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# UNITED STATESSECURITIES
AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

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FORM 10-K

# ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

# FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2004

# Commission File
Number: 005-78774

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

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

# 1235 N Street,
Lincoln, Nebraska 68508Telephone Number (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 by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject
to such filing requirements for the past 90 days. YES  X  NO

Indicate by check mark whether the
Registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act
of 1934. 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. |_|

The aggregate market value of the
voting stock held by non-affiliates of the Registrant was $393,327,795 as of June 30,
2004. As of March 1, 2005, there were 18,284,311 issued and outstanding shares of the
Registrants common stock.

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# Documents Incorporated
by Reference

Portions of the definitive Proxy
Statement for the Registrants Annual Meeting of Shareholders to be held May 2, 2005
are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14.

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# TierOne
CorporationForm 10-K Index

|           | Part I.                                                                 | Page
|---------- | ----------------------------------------------------------------------- | ----
|Item 1.    | Business                                                                | 3   
|Item 2.    | Properties                                                              | 50  
|Item 3.    | Legal Proceedings                                                       | 50  
|Item 4.    | Submission of Matters to a Vote of Security Holders                     | 51  
|           | Part II.                                                               
|Item 5.    | Market for the Registrant's Common Stock, Related Stockholder Matters  
|           | and Issuer Purchases of Equity Securities                               | 52  
|Item 6.    | Selected Financial Data                                                 | 54  
|Item 7.    | Management's Discussion and Analysis of Financial Condition and Results
|           | of Operations                                                           | 55  
|Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk              | 81  
|Item 8.    | Financial Statements and Supplementary Data                             | 82  
|Item 9.    | Changes in and Disagreements With Accountants on Accounting and        
|           | Financial Disclosure                                                    | 131 
|Item 9A.   | Controls and Procedures                                                 | 131 
|Item 9B.   | Other Information                                                       | 132 
|           | Part III.                                                              
|Item 10.   | Directors and Executive Officers of the Registrant                      | 133 
|Item 11.   | Executive Compensation                                                  | 133 
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and     
|           | Related Stockholder Matters                                             | 134 
|Item 13.   | Certain Relationships and Related Transactions                          | 134 
|Item 14.   | Principal Accountant Fees and Services                                  | 134 
|           | Part IV.                                                               
|Item 15.   | Exhibits and Financial Statement Schedules                              | 135 
|Signatures |                                                                         | 136 

2

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# Part I.

# Item 1. Business

# 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 2004 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. Factors which could result in
material variations include, but are not limited to:

| |  | Changes
in interest rates which could affect net interest margins and net interest income;
| | - | ------------------------------------------------------------------------------------------

| |  | Competitive
factors which could affect net interest income and noninterest income;
| | - | ----------------------------------------------------------------------------------

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

| |  | Changes
in asset quality and general economic conditions;
| | - | ---------------------------------------------------------

| |  | Unanticipated
issues associated with the execution of the company's strategic plan;
| | - | -----------------------------------------------------------------------------------

| |  | Unanticipated
difficulties in realizing the growth opportunities and cost savings from recent
acquisitions;
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Unanticipated
issues related to the resultant integration of recent acquisitions; 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 Form 10-K and the accompanying 2004 Annual
Report.

# Available Information

TierOne
Corporation (Company) is a public company and files annual, quarterly and
current reports, proxy statements and other information with the Securities and Exchange
Commission (SEC). The Company maintains a website at
www.tieronebank.com and makes available, free of charge, on its Internet web site
copies of its 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, the
Company has available on its website, free of charge, its Code of Conduct and Ethics,
Audit Committee Charter, Compensation Committee Charter and Nominating and Corporate
Governance Committee Charter. The Company is not including the information contained on or
available through its website as a part of, or incorporating by reference into, this
Annual Report on Form 10-K.

3

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# General

The
Company is a Wisconsin corporation headquartered in Lincoln, Nebraska. The Company became
the holding company for TierOne Bank (Bank), a federally chartered stock
savings bank, in connection with the mutual to stock conversion of the Bank which was
completed in October 2002. The Bank operates from 68 banking offices located in Nebraska,
Iowa and Kansas and eight loan production offices located in Arizona, Colorado, Florida,
Minnesota and North Carolina. The executive office of the Company is located at 1235
N Street, Lincoln, Nebraska 68508.

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.

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
principal business is gathering deposits from the general public in the market areas
surrounding our 68 banking offices and investing those deposits, together with funds
generated from operations and borrowings, primarily in loans and to a lesser degree in
investment securities. We continue to implement our management strategy to grow and
diversify our operations as a regional community bank. Highlights of our management
strategy, which is also designed to increase our profitability, include:

| |  | building
a strong corporate brand and identity;
| | - | -----------------------------------------------

| |  | continuing
our controlled growth and expanding our franchise;
| | - | -------------------------------------------------------------

| |  | repositioning
our loan portfolio to increase yields and/or reduce interest rate risk;
| | - | -------------------------------------------------------------------------------------

| |  | emphasizing
growth of our core deposits and managing our cost of funds;
| | - | -----------------------------------------------------------------------

| |  | increasing
our fee income and expanding our products and services; and
| | - | ----------------------------------------------------------------------

| |  | maintaining
asset quality.
| | - | --------------------------

In
recent years, we have increased our emphasis on construction, commercial real estate and
land, second mortgage residential, consumer, business, multi-family residential and
agricultural loans and warehouse mortgage lines of credit. These loans typically have
higher yields than single-family residential first mortgage loans and/or expected shorter
terms to maturity. At December 31, 2004, our portfolio of second mortgage residential,
multi-family residential, commercial real estate and land, construction, agricultural,
business and consumer loans and warehouse mortgage lines of credit amounted to $2.7
billion in the aggregate, or 86.5%, of our total loan portfolio, compared to an aggregate
of $1.7 billion, or 74.8% of our total loan portfolio, at December 31, 2003. The remainder
of our loan portfolio consisted of one-to-four family residential first mortgage loans
which amounted to $418.3 million, or 13.5% of the total loan portfolio, and $559.1
million, or 25.2% of the total loan portfolio, at December 31, 2004 and 2003,
respectively.

4

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We
originate loans to customers located in Nebraska, Iowa, Kansas, Arizona, Colorado,
Florida, Minnesota 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,
2004 approximately 29.2% of our loan portfolio consisted of loans secured by properties or
made to individuals located outside our Primary Lending Market Area. During 2004, we
redefined our Primary Lending Market Area to include Arizona, Florida, Minnesota and North
Carolina. We purchase adjustable-rate, single-family residential first mortgage loans for
our portfolio, while selling substantially all newly originated fixed-rate, single-family
residential first mortgage loans in the secondary market (with servicing retained). We
sell substantially all newly originated fixed-rate, single-family residential first
mortgage loans which produce noninterest income in the form of net gains and losses on
sales and loan servicing fees. We also have developed relationships with several financial
institutions from which we purchase commercial real estate and land and construction loans
or participation interests in such loans. In addition, we originate warehouse mortgage
lines of credit with a number of mortgage brokerage firms located throughout the United
States.

In
order to effectively manage our diversified loan portfolio, we have employed a number of
additional loan officers in recent years with experience in construction, commercial real
estate, business, agricultural and consumer lending. We endeavor to ensure that all of our
loans, whether originated by us or purchased, are in compliance with our underwriting
standards.

In
addition to our loan activities, we focus on our deposit products, particularly checking
accounts, and the sale of other products such as annuities and securities.

Our
revenues are derived principally from interest on our loans, and, to a lesser extent,
noninterest income and interest and dividends on our investment securities. Our primary
sources of funds are principal and interest payments on loans, proceeds from the sale of
loans, advances from the Federal Home Loan Bank (FHLB), deposits and principal
and interest payments on investment securities.

# Market Area and
Competition

We
are a community-oriented bank offering a variety of financial products and services to
meet the needs of the customers we serve. Our deposit gathering is concentrated in the
communities surrounding our 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 eight loan production offices located in Arizona,
Colorado, Florida, Minnesota and North Carolina whose sole purpose is to originate
commercial real estate and land and/or construction loans in their respective states. In
recent years, we have increased our investment in commercial real estate and land and
construction loans secured by properties located in other parts of the United States. The
five largest concentrations of loans outside our Primary Lending Market Area (excluding
warehouse mortgage lines of credit) are California ($130.5 million or 4.2% of the total
loan portfolio), South Carolina ($117.9 million or 3.8%), Texas ($83.9 million or 2.7%),
New York ($63.1 million or 2.0%) and the State of Washington ($56.0 million or 1.8%).

5

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Our
corporate headquarters are located in Lincoln, Nebraska, which is the state capital and
home of the University of Nebraska-Lincoln. The Primary Banking Market Area in which our
banking offices are located was once dominated by agriculture, but now consists of a
diverse blend of industries, urban centers and significant corporate investment. The
regions population is 1.9 million persons and more than 90% of the individuals in
our Primary Banking Market Area live in Nebraska. Population growth continues in the
region and, according to the latest Census Bureau estimates, Nebraska exhibited the second
highest population growth between 2003 and 2004 of all states in the northern Great Plains
area with populations of one million or more residents. The regions main
metropolitan areas of Omaha and Lincoln, as well as other mid-sized regional growth
centers scattered throughout our Primary Banking Market Area, lead the balance of the
region in net population growth. The U.S. Census Bureau reported the median household
income in Nebraska was estimated to be $41,406 in 2003, a 10.8% increase from 2000
compared to a national median household income growth rate of 5.0% for the same period.
Nebraskas cost of living index ranks the state as the tenth most affordable in the
country based on data from the third quarter of 2004.

The
nations continued economic recovery during 2004 contributed to Nebraskas
growing economic momentum despite a state budget deficit and only modest relief from a
continued severe drought which has impacted several states throughout the Midwest.
Nebraska non-farm employment growth has been relatively consistent and continues to
experience modest gains. Strong growth in the transportation, health care,
professional/business and financial services sectors, combined with a large and relatively
stable retail workforce, has helped to offset declines in the educational services area.
Unemployment rates in Nebraska have historically been approximately two to three
percentage points below national averages and typically rank the state among the lowest in
the country for unemployment. Nebraska unemployment finished 2004 at 3.6% compared to a
national level of 5.4%. After a record 2003, taxable retail sales through October 2004
have already outpaced the previous year by 7.8%. Sales of existing homes in
Nebraskas two leading urban markets (Omaha and Lincoln) continue near record
activity with major developments of new home construction in both communities. Median
sales prices of existing single-family homes at the quarter ended September 30, 2004 were
$134,100 and $139,600 for Omaha and Lincoln, respectively, and are well below national
levels of $188,500 and less than the Des Moines ($144,500), Kansas City ($152,300) and
Minneapolis ($219,800) metropolitan areas. Total Nebraska nonresidential and non-building
construction contracts slowed in 2004 from record levels in 2003; however, residential
construction continued to grow to over $1.65 billion, a 4.6% increase above 2003 record
levels. Major capital developments throughout Omaha and Lincoln and continued corporate
expansion of leading regional businesses, combined with other investment projects
scattered throughout the primary banking market region, are expected to contribute to a
modestly growing regional economy.

We
strengthened our market footprint within our existing Primary Banking Market Area
following the August 2004 acquisition of United Nebraska Financial Co. (UNFC),
the parent company of United Nebraska Bank (UNB) headquartered in Grand
Island, Nebraska. As a result of the acquisition, we added 16 banking offices in 11
Nebraska communities including Broken Bow, Burwell, Callaway, Columbus, Grand Island,
Holdrege, Lexington, North Platte, Omaha, ONeill and Ord. Four existing Bank offices
in Broken Bow, Columbus, North Platte and Ord were consolidated and the former UNB Omaha
office was closed. As a result, we improved our market share position to the top three in
nine of eleven former UNB communities. Virtually all of these communities serve as a
regional economic growth center for retail commerce, medical care and professional and
government services for local and surrounding area residents. Located generally in
agricultural areas of Greater Nebraska, unemployment rates have historically run at or
below state levels and many of the larger communities have diversified their industrial
employment mix to minimize cyclical trends in the agricultural economy.

6

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We
also expanded our loan production capabilities in early 2004 with the opening of a third
Colorado loan production office in Fort Collins. This growth was further supplemented
through the November 2004 purchase from First Indiana Bank of Indianapolis, Indiana of
four residential construction loan production offices located in Phoenix, Arizona;
Orlando, Florida; and Charlotte and Raleigh, North Carolina and outstanding loan balances
of $134.4 million. These additional offices will enable us to build upon our growing
commercial real estate and land and/or construction lending business and were located in
metropolitan areas known for economic growth and vitality. Five of our eight loan
production offices are located in the top ten fastest growing major metropolitan areas of
the country.

Fort
Collins, Colorado, just 62 miles north of Denver, is Colorados third largest
metropolitan area with a 2000 Census population of over 251,000 residents. Fort Collins
ranked as the fastest growing metropolitan area along Colorados Front Range during
the 1990s with a population growth rate of 35.1%. Together with nearby Loveland,
Fort Collins is the primary regional growth center of north central Colorado. Colorado
State University is the areas largest employer and leads a diverse mix of education,
health, retail and banking industries. Unemployment in December 2004 was 5.0%; moderately
below the national unemployment rate of 5.4%.

Phoenix,
Arizona, the 14th largest metropolitan area in the United States with over 3.25
million residents, ranks among the top three fastest growing metropolitan areas in the
nation with populations in excess of one million. The greater Phoenix area is a $50
billion marketplace driven by technology and is the corporate or regional headquarters for
Intel, Avnet, Motorola, AlliedSignal, Honeywell and Boeing Company. Nearly one-third of
all Phoenix jobs are in the service sector with nearly one-fourth of all jobs in wholesale
or retail trade. A strong manufacturing sector, especially in electronics, has ranked
Phoenix third in the nation among electronic production centers. The third quarter 2004
median sale price of an existing single-family home in Phoenix was $172,700. The Phoenix
metropolitan area is also home to Arizona State University. Unemployment in the Phoenix
metropolitan area was 3.3% in December 2004.

Ranked
as the 27th largest metropolitan area in the United States, Orlando, Florida
had 1.6 million people in 2000; an increase of 34.3% from 1990. Orlando is considered the
sixth fastest growing city in the nation. Tourism, lead by Walt Disney World, Epcot Center
and Sea World, is a $21.8 billion annual industry followed by high technology at $9.0
billion. Orlandos cost of living index ranks the community below national levels.
The median sales price for an existing home in the third quarter of 2004 was $180,500.
Leading employment sectors include trade, transportation and utilities (181,600
employees), leisure and hospitality (178,600), professional and business services
(162,000), government (108,800) and education and health services (99,100). The University
of Central Florida, with over 42,000 students, is located in Orlando. December 2004
unemployment for the Orlando metropolitan area was 3.8%.

7

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Charlotte,
North Carolina is the nations 33rd largest metropolitan area with nearly
1.5 million people in 2000. During the 1990s, Charlottes population grew 29.0%
ranking it among the ten fastest growing cities (one million or more in population) in the
United States. By 2013, the metropolitan area is expected to have 2.1 million people.
Charlotte has more headquartered Fortune 500 companies than all but five other U.S.
cities. Considered the nations second largest banking center, Charlottes
largest industry segment is wholesale trade followed by services, manufacturing and
construction. Over 12,600 residential units were built in Charlotte in 2004 totaling $1.6
billion. Unemployment was 5.2% in December 2004.

In
2000, Raleigh, North Carolina was ranked as the 40th largest metropolitan area
in the United States with nearly 1.2 million people. Its growth rate during the
1990s of 38.9% tied with Atlanta, Georgia as the fourth fastest growing major
metropolitan area in the U.S. The tri-city metropolitan area of Raleigh, Durham and Chapel
Hill, North Carolina has averaged growth of nearly 3,500 people each month since 2000.
Forbes Magazine ranked Raleigh-Durham as the second best city in the country for business.
The tri-city area is home to North Carolina State University, the University of North
Carolina and Duke University. Education and health care is the areas leading
employment industry followed by trade/transportation/utilities, professional and business
services and manufacturing. The median sales price for residential homes was $184,800 in
the third quarter 2004. The unemployment rate in Raleigh was 3.3% in December 2004.

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
continued consolidation of the banking industry as locally based institutions have been
acquired by large regional and nationally based financial institutions.

Many
of these financial service providers are significantly larger than us and have greater
financial resources. Our competition for loans comes principally from commercial banks,
savings banks, credit unions, mortgage brokers, mortgage-banking companies and insurance
companies. Our most direct competition for deposits has historically come from commercial
banks, savings 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.

# Lending Activities

Loan
Portfolio Composition. At December 31, 2004, our total loans receivable
amounted to $3.1 billion, of which $418.3 million or 13.5% consisted of one-to-four family
residential loans. Our investment in one-to-four family residential loans decreased $140.9
million, or 25.2%, as implementation of our lending strategy has caused us to increase our
emphasis on construction, second mortgage residential, consumer, commercial real estate
and land, business, multi-family residential and agricultural loans as well as warehouse
mortgage lines of credit. Our emphasis on higher yielding and/or shorter term loans has
also allowed us to reduce the weighted average contractual maturity of our loan portfolio.
At December 31, 2004, 77.4% of our total loan portfolio had contractual maturities of 10
years or less compared to 64.9% at December 31, 2003. Additionally, 64.0% of our total
loan portfolio had adjustable interest rates at December 31, 2004 compared to 63.0% at
December 31, 2003.

8

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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 include, but are not limited to, economic conditions, monetary
policies of the Federal Government, including the Board of Governors of the Federal
Reserve System (Federal Reserve Board) and legislative tax policies.

9

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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:

|                                   | 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 loans                     |             
|                                  
|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   |             
|                                  

10

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Contractual
Terms to Final Maturities. The following table shows the scheduled
contractual maturities of our loans as of December 31, 2004, before giving effect to net
items. Demand loans, loans having no stated schedule of repayments and no stated maturity,
and overdrafts are reported as due in one year or less. The amounts shown below do not
take into account loan prepayments.

|(Dollars in thousands)                  | One-to-FourFamilyResidential | Second Mortgage Residential | Multi-FamilyResidential | CommercialReal Estate andLand | ResidentialConstruction | CommercialConstruction
|--------------------------------------- | ---------------------------- | --------------------------- | ----------------------- | ----------------------------- | ----------------------- | ----------------------
|                                       
|Amounts due after December 31, 2004 in: |                              |                             |                         |                               |                         |                       
|One year or less                        |                              |                             | $                       | 1,579                         |                         | $                     
|After one year through two years        |                              |                             |                         | 1,031                         |                         |                       
|After two years through three years     |                              |                             |                         | 2,195                         |                         |                       
|After three years through five years    |                              |                             |                         | 15,688                        |                         |                       
|After five years through ten years      |                              |                             |                         | 15,086                        |                         |                       
|After ten years through fifteen years   |                              |                             |                         | 29,236                        |                         |                       
|After fifteen years                     |                              |                             |                         | 353,455                       |                         |                       
|                                       
|Total (1)                               |                              |                             | $                       | 418,270                       |                         | $                     
|                                       

|(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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(Dollars in thousands)                  | Agriculture | Business Loans | Agriculture -Operating | WarehouseMortgageLines of Credit | Consumer | Total
|--------------------------------------- | ----------- | -------------- | ---------------------- | -------------------------------- | -------- | -----
|                                       
|Amounts due after December 31, 2004 in: |             |                |                        |                                  |          |      
|One year or less                        |             |                | $                      | 6,574                            |          | $    
|After one year through two years        |             |                |                        | 2,448                            |          |      
|After two years through three years     |             |                |                        | 2,487                            |          |      
|After three years through five years    |             |                |                        | 10,005                           |          |      
|After five years through ten years      |             |                |                        | 35,615                           |          |      
|After ten years through fifteen years   |             |                |                        | 5,067                            |          |      
|After fifteen years                     |             |                |                        | 4,634                            |          |      
|                                       
|Total (1)                               |             |                | $                      | 66,830                           |          | $    
|                                       

|(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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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The
following table shows the dollar amount of all loans, including loans held for sale,
before net items, due after one year from December 31, 2004 as shown in the preceding
table, which have fixed interest rates or which have floating or adjustable interest
rates.

|(Dollars in thousands)          | Fixed-Rate | Floating or Adjustable-Rate | Total
|------------------------------- | ---------- | --------------------------- | -----
|One-to-four family residential  |            |                             | $    
|Second mortgage residential     |            |                             |      
|Multi-family residential        |            |                             |      
|Commercial real estate and land |            |                             |      
|Residential contruction         |            |                             |      
|Commercial construction         |            |                             |      
|Agriculture                     |            |                             |      
|Business loans                  |            |                             |      
|Agriculture - operating         |            |                             |      
|Consumer                        |            |                             |      
|                               
|Total                           |            |                             | $    
|                               

Origination,
Purchase, Sale and Servicing of Loans. Our lending activities are subject
to underwriting standards and loan origination procedures established by our Board of
Directors and management. Applications for mortgages and other loans are taken at our
banking and loan production offices. In the past, we relied on a network of loan
correspondents and brokers to originate a substantial part of our loans. In recent years
we have 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 single-family residential
loans to supplement our origination efforts. A substantial portion of such loans consists
of fixed-rate, single-family residential mortgage loans which we sell into the secondary
market with servicing retained.

