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

# FORM 10-K

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

# For the fiscal year
ended December 31, 2006

# Commission File
Number: 005-78774

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

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

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

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

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

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

Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|

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

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

The aggregate market value of the
voting stock held by non-affiliates of the Registrant was $612,915,166 as of June 30,
2006. As of March 6, 2007, there were 18,057,813 issued and outstanding shares of the
Registrants common stock.

---

# Documents Incorporated
by Reference

Portions of the definitive Proxy
Statement for the Registrants Annual Meeting of Shareholders to be held May 15, 2007
are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14.

---

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# TierOne Corporation

# Form 10-K Index

| | Part I. | Page
| | ------- | ----

|Item 1.  | Business                                            | 4 
|-------- | --------------------------------------------------- | --
|Item 1A. | Risk Factors                                        | 34
|Item 1B. | Unresolved Staff Comments                           | 38
|Item 2.  | Properties                                          | 38
|Item 3.  | Legal Proceedings                                   | 39
|Item 4.  | Submission of Matters to a Vote of Security Holders | 39

Part II.

|Item 5.  | Market for the Registrants Common Equity, Related Stockholder Matters  |    
|-------- | ----------------------------------------------------------------------- | ---
|         | and Issuer Purchases of Equity Securities                               | 40 
|Item 6.  | Selected Financial Data                                                 | 42 
|Item 7.  | Managements Discussion and Analysis of Financial Condition and Results
|         | of Operations                                                           | 43 
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk              | 71 
|Item 8.  | Financial Statements and Supplementary Data                             | 72 
|Item 9.  | Changes in and Disagreements With Accountants on Accounting and        
|         | Financial Disclosure                                                    | 112
|Item 9A. | Controls and Procedures                                                 | 112
|Item 9B. | Other Information                                                       | 114

Part III.

|Item 10. | Directors, Executive Officers and Corporate Governance                | 115
|-------- | --------------------------------------------------------------------- | ---
|Item 11. | Executive Compensation                                                | 115
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and   
|         | Related Stockholder Matters                                           | 115
|Item 13. | Certain Relationships, Related Transactions and Director Independence | 116
|Item 14. | Principal Accountant Fees and Services                                | 116

Part IV.

|Item 15.   | Exhibits and Financial Statement Schedules | 117
|---------- | ------------------------------------------ | ---
|Signatures | 118                                       

2

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

Statements
contained in this Annual Report on Form 10-K and the accompanying 2006 Annual Report which
are not historical facts may be forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward looking statements are
subject to risks and uncertainties which could cause actual results to differ materially
from those currently anticipated due to a number of factors. In addition to the risk
factors described in Item 1A. of this Annual Report on Form 10-K, factors that could
result in material variations include, but are not limited to:

| |  | Strength
of the United States economy in general and the strength of the local economies in which
we conduct our operations;
| | - | ----------------------------------------------------------------------------------------------------------------------------

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

| |  | Changes
in deposit flows,  and in the demand for deposits,  loans,  investment  products and
other  financial  services in the          markets we serve;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Changes
in the quality or composition of our loan portfolios;
| | - | -------------------------------------------------------------

| |  | Changes
in real estate values, which could impact the quality of the assets securing the loans in
our portfolios;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | Borrower
bankruptcies, claims and assessments;
| | - | ----------------------------------------------

| |  | Unanticipated
issues associated with the execution of our strategic plan, including issues associated
with the growth of a more diversified loan portfolio;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
timely development of new lines of business and competitive products or services within
our existing lines of business in a changing environment, and the acceptance of such
products or services by our customers;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Any
interruption or breach of security resulting in failures or disruptions in customer
account management, general ledger, deposit operations, lending or other systems;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| |  | Other
factors discussed in documents we may file with the Securities and Exchange Commission
from time to time.
| | - | ---------------------------------------------------------------------------------------------------------------

These
factors should be considered in evaluating the forward-looking statements and undue
reliance should not be placed on such statements. We undertake no obligation, and disclaim
any obligation, to update information contained in this Annual Report on Form 10-K and the
accompanying 2006 Annual Report, including these forward-looking statements, to reflect
events or circumstances that occur after the date of the filing of this Annual Report on
Form 10-K and the accompanying 2006 Annual Report.

3

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# Part I

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

# Item 1. Business

# General

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

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

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

On
August 27, 2004, we acquired all of the issued and outstanding capital stock of United
Nebraska Financial Co. (UNFC), the holding company of United Nebraska Bank
(UNB), headquartered in Grand Island, Nebraska. The purchase price of this
acquisition was approximately $97.3 million. UNB had assets in excess of $500 million and
16 banking offices located in Nebraska. On November 1, 2004, we acquired all non-Indiana
residential construction loan production offices from First Indiana Bank of Indianapolis,
Indiana. The acquisition included the purchase of $134.4 million of outstanding
residential construction loans against forward commitments of $264.5 million and four loan
production offices located in Phoenix, Arizona; Orlando, Florida; and Charlotte and
Raleigh, North Carolina. On June 2, 2006, we completed the purchase of Marine Banks
only banking office in Omaha Nebraska. We acquired $8.1 million of deposits as a result of
this transaction. On December 15, 2006, we sold our Plainville and Stockton, Kansas bank
offices to Stockton National Bank of Stockton, Kansas. As a result of this sale, we
transferred $21.7 million of deposits to the purchaser and recorded a gain on sale of $1.0
million.

# Market Area and
Competition

We
are a regional community bank offering a variety of financial products and services to
meet the needs of the customers we serve. Our deposit gathering is concentrated in the
communities surrounding our 69 banking offices located in Nebraska, seven counties in
southwest Iowa and one county in northern Kansas (Primary Banking Market
Area). We compete for customers by emphasizing convenience and service, and by
offering a full range of traditional and non-traditional products and services. We offer
24-hour ATM banking at 68 of our banking offices and currently offer 33 ATM banking
locations at supermarkets, convenience stores and shopping malls.

In
addition to loans generated through our banking offices, our lending efforts have been
expanded to include nine loan production offices located in Arizona, Colorado, Florida,
Minnesota, Nevada and North Carolina whose primary purpose is to originate commercial real
estate and construction, land and land development and/or residential construction loans
in their respective states.

4

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

# Available Information

We
are a public company and are required to file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(SEC). We maintain a website at www.tieronebank.com and make available,
free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K and any amendments to such documents as soon as reasonably
practicable after the reports have been electronically filed or furnished to the SEC. In
addition, we provide our Code of Conduct and Ethics, Audit Committee Charter, Compensation
Committee Charter and Nominating and Corporate Governance Committee Charter on our
website. We are not including the information contained on or available through our
website as a part of, nor are we incorporating such information by reference, into this
Annual Report on Form 10-K.

# Lending Activities

General.         We
originate loans to customers located in Nebraska, Iowa, Kansas, Arizona,
          Colorado, Florida, Minnesota, Nevada and North Carolina (Primary Lending
          Market Area). Our Primary Lending Market Area is comprised of states in
          which we have banking or loan production offices. We also purchase loans and
          loan participation interests from financial institutions, loan correspondents
          and mortgage brokers located throughout the United States. At December 31, 2006
          and 2005, approximately 20.8% and 22.2%, respectively, of our total loan
          portfolio consisted of loans secured by properties located outside of our
          Primary Lending Market Area. In recent years, we have become a regional
          community bank by shifting our focus to multi-family residential, commercial
          real estate, land and land development, construction, agricultural, business,
          warehouse mortgage lines of credit and consumer lending. These loans typically
          have relatively higher yields, adjustable interest rates and/or shorter terms
to           maturities. Such loans, however, generally involve a higher degree of risk
than           financing one-to-four family residential loans because collateral is more
          difficult to appraise, the collateral may be difficult to obtain or liquidate
          following an uncured default and it can be difficult to predict the
          borrowers ability to generate future cash flows.

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

Loan
Portfolio Composition.  At December 31, 2006, our total loans receivable
amounted to $3.7 billion. We have shifted the focus of our lending
strategy to place an increased emphasis on multi-family residential, commercial real
estate, land and land development, construction, agricultural, business, warehouse
mortgage lines of credit and consumer lending. The types of loans that we may purchase and
originate are subject to federal and state laws and regulations. The interest rates we
charge on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These factors are, in
turn, affected by general and local economic conditions, monetary policies of the Federal
Government, including the Board of Governors of the Federal Reserve System and legislative
tax policies.

5

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Residential
Mortgage Lending.  One-to-four family residential mortgage loan originations
are generally obtained from our in-house loan representatives, from existing or past
customers and from mortgage brokers. We also originate and/or purchase from correspondent
lenders second mortgage loans in amounts up to 100% of the appraised value of the
collateral with maturities of up to 30 years.

We
currently originate fixed-rate, one-to-four family residential mortgage loans generally
with terms of up to 30 years. We sell substantially all newly originated fixed-rate,
one-to-four family residential loans into the secondary market on a servicing retained basis
which produces noninterest income in the form of net gains and losses on sales and loan
servicing fees.

We
originate or purchase adjustable-rate, one-to-four family residential mortgage loans with
terms of up to 30 years and interest rates which generally adjust one to seven years from
the outset of the loan and thereafter annually for the duration of the loan. The interest
rates for such adjustable-rate loans are normally tied to indices such as the U.S.
Treasury CMT or LIBOR, plus a margin. Our adjustable-rate loans generally provide for
periodic caps (generally not more than 2.0%) on the increase or decrease in the interest
rate at any adjustment date. The maximum amount the rate can increase or decrease from the
initial rate during the life of the loan is 5.0%  6.0% over the start rate.

The
origination or purchase of adjustable-rate, one-to-four family residential mortgage loans
helps reduce our exposure to interest rate risk. However, adjustable-rate loans generally
pose risks not inherent in fixed-rate loans, primarily because as interest rates rise, the
underlying payments of the borrower rise, thereby increasing the potential for default.
Periodic and lifetime caps on interest rate increases help to reduce the risks associated
with adjustable-rate loans but also limit the interest rate sensitivity of such loans.

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

Multi-Family
Residential, Commercial Real Estate and Land and Land Development Lending.We
offer multi-family residential, commercial real estate and land and land development loans
for permanent financing collateralized by real property. These loans are generally used
for business purposes such as apartment buildings, office and retail facilities and land
being held for commercial and residential development. The properties securing these loans
are generally located in our Primary Lending Market Area. At December 31, 2006, 67.5%,
83.1% and 96.3% of our multi-family residential, commercial real estate and land and land
development loans, respectively, were located within our Primary Lending Market Area. We
have increased our involvement in these lending categories as part of our strategy to
increase our investment in loans with relatively higher yields, adjustable interest rates
and/or shorter terms to maturity. We increased our capacity to originate such loans during
the past few years with the hiring of several experienced real estate lenders.

Our
underwriting procedures generally provide that multi-family residential, commercial real
estate and land and land development loans may be made in amounts up to 80% of the value
of the property if it is located within our Primary Lending Market Area and 75% of the
value if it is outside our Primary Lending Market Area. Loans exceeding prescribed
loan-to-value ratios must be reviewed by our Board of Directors and supported by
documentation of the relevant factors justifying the deviation from policy.

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

6

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Construction
Lending. We offer residential construction loans for either pre-sold houses
(a purchase contract has been signed) or speculative houses (properties for which no buyer
yet exists). We originate most of our residential construction loans within our Primary
Lending Market Area typically through direct contact with home builders. At December 31,
2006, approximately 82.0% of our residential construction loans were located in our
Primary Lending Market Area. At December 31, 2006, approximately 57.1% of our residential
construction loans were for pre-sold houses. During the years ended December 31, 2006 and
2005, we purchased $161.5 million and $589.5 million, respectively, of residential
construction loans.

We
also originate commercial real estate construction loans as well as purchase participation
interests in such loans. We provide commercial construction loans to real estate
developers for the purpose of constructing a variety of commercial projects such as retail
facilities, industrial buildings and warehouses. At December 31, 2006, 76.9% of our
commercial construction loans were located in our Primary Lending Market Area.

Commercial
construction lending involves a higher degree of risk than one-to-four family residential
lending, therefore, we closely monitor our concentration in such loans. We also seek a
broad diversification of project types, borrowers and geographic areas to reduce the level
of risk associated with this lending type.

Our
ability to originate both residential and commercial construction loans significantly
increased during 2004, 2005 and 2006 with the acquisition or opening of loan production
offices in Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. Additionally,
we have, in recent years, hired several experienced real estate loan officers to increase
our capabilities in both types of construction lending.

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

Agricultural
Loans. Agricultural loans are made predominantly to farmers and ranchers in
Nebraska, Iowa and Kansas. At December 31, 2006, 97.9% of our agricultural loans were
located in our Primary Lending Market Area. Agricultural operating loans are made to
finance day-to-day operations, including crop and livestock production. Intermediate term
loans are used to purchase breeding livestock and machinery. Real estate loans are used to
purchase or refinance farm and ranchland.

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

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

Warehouse
Mortgage Lines of Credit.  We are actively involved in originating revolving
lines of credit to mortgage brokers. These lines are drawn upon by mortgage brokers to
fund the origination of one-to-four family residential mortgage loans. Prior to funding
the advance, the mortgage broker must have an approved commitment for the purchase of the
loan which reduces credit exposure associated with the line. The lines are repaid upon
sale of the mortgage loan to a third party which usually occurs within 30 days of
origination of the loan. In connection with extending the line of credit to the mortgage
broker, we enter into agreements with the purchaser to which such mortgage broker intends
to sell loans. Under such agreements, the loan purchaser agrees to hold the mortgage
documents issued by the mortgage brokers on our behalf and for our benefit until such time
that the purchaser remits to us the purchase price for such loans. As part of the
structure of the lines of credit, the mortgage brokers are required to maintain commercial
deposits with us, with the amount of such deposits dependent upon the amount of the line
and other factors. The lines are structured with adjustable rates indexed to the Wall
Street Journal prime rate. Maximum amounts permitted to be advanced by us under existing
warehouse mortgage lines of credit range in amounts from $1.5 million to $40.0 million.

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Business
Lending.  Business loans are made predominantly to small- and mid-sized
businesses located within Nebraska, Iowa and Kansas. At December 31, 2006, 97.7% of our
business loans were located in our Primary Lending Market Area. The business lending
products we offer include lines of credit, receivable and inventory financing and
equipment loans. We have established minimum underwriting standards in regard to business
loans which set forth the criteria for sources of repayment, borrowers capacity to
repay, specific financial and collateral margins and financial enhancements such as
guarantees. Generally, the primary source of repayment is cash flow from the business and
the financial strength of the borrower.

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

Consumer
and Other Lending.  Consumer loans are generally originated directly through
our network of banking offices. We generally offer home equity loans, home improvement
loans and home equity lines of credit in amounts up to $100,000 with a term of 15 years or
less and a loan-to-value ratio up to 100% of the appraised value of the collateral. A
portion of our home improvement loans consist of participation interests we have purchased
from a third party. Under the terms of our third party arrangement, if any loan becomes
more than 120 days past due, we can require the seller to repurchase such loan at a price
equal to our total investment in the loan, including any uncollected and accrued interest.
We also offer automobile loans in amounts up to $50,000 with maximum 72 month and 60 month
terms for new and used cars, respectively, and purchase price ratios of generally not more
than 95% and 85% for new and used cars, respectively. Most of our automobile loans are
obtained through a network of 80 new and used automobile dealers located primarily in
Lincoln and Omaha, Nebraska. Although employees of the automobile dealership take the
application, the loan is made pursuant to our underwriting standards and must be
approved by one of our authorized loan officers. Our consumer loan portfolio also includes
manufactured housing, recreational vehicle, boat, motorcycle and unsecured loans.

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

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

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

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Loan
Portfolio  Concentration  by State.  The following  table details the  concentration  of
our total loan portfolio by state at the dates indicated:

|                                              | At December 31,
|--------------------------------------------- | ---------------
|
|Within Our Primary Lending Market Area:       |                
|Nebraska                                      |                
|Florida                                       |                
|Colorado                                      |                
|Nevada                                        |                
|Arizona                                       |                
|North Carolina                                |                
|Minnesota                                     |                
|Iowa                                          |                
|Kansas                                        |                
|                                             
|Total within our primary lending market area  |                
|                                             
|Outside our Primary Lending Market Area:      |                
|South Carolina                                |                
|California                                    |                
|Texas                                         |                
|Illinois                                      |                
|Washington                                    |                
|Oregon                                        |                
|Other States                                  |                
|                                             
|Total outside our primary lending market area |                
|                                             
|Total loans                                   |                
|                                             

No
individual state in the Other States category comprises more than one percent
of total loans at December 31, 2006. Our total loans in Florida at December 31, 2006 were
$317.5 million, a decrease of $191.3 million, or 37.6%, compared to $508.8 million at
December 31, 2005. During 2006, we reduced the volume of residential construction loans we
purchase from mortgage brokers in the state of Florida. This decision was made in order to
manage our concentration of loans within the state of Florida. Our total loans in Nevada
increased $220.3 million, or 673.6%, to $253.0 million at December 31, 2006 compared to
$32.7 million at December 31, 2005. This increase was primarily attributable to the
opening of our loan production office in Las Vegas, Nevada which originates residential
construction and land and land development loans. The Nevada loan production office opened
in late December 2005.

10

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Contractual
Terms to Final Maturities. The following table shows the scheduled
contractual maturities of our loans at December 31, 2006. Demand loans, loans having no
stated schedule of repayments and no stated maturity and overdrafts are reported as due in
one year or less. The following amounts do not take into account loan prepayments.

|                                                                                                                                                                                                                                                     | Principal Payments Contractually Due in Years | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | 
|
|Real estate loans:                                                                                                                                                                                                                                   |                                               | 
|One-to-four family residential                                                                                                                                                                                                                       |                                               | 
|Second mortgage residential                                                                                                                                                                                                                          |                                               | 
|Multi-family residential                                                                                                                                                                                                                             |                                               | 
|Commercial real estate                                                                                                                                                                                                                               |                                               | 
|Land and land development                                                                                                                                                                                                                            |                                               | 
|Residential construction                                                                                                                                                                                                                             |                                               | 
|Commercial construction                                                                                                                                                                                                                              |                                               | 
|Agriculture                                                                                                                                                                                                                                          |                                               | 
|                                                                                                                                                                                                                                                    
|Total real estate loans                                                                                                                                                                                                                              |                                               | 
|                                                                                                                                                                                                                                                    
|Business                                                                                                                                                                                                                                             |                                               | 
|Agriculture - operating                                                                                                                                                                                                                              |                                               | 
|Warehouse mortgage lines of credit                                                                                                                                                                                                                   |                                               | 
|Consumer                                                                                                                                                                                                                                             |                                               | 
|                                                                                                                                                                                                                                                    
|Total loans (1) (2)                                                                                                                                                                                                                                  |                                               | 
|                                                                                                                                                                                                                                                    
|(1) Gross of unamortized premiums, discounts and deferred loan fees, loans in process and allowance for loan losses.                                                                                                                                
|(2)  Total loans due after one year from December 31, 2006 with fixed interest rates totaled $1.0 billion.
             Total loans due after one year from December 31, 2006 with floating or adjustable interest rates totaled
      $1.2 billion.
|                                                                                                                                                                                                                                                    

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

Although
we originate both adjustable-rate and fixed-rate loans, our ability to originate and
purchase fixed- or adjustable-rate loans is dependent upon customer demand for such loans,
which is affected by the current and expected future level of interest rates. In order to
maintain a mortgage loan portfolio that consists primarily of adjustable-rate loans, we
purchase loans to supplement our loan origination activity. The loans purchased for retention during
2006 consisted of construction, one-to-four family residential, consumer (primarily home
improvement loans and automobile financing), business, multi-family residential, land and
land development (including participation interests) and second mortgage residential
loans.

