                        
|                    | Charles W. Hoskins                               
|                    | Director                                         

104

---

# Exhibit Index

|No.   | Exhibits                                                                                             | Location      
|----- | ---------------------------------------------------------------------------------------------------- | --------------
|2.1   | Stock Purchase Agreement, dated as of March 30, 2004, among TierOne Corporation,                     |               
|      | United Nebraska Financial Co. and the Shareholders of United Nebraska Financial Co.                  | (1)           
|3.1   | Articles of Incorporation of TierOne Corporation                                                     | (2)           
|3.2   | Bylaws of TierOne Corporation                                                                        | (2)           
|4.0   | Forms of Stock Certificate of TierOne Corporation                                                    | (2)           
|10.1  | Employment Agreement between TierOne Bank and Gilbert G. Lundstrom*                                  | (2)           
|10.2  | Employment Agreement between TierOne Bank and James A. Laphen*                                       | (2)           
|10.3  | Form of Employment Agreement between TierOne Corporation and Gilbert G. Lundstrom*                   | (2)           
|10.4  | Form of Employment Agreement between TierOne Corporation and James A. Laphen*                        | (2)           
|10.5  | Supplemental Retirement Plan*                                                                        | (2)           
|10.6  | Form of Change in Control Agreement between TierOne Bank and certain executive officers*             | (2)           
|10.7  | Form of Change in Control Agreement between TierOne Bank and certain executive officers*             | (2)           
|10.8  | Form of TierOne Bank Employee Severance Plan*                                                        | (2)           
|10.9  | Form of Employee Stock Ownership Plan Supplemental Executive Retirement Plan*                        | (2)           
|10.10 | Form of 401(k) Plan Supplemental Executive Retirement Plan*                                          | (2)           
|10.11 | Directors Deferred Compensation Plan*                                                               | (2)           
|10.12 | Third Amended and Restated Consultation Plan for Directors*                                          | (5)           
|10.13 | TierOne Bank Management Incentive Compensation Plan*                                                 | (4)           
|10.14 | TierOne Bank Deferred Compensation Plan*                                                             | (4)           
|10.15 | 2003 Stock Option Plan*                                                                              | (3)           
|10.16 | Form of Non-employee Director Compensatory Stock Option Agreement for use under the                 
|      | 2003 Stock Option Plan*                                                                              | (5)           
|10.17 | Form of Employee Compensatory Stock Option Agreement for use under the 2003 Stock Option Plan*(5)   
|10.18 | Form of Employee Incentive Stock Option Agreement for use under 2003 Stock Option Plan*              | (5)           
|10.19 | 2003 Management Recognition and Retention Plan and Trust Agreement*                                  | (3)           
|10.20 | Form of award agreements for use under the Management Recognition and Retention                     
|      | Plan and Trust Agreement*                                                                            | (5)           
|22    | Subsidiaries of the Registrant - Reference is made to Item 1. Business -                            |               
|      | Subsidiaries of the Form 10-K for the required information                                          | --            
|23    | Consent of KPMG LLP                                                                                  | Filed Herewith
|31.1  | Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted
|      | pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                            | Filed Herewith
|31.2  | Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted
|      | pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                            | Filed Herewith
|32.1  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   | Filed Herewith
|32.2  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   | Filed Herewith
|     

|* | Denotes
a management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------

|(1) | Incorporated
by reference from Exhibit 2 of TierOne Corporations Form 8-K filed on
                August 31, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
by reference from TierOne Corporations Registration Statement on Form S-1,
                filed on April 8, 2002, as amended and declared effective on August 12,
2002 (File No. 333-                 85838).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated
herein by reference from TierOne Corporations definitive proxy                 statement
filed by TierOne Corporation with the SEC on March 11, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
by reference from TierOne Corporations Annual Report and                 Form 10-K for
the year ended December 31, 2002 filed by TierOne Corporation                 with the
SEC on March 28, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
by reference from TierOne Corporations Annual Report on Form 10-K for the year
                ended December 31, 2004 filed by TierOne Corporation with the SEC on
March 9, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   

105