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

Generally,
we originate adjustable-rate mortgage loans for retention in our portfolio. It is our
current policy to sell substantially all the single-family, fixed-rate residential first
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 FHLB 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 FHLB pursuant to forward sale commitments, with
delivery being required in approximately 90 days. We generally agree to deliver a somewhat
smaller dollar amount of loans in the event that not all the loans for which applications
are submitted actually close. Loans are delivered pursuant to such sale contracts upon
their origination or purchase and are not aggregated for sale as loan packages. As a
result, we typically do not have a significant amount of loans held for sale at any given
point in time. We recognize, at the time of disposition, the gain or loss on the sale of
the loans. The gain or loss is based on the difference between the net proceeds received
and the carrying value of the loans sold. During 2002, 2003 and 2004, we increased our
purchases of fixed-rate, single-family residential first mortgage loans for immediate sale
as we continued to increase the size of our loan servicing portfolio. While we purchased
$15.6 million of such loans in 2000, in 2001, 2002, 2003 and 2004 such purchases increased
to $195.4 million, $339.0 million, $324.1 million and $159.4 million, respectively.

12

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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 second mortgage residential, 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. The following primary
lending relationships existed at December 31, 2004:

| | Charleston
and Columbia, South Carolina. Of the primary relationships, the first is
with a mortgage banker in the Charleston and Columbia, South Carolina markets. Pursuant
to the relationship with this mortgage banker, we have purchased loans made to local
builders to finance the construction of residential properties. Under the terms of our
arrangement, we service these loans and the mortgage banker shares 50% of any losses
incurred. As of December 31, 2004, this relationship consisted of 620 individual loans
with an aggregate balance of $127.0 million. The outstanding loan balance under this
relationship (disbursed loan proceeds) was $70.6 million at December 31, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Maitland
(Orlando), Florida. The second relationship is with a mortgage banker in
the Maitland (Orlando), Florida area which began in April 2003. Pursuant to this
relationship, we have purchased loans made to individual borrowers to finance the
construction of single-family residential properties. Under the terms of this
relationship, all loans purchased are pre-approved for permanent financing following the
construction phase. Disbursements are made on the purchased loans by others as the
construction phase progresses. As of December 31, 2004, this relationship encompassed 455
individual loans with an aggregate balance of $67.3 million. The outstanding loan balance
under this relationship (disbursed loan proceeds) was $31.5 million at December 31, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| | Birmingham,
Alabama. The third relationship is with a financial institution
headquartered in Birmingham, Alabama and involves the purchase of generally a 50% loan
participation interest in residential construction and commercial real estate and land
loans extended to builders. Currently, the loans are secured by properties located in
Birmingham, Alabama; Atlanta, Georgia and Las Vegas, Nevada. At December 31, 2004, this
relationship consisted of 397 individual loans with an aggregate balance of $36.0
million. The outstanding loan balance under this relationship (disbursed loan proceeds)
was $26.7 million at December 31, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At
December 31, 2004 and 2003, we were servicing $1.1 billion and $956.7 million,
respectively, of loans for others, primarily consisting of one-to-four family residential
loans sold by us to investors. In recent years, we began selling substantially all
fixed-rate 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, contacting delinquent borrowers, supervising
foreclosures and property dispositions in the event of unremedied defaults, remitting
certain insurance and tax payments on behalf of the borrowers and generally administering
the loans. The gross servicing fee income from loans sold is generally 0.25% to 0.50% of
the total balance of each loan serviced.

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 $38.5 million at December
31, 2004), 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, 2004. At
December 31, 2004, our six largest credit relationships with an individual borrower and
related entities consisted of loans that total $25.4 million, $24.9 million, $20.0
million, $20.0 million, $19.4 million and $18.9 million. A brief summary of these six
relationships follows:

| |  | The
largest credit is a $25.4 million relationship collateralized by a 364 unit apartment
complex located in Colorado Springs, Colorado. This relationship consists of three loans:
a $12.6 million one-year adjustable-rate loan with a five-year term, a $12.7 million
fixed-rate loan with a five-year term and a $100,000 fixed-rate loan with a five- year
term. These loans are classified as multi-family residential loans in the loan
composition table.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
second largest credit relationship consists of a business revolving line of credit for
$12.0 million and an equipment term note of $12.9 million. Both loans are secured by the
assets of four related companies in Lincoln, Nebraska engaged in asphalt and concrete
paving and utilities construction. The $12.0 million adjustable-rate revolving line of
credit, which matures in September 2006, is intended to finance work-in-process, accounts
receivable and inventory. The $12.9 million adjustable-rate term note, which matures in
September 2009, consolidated existing equipment loans with other financial institutions.
At December 31, 2004, the total outstanding balance on the line of credit was $12.0
million. These loans are classified as business loans in the loan composition table.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| |  | The
third largest credit relationship consists of two $10.0 million business revolving lines
of credit secured by real estate and other business assets to a borrower who owns an
excavation and construction company in Lincoln, Nebraska. One $10.0 million line is
intended to finance work-in-process, accounts receivable and inventory. The other $10.0
million line is intended to finance equipment. Both loans have adjustable interest rates
and mature in September 2006. At December 31, 2004, the total outstanding balance for
both lines of credit aggregated $575,000. These lines of credit are classified as
business loans in the loan composition table.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
fourth largest credit relationship consists of two adjustable-rate business revolving
lines of credit, one for $19.75 million and one for $250,000 to four related companies
located in Lincoln, Nebraska. The $19.75 million line of credit is used to purchase real
estate tax sale certificates from various governmental entities in several states while
the $250,000 line of credit is used to meet operating needs of the borrower. The borrowers
interest in the real estate tax sale certificates purchased and all other business assets
of the borrower are used to secure both lines of credit. At December 31, 2004, the total
outstanding balance for both lines of credit aggregated $14.3 million. These lines of
credit are classified as business loans in the loan composition table.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
fifth largest credit relationship consists of a $19.4 million credit relationship to
construct a 323 unit apartment complex to be built in San Antonio, Texas. In addition to
being secured by real estate, we are also secured by letters of credit totaling $1.1
million. This credit relationship carries a fixed interest rate for the first three years
with annual adjustments thereafter and matures in September 2009. At December 31, 2004,
$1,000 had been disbursed under this credit relationship as this is a new loan which is
classified as a commercial construction loan in the loan composition table.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
sixth largest credit relationship is an $18.9 million participation interest in the
construction financing of a 442,576 square foot retail center located in Omaha, Nebraska.
We are one of three financial institutions participating in this $67.3 million
construction project. This loan has an adjustable-rate and matures in August 2005. At
December 31, 2004, a total of $18.0 million had been disbursed under this credit
relationship. This loan is classified as a commercial construction loan in the loan
composition table.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each of these relationships was
performing in accordance with its terms and conditions as of December 31, 2004.

15

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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, |                        
|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:                 |                        
|Mortgage, business 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, |                        
|end of year                                |                        
|                                          

|(1) | Reflects
amounts advanced and repaid under such lines of credit during the years presented.
|--- | -------------------------------------------------------------------------------------------

|(2) | Substantially
all of these loans were acquired from mortgage bankers and sold to Fannie Mae, Freddie
Mac or          the Federal Home Loan Bank 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
the allowance for loan losses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

16

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One-to-Four
Family Residential Mortgage Lending. We offer both fixed-rate and
adjustable-rate loans with maturities of up to 30 years secured by single-family
residences. Single-family mortgage loan originations are generally obtained from our
in-house loan representatives, from existing or past customers, from mortgage bankers and
through referrals from members of our local communities. At December 31, 2004, our
one-to-four family residential mortgage loans totaled $418.3 million or 13.5% of total
loans. Of such amount, $224.2 million, or 53.6%, related to loans secured by properties
located outside our Primary Lending Market Area and approximately 79.3% had adjustable
rates. The average loan size of our one-to-four family residential mortgage portfolio was
$108,000 at December 31, 2004. A total of $1.9 million, or 0.46%, of our one-to-four
family residential mortgage loans at December 31, 2004 were 90 days or more delinquent
compared to $1.5 million, or 0.26%, at December 31, 2003. During the years ended December
31, 2004 and 2003, we charged-off an aggregate of $16,000 and $6,000 of one-to-four family
residential mortgage loans, respectively.

We
currently originate or purchase adjustable-rate, single-family residential mortgage loans
with terms of up to 30 years and interest rates which generally adjust one to seven years
from the outset of the loan and thereafter annually for the duration of the loan. The
interest rates for such adjustable-rate loans are 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, residential mortgage loans helps reduce our
exposure to increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest rates rise,
the underlying payments of the borrower rise, thereby increasing the potential for
default. Periodic and lifetime caps on interest rate increases help to reduce the risks
associated with adjustable-rate loans but also limit the interest rate sensitivity of such
loans.

Generally,
we originate single-family residential mortgage loans in amounts up to 80% of the lower of
the appraised value or the selling price of the property and up to 100% if private
mortgage insurance is obtained. Mortgage loans originated by us generally include
due-on-sale clauses which provide us with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the property
without our consent. We require fire, casualty, title and, in certain cases, flood
insurance on properties securing real estate loans made by us.

Second
Mortgage Residential Lending. Second mortgage loans declined to $255.2
million, or 8.3% of the total loan portfolio, at December 31, 2004 compared to $258.1
million, or 11.6% of the total loan portfolio, at December 31, 2003. Although the purchase
for retention in our portfolio of fixed-rate second mortgage residential loans is contrary
to our general policy of pursuing adjustable-rate loans, the expected yields and lives of
the fixed-rate loans justified their inclusion in our loan portfolio. At December 31,
2004, $212.2 million, or 83.1% of our second mortgage residential loans, were secured by
properties located outside our Primary Lending Market Area. The average loan size of our
second mortgage residential loan portfolio was $35,000 at December 31, 2004. Of the second
mortgage residential loans outstanding at December 31, 2004, approximately 94.3% were
fixed-rate loans. At December 31, 2004, $739,000, or 0.29%, were 90 or more days
delinquent compared to $224,000, or 0.09%, at December 31, 2003. During the years ended
December 31, 2004 and 2003, we charged-off an aggregate of $520,000 and $107,000,
respectively, of second mortgage residential loans.

17

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Multi-Family
Residential Real Estate.We invest in multi-family residential loans that are
secured by multi-family housing units generally located in our Primary Lending Market
Area. At December 31, 2004, our multi-family residential loan portfolio totaled $142.5
million, or 4.6% of the total loan portfolio, compared to $99.1 million, or 4.5% of the
total loan portfolio, at December 31, 2003. At December 31, 2004, 86.6% of the
multi-family residential loans were secured by properties located in our Primary Lending
Market Area. The average loan size of our multi-family residential loan portfolio was $1.8
million at December 31, 2004 and 54.0% of our multi-family residential loans had
adjustable rates of interest. At December 31, 2004, $2.4 million, or 1.7% of our
multi-family residential loans, were 90 or more days delinquent. We had no multi-family
residential loans 90 or more days delinquent at December 31, 2003. We had no charge-offs
of multi-family residential loans during the years ended December 31, 2004 and 2003.

The
largest multi-family residential credit relationship at December 31, 2004 is a $25.4
million relationship collateralized by a 364 unit apartment complex located in Colorado
Springs, Colorado. This relationship consists of three loans: a $12.6 million one-year
adjustable-rate loan with a five-year term, a $12.7 million fixed-rate loan with a
five-year term and a $100,000 fixed-rate loan with a five-year term. These loans were
performing in accordance with their loan terms at December 31, 2004.

Commercial
Real Estate and Land Lending. We invest in commercial real estate loans
that are secured by properties generally used for business purposes, such as office
buildings and retail facilities, and land being held for commercial and residential
development. The properties securing these loans are located primarily in Lincoln and
Omaha, Nebraska and in selected areas outside of our Primary Lending Market Area. We have
increased our involvement in this lending category as part of our strategy to increase our
investment in loans with higher yield and/or shorter expected average lives. We have also
increased our capacity to originate such loans internally with the hiring of several
experienced commercial real estate lenders as well as the opening of loan production
offices in Arizona, Colorado, Florida, Minnesota and North Carolina.

Our
underwriting procedures provide generally that commercial real estate loans (as well as
multi-family, land and commercial construction loans) may be made in amounts up to 80% of
the value of the property if it is located within our Primary Lending Market Area and 75%
of the value if it is outside our Primary Lending Market Area. Any loan exceeding such
loan-to-value ratio must be supported by documentation of the relevant factors justifying
the deviation which is reviewed by the Board of Directors on a quarterly basis. The
following is a summary of lending guidelines concerning our commercial real estate
lending:

| |  | The
total of commercial real estate loans exceeding established loan-to-value limits may not
exceed 30% of our risk-based capital. At December 31, 2004, we were in compliance with
established guidelines related to risk-based capital as these loans totaled 18.0% of our
risk-based capital.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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| |  | The
total of all commercial real estate loans, land loans related to commercial development,
multi-family residential loans and commercial construction loans cannot exceed 50% of our
total loan portfolio. At December 31, 2004, 33.1% of our total loan portfolio consisted
of such loans. Furthermore, no more than 40% of such loans can be secured by properties
located outside of our Primary Lending Market Area. At December 31, 2004, 19.4% of such
loans were secured by properties outside our Primary Lending Market Area, with the
highest concentration of such loans in California (4.2%).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Such
loans are currently originated with various indices such as U.S. Treasury CMT, Libor or
prime rate, plus a margin, with various terms and with interest rates which generally
adjust every three or five years. The majority of these loans have 20 or 25 year
amortization schedules and require payment of the remaining principal at maturity. Our
adjustable-rate loans generally do not have periodic limits on the increases or decreases
in the interest rate that may be affected at the time of the adjustment other than
lifetime floor and ceiling limits.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Most
commercial real estate and land and multi-family residential loans are underwritten by
our centralized loan underwriting department. In underwriting these loans, we consider
all aspects of the credit profile of each borrowers ability to repay the debt. We
consider the borrowers income, probable continuation of income and credit history.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Loans
in excess of $10.0 million, in addition to management level approval, must also be
approved by our Board of Directors.
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | We
have generally required that the properties securing these real estate loans have debt
service coverage ratios (the ratio of earnings before debt service to debt service) of at
least 125%. Personal guarantees are generally required. In addition, we require that
security instruments contain affirmative language concerning the prospective borrowers
responsibility for compliance with laws and regulations (including environmental, health
and safety) and for protecting the environmental conditions of the security property. A
phase one environmental assessment report, prepared in conformance with our environmental
risk policy, is normally obtained if the loan is in excess of $1.0 million or if there is
any indication of possible contamination at the security property.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
commercial real estate and land loan portfolio at December 31, 2004 was $597.1 million, or
19.3% of total loans, compared to $449.2 million, or 20.3% of total loans, at December 31,
2003. At December 31, 2004, $468.2 million, or 78.4% of our commercial real estate and
land loans, were secured by properties located within our Primary Lending Market Area. The
average loan size of our commercial real estate loan portfolio at December 31, 2004 was
$631,000. At December 31, 2004, 78.7% of our commercial real estate and land loans had
adjustable rates. A total of $707,000, or 0.12%, of our commercial real estate and land
loans at December 31, 2004 were 90 days or more delinquent. We had no commercial real
estate and land loans delinquent 90 or more days at December 31, 2003. During the years
ended December 31, 2004 and 2003, we charged-off an aggregate of $0 and $330,000,
respectively, of commercial real estate and land loans.

The
largest commercial real estate loan outstanding at December 31, 2004 is a $16.3 million
10-year adjustable-rate loan and a $3.0 million adjustable-rate operating line of credit
secured by a 59 bed acute care hospital located in Lincoln, Nebraska dedicated to heart
surgeries and related procedures. These loans were performing in accordance with their
terms at December 31, 2004.

19

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In
recent years we have increased our lending to finance the acquisition of land for
residential and commercial real estate projects. Such land loans totaled $151.2 million,
or 4.9% of total loans, at December 31, 2004 ($106.2 million of which had been disbursed
at such date). The average size of our land loans at December 31, 2004 was $724,000.

During
2004, we refinanced a land development loan and a revolving line of credit loan
aggregating $20.0 million which are secured by a 290 acre parcel of land in Lincoln,
Nebraska. At December 31, 2004, a total of $10.8 million had been disbursed to the
borrower. The loans were performing in accordance with their terms at December 31, 2004.

Loans
secured by commercial real estate and multi-family residential real estate properties
generally involve larger principal amounts and a greater degree of risk than single-family
residential mortgage loans. Payments on loans secured by multi-family and commercial real
estate properties are often dependent on the successful operation or management of the
properties. Repayment of such loans may be subject to adverse conditions in the real
estate market or the economy and a concentration of loans in a geographic region may be
subject to greater risk because of the potential for adverse economic conditions affecting
that region. We seek to minimize these risks through our underwriting standards.

Construction
Lending. We offer residential construction loans for either pre-sold houses
(a purchase contract has been signed) or speculative houses (properties for which no buyer
yet exists). We are also involved in commercial real estate construction lending as well
as purchasing participation interests in such loans. Approximately 60% of our residential
construction loans are for pre-sold houses. We originate our residential construction
loans within our Primary Lending Market Area typically through direct contact with home
builders. Most of such loans involve properties located in our Primary Lending Market
Area. During the past few years, we have become involved in purchasing residential
construction loans and participation interests in such loans secured by properties located
outside our Primary Lending Market Area, generally in more densely populated cities in
South Carolina, Georgia, Alabama and Nevada. As part of the increased emphasis on
construction lending, we have, in recent years, hired several experienced loan originators
in order to increase our capabilities in this type of lending. Additionally, on November
1, 2004, we completed the purchase of all non-Indiana residential construction loan
production offices from First Indiana Bank. The purchase, which included $134.4 million of
outstanding residential construction loans against forward commitments of $264.5 million,
also included loan production offices in Phoenix, Arizona; Charlotte, North Carolina;
Raleigh, North Carolina and Orlando, Florida. The following summarizes the residential
construction loan portfolios at each of the loan production offices acquired from First
Indiana Bank:

| | Phoenix,
Arizona. At December 31, 2004, there were 131 individual residential
construction loans to individuals and local builders outstanding. The aggregate balance
of these loans was $52.3 million ($24.6 million had been disbursed) at December 31, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

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| | Charlotte,
North Carolina. At December 31, 2004, there were 205 individual
residential construction loans to individuals and local builders outstanding. The
aggregate balance of these loans was $63.1 million ($25.4 million had been disbursed) at
December 31, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Raleigh,
North Carolina. At December 31, 2004, there were 114 individual
residential construction loans to individuals and local builders outstanding. The
aggregate balance of these loans was $56.7 million ($25.1 million had been disbursed) at
December 31, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Orlando,
Florida. At December 31, 2004, there were 107 individual residential
construction loans outstanding to both individuals and local builders. The aggregate
balance of these loans was $98.9 million ($49.3 million had been disbursed) at December
31, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following is a summary of our
lending guidelines for residential construction loans:

| |  | Whether
we originate or purchase residential construction loans, we review all plans,
specifications and cost estimates and require that the contractor be deemed reputable.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
amount of construction advances to be made, together with the sum of previous
disbursements, may not exceed the percentage of completion of the construction.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Such
loans generally have terms not exceeding 18 months, have loan-to-value ratios of 90% or
less of the appraised value upon completion and do not require the amortization of the
principal during the term of the loan.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
loans are generally made with adjustable rates of interest based on the Wall Street
Journal prime rate plus a margin.
| | - | -------------------------------------------------------------------------------------------------------------------------

At
December 31, 2004, residential construction loans (including participation interests)
totaled $601.1 million (including undisbursed loans in process), or 19.5%, of our total
loan portfolio. Of such amount, $156.7 million, or 26.1%, related to loans secured by
properties located outside our Primary Lending Market Area. The average loan size of our
residential construction loans was $304,000 at December 31, 2004. A total of 83.6% of our
residential construction loans had adjustable rates of interest at December 31, 2004. At
December 31, 2004, $2.3 million, or 0.38%, of our total residential construction loan
portfolio was 90 or more days delinquent compared to $1.0 million, or 0.41%, at December
31, 2003. During the years ended December 31, 2004 and 2003, we charged-off an aggregate
of $138,000 and $13,000, respectively, of residential construction loans.