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

11

---

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

12

---

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

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

13

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Loan
Servicing.  We sell substantially all fixed-rate, one-to-four family
residential mortgage loans with servicing retained in order to develop additional sources
of noninterest income. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding escrow funds for the payment of real estate
taxes and insurance premiums, contacting delinquent borrowers and supervising foreclosures
and property dispositions in the event of unremedied defaults. The gross servicing fee
income from loans sold is generally 0.25% to 0.50% of the total balance of each loan
serviced. At December 31, 2006 and 2005, we were servicing $1.3 billion and $1.2 billion,
respectively, of loans for others, primarily consisting of one-to-four family residential
loans sold by us in the secondary market.

Loan
Commitments.  We generally issue written commitments to individual borrowers
and mortgage brokers for the purposes of originating and purchasing loans. These loan
commitments establish the terms and conditions under which we will fund the loans. At
December 31, 2006, we had issued commitments totaling $865.9 million, excluding loans in
process, to fund and purchase loans, extend credit on commercial and consumer unused lines
of credit and to extend credit under unused warehouse mortgage lines of credit. These
outstanding loan commitments do not necessarily represent future cash requirements since
many of the commitments may expire without being drawn.

# Asset Quality

Reports
listing all delinquent loans, classified assets and real estate owned are reviewed by
management and our Board of Directors no less frequently than quarterly. The procedures we
take with respect to delinquencies vary depending on the nature of the loan, period and
cause of delinquency and whether the borrower is habitually delinquent. When a borrower
fails to make a required payment on a loan, we take a number of steps to have the borrower
cure the delinquency and restore the loan to current status. In the event payment is not
then received or the loan not otherwise satisfied, letters and telephone calls generally
are made. If the loan is still not brought current or satisfied and it becomes necessary
for us to take legal action, which typically occurs after a loan is 90 days or more
delinquent, we will commence recovery proceedings against the property securing the loan.
If a legal action is instituted and the loan is not brought current, paid in full, or
refinanced before the recovery sale, the property securing the loan generally is sold and,
if purchased by us, becomes real estate owned or a repossessed asset.

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

|                                           | At December 31,
|------------------------------------------ | ---------------
|
|One-to-four family residential             |                
|Second mortgage residential                |                
|Commercial real estate                     |                
|Land and land development                  |                
|Residential construction                   |                
|Agriculture                                |                
|Business                                   |                
|Agriculture - operating                    |                
|Consumer                                   |                
|                                          
|Total delinquent loans                     |                
|                                          
|Delinquent loans as a percentage of        |                
|net loans before allowance for loan losses |                
|                                          

14

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

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

At
December 31, 2006, our nonperforming residential construction loans totaled $18.1 million
of which $13.7 million were located in Florida. Approximately $9.4 million of our
nonperforming residential construction loans in Florida were located in the Cape Coral
area of Lee County. Working with a local Florida-based mortgage brokerage firm, we
acquired nine- to 18-month residential construction loans for individual homebuyers who
represented to us their intention to build a second or retirement home in the Cape Coral
area. Each borrower possessed a strong credit score which met FNMA or other secondary
market underwriting guidelines and had also obtained a contractual commitment for
permanent financing with third-party lenders upon the completion of the residence. We have
not purchased residential construction loans in the Cape Coral area since December 31,
2005. A substantial increase in the number of residential construction building permit
applications, coupled with other contributing factors in the Cape Coral area in 2006,
resulted in delays affecting the commencement of construction. In some cases, these delays
extended beyond the original term of the residential construction loan. As a result of
these factors, some borrowers in the Cape Coral area have not kept current on their contractual loan payment
obligation and are now 90 or more days delinquent. This backlog of
residential construction permits awaiting issuance has recently improved and the City
of Cape Corals permit issuance process has returned to its normal four- to
six-week time frame. As a result, residential builders are actively constructing homes for
our borrowers. At December 31, 2006, we had 535 residential construction loan commitments
in the Cape Coral area which amounted to $144.9 million with disbursed funds totaling
$84.2 million. Since December 2006, our Cape Coral residential construction loans have continued to decline as
borrowers pay off loans.

15

---

Our
nonperforming land and land development loans at December 31, 2006 primarily consist of
three loans totaling $4.6 million. These loans primarily relate to the development of land
for the purpose of constructing residential homes.

Interest
income that would have been recognized had nonperforming loans and troubled debt
restructurings been current or in accordance with their original terms approximates $1.8
million and $802,000 for the years ended December 31, 2006 and 2005, respectively.

Impaired
Loans.  Included in the preceding table, under nonperforming loans and
troubled debt restructurings, are impaired loans of $3.8 million and $4.2 million at
December 31, 2006 and 2005, respectively. The average balance of impaired and restructured
loans for the years ended December 31, 2006 and 2005 totaled $11.4 million and $7.1
million, respectively. Interest recognized on impaired and restructured loans for the
years ended December 31, 2006 and 2005 was $725,000 and $603,000, respectively. At
December 31, 2006, impaired loans consisted primarily of 12 business loans totaling $2.0
million, six residential construction loans totaling $459,000 and $1.1 million of consumer
loans. We had established an allowance for loan losses related to impaired loans of
$152,000 and $1.1 million at December 31, 2006 and 2005, respectively.

Real
Estate Owned.  When we acquire real estate owned property through
foreclosure or deed in lieu of foreclosure, it is initially recorded at the lower of the
recorded investment in the corresponding loan or the fair value of the related assets at
the date of foreclosure, less costs to sell. If there is a further deterioration in value,
we provide for a specific valuation allowance and charge operations for the decline in
value. We generally obtain an appraisal or 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 of such properties.

Real
Estate Owned Activity. The following table sets forth the activity of our
real estate owned for the periods indicated:

|                                      | Year Ended December 31,
|------------------------------------- | -----------------------
|
|Balance at beginning of period        |                        
|Loan foreclosures and other additions |                        
|Sales                                 |                        
|Provisions for losses                 |                        
|Gain (loss) on disposal               |                        
|                                     
|Balance at end of period              |                        
|                                     

At
December 31, 2006, real estate owned consisted primarily of three commercial properties
totaling $4.4 million and nine residential properties totaling $778,000.

16

---

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

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

Allowance
for Loan Losses.A provision for loan losses is charged to earnings when it is
determined by management to be required based on our analysis. The allowance for loan
losses is maintained at a level to cover all known and inherent losses in the loan
portfolio that are both probable and reasonable to estimate at each reporting date.
Management reviews the loan portfolio no less frequently than quarterly in order to
identify those inherent losses and to assess the overall collection probability of the
portfolio. Our review includes a quantitative analysis by loan category, using historical
loss experience, classifying loans pursuant to a grading system and consideration of a
series of qualitative loss factors. These loss factors are developed using our historical
loan loss experience for each group of loans as further adjusted for specific factors,
including the following:

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

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

| |  | Underwriting
terms or guarantees for loans;
| | - | -------------------------------------------

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

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

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

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

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

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

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

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

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

Management
believes that, based on information currently available to us at this time, our allowance
for loan losses is maintained at a level which covers all known and inherent losses that
are both probable and reasonable to estimate at each reporting date. Actual losses are
dependent upon future events and, as such, further changes to the level of allowances
for loan losses may become necessary.

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

17

---

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

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

18

---

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

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

|                                                                                                                                                                                                    | At December 31,
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------
|
|
|One-to-four family residential                                                                                                                                                                      |                
|Second mortgage residential *                                                                                                                                                                       |                
|Multi-family residential                                                                                                                                                                            |                
|Commercial real estate                                                                                                                                                                              |                
|Land and land development                                                                                                                                                                           |                
|Residential construction                                                                                                                                                                            |                
|Commercial construction                                                                                                                                                                             |                
|Agriculture                                                                                                                                                                                         |                
|Business                                                                                                                                                                                            |                
|Agriculture - operating                                                                                                                                                                             |                
|Warehouse mortgage lines                                                                                                                                                                            |                
|of credit                                                                                                                                                                                           |                
|Consumer                                                                                                                                                                                            |                
|Unallocated                                                                                                                                                                                         |                
|                                                                                                                                                                                                   
|Total                                                                                                                                                                                               |                
|                                                                                                                                                                                                   
|* Second mortgage residential loans disclosed separately for 2003, 2004, 2005 and 2006 as we began
      analyzing this portfolio separately in 2003 due to our increased investment in such loans.
|                                                                                                                                                                                                   

19

---

# Investment Activities

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

Our
investment policy, as approved by our Board of Directors, requires management to maintain
adequate liquidity and to generate a favorable return on investment without incurring
undue interest rate and credit risk. We primarily utilize investments in securities for
liquidity management and as a method of deploying excess funding not utilized for loan
originations and purchases. We have invested in U.S. Government securities and agency
obligations, corporate securities, municipal obligations, agency equity securities, mutual
funds, U.S. Government sponsored agency issued mortgage-backed securities and
collateralized mortgage obligations. As required by SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, we have established an investment
portfolio of securities that are categorized as held to maturity or available for sale. We
do not currently maintain a portfolio of securities categorized as held for trading.
Substantially all of our investment securities are purchased for the available for sale
portfolio which totaled $105.0 million, or 3.1% of total assets, at December 31, 2006. At
such date, we had net unrealized losses with respect to such securities of $963,000. At
December 31, 2006, the held to maturity securities portfolio totaled $90,000.

At
December 31, 2006, our mortgage-backed security portfolio (all of which were classified as
available for sale) totaled $12.3 million, or 0.4% of total assets. Investments in
mortgage-backed securities involve a risk that actual prepayments will be greater than
estimated prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such instruments
thereby changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event the issuer redeems
such securities. In addition, the fair value of such securities may be adversely affected
by changes in interest rates.

The
Government National Mortgage Association (GNMA) is a government agency within
the Department of Housing and Urban Development which is intended to help finance
government-assisted housing programs. GNMA securities are backed by loans insured by the
Federal Housing Administration, or guaranteed by the Veterans Administration. The timely
payment of principal and interest on GNMA securities is guaranteed by GNMA and backed by
the full faith and credit of the U.S. Government. FHLMC is a private corporation chartered
by the U.S. Government. FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage
loans. FNMA guarantees the timely payment of principal and interest on FNMA securities.
FHLMC and FNMA securities are not backed by the full faith and credit of the U.S.
Government, but because FHLMC and FNMA are U.S. Government-sponsored enterprises, these
securities are considered to be among the highest quality investments with minimal credit
risks.

20

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

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

Investment Security Maturity and Yield.  The following table sets forth the
amount of available for sale investment securities which mature during each of the years
indicated and the weighted average yields for each range of maturities at December 31,
2006. No tax-exempt yields have been adjusted to a tax-equivalent basis.

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

21

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Mortgage-Backed
 Securities  Portfolio  Composition.  The  following  table  sets  forth the  composition
 of our  mortgage-backed securities portfolio at the dates indicated:

|                                 | At December 31,
|-------------------------------- | ---------------
|
|
|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 |                
|                                

Mortgage-Backed
Security Maturity and Yield. Information regarding the contractual maturities and weighted
average yield of our mortgage-backed securities portfolio at December 31, 2006 is
presented below. Due to repayments of the underlying loans, the actual maturities of
mortgage-backed securities generally are less than the scheduled maturities.

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

22

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Unrealized
Losses. At December 31, 2006 and 2005, all unrealized losses related to
investment and mortgage-backed securities are considered temporary in nature. Impairment
is deemed temporary if the positive evidence indicating that an 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,
2006 and 2005, are summarized in the following tables:

|                                      | Less than 12 Months | 12 Months or Longer | Total
|------------------------------------- | ------------------- | ------------------- | -----
|
|At December 31, 2006:                 |                     |                     |      
|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 |                     |                     | $    
|                                     
|At December 31, 2005:                 |                     |                    
|U.S. Government securities and        |                     |                    
|agency obligations                    |                     |                     | $    
|Corporate securities                  |                     |                     |      
|Municipal obligations                 |                     |                     |      
|Agency equity securities              |                     |                     |      
|Asset Management Fund - ARM Fund      |                     |                     |      
|Mortgage-backed securities            |                     |                     |      
|                                     
|Total temporarily impaired securities |                     |                     | $    
|                                     

We
believe all unrealized losses at December 31, 2006 and 2005 to be market related, with no
permanent sector or issuer credit concerns or impairments. The unrealized losses are
believed to be temporarily, not permanently, impaired in value.

23

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# Sources of Funds

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

Deposits.
          As a regional community bank, we offer a variety of deposit products designed
to           attract both short-term and long-term deposits from the general public. Our
          product offerings consist of checking (both interest- and noninterest-bearing),
          money market, savings, time deposits and individual retirement accounts. We
also           use brokered time deposits as an additional source of funds for our loan
          origination and purchase activity. During 2006, deposits generated through our
retail banking facilities increased $105.6 million and we acquired $8.1 million in
deposits related to the Marine Bank transaction. Offsetting our 2006 increase in deposits
was a transfer of $21.7 million of deposits to the purchaser of our Plainville and
Stockton, Kansas bank offices and the maturing of $78.0 million of brokered time deposits
which existed at December 31, 2005. As a result, net deposits increased $14.0 million, or
0.7% to $2.1 billion at December 31, 2006. At December 31, 2005 and 2004, we had
          brokered time deposits of $78.0 million and $124.6 million, respectively. We
did           not have any brokered time deposits at December 31, 2006.

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

|                                                                                                                                                                                                | At December 31,
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------
|
|
|Time deposits:                                                                                                                                                                                  |                
|0.00% - 0.99%                                                                                                                                                                                   |                
|1.00% - 1.99%                                                                                                                                                                                   |                
|2.00% - 2.99%                                                                                                                                                                                   |                
|3.00% - 3.99%                                                                                                                                                                                   |                
|4.00% - 4.99%                                                                                                                                                                                   |                
|5.00% - 5.99%                                                                                                                                                                                   |                
|6.00% - 6.99%                                                                                                                                                                                   |                
|                                                                                                                                                                                               
|Total time deposits (1)                                                                                                                                                                         |                
|                                                                                                                                                                                               
|Transaction accounts:                                                                                                                                                                           |                
|Noninterest-bearing checking                                                                                                                                                                    |                
|Savings                                                                                                                                                                                         |                
|Interest-bearing checking                                                                                                                                                                       |                
|Money market                                                                                                                                                                                    |                
|                                                                                                                                                                                               
|Total transaction accounts                                                                                                                                                                      |                
|                                                                                                                                                                                               
|Total deposits                                                                                                                                                                                  |                
|                                                                                                                                                                                               
|(1)  Includes $78.0 million and $124.6 million, respectively, of brokered time deposits at December 31, 2005 and 2004.
        We did not have any brokered time deposits at December 31, 2006.
|                                                                                                                                                                                               

24

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Deposit
Average Balances and Average Rates Paid. The following table shows the
average balance of each type of deposit and the average rate paid on each type of deposit
for the years indicated:

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

Deposit
Account Activity.  The following table shows our deposit flows during the years indicated:

|                                             | Year Ended December 31,
|-------------------------------------------- | -----------------------
|
|Total deposits                               |                        
|Total withdrawals                            |                        
|Interest credited                            |                        
|                                            
|Total increase in deposits                   |                        
|Deposits acquired in Marine Bank transaction |                        
|Deposits transferred due to Kansas           |                        
|branch sale transaction                      |                        
|Deposits acquired in United Nebraska         |                        
|Financial Co. acquisition                    |                        
|                                            
|Net increase in deposits                     |                        
|                                            

Time
Deposit Maturity. The following table presents, by various interest rate
categories and maturities, the amount of time deposits at December 31, 2006:

|                    | Balance at December 31, 2006
Maturing in the 12 Months Ending December 31,
|------------------- | --------------------------------------------------------------------------
|
|Time deposits:      |                                                                           
|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 |                                                                           
|                   

25

---

Time
Deposits Exceeding $100,000. The following table shows the maturities of
our time deposits exceeding $100,000 at December 31, 2006 by the time remaining to
maturity. There are no brokered time deposits included in the following table as we did
not have any brokered time deposits at December 31, 2006.

|(Dollars in thousands)                 | Amount | Weighted Average Rate
|-------------------------------------- | ------ | ---------------------
|Quarter ending:                        |        |                      
|March 31, 2007                         |        |                      
|June 30, 2007                          |        |                      
|September 30, 2007                     |        |                      
|December 31, 2007                      |        |                      
|After December 31, 2007                |        |                      
|                                      
|Total time deposits exceeding $100,000 |        |                      
|                                      

Borrowings.          We
utilize advances from the FHLBank as an alternative to retail deposits to           fund
our operations as part of our operating strategy. The FHLBank is part of a
          system of 12 regional Federal Home Loan Banks, each subject to Federal Housing
          Finance Board supervision and regulation, that function as a central reserve
          bank providing credit to financial institutions. As a condition of membership
in           the FHLBank we are required to own stock of the FHLBank. Our FHLBank
advances           are collateralized by our qualifying residential, multi-family
residential and           commercial real estate mortgages, residential construction,
commercial           construction and agricultural real estate loans, and secondarily by
our           investment in capital stock of the FHLBank. FHLBank advances are made
pursuant           to several different credit programs, each of which has its own
interest rate           and range of maturities. The maximum amount that the FHLBank will
advance to           member institutions, including us, fluctuates from time to time in
accordance           with the policies of the FHLBank. At December 31, 2006 and 2005, we
had $907.2           million and $747.1 million, respectively, in outstanding FHLBank
advances.

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

In
connection with our acquisition of UNFC on August 27, 2004, we assumed $7.0 million of
variable rate debentures that had been issued on November 28, 2001 by United Nebraska
Capital Trust, a trust formed by UNFC. We exercised our right to call and retire these
debentures in December 2006.

26

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FHLBank
Advances and Other Borrowings. The following table shows certain
information regarding our borrowings at or for the dates indicated:

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

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

27

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# Subsidiary Activities

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

# Personnel

As
of December 31, 2006, 2005 and 2004, we had 850, 772 and 724 full-time equivalent
employees, respectively. Employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.

# Regulation and
Supervision

The
following is not intended to be a complete discussion but is intended to be a summary of
some of the more significant provisions of laws and regulations which are applicable to
the Company and the Bank. This regulatory framework is intended to protect depositors,
federal deposit insurance funds and the banking system as a whole, and not to protect
security holders. To the extent that the information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to those provisions.
Additionally, such statutes, regulations and policies are continually under review by
Congress and state legislatures, and federal and state regulatory agencies. A change in
statutes, regulations or regulatory policies applicable to the Company or the Bank,
including changes in interpretations, could have a material effect on our business.