We
have increased significantly our involvement in commercial construction lending during the
last three years. Most of such loans are extended to build office buildings, retail
centers or apartment buildings. As a result of such efforts, commercial construction loans
totaled $282.4 million (including undisbursed loans in process) at December 31, 2004, or
9.1% of total loans, compared to $154.2 million, or 7.0% of total loans, at December 31,
2003. The average loan size of our commercial construction loan portfolio was $3.7 million
at December 31, 2004. At December 31, 2004, $50.3 million, or 17.8%, of our commercial
construction loans were secured by properties located outside our Primary Lending Market
Area. Of the commercial construction loans outstanding at December 31, 2004, approximately
41.4% had adjustable rates. At December 31, 2004 and 2003, we had no commercial
construction loans 90 or more days delinquent. Additionally, there were no commercial
construction loans charged-off during the years ended December 31, 2004 and 2003.

21

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At
December 31, 2004, our largest commercial construction loan was an $18.9 million
participation in the construction financing of a 442,576 square foot retail center located
in Omaha, Nebraska. We are one of three financial institutions participating in this $67.3
million construction project. At December 31, 2004, a total of $18.0 million had been
disbursed under this credit relationship. This loan was performing in accordance with its
terms at December 31, 2004.

Risk
of loss on a construction loan 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 residential properties. If the appraised 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 to finance agricultural production activities and to
purchase or refinance agricultural real estate. Agricultural real estate loans are made to
farmers and ranchers to purchase or refinance real estate used in agricultural activities.
At December 31, 2004, our agricultural real estate loans totaled $66.8 million or 2.2% of
the total loan portfolio. At December 31, 2004, 76.6% of our agricultural real estate
loans had adjustable interest rates. The average loan size of our agricultural real estate
loan portfolio was $112,000 at December 31, 2004. At December 31, 2004, $349,000 or 0.52%,
of our agricultural real estate loans were 90 or more days delinquent. We had no
charge-offs of agricultural real estate loans during the year ended December 31, 2004.

Agricultural
operating loans are made to finance the day-to-day operations of agricultural production
activities. At December 31, 2004, our agricultural operating loans totaled $71.2 million
or 2.3% of the total loan portfolio. At December 31, 2004, 73.8% of our agricultural
operating loans had adjustable interest rates. The average loan size of our agricultural
operating loan portfolio was $57,000 at December 31, 2004. At December 31, 2004, $1,000 of
our agricultural operating loans was 90 or more days delinquent. We charged-off $64,000 of
agricultural operating loans during the year ended December 31, 2004.

22

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Warehouse
Mortgage Lines of Credit. We are actively involved in originating revolving
lines of credit to mortgage brokers. The lines are drawn upon by such companies to fund
the origination of single-family residential 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.
We fund a portion of the advances using short-term borrowings from the FHLB. Maximum
amounts permitted to be advanced by us under existing warehouse mortgage lines of credit
range in amounts from $2.5 million to $55.0 million. Our warehouse mortgage lines of
credit totaled $132.9 million, or 4.3% of the total loan portfolio, at December 31, 2004
compared to $78.8 million, or 3.6% of the total loan portfolio, at December 31, 2003. With
respect to our largest line of credit ($55.0 million), we have arranged participation
interests aggregating $20.0 million to other financial institutions thus reducing to $35.0
million our line of credit in order to limit risk and to ensure compliance with our
loans-to-one borrower regulatory limitation. At December 31, 2004, the largest outstanding
amount under an individual warehouse mortgage line was $16.1 million. Additionally, at
December 31, 2004, unused warehouse mortgage lines of credit totaled $439.6 million
compared to unused lines of $493.1 million at December 31, 2003. Line of credit advances
totaled $3.1 billion for the year ended December 31, 2004 compared to $5.5 billon for the
year ended December 31, 2003, which is the result of a reduced level of refinancing
activity during the year ended December 31, 2004 compared to the year ended December 31,
2003 which was partially offset by an increased number of brokers with which we do
business. At December 31, 2004 and December 31, 2003, there were no warehouse mortgage
lines of credit 90 or more days delinquent. During the years ended December 31, 2004 and
2003, we charged-off an aggregate of $20,000 and $110,000, respectively, of warehouse
mortgage lines of credit.

Business
Lending. Business loans are made predominantly to small and mid-sized
businesses located within our Primary Banking Market Area. We are increasing our focus on
such lending in conjunction with our overall increased emphasis on loans with higher
yields and/or shorter expected lives. At December 31, 2004, we had $142.7 million in
business loans which amounted to 4.6% of total loans receivable compared to $64.5 million
or 2.9% of total loans receivable at December 31, 2003. Of the business loans outstanding
at December 31, 2004, approximately 60.2% had adjustable rates. At December 31, 2004,
$771,000 or 0.54% of our total business loan portfolio was 90 or more days delinquent
compared to $219,000 or 0.34% at December 31, 2003. For the years ended December 31, 2004
and 2003, we charged-off an aggregate of $57,000 and $5,000, respectively, of business
loans.

The
largest credits consists of a business revolving line of credit for $12.0 million and an
equipment term note of $12.9 million. Both loans are secured by the assets of four related
companies in Lincoln, Nebraska engaged in asphalt and concrete paving and utilities
construction. The $12.0 million revolving line of credit is intended to finance
work-in-process, accounts receivable and inventory. This line of credit carries an
adjustable interest rate and matures in September 2006. The $12.9 million term note was
executed to consolidate existing equipment loans with other financial institutions and
carries an adjustable interest rate. This note matures in September 2009. At December 31,
2004, the total outstanding balance for both lines of credit aggregated $24.9 million.

23

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Consumer
and Other Lending. Consumer loans, consisting primarily of home equity,
home improvement and automobile loans amounted to $379.0 million or 12.3% of our total
loan portfolio at December 31, 2004. We generally offer home equity loans and lines of
credit in amounts up to $100,000 with a term of 15 years or less and a loan-to-value ratio
up to 100% of value. We also offer home improvement loans in amounts up to $100,000 with a
term of 15 years or less and a loan-to-value ratio up to 100% of value. A substantial
portion of our home improvement loans consist of participation interests we have purchased
from a third party. Under the terms of our arrangement with this third party, 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. During 2004, we purchased $22.7 million of such loans and at December 31, 2004,
we held $56.4 million of loans purchased under such arrangement. 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 73 new and used automobile dealers located primarily in Lincoln and Omaha,
Nebraska. During 2004, we purchased approximately $26.7 million of such loans. 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. Upon closing of the loan by the dealer, the loan is purchased by us. Our
consumer loan portfolio also includes recreational vehicle, boat, motorcycle and other
unsecured loans.

Unsecured
loans and loans secured by rapidly depreciating assets, such as automobiles, entail
greater risks than single-family residential mortgage loans. In such cases, repossessed
collateral, 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. At December 31, 2004, $1.1 million, or 0.30% of our consumer
loan portfolio, was 90 or more days delinquent compared to $700,000, or 0.23%, at December
31, 2003. For both years ended December 31, 2004 and 2003, we charged-off $1.4 million of
consumer loans.

Loan
Commitments. At December 31, 2004, we had issued commitments totaling
$834.8 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 to extend credit do not necessarily represent
future cash requirements since many of the commitments may expire without being drawn.

Derivative
Financial Instruments. The Company enters 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
and are recorded at their fair value in other assets on the Consolidated Statements of
Financial Condition. Changes in fair value are recorded in the net gain on loans held for
sale category on 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, 2004. 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. Rate lock commitments expose the Company to interest rate risk.

24

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The
Company manages the interest rate risk by entering into forward sales commitments, which
are also defined as derivatives under SFAS No. 133, and are recorded at their fair value
in the other liabilities category on the Consolidated Statements of Financial Condition,
with changes in fair value reported in net gain on loans held for sale on the Consolidated
Statements of Income. Their fair value is based on a quoted premium or penalty that would
be received or paid if we exited the forward position at December 31, 2004.

Loan
Approval Procedures and Authority. Our Board of Directors establishes
lending policies. All general lending procedures are set on an ongoing basis by the
Asset/Liability Committee 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 Financial Analysis
Manager. Under policies established 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.

# Delinquent Loans,
Classified Assets and Real Estate Owned

Delinquencies
and Classified Assets.Reports listing all delinquent accounts are generated and
reviewed by management on a monthly basis. These reports include information regarding all
loans 30 days or more delinquent and all real estate owned. These reports are also
provided to the 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. We generally send the borrower a written notice of non-payment
after the loan is first past due. Our loan recovery guidelines provide that telephone,
written correspondence and/or face-to-face contact will be attempted to ascertain the
reasons for delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to commencing legal action, we will attempt to obtain full
payment or work out a repayment schedule with the borrower. In the event payment is not
then received or the loan not otherwise satisfied, additional letters and telephone calls
generally are made. If the loan is still not brought current or satisfied and it becomes
necessary for us to take legal action, which typically occurs after a loan is 90 days or
more delinquent, we will commence recovery proceedings against all property that secures
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.

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. Problem 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.

25

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When
we classify one or more assets, or portions thereof, as substandard,
doubtful or loss, we establish a valuation allowance for loan
losses in an amount deemed prudent by management based on the specific facts of the asset.
In addition to these specific valuation allowances, we establish a general valuation
allowance to absorb losses which exist in the loan portfolio but which have not been
specifically identified. To quantify this general valuation allowance, we segment the loan
portfolio by loan type and apply loss factors to develop our allowance levels. These loss
factors are developed using our historical loan loss experience for each group of loans as
further adjusted for specific documented factors, including the following:

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

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

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

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

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

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

| |  | Changes
in credit concentration.
| | - | --------------------------------

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
Asset Classification Committee is composed of the following officers of the Bank: Chief
Executive Officer, Chief Operating Officer, Chief Credit Officer, Director of Lending,
Chief Financial Officer, the Assistant Director of Lending, Controller, Financial Analysis
Manager and Regulatory Reporting Accountant. The Asset Classification Committee reviews
and classifies assets no less frequent than quarterly and the Board of Directors reviews
the results of the reports on a quarterly basis. At December 31, 2004 and 2003, we had
$29.3 million and $10.4 million, respectively, of assets classified as
substandard which consisted of real estate owned, single-family residential
mortgage, residential construction, business and consumer loans. Non-accrual loans are
those loans 90 days or more delinquent. At December 31, 2004 and 2003, substandard assets
included in loans 90 days or more delinquent were $10.2 million and $3.6 million,
respectively. At such dates, we had no loans classified as doubtful or
loss. In addition, as of December 31, 2004 and 2003, we had $36.9 million and
$35.3 million, respectively, of loans designated special mention.

26

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Delinquent
Loans.  The following table shows the delinquencies in our loan portfolio as of the dates
indicated:

|                                    | December 31, 2004 | December 31, 2003
|----------------------------------- | ----------------- | -----------------
|
|
|One-to-four family residential      |                   |                  
|Second mortgage residential         |                   |                  
|Multi-family residential            |                   |                  
|Commercial real estate and land     |                   |                  
|Residential construction            |                   |                  
|Commercial construction             |                   |                  
|Agriculture                         |                   |                  
|Business loans                      |                   |                  
|Agriculture - operating             |                   |                  
|Warehouse mortgage lines of credit  |                   |                  
|Consumer loans                      |                   |                  
|                                   
|Total delinquent loans              |                   |                  
|                                   
|Delinquent loans as a percentage of |                   |                  
|total loans                         |                   |                  
|                                   

27

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Non-Accrual
Loans and Real Estate Owned. The following table sets forth information regarding
non-accrual loans and real estate owned. At December 31, 2004, nonperforming loans
consisted of 32 single-family residential loans with an average balance of $83,000, 13
residential construction loans with an average balance of $174,000, one multi-family
residential loan with a balance of $2.4 million, six commercial real estate and land and
agriculture real estate loans with an average balance of $176,000, four business loans
with an average balance of $193,000 and 107 consumer loans with an average balance of
$10,000. At such date, real estate owned totaled $382,000 consisting of nine single-family
residential properties and repossessed automobiles. Troubled debt restructurings consisted
of 11 loans with an average balance of $315,000 at December 31, 2004. Such restructured
loans were performing in accordance with their terms at such date. It is our policy to
cease accruing interest on loans contractually delinquent 90 days or more and charge-off
all accrued interest. For the years ended December 31, 2004 and 2003, the amount of
interest income not recognized on non-accrual loans was $513,000 and $308,000,
respectively. Total impaired loans (includes troubled debt restructurings) amounted to
approximately $6.1 million and $864,000 at December 31, 2004 and 2003, respectively.

The
following table shows the amounts of our nonperforming assets at the dates indicated. We
did not have any accruing loans 90 days or more past due at the dates shown.

|                                   | December 31,
|---------------------------------- | ------------
|
|Non-accruing loans:                |             
|One-to-four family residential     |             
|Second mortgage residential        |             
|Multi-family residential           |             
|Commercial real estate and land    |             
|Residential construction           |             
|Commercial construction            |             
|Agriculture                        |             
|Business loans                     |             
|Agriculture - operating            |             
|Warehouse mortgage lines of credit |             
|Consumer                           |             
|                                  
|Total non-accruing loans           |             
|Real estate owned, net (1)         |             
|                                  
|Total nonperforming assets         |             
|Troubled debt restructurings       |             
|                                  
|Total nonperforming assets and     |             
|troubled debt restructurings       |             
|                                  
|Total nonperforming loans as a     |             
|percent of net loans               |             
|                                  
|Total nonperforming assets as a    |             
|percent of total assets            |             
|                                  
|Total nonperforming assets and     |             
|troubled debt restructurings       |             
|as a percent of total assets       |             
|                                  

|(1) | Real
estate owned balances are shown net of related loss allowances.  Includes both real
property and         other reposessed collateral consisting primarily of automobiles.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

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When
we acquire property through foreclosure or deed in lieu of foreclosure, it is initially
recorded at the lower of the recorded investment in the corresponding loan or the fair
value of the related assets at the date of foreclosure, less costs to sell. Thereafter, if
there is a further deterioration in value, we provide for a specific valuation allowance
and charge operations for the diminution in value. It is our policy to obtain an appraisal
or brokers price opinion on all real estate subject to foreclosure proceedings prior
to the time of foreclosure. It is our policy to require appraisals on a periodic basis on
foreclosed properties as well as conduct inspections on such properties.

Allowance
for Loan Losses.A provision for loan losses is charged to income when it is
determined by management to be required based on its analysis. The allowance is maintained
at a level to cover all known and inherent losses in the loan portfolio that are both
probable and reasonable to estimate at each reporting date. Management reviews the loan
portfolio no less frequently than quarterly in order to identify those inherent losses and
to assess the overall collection probability of the portfolio. Managements review
includes a quantitative analysis by loan category, using historical loss experience,
classifying loans pursuant to a grading system and consideration of a series of
qualitative loss factors. The evaluation process includes, among other things, an analysis
of delinquency trends, nonperforming loan trends, the level of charge-offs and recoveries,
prior loss experience, 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 the loan, the number of loans requiring heightened management 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 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 (i)
the fair value of the collateral if the loan is collateral dependent, (ii) the present
value of expected future cash flows, or (iii) the loans 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.

29

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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, 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                            |                                      
|Commercial construction                             |                                      
|Agriculture                                         |                                      
|Business loans                                      |                                      
|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, end of year              |                                      
|                                                   
|Allowance for loan losses as a percent of net loans |                                      
|Allowance for loan losses as a                      |                                      
|percent of nonperforming loans                      |                                      
|Ratio of net charge-offs during the year as a       |                                      
|percent of average loans outstanding during         |                                      
|the year                                            |                                      
|                                                   

30

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

|                                | 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 2004 and 2003 as we began analyzing
this portfolio seperately in 2003 due to our increased investment in such loans.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31

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# 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 their assets in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise authorized to make
directly. Historically, we have maintained liquid assets at a level considered to be
adequate to meet our normal daily activities.

Our
investment policy, as approved by the Board of Directors, requires management to maintain
adequate liquidity, generate a favorable return on investment without incurring undue
interest rate and credit risk and to complement our lending activities. We primarily
utilize investments in securities for liquidity management and as a method of deploying
excess funding not utilized for loan originations and purchases. We have invested in U.S.
Government securities and agency obligations, corporate commercial paper, 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, 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
$127.8 million, or 4.2% of total assets, at December 31, 2004. At such date, we had net
unrealized losses with respect to such securities of $343,000. At December 31, 2004, the
held to maturity securities portfolio totaled $126,000.

At
December 31, 2004, our mortgage-backed security portfolio (all of which were classified as
available for sale) totaled $36.2 million or 1.2% of total assets. Of such amount, $20.3
million were collateralized mortgage obligations (CMOs), $7.4 million were
issued by FNMA, $5.9 million were issued by the Government National Mortgage Association
(GNMA) and $2.5 million were issued by the FHLMC. Of the $36.2 million of
mortgage-backed securities, $9.2 million had adjustable-rates with interest rate
adjustments of 1.0% to 2.0% annually. Investments in mortgage-backed securities involve a
risk that actual prepayments will be greater than estimated prepayments over the life of
the security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby changing the net yield on
such securities. There is also reinvestment risk associated with the cash flows from such
securities or in the event such securities are redeemed by the issuer. In addition, the
market value of such securities may be adversely affected by changes in interest rates.

The
GNMA is a government agency within the Department of Housing and Urban Development which
is intended to help finance government-assisted housing programs. GNMA securities are
backed by loans insured by the Federal Housing Administration, or guaranteed by the
Veterans Administration. The timely payment of principal and interest on GNMA securities
is guaranteed by GNMA and backed by the full faith and credit of the U.S. Government.
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.

32

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

|                                                  | December 31,
|------------------------------------------------- | ------------
|
|
|U.S. Government securities and agency obligations |             
|Corporate securities                              |             
|Municipal obligations                             |             
|Agency equity securities                          |             
|Asset Management Fund - ARM Fund                  |             
|                                                 
|Total investment securities                       |             
|Federal Home Loan Bank stock                      |             
|                                                 
|Total investment securities and                   |             
|Federal Home Loan Bank stock                      |             
|                                                 

33

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The
following table sets forth the amount of investment securities which mature during each of
the periods indicated and the weighted average yields for each range of maturities at
December 31, 2004. No tax-exempt yields have been adjusted to a tax-equivalent basis.

|(Dollars in thousands)           | One Year orless | Weighted AverageYield | Over One YearThroughFive Years | WeightedAverageYield | Over Five YearsThroughTen Years | WeightedAverageYield | Over TenYears | WeightedAverageYield | TotalAmortizedCost | 2004FairValue
|-------------------------------- | --------------- | --------------------- | ------------------------------ | -------------------- | ------------------------------- | -------------------- | ------------- | -------------------- | ------------------ | -------------
|Bonds and other debt securities: |                 |                       |                                |                      |                                 |                      |               |                      |                    |              
|U.S. Government securities       |                 |                      
|and agency obligations           |                 |                       | $                              | 12,024               |                                 |                      | 2.59          | %                    | $                  | 61,124       
|Corporate securities             |                 |                       |                                | 754                  |                                 |                      | 3.28          |                      |                    | 2,619        
|Municipal obligations            |                 |                       |                                | 2,121                |                                 |                      | 3.21          |                      |                    | 6,106        
|Equity securities:               |                 |                      
|Asset Management Fund - ARM Fund |                 |                       |                                | 6,000                |                                 |                      | 2.74          |                      |                    | --           
|Agency equity securities         |                 |                       |                                | 3,763                |                                 |                      | 5.20          |                      |                    | --           
|Federal Home Loan Bank stock     |                 |                       |                                | 54,284               |                                 |                      | 4.17          |                      |                    | --           
|                                
|Total investment securities and  |                 |                      
|Federal Home Loan Bank stock     |                 |                       | $                              | 78,946               |                                 |                      | 3.83          | %                    | $                  | 69,849       
|                                

The
following table sets forth the purchases, sales and principal repayments of our investment
securities portfolio during the years indicated:

|                                             | At or For the Year Ended December 31,
|-------------------------------------------- | -------------------------------------
|
|Investment securities at beginning of year   |                                      
|Investment securities acquired               |                                      
|Purchases                                    |                                      
|Maturities                                   |                                      
|Principal repayments                         |                                      
|Sales                                        |                                      
|Gain (loss) on sale                          |                                      
|Loss on impairment of securities             |                                      
|Change in unrealized gain (loss), net        |                                      
|Amortizations of premiums and discounts, net |                                      
|                                            
|Investment securities at end of year         |                                      
|                                            
|Weighted average yield at end of year        |                                      
|                                            

34

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

|                                 | 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 |             
|                                

35

---

Information
regarding the contractual maturities and weighted average yield of our mortgage-backed
securities portfolio at December 31, 2004 is presented below. Due to repayments of the
underlying loans, the actual maturities of mortgage-backed securities generally are less
than the scheduled maturities.

|(Dollars in thousands) | One Year orLess | Weighted AverageYield | Over One YearThroughFive Years | WeightedAverageYield | Over Five Years | WeightedAverageYield | TotalAmortizedCost | 2004FairValue
|---------------------- | --------------- | --------------------- | ------------------------------ | -------------------- | --------------- | -------------------- | ------------------ | -------------
|Fixed-rate:            |                 |                       |                                |                      |                 |                      |                    |              
|FHLMC                  |                 |                       | $                              | --                   |                 |                      | --                 | %            
|FNMA                   |                 |                       |                                | 140                  |                 |                      | 4.26               |              
|GNMA                   |                 |                       |                                | 2                    |                 |                      | 5.78               |              
|CMOs                   |                 |                       |                                | --                   |                 |                      | --                 |              
|                      
|Total fixed-rate       |                 |                       |                                | 142                  |                 |                      | 4.28               |              
|                      
|Adjustable-rate:       |                 |                      
|GNMA                   |                 |                       |                                | --                   |                 |                      | --                 |              
|FNMA                   |                 |                       |                                | --                   |                 |                      | --                 |              
|FHLMC                  |                 |                       |                                | --                   |                 |                      | --                 |              
|                      
|Total adjustable-rate  |                 |                       |                                | --                   |                 |                      | --                 |              
|                      
|Total                  |                 |                       | $                              | 142                  |                 |                      | 4.28               | %            
|                      

The
following table sets forth the purchases, sales and principal repayments of our
mortgage-backed securities during the years indicated:

|                                                | At or For the Year Ended December 31,
|----------------------------------------------- | -------------------------------------
|
|Mortgage-backed securities at beginning of year |                                      
|Mortgage-backed securities acquired             |                                      
|Purchases                                       |                                      
|Repayments                                      |                                      
|Sales                                           |                                      
|Change in unrealized gain (loss), net           |                                      
|Amortizations of premiums and discounts, net    |                                      
|                                               
|Mortgage-backed securities at end of year       |                                      
|                                               
|Weighted average yield at end of year           |                                      
|                                               

36

---

At
December 31, 2004, 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, 2004, are summarized
below:

|                                      | 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 |                     |                     | $    
|                                     

The
investment securities available for sale in a continuous loss position for 12 months or
longer consisted of one investment security with unrealized losses of $73,000 at December
31, 2004. The unrealized loss on these securities resulted from market interest rates and
we do not deem the conditions that caused the losses to be other-than-temporary.

In
response to concerns regarding the potential value of FNMA equity securities, the Company
recorded an other-than-temporary impairment charge of $135,000, in the fourth quarter, on
our holdings of FNMA equity securities as the value of these securities could be impacted
by factors other than interest rate changes. The Companys estimated carrying value
represents the fair value of these securities and there were no unrealized losses
associated with them at December 31, 2004.

# Sources of Funds

General.                 Deposits,
loan repayments and prepayments, proceeds from sales of loans, cash           flows
generated from operations and FHLB advances are the primary sources of our
          funds for use in lending, investing and for other general purposes.

Deposits.                 We
offer a variety of deposit accounts with a range of interest rates and terms.
          Our deposits consist of checking (both interest-bearing and
          noninterest-bearing), money market, savings, time deposits and individual
          retirement accounts.

The
flow of deposits is influenced significantly by general economic conditions, changes in
money market rates, prevailing interest rates and competition. Our deposits are obtained
predominantly from the areas where our banking offices are located. We have historically
relied primarily on customer service and long-standing relationships with customers to
attract and retain these deposits; however, market interest rates and rates offered by
competing financial institutions significantly affect our ability to attract and retain
deposits.

37

---

We
use traditional means of advertising our deposit products, including broadcast and print
media. We have expanded our marketing efforts to include direct mailings in an effort to
attract new checking relationships. In 2000, we introduced our High
Performance checking product line which includes a number of product options for our
customers including free checking, interest-bearing checking and the Wall
Street checking account. As a result, the number and aggregate balance of our
checking accounts increased from approximately 36,700 and $157.5 million, respectively, at
December 31, 2000 to approximately 90,300 and $526.3 million, respectively, at December
31, 2004, reflecting increases of 146.1% and 234.1%. Employees are offered incentives to
sell the products and customers receive gifts for opening new accounts as well as
referring other customers.

We
use brokered time deposits as an additional source of funds for our loan origination and
purchases activity. At December 31, 2004 and December 31, 2003 we had brokered time
deposits of $124.6 million and $65.5 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:

|                             | 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%                |             
|7.00% - 7.99%                |             
|8.00% or more                |             
|                            
|Total time deposits (1)      |             
|                            
|Transaction accounts:        |             
|Savings                      |             
|Money market                 |             
|Interest-bearing checking    |             
|Noninterest-bearing checking |             
|                            
|Total transaction accounts   |             
|                            
|Total deposits               |             
|                            

(1)  Includes $124.6 million, $65.5
million and $0, respectively, of brokered time deposits at    December 31, 2004, 2003 and
2002.

---

38

---

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,
|------------------------------- | -----------------------
|
|
|Interest-bearing checking       |                        
|Savings                         |                        
|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 |                        
|                          

39

---

The following
table presents, by various interest rate categories and maturities, the amount of time
deposits at December 31, 2004:

|                        | Balance at December 31, 2004
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.
|--- | --------------------------------

The
following table shows the maturities of our time deposits exceeding $100,000 at December
31, 2004 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, 2004.

|(Dollars in thousands)                 | Amount | Weighted Average Rate
|-------------------------------------- | ------ | ---------------------
|Quarter ending:                        |        |                      
|March 31, 2005                         |        |                      
|June 30, 2005                          |        |                      
|September 30, 2005                     |        |                      
|December 31, 2005                      |        |                      
|After December 31, 2005                |        |                      
|                                      
|Total time deposits exceeding $100,000 |        |                      
|                                      

Borrowings.                 We
utilize advances from the FHLB as an alternative to retail deposits to fund           our
operations as part of our operating strategy. These FHLB 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 FHLB. FHLB 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 FHLB will advance to member
          institutions, including us, fluctuates from time to time in accordance with the
          policies of the FHLB. At December 31, 2004, we had $779.9 million in
outstanding           FHLB advances. For additional information see Regulation
 Federal           Home Loan Bank.

On
April 26, 2004, the Company formed a trust (TierOne Capital Trust I) 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) issued by the Company.
The debentures are callable at par in June 2009 and mature in June 2034. The
Companys obligation under the debentures constitutes a full and unconditional
guarantee by the Company 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.

40

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In
connection with the Companys acquisition of UNFC on August 27, 2004, the Company
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. The Companys obligation under the debentures constitutes a
full and unconditional guarantee by the Company of United Nebraska Capital Trusts
obligations under the debentures. In accordance with FIN 46R, United Nebraska Capital
Trust is not consolidated and related amounts are treated as debt of the Company.

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

|                                                | At or For the Year Ended December 31,
|----------------------------------------------- | -------------------------------------
|
|Federal Home Loan Bank advances:                |                                      
|Average balance outstanding                     |                                      
|Maximum amount outstanding at any               |                                      
|month-end during the period                     |                                      
|Balance outstanding at end of period            |                                      
|Average interest rate during period             |                                      
|Weighted average interest rate at end of period |                                      
|                                               
|Other borrowings:                               |                                      
|Average balance outstanding                     |                                      
|Maximum amount outstanding at any               |                                      
|month-end during the period                     |                                      
|Balance outstanding at end of period            |                                      
|Average interest rate during period             |                                      
|Weighted average interest rate at end of period |                                      
|                                               

At
December 31, 2004, our overnight line of credit with the FHLB amounted to $261.2 million
with a weighted average rate of 2.47%. For more information regarding our borrowings, see
Note 15 included in Item 8. Financial Statements and Supplementary Data.

41

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# Subsidiary Activities

The
Bank is the wholly owned subsidiary of the Company. TMS Corporation of the Americas is the
wholly owned subsidiary of the 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 that is sold in conjunction with the origination of consumer
loans by the Bank. United Farm & Ranch Management, Inc. (UFARM) is a
wholly owned subsidiary of the Bank. UFARM provides farm and ranch real estate management
services in the state of Nebraska and in the neighboring states of Iowa, South Dakota,
Kansas, Colorado and Wyoming. Fees generated through equity, annuity, mutual fund and
insurance sales and commissions and farm and ranch real estate management contributed $3.3
million and $2.1 million in noninterest income during the years ended December 31,
2004 and 2003, respectively.

# Personnel

As
of December 31, 2004, we had 667 full-time employees and 113 part-time employees. The
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 federal regulation and
oversight by the OTS extending to all aspects of its operations. 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. Federally chartered savings institutions are required to file periodic reports
with the OTS and are subject to periodic examinations by the OTS and the FDIC. 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 its 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 us and the Bank
and our operations.

42

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# TierOne Corporation

The
Company, a Wisconsin corporation and the holding company for the Bank, is a registered
savings and loan holding company under Section 10 of the Home Owners Loan Act
(HOLA), as amended, and is subject to OTS examination and supervision as well
as certain reporting requirements. In addition, because the Banks deposits are
insured by the SAIF and administered by the FDIC, the Bank is, and will continue to be,
subject to certain restrictions in dealing with the Company and with other persons
affiliated with the Bank.

We
currently operate as a unitary savings and loan holding company. Generally, the HOLA
prohibits a savings and loan holding company, such as us, directly or indirectly, from (1)
acquiring control (as defined) of a savings institution (or holding company thereof)
without prior OTS approval, or (2) 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, or (3) 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 (4) 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.

# TierOne Bank

Insurance
of Accounts. 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.

43

---

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.

In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing Corporation, a
mixed-ownership government corporation established to recapitalize the predecessor to the
SAIF. The assessment rate for the fourth quarter of 2004 was .0146% of insured deposits
and is adjusted quarterly. These assessments will continue until the Financing Corporation
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.The OTS capital requirements consist of a tangible
capital requirement, a leverage capital requirement and a
risk-based capital requirement. The OTS is authorized to impose capital
requirements in excess of those standards on individual institutions on a case-by-case
basis.

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

Under
the leverage 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 capital is defined as common shareholders equity (including retained earnings),
non-cumulative perpetual preferred stock, and minority interests in the equity accounts of
consolidated subsidiaries, plus purchased mortgage servicing rights valued at the lower of
90% of fair market value, 90% of original cost or the current amortized book value as
determined under generally accepted accounting principles, 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. Qualifying one-to-four
family residential real estate loans and qualifying multi-family residential real estate
loans (not more than 90 days delinquent and having an 80% or lower loan-to-value ratio),
which at December 31, 2004 represented 23.3% of the total loans receivable of the Bank,
are weighted at a 50% risk factor. 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.

44

---

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 generally accepted accounting principles.

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 generally accepted accounting principles purposes. For
excludable subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. At December 31, 2004, the Bank had $1.5 million of investments
subject to a deduction from tangible capital.

Under
currently applicable 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 generally accepted accounting principles.

At
December 31, 2004, the Bank exceeded all of its regulatory capital requirements. For more
information see Note 19  Regulatory Capital Requirements attached hereto
in Item 8. Financial Statements and Supplementary Data.

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.

45

---

Prompt
Corrective Action. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991, federal banking regulators are required to take prompt corrective
action if an insured depository institution fails to satisfy certain minimum capital
requirements including a leverage limit, a risk-based capital requirement and any other
measure of capital deemed appropriate by the federal banking regulator for measuring the
capital adequacy of an insured depository institution. 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
the Federal Deposit Insurance Corporation Improvement Act, an institution is deemed to be
(a) well capitalized if it has total risk-based capital of 10.0% or more, has
a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of
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%, and (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, 2004, the Bank was in the well capitalized category for purposes
of the above regulations.

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.

46

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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: (1)
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, (2) the institution would not be at least
adequately capitalized following the distribution, (3) the distribution would violate any
applicable statute, regulation, agreement or OTS-imposed condition, or (4) the institution
is not eligible for expedited treatment of its filings. If an application is not required
to be filed, savings institutions which are a subsidiary of a holding company (as well as
certain other institutions) must still file a notice with the OTS at least 30 days before
the Board of Directors declares a dividend or approves a capital distribution.

Branching
by Federal Savings Institutions. OTS policy permits interstate branching to
the full extent permitted by statute (which is essentially unlimited). Generally, federal
law prohibits federal savings institutions from establishing, retaining or operating a
branch outside the state in which the federal institution has its home office unless the
institution meets the Internal Revenue Service (IRS) domestic building and
loan test (generally, 60% of a 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. An unsatisfactory Community Reinvestment Act 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 Community Reinvestment Act and related regulations of the OTS to
help meet the credit needs of their communities, including low- and moderate-income
neighborhoods. 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 Community Reinvestment Act 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.

47

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Qualified
Thrift Lender Test. All savings institutions are required to meet a
qualified thrift lender 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 qualified thrift lender test by either qualifying
as a domestic building and loan bank as defined in Section 7701(a)(19) of the Internal
Revenue Code or by meeting the second criteria of the qualified thrift lender test set
forth in Section 10(m) of the HOLA. A savings institution that does not meet the qualified
thrift lender 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 FHLB 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 FHLB advances (subject to safety and soundness
considerations).

Currently,
the portion of the qualified thrift lender 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 FHLB 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, 2004, approximately 74.7% of the
portfolio assets of the Bank were qualified thrift investments.

Federal
Home Loan Bank. The Bank is a member of the FHLB, which administers the
home financing credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures established
by its Board of Directors. At December 31, 2004, the Bank had $781.1 million of FHLB
advances. At December 31, 2004, the Bank was required to hold $50.8 million in stock of
the FHLB as collateral for the Banks FHLB advances.

The
FHLB is required to provide funds for the resolution of troubled savings institutions and
to contribute to affordable housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing projects.
These contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future and could also result in the FHLB imposing higher interest
rates on advances to members. These contributions also could have an adverse effect on the
value of FHLB stock in the future.

48

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Federal
Reserve System. Federal Reserve Board (FRB) regulations require
all depository institutions to maintain noninterest earning reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time
deposits. At December 31, 2004, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed by the FRB
may be used to satisfy liquidity requirements that may be imposed by the OTS.

Savings
banks are authorized to borrow from a Federal Reserve Bank discount window,
but FRB regulations require savings banks to exhaust other reasonable alternative sources
of funds, including FHLB 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 market value ranging from
100% to 130% (depending on the type of collateral) of the amount of the loan or extension
of credit.

49

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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.

# Federal Securities Law

The
Companys common stock is registered with the SEC under the Securities Exchange Act
of 1934, as amended (Exchange Act), and under OTS regulations, and generally
may not be deregistered for at least three years after the initial public offering which
was completed on October 1, 2002. We are subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Exchange Act.

# Item 2. Properties

We
currently operate 68 banking offices in Nebraska (56), Iowa (9) and Kansas (3) of which 51
were owned by us and 17 were 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 Arizona, Florida and Minnesota all of which are
under operating leases. We own our corporate headquarters located in Lincoln, Nebraska.

For
further information regarding our properties, see Note 20  Lease
Commitments which is attached hereto in Item 8. Financial Statements and
Supplementary Data.

# 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 the Companys consolidated financial condition or consolidated results of
operations.

In
August 1995, we commenced litigation against the U.S. 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 Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (FIRREA).

Pursuant
to FIRREA, which became effective in August 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 immediately exclude 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
FIRREA and 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. As a result, we commenced litigation
against the U.S., as discussed below, seeking damages for this breach of contract.

50

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Our
case was initially stayed pending resolution on appeal of a series of cases (United States
v. Winstar Corporation) (the Winstar Cases). In July 1996, the United States
Supreme Court ruled in the Winstar Cases that when the United States Congress changed the
accounting for supervisory goodwill specified in FIRREA, it breached 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 was held. On November
6, 2003, the Claims Court rendered a decision finding the U.S. liable to the Bank for
breach of contract with regard to one of three claims and the Court dismissed the breach
of contract complaint on the remaining two claims. A Motion For Reconsideration of the
Courts Liability Decision with respect to the one claim was filed by the U.S. and was
subsequently denied by the Claims Court on April 28, 2004. As of December 31, 2004, the
issue of damages and the amount thereof, if any, remains to be determined in subsequent
judicial proceedings.

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 us. To conform to the Claims
Courts ruling finding the U.S. liable on only one of the three claims, we now seek
an amended percentage reduction of our original total damage claim under two alternative
theories. First, we are now claiming amended lost profits damages of $29.6 million.
Alternatively, we have claimed amended damages of $13.1 million for the value of the lost
goodwill adjusted to the future trial date. On January 7, 2005, the U.S. filed a motion
for summary judgment contending that we cannot recover on either damage theory as a matter
of law. Extensive legal briefs have been filed by both parties, but the matter has not
been ruled upon at the present time by the Claims Court.

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. As a consequence,
claimants, including us, plan to proceed to trial to pursue our damage claims. 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.

51

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# PART II

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

The
Companys common stock trades on the Nasdaq stock market under the symbol
TONE. As of December 31, 2004, the Company had 1,722 shareholders of record
which does not include those persons or entities holding stock in nominee or
street name through brokerage firms or others. The table below shows the high
and low bid prices of the Companys common stock during the periods indicated as well
as the period end closing sales price and the dividend paid each quarter.

|               | December 31, 2004 | December 31, 2003
|-------------- | ----------------- | -----------------
|
|First Quarter  |                   |                  
|Second Quarter |                   |                  
|Third Quarter  |                   |                  
|Fourth Quarter |                   |                  

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The
Companys current stock repurchase plan, announced in July 2004, authorizes the
purchase of 1,828,581 shares of the Companys outstanding common stock in open market
or privately negotiated transactions. There were no shares repurchased under this plan
during the quarter ended December 31, 2004. Unless terminated earlier by the Board of
Directors of the Company, the plan will expire when the Company has repurchased all shares
authorized for repurchase under the plan. The following table sets forth information in
connection with purchases made by, or on the behalf of, the Company of shares of the
Companys common stock during the fourth quarter of the fiscal year ended December
31, 2004.

|                                  | 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 2004                      |                                  |                              |                                                                                  |                                                                           
|Beginning Date - October 1, 2004 
|Ending Date - October 31, 2004    | --                               | --                           | --                                                                               | 1,828,581                                                                 
|November 2004                    
|Beginning Date - November 1, 2004
|Ending Date - November 30, 2004   | --                               | --                           | --                                                                               | 1,828,581                                                                 
|December 2004                    
|Beginning Date - December 1, 2004
|Ending Date - December 31, 2004   | --                               | --                           | --                                                                               | 1,828,581                                                                 
|                                 
|Total Shares Purchased            | --                               | --                           | --                                                                               | 1,828,581                                                                 
|                                 

53

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# Item 6. Selected
Financial Data

|                                     | At December 31,
|------------------------------------ | ---------------
|
|Selected Financial and Other Data:   |                
|Total assets                         |                
|Cash and cash equivalents            |                
|Investment securities:               |                
|Held to maturity                     |                
|Available for sale                   |                
|Mortgage-backed securities:          |                
|Held to maturity                     |                
|Available for sale                   |                
|Net loans after allowance            |                
|for loan losses                      |                
|Deposits                             |                
|Advances from Federal Home           |                
|Loan Bank and other borrowings       |                
|Stockholders' equity                 |                
|Full service offices                 |                
|
|
|Selected Operating 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  |                
|                                    

|* | Information
applicable to post stock conversion period only.  The Company completed its initial
public offering     on October 1, 2002.
|- | ---------------------------------------------------------------------------------------------------------------------------------------

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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 a plan to grow and diversify our
operations to become a regional community bank. In our Primary Banking Market Area we have
endeavored to position ourselves as a local alternative to national and super-regional
competitors. In addition, we have availed ourselves of additional loan opportunities
outside our Primary Banking Market Area and have selectively entered into relationships
with other financial institutions throughout the United States to purchase whole loans or
participation interests in loans, particularly commercial real estate and land, second
mortgage residential 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. We have also expanded our
originations of warehouse mortgage lines of credit to mortgage brokers that primarily
serve regions outside of our Primary Lending Market Area.