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

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

Deposit
Insurance Assessments. On February 15, 2006, President Bush signed the
Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (Reform
Act), which contains comprehensive deposit insurance reform provisions. The
legislation merged the Bank Insurance Fund and the Savings Association Insurance Fund to
form the Deposit Insurance Fund, eliminated any disparities in bank and thrift risk-based
premium assessments, reduced the administrative burden of maintaining and operating two
separate funds and established certain new insurance coverage limits and a mechanism for
possible periodic increases. The legislation also gave the FDIC greater discretion to
identify the relative risks all institutions present to the Deposit Insurance Fund and set
risk-based premiums.

28

---

Major
provisions in the legislation include:

| |  | Merging
 the Bank  Insurance  Fund and Savings  Association  Insurance  Fund into the Deposit
 Insurance  Fund,  which  became          effective March 31, 2006;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Maintaining
basic deposit and municipal account insurance coverage at $100,000 but providing for a
new basic insurance coverage for retirement accounts of $250,000. Insurance coverage for
basic deposit and retirement accounts could be increased for inflation every five years
in $10,000 increments beginning in 2011;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Providing
the FDIC with the ability to set the designated reserve ratio within a range of between
1.15% and 1.50%, rather then maintaining 1.25% at all times regardless of prevailing
economic conditions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Providing
a one-time assessment credit of $4.7 billion to banks and savings associations in
existence on December 31, 1996, which may be used to offset future premiums with certain
limitations;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Requiring
the payment of dividends of 100% of the amount that the Deposit Insurance Fund exceeds
1.5% of the estimated insured deposits and the payment of 50% of the amount that the
Deposit Insurance Fund exceeds 1.35% of the estimated insured deposits (when the reserve
is greater than 1.35% but no more than 1.5%); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Providing
for a new risk-based assessment system and allowing the FDIC to establish separate
risk-based assessment systems for large and small members of the Deposit Insurance Fund.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All
FDIC-insured depository institutions must pay an annual assessment to provide funds for
the payment of interest on bonds issued by the Financing Corporation (FICO), a
federal corporation chartered under the authority of the Federal Housing Finance Board.
The bonds (referred to as FICO bonds) were issued to capitalize the Federal Savings and
Loan Insurance Corporation. The FICO has assessment authority, separate from the
FDICs authority to assess risk-based premiums for deposit insurance, to collect
funds from FDIC-insured institutions sufficient to pay interest on FICO bonds. The FDIC
acts as a collection agent for the FICO. The FICO assessment rate effective for the first
quarter of 2007 is 1.22 cents annually per $100 of assessable deposits. These assessments
will continue until the FICO bonds mature in 2019.

Regulatory
Capital Requirements.Pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), the OTS adopted regulations implementing new
capital standards applicable to all savings associations, including the Bank. Such capital
standards require that savings associations maintain: (a) capital of not less than 1.5% of
adjusted total assets (Tangible Capital); (b) core (Tier 1) capital of not less than 4% of
adjusted total assets; and (c) total risk-based capital of not less than 8% of
risk-weighted assets. As of December 31, 2006, the Bank met all regulatory capital
requirements. The OTS is authorized to impose capital requirements in excess of those
standards on individual institutions on a case-by-case basis.

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

Under
the Core (Tier 1) capital requirement adopted by the OTS, savings banks must maintain
core capital in an amount equal to at least 4.0% of adjusted total assets.
Core (Tier 1) capital consists of: common stockholders equity (including retained
earnings), non-cumulative perpetual preferred stock, certain non-withdrawable and pledged
deposits; and minority interests in the equity accounts of consolidated subsidiaries plus
purchased mortgage servicing rights valued at the lower of 90% of fair value, 90% of
original cost or the current amortized book value as determined in conformity with U.S.
generally accepted accounting principles (GAAP) and goodwill, less non-qualifying intangible assets.

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

29

---

Certain
exclusions from capital and assets are required to be made for the purpose of calculating
total capital, in addition to the adjustments required for calculating core capital.
However, in calculating regulatory capital, institutions can add back unrealized losses
and deduct unrealized gains net of taxes, on debt securities reported as a separate
component of capital calculated according to GAAP.

OTS
regulations establish special capitalization requirements for savings banks that own
service corporations and other subsidiaries, including subsidiary savings banks. According
to these regulations, certain subsidiaries are consolidated for capital purposes and
others are excluded from assets and capital. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for national
banks, engaged solely in mortgage-banking activities or engaged in certain other
activities solely as agent for its customers are includable subsidiaries that
are consolidated for capital purposes in proportion to the Banks level of ownership,
including the assets of includable subsidiaries in which the Bank has a minority interest
that is not consolidated for GAAP purposes. For excludable subsidiaries, the debt and
equity investments in such subsidiaries are deducted from assets and capital. At December
31, 2006, the Bank had $1.2 million of investments subject to a deduction from tangible
capital.

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

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

At
December 31, 2006, the Bank exceeded all of its regulatory capital requirements. For more
information see Note 18  Regulatory Capital Requirements included
in Item 8. Financial Statements and Supplementary Data, in Part II of this Annual Report
on Form 10-K.

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

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

30

---

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

At
December 31, 2006, the Bank met the standards for a well capitalized
institution.

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

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

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

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

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

31

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Loans-to-One
Borrower Limitations. As a federal savings bank, we are limited in the
amount of loans we can make to any one borrower. This amount is equal to 15% of our
unimpaired capital and surplus (this amount was approximately $54.1 million at December
31, 2006), although we are permitted to lend up to an additional 10% of unimpaired capital
and surplus if the loans are secured by readily marketable securities. Our aggregate loans
to any one borrower have been within these limits for the year ended December 31, 2006.

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

Currently,
the portion of the QTL Test that is based on Section 10(m) of the HOLA rather than the
Internal Revenue Code requires that 65% of an institutions portfolio
assets (as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify without limit
for inclusion as part of the 65% requirement are loans made to purchase, refinance,
construct, improve or repair domestic residential housing and manufactured housing; home
equity loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); stock issued by the FHLBank and direct or
indirect obligations of the FDIC. Small business loans, credit card loans and student
loans are also included without limitation as qualified investments. In addition, the
following assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institutions portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of loans for
personal, family and household purposes (other than credit card loans and educational
loans); and stock issued by FNMA or FHLMC. Portfolio assets consist of total assets minus
the sum of: (a) goodwill and other intangible assets; (b) property used by the savings
institution to conduct its business; and (c) liquid assets up to 20% of the
institutions total assets. At December 31, 2006, approximately 70.4% of the
portfolio assets of the Bank were qualified thrift investments.

Federal
Reserve System. The Bank is subject to various regulations promulgated by
the Federal Reserve, including, among others, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Funds Transfers), Regulation Z (Truth in
Lending), Regulation CC (Availability of Funds), and Regulation DD (Truth in Savings).
Regulation D requires noninterest-bearing reserve maintenance in the form of either vault
cash or funds on deposit at Federal Reserve Bank of Kansas City or another designated
depository institution in an amount calculated by formula. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity
requirements. At December 31, 2006, the Bank was in compliance with these reserve
requirements.

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

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

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

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

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

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

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

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

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

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

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

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# Item 1A. Risk Factors

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

# As a bank holding
company, our earnings are dependent upon the performance of the Bank and the Banks
subsidiaries.

Since
we are a holding company with no significant assets other than the Bank, we currently
depend upon dividends from the Bank for a substantial portion of our revenues. These
dividends are the primary funding source for the dividends we pay on our common stock. Our
ability to pay dividends will continue to depend in large part upon our receipt of
dividends or other capital distributions from the Bank. Various state and federal laws and
regulations limit the amount of dividends that a bank may pay to a parent holding company.
In addition, our right to participate in a distribution of assets upon the liquidation or
reorganization of a subsidiary may be subject to prior claims of the subsidiarys
creditors. In the event the Bank is unable to pay dividends to the Company, we may not be
able to service our debt, pay our obligations or pay dividends on our common stock. The
inability to receive dividends from the Bank could therefore have a material adverse
effect on our business, our financial condition and our results of operations.

# If economic conditions
decline, our financial condition and results of operations could be adversely affected.

Our
operating results are affected by national and local economic and competitive conditions,
including changes in market interest rates, the strength of the local economy,
governmental policies of the communities in which we do business and actions of regulatory
authorities. A decline in the local or national economy could adversely affect our
financial condition and results of operations. Deterioration in economic conditions could
result in the following consequences, any of which could have a material adverse effect on
our business, financial condition, results of operations and cash flows:

| |  | A
decline in the demand for the products and services we offer;
| | - | ---------------------------------------------------------------

| |  | An
increase in nonperforming loans and loan charge-offs;
| | - | --------------------------------------------------------

| |  | An
increase in provisions for loan losses;
| | - | ------------------------------------------

| |  | An
increase in losses on real estate owned (acquired through foreclosure); and
| | - | ------------------------------------------------------------------------------

| |  | A
migration from low-yielding or noninterest bearing deposits to higher-yielding deposit
products such as time deposits.
| | - | ------------------------------------------------------------------------------------------------------------------------

# Our loan origination and
purchase activity is highly concentrated in certain types of loans.

At
December 31, 2006, $1.8 billion, or 47.6%, of our total loans consisted of multi-family
residential, commercial real estate, land and land development, commercial construction
and business loans. This portfolio of loans has grown is recent years and we intend to
continue our emphasis in these types of lending. These types of loans generally expose a
lender to a greater risk of non-payment and loss than one-to-four family residential
mortgage loans because repayment of such loans is dependent upon the successful operation
of the property and the income stream of the borrowers. Additionally, these types of loans
typically involve larger loan balances to single borrowers or groups of related borrowers
compared to one-to-four family residential mortgage loans. Also, many of the Banks
commercial borrowers have more than one loan outstanding. Consequently, an adverse
development with respect to one loan or one credit relationship may expose us to a
significantly greater risk of loss compared to an adverse development with respect to a
one-to-four family residential mortgage loan.

At
December 31, 2006, $781.0 million, or 21.2%, of our total loans consisted of residential
construction loans. Our portfolio of residential construction loans has increased
dramatically over the past three years as a result of our emphasis on loans with
relatively higher yields, adjustable interest rates and/or shorter terms to maturity. Risk
of loss on a residential construction loan is dependent largely upon the accuracy of the
initial estimate of the propertys value when completed compared to the projected
cost (including interest) of construction and other assumptions, including the approximate
time to sell the property. Our ability to continue to originate and/or purchase
residential construction loans may be impaired by adverse changes in local and regional
economic conditions in the real estate markets, or by acts of nature. Due to the
concentration of real estate collateral, these events could have a material adverse impact
on the value of collateral, resulting in delinquencies and/or losses. Customer demand for
loans secured by real estate could be reduced by a weaker economy, an increase in
unemployment, a decrease in real estate values or an increase in interest rates.

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# Our concentration of
loans in certain areas of Florida may expose us to increased credit risk.

At
December 31, 2006, we had 535 residential construction loan commitments in the Cape Coral
area of Lee County in Florida totaling $144.9 million with disbursed funds totaling $84.2
million. At December 31, 2006, $13.7 million of our nonperforming residential construction
loans were located in Florida. Approximately $9.4 million of our nonperforming residential
construction loans in Florida were located in the Cape Coral area of Lee County. Working
with a local Florida-based mortgage brokerage firm, we acquired nine- to 18-month
residential construction loans for individual homebuyers who represented to us their
intention to build a second or retirement home in the Cape Coral area.  A
substantial increase in the number of residential construction building permit
applications, coupled with other contributing factors in the Cape Coral area in 2006,
resulted in delays affecting the commencement of construction. In some cases, these delays
extended beyond the original term of the residential construction loan. As a result of
these factors, some borrowers in the Cape Coral area have not kept current on their contractual loan payment
obligation and are now 90 or more days delinquent.

# Our results of
operations are significantly affected by the fiscal and monetary policies of the federal
government and the governments of the states in which we operate.

The
Board of Governors of the Federal Reserve System, also known as the Federal Reserve Board,
regulates the supply of money and credit in the United States. Its policies determine in
large part our cost of funds for lending and investing and the return we earn on those
loans and investments, both of which impact our net interest margin, and can significantly
affect the value of financial instruments such as debt securities and mortgage servicing
rights. Its policies can also affect our borrowers, potentially increasing the risk that
they may fail to repay their loans. Changes in Federal Reserve Board policies are beyond
our control and difficult to predict or anticipate.

The
amount of income taxes we are required to pay on our earnings is based on federal and
state legislation and regulations. We have provided for current and deferred income taxes
in our financial statements, based on our results of operations, business activity, and
interpretations of tax statutes. We may take filing positions or follow tax strategies
that may be subject to challenge by federal and state taxing authorities. Our net income
and earnings per share may be reduced if a federal, state or local authority assessed
charges for taxes that have not been provided for in our consolidated financial
statements.

# If the interest payments
on our interest-bearing liabilities increase relative to the interest we earn on our
interest-earning assets, our net interest income may decline.

When
interest-bearing liabilities mature or reprice more quickly than interest-earning assets,
a significant increase in market interest rates could adversely affect net interest
income. Conversely, a significant decrease in market interest rates could result in
increased net interest income. We seek to manage our exposure to interest rate
fluctuations, however, changes in market interest rates are neither predictable nor
controllable and may have an adverse impact on our financial condition and results of
operations.

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

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

# Our allowance for loan
losses may be inadequate.

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

If
our evaluation is incorrect, our allowance for loan losses may not be sufficient to cover
losses inherent in the loan portfolio, resulting in additions to our allowance for loan
losses. Increases in the allowance for loan losses result in an expense for the period.
If, as a result of general economic conditions or a decrease in asset quality, management
determines that additional increases in the allowance for loan losses are warranted, we
may incur additional expenses. We can make no assurances that our allowance for loan
losses will be adequate to cover loan losses inherent in our portfolio.

Our
loans are primarily secured by real estate, including regional concentrations of loans in
areas of the United States that are susceptible to tornados, earthquakes, hurricanes or
other natural disasters. If a natural disaster were to occur in one of our major market
areas, loan losses could occur that are not incorporated in the existing allowance for
loan losses.

# We could be held
responsible for environmental liabilities of properties acquired through foreclosure.

If
we are forced to foreclose on a defaulted mortgage loan to recover our investment, we may
be subject to environmental liabilities related to the underlying real property. Hazardous
substances or wastes, contaminants, pollutants or sources thereof may be discovered on
properties under our ownership or after a sale to a third party. The amount of
environmental liability could exceed the value of the real property. There can be no
assurance that we would not be fully liable for the entire cost of any removal,
remediation or other clean-up on the acquired property, that the cost of removal and
clean-up would not exceed the value of the property or that costs could be recovered from
any third party. Additionally, it may be difficult or impossible to sell the property
prior to or following any environmental remediation.

# Our cost of funds may
increase as a result of general economic conditions, interest rates or competitive
pressures.

Our
cost of funds may increase because of general economic conditions, unfavorable conditions
in capital markets, interest rates and competitive pressures. We have traditionally
obtained funds primarily through deposits and borrowings. Generally, deposits are a
preferable source of funds than borrowings because interest rates paid for deposits are
typically less than interest rates charged for borrowings. If deposit growth is inadequate
to fund our operations, we may have to rely on borrowings as a source of funds. Relying on
borrowings as a primary funding source may have an adverse impact on our net interest
margin.

36

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# Competition could result
in our loan portfolios and deposit base declining.

The
banking and financial services businesses in our market areas are highly competitive. Our
market area has a high density of financial institutions, some of which have greater
financial resources, name recognition and market presence than us, and all of which are
our competitors. Competition within the banking, mortgage and finance industries may limit
our ability to attract and retain customers. Our competition for loans comes primarily
from commercial banks, savings banks, savings and loan associations, mortgage banking
companies, insurance companies, finance companies and credit unions. Our most direct
competition for deposits historically has come from commercial banks, savings banks,
savings and loan associations and credit unions. In addition, we face competition for
deposits from products offered by brokerage firms, insurance companies and other financial
intermediaries, such as money market and other mutual funds and annuities. If we are
unable to attract and retain customers, our loan and deposit growth may be inhibited which
could have an adverse impact on our financial condition and results of operations.

# Legislative and
regulatory issues could adversely affect our financial condition and results of
operations.

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

# There are risks
associated with potential acquisitions.

We
may enter into transactions to acquire other banks or financial institutions from time to
time that further our business strategy. Acquisitions involve numerous risks including
lower than expected performance or higher than expected costs, difficulties in the
integration of operations, services, products and personnel, the diversion of
managements attention from other business matters, changes in relationships with
customers and the potential loss of key employees. Any acquisition would be subject to
regulatory approval, and there can be no assurance that we will be able to obtain such
approvals. We may not be successful in identifying acquisition candidates, integrating
acquired institutions or preventing deposit erosion or loan quality deterioration at
acquired institutions. There can be no assurance that we will be successful in completing
future acquisitions, or if such transactions are completed, that we will be successful in
integrating acquired institutions into our operations. Our ability to grow may be limited
if we are unable to successfully make future acquisitions.

# We may not be able to
retain or replace key members of management or attract and retain qualified customer
relationship managers.

We
depend on the services of existing management personnel to carry out our business and
investment strategies. It is critical that we are able to attract and retain management
and other qualified personnel. Competition for qualified personnel is significant in our
geographical market areas. The loss of services of any management personnel, or the
inability to recruit and retain qualified personnel in the future, could have an adverse
effect on our financial condition and results of operations.

# We rely on
communications, information, operating and financial control systems technology from
third-party service providers. An interruption in these third-party systems could have an
adverse effect on our business.

We
rely heavily on third-party service providers for much of our communications, information,
operating and financial control systems technology. Any failure, interruption or breach in
security of these systems could result in failures or interruptions in our customer
relationship management, general ledger, deposit, loan servicing and loan
origination systems. We can make no assurances that such failures or interruptions will
not occur or, if they do occur, that they will be adequately addressed by us or the third
parties on which we rely. Any failure or interruption could have a material adverse effect
on our business, financial condition and results of operations. If any of our third-party
service providers experience financial, operational or technological difficulties, or if
there is any other disruption in our relationships with them, we may be required to locate
alternative sources of such services. We can make no assurances that we could negotiate
terms that are favorable to us, or could obtain comparable services without the need to
expend substantial resources.

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# Our stock price can be
volatile.

Our
stock price can fluctuate in response to a variety of factors, including actual or
anticipated variations in quarterly operating results; changes in our stockholder dividend
policy; recommendations of securities analysts; and news media reports relating to trends,
concerns and other issues in the financial services industry. Other factors that may
influence our stock price include products or services offered by our competitors;
operating and stock price performance of other companies that investors or analysts deem
comparable to us; and changes in governmental regulations.

General
market fluctuations, industry factors and general economic conditions and political
conditions and events, such as future terrorist activities, economic slowdowns or
recessions, interest rate changes or credit loss trends, also could cause our stock price
to decline regardless of our operating results.

# If we fail to maintain
effective systems of internal and disclosure control, we may not be able to accurately
report our financial results or prevent fraud.

Effective
internal and disclosure controls are necessary for us to provide reliable financial
reports, to effectively prevent fraud and to operate successfully as a public company. If
we were unable to provide accurate and reliable financial reports or prevent fraud, our
reputation and results of operations would be adversely effected. As part of our ongoing
monitoring of internal controls, we may discover material weaknesses or significant
deficiencies in our internal controls as defined under standards adopted by the Public
Company Accounting Oversight Board (PCAOB) that require remediation. Under
PCAOB standards, a material weakness is a significant deficiency or
combination of significant deficiencies, which results in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will not be
prevented or detected. A significant deficiency is a control deficiency or
combination of control deficiencies, that adversely affect a companys ability to
initiate, authorize, record, process or report external financial data reliably in
accordance with GAAP such that there is a more than remote likelihood that a misstatement
of a companys annual or interim financial statements that is more than
inconsequential will not be prevented or detected.

Any
failure to maintain effective internal and disclosure controls, or to make necessary
improvements in such controls in a timely manner, could harm operating results or cause us
to fail in meeting our financial reporting obligations. Such a failure could have an
impact on our ability to remain listed on the NASDAQ Global Select Market. Ineffective internal
and disclosure controls could also cause investors to lose confidence in our reported
financial information, which would likely have a negative effect on our stock price.

# Item 1B. Unresolved
Staff Comments

Not applicable.

# Item 2. Properties

We
currently operate 69 banking offices in Nebraska (59), Iowa (9) and Kansas (1) of which 51
are owned by us and 18 are under operating leases. Additionally, we operate three loan
production offices located in Colorado, two loan production offices located in North
Carolina and one loan production office in each of Arizona, Florida, Minnesota and Nevada
all of which are under operating leases. We own our corporate headquarters located in
Lincoln, Nebraska.

For
further information regarding our properties, see Note 19  Lease
Commitments included in Item 8. Financial Statements and Supplementary Data, in
Part II of this Annual Report on Form 10-K.

38

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# Item 3. Legal Proceedings

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

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

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

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

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

To
conform to the Court of Federal Claims ruling finding the U.S. liable on only one of
the three claims, we sought a reduced amount of damages which corresponded to the amount
of remaining supervisory goodwill in the one supervisory merger as to which the Court held
the government breached its contract bore in relation to the entire amount of remaining
goodwill at the time of the breach.

On
May 22, 2006, a nine-day trial related solely to the issue of damages associated with our
lost profits claim commenced in the Court of Federal Claims. On October 31, 2006, the
Court issued an opinion finding the U.S. liable to the Bank for lost franchise value and
awarded the Bank $4.5 million in damages. Consistent with rulings in all but one of the
Winstar-related cases, the Court did not find the U.S. liable to the Bank for lost
profits. The Courts ruling was appealed to the United States Court of Appeals for
the Federal Circuit by the U.S. on December 29, 2006. The Bank has subsequently filed a
cross-appeal seeking review of earlier liability rulings which absolved the U.S. of
liability in connection with the two other merger transactions and reduced the amount of the Banks potential recovery. The Court of Appeals has
established a timetable requiring all legal briefs on appeal to be submitted to the Court
during the second quarter of 2007. There can be no assurance as to the type or amount of
damages, if any, that we may recover or the timing, if we are successful, for receipt by
us of any damages from the U.S. Government.

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

Not Applicable.

39

---

# PART II

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

Common
Stock Price Summary.  Our common stock trades on the NASDAQ Global Select
Market under the symbol TONE. As of December 31, 2006, we had 1,564
stockholders of record, which does not include those persons or entities holding stock in
nominee or street name through brokerage firms or others. The following table
shows the high and low bid prices of our common stock during the periods indicated as well
as the period end closing sales price and the dividend paid each quarter.

|               | 2006 | 2005
|-------------- | ---- | ----
|
|First Quarter  |      |     
|Second Quarter |      |     
|Third Quarter  |      |     
|Fourth Quarter |      |     
|               |      |     

Common
Stock Repurchase Activity.  The following table details our purchases of
common stock during the three months ended December 31, 2006:

|                                     | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased asPart of PubliclyAnnounced Plans orPrograms* | Maximum Numberof Shares that May Yet Be PurchasedUnder Plans or Programs
|------------------------------------ | -------------------------------- | ---------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------------------------
|October 2006                         |                                  |                              |                                                                                |                                                                         
|Beginning Date - October 1, 2006     |                                  |                             
|Ending Date - October 31, 2006       |                                  |                              |                                                                                | 946                                                                     
|November 2006                        |                                  |                             
|Beginning Date - November 1, 2006    |                                  |                             
|Ending Date - November 30, 2006      |                                  |                              |                                                                                | 110,500                                                                 
|December 2006                        |                                  |                             
|Beginning Date - December 1, 2006    |                                  |                             
|Ending Date - December 31, 2006      |                                  |                              |                                                                                | 19,814                                                                  
|                                    
|Total shares purchased during the    |                                  |                             
|three months ended December 31, 2006 |                                  |                              |                                                                                | 131,260                                                                 
|                                    

|* | Information
related to our publicly announced plan authorizing purchases of common stock during the
three months ended December 31, 2006, is as follows:
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------

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

40

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Performance Graph.We completed our initial public offering on October
1, 2002, during which we sold an aggregate of 22,075,075 shares of our common stock at a
price of $10.00 per share. The following graph represents $100.00 invested in our common
stock at the $14.00 per share closing price of the common stock on October 2, 2002, the
date our common stock commenced trading on the NASDAQ, and assumes the reinvestment of all
dividends. The graph demonstrates comparison of the cumulative total returns for the
common stock of TierOne Corporation, the Russell 2000 Index and the SNL Securities $1B
 $5B Thrift Index for the periods indicated.

The
following information in this Item 5 of this Annual Report on Form 10-K is not deemed to
be soliciting material or to be filed with the SEC or subject to
Regulation 14A or 14C under the Securities Act of 1934 or to the liabilities of Section 18
of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent we specifically incorporate it by reference into such a
filing.



| | Source:
SNL Financial LC, Charlottesville, VA © 2007
| | ----------------------------------------------------

41

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# Item 6. Selected
Financial Data

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | At or For the Year Ended December 31,
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
|
|Selected Statement of Income Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                      
|Total interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                      
|Total interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                      
|Provision for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net interest income after provision                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                      
|for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Total noninterest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                      
|Total noninterest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Income before income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                      
|Income tax expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net income per common share, basic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                      
|Net income per common share, diluted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                      
|Dividends declared per common share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Selected Financial Condition Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                      
|Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                      
|Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                      
|Investment securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                      
|Mortgage-backed securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                      
|Net loans after allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                      
|Deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                      
|FHLBank Topeka advances and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                      
|other borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                      
|Stockholders equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Selected Operating Ratios:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                      
|Average yield on interest-earning assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                      
|Average rate on interest-bearing liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                      
|Average interest rate spread (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                      
|Net interest margin (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                      
|Average interest-earning assets to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                      
|average interest-bearing liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                      
|Net interest income after provision for                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                      
|loan losses to noninterest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                      
|Total noninterest expense to average assets(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                      
|Efficiency ratio (3)(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                      
|Return on average assets (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                      
|Return on average equity (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                      
|Average equity to average assets (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                      
|Return on tangible equity (3)(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(1)  Information applicable to post stock conversion period only.  We completed our initial public offering on October 1, 2002.
(2) Excluding the receipt of a $2.7 million loan prepayment fee, our average interest rate spread  and net interest margin would
           have been 3.63% and 3.99%, respectively, for the year ended December 31, 2006.
(3)  Employee stock options were expensed beginning January 1, 2006.
(4)  Efficiency ratio is calculated as total noninterest expense, less amortization expense of intangible assets, as a percentage
           of the sum of net interest income and noninterest income.
(5)  Return on tangible equity is calculated as annualized net income as a percentage of average stockholders' equity
            adjusted for goodwill and other intangible assets.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

42

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

# Executive Summary and
Highlights

As
a regional community bank, our goal is to enhance stockholder value while focusing on
building a solid banking franchise. We focus on growing our core businesses of mortgage
and business lending and retail banking while striving to maintain asset quality and
control expenses. We seek to provide returns to our stockholders through increased
dividends and stock repurchases. We have been successful in achieving our goal of
enhancing stockholder value over the past several years.

During
2006, we achieved record net income and earnings per share as we continued to execute our
business model. Our total loan portfolio increased during the year ended December 31,
2006. This increase was primarily the result of strong loan origination volume, primarily
in our land and land development, business and commercial construction loan portfolios.
Our deposit balance at December 31, 2006 was relatively unchanged when compared to
December 31, 2005, however, we have experienced an increase in deposits generated by our
retail banking offices which was offset by the maturity during 2006 of all brokered time
deposits that existed at December 31, 2005. Our FHLBank advances and other borrowings
increased during 2006 as we utilized borrowings as our primary funding source for loan
growth. Net income for 2006 increased compared to the prior
year. This increase was primarily the result of an increase in net interest income. The
increase in interest income was primarily the result of an increase in the average yield
earned on interest-earning assets. The increase in net interest income was partially
offset by an increase in interest expense. The increase in interest expense was primarily
the result of an increase in the average rate paid on interest-bearing liabilities.

# 2006 Highlights

| |  | Record
net income of $41.3 million;
| | - | -----------------------------------

| |  | Record
diluted earnings per common share of $2.41;
| | - | --------------------------------------------------

| |  | Total
assets increased 6.5% to $3.4 billion;
| | - | --------------------------------------------

| |  | Net
loans increased $205.5 million to $3.1 billion;
| | - | ---------------------------------------------------

| |  | Total
loan originations, excluding warehouse mortgage lines of credit, totaled $2.1 billion;
| | - | --------------------------------------------------------------------------------------------

| |  | Retail-generated
deposits increased $105.6 million;
| | - | ---------------------------------------------------

| |  | The
number of transaction accounts increased 3.0% during 2006 to nearly 128,600;
| | - | --------------------------------------------------------------------------------

| |  | Interest
income increased $46.5 million or 26.2%;
| | - | -------------------------------------------------

| |  | We
opened two new banking offices, relocated a banking office and acquired a banking office;
| | - | --------------------------------------------------------------------------------------------

| |  | We
increased our quarterly cash dividend to $0.07 per common share; and
| | - | -----------------------------------------------------------------------

| |  | We
received a favorable opinion, which is now on appeal, from the United States Court of
Federal Claims awarding us $4.5 million in damages related to a breach of contract
lawsuit filed in 1995 against the federal government.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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, land and land
development and construction loans. Additionally, we have opened or acquired loan
production offices in high growth cities of the United States in an effort to
strategically supplement our loan origination activities.

43

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

| |  | Continuing
Our Controlled Growth and Expanding Our Franchise. We have increased our
total assets in each of the past five years. During this previous five-year period, total
assets have increased by $1.9 billion to $3.4 billion. In addition, we believe that our
conversion from mutual to stock form in October 2002 facilitated our ability to expand
our franchise. We have also executed a strategic acquisition plan designed to strengthen
market share in our Primary Banking Market Area as well as to build our lending presence
in growing metropolitan areas outside of our Primary Banking Market Area.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Building
a Quality Loan Portfolio to Increase Yields and/or Reduce Interest Rate Risk. We
have focused on increasing our holdings of quality loans with relatively higher yields,
adjustable interest rates and/or shorter terms to maturity. At December 31, 2006, our
second mortgage residential, multi-family residential, commercial real estate, land and
land development, construction, business, agricultural, warehouse mortgage lines of
credit and consumer loans amounted to $3.3 billion in the aggregate or 90.8% of our total
loan portfolio. This compares to $1.0 billion, or 66.9%, of total loans at December 31,
2001. We have sought to maintain a high level of asset quality and moderate credit risk
by utilizing loan underwriting standards which we believe are conservative. Although we
are an acquirer of loans and participation interests in loans from outside our Primary
Lending Market Area, we generally apply our own underwriting standards to all such loans.
Our nonperforming loans as a percentage of net loans at December 31, 2006 were 0.99%
compared to 0.12% at December 31, 2001. While our nonperforming loan ratio has generally
trended upward in the past five years due in part to our strategy of increasing yields,
we remain focused on minimizing credit risk through our loan origination, monitoring and
recovery processes.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Emphasizing
Growth of Our Core Deposits and Minimizing Our Cost of Funds. Our core
deposits, consisting of checking, money market and savings accounts, have increased from
$560.9 million at December 31, 2001 to $931.8 million at December 31, 2006. We continue
our emphasis on increasing the number of core checking account relationships, which
during the five-year period ended December 31, 2006, have grown by 111.9% from 46,900 to
99,400. The establishment of additional core relationships, including consumer and
business banking relationships, provides new opportunities to sell other profitable
products and services and increase market share.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increasing
Our Fee Income and Expanding Our Products and Services.Noninterest income
increased by $17.8 million, or 157.7%, to $29.1 million for the year ended December 31,
2006 compared to $11.3 million for the year ended December 31, 2001. The increase
primarily reflects increased fee income due largely to an increase in the number of core
deposit accounts. We have been pro-active in our efforts to increase noninterest income,
largely by increasing the number of customers that we serve in our Primary Banking Market
Area as well as increasing the number of our financial products that we offer our
customers. We expect our employees to cross-sell our financial products and services to
customers and we provide them with economic incentives to do so. Our efforts have also
included redesigning a number of our banking offices to be retail sales centers, which
have a floor plan we believe is more conducive to cross-selling of products. We
continually search for new products and services that serve the needs of our customers.
In the past five years, we have introduced on-line banking, farm and ranch management
services, cash management services, business checking and an expanded business loan
program.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Improving
Brand Awareness and Perception. Our success in continuing to build a
profitable market share in the areas we serve is partially driven by our ability to
positively extend the reach of our corporate identity through increased public awareness
and market perception. In our competitive environment, where consumers and businesses are
offered a multitude of choices for banking services, a strong corporate brand enhances
our ability to be among the candidates when a final selection is made. This is achieved
through a comprehensive, consistent and sustainable marketing program, an effective
delivery of competitive products and services and a well-trained and knowledgeable
workforce. While building brand awareness and perception is important throughout the
entire market region, special emphasis has and will be placed in growing metropolitan and
economically vibrant regional growth center market areas.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44

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# Critical Accounting
Policies

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

Income
Recognition. We recognize interest income by methods that conform to GAAP.
In the event management believes collection of all or a portion of contractual interest on
a loan has become doubtful, which generally occurs after a loan is contractually
delinquent 90 days or more, we discontinue the accrual of interest and charge-off all previously accrued interest.
Interest received
on nonperforming loans is included in income only if principal recovery is reasonably
assured. A nonperforming loan is restored to accrual status when it is brought current,
has performed in accordance with its contractual terms for a reasonable period of time and
the collectibility of the total contractual principal and interest is no longer in doubt.

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

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

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

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

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

We
establish provisions for loan losses, which are charges to our operating results, in order
to maintain a level of total allowance for loan losses that, in 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. This
evaluation is inherently subjective, as it requires estimates that are susceptible to
significant revision as more information becomes available or as future events occur.

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

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

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

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

45

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

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

Goodwill
and Other Intangible Assets. Goodwill represents the excess price paid over
the fair value of the tangible and intangible assets and liabilities acquired in
connection with the August 27, 2004 acquisition of UNFC. There was no goodwill recorded in
connection with our Marine Bank branch purchase on June 2, 2006. In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite-lived
intangible balances are not being amortized, but are tested for impairment annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires intangible
assets with estimated useful lives to be amortized over their respective estimated useful
lives to their residual values, and reviewed for impairment in accordance with SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets.

Our
policy is to evaluate annually the carrying value of our reporting unit goodwill and
identifiable assets not subject to amortization. Goodwill was established in connection
with the UNFC acquisition .

We
have identified a single reporting unit for purposes of goodwill impairment testing. The
impairment test is therefore performed on a consolidated basis. We perform our goodwill
impairment analysis on an annual basis during the third quarter. Additional impairment
analysis may be performed if circumstances or events occur which may have an impact on the
fair value of our goodwill. Generally, fair value represents a multiple of earnings or
discounted projected cash flows. Potential impairment is indicated when the carrying value
of the entity, including goodwill, exceeds its fair value. If potential for impairment
exists, the fair value of the entity is subsequently measured against the fair value of
its underlying assets and liabilities, excluding goodwill, to estimate an implied fair
value of the entitys goodwill. Impairment loss is recognized for any excess of the
carrying value of the entitys goodwill over the implied fair value. We performed our
impairment analysis as of September 30, 2006 and concluded that no potential impairment of
goodwill existed as the fair value of our goodwill exceeded its carrying value.

The
value of core deposit intangible assets acquired in connection with the UNFC and Marine
Bank transactions, which is subject to amortization, is included in the Consolidated
Statements of Financial Condition as other intangible assets. Determining the amount of
identifiable intangible assets and their average lives involves multiple assumptions and
estimates and is typically determined by performing a discounted cash flow analysis, which
involves a combination of any or all of the following assumptions: customer attrition,
account runoff, alternative funding costs, deposit servicing costs and discount rates.
Core deposit intangible assets are amortized using an accelerated method of amortization
which is recorded in the Consolidated Statements of Income as other operating expense.

We
review our core deposit intangible assets for impairment whenever events or changes in
circumstances indicate that we may not recover our investment in the underlying assets or
liabilities which gave rise to the identifiable intangible assets. For the years ended
December 31, 2006, 2005 and 2004, no events or circumstances triggered an impairment
charge against our core deposit intangible assets.

46

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

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

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

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

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

Real
Estate Owned. Property and other assets acquired through foreclosure of
defaulted mortgage or other collateralized loans are carried at the lower of cost or fair
value, less estimated costs to sell the property and other assets. The fair value of real
estate owned is generally determined from appraisals obtained by independent appraisers.
Development and improvement costs relating to such property are capitalized to the extent
they are deemed to be recoverable.

An
allowance for losses on real estate and other assets owned is designed to include amounts
for estimated losses as a result of impairment in value of real property after
repossession. We review our real estate owned for impairment in value whenever events or
circumstances indicate that the carrying value of the property or other assets may not be
recoverable.

Income
Taxes. We estimate income taxes payable based on the amount we expect to
owe various tax authorities. Accrued income taxes represent the net estimated amount due
to, or to be received from, taxing authorities. In estimating accrued income taxes, we
assess the relative merits and risks of the appropriate tax treatment of transactions,
taking into account the applicable statutory, judicial and regulatory guidance in the
context of our tax position. Although we utilize current information to record income
taxes, underlying assumptions may change over time as a result of unanticipated events or
circumstances.

47

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We
utilize estimates of future earnings to support our position that the benefit of our
deferred tax assets will be realized. If future pre-tax income should prove nonexistent or
less than the amount of temporary differences giving rise to the net deferred tax assets
within the tax years to which they may be applied, the assets will not be realized and our
net income will be adversely affected.

48

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# Comparison of Financial
Condition at December 31, 2006 and 2005

# Assets

General.Our
total assets were $3.4 billion at December 31, 2006, an increase of           $208.9
million, or 6.5%, compared to $3.2 billion at December 31, 2005. The           increase
is primarily the result of a $205.5 million increase in net loans.

Investment
Securities. Our available for sale investment securities totaled $105.0
million at December 31, 2006, an increase of $2.4 million, or 2.3%, compared to $102.6
million at December 31, 2005. During 2006 we had security purchases of $94.5 million which
were partially offset by $92.8 million in proceeds from maturing and sold investment
securities. The securities purchased during 2006 were primarily U.S. Treasury securities
that were purchased to collateralize deposits.

Mortgage-Backed
Securities. Our mortgage-backed securities, all of which are recorded as
available for sale, totaled $12.3 million at December 31, 2006, a decrease of $7.5
million, or 37.9%, compared to $19.8 million at December 31, 2005. The decrease in our
mortgage-backed securities was the result of $7.5 million of principal payments received
during the year ended December 31, 2006.