Highlights of our management strategy
are as follows:

| |  | Building
a Strong Corporate Brand and Identity. Following the introduction of the
new TierOne Bank name in early 2002, we have focused our marketing efforts in building
equity in our strong corporate brand. We have significantly enhanced our marketing by
direct mail and other advertising as part of our program to increase the recognition and
positive perception of our corporate identity. We have also continued to develop a
strong, focused and innovative employee culture. We have increased the investment in our
professional employee base to help ensure that our team of employees has the capability,
training and incentives to deliver quality service across our expanded product line.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Continuing
Our Controlled Growth and Expanding Our Franchise. We increased our total
assets in each of the past five years. During this five-year period, total assets have
increased by $1.7 billion to $3.0 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 employed a strategic acquisition strategy 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Repositioning
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 and/or
shorter terms to maturity. At December 31, 2004, our second mortgage residential,
multi-family residential, commercial real estate and land, construction, business,
agricultural, business, warehouse mortgage lines of credit and consumer loans amounted to
$2.7 billion in the aggregate or 86.5% of our total loan portfolio. We generally sell
single family fixed-rate residential first mortgage loans into the secondary market, with
servicing retained.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Emphasizing
Growth of Our Core Deposits and Reducing Our Cost of Funds. Our core
deposits, consisting of checking accounts, money market accounts and savings accounts,
have increased from $631.0 million at December 31, 2003 to $897.0 million at December 31,
2004. We continue our emphasis on increasing the number of core checking account
relationships, which during the four-year period ended December 31, 2004, have grown by
146.1% from 36,700 to 90,300. Establishment of additional core relationships provide new
opportunities to sell other profitable products and services and increase household
market share. The combination of the repricing of time deposits as they matured and
deposits assumed in the UNFC acquisition resulted in our cost of funds on average
interest-bearing deposits declining to 1.88% for the year ended December 31, 2004 from
2.04% for the year ended December 31, 2003.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increasing
Our Fee Income and Expanding Our Products and Services.Our other income,
which is 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 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 other 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 four years, we have introduced on-line banking, a High
Performance checking program, indirect automobile lending, business checking and an
expanded business loan program.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Maintaining
Asset Quality. We believe that superior asset quality 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 active acquirer of mortgage loans and participation interests in loans from
outside our Primary Lending Market Area, we 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,
2004 was 0.35% compared to 0.19% at December 31, 2003.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# Critical Accounting
Policies

Allowance
for Loan Losses. We have identified the evaluation of the allowance for
loan losses as a critical accounting policy where amounts are sensitive to material
variation. This policy is significantly affected by our judgment and uncertainties and
there is a likelihood that materially different amounts 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:

| |  | An
analysis of delinquency trends;
| | - | ----------------------------------

| |  | Nonperforming
loan trends;
| | - | --------------------------

| |  | Levels
of charge-offs and recoveries;
| | - | -------------------------------------

| |  | Prior
loss experience;
| | - | ----------------------

| |  | Total
loans outstanding;
| | - | ------------------------

| |  | Volume
of loan originations;
| | - | ----------------------------

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

| |  | Value
of collateral securing loans;
| | - | -----------------------------------

| |  | Number
of loans requiring heightened management 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 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:

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| |  | 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 by
the Company over the fair value of the tangible and intangible assets and liabilities
acquired from 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 instead will be tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires the 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.

The
impairment of identifiable intangibles and long-lived assets is assessed whenever events
or changes in circumstances indicate their carrying value may not be recoverable through
expected future undiscounted cash flows. If the total expected undiscounted cash flows are
less than the carrying value of the assets, the asset is written down to its estimated
fair value.

The
Companys only identifiable intangible asset is the value of the core deposits
acquired as part of the UNFC acquisition. 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. The Company is not aware of any events or circumstances that indicate
carrying value or estimated life has changed since the August 27, 2004 acquisition and
measurement date.

The
Companys policy is to annually evaluate the carrying value of goodwill and
identifiable assets not subject to amortization. Goodwill was established and supported by
third-party valuations as of August 27, 2004 as part of the UNFC acquisition. If the
carrying value of the goodwill exceeded the implied fair value of the goodwill, an
impairment loss would be recorded in an amount equal to that excess. Performing such a
discounted cash flow analysis would involve the significant use of estimates and
assumptions.

58

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There
have been no changes in the carrying amount of goodwill for the year ended December 31,
2004 due to impairment as the Company is not aware of any facts or circumstances that
would indicate the Companys carrying value exceeded fair value during the period
from the measurement date to December 31, 2004.

Mortgage
Servicing Rights.The Bank capitalizes the estimated value of mortgage
servicing rights upon the sale of loans. The Banks 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. Management evaluates 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 the Bank 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 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.

59

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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.

Investment
Securities. The Company evaluates its 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. The
Company considers various factors in determining whether it 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 market
value.

# How We Manage Our Risks

Market
risk is the risk of loss from adverse changes in market prices and rates. Our market risk
arises primarily from the interest rate risk which is inherent in our lending and deposit
taking activities. To that end, we actively manage our interest rate risk exposure. Our
profitability is affected by fluctuations in interest rates. A sudden and substantial
change in interest rates may adversely impact the Companys earnings to the extent
that the interest rates on assets and liabilities do not change at the same speed, to the
same extent or on the same basis. To that end, management actively monitors and manages
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.

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 reviewing 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 the Board of
Directors on a quarterly basis.

The
Company utilizes the following strategies to manage interest rate risk: (1) emphasizing
the origination for portfolio retention of loans with adjustable rates and/or shorter
terms to maturity; (2) holding shorter term and/or adjustable-rate investment securities;
(3) attempting to reduce the overall interest rate sensitivity of liabilities by
emphasizing core and longer-term deposits; and (4) extending the maturities on borrowings.
Additionally, the Company generally sells originated fixed-rate, single-family residential
loans into the secondary market with servicing retained.

60

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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 market 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, 2004, as calculated by the OTS:

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

Due
to our recognition of the need to control our interest rate exposure, we have focused on
higher-yielding and shorter term loans 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.

61

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# Quantitative and
Qualitative Disclosures About Market Risk

Derivative
financial instruments include futures, forwards, interest rate swaps, option contracts,
and other financial instruments with similar characteristics. We currently do not enter
into futures, swaps, or options. However, we are party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend credit. The
commitments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the Consolidated Statements of Financial Condition.
Commitments generally have fixed expiration dates and may require additional collateral
from the borrower if deemed necessary.

62

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# Table of Market Risk
Sensitive Instruments

The
following table shows our financial instruments that are sensitive to change in interest
rates, categorized by expected maturity, and the instruments fair values at December
31, 2004. Market risk sensitive instruments are generally defined as on- and off-balance
sheet derivatives and other financial instruments.

|(Dollars in thousands)         | Weighted Average Interest Rate | 2005 | 2006 | 2007  | 2008 | 2009 | Thereafter | Total | 2004 Fair Value
|------------------------------ | ------------------------------ | ---- | ---- | ----- | ---- | ---- | ---------- | ----- | ---------------
|Interest Sensitive Assets:     |                                |      |      |       |      |      |            |       |                
|Federal funds sold             |                                |      |      | --    | %    | $    | --         |       | $              
|Investment securities          |                                |      |      | 3.70  |      |      | 24,662     |       |                
|Total loans                    |                                |      |      | 5.60  |      |      | 1,235,819  |       |                
|Mortgage-backed securities     |                                |      |      | 4.12  |      |      | 13,357     |       |                
|Federal Home Loan              |                                |     
|Bank stock                     |                                |      |      | 4.17  |      |      | 54,284     |       |                
|                              
|Total                          |                                |      |      |       |      | $    | 1,328,122  |       | $              
|                              
|Interest Sensitive             |                                |     
|Liabilities:                   |                                |     
|Money market accounts          |                                |      |      | 1.09  | %    | $    | 52,836     |       | $              
|Savings accounts               |                                |      |      | 0.65  |      |      | 12,832     |       |                
|Interest-bearing               |                                |     
|checking accounts              |                                |      |      | 0.67  |      |      | 56,381     |       |                
|Time deposits                  |                                |      |      | 2.77  |      |      | 544,698    |       |                
|Federal Home Loan Bank         |                                |     
|advances and other             |                                |     
|borrowings                     |                                |      |      | 3.25  |      |      | 390,908    |       |                
|                              
|Total                          |                                |      |      |       |      | $    | 1,057,655  |       | $              
|                              
|
|Loans serviced for others      |                                |      |      | 5.73  | %    |      |            |       |                
|Commitments to                 |                                |     
|extend credit                  |                                |      |      | 5.83  |      |      |            |       |                
|Unused warehouse mortgage      |                                |     
|lines of credit                |                                |      |      | 5.13  |      |      |            |       |                
|Unused commercial              |                                |     
|lines of credit                |                                |      |      | 5.82  |      |      |            |       |                
|Unused consumer                |                                |     
|lines of credit                |                                |      |      | 5.78  |      |      |            |       |                
|Standby letters of credit      |                                |      |      | 5.99  |      |      |            |       |                
|Recourse obligations on assets |                                |      |      | N/A   |      |      |            |       |                
|Commitments to                 |                                |     
|purchase loans                 |                                |      |      | 5.44  |      |      |            |       |                
|Commitments to sell loans      |                                |      |      | N/A   |      |      |            |       |                
|Commitments to                 |                                |     
|purchase securities            |                                |      |      | 10.00 |      |      |            |       |                
|                              

|(1) | Total
balance equals the notional amount of off-balance sheet items, and interest rates are the
weighted average interest rates of the underlying items.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Fair
value of derivative financial instruments were recorded in the Company's Statements of
Financial Condition.
|--- | ----------------------------------------------------------------------------------------------------------------

---

63

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Expected
maturities are contractual maturities adjusted for prepayment of principal. We use certain
assumptions to estimate fair values and expected maturities. For assets, expected
maturities are based upon contractual maturity, projected prepayments and repayments of
principal. The prepayment experience reflected herein is based on our historical
experience. The actual maturities of these instruments could vary substantially if future
prepayments differ from the Banks historical experience.

We
are subject to certain market risks and interest rate risks from the time we issue
commitments to originate new loans. In recent years, we have reduced our exposure to
interest rate risk by focusing on loans with higher yields and/or shorter terms for
retention in portfolio and selling most of our single family fixed-rate residential first
mortgage loans into the secondary market. In an effort to protect us against adverse
interest rate movements, we typically enter into an agreement to sell the loan, or a loan
within the same interest rate range, into the secondary market at the time we take an
application for a fixed-rate loan. This is known as a matched sale approach
and reduces our interest rate risk with respect to these loans. There is still some risk
because some portion of these loans may never close for various reasons. However, the
agencies to whom we sell loans permit us some flexibility in delivering loan product to
them. In certain instances, if the loans we deliver for sale do not match the
characteristics outlined in our forward sale commitments, our gain on sale may be reduced.
To date this has not been a significant issue.

64

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# Contractual Obligations,
Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

We
use our 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, 2004, we had the following contractual
obligations (excluding bank deposits and interest) and lending commitments:

|                                        | Due In
|--------------------------------------- | ------
|
|Contractual obligations:                |       
|Federal Home Loan Bank advances         |       
|and other borrowings                    |       
|Recourse obligations on assets          |       
|Purchase investment securities          |       
|Annual rental commitments under non-    |       
|cancellable operating leases            |       
|                                       
|                                        |       
|                                       
|
|
|Lending commitments:                    |       
|Commitments to originate loans          |       
|Commitments to sell loans               |       
|Commitments to purchase loans           |       
|Undisbursed portion of loans in process |       
|Standby letters of credit               |       
|Unused lines of credit:                 |       
|Warehouse mortgage lines of credit      |       
|Business loans                          |       
|Consumer loans                          |       
|                                       

65

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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,
2004, the maximum total dollar amount of such recourse was approximately $13.4 million.
Based on historical experience, at December 31, 2004, we had established a liability of
$720,000 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 22 in Item 8. Financial Statements
and Supplementary Data.

66

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# Analysis of Net Interest
Income

Net
interest income represents the difference between income on interest-earning assets and
expense on interest-bearing liabilities. Net interest income also depends upon the
relative amounts of interest-earning assets and interest-bearing liabilities and the
interest rate earned or paid on them.

# 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 monthly balances. Management does not believe
that the monthly averages differ significantly from what the daily averages would be.

|                                     | Year Ended December 31,
|------------------------------------ | -----------------------
|
|
|Interest-earning assets:             |                        
|Fed 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   |                        
|Regular savings accounts             |                        
|Money market accounts                |                        
|Time deposits                        |                        
|                                    
|Total interest-bearing deposits      |                        
|Federal Home Loan Bank advances      |                        
|and other borrowings                 |                        
|                                    
|Total interest-bearing liabilities   |                        
|Noninterest-bearing accounts         |                        
|Other liabilities                    |                        
|                                    
|Total liabilities                    |                        
|Shareholders' equity                 |                        
|                                    
|Total liabilities and                |                        
|shareholders' 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
Federal Home Loan Bank stock.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
nonaccrual loans during the respective periods.  Calculated net of unamortized premiums,
discounts and deferred fees,      undisbursed portion of construction and land
development loans in process and allowance for loan losses.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Equals
net interest income divided by average interest-earning assets.
|--- | ----------------------------------------------------------------------

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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.

|                                  | 2004 vs. 2003 | 2003 vs. 2002
|--------------------------------- | ------------- | -------------
|
|
|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                    |               |              
|Federal Home Loan Bank 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

68

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

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 FHLB 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.

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).

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 is
primarily the result of $29.8 million of mortgage-backed securities acquired from UNFC
partially offset by $9.0 million of principal payments received.

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.

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
provisions 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 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.

69

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We
recorded $42.3 million of goodwill at December 31, 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 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.

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.

Our
FHLB 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 FHLB 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 FHLB advances
and other borrowings was 3.25% compared to 3.01% at December 31, 2003.

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, loan servicing payments, end-lender loan payments associated with
our warehouse mortgage lines of credit and other miscellaneous accrued expenses.

Our
shareholders 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
shareholders equity is attributable to the repurchase of 2,031,757 shares of the
Companys 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 the Companys 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 Employee Stock Ownership Plan (ESOP) and $2.8 million
related to the amortization of common stock awards under the 2003 Management Recognition
and Retention Plan (MRRP).

70

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# Comparison of Financial
Condition at December 31, 2003 and December 31, 2002

Our
total assets were $2.2 billion at December 31, 2003, a $262.3 million, or 13.5%, increase
from December 31, 2002. This increase primarily reflects a $244.8 million increase in net
loans. During 2003, we utilized additional FHLB borrowings, increased deposits, proceeds
from the sale of mortgage-backed securities and proceeds from the maturity of investment
securities, to fund our loan portfolio growth.

Our
available for sale investment securities totaled $43.5 million at December 31, 2003, a
$13.0 million, or 42.5%, increase from December 31, 2002. This increase primarily reflects
$33.9 million in purchases during 2003 partially offset by $22.0 million of maturities. A
majority of the investment securities purchased were FHLB step-up notes.

Our
mortgage-backed securities portfolio declined by $14.7 million, or 48.3%, to $15.7 million
at December 31, 2003 compared to $30.4 million at December 31, 2002. This decrease was due
in large part to high levels of mortgage refinancing activity during the first half of
2003 which resulted in more rapid repayment of these securities. During 2003, we had $42.3
million of principal reductions related to mortgage-backed securities. Additionally, we
had purchases of $84.0 million which were partially offset by sales proceeds of $53.8
million during the year ended December 31, 2003.

Net
loans increased by $244.8 million, or 13.7%, to $2.0 billion at December 31, 2003 compared
to $1.8 billion at December 31, 2002. Throughout 2003, we have continued to focus on
increasing our holdings of loans with relatively higher yields as well as adjustable rates
of interest and/or shorter terms to maturity. During the year ended December 31, 2003, we
purchased a total of $1.3 billion of loans, including $652.8 million of single-family
residential first mortgage loans, $304.6 million of single family second mortgage loans,
$229.7 million of construction loans, $67.5 million of consumer loans and $43.9 million of
commercial real estate and land loans.

Total
deposits increased by $87.9 million, or 7.8%, to $1.2 billion at December 31, 2003
compared to $1.1 billion at December 31, 2002. During 2003 we purchased $65.5 million of
brokered time deposits at rates which closely approximated the rates we were offering on
time deposits through our retail delivery system. We purchased these brokered time
deposits as an additional source of funds for our loan origination and purchase activity.
At December 31, 2003, our interest-bearing and non-interest-bearing checking accounts
totaled $340.4 million in the aggregate, a $14.4 million, or 4.4%, increase from an
aggregate of $326.0 million at December 31, 2002.

71

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Our
FHLB advances and other borrowings amounted to $645.7 million at December 31, 2003, an
increase of $227.4 million, or 54.4%, compared to $418.3 million at December 31, 2002. We
utilized FHLB advances as the primary funding source for the growth in our loan portfolio.

Our
shareholders equity totaled $295.1 million at December 31, 2003 compared to $339.9
million at December 31, 2002, a decrease of $44.8 million or 13.2%. The decline in
shareholders equity was attributable to the repurchase of 2,257,507 shares of the
Companys common stock in connection with a Board of Directors authorized stock
repurchase program at an average purchase price of $23.75 per share. Additionally, we
purchased 903,003 shares of the Companys common stock to fund the
shareholder-approved 2003 MRRP at an average purchase price of $22.20 per share. We had
$23.8 million of net income that partially offset the impact of the stock repurchase
program and the funding of the MRRP.

Comparison of Operating Results
for the Years Ended December 31, 2004 and December 31, 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 is the principal source of earnings
for the Company, and consists primarily of interest income on loans receivable and
investment and mortgage-backed securities, offset by interest expense on deposits and
borrowed funds. Net interest income is determined by interest rate spread (i.e., the
difference between the yields earned on interest-earning assets and the rates paid on
interest-bearing liabilities) and also by the amount of interest earning assets relative
to interest-bearing liabilities. Generally, we are able to increase our net interest
income at a faster pace when the spread between short-term and long-term U.S. Treasury
rates is positive, due to funding costs being more directly tied to shorter-term rates,
while loan rates are tied to intermediate to longer-term rates. 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 was the
Companys 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 FHLB advances or other borrowings. The
Companys 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

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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 FHLB 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, 2004. 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 FHLB 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 FHLB 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 FHLB 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 FHLB advances and other borrowings during 2004 as our primary
funding source for loan portfolio growth and the UNFC acquisition.

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Provision
for Loan Losses. We establish provisions for loan losses, which are charges
to our operating results, in order to maintain a level of total allowance for loan losses
that management believes covers all known and inherent losses that are both probable and
reasonably estimable at each reporting date. Management 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. For each primary type of loan, we establish a loss factor reflecting our
estimate of the known and inherent losses in each loan type using both quantitative
analysis as well as qualitative factors. Our evaluation process includes, among other
things, an analysis of delinquency trends, nonperforming loan trends, the levels 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
management oversight and general economic conditions. The amount of the allowance for loan
losses is only an estimate and actual losses may vary from these estimates.

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 December 31, 2003, approximately 63.6% and 70.6% of our
charge-offs related to consumer loans, respectively, 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 December 31, 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.

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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 December 31, 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 Companys 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 December 31, 2003 was 37.2% and 37.4%, respectively.