Loans
Receivable. Net loans totaled $3.1 billion at December 31, 2006, an
increase of $205.5 million, or 7.2%, compared to $2.8 billion at December 31, 2005. During
the year ended December 31, 2006, we originated $2.1 billion of loans (exclusive of
warehouse mortgage lines of credit) and purchased $484.1 million of loans. These increases
were partially offset by $2.2 billion of principal repayments (exclusive of warehouse
mortgage lines of credit) and $247.4 million of loan sales.

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

49

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We
continue to execute our ongoing strategy of building a loan portfolio to increase yields
and reduce interest rate risk by focusing on loans with relatively higher yields,
adjustable interest rates and/or shorter terms to maturity. The increase in our land and
land development and commercial construction loan portfolios was primarily attributable to
loan origination activity related to our loan production offices (located in Arizona,
Colorado, Florida, Minnesota, Nevada and North Carolina) that are strategically positioned
in high growth areas of the United States. The increase in business loans was primarily
the result of expanded lending capabilities resulting from the addition of commercial
banking personnel specializing in corporate banking. The increase in our agricultural real
estate and agriculture-operating loans was primarily the result of expanded lending
opportunities resulting from the addition of lending personnel with agricultural lending
expertise. The increase in our warehouse mortgage lines of credit reflected increased
mortgage financing activity during the latter portion of 2006 due to a short-term decrease
in mortgage interest rates. During 2006 we reduced the volume of residential construction
loans we purchase from mortgage brokers in the state of Florida. This reduction resulted
in a decline in our residential construction loans at December 31, 2006. Our one-to-four
family residential loan portfolio declined primarily due to a decreased demand for
adjustable-rate residential loans as borrowers have migrated to fixed-rate loans.
Generally, we originate adjustable-rate, one-to-four family residential loans for
retention in our portfolio. We sell substantially all newly originated fixed-rate,
one-to-four family residential mortgage loans in the secondary market on a servicing
retained basis which produces noninterest income in the form of net gains and losses on
sales and servicing fees. The decrease in our second mortgage loan portfolio was primarily
the result of loan repayments and prepayments. The decline in our multi-family residential
and commercial real estate loan portfolios was primarily the result of refinancing
activity as borrowers have migrated to fixed-rate loan products. Our consumer loan
portfolio remained relatively unchanged at December 31, 2006 compared to December 31,
2005.

Allowance
for Loan Losses. Our allowance for loan losses increased $2.3 million, or
7.3%, to $33.1 million at December 31, 2006 compared to $30.9 million at December 31,
2005. Our allowance for loan losses as a percentage of nonperforming loans was 110.25% at
December 31, 2006 compared to 214.30% at December 31, 2005. Our ratio of the allowance for
loan losses to net loans was 1.09% at both December 31, 2006 and 2005.

Nonperforming
loans increased $15.6 million, or 108.6%, to $30.1 million at December 31, 2006 compared
to $14.4 million at December 31, 2005. The increase in nonperforming loans at December 31,
2006 was primarily attributable to residential construction and land and land development
loans. The increase in our nonperforming residential construction loans was primarily
related to properties in the Cape Coral area of Lee County in Florida. At December 31,
2006, residential construction loan commitments in the Cape Coral area amounted to $144.9
million with disbursed funds totaling $84.2 million. Nonperforming loans (those loans 90
or more days delinquent) related to the Cape Coral area totaled $9.4 million at December
31, 2006. A substantial increase in the number of residential construction building permit
applications, coupled with other contributing factors in the Cape Coral area in 2006,
resulted in delays affecting the commencement of construction. In some cases, these delays
extended beyond the original term of the residential construction loan. As a result of
these factors, some borrowers in the Cape Coral area have not kept current on their contractual loan payment
obligations and are now 90 or more days delinquent. This backlog of
residential construction permits awaiting issuance has recently improved and the City
of Cape Corals permit issuance process has  returned to its normal four- to
six-week time frame. As a result, residential builders are actively constructing homes for
our borrowers. Additionally, our loans in the Cape Coral area continue to decline as
borrowers pay off loans. We have not purchased residential construction loans in the Cape
Coral area since December 31, 2005. The increase in our nonperforming land and land
development loans relates to three loans totaling $4.6 million that primarily involve
the development of land for the purpose of constructing residential homes. We believe that our allowance for loan losses is adequate
to cover loan losses inherent in our loan portfolio at December 31, 2006.

FHLBank
Topeka Stock. FHLBank stock totaled $62.0 million at December 31, 2006, an
increase of $3.5 million, or 6.0%, compared to $58.5 million at December 31, 2005. The
increase was attributable to FHLBank stock dividends received during the year ended
December 31, 2006.

Premises
and Equipment. Premises and equipment increased $312,000, or 0.8%, to $39.8
million at December 31, 2006 compared to $39.5 million at December 31, 2005. The increase
was attributable to $5.0 million in asset additions which were partially offset by
depreciation and amortization of $3.8 million during the year ended December 31, 2006.
Significant additions during the year ended December 31, 2006 included new, full-service
banking facilities opened in Omaha, Hastings and Papillion, Nebraska.

50

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Goodwill.          Goodwill
totaled $42.2 million at December 31, 2006, a decrease of $55,000, or           0.1%,
compared to $42.3 million at December 31, 2005. Our goodwill at December           31,
2006 and 2005 relates to the 2004 acquisition of UNFC. There was no goodwill
          recorded in connection with our Marine Bank branch purchase in June 2006. The
          decrease in goodwill was the result of a realized tax benefit associated with
          the UNFC acquisition.

Other
Intangible Assets. Our other intangible assets declined $1.7 million, or
16.4%, to $8.4 million at December 31, 2006 compared to $10.0 million at December 31, 2005
and relates to core deposit intangible assets recorded as a result of the UNFC acquisition
and the Marine Bank transaction. The decrease was attributable to $1.8 million of
amortization partially offset by a $102,000 core deposit intangible asset recorded in
conjunction with the Marine Bank transaction.

Other
Assets.Other assets increased $6.0 million, or 21.2%, to $34.5 million at
December 31, 2006 compared to $28.5 million at December 31, 2005. At December 31, 2006,
the largest item recorded in other assets was net mortgage servicing assets of $12.5
million. The remainder consisted of prepaid expenses, miscellaneous receivables and other
miscellaneous assets.

# Liabilities and
Stockholders Equity

General.          Our
total liabilities were $3.1 billion at December 31, 2006, an increase of           $164.5
million, or 5.6%, compared to $2.9 billion at December 31, 2005. We           primarily
utilized FHLBank advances to fund lending growth during the year ended           December
31, 2006.

Deposits.        During
2006, deposits generated through our retail banking facilities increased $105.6 million
and we acquired $8.1 million in deposits related to the Marine Bank transaction.
Offsetting our 2006 increase in deposits was a transfer of $21.7 million of deposits to
the purchaser of our Plainville and Stockton, Kansas bank offices and the maturing of
$78.0 million of brokered time deposits which existed at December 31, 2005. As a result, net
deposits increased $14.0 million, or 0.7%, to $2.1 billion at December 31, 2006.

|                             | December 31,
|---------------------------- | ------------
|
|Noninterest-bearing checking |             
|Savings                      |             
|Interest-bearing checking    |             
|Money market                 |             
|Time deposits                |             
|                            
|Total retail deposits        |             
|Brokered time deposits       |             
|                            
|Total deposits               |             
|                            

Our
transaction accounts (checking, savings and money market) totaled $931.8 million at
December 31, 2006, a decrease of $437,000 compared to $932.2 million at December 31, 2005.
The number of transaction accounts increased by 3,700 accounts, or 3.0%, to 128,600
transaction accounts. The weighted average interest rate of our transaction accounts was
1.68% at December 31, 2006 compared to 1.35% at December 31, 2005. The weighted average
interest rate of our time deposits was 4.81% at December 31, 2006 compared to 3.52% at
December 31, 2005. The increase in our money market accounts and time deposits was
primarily the result of customers migrating to these accounts from lower-yielding deposit
accounts due to a rising interest rate environment.

51

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FHLBank
Advances and Other Borrowings. Our FHLBank advances and other borrowings
totaled $962.4 million at December 31, 2006, an increase of $147.5 million, or 18.1%,
compared to $814.9 million at December 31, 2005. We utilized FHLBank advances as our
primary funding source for loan growth during the year ended December 31, 2006. The
increase in FHLBank advances and other borrowings at December 31, 2006 was primarily
attributable to borrowing an additional $440.0 million of convertible fixed-rate advances
from the FHLBank and an increase in the outstanding balance on our FHLBank line of credit
to $72.5 million at December 31, 2006. These new advances were partially offset by the
repayment of $352.2 million of FHLBank advances. The weighted average interest rate on
FHLBank advances executed in 2006 was 4.28%. The weighted average interest rate on FHLBank
advances which matured or were called by the FHLBank in 2006 was 3.08%. The weighted
average interest rate on our FHLBank advances and other borrowings was 4.40% at December
31, 2006, an increase of 63 basis points compared to 3.77% at December 31, 2005.

Accrued
Expenses and Other Liabilities. Our accrued expenses and other liabilities
totaled $29.3 million at December 31, 2006, an increase of $1.3 million, or 4.8%, compared
to $28.0 million at December 31, 2005. The primary items comprising accrued expenses and
other liabilities are accrued taxes payable, deferred compensation agreements, loan
servicing payments and other miscellaneous accrued expenses.

Stockholders
Equity. At December 31, 2006, stockholders equity totaled $353.3
million, an increase of $44.4 million, or 14.4%, compared to $308.9 million at December
31, 2005. The increase in stockholders equity primarily reflected net income of $41.3
million during the year ended December 31, 2006, $4.9 million related to common stock
earned by participants in the Employee Stock Ownership Plan (ESOP), $2.9
million related to amortization of awards under the 2003 Management Recognition and
Retention Plan (MRRP) and $1.7 million related to amortization of stock
options under the 2003 Stock Option Plan (SOP). These increases were partially
offset by $4.8 million in stock repurchases and $4.5 million in cash dividends paid to our
stockholders. We paid cash dividends of $0.06 per common share on March 31, 2006 to
stockholders of record on March 15, 2006 and $0.07 per common share on June 30, 2006,
September 29, 2006 and December 29, 2006 to stockholders of record on June 15, 2006,
September 15, 2006 and December 15, 2006.

On
July 27, 2004, we announced that our Board of Directors had authorized the repurchase of
up to 1,828,581 shares of our outstanding common stock. There is no stated expiration date
for this authorization. We repurchased 152,984 shares of our outstanding common stock
during the year ended December 31, 2006. The weighted average price paid per common share
was $31.54 for the year ended December 31, 2006. After accounting for earlier repurchases,
at December 31, 2006, the total remaining common stock repurchase authority was 1,527,059
shares. For further discussion regarding our common stock repurchases, see Part II, Item 5
Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

54

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

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

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

# Comparison of Operating
Results for the Years Ended December 31, 2006 and 2005

Net
Income. Net income for the year ended December 31, 2006 was $41.3 million,
or $2.41 per diluted share ($2.50 per basic share), compared to net income of $32.8
million, or $1.97 per diluted share ($2.02 per basic share), for the year ended December
31, 2005. Contributing to the increases in net income and earnings per share for the year
ended December 31, 2006 was a $2.7 million pre-tax prepayment fee on a commercial real
estate loan and a $1.0 million pre-tax gain on sale of two north-central Kansas bank
offices and related deposits. Offsetting the positive effect of these two items were
expenses related to employee stock options. Employee stock option expenses impacted
earnings per share by $0.06 for the year ended December 31, 2006. We began expensing
employee stock options in the first quarter of 2006 following the implementation of new
accounting guidelines.

Net
Interest Income. Net interest income is the most significant component of
our earnings and consists of interest income on interest-earning assets offset by interest
expense on interest-bearing liabilities. Changes in net interest income result from
changes in volume, net interest spread and net interest margin. Volume relates to the
level of interest-earning assets and interest-bearing liabilities. Net interest spread
refers to the difference between the yield on interest-earning assets and the rate paid on
interest-bearing liabilities. Net interest margin refers to net interest income divided by
total interest-earning assets and is influenced by the level and mix of interest-earning
assets and interest-bearing liabilities. Net interest income before provision for loan
losses totaled $125.9 million for the year ended December 31, 2006, an increase of $21.0
million, or 20.0%, compared to $104.9 million for the year ended December 31, 2005. The
increase in net interest income was attributable to a continued increase in the average
yield on our net loan portfolio, partially offset by an increase in our funding cost,
supplemented by a $2.7 million prepayment fee collected on a commercial real estate loan
during the year ended December 31, 2006.

Our
average interest rate spread for the years ended December 31, 2006 and 2005 was 3.72% and
3.33%, respectively. The increase in our average interest rate spread was attributable to
the increase in the yield earned on our interest-earning assets, primarily our net loan
portfolio, being greater than the increase in our average rate paid on interest-bearing
liabilities. The average yield on interest-earning assets was 7.24% for the year ended
December 31, 2006, a 119 basis point increase compared to 6.05% for the year ended
December 31, 2005. The increase in the average yield earned on interest-earning assets was
primarily related to an increase in the average yield earned on loans receivable. Our
average yield earned on loans receivable for the years ended December 31, 2006 and 2005
was 7.39% and 6.19%, respectively. This increase was primarily the result of our lending
strategy to focus on loans with relatively higher yields, adjustable interest rates and/or
shorter terms to maturity. Our average rate paid on interest bearing liabilities was 3.52%
for the year ended December 31, 2006, an increase of 80 basis points compared to 2.72% for
the year ended December 31, 2005. The increase in the average rate paid on interest-bearing
liabilities was primarily the result of customers migrating to higher-yielding
deposit products such as time deposits and money market accounts coupled with increased
borrowing costs associated with FHLBank advances. These increases were primarily the result of a
series of interest rate increases set by the Federal Reserve Board throughout 2005 and the first half
of 2006 that has affected the rate we pay on interest-bearing deposits and borrowings.

55

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Our
net interest margin (net interest income divided by average interest-earning assets)
increased to 4.07% for the year ended December 31, 2006 compared to 3.58% for the year
ended December 31, 2005. The increase in our net interest margin for the year ended
December 31, 2006 was primarily the result of increases in the average yield earned and
average balance of loans receivable. The average balance of our total interest-earning
assets was $3.1 billion for the year ended December 31, 2006, an increase of $157.0
million, or 5.4%, compared to $2.9 billion for the year ended December 31, 2005. We
anticipate that average interest rate spread and net interest margin compression may occur
during 2007 due to increased deposit interest costs and refinancing of our FHLBank
advances and other borrowings.

Excluding
the receipt of the $2.7 million pre-tax loan prepayment fee, our average interest rate
spread would have been 3.63% for the year ended December 31, 2006. Our net interest margin
would have been 3.99% for the year ended December 31, 2006.

56

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

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

57

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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.

|                                                                                                                        | 2006 vs. 2005 | 2005 vs. 2004
|----------------------------------------------------------------------------------------------------------------------- | ------------- | -------------
|
|
|Interest income:                                                                                                        |               |              
|Federal funds sold                                                                                                      |               |              
|Investment securities                                                                                                   |               |              
|Mortgage-backed securities                                                                                              |               |              
|Loans receivable (1)                                                                                                    |               |              
|                                                                                                                       
|Total interest income                                                                                                   |               |              
|                                                                                                                       
|Interest expense:                                                                                                       |               |              
|Interest-bearing                                                                                                        |               |              
|checking accounts                                                                                                       |               |              
|Savings accounts                                                                                                        |               |              
|Money market accounts                                                                                                   |               |              
|Time deposits                                                                                                           |               |              
|                                                                                                                       
|Total deposits                                                                                                          |               |              
|FHLBank Topeka advances and                                                                                             |               |              
|other borrowings                                                                                                        |               |              
|                                                                                                                       
|Total interest expense                                                                                                  |               |              
|                                                                                                                       
|Net change in net interest income                                                                                       |               |              
|                                                                                                                       
|(1) Calculated net of uamortized premiums, discounts and deferred fees, loans in process and allowance for loan losses.
|                                                                                                                       

Interest
Income.Our total interest income for the year ended December 31, 2006 was $223.9
million, an increase of $46.5 million, or 26.2%, compared to $177.3 million for the year
ended December 31, 2005. Interest income on loans receivable totaled $214.7 million for
the year ended December 31, 2006, an increase of $45.6 million, or 26.9%, compared to
$169.2 million for year ended December 31, 2005. The average balance of loans receivable
increased $172.2 million, or 6.3%, to $2.9 billion for the year ended December 31, 2006
compared to $2.7 billion for year ended December 31, 2005. The average yield earned on
loans receivable increased to 7.39% for the year ended December 31, 2006 compared to 6.19%
for the year ended December 31, 2005.

The
increase in total interest income for the year ended December 31, 2006 was primarily
attributable to an increase in interest income on loans receivable. The increase in
interest income on loans receivable was primarily attributable to an increase in the
average yield earned. The increase in the average yield earned and average balance of
loans receivable was primarily the result of our lending strategy to focus on and sustain
our holdings of loans with relatively higher yields, adjustable interest rates and/or
shorter terms to maturity.

Interest
Expense.Our total interest expense for the year ended December 31, 2006 was $98.0
million, an increase of $25.6 million, or 35.3%, compared to $72.4 million for the year
ended December 31, 2005. Interest expense on deposits totaled $60.2 million for the year
ended December 31, 2006, an increase of $18.3 million, or 43.6%, compared to $41.9 million
for the year ended December 31, 2005. Interest expense on FHLBank advances and other
borrowings increased $7.3 million, or 24.0%, to $37.8 million for the year ended December
31, 2006 compared to $30.5 million for the year ended December 31, 2005. The average rate
paid on interest-bearing deposits was 3.18% and 2.29% for the years ended December 31,
2006 and 2005, respectively. The average rate paid on FHLBank advances and other
borrowings increased to 4.23% for the year ended December 31, 2006 compared to 3.65% for
the year ended December 31, 2005. The average balance of our interest-bearing liabilities
totaled $2.8 billion for the year ended December 31, 2006, an increase of $121.1 million,
or 4.5%, compared to $2.7 billion for the year ended December 31, 2005. The average
balance of our interest-bearing deposits increased $62.3 million, or 3.4%, to $1.9 billion
for the year ended December 31, 2006 compared to $1.8 billion for the year ended December
31, 2005. The average balance of our FHLBank advances and other borrowings totaled $893.4
million for the year ended December 31, 2006, an increase of $58.8 million, or 7.0%,
compared to $834.6 million for the year ended December 31, 2005.

58

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The
increase in interest expense was attributable to an increase in the average rate paid on
interest-bearing liabilities. This increase was primarily the result of a series of
interest rate increases set by the Federal Reserve Board throughout 2005 and the first
half of 2006 that has affected the rate we pay on interest bearing deposits and
borrowings.