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Comparison of Operating Results
for the Years Ended December 31, 2003 and December 31, 2002

Net
Income. Our net income increased by $8.8 million, or 59.1%, to $23.8
million for the year ended December 31, 2003 as compared to $15.0 million for the year
ended December 31, 2002. Included in our net income for the year ended December 31, 2002
was a $5.0 million pre-tax charge relating to the contribution of 500,000 shares of our
common stock to the TierOne Charitable Foundation which was formed in connection with the
Banks conversion from mutual to stock form in October 2002. Our net income increased
due primarily to improved net interest income resulting from a higher average balance of
loans receivable in 2003. Net interest income is our principal source of income and
represents the difference between the income we earn on our investment securities,
mortgage-backed securities and loan portfolios and the cost of funds, which is the
interest we pay on deposits and borrowings. In large part, net interest income is
determined by interest rate spread (i.e., the difference between the yields earned on
interest-earning assets and the rates paid on interest-bearing liabilities) and also by
the amount of interest-earning assets relative to interest-bearing liabilities. Our
average interest rate spread declined to 3.05% for the year ended December 31, 2003 as
compared to 3.37% for the year ended December 31, 2002. Net interest margin declined to
3.48% for the year ended December 31, 2003 as compared to 3.82% for the year ended
December 31, 2002. During 2003 our average interest rate spread and average interest
margin were negatively impacted by a 105 basis point decrease in the average yield on
loans receivable caused by the high level of refinance activity experienced during the
period and lower than expected yields on mortgage-backed securities due to higher than
projected prepayments. Our ratio of average interest-earning assets to average
interest-bearing liabilities increased to 120.94% for the year ended December 31, 2003 as
compared to 116.28% for the year ended December 31, 2002. The increase in the ratio of
average interest-earning assets to average interest-bearing liabilities is primarily the
result of an increase in average loans due to utilization of proceeds from our initial
public offering completed in October 2002.

Interest
Income. Our total interest income for the year ended December 31, 2003 was
$110.8 million, an increase of $5.9 million, or 5.6%, compared to $104.9 million for the
year ended December 31, 2002. The increase in interest income for the year ended December
31, 2003 was the result of an increase in average loans of $391.0 million, or 26.6%, to
$1.9 billion at December 31, 2003 compared to $1.5 billion at December 31, 2002. The
increase in the average balance of net loans during 2003 was partially offset by a
reduction in the average yield earned on net loans from 6.80% at December 31, 2002 to
5.75% at December 31, 2003. Average yields also were lower on our investment securities
and mortgage-backed securities in the year ended December 31, 2003 compared to 2002. These
declines in average yields earned on interest-earning assets primarily reflect the low
interest rate environment which continued to exist throughout 2003.

Interest
Expense. Our total interest expense for the year ended December 31, 2003
was $40.9 million, a decrease of $3.4 million, or 7.6%, compared to $44.2 million for the
year ended December 31, 2002. The primary reason for the decrease in interest expense was
a $8.3 million, or 26.6%, reduction in interest expense on deposits due to an 80 basis
point decrease in the average rate paid on interest-bearing deposits to 2.04% during 2003
compared to 2.84% in 2002. The average rate paid on our time deposits was 3.15% in the
year ended December 31, 2003 compared to 3.95% in the year ended December 31, 2002. The
average rates paid on our interest-bearing checking accounts, money market accounts and
savings accounts also declined in 2003 compared to 2002. Interest expense on FHLB advances
and other borrowings was $18.0 million for the year ended December 31, 2003, an increase
of $4.9 million, or 37.4%, compared to $13.1 million for the year ended December 31, 2002.
The primary reason for the increase in interest expense related to our FHLB advances and
other borrowings was an increase of $267.4 million to $542.0 million in the average
balance of FHLB advances and other borrowings for the year ended December 31, 2003
compared to an average balance of $274.6 million for the year ended December 31, 2002. We
have utilized FHLB advances as the primary funding source for our loan portfolio growth.
The average rate paid on FHLB advances and other borrowings declined to 3.33% for 2003
compared to 4.78% for the year ended December 31, 2002.

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Provision
for Loan Losses. We made a provision for loan losses of $4.3 million for
the year ended December 31, 2003 compared to $4.7 million for the year ended December 31,
2002. Our portfolio of commercial real estate and land loans, construction loans
(residential and commercial), business loans and consumer loans totaled $1.2 billion at
December 31, 2003, an increase of $202.3 million, or 19.8%, compared to $1.0 billion at
December 31, 2002. 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, 2003 our non-performing assets amounted to
$4.3 million, or 0.19% of total assets, compared to $7.5 million, or 0.38% of total
assets, at December 31, 2002. The decline in non-performing assets at December 31, 2003
was primarily attributable to the disposition of a commercial real estate property
acquired through foreclosure during the year. During the years ended December 31, 2003 and
2002 we charged-off loans in the amount of, net of recoveries, $1.8 million and $1.1
million, respectively. For the year ended December 31, 2003, approximately 71% of our
charge-offs related to consumer loans, in particular automobile loans, compared to 88% for
the year ended December 31, 2002. At December 31, 2003, our allowance for loan losses
amounted to 541.7% of non-performing loans compared to 311.7% at December 31, 2002. Our
allowance for loan losses as a percentage of net loans was 0.96% at December 31, 2003 and
December 31, 2002. We believe that the allowance for loan losses at December 31, 2003 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. Regulatory agencies, in the
course of their regular examinations, review the allowance for loan losses and carrying
value of non-performing assets. No assurance can be given that these agencies might not
require changes to the allowance for loan losses in the future.

Noninterest
Income. Our other income increased by $6.7 million, or 51.5%, to $19.9
million for the year ended December 31, 2003 compared to $13.1 million for the year ended
December 31, 2002. The growth in other income is primarily attributable to a $3.6 million
increase in gains on loans held for sale which were generated by the sales of our
single-family fixed-rate residential first mortgage loans in the secondary market. During
the year ended December 31, 2003, we sold $627.5 million of fixed-rate single-family
residential loans, an increase of $61.9 million, or 11.0%, compared to $565.6 million for
the year ended December 31, 2002. Additionally we experienced a $2.5 million increase in
deposit account and debit card fees which is the result of an increased number of core
deposit accounts. We also had a $1.6 million increase in loan fees which is the direct
result of our growing loan portfolio.

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During
the year ended December 31, 2003 we had $4.3 million of mortgage servicing rights
amortization expense related to prepayments of loans and $1.3 million of normal
amortization expense related to our mortgage servicing rights portfolio. Amortization
expense during 2003 was partially offset by a $652,000 net recapture of the mortgage
servicing valuation reserve due to stabilization of interest rates in the second half of
2003 resulting in a reduction of the loan prepayment speeds that the Company was
experiencing.

During
the six month period ended June 30, 2003 we recorded $2.0 million of mortgage servicing
rights impairment charges bringing our mortgage servicing valuation reserve to $4.3
million at June 30, 2003 as the low interest rate environment continued to generate a high
level of mortgage refinance activity. During the six months ended December 31, 2003 we
recaptured $2.6 million of mortgage servicing rights impairment as interest rates
stabilized and we experienced an increase in the valuation of our mortgage servicing
rights portfolio. Our mortgage servicing right valuation allowance totaled $1.7 million at
December 31, 2003. 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 other expense increased $1.9 million, or 4.1%, to $47.5
million for the year ended December 31, 2003 compared to $45.7 million for the year ended
December 31, 2002. Other expense for the year ended December 31, 2002 reflected a $5.0
million pre-tax charitable contribution to the TierOne Charitable Foundation in connection
with the completion of TierOne Banks conversion from mutual to stock form. During
the year ended December 31, 2003, salaries and employee benefit expense increased $5.8
million which was primarily the result of costs related to our ESOP and MRRP, increased
health insurance costs, an increase in the number of staff and normal salary increases.

Income
Tax Expense. Our income tax expense increased by $5.7 million to $14.2
million for the year ended December 31, 2003 compared to $8.5 million for the year ended
December 31, 2002. The increase in income tax expense primarily reflects the increase in
net income. Our effective income tax rate for the year ended December 31, 2003 was 37.4%
compared to 36.2% for the year ended December 31, 2002. The increase in the 2003 effective
tax rate was primarily attributable to the partial non-deductible nature of certain
expenses related to the Companys ESOP.

# Liquidity

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

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At
December 31, 2004, we had time deposits maturing within the next 12 months amounting to
$544.7 million. Based upon historical experience, we anticipate that a significant portion
of the maturing time deposits will be redeposited with us.

In
addition to cash flow from loan and securities payments and prepayments, we have
additional borrowing capacity 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
borrowings was $661.7 million for the year ended December 31, 2004 compared to $542.0
million and $274.6 million for the years ended December 31, 2003 and 2002, respectively.
To date, substantially all of our borrowings have consisted of advances from the FHLB, of
which we are a member. Pursuant to blanket collateral agreements with the FHLB, the Bank
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 $1.6 billion and $1.3 billion at
December 31, 2004 and 2003, respectively. Other qualifying collateral can be pledged in
the event additional borrowing capacity is required.

# Impact of Inflation and
Changing Prices

The
financial statements, accompanying notes, and related financial data presented in Item 8.
Financial Statements and Supplementary Data have been prepared in accordance with
accounting principles generally accepted in the United States of America, 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.

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# Recent Accounting
Pronouncements

In
January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities. Interpretation
No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial
support from other parties (variable interest entities). Variable interest
entities (VIE) are required to be consolidated by their primary beneficiaries
if they do not effectively disperse risks among parties involved. The primary beneficiary
of a VIE is the party that absorbs a majority of the entitys expected losses,
receives a majority of its expected residual returns, or both, as a result of holding
variable interests. Interpretation No. 46 also requires new disclosures about VIEs. In
December 2003, the FASB issued a revised Interpretation No. 46 (FIN 46R) which
addresses how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly should
consolidate the entity. The proposed clarifications and modifications apply to periods
ending after December 31, 2003. Adoption of this Interpretation did not have a material
impact on the Companys consolidated financial statements.

In
December 2003, the American Institute of Certified Public Accountants (AICPA)
released Statement of Position 03-3 (SOP 03-3), Accounting for Certain
Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses accounting for
differences between contractual cash flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities acquired in a transfer if
those differences are attributable to credit quality. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Adoption of this statement is
not expected to have a material impact on the Companys consolidated financial
statements.

In
March 2004, the FASB issued Staff Accounting Bulletin No. 105 (SAB No. 105),
Loan Commitments Accounted for as Derivative Instruments. The requirements of SAB
No. 105 require entities that enter into mortgage loan commitments to disclose their
accounting policy for such commitments and include the methods and assumptions used to
estimate the fair value of loan commitments in the financial statements. Additionally, any
hedging strategy associated with mortgage loan commitments is required to be disclosed.
The requirements of SAB No. 105 must be applied to mortgage loan commitments that are
accounted for as derivatives and are entered into after March 31, 2004. SAB No. 105
permits entities to continue using previously applied accounting policies to loan
commitments entered into on or before March 31, 2004. The adoption of SAB No. 105 did not
have a material impact on the Companys consolidated financial statements.

In
December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which
amends Accounting Principles Board (APB) Opinion No. 29, Accounting for
Nonmonetary Transactions. APB Opinion 29 was based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets exchanged. The
guidance in APB No. 29, however, included certain exceptions to that principle. SFAS No.
153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a
result of the exchange. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Adoption of this statement is
not expected to have a material impact on the Companys consolidated financial
statements.

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In
December 2004, FASB issued SFAS No. 123R, Share Based Payment. SFAS No. 123R amends
SFAS No. 123, Accounting for Stock-Based Compensation, and superseded APB No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123R 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. 123R also requires significant additional disclosures for
share-based payment awards. SFAS No. 123R is effective for share-based payment awards
granted, modified or settled after the first reporting period beginning after June 15,
2005. The Company has not completed the process of evaluating the impact of SFAS No. 123R
on its consolidated financial statements.

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

The
information required herein is incorporated by reference from Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations.

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# 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, 2004 and 2003, 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, 2004. 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, 2004 and 2003, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2004, 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, 2004, 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 4,
2005 expressed an unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial reporting.

# /s/ KPMG LLP

Lincoln, NebraskaMarch 4,
2005

82

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# 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, 2004, 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.

83

---

In
our opinion, managements assessment that TierOne Corporation maintained effective
internal control over financial reporting as of December 31, 2004, 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, 2004, 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 statements of financial condition of
TierOne Corporation and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and our report
dated March 4, 2005 expressed an unqualified opinion on those consolidated financial
statements.

# /s/ KPMG LLP

Lincoln, NebraskaMarch 4,
2005

84

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# TierOne Corporation
and SubsidiariesConsolidated Statements of Financial Condition

|                                                                             | December 31,
|---------------------------------------------------------------------------- | ------------
|
|ASSETS                                                                       |             
|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 $11,956 and $7,083 at             |             
|December 31, 2004 and December 31, 2003, respectively)                       |             
|Allowance for loan losses                                                    |             
|                                                                            
|Net loans after allowance for loan losses                                    |             
|                                                                            
|Federal Home Loan Bank stock                                                 |             
|Premises and equipment, net                                                  |             
|Accrued interest receivable                                                  |             
|Goodwill                                                                     |             
|Other intangible assets, net                                                 |             
|Other assets                                                                 |             
|                                                                            
|Total assets                                                                 |             
|                                                                            
|LIABILITIES AND STOCKHOLDERS' EQUITY                                         |             
|Liabilities:                                                                 |             
|Deposits                                                                     |             
|Advances from Federal Home Loan Bank 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; 18,287,811 and |             
|20,317,568 shares issued and outstanding at December 31, 2004 and            |             
|December 31, 2003, respectively                                              |             
|Additional paid-in capital                                                   |             
|Retained earnings, substantially restricted                                  |             
|Treasury stock, at cost; 4,287,264 and 2,257,507 shares at                   |             
|December 31, 2004 and December 31, 2003, 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.

85

---

# TierOne Corporation
and SubsidiariesConsolidated 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 Federal Home Loan Bank 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                                  |                        
|Income (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                                               |                        
|Contributions to TierOne Charitable Foundation            |                        
|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                       |                        
|                                                         

|* | Information
applicable to fourth quarter 2002 only as the Company completed its initial public
offering on October 1, 2002.
|- | ---------------------------------------------------------------------------------------------------------------------------

See accompanying notes to
consolidated financial statements.

86

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

|(Dollars in thousands)            | Common Stock | Additional Paid-InCapital | Retained Earnings,SubstantiallyRestricted | TreasuryStock | Unallocated Common StockHeld by theEmployee StockOwnership Plan | UnearnedCommon StockHeld by theManagementRecognition andRetention Plan | Accumulated OtherComprehensiveIncome (Loss), Net | Total Stockholders'Equity
|--------------------------------- | ------------ | ------------------------- | ----------------------------------------- | ------------- | --------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------ | -------------------------
|Balance at December 31, 2001      |              |                           | $                                         | --            |                                                                 | $                                                                      | --                                               |                          
|                                 
|Proceeds of stock conversion, net |              |                           |                                           | 203           |                                                                 |                                                                        | 197,919                                          |                          
|Acquisition of Bank's equity upon |              |                          
|stock conversion                  |              |                           |                                           | --            |                                                                 |                                                                        | 134,626                                          |                          
|Contribution of stock to TierOne  |              |                          
|Charitable Foundation             |              |                           |                                           | 5             |                                                                 |                                                                        | 4,995                                            |                          
|Issuance of stock to Employee     |              |                          
|Stock Ownership Plan              |              |                           |                                           | 18            |                                                                 |                                                                        | 18,042                                           |                          
|Common stock earned by            |              |                          
|employees in Employee Stock       |              |                          
|Ownership Plan                    |              |                           |                                           | --            |                                                                 |                                                                        | 159                                              |                          
|Comprehensive income:             |              |                          
|Net income                        |              |                           |                                           | --            |                                                                 |                                                                        | --                                               |                          
|Additional minimum pension        |              |                          
|liability, net of tax             |              |                           |                                           | --            |                                                                 |                                                                        | --                                               |                          
|Change in unrealized gain on      |              |                          
|available for sale securities,    |              |                          
|net of tax and reclassifications  |              |                           |                                           | --            |                                                                 |                                                                        | --                                               |                          
|                                 
|Total comprehensive income        |              |                           |                                           | --            |                                                                 |                                                                        | --                                               |                          
|                                 
|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                                          |                          
|                                 

See accompanying notes to
consolidated financial statements.

87

---

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

|(Dollars in thousands)                  | Common Stock | Additional Paid-InCapital | Retained Earnings,SubstantiallyRestricted | TreasuryStock | Unallocated Common StockHeld by theEmployee StockOwnership Plan | UnearnedCommon StockHeld by theManagementRecognition andRetention Plan | Accumulated OtherComprehensiveIncome (Loss), Net | Total Stockholders'Equity
|--------------------------------------- | ------------ | ------------------------- | ----------------------------------------- | ------------- | --------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------ | -------------------------
|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                              |              |                           |                                           | --            |                                                                 |                                                                        | --                                               |                          
|Change in additional minimum            |              |                          
|pension liability, net of tax           |              |                           |                                           | --            |                                                                 |                                                                        | --                                               |                          
|Change in unrealized gain on            |              |                          
|available for sale securities,          |              |                          
|net of tax and                          |              |                          
|reclassification adjustment             |              |                           |                                           | --            |                                                                 |                                                                        | --                                               |                          
|                                       
|Total comprehensive income              |              |                           |                                           | --            |                                                                 |                                                                        | --                                               |                          
|                                       
|Balance at December 31, 2004            |              |                           | $                                         | 226           |                                                                 | $                                                                      | 355,986                                          |                          
|                                       

88

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# 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 premium on Federal Home Loan Bank advances                 |                        
|Employee Stock Ownership Plan expense                                      |                        
|Management Recognition and Retention Plan expense                          |                        
|Amortization of premiums on net loans                                      |                        
|Federal Home Loan Bank 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                          |                        
|Contribution of stock to TierOne Charitable Foundation                     |                        
|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 Federal Home Loan Bank stock                                   |                        
|Sale of Federal Home Loan Bank 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                                      |                        
|                                                                          

89

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

|                                                                                                                    | Year Ended December 31,
|------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|Cash flows from financing activities:                                                                               |                        
|Net increase in deposits                                                                                            |                        
|Net advances (repayment) on Federal Home Loan Bank line of credit                                                   |                        
|and short-term advances and other borrowings                                                                        |                        
|Proceeds from Federal Home Loan Bank long-term advances and other borrowings                                        |                        
|Repayments of Federal Home Loan Bank long-term advances and other borrowings                                        |                        
|Proceeds from junior subordinated debentures                                                                        |                        
|Net increase (decrease) in advances from borrowers for taxes,                                                       |                        
|insurance and other escrow funds                                                                                    |                        
|Repurchase of common stock                                                                                          |                        
|Dividends paid on common stock                                                                                      |                        
|Treasury stock reissued under stock option plan                                                                     |                        
|Purchase of common stock for Management Recognition and Retention Plan                                              |                        
|Proceeds of stock conversion, net                                                                                   |                        
|                                                                                                                   
|Net cash provided by financing activities                                                                           |                        
|                                                                                                                   
|Net increase (decrease) 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                                                                                    |                        
|                                                                                                                   
|Noncash financing activities:                                                                                       |                        
|During 2002, the Company issued 1,806,006 shares of common stock to the Employee Stock Ownership Plan ("ESOP") and  |                        
|recorded a note receivable from the ESOP. The note receivable is shown as unallocated common stock held by the ESOP |                        
|in the consolidated statement of financial condition.                                                               |                        
|                                                                                                                   

See accompanying notes to
consolidated financial statements.

90

---

# 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.

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 farm and ranch real estate management
services.

Investment
and Mortgage-Backed Securities. The Company classifies its investment
securities portfolio between those securities the Company intends to hold to maturity and
those securities available for sale.

Securities
classified as held to maturity are those securities which the Company has 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 those securities that the Company intends 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 the Companys 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.

91

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Accounting
for Derivatives and Hedging Activities.Effective July 1, 2000, which
was previously the beginning of the Banks fiscal year, the Bank adopted Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, an
Amendment of FASB Statement No. 133. 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 balance sheet 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, less
unamortized premiums, discounts and deferred loan origination fees and the undisbursed
portion of construction and land 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.

Loans
Held for Sale.Upon origination or purchase, the Companys management
designates certain loans receivable as held for sale as management does not intend to hold
such loans through maturity. Loans held for sale consist of single-family, fixed-rate
residential first mortgage 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.