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

We
made a provision for loan losses of $6.1 million for the year ended December 31, 2006
compared to $6.4 million for the year ended December 31, 2005, a decrease of $383,000, or
6.0%. At December 31, 2006 our nonperforming loans totaled $30.1 million, or 0.99% of net
loans, compared to $14.4 million, or 0.51% of net loans, at December 31, 2005. The
increase in nonperforming loans and assets related primarily to increases of $16.2 million
in nonperforming residential construction loans, $3.8 million in nonperforming land and
land development loans, $2.8 million in real estate owned and $1.8 million in
nonperforming business loans partially offset by a $4.6 million decline in nonperforming
multi-family residential loans. Our focus on loans with relatively higher yields,
adjustable interest rates and/or shorter terms to maturity also subjects us to a
potentially higher degree of credit risk. Our loan delinquency rate (30 or more days
delinquent) at December 31, 2006 as a percentage of net loans (before allowance for loan
losses) was 1.89% compared to 1.34% at December 31, 2005. We anticipate that the level of
loan delinquencies may continue to increase for the foreseeable future.

During
the years ended December 31, 2006 and 2005, we charged-off, net of recoveries, $3.8
million and $2.4 million, respectively. Charge-offs, net of recoveries, during the year
ended December 31, 2006 consisted primarily of $1.4 million of consumer loans, $982,000 of
business loans and $532,000 of land and land development loans. Our charge-offs, net of
recoveries, as a percentage of average loans outstanding were 0.13% and 0.09%,
respectively, for the years ended December 31, 2006 and 2005. Our strategy of focusing on
loans with relatively higher yields, adjustable interest rates and/or shorter terms to
maturity subjects us to an increased level of credit risk. Our focus on such loans has
contributed to an increased amount of loan delinquencies and charge-offs in recent years.

59

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Noninterest
Income.Noninterest income for the year ended December 31, 2006 was $29.1 million,
an increase of $2.5 million, or 9.4%, compared to $26.6 million for the year ended
December 31, 2005.

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

The
increase in noninterest income during the year ended December 31, 2006 compared to the
year ended December 31, 2005 was primarily attributable to a $1.2 million increase in
deposit account fees and service charges and a $1.0 million pre-tax gain on sale of two
north-central Kansas bank offices and related deposits. The increase in deposit account
and debit card fees was largely due to an increase in the number of transaction accounts.
At December 31, 2006, we had 128,600 transaction accounts, an increase of 3,700 accounts,
compared to December 31, 2005. The increases in noninterest income during the year ended
December 31, 2006 compared to the year ended December 31, 2005 were partially offset by no
mortgage servicing rights valuation recapture in 2006 compared to $800,000 of recapture
during 2005.

Noninterest
Expense.Our noninterest expense increased by $9.3 million, or 12.9%, to $81.8
million for the year ended December 31, 2006 compared to $72.5 million for the year ended
December 31, 2005.

|                                           | Year Ended December 31,
|------------------------------------------ | -----------------------
|
|Employee compensation                      |                        
|Employee benefits                          |                        
|Payroll taxes                              |                        
|Management Recognition and Retention Plan  |                        
|Employee Stock Ownership Plan              |                        
|2003 Stock Option Plan                     |                        
|Occupancy, net                             |                        
|Data processing                            |                        
|Advertising                                |                        
|Core deposit intangible asset amortization |                        
|Professional services                      |                        
|Other                                      |                        
|                                          
|Total noninterest expense                  |                        
|                                          

60

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The
increase in noninterest expense during the year ended December 31, 2006 compared to the
year ended December 31, 2005 was primarily attributable to increases in employee
compensation, stock-based compensation plans and employee benefits. The increase in
employee compensation, employee benefits and payroll taxes resulted from continued
personnel growth and annual salary increases as well as charges related to the expensing
of employee stock options. At December 31, 2006 we had 850 full-time equivalent employees
compared to 772 full-time equivalent employees at December 31, 2005. In accordance with
SFAS No. 123(R), Share-Based Payment, we began expensing stock options on January
1, 2006 using the modified-prospective application method. Other operating expenses in
2006 increased primarily due to an increase of $874,000 in legal expense. Our legal
expenses in 2006 primarily relate to a breach of contract lawsuit filed in 1995 against the
federal government following the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (FIRREA). Under FIRREA, the federal government
eliminated approximately $30.0 million of goodwill remaining from three supervisory
mergers we completed in 1982. In October 2006, we received a favorable opinion, which is
now on appeal, from the United States Court of Federal Claims awarding us $4.5 million in
damages.

Income
Tax Expense.Our income tax expense increased by $6.0 million, or 30.5%, to $25.8
million for the year ended December 31, 2006 compared to $19.8 million for the year ended
December 31, 2005. The increase in income tax expense for the year ended December 31, 2006
compared to the same period in 2005 was primarily due to an increase in net income. The
effective income tax rate for the year ended December 31, 2006 was 38.5% compared to 37.6%
for the year ended December 31, 2005. This increase in our effective tax rate was the
result of an increase in nondeductible employee benefits.

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

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

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

Net
Interest Income. Net interest income before provision for loan losses
totaled $104.9 million for the year ended December 31, 2005, an increase of $27.7 million,
or 35.9%, compared to $77.2 million for the year ended December 31, 2004. The increase in
net interest income was primarily due to increases in the average balance of and average
yield earned on loans receivable.

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

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

61

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

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

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

62

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

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

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

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

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

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

63

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

# Asset and Liability
Management

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

Additionally,
the extent to which borrowers prepay loans is affected by prevailing interest rates. When
interest rates increase, borrowers are less likely to prepay loans; whereas, when interest
rates decrease, borrowers are more likely to prepay loans. Loan prepayments may affect the
levels of loans retained in our portfolio and may affect our net interest income.

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

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

64

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Net
Portfolio Value.  The following table sets forth our NPV as of December 31, 2006, as
calculated by the OTS:

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

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

65

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GAP
Analysis. The following table sets forth the estimated maturity/repricing
and the resulting gap between our interest-earning assets and interest-bearing liabilities
at December 31, 2006. The estimated maturity/repricing amounts reflect contractual
maturities and amortizations, assumed loan prepayments based on our historical experience
and estimated deposit account decay rates. Management believes these assumptions and
estimates are reasonable, but there can be no assurance in this regard.

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

66

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# Liquidity and Capital
Resources

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

We
actively manage our liquidity in an effort to maintain an adequate liquidity margin over
the level necessary to support expected and potential loan fundings and deposit
withdrawals. Our liquidity level may vary throughout the year, depending on economic
conditions, deposit fluctuations and loan funding needs.

During
the year ended December 31, 2006, net cash provided by operating activities was $39.9
million, which primarily consisted of net income. Net cash used in investing activities
during the year ended December 31, 2006 was $190.6 million and related to the funding of
loans, the purchase of available for sale investment securities and premises and equipment
purchases partially offset by cash inflows from maturing and sold investment securities.
During the year ended December 31, 2006, net cash provided by financing activities was
$149.5 million, which consisted primarily of net cash inflows from FHLBank advances and
deposits, partially offset by cash transferred due to the sale of branches and deposits,
the repurchase of common stock and cash dividends paid on our common stock.

Deposits,
particularly core deposits, typically provide a more preferable source of funding than
FHLBank advances and other borrowings. However, to the extent that competitive or market
factors do not allow us to meet our funding needs with deposits alone, FHLBank advances
and other borrowings provide a readily available alternative source of liquidity. During
2006, deposits generated through our retail banking facilities increased $105.6 million
and we acquired $8.1 million in deposits related to the Marine Bank transaction.
Offsetting our 2006 increase in deposits was a transfer of $21.7 million of deposits to
the purchaser of our Plainville and Stockton, Kansas bank offices and the maturing of
$78.0 million of brokered time deposits which existed at December 31, 2005. As a result,
net deposits increased $14.0 million, or 0.7% to $2.1 billion at December 31, 2006. The
increase in deposits was primarily used to fund loan origination and purchase activities.
At December 31, 2006, we had time deposits maturing within the next 12 months amounting
to $990.6 million. Based upon historical experience, we anticipate that a significant
portion of the maturing time deposits will be redeposited with us.

In
addition to cash flows generated by loan and securities payments and prepayments, we have
additional borrowing capacity to fund our asset growth. The average balance of our FHLBank
advances and other borrowings was $893.4 million for the year ended December 31, 2006
compared to $834.6 million for the year ended December 31, 2005. To date, substantially
all of our borrowings have consisted of FHLBank advances. Pursuant to blanket collateral
agreements with the FHLBank, we have pledged qualifying residential, multi-family
residential and commercial real estate mortgages, residential construction, commercial
construction and agricultural real estate loans with carrying values totaling
approximately $1.6 billion and $1.7 billion at December 31, 2006 and 2005, respectively.
Other qualifying collateral can be pledged in the event additional borrowing capacity is
required.

67

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# Aggregate Contractual
Obligations and Off-Balance Sheet Arrangements

We
believe we have sufficient liquidity to fund existing and future loan commitments, to
fund maturing time deposits and demand deposit withdrawals, to invest in other
interest-earning assets and to meet operating expenses. At December 31, 2006, we had the
following contractual obligations (excluding bank deposits and interest) and lending
commitments:

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

We
have not used, and have no intention to use, any significant off-balance sheet financing
arrangements for liquidity purposes or otherwise. Our primary financial instruments with
off-balance sheet risk are limited to loan servicing for others, our obligations to fund
loans to customers pursuant to existing commitments and commitments to purchase and sell
mortgage loans. In addition, we have certain risks due to limited recourse arrangements on
loans serviced for others and recourse obligations related to loan sales. At December 31,
2006, the maximum total dollar amount of such recourse was approximately $17.4 million.
Based on historical experience, at December 31, 2006, we had established a liability of
$742,000 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 21  Commitments,
Contingencies and Financial Instruments with Off-Balance Sheet Risk included in
Item 8. Financial Statements and Supplementary Data, in Part II of this Annual Report on
Form 10-K.

68

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# Impact of Inflation and
Changing Prices

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

# Recent Accounting
Pronouncements

# Statements of Financial
Accounting Standards

In
February 2006, the Financial Accounting Standards Board (FASB) issued
Statement No. 155, Accounting for Certain Hybrid Financial Instruments  an
Amendment of FASB Statements No. 133 and 140, (SFAS No. 155), to address
issues which had arisen related to SFAS Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Under SFAS No. 155, companies may elect to measure
at fair value entire financial instruments containing embedded derivatives that would
otherwise have to be accounted for separately. Additionally, SFAS No. 155 provides the
following: (a) requires companies to identify interests in securitized financial assets
that are freestanding derivatives or contain embedded derivatives that would have to be
accounted for separately; (b) clarifies which interest- and principal-only strips are
subject to SFAS No. 133; and (c) amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(SFAS No.
140), to eliminate the prohibition of a qualifying special purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. SFAS No. 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement (new basis) event after the
beginning of a companys first fiscal year beginning after September 15, 2006. We do
not anticipate that the adoption of SFAS No. 155 will have a material impact on our
consolidated financial statements.

In
March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
 an Amendment of FASB Statement No. 140(SFAS No. 156). SFAS No. 156
amends SFAS No. 140 with respect to the accounting for separately recognized servicing
assets and servicing liabilities. SFAS No. 156 has the following requirements: (a)
requires an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a servicing
contract; (b) requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practical; (c) permits an entity to
choose either the amortization method or fair value measurement method for each class of
separately recognized servicing assets and servicing liabilities; (d) at its initial
adoption, permits a one-time reclassification of available for sale securities to trading
securities by entities with recognized servicing rights, without calling into question the
treatment of other available for sale securities under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, provided that the available for
sale securities are identified in some manner as offsetting the entitys exposure to
changes in fair value of servicing assets or servicing liabilities that a servicer elects
to subsequently measure at fair value; and (e) requires separate presentation of servicing
assets and servicing liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately recognized servicing
assets and servicing liabilities. SFAS No. 156 is effective as of a companys first
fiscal year beginning after September 15, 2006. We do not anticipate that the adoption of
SFAS No. 156 will have a material impact on our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles and expands disclosure about
fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use in
pricing the asset or liability. This statement clarifies that market participant
assumptions include assumptions about risk. A fair value measurement should include an
adjustment for risk if market participants would include one in pricing the related asset
or liability, even if the adjustment is difficult to determine. This statement also
clarifies that market participant assumptions should also include assumptions about the
effect of a restriction on the sale or use of an asset. This statement clarifies that fair
value measurement for a liability should reflect nonperformance risk (the risk that the
obligation will not be fulfilled). This statement expands disclosures about the use of
fair value to measure assets and liabilities in interim and annual periods subsequent to
initial recognition. The disclosures focus on the inputs used to measure fair value and
for recurring fair value measurements using significant unobservable inputs and the effect
of the measurements on earnings (or changes in net assets) for the period. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15,
2007. We are evaluating the impact that SFAS No. 157 may have on our consolidated
financial statements.

69

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In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87,
88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires an employer to
recognize the overfunded or underfunded status of defined benefit postretirement plans as
an asset or liability in its statement of financial position. The funded status is
measured as the difference between the assets at fair value and benefit obligation (the
projected benefit obligation for pension plans or the accumulated benefit obligation for
other postretirement benefit plans). An employer is also required to measure the funded
status of a plan as of the date of its year-end statement of financial position with
changes in the funded status recognized through comprehensive income. SFAS No. 158 also
requires certain disclosures regarding the effects on net periodic benefit cost for the
next fiscal year that arise from delayed recognition of gains or losses, prior service
costs or credits and the transition asset or obligation. An employer with publicly traded
equity securities is required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the end of the
fiscal year ending after December 15, 2006. The adoption of SFAS No. 158 did not have a
material impact on our consolidated financial statements.

# Financial Accounting
Standards Board Interpretations

In
June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an Interpretation of FASB Statement No. 109 (FIN
48)", which clarifies the accounting for uncertainty in income taxes recognized
in a companys financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after December
15, 2006. We are evaluating the impact that FIN 48 may have on our consolidated financial
statements, however, we do not anticipate that it will have a material impact on our
consolidated financial statements upon adoption.

# SEC Staff Accounting
Bulletins

In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements in Current Year Financial Statements(SAB
108). SAB 108 addresses how the effects of prior year uncorrected
errors must be considered in quantifying misstatements in the current year financial
statements. The effects of prior year uncorrected errors include the potential
accumulation of improper amounts that may result in a material misstatement on the balance
sheet or the reversal of prior period errors in the current period that result in material
misstatement of the current period income statement amounts. Adjustments to current or
prior period financial statements would be required in the event that after application of
various approaches for assessing materiality of a misstatement in current period financial
statements and consideration of all relevant quantitative and qualitative factors, a
misstatement is determined to be material. SAB 108 will be applicable to all financial
statements issued after November 15, 2006. The adoption of SAB 108 did not have an
impact on our consolidated financial statements.

70

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

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

71

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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, 2006 and 2005, and the related
consolidated statements of income, stockholders equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31, 2006.
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, 2006 and 2005, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2006, 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, 2006, 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 7,
2007 expressed an unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial reporting.

As
discussed in Note 1 to the consolidated financial statements, effective January 1, 2006,
the Company changed its method of accounting for stock-based benefit plans.

# /s/ KPMG LLP

Lincoln, NebraskaMarch 7,
2007

72

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# TierOne Corporation
and Subsidiaries  Consolidated Statements of Financial Condition

|                                                                                     | At December 31,
|------------------------------------------------------------------------------------ | ---------------
|
|ASSETS                                                                               |                
|Cash and due from banks                                                              |                
|Federal funds sold                                                                   |                
|                                                                                    
|Total cash and cash equivalents                                                      |                
|                                                                                    
|Investment securities:                                                               |                
|Held to maturity, at cost which approximates fair value                              |                
|Available for sale, at fair value                                                    |                
|Mortgage-backed securities, available for sale, at fair value                        |                
|Loans receivable:                                                                    |                
|Net loans (includes loans held for sale of $19,285 and $8,666 at                     |                
|December 31, 2006 and 2005, respectively)                                            |                
|Allowance for loan losses                                                            |                
|                                                                                    
|Net loans after allowance for loan losses                                            |                
|                                                                                    
|FHLBank Topeka stock, at cost                                                        |                
|Premises and equipment, net                                                          |                
|Accrued interest receivable                                                          |                
|Goodwill                                                                             |                
|Other intangible assets, net                                                         |                
|Other assets                                                                         |                
|                                                                                    
|Total assets                                                                         |                
|                                                                                    
|LIABILITIES AND STOCKHOLDERS EQUITY                                                 |                
|Liabilities:                                                                         |                
|Deposits                                                                             |                
|FHLBank Topeka advances and other borrowings                                         |                
|Advance payments from borrowers for taxes, insurance and other escrow funds          |                
|Accrued interest payable                                                             |                
|Accrued expenses and other liabilities                                               |                
|                                                                                    
|Total liabilities                                                                    |                
|                                                                                    
|Stockholders equity:                                                                |                
|Preferred stock, $0.01 par value. 10,000,000 shares authorized; none issued          |                
|Common stock, $0.01 par value. 60,000,000 shares authorized; 18,041,413 and          |                
|18,150,773 shares issued and outstanding at December 31, 2006 and 2005, respectively |                
|Additional paid-in capital                                                           |                
|Retained earnings, substantially restricted                                          |                
|Treasury stock, at cost; 4,533,662 and 4,424,302 shares at                           |                
|December 31, 2006 and 2005, 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.

73

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# TierOne Corporation
and Subsidiaries Consolidated Statements of Income

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

See accompanying notes to consolidated
financial statements.