92

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Provision
and Allowance for Loan Losses.A provision for loan losses is charged to
income when it is determined by management to be required based on its analysis. The
allowance is maintained at a level to cover all known and inherent losses in the loan
portfolio that are both probable and reasonable to estimate at each reporting date.
Management reviews the loan portfolio no less frequently than quarterly in order to
identify those inherent losses and to assess the overall collection probability of the
portfolio. Managements review includes a quantitative analysis by loan category,
using historical loss experience, classifying loans pursuant to a grading system and
consideration of a series of qualitative loss factors. The evaluation process includes,
among other things, an analysis of delinquency trends, nonperforming loan trends, the
level of charge-offs and recoveries, prior loss experience, 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 the loan, the number of loans requiring
heightened management 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 the Companys credit review
function that are evaluated individually for impairment and are considered to be impaired.
A loan is considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of principal
and interest when due according to the contractual terms of the loan agreement. Impairment
is measured by: (i) the fair value of the collateral if the loan is collateral
dependent, (ii) the present value of expected future cash flows, or (iii) the
loans observable market price. The second element is an allowance established for
losses which are probable and reasonable to estimate on each of the Companys
categories of outstanding loans. While management uses available information to recognize
probable losses on loans inherent in the portfolio, future additions to the allowance may
be necessary based on changes in economic conditions and other factors. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for losses on loans. Such agencies may
require the Company to recognize additions to the allowance based on their judgment of
information available to them at the time of their examination.

Goodwill
and Intangible Assets. Goodwill represents the excess price paid by the
Company 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 instead
will be tested for impairment at least annually in accordance with the provisions of SFAS
No. 142. SFAS No. 142 also requires the 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.

93

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
Companys policy is to evaluate the carrying value of goodwill and identifiable
assets not subject to amortization annually, at the end of the quarter ending September
30. Goodwill was established and supported by third-party valuations as of August 27, 2004
as part of the UNFC acquisition and, as such, the first impairment test is scheduled for
the quarter ended September 30, 2005. If the carrying value of the goodwill exceeded the
implied fair value of the goodwill, an impairment loss would be recorded in an amount
equal to that excess. Performing such a discounted cash flow analysis would involve the
significant use of estimates and assumptions.

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: (1) the assets have been isolated from the Company,
(2) 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
(3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity. The Company has not had any
significant transactions, arrangements or other relationships with any special purpose
entities.

Estimates. The
preparation of consolidated financial statements in           conformity with accounting
principles generally accepted in the United States of           America 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 (carrying 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.

94

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Premises
and Equipment.Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The Companys general policy is to capitalize asset
purchases which exceed a certain monetary threshold and whose useful lives exceed
one year. Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the related assets. Improvements to buildings are
depreciated over their useful lives not to exceed the remaining useful life of the related
building. Leasehold improvements are amortized over the lesser of their useful lives or
the related lease period.

Income
Taxes.The Company files 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.

95

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Earnings
Per Share.The Company computes and presents earnings per share (EPS)
in accordance with SFAS No. 128, Earnings perShare. The difference between
the Companys 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. The Companys
potentially dilutive common shares at December 31, 2004 represent shares issuable
under its stock option and MRRP plans.

The
Company accounts for its stock options in accordance with Accounting Principles Board
Opinion No. 25, Accounting for StockIssued to Employees (APB No. 25).
Under the provisions of APB No. 25, since the exercise price of the Companys
employees stock options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized. 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.

|                                                                                                                              | For the 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                                                                                          |                                
|                                                                                                                             
|* Information applicable to fourth quarter 2002 only as the Company completed its initial public offering on October 1, 2002. |                                
|                                                                                                                             
|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 December 31, 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.

96

---

# 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
($25,000), $84,000 and ($260,000) for the years ended December 31, 2004, 2003 and
2002, respectively. Reclassification adjustments for realized gross gains (losses)
included in income, were approximately $171,000, $118,000 and ($10,000), net of tax
(expense) benefit of approximately ($60,000), ($41,000) and $3,000, respectively, for the
years ended December 31, 2004, 2003 and 2002, 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 2004 presentation.

# 2. Industry Segment
Information

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

# 3. Stock Conversion

On
October 1, 2002, the Company completed the mutual to stock conversion
(Conversion) of the Bank and the concurrent issuance in connection therewith
of 22,575,075 shares of Company common stock, par value $0.01 per share, at $10.00 per
share resulting in net proceeds of $198,122,000. As an integral part of the Conversion and
in furtherance of the Companys commitment to the communities that it serves, the
Company established a charitable foundation known as the TierOne Charitable Foundation
(Foundation) and contributed 500,000 shares of common stock to the Foundation
on October 1, 2002. The Foundation will provide funding to support charitable causes
and community development activities which will complement the Companys existing
community activities. In addition, the Company established an ESOP for the employees of
the Company and the Bank which purchased shares in connection with the Conversion. See
note 17 for additional discussion of the ESOP.

In
connection with the Conversion, the Bank established a liquidation account in an amount
equal to its net worth as of 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 balances for accounts then held.

97

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 4. 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. The Companys potentially dilutive common shares at December 31,
2004 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, 2004 | Year Ended
December 31, 2003
|--------------------------------------------------------- | ---------------------------- | ----------------------------
|
|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                                        |                              |                             
|                                                         

98

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 5. Business Combination

On
August 27, 2004, the Company completed the acquisition of UNFC, the parent company of
United Nebraska Bank (UNB).

The
following table summarizes the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition:

|(Dollars in thousands)                               | August 27, 2004
|---------------------------------------------------- | ---------------
|Cash and cash equivalents                            |                
|Investment and mortgage-backed securities            |                
|Net loans                                            |                
|Other intangible assets                              |                
|Other assets                                         |                
|                                                    
|Total assets                                         |                
|                                                    
|Deposits                                             |                
|Federal Home Loan Bank advances and other borrowings |                
|Accrued expenses and other liabilities               |                
|                                                    
|Total liabilities                                    |                
|                                                    
|Net assets acquired                                  |                
|Cash paid                                            |                
|                                                    
|Goodwill (cash paid to United Nebraska Financial Co. |                
|shareholders less net assets acquired)               |                
|                                                    

Assuming
the acquisition of UNFC occurred on January 1, 2004 and 2003, the following summarizes the
unaudited pro forma combined operating results for the years ended December 31, 2004 and
2003:

|                                       | (Unaudited)
For the Year Ended December 31,
|-------------------------------------- | -------------------------------------------
|
|Pro forma interest income              |                                            
|Pro forma net income, after tax        |                                            
|Pro forma earnings per share - basic   |                                            
|Pro forma earnings per share - diluted |                                            

99

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 6. Investment and
Mortgage-Backed Securities

The
amortized cost, gross unrealized gains and losses, and fair value of investment and
mortgage-backed securities by major security category at December 31, 2004 and 2003
are as follows:

|                                                  | December 31, 2004
|------------------------------------------------- | -----------------
|
|
|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                    |                  
|                                                 

|                                     | December 31, 2003
|------------------------------------ | -----------------
|
|
|Held to maturity:                    |                  
|Municipal obligations                |                  
|                                    
|Available for sale:                  |                  
|Mortgage-backed securities           |                  
|U.S. Government agency obligations   |                  
|Corporate securities                 |                  
|Asset Management Fund - ARM Fund     |                  
|                                    
|Total investment and mortgage-backed |                  
|securities, available for sale       |                  
|                                    

100

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
amortized cost and estimated fair value of investment securities at December 31,
2004, by contractual maturity, are shown in the following table. Expected maturities will
differ from the contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

|                              | December 31, 2004
|----------------------------- | -----------------
|
|
|Within 1 year                 |                  
|Over 1 year through 5 years   |                  
|Over 5 years through 10 years |                  
|Over 10 years                 |                  
|                             
|                              |                  
|                             

There
were no sales of investment securities held to maturity during the three years ended
December 31, 2004. Proceeds from the sales of investment securities available for
sale totaled $16.8 million for the year ended December 31, 2004, resulting in gross
realized gains of $596,000 and gross realized losses of $135,000. There were no sales of
investment securities available for sale during the years ended December 31, 2003 and
December 31, 2002. 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, 2004 and December
31, 2002.

At
December 31, 2004 and 2003, investment and mortgage-backed securities with fair
values of approximately $100.8 million and $10.1 million, respectively, were pledged to
secure public deposits.

Investment
and mortgage-backed securities with unrealized losses at December 31, 2004 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 |                     |                     | $    
|                                     

101

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
investment securities available for sale in a continuous loss position for 12 months or
longer consisted of one investment security with unrealized losses of $73,000 at December
31, 2004. The unrealized loss on these securities resulted from market interest rates and
we do not deem the conditions that caused the losses to be other-than-temporary.

In
response to concerns regarding the potential value of Fannie Mae (FNMA) equity
securities, the Company recorded an other-than-temporary impairment charge of $135,000, in
the fourth quarter, on our holdings of FNMA equity securities as the value of these
securities could be impacted by factors other than interest rate changes. The
Companys estimated carrying value represents the fair value of these securities and
there were no unrealized losses associated with them at December 31, 2004.

102

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 7. Loans Receivable

Loans
receivable at December 31, 2004 and 2003 are summarized in the following table:

|                                                       | 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 loans                                         |             
|                                                      
|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                       |             
|                                                      

At
December 31, 2004, approximately 29.2% of total loans were secured by properties or
made to individuals located outside the Companys primary lending market area. The
Companys primary lending market area consists of Nebraska, Iowa, Kansas, Arizona,
Colorado, Florida, Minnesota and North Carolina.

103

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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                     |                        
|                                          

Total
nonaccrual and restructured loans aggregated approximately $13.7 million and $4.1 million
at December 31, 2004 and 2003, respectively. There were no material commitments to
lend additional funds to these customers at December 31, 2004 and 2003. Interest
income recognized on nonaccrual and restructured loans totaled $121,000, $172,000 and
$35,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Troubled
debt restructurings and impaired loans totaled $6.1 million and $864,000 at
December 31, 2004 and 2003, respectively. There was an allowance for loan losses of
$464,000 and $50,000 specifically allocated to these loans at December 31, 2004 and
2003, respectively. Average balances of impaired and restructured loans for the years
ended December 31, 2004, 2003 and 2002 totaled $1.6 million, $3.0 million and
$560,000, respectively. The interest income not recognized on impaired loans was
approximately $62,000, $192,000 and $147,000 in 2004, 2003 and 2002, respectively.

The
Company serviced loans for others amounting to approximately $1.1 billion and $956.7
million at December 31, 2004 and 2003, 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, the Bank held borrowers escrow balances of
approximately $13.4 million and $11.1 million at December 31, 2004 and 2003,
respectively.

Loans
serviced for others include approximately $584.2 million and $489.4 million of unpaid
principal balances of residential real estate loans at December 31, 2004 and 2003,
respectively, for which the Company has retained a limited amount of recourse obligation.
The Company has 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 $15.9 million and $12.1 million at December 31, 2004
and 2003, respectively. The Bank has established a liability for this recourse obligation,
which is based on historical loss experience of the Banks loan portfolio, in the
amount of approximately $720,000 and $642,000 at December 31, 2004 and 2003,
respectively. This liability is included in accrued expenses and other liabilities.

104

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 8. Mortgage Servicing
Rights

The
balance of capitalized mortgage servicing rights, net of valuation allowances, included in
other assets at December 31, 2004 and 2003, was $10.5 million and $8.7 million,
respectively. The fair values of these rights were approximately $11.5 million and $9.2
million, respectively, at such dates. 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:

|                                   | 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.

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                |                        
|                                     

105

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
estimated future amortization expense for capitalized mortgage servicing rights for each
of the years ending December 31, 2005 through 2009 is approximately $1.8 million,
$1.7 million, $1.4 million, $1.1 million and $880,000, respectively. These projections of
amortization expense are based on existing asset balances and the existing interest rate
environment as of December 31, 2004. The amount the Company actually experiences in
amortization expense in any given period may be significantly different depending upon
changes in mortgage interest rates and market conditions.

The
Company periodically evaluates its capitalized mortgage servicing rights for impairment.
There was a valuation allowance established for capitalized mortgage servicing rights of
$800,000 and $1.7 million at December 31, 2004 and 2003, respectively. The
amortization expense and valuation adjustment is recorded as a reduction of fees and
service charges in the accompanying Consolidated Statements of Income.

# 9. Accrued Interest
Receivable

Accrued
interest receivable at December 31, 2004 and 2003 is summarized in the following
table:

|                                          | December 31,
|----------------------------------------- | ------------
|
|Loans receivable                          |             
|Investment and mortgage-backed securities |             
|                                         
|                                          |             
|                                         

# 10. Restricted Stock in
Federal Home Loan Bank

The
Company is a member of the Federal Home Loan Bank (FHLB) system. As a member,
the Company is required to purchase and hold stock in the FHLB. The investment in FHLB
stock is carried at cost, which represents redemption value. The Company was required to
hold approximately $50.8 million and $32.1 million of FHLB stock at December 31, 2004
and 2003, respectively.

# 11. Real Estate Owned

Real
estate owned, included in other assets on the Consolidated Statements of Financial
Condition, at December 31, 2004 and 2003 aggregating $347,000 and $629,000,
respectively, is recorded net of a valuation allowance of $8,000 and $0, respectively.

106

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 12. Premises and
Equipment

Premises
and equipment at December 31, 2004 and 2003 are summarized in the following table:

|                                   | December 31, | Estimated
Useful
|---------------------------------- | ------------ | ----------------
|
|Land                               |              |                 
|Buildings                          |              |                 
|Leasehold improvements             |              |                 
|Furniture, fixtures, and equipment |              |                 
|Computer equipment                 |              |                 
|Vehicles                           |              |                 
|                                  
|                                   |              |                 
|Less accumulated depreciation      |              |                 
|and amortization                   |              |                 
|                                  
|                                   |              |                 
|                                  

107

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 13. Goodwill and
Acquired Intangible Assets

The
changes in the carrying amount of goodwill for the year ended December 31, 2004 is as
follows:

|(Dollars in thousands)                                           | TierOne Bank
|---------------------------------------------------------------- | ------------
|Balance at December 31, 2003                                     |             
|Goodwill related to acquisition of United Nebraska Financial Co. |             
|Impairment losses                                                |             
|                                                                
|Balance at December 31, 2004                                     |             
|                                                                

The
changes in the carrying amount of acquired intangible assets for the year ended December
31, 2004 is as follows:

|                                  | For the Year Ended December 31, 2004
|--------------------------------- | ------------------------------------
|
|Amortized intangible assets:      |                                     
|Core value of deposits            |                                     
|                                 
|Total amortized intangible assets |                                     
|                                 

Amortization
expense for core value of deposits for the year ended December 31, 2004 and estimates for
the five years thereafter are as follows:

|(Dollars in thousands)               | Core Value of Deposits
|------------------------------------ | ----------------------
|Aggregate amortization expense:      |                       
|For the year ended December 31, 2004 |                       
|Estimated amortization expense:      |                       
|For the year ended December 31, 2005 |                       
|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 |                       

108

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 14. Deposits

Deposits
at December 31, 2004 and 2003 are summarized in the following table:

|                             | December 31,
|---------------------------- | ------------
|
|
|Transaction accounts:        |             
|Noninterest-bearing checking |             
|Savings                      |             
|Interest-bearing checking    |             
|Money market                 |             
|                            
|                             |             
|                            
|                             |             
|                            
|Time deposits:               |             
|0.00% to 2.99%               |             
|3.00% to 4.99%               |             
|5.00% to 6.99%               |             
|                            
|                             |             
|                            
|                             |             
|                            
|                             |             
|                            
|                             |             
|                            

At December 31, 2004, scheduled
maturities of time deposits are shown in the following table:

|(Dollars in thousands) | Amount | Percent
|---------------------- | ------ | -------
|2005                   |        |        
|2006                   |        |        
|2007                   |        |        
|2008                   |        |        
|2009                   |        |        
|Thereafter             |        |        
|                      
|                       |        |        
|                      

At
December 31, 2004 and 2003, time deposits of $100,000 or more approximated $169.1
million and $76.6 million, respectively. The deposits of the Company 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.

109

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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, 2004, 2003 and 2002 is as follows:

|                          | For the Year Ended December 31,
|------------------------- | -------------------------------
|
|Savings                   |                                
|Interest-bearing checking |                                
|Money market              |                                
|Time deposits             |                                
|                         
|                          |                                
|                         

110

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 15. Advances from
Federal Home Loan Bank and Other Borrowings

At
December 31, 2004 and 2003, the Company was indebted on notes as shown in the
following table:

|                               | Original | Interest | December 31,
|------------------------------ | -------- | -------- | ------------
|
|Permanent fixed-rate notes     |          |          |             
|payable to the FHLB:           |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|Convertible fixed-rate notes   |          |         
|payable to the FHLB:           |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|                               |          |          |             
|Line of credit with the FHLB   |          |          |             
|Adjustable-rate note payable   |          |         
|to FHLB                        |          |          |             
|Retail repurchase agreements   |          |          |             
|Junior subordinated debentures |          |          |             
|                              
|                               |          |          |             
|                              
|Weighted average interest rate |          |          |             
|                              

The
convertible fixed-rate notes are convertible to adjustable-rate notes at the option of the
FHLB, with call dates ranging from January 2005 to January 2008. The line of credit
with the FHLB expires in November 2005. The Company expects the line of credit
agreement with the FHLB to be renewed in the ordinary course of business.

Pursuant
to blanket collateral agreements with the FHLB, such advances are secured by the
Banks qualifying residential, multi-family residential and commercial real estate
mortgages, residential construction, commercial construction and agricultural real estate
loans with carrying values totaling approximately $1.6 billion and $1.3 billion at
December 31, 2004 and 2003, respectively. Other qualifying collateral can be pledged
in the event additional borrowing capacity is required.

111

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 16. Income Taxes

Income
tax expense (benefit) for the years ended December 31, 2004, 2003 and 2002 consists
of the following components:

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

The
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:

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

112

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
significant items comprising the Companys net deferred income tax asset as of
December 31, 2004 and 2003 are shown in the following table:

|                                          | December 31,
|----------------------------------------- | ------------
|
|Deferred tax liabilities:                 |             
|Net unrealized gains on securities        |             
|Deferred fees on loans                    |             
|Federal Home Loan Bank stock              |             
|Premises and equipment depreciation       |             
|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              |             
|Pension expense                           |             
|Vacation expense                          |             
|Other                                     |             
|Additional minimum pension liability      |             
|                                         
|Deferred tax assets                       |             
|                                         
|Net deferred income tax asset (liability) |             
|                                         

There
was no valuation allowance for deferred tax assets considered necessary at
December 31, 2004 and 2003. In assessing the realizability of the Companys
deferred tax assets, management considers 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. Management considers 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 liability as of December 31, 2004 in included in
accrued expenses and other liabilities in the Consolidated Statements of Financial
Condition. Conversely, the net deferred tax asset as of December 31, 2003 is included
in other assets in the Consolidated Statements of Financial Condition. Income taxes
payable as of December 31, 2004 and 2003 were approximately $2.6 million and $2.8
million, respectively, and are included in accrued expenses and other liabilities in the
Consolidated Statements of Financial Condition.

113

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
Banks retained earnings as of December 31, 2004 and 2003 include approximately
$7.7 million, for which no Federal income tax liability has been provided. Such amount
represents the bad debt reserves 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 during 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. The
Company had recaptured all bad debt reserves required under this Act as of December 31,
2003.

114

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 17. Employee Benefit
Plans

Retirement
Plan. On March 31, 2004, the Company merged its single-employer defined
benefit pension plan and transferred all pension plan assets and future plan obligations
to an unrelated third party plan. This transaction resulted in a $1.5 million pre-tax gain
for the year ended December 31, 2004 from the curtailment of the liability associated with
the plan. The Company 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. Generally, the plan provided for benefits at normal retirement age of 65, or
five years after plan entry date, if later, but employees could elect reduced
benefits with early retirement after completion of 10 years of service and reaching
age 60. The Companys funding policy was to make contributions to a trust as
necessary to provide up to the minimum funding requirements. A measurement period of
October 1, 2002 to October 1, 2003 had been used for the year ended December 31, 2003. The
assets and liabilities of the plan were calculated as of October 1, 2003 and were adjusted
for known contributions received between October 1, 2003 and December 31, 2003.
Information pertaining to the activity in the plan as of December 31, 2004,
October 1, 2003 and 2002, the most recent actuarial studies, is as follows:

|                                               | October 1,
|---------------------------------------------- | ----------
|
|Change in benefit obligation:                  |           
|Benefit obligation at beginning of year        |           
|Service cost                                   |           
|Interest cost                                  |           
|Actuarial loss                                 |           
|Benefits paid                                  |           
|Liability transferred                          |           
|Curtailment gain                               |           
|                                              
|Benefit obligation at end of year              |           
|                                              
|Change in plan assets:                         |           
|Fair value of plan assets at beginning of year |           
|Employer contributions                         |           
|Actual return on plan assets                   |           
|Plan expenses paid                             |           
|Assets transferred                             |           
|Benefits paid                                  |           
|                                              
|Fair value of plan assets at end of year       |           
|                                              
|Funded status                                  |           
|Unrecognized net actuarial loss                |           
|                                              
|Accrued pension liability                      |           
|                                              

115

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Effective
December 31, 2002, there was a plan freeze resulting in a curtailment of future
accrual of benefits under the plan.

As
of December 31, 2003, the Company recorded an additional liability of $457,000 and an
offsetting charge to shareholders equity of $297,000, net of deferred taxes, for the
additional minimum pension liability, as required by SFAS No. 87, Employers
Accounting for Pensions.

The components of net periodic
pension cost (benefit) charged to expense are as follows:

|                                      | Year Ended December 31,
|------------------------------------- | -----------------------
|
|Service cost                          |                        
|Interest cost                         |                        
|Expected return on plan assets        |                        
|Recognized net actuarial gain         |                        
|Amortization of transition obligation |                        
|Amortization of prior service cost    |                        
|Effect of curtailment                 |                        
|                                     
|Net periodic pension cost             |                        
|                                     

For
the years ended December 31, 2003 and 2002, actuarial assumptions include an assumed
discount rate on benefit obligations of 5.75% and 6.25%, respectively, an expected
long-term rate of return on plan assets of 8.00% and 8.00%, respectively, and an annual
weighted average rate of compensation increase of 0.00% (due to plan freeze) and 5.73%,
respectively. The expected long-term rate of return on plan assets is based upon a
long-term interest rate model because the assets of the retirement plan were invested
primarily in equity securities. The asset allocation of the Companys pension plan at
October 1, 2003 and 2002 from the most recent actuarial study is summarized below:

|                  | October 1,
|----------------- | ----------
|
|Asset category:   |           
|Equity securities |           
|Debt securities   |           
|Real estate       |           
|Other             |           
|                 
|                  |           
|                 

Through
2003, the Companys investment policies and strategies regarding the pension plan did
not use target allocations for individual asset categories. The Companys investment
goals were to maximize returns subject to specific risk management policies. Its risk
management policies permit investments in mutual funds and prohibit direct investments in
debt and equity securities and derivative financial instruments. The Company addressed
diversification by the use of mutual fund investments whose underlying investments are in
domestic fixed income securities and domestic and international equity securities. These
mutual funds were readily marketable and could be sold to fund benefit payment obligations
as they become payable.

116

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Savings
Plan.The Company sponsors a defined contribution 401(k) profit sharing
plan. At December 31, 2004 and December 31, 2003, the Bank 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, 2004, 2003 and 2002 were $522,000, $526,000 and $650,000, respectively,
and are included in salaries and employee benefits in the accompanying Consolidated
Statements of Income.

Deferred
Compensation Agreements.The Company has 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 the creditors of the Bank. The expense related to the
agreements was approximately $837,000, $690,000 and $551,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. The liability, which is included in
accrued expenses and other liabilities, is as shown in the following table:

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

Management
Incentive Compensation Plan.The Company has a management incentive
compensation plan designed to give officers and key employees, as determined by the 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 $1.3
million, $1.2 million and $1.2 million for the years ended December 31, 2004, 2003
and 2002, respectively. The liability for this plan is included in accrued expenses and
other liabilities.

117

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 18. Stock Based Benefit
Plans

Employee
Stock Ownership Plan.Concurrent with the conversion from mutual to stock
ownership, the Company established an ESOP for the benefit of employees of the Company and
the Bank. 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.

The
Company accounts for its ESOP in accordance with SOP 93-6. Accordingly, expense is
recognized based on the fair value (average stock price) of shares scheduled to be
released from the ESOP trust. As shares are committed to be released from collateral, the
Company reports compensation expense equal to the average market price of the shares and
the shares become outstanding for EPS computations. Bank contributions and dividends on
allocated and unallocated ESOP shares are used to pay down the loan. Accordingly, the
Company has recorded the obligation with an offsetting amount of unearned compensation in
shareholders equity in the accompanying December 31, 2004 Consolidated
Statements of Financial Condition. Expense related to the ESOP for the years ended
December 31, 2004, 2003 and 2002 was $3.3 million, $3.0 million and $535,000,
respectively. As of December 31, 2004 and 2003, the ESOP held 337,153 and 188,051,
respectively, of the allocated participant shares. As of December 31, 2004 and 2003, the
ESOP had allocated to participants 338,626 and 188,126 shares, respectively, and 1,467,380
and 1,617,880 shares, respectively, were unallocated to participants and pledged as
collateral for the unearned shares on outstanding debt of $15.4 million as of December 31,
2004. The fair value of the unearned and unallocated shares as of December 31, 2004 and
2003 was approximately $36.5 million and $37.1 million, respectively.

Management
Recognition and Retention Plan.The Company established the 2003 MRRP which
is a stock-based incentive plan that was approved by the shareholders at the
Companys Annual Meeting of Shareholders held April 23, 2003. The 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 the
Companys stock as of the date the awards were made. The remaining unamortized cost
of the MRRP shares acquired to date is reflected as a reduction in shareholders
equity. Shareholders approved 903,003 shares to be granted under the MRRP of which 797,350
and 764,850 shares had been awarded at December 31, 2004 and 2003, respectively. No shares
were forfeited during the years ended December 31, 2004 and 2003. Expense under this plan
for the year ended December 31, 2004 and 2003 was approximately $2.8 million and $1.9
million, respectively. As of December 31, 2003, the Company had completed the purchase in
open market transactions of all 903,003 shares authorized to be awarded under the plan.

118

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Stock
Option Plan.The Company established the 2003 Stock Option Plan under which
2,257,508 shares of the Companys common stock are 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, end of year                               |                     |                            |                    
|                                                                    
|Stock options remaining for future grants                            |                     |                            |                    
|                                                                    

As
of December 31, 2004, 2,000 stock options had been exercised and 6,500 stock options had
been forfeited. There were no stock options exercised or forfeited during the year ended
December 31, 2003.

# 19. Regulatory
Capital Requirements

The
Bank is subject to various regulatory capital requirements administered by the 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 the Companys financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative measures
of the Banks 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 the
Bank to maintain minimum capital amounts and ratios (set forth in the following table).
The Banks primary regulatory agency, the Office of Thrift Supervision
(OTS), requires that the Bank 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%. Management believes, as of December 31,
2004, that the Bank exceeds all capital requirements to which it is subject.

As
of December 31, 2004 and 2003, 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
management believes have changed the Banks category. The actual capital amounts and
ratios as of December 31, 2004 and 2003 are presented in the following table:

119

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

|                            | Actual | For Capital
Adequacy Purposes | To be Well Capitalized
Under Prompt Corrective
Action Provisions
|--------------------------- | ------ | ----------------------------- | ----------------------------------------------------------------
|
|As of December 31, 2004:    |        |                               |                                                                 
|Total risk-based capital    |        |                              
|(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, 2003:    |        |                              
|Total risk-based capital    |        |                              
|(risk-weighted assets)      |        |                               | $                                                               
|Tier 1 capital (to adjusted |        |                              
|tangible assets)            |        |                               |                                                                 
|Tangible capital (to        |        |                              
|tangible assets)            |        |                               |                                                                 
|Tier 1 capital (to risk-    |        |                              
|weighted assets)            |        |                               |                                                                 
|                           

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

120

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
following table shows a reconciliation between the Banks capital calculated in
accordance with accounting principles generally accepted in the United States of America
(GAAP) and consolidated Bank regulatory capital amounts as presented in the
previous table:

|                                             | December 31, 2004
|-------------------------------------------- | -----------------
|
|Bank GAAP capital                            |                  
|Plus:                                        |                  
|General loan valuation allowance             |                  
|for loan losses                              |                  
|Net unrealized loss on available             |                  
|for sale securities                          |                  
|Less:                                        |                  
|Investment in nonincludable subsidiaries     |                  
|Goodwill and certain other intangible assets |                  
|Disallowed mortgage servicing asset          |                  
|                                            
|Bank regulatory capital                      |                  
|                                            
|
|
|Bank GAAP capital                            |                  
|Plus:                                        |                  
|General loan valuation allowance             |                  
|for loan losses                              |                  
|Less:                                        |                  
|Investment in nonincludable subsidiaries     |                  
|Disallowed mortgage servicing asset          |                  
|Net unrealized gain on available             |                  
|for sale securities                          |                  
|                                            
|Bank regulatory capital                      |                  
|                                            

121

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 20. Lease Commitments

At
December 31, 2004, 2003 and 2002, the Company was 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 $795,000, $614,000 and $607,000, for the years ended
December 31, 2004, 2003 and 2002, 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
|-------------------------------- | ------
|2005                             |       
|2006                             |       
|2007                             |       
|2008                             |       
|2009                             |       
|Thereafter                       |       
|                                
|Total minimum lease payments due |       
|                                

122

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 21. Fair Value of
Financial Instruments

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

General
Assumptions.The Company assumes 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 due
from banks, federal funds sold, 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 FHLB Stock, Advances from FHLB and Other Borrowings.The fair value of
FHLB stock is equivalent to its carrying amount due to it only being redeemable at par
value with the FHLB. The fair value of advances from the FHLB and other borrowings is the
estimated market value of similar advances and borrowings with comparable maturities at
interest rates currently offered by the FHLB.

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-rate 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 allowance for loan
losses, as recorded in these consolidated financial statements, is considered by
management to include a reasonable estimation of the credit and market risk associated
with nonperforming loans.

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.

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.

123

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
estimated fair values of the Companys financial instruments at December 31,
2004 and 2003 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.

|                             | December 31,
|---------------------------- | ------------
|
|
|Financial assets:            |             
|Cash and due from banks      |             
|Investment securities        |             
|Mortgage-backed securities   |             
|Net loans after allowance    |             
|for loan losses              |             
|Accrued interest receivable  |             
|Federal Home Loan Bank stock |             
|Financial liabilities:       |             
|Deposits                     |             
|Advances from Federal        |             
|Home Loan Bank 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 the Companys 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           Instrumentsexcludes 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.

124

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 22. 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, 2004 and 2003, the Company had commitments to originate fixed-rate loans
of approximately $36.0 million and $33.8 million, respectively, and adjustable-rate loans
of approximately $35.4 million and $52.9 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 4.24% to 12.46% and 4.00% to 18.00% at December 31, 2004
and 2003, 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. The Company evaluates
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, 2004 and 2003, the Company had commitments to lend under unused
warehouse mortgage lines of credit of approximately $439.6 million and $493.1 million,
respectively. The Company also had commitments to lend customers unused consumer
lines of credit at December 31, 2004 and 2003 of approximately $120.4 million and $95.6
million, respectively. In addition, at December 31, 2004 and 2003, the Company had
commitments to lend to customers pursuant to unused commercial lines of credit of
approximately $136.4 million and $46.0 million, respectively.

At
December 31, 2004 and 2003, outstanding commitments to purchase mortgage loans
aggregated approximately $60.4 million and $59.8 million, respectively, and commitments to
sell mortgage loans aggregated approximately $36.8 million and $31.6 million,
respectively. These commitments to sell extend over varying periods of time with the
majority being settled within a 60-day period.

At
December 31, 2004 and 2003, the Company had commitments to purchase investment securities
of approximately $1.6 million and $1.1 million, respectively.

The
Company has 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.

The
Company is party to litigation and claims arising in the normal course of business.
Management, after consultation with legal counsel, believes that the liabilities, if any,
arising from such litigation and claims will not be material to the Companys
Consolidated Statements of Financial Condition or Consolidated Statements of Income.

125

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Information
pertaining to the notional amounts of the Companys derivative financial instruments
is presented in the following table:

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

The
fair value of these derivative financial instruments were recorded in the Companys
Statements of Financial Condition at December 31, 2004 and 2003. The gain or loss on
derivatives was deemed inconsequential for the years ended December 31, 2004 and 2003.

# 23. Concentration of
Credit Risk

At
December 31, 2004 and 2003, the Company had second mortgage residential, multi-family
residential, commercial real estate and land, construction, agricultural, business and
consumer loans and warehouse mortgage lines of credit which are considered by management
to be of greater risk of collectibility than one-to-four family residential loans. These
loans totaled approximately $2.2 billion and $1.5 billion at December 31, 2004 and
2003, respectively.

126

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 24. Condensed Parent
Company Financial Statements

The
following represents the condensed Statements of Financial Condition as of
December 31, 2004 and 2003 and condensed Statements of Income and Cash Flows for the
years ended December 31, 2004 and 2003 and three months ended December 31, 2002 for
TierOne Corporation, the parent company.

# Statements of
Financial Condition                                             (Parent Company Only)
                                         December 31, 2004 and 2003

|(Dollars in thousands, except per share data) | 2004 | 2003
|--------------------------------------------- | ---- | ----
|Assets                                        |      |     
|Cash in subsidiary bank                       |      |     
|Investment securities, available for sale     |      |     
|Investment in subsidiary bank                 |      |     
|Note receivable from subsidiary bank          |      |     
|Deferred tax asset                            |      |     
|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                 |      |     
|Unallocated common stock held by the          |      |     
|Management Recognition and Retention Plan     |      |     
|Accumulated other comprehensive loss, net     |      |     
|                                             
|Total stockholders' equity                    |      |     
|                                             
|Total liabilities and stockholders' equity    |      |     
|                                             

127

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# Statements of Income
                                              (Parent Company Only)
                   Years Ended December 31, 2004, 2003 and Three Months Ended December
31, 2002

|(Dollars in thousands)                                         | 2004 | 2003 | 2002
|-------------------------------------------------------------- | ---- | ---- | ----
|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              |      |      |     
|Contribution to TierOne Charitable Foundation                  |      |      |     
|Other expense                                                  |      |      |     
|                                                              
|Net income (loss) before income tax (expense) benefit          |      |     
|and equity in earnings of subsidiary bank                      |      |      |     
|Income tax (expense) benefit                                   |      |      |     
|                                                              
|Net income (loss) before equity in earnings of subsidiary bank |      |      |     
|Equity in earnings of subsidiary bank                          |      |      |     
|                                                              
|Net income                                                     |      |      | $   
|                                                              

128

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# Statements of Cash
Flows                                                  (Parent Company Only)
          Years Ended December 31, 2004 and December 31, 2003 and the Three Months Ended
December 31, 2002

|(Dollars in thousands)                                                                                         | 2004 | 2003 | 2002
|-------------------------------------------------------------------------------------------------------------- | ---- | ---- | ----
|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                                                                          |      |      |     
|Contribution of stock to TierOne Charitable Foundation                                                         |      |      |     
|Deferred income tax expense (benefit)                                                                          |      |      |     
|Net (gain) loss 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 provided by (used in) 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 sale of investment securities, available for sale                                                |      |      |     
|Dividends received from subsidiary bank                                                                        |      |      |     
|Investment in subsidiary bank                                                                                  |      |      |     
|Net (advances) repayment on note receivable from subsidiary bank                                               |      |      |     
|                                                                                                              
|Net cash provided by (used in) investing activities                                                            |      |      |     
|                                                                                                              
|Cash flows from financing activities:                                                                          |      |     
|Proceeds of stock conversion, net                                                                              |      |      |     
|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 provided by (used in) financing activities                                                            |      |      |     
|                                                                                                              
|Net increase in cash in subsidiary bank                                                                        |      |      |     
|Cash in subsidiary bank at beginning of period                                                                 |      |      |     
|                                                                                                              
|Cash in subsidiary bank at end of period                                                                       |      |      | $   
|                                                                                                              
|Noncash financing activities:                                                                                  |      |     
|During 2002, the Company issued 1,806,006 shares of common stock to the Employee Stock Ownership Plan ("ESOP") |      |     
|and recorded a note receivable from the ESOP. The note receivable is shown as unallocated common stock held by |      |     
|the ESOP in the balance sheet.                                                                                 |      |     
|                                                                                                              

129

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 25. Quarterly Financial
Information (Unaudited)

|                                    | Year Ended December 31, 2004
|----------------------------------- | ----------------------------
|
|Total interest income               |                             
|Net interest income                 |                             
|Provision for loan losses           |                             
|Net income                          |                             
|Basic earnings per share            |                             
|Diluted earnings per share          |                             
|Dividends declared per common share |                             
|
|
|Total interest income               |                             
|Net interest income                 |                             
|Provision for loan losses           |                             
|Net income                          |                             
|Basic earnings per share            |                             
|Diluted earnings per share          |                             

130

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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 accountants to report.

# Item 9A. Controls and
Procedures

# Evaluation of Disclosure
Controls and Procedures

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

# 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
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 the 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, 2004
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, 2004, our internal control
over financial reporting was effective based on those criteria.

Our
auditors, KPMG LLP have issued an attestation report on managements assessment of
our internal control over financial reporting. That attestation report is set forth on pages 82-84.

131

---

# 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, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

# Item 9B. Other
Information

None.

132

---

# 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 to be held May 2, 2005 (the
Proxy Statement), which will be filed with the Securities and Exchange
Commission prior to April 30, 2005.

The
Company has adopted a Code of Conduct and Ethics that applies to its principal executive
officer and principal 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 Form 10-K and filed with the Securities and Exchange Commission), may also be found
on the Companys website at www.tieronebank.com. The Company intends 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 its
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.

133

---

# 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,
2004:

|Plan Category             | Number of Shares to be Issued Upon the Exercise of OutstandingOptions, Restricted Stock Grants,Warrants and Rights | Weighted-Average Exercise Price ofOutstanding OptionsRestricted Stock Grants,Warrants and Rights | Number of Shares 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                     |                                                                                                                    |                                                                                                  |                                                                                                       
|                         

# 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.

134

---

# PART IV

# Item 15. Exhibits and
Financial Statement Schedules

| | (a)(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, 2004 and 2003;
| | - | -----------------------------------------------------------------------------

| |  | Consolidated
Statements of Income for the years ended December 31, 2004, 2003 and 2002;
| | - | ---------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Changes in Stockholders' Equity for the years ended December 31, 2004, 2003
and 2002;
| | - | ----------------------------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002;
| | - | -------------------------------------------------------------------------------------------

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

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

| | (a)(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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

135

---

# 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 4, 2005 | 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 4, 2005  | By:  /s/ Gilbert G. Lundstrom                    
|-------------------- | -------------------------------------------------
|                     | Gilbert G. Lundstrom                             
|                     | Chairman of the Board and Chief Executive Officer
|Date:  March 4, 2005 | By:  /s/ James A. Laphen                         
|                     | James A. Laphen                                  
|                     | Chief Operating Officer and Director             
|Date:  March 4, 2005 | By:  /s/ Eugene B. Witkowicz                     
|                     | Eugene B. Witkowicz                              
|                     | Chief Financial Officer and Corporate Secretary  
|                     | (Principal Accounting Officer)                   
|Date:  March 4, 2005 | By:  /s/ Campbell R. McConnell                   
|                     | Campbell R. McConnell                            
|                     | Director                                         
|Date: March 4, 2005  | By:  /s/ Joyce Person Pocras                     
|                     | Joyce Person Pocras                              
|                     | Director                                         
|Date:  March 4, 2005 | By:  /s/ Ann Lindley Spence                      
|                     | Ann Lindley Spence                               
|                     | Director                                         
|Date:  March 4, 2005 | By:  /s/ Charles W. Hoskins                      
|                     | Charles W. Hoskins                               
|                     | Director                                         

136

---

# 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*                              | Filed Herewith
|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*                                                                  | Filed Herewith
|10.17 | Form of Employee Compensatory Stock Option Agreement for use under the                   |               
|      | 2003 Stock Option Plan*                                                                  | Filed Herewith
|10.18 | Form of Employee Incentive Stock Option Agreement for use under 2003 Stock Option Plan*  | Filed Herewith
|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                                                                 | Filed Herewith
|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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

137