74

---

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

|(Dollars in thousands)                  | Common Stock | AdditionalPaid-InCapital | RetainedEarnings,SubstantiallyRestricted | TreasuryStock | UnallocatedCommon StockHeld by theEmployee StockOwnership Plan | UnearnedCommon StockHeld by theManagementRecognition andRetention Plan | Accumulated OtherComprehensiveIncome (Loss), Net | Total Stockholders Equity
|--------------------------------------- | ------------ | ------------------------ | ---------------------------------------- | ------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------ | --------------------------
|Balance at December 31, 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 2003      |              |                         
|Stock Option Plan                       |              |                          |                                          | --            |                                                                |                                                                        | (10                                              | )                         
|Repurchase of common stock              |              |                         
|(2,031,757 shares)                      |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Dividends paid ($0.20 per common share) |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Comprehensive income:                   |              |                         
|Net income                              |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Additional minimum pension              |              |                         
|liability, net of tax                   |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Change in unrealized gain on            |              |                         
|available for sale securities,          |              |                         
|net of tax and                          |              |                         
|reclassification adjustment             |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|                                       
|Total comprehensive income              |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|                                       
|Balance at December 31, 2004            |              |                          |                                          | 226           |                                                                |                                                                        | 355,986                                          |                           
|                                       
|Common stock earned by                  |              |                         
|employees in Employee                   |              |                         
|Stock Ownership Plan                    |              |                          |                                          | --            |                                                                |                                                                        | 2,446                                            |                           
|Amortization of awards under the        |              |                         
|Management Recognition and              |              |                         
|Retention Plan                          |              |                          |                                          | --            |                                                                |                                                                        | 214                                              |                           
|Treasury stock reissued under 2003      |              |                         
|Stock Option Plan                       |              |                          |                                          | --            |                                                                |                                                                        | (59                                              | )                         
|Repurchase of common stock              |              |                         
|(148,538 shares)                        |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Dividends paid ($0.23 per common share) |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Comprehensive income:                   |              |                         
|Net income                              |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Change in unrealized loss on            |              |                         
|available for sale securities,          |              |                         
|net of tax and                          |              |                         
|reclassification adjustment             |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|                                       
|Total comprehensive income              |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|                                       
|Balance at December 31, 2005            |              |                          | $                                        | 226           |                                                                | $                                                                      | 358,587                                          |                           
|                                       

75

---

# TierOne Corporation
and Subsidiaries Consolidated Statements of Changes in Stockholders Equity and
Comprehensive Income (Continued)

|(Dollars in thousands)                   | Common Stock | AdditionalPaid-InCapital | RetainedEarnings,SubstantiallyRestricted | TreasuryStock | UnallocatedCommon StockHeld by theEmployee StockOwnership Plan | UnearnedCommon StockHeld by theManagementRecognition andRetention Plan | Accumulated OtherComprehensiveIncome (Loss), Net | Total Stockholders Equity
|---------------------------------------- | ------------ | ------------------------ | ---------------------------------------- | ------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------ | --------------------------
|Balance at December 31, 2005             |              |                          | $                                        | 226           |                                                                | $                                                                      | 358,587                                          |                           
|                                        
|Common stock earned by                   |              |                         
|employees in Employee                    |              |                         
|Stock Ownership Plan                     |              |                          |                                          | --            |                                                                |                                                                        | 3,404                                            |                           
|Transfer of unearned common stock        |              |                         
|held by Management Recognition and       |              |                         
|Retention Plan upon adoption of          |              |                         
|SFAS No. 123(R) on January 1, 2006       |              |                          |                                          | --            |                                                                |                                                                        | (9,368                                           | )                         
|Amortization of awards under the         |              |                         
|Management Recognition and               |              |                         
|Retention Plan                           |              |                          |                                          | --            |                                                                |                                                                        | 2,904                                            |                           
|Amortization of stock options under      |              |                         
|2003 Stock Option Plan upon              |              |                         
|adoption of SFAS No. 123(R)              |              |                          |                                          | --            |                                                                |                                                                        | 1,682                                            |                           
|Repurchase of common                     |              |                         
|stock (152,984 shares)                   |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Treasury stock reissued under 2003       |              |                         
|Stock Option Plan                        |              |                          |                                          | --            |                                                                |                                                                        | (216                                             | )                         
|Excess tax benefit realized from stock-  |              |                         
|based compensation plans                 |              |                          |                                          | --            |                                                                |                                                                        | 960                                              |                           
|Tax benefits realized from certain costs |              |                         
|deducted in mutual to stock conversion   |              |                          |                                          | --            |                                                                |                                                                        | 780                                              |                           
|Dividends paid ($0.27 per common share)  |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Comprehensive income:                    |              |                         
|Net income                               |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|Change in unrealized loss on             |              |                         
|available for sale securities,           |              |                         
|net of tax and                           |              |                         
|reclassification adjustment              |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|                                        
|Total comprehensive income               |              |                          |                                          | --            |                                                                |                                                                        | --                                               |                           
|                                        
|Balance at December 31, 2006             |              |                          | $                                        | 226           |                                                                | $                                                                      | 358,733                                          |                           
|                                        

See accompanying notes to
consolidated financial statements.

76

---

# TierOne Corporation
and Subsidiaries  Consolidated 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 (accretion) of investment and mortgage-backed securities   |                        
|Premises and equipment depreciation and amortization                                |                        
|Amortization of intangible assets                                                   |                        
|Amortization of discount on FHLBank Topeka advances                                 |                        
|Employee Stock Ownership Plan compensation expense                                  |                        
|2003 Management Recognition and Retention Plan compensation expense                 |                        
|2003 Stock Option Plan compensation expense                                         |                        
|Amortization of premiums (accretion of discounts) on net loans                      |                        
|FHLBank Topeka stock dividend                                                       |                        
|Deferred income tax expense (benefit)                                               |                        
|Provision for loan losses                                                           |                        
|Provision for real estate owned losses                                              |                        
|Proceeds from sales of loans held for sale                                          |                        
|Originations and purchases of loans held for sale                                   |                        
|Excess tax benefits from stock-based compensation plans                             |                        
|Premium on sale of branch deposits                                                  |                        
|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           |                        
|Proceeds from sale of investment and mortgage-backed securities, available for sale |                        
|Proceeds from maturities of investment securities, available for sale               |                        
|Proceeds from principal repayments of investment                                    |                        
|and mortgage-backed securities available for sale and held to maturity              |                        
|Increase in loans receivable                                                        |                        
|Purchase of FHLBank Topeka stock                                                    |                        
|Sale of FHLBank Topeka stock                                                        |                        
|Additions to premises and equipment                                                 |                        
|Proceeds from sale of premises and equipment                                        |                        
|Proceeds from sale of real estate owned                                             |                        
|Marine Bank branch purchase, net of cash acquired                                   |                        
|                                                                                   
|Net cash used in investing activities                                               |                        
|                                                                                   

77

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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 FHLBank Topeka line of credit                      |                        
|and short-term advances and other borrowings                                   |                        
|Proceeds from FHLBank Topeka long-term advances and other borrowings           |                        
|Repayments of FHLBank Topeka long-term advances and other borrowings           |                        
|Proceeds from junior subordinated debentures                                   |                        
|Repayment of 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                                                 |                        
|Excess tax benefit realized from the exercise of stock options                 |                        
|Excess tax benefit realized from the vesting of Management Recognition and     |                        
|Retention Plan shares                                                          |                        
|Proceeds from the exercise of stock options                                    |                        
|Net cash transferred due to sale of branches and deposits                      |                        
|                                                                              
|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                                               |                        
|                                                                              

See accompanying notes to
consolidated financial statements.

78

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 1. Summary of
Significant Accounting Policies

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

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

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

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

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

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

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

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

79

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Loans
Receivable. Net loans are stated at unpaid principal balances, plus/minus
unamortized premiums, discounts and deferred loan origination fees and costs and loans in
process. Interest on loans is credited to income as earned. Interest is not accrued on
loans 90 or more days delinquent. 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, we designate certain loans
receivable as held for sale, as we do not intend to hold such loans through maturity.
Loans held for sale generally consist of fixed-rate, one-to-four family residential loans
and are carried at the lower of cost or market value, determined on an aggregate basis.
Gains or losses on such loans are recognized utilizing the specific identification method.

Provision
and Allowance for Loan Losses. A provision for loan losses is charged to
income when it is determined to be required based on our analysis. The allowance is
maintained at a level to cover all known and inherent losses in the loan portfolio that
are both probable and reasonable to estimate at each reporting date. We review the loan
portfolio no less frequently than quarterly in order to identify those inherent losses and
to assess the overall collection probability of the portfolio. Our review includes a
quantitative analysis by loan category, using historical loss experience, classifying
loans pursuant to a grading system and consideration of a series of qualitative loss
factors. The evaluation process includes, among other things, an analysis of delinquency
trends, nonperforming loan trends, the level of charge-offs and recoveries, prior loss
experience, total loans outstanding, the volume of loan originations, the type, size,
terms and geographic concentration of loans held by us, the value of collateral securing
loans, the number of loans requiring heightened oversight and general economic conditions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available or as future events change.

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

Goodwill
and Intangible Assets. Goodwill represents the excess price paid over the
fair value of the tangible and intangible assets and liabilities acquired in connection
with the August 27, 2004 acquisition of United Nebraska Financial Co. (UNFC).
There was no goodwill recorded in connection with our Marine Bank branch purchase on June
2, 2006. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill and indefinite-lived intangibles balances are not being amortized, but are tested
for impairment annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires intangible assets with estimated useful lives be amortized over their
respective estimated useful lives to their residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets.

80

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

We
have identified a single reporting unit for purposes of goodwill impairment testing. The
impairment test is therefore performed on a consolidated basis. We perform our goodwill
impairment analysis on an annual basis during the third quarter. Additional impairment
analysis may be performed if circumstances or events occur which may have an impact on the
fair value of our goodwill. Generally, fair value represents a multiple of earnings or
discounted projected cash flows. Potential impairment is indicated when the carrying value
of the entity, including goodwill, exceeds its fair value. If potential for impairment
exists, the fair value of the entity is subsequently measured against the fair value of
its underlying assets and liabilities, excluding goodwill, to estimate an implied fair
value of the entitys goodwill. Impairment loss is recognized for any excess of the
carrying value of the entitys goodwill over the implied fair value. We performed our
impairment analysis as of September 30, 2006 and concluded that no potential impairment of
goodwill existed since the fair value of our goodwill exceeded its carrying value.

The
value of core deposit intangible assets acquired in connection with the UNFC and Marine
Bank transactions, which is subject to amortization, is included in the Consolidated
Statements of Financial Condition as other intangible assets. Determining the amount of
identifiable intangible assets and their average lives involves multiple assumptions and
estimates and is typically determined by performing a discounted cash flow analysis, which
involves a combination of any or all of the following assumptions: customer attrition,
account runoff, alternative funding costs, deposit servicing costs and discount rates. The
core deposit intangible assets have been estimated to have nine- to ten-year lives. Core
deposit intangible assets are amortized using an accelerated method of amortization which
is recorded in the Consolidated Statements of Income as other operating expense.

We
review our core deposit intangible assets for impairment whenever events or changes in
circumstances indicate that we may not recover our investment in the underlying assets or
liabilities which gave rise to these intangible assets. For the years ended December 31,
2006 and 2005, no events or circumstances triggered an impairment charge against our core
deposit intangible assets.

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

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

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

81

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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

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

Earnings
Per Share.Basic earnings per share (EPS) is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised. It is computed after giving consideration
to the weighted average dilutive effect of our Employee Stock Ownership Plan
(ESOP) shares, 2003 Stock Option Plan (SOP) shares and 2003
Management Recognition and Retention Plan (MRRP) shares.

Stock-Based
Compensation. SFAS No. 123(R), Share-Based Payment(SFAS No.
123(R)), requires that compensation expense related to stock-based payment
transactions be recognized in the financial statements and that expense be measured based
on the fair value of the equity or liability instrument issued. SFAS No. 123(R) also
requires that forfeitures be estimated over the vesting period of the instrument. We
adopted SFAS No. 123(R) using the modified-prospective method and have applied this method
to the accounting for our stock options and restricted shares. Under the
modified-prospective method, stock-based employee compensation expense recognized after
adoption includes: (a) stock-based expense for all awards granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), and (b) stock-based employee compensation
expense for all awards granted subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of SFAS No. 123(R). Prior to January 1,
2006, as permitted by SFAS No. 123, we accounted for stock-based payments to employees
using Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and, therefore recorded no stock-based employee
compensation expense for employee stock options. Results for periods prior to January 1,
2006 have not been restated.

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
$210,000, ($500,000) and ($25,000) for the years ended December 31, 2006, 2005 and
2004, respectively. Reclassification adjustments for realized gross gains (losses)
included in income, were approximately ($291,000), ($57,000) and $171,000, net of tax
(expense) benefit of approximately $109,000, $20,000 and ($60,000), respectively, for the
years ended December 31, 2006, 2005 and 2004, respectively.

Cash
and Cash Equivalents. For purposes of the Consolidated Statements 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 2006           presentation.

# 2. Industry Segment
Information

Our
activities are considered to be a single industry segment for financial reporting
purposes. We are engaged in the business of commercial and retail banking, investment
management, insurance and farm and ranch management and real estate brokerage services
with operations conducted through 69 banking offices located in Nebraska, Iowa and Kansas
and nine loan production offices located in Arizona, Colorado, Florida, Minnesota, Nevada
and North Carolina. Substantially all income is derived from a diverse base of commercial,
mortgage and retail lending activities and investments.

82

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 3. Earnings Per Share

Basic
and diluted EPS data are based on the weighted average number of common shares outstanding
during each reporting period. The basic EPS calculation excludes the dilutive effect of
all common stock equivalents. Diluted EPS are further adjusted for potential common shares
that were dilutive and outstanding during the reporting period. Our potentially dilutive
common shares at December 31, 2006, 2005 and 2004 represent shares issuable under our SOP
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,
|------------------------------- | -----------------------
|
|
|Net income                      |                        
|                               
|Weighted average number of      |                        
|common shares outstanding       |                        
|used in basic earnings per      |                        
|share calculation (in 000's)    |                        
|                               
|Common share equivalents -      |                        
|2003 Stock Option Plan and MRRP |                        
|2003 Management Recognition     |                        
|and Retention Plan              |                        
|shares (in 000's)               |                        
|                               
|Weighted average number of      |                        
|common shares outstanding       |                        
|used in diluted earnings per    |                        
|share calcuation (in 000's)     |                        
|                               
|Earnings per share              |                        
|                               

Had
stock-based employee compensation expense for our SOP been determined based on a
calculated fair value using the Black-Scholes model at the grant date for awards
subsequent to the distribution, consistent with the recognition provisions of SFAS No.
123(R), our net income and earnings per share would have been impacted as follows for the
years ended December 31, 2005 and 2004:

|                                                             | Year Ended December 31,
|------------------------------------------------------------ | -----------------------
|
|Net income (as reported)                                     |                        
|Add: stock-based employee compensation expense               |                        
|included in reported net income, net of related tax effects  |                        
|Deduct: 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                         |                        
|                                                            

83

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 4. 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, 2006 and 2005
are as follows:

|                                                  | At December 31, 2006
|------------------------------------------------- | --------------------
|
|
|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                    |                     
|                                                 

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

84

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
amortized cost and estimated fair value of investment securities at December 31,
2006, by contractual maturity, is shown in the following table. Actual maturities may
differ from the contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

|                            | At December 31, 2006
|--------------------------- | --------------------
|
|
|Amount maturing in:         |                     
|2007                        |                     
|2008 - 2011                 |                     
|2012 - 2016                 |                     
|After 2016                  |                     
|                           
|Total investment securities |                     
|                           

There
were no sales of investment securities held to maturity during the three years ended
December 31, 2006. Proceeds from the sale of investment securities available for sale
totaled $2.3 million, $3.2 million and $16.8 million for the years ended December 31,
2006, 2005 and 2004, respectively. Gross realized gains on the sale of investment
securities were $21,000, $14,000 and $596,000 for the years ended December 31, 2006, 2005
and 2004, respectively. There were no losses on the sale of investment securities during
the years ended December 31, 2006 and 2005. Realized losses, due to impairment, were
$135,000 on investment securities for the year ended December 31, 2004. There were no
sales of mortgage-backed securities during the years ended December 31, 2006, 2005 and
2004.

At
December 31, 2006 and 2005, investment and mortgage-backed securities with fair
values of approximately $96.3 million and $99.3 million, respectively, were pledged to
secure public deposits.

85

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Investment
and mortgage-backed securities with unrealized losses at December 31, 2006 and 2005 are
summarized in the following table:

|                                      | Less Than 12 Months | 12 Months or Longer | Total
|------------------------------------- | ------------------- | ------------------- | -----
|
|At December 31, 2006:                 |                     |                     |      
|Mortgage-backed securities            |                     |                     | $    
|U.S. Government securities and        |                     |                    
|agency obligations                    |                     |                     |      
|Corporate securities                  |                     |                     |      
|Municipal obligations                 |                     |                     |      
|Agency equity securities              |                     |                     |      
|Asset Management Fund - ARM Fund      |                     |                     |      
|                                     
|Total temporarily impaired securities |                     |                     | $    
|                                     
|At December 31, 2005:                 |                     |                    
|Mortgage-backed securities            |                     |                     | $    
|U.S. Government securities and        |                     |                    
|agency obligations                    |                     |                     |      
|Corporate securities                  |                     |                     |      
|Municipal obligations                 |                     |                     |      
|Agency equity securities              |                     |                     |      
|Asset Management Fund - ARM Fund      |                     |                     |      
|                                     
|Total temporarily impaired securities |                     |                     | $    
|                                     

We
believe all unrealized losses as of December 31, 2006 and 2005 to be market related, with
no permanent sector or issuer credit concerns or impairments. We had 107 and 112
securities with unrealized losses for 12 consecutive months or longer as of December 31,
2006 and 2005, respectively. The unrealized losses are believed to be temporarily, not
permanently, impaired in value. 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.

86

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 5. Loans Receivable

Loans
receivable at December 31, 2006 and 2005 are summarized in the following table:

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

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

87

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

At
December 31, 2006 and 2005 our second mortgage residential, multi-family residential,
commercial real estate, land and land development, construction, agricultural, business,
warehouse mortgage lines of credit and consumer loans totaled $3.3 billion and $3.1
billion, respectively. These loan types are considered by management to be of greater risk
of collectibility than one-to-four family residential loans. Additionally, at December 31,
2006 and 2005, we had $62.4 million and $74.4 million, respectively, of interest-only
one-to-four family residential loans.

Primary
Lending Market Area. Our primary lending market area consists of Nebraska,
Iowa, Kansas, Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. Our
Asset/Liability and Asset Classification Committees are responsible for setting guidelines
related to loan concentrations and monitoring such concentrations to limit potential loss
exposure. At December 31, 2006 and 2005, approximately 20.8% and 22.2%, respectively,
of total loans were secured by properties or made to individuals located outside of our
primary lending market area.

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

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

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

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

Impaired
loans totaled $3.8 million, $4.2 million and $2.4 million at December 31, 2006, 2005 and
2004, respectively. The average balance of impaired and restructured loans for the years
ended December 31, 2006, 2005 and 2004 totaled $11.4 million, $7.1 million and $1.6
million, respectively. Interest recognized on such loans for the years ended December 31,
2006, 2005 and 2004 approximated $725,000, $603,000 and $121,000, respectively. Additionally, interest
income that would have been recorded for the years ended December 31, 2006, 2005 and 2004 if
nonperforming loans and troubled debt restructurings had been current or in accordance
with their original terms approximates $1.8 million, $802,000 and $62,000, respectively.

88

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Loans
serviced for others are not included in the accompanying Consolidated Statements of
Financial Condition. Servicing loans for others consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and conducting foreclosure
processing. In connection with these loans serviced for others, we held borrowers
escrow balances of approximately $17.1 million and $15.5 million at December 31, 2006
and 2005, respectively.

Loans
serviced for others include approximately $605.8 million and $596.3 million of unpaid
principal balances of residential real estate loans at December 31, 2006 and 2005,
respectively, for which we have retained a limited amount of recourse obligation. We have
certain risks due to limited recourse arrangements on loans serviced for others and
recourse obligations related to loan sales. The maximum total dollar amount of such
recourse was approximately $17.4 million and $15.4 million at December 31, 2006 and
2005, respectively. We have established a liability for this recourse obligation, which is
based on our historical loss experience, in the amount of approximately $742,000 and
$732,000 at December 31, 2006 and 2005, respectively. This liability is included in
accrued expenses and other liabilities.

# 6. Mortgage Servicing
Rights

The
balance of capitalized mortgage servicing rights, net of valuation allowances, included in
other assets at December 31, 2006 and 2005, was $12.5 million and $11.7 million,
respectively. The fair values of these rights were approximately $15.3 million and $15.0
million at December 31, 2006 and 2005, respectively. The following are the key assumptions
used in measuring the fair values of capitalized mortgage servicing rights and the
sensitivity of the fair values to changes in those assumptions:

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

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

89

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Mortgage
Servicing Right Activity.  The following table summarizes  activity in
capitalized  mortgage servicing rights,  including amortization expense:

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

The
estimated future amortization expense on capitalized mortgage servicing rights for each of
the years ending December 31, 2007 through 2011 is approximately $3.2 million, $2.5
million, $1.8 million, $1.3 million and $960,000, respectively. These projections are
based on existing asset balances and the existing interest rate environment at
December 31, 2006. The amount of amortization expense in any given period may be
significantly different depending upon changes in mortgage interest rates and market
conditions.

We
evaluate the fair value of mortgage servicing rights on a quarterly basis using current
prepayment speeds, cash flow and discount rate estimates. Changes in these estimates
impact fair value and could require us to record a valuation allowance or recovery. During
the year ended December 31, 2005, the balance of our mortgage servicing rights valuation
allowance was recaptured into earnings. There was a valuation allowance established for
capitalized mortgage servicing rights of $800,000 at December 31, 2004. Our
evaluation of mortgage servicing rights at December 31, 2006 indicated that no valuation
allowance was necessary. The amortization expense and valuation adjustment is recorded as
a reduction of fees and service charges in the accompanying Consolidated Statements of
Income.

# 7. Accrued Interest
Receivable

Accrued
interest receivable at December 31, 2006 and 2005 is summarized in the following
table:

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

# 8. FHLBank Topeka Stock

We
are a member of the FHLBank Topeka (FHLBank) and are required to purchase and
hold stock to collateralize our borrowings. Our investment in FHLBank stock is carried at
cost, which represents redemption value. We were required to hold approximately $57.5
million and $49.3 million of FHLBank stock at December 31, 2006 and 2005,
respectively.

90

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 9. Real Estate Owned

Real
estate owned, included in other assets in the Consolidated Statements of Financial
Condition, at December 31, 2006 and 2005 aggregating $5.3 million and $2.4 million,
respectively, is recorded net of a valuation allowance of $29,000 and $44,000,
respectively. At December 31, 2006, real estate owned includes three commercial properties
totaling $4.4 million and nine residential properties totaling $778,000.

# 10. Premises and
Equipment

Premises
and equipment at December 31, 2006 and 2005 are summarized in the following table:

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

Premises and
equipment depreciation and amortization expense for the years ended December 31, 2006,
2005 and 2004 was $3.8 million, $3.6 million and $3.2 million, respectively.

# 11. Goodwill and
Acquired Intangible Assets

Goodwill
represents the excess price paid over the fair value of the tangible and intangible
assets and liabilities acquired in connection with the August 27, 2004 acquisition of
UNFC. There was no goodwill recorded in connection with our Marine Bank branch purchase
in June 2006. The changes in the carrying amount of goodwill for the years ended December
31, 2006 and 2005 are as follows:

|                                          | Year Ended December 31,
|----------------------------------------- | -----------------------
|
|Balance at beginning of year              |                        
|Realized tax benefit associated with      |                        
|United Nebraska Financial Co. acquisition |                        
|                                         
|Balance at end of year                    |                        
|                                         

Our
only identifiable intangible asset is the value of the core deposits acquired as part of
the UNFC and Marine Bank transactions. The core deposit intangible assets have been
estimated to have nine- to ten-year lives. Core deposit intangible assets are amortized
using an accelerated method of amortization which is recorded in other operating expense.

91

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Other
Intangible Asset Activity. The changes in the carrying amount of acquired
intangible assets for the years ended December 31, 2006 and 2005 are as follows:

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

Other
Intangible Asset Estimated Amortization. Estimated amortization expense
related to our core deposit intangible assets for the year ended December 31, 2007 and
five years thereafter are as follows:

|(Dollars in thousands)               | Core Deposit Intangible Asset
|------------------------------------ | -----------------------------
|Estimated amortization expense:      |                              
|For the year ended December 31, 2007 |                              
|For the year ended December 31, 2008 |                              
|For the year ended December 31, 2009 |                              
|For the year ended December 31, 2010 |                              
|For the year ended December 31, 2011 |                              
|For the year ended December 31, 2012 |                              
|                                    

United
Nebraska Financial Co. Acquisition. On August 27, 2004, we completed the
acquisition of UNFC, the parent company of United Nebraska Bank. Assuming the acquisition
of UNFC occurred on January 1, 2004, the following table summarizes the unaudited pro
forma combined results of operations for the year ended December 31, 2004:

|(Dollars in thousands, except per share data) | (Unaudited)
For the Year Ended December 31, 2004
|--------------------------------------------- | ------------------------------------------------
|Proforma interest income                      |                                                 
|Proforma net income, after tax                |                                                 
|Proforma earnings per share - basic           |                                                 
|Proforma earnings per share - diluted         |                                                 
|                                             

92

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 12. Deposits

Deposit
Composition.  Deposits at December 31, 2006 and 2005 are summarized in the
following table:

|                                | At December 31,
|------------------------------- | ---------------
|
|
|Transaction accounts:           |                
|Noninterest-bearing checking    |                
|Savings                         |                
|Interest-bearing checking       |                
|Money market                    |                
|                               
|Total transaction accounts      |                
|                               
|Total transaction accounts as a |                
|percentage of total deposits    |                
|                               
|Time deposits:                  |                
|0.00% to 0.99%                  |                
|1.00% to 1.99%                  |                
|2.00% to 2.99%                  |                
|3.00% to 3.99%                  |                
|4.00% to 4.99%                  |                
|5.00% to 5.99%                  |                
|6.00% to 6.99%                  |                
|                               
|Total time deposits             |                
|                               
|Total time deposits as a        |                
|percentage of total deposits    |                
|                               
|Total deposits                  |                
|                               

Time
Deposit Maturity.  The scheduled maturities of time deposits at December 31, 2006
are shown in the following table:

|(Dollars in thousands) | Amount | Percent
|---------------------- | ------ | -------
|2007                   |        |        
|2008                   |        |        
|2009                   |        |        
|2010                   |        |        
|2011                   |        |        
|Thereafter             |        |        
|                      
|Total time deposits    |        |        
|                      

At
December 31, 2006 and 2005, time deposits of $100,000 or more approximated $269.9
million and $233.1 million, respectively.

93

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Interest
Expense on Deposits.  Interest expense,  by each category of deposits,  for the
years ended  December 31,  2006, 2005 and 2004 was as follows:

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

# 13. FHLBank Topeka
Advances and Other Borrowings

Borrowings
Composition.  At December 31, 2006 and 2005, we were indebted on notes as shown
in the following table:

|                                       | Original  | Interest     | At December 31,
|-------------------------------------- | --------- | ------------ | ---------------
|
|Permanent fixed-rate notes             |           |              |                
|payable to the FHLBank Topeka:         | 2006      | 1.83 - 3.32% | $           -- 
|                                       | 2007      | 2.79         | 10,000         
|                                       | 2009      | 5.41         | 5,679          
|                                       | 2013      | 6.24         | 396            
|                                       | 2015      | 3.97         | 1,263          
|                                       | 2030      | 5.46         | 2,326          
|Convertible fixed-rate notes           |           |              |                
|payable to the FHLBank Topeka:         | 2008      | 2.10         | --             
|                                       | 2009      | 5.41 - 5.55  | 75,000         
|                                       | 2010      | 4.69 - 5.36  | 40,000         
|                                       | 2011      | 3.96 - 4.54  | --             
|                                       | 2012      | 3.01 - 3.30  | 75,000         
|                                       | 2013      | 2.23 - 2.99  | 25,000         
|                                       | 2015      | 2.99 - 4.00  | 160,000        
|                                       | 2016      | 3.83 - 4.66  | 440,000        
|Line of credit with the FHLBank Topeka | 2007      | 5.47         | 72,500         
|Retail repurchase agreements           | 2007/2006 | 1.31 - 4.96  | 24,284         
|Junior subordinated debentures         | 2031/2034 | 7.29 - 8.42  | 30,928         
|                                      
|Total FHLBank Topeka advances and      |           |              |                
|other borrowings                       |           |              | $  962,376     
|                                      
|Weighted average interest rate         |           |              | 4.40  %        
|                                      

The
convertible fixed-rate notes are convertible to adjustable-rate notes at the option of the
FHLBank, with call dates ranging from March 2007 to September 2008. The line of
credit with the FHLBank expires in November 2007. We expect the line of credit
agreement with the FHLBank to be renewed in the ordinary course of business.

94

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Pursuant
to blanket collateral agreements with the FHLBank, such advances are secured by our
qualifying residential, multi-family residential and commercial real estate mortgages,
residential construction, commercial construction and agricultural real estate loans with
carrying values totaling approximately $1.6 billion and $1.7 billion at December 31,
2006 and 2005, respectively. Under our blanket collateral agreement with the FHLBank, our borrowing capacity
at December 31, 2006 and 2005 was $984.4 million and $1.0 billion, respectively. Other qualifying collateral can be pledged in the event
additional borrowing capacity is required.

Our
retail repurchase agreements are primarily collateralized by U.S. Government and agency
and municipal obligations (investment securities).

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

In
connection with our acquisition of UNFC on August 27, 2004, we assumed $7.0 million of
variable rate debentures that had been issued on November 28, 2001 by United Nebraska
Capital Trust, a trust formed by UNFC. We exercised our right to call and retire these
debentures in December 2006.

# 14. Income Taxes

Income
Tax  Expense.  Income  tax  expense  for the years  ended  December 31,  2006,
 2005 and 2004  consisted  of the  following components:

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

95

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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

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

Deferred
Taxes.  The  significant  items  comprising our net deferred income tax asset at
December 31,  2006 and 2005 are shown in the following table:

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

There
was no valuation allowance for deferred tax assets considered necessary at
December 31, 2006 and 2005. In assessing the realizability of our deferred tax
assets, we consider whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversals of deferred
tax liabilities, projected taxable income, carryback opportunities and tax planning
strategies in making the assessment of the amount of the valuation allowance. The net
deferred tax asset at December 31, 2006 and 2005 was included in other assets in the
Consolidated Statements of Financial Condition. We believe it is more likely than not that
the results of future operations will generate sufficient taxable income to realize our
deferred tax assets.

96

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Accrued
Taxes Payable. Income taxes payable as of December 31, 2006 and 2005
were approximately $2.3 million and $3.2 million, respectively, and are included in
accrued expenses and other liabilities in the Consolidated Statements of Financial
Condition.

Pre-1988
Bad Debt Reserve. Our retained earnings at December 31, 2006 and 2005
include approximately $7.7 million, for which no federal income tax liability has been
provided. Such amount represents the bad debt reserve for tax purposes which were
accumulated in tax years through the year ended December 31, 1987 (the base year). These
amounts represent allocations of income to bad debt deductions for tax purposes only.
Reductions of the remaining allocated retained earnings for purposes other than tax bad
debt losses will create taxable income, which will be subject to the then corporate income
tax rate. The Small Business Protection Act, passed by Congress in 1996, requires that
savings and loan associations recapture into taxable income bad debt reserves, which were
accumulated in taxable years after December 31, 1987 and which exceeded certain
guidelines.

# 15. Sale / Purchase of
Branches and Deposits

Branch
Sale. In December 2006, a branch sale transaction was consummated whereby
a Kansas-based financial institution purchased the assets (primarily premises and
equipment) and assumed the liabilities (primarily deposits) of our branches located in
Plainville and Stockton, Kansas. We retained all loans and investment accounts associated
with the Plainville and Stockton branches. The components of the gain on sale of branches
were as follows:

|(Dollars in thousands)             | For the Year Ended December 31, 2006
|---------------------------------- | ------------------------------------
|Premium on sale of branch deposits |                                     
|Sale of premises and equipment     |                                     
|                                  
|Gain on sale of branches           |                                     
|                                  

Branch
Purchase. In June 2006, we completed the purchase of Marine Banks
only banking office in Omaha, Nebraska. We acquired $8.1 million of deposits and recorded
a core deposit intangible asset of $102,000 as a result of this transaction.

# 16. Employee Benefit
Plans

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

Savings
Plan. We sponsor a defined contribution 401(k) profit sharing plan. At
December 31, 2006, 2005 and 2004, we contributed 50% of each participants
contribution up to a maximum of 6% of the participants eligible salary, as defined
by the plan. Plan expenses, net of forfeitures, for the years ended December 31,
2006, 2005 and 2004 were $691,000, $604,000 and $522,000, respectively, and are included
in salaries and employee benefits in the accompanying Consolidated Statements of Income.

97

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Deferred
Compensation Agreements. We have deferred compensation agreements with
certain officers and directors. These agreements, which include the Supplemental Executive
Retirement Plan and the deferred compensation program for directors and officers,
generally include certain requirements such as continued employment for a specified
period, availability for consulting services and agreements not to compete after
retirement. These deferred compensation arrangements, which are partially funded,
represent only a promise to pay amounts in the future and the assets to fund such promises
are subject to the claims of our creditors. The expense related to the agreements was
approximately $855,000, $1.0 million and $837,000 for the years ended December 31,
2006, 2005 and 2004, respectively. The liability, which is included in accrued expenses
and other liabilities, is as shown in the following table:

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

Management
Incentive Compensation Plan. We have a management incentive compensation
plan designed to award officers and key employees, as determined by our Board of
Directors, an incentive for effectively operating the Company. This plan provides for
payments equal to a percentage of salaries for meeting certain organizational and
individual performance targets. Expense related to this plan totaled approximately $1.9
million, $1.6 million and $1.3 million for the years ended December 31, 2006, 2005
and 2004, respectively. The liability for this plan is included in accrued expenses and
other liabilities.

# 17. Stock Based Benefit
Plans

Stock-Based
Employee Compensation Expense. Amounts recognized in the financial
statements with respect to our ESOP and stock-based employee compensation plans are
presented in the following table:

|                                                  | For the Year Ended December 31,
|------------------------------------------------- | -------------------------------
|
|Stock-based employee compensation expense:        |                                
|Employee Stock Ownership Plan expense             |                                
|Management Recognition and Retention Plan expense |                                
|2003 Stock Option Plan expense                    |                                
|                                                 
|Amount of stock-based compensation expense,       |                                
|before income tax benefit                         |                                
|                                                 
|Amount of related income tax benefit recognized   |                                
|                                                 

Employee
Stock Ownership Plan.Concurrent with the conversion from mutual to stock
ownership, we established an ESOP for the benefit of our employees. The ESOP is a
qualified pension plan under Internal Revenue Service guidelines that 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.

98

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

We
account for our ESOP in accordance with Statement of Position 93-6, Employers
Accounting for Employee Stock Ownership Plans. Accordingly, expense is recognized
based on the market value (average stock price) of shares scheduled to be released from
the ESOP trust. The excess fair value of ESOP shares over cost is recorded as compensation
expense but is not deductible for tax purposes. As shares are committed to be released
from collateral, we report compensation expense equal to the average market price of the
shares and the shares become outstanding for EPS computations. Our contributions and
dividends on allocated and unallocated ESOP shares are used to pay down the loan.
Accordingly, we have recorded the obligation with an offsetting amount of unearned
compensation in stockholders equity in the accompanying Consolidated Statements of
Financial Condition.

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

Management
Recognition and Retention Plan.We established the MRRP which is a
stock-based incentive plan that was approved by our stockholders at our 2003 Annual
Meeting of Shareholders. The shares awarded by the MRRP vest to participants at the rate
of 20% per year. Employee compensation expense for this plan is being recorded over a
60-month period, using the straight-line amortization method adjusted for forfeitures, and
is based on the market value of our stock as of the date the awards were made.
Stockholders approved 903,003 shares to be granted under the MRRP and 100,653 shares are
still available for future grants as of December 31, 2006.

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

The
following tables sets forth the weighted average grant date fair value of shares awarded
by the MRRP:

|                                        | Year Ended December 31,
|--------------------------------------- | -----------------------
|
|Shares outstanding at beginning of year |                        
|Shares granted                          |                        
|Shares vested                           |                        
|Shares forfeited                        |                        
|                                       
|Shares outstanding at end of year       |                        
|                                       

99

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

As
of December 31, 2006, we had $4.1 million of total unrecognized employee compensation
expense related to unvested MRRP shares. These expenses are expected to be recognized over
a weighted average period of 1.6 years. Excess tax benefits of $830,000 were realized
during the year ended December 31, 2006 as a result of the vesting of 160,220 MRRP shares.

Stock
Option Plan.We established the 2003 Stock Option Plan under which
2,257,508 shares of our common stock were reserved for the grant of stock options to
directors, officers and employees. Stock options awarded under the Stock Option Plan vest
to participants at the rate of 20% per year. The exercise price of the options is equal to
the fair market value of the common stock on the grant date. Employee compensation expense
for this plan is being recorded over a 60-month period, using the straight-line
amortization method adjusted for forfeitures, and is based on the fair value of our stock
options as of the date the awards were made.

The
fair value of each option was estimated on the date of the grant using the Black-Scholes
model. The dividend yield was calculated based on the annual dividends paid and the
12-month average closing stock price at the time of the grant. Expected volatility was
based on the historical volatility of our stock price at the date of grant. We have
utilized historical experience to determine the expected life of the stock options and to
estimate future forfeitures. All inputs into the Black-Scholes model are estimates at the
time of the grant. Actual results in the future could materially differ from these
estimates; however, such results would not impact future reported net income.

The
following table details the inputs into the Black-Scholes model for stock options granted
during the years ended December 31, 2004 and 2003. There were no stock options granted
during the years ended December 31, 2006 and 2005.

|                                                     | Year Ended December 31,
|---------------------------------------------------- | -----------------------
|
|Dividend yield                                       |                        
|Expected volatility                                  |                        
|Risk-free interest rate                              |                        
|Expected life of stock options                       |                        
|Weighted average fair value of stock options granted |                        
|                                                    

Stock
Option Activity. The following table details stock options granted,
exercised and forfeited during the year ended December 31, 2006:

|(Dollars in thousands, except for share data)  | Number of Shares | Weighted AverageExercise Price | Weighted AverageRemainingContractual Term(Years) | Aggregate Intrinsic Value
|---------------------------------------------- | ---------------- | ------------------------------ | ------------------------------------------------ | -------------------------
|Stock options outstanding at beginning of year |                  |                                |                                                  | 1,864,750                
|Stock options granted                          |                  |                                |                                                  | --                       
|Stock options exercised                        |                  |                                |                                                  | (43,624                  
|Stock options forfeited                        |                  |                                |                                                  | (2,500                   
|                                              
|Stock options outstanding at end of year       |                  |                                |                                                  | 1,818,626                
|                                              
|Stock options exercisable at end of year       |                  |                                |                                                  | 1,063,526                
|                                              

100

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
aggregate intrinsic value in the preceding table for stock options outstanding is based on
the closing price of our stock at December 31, 2006. The aggregate intrinsic value in the
preceding table of stock options exercised was based on the closing price of our stock on
the exercise date.

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

|                                               | Number of Shares | Weighted Average Exercise Price | Average Grant Date Fair Value
|---------------------------------------------- | ---------------- | ------------------------------- | -----------------------------
|Stock options outstanding at December 31, 2003 |                  |                                 |                              
|Stock options granted                          |                  |                                 |                              
|Stock options exercised                        |                  |                                 |                              
|Stock options forfeited                        |                  |                                 |                              
|                                              
|Stock options outstanding at December 31, 2004 |                  |                                 |                              
|                                              
|Stock options granted                          |                  |                                 |                              
|Stock options exercised                        |                  |                                 |                              
|Stock options forfeited                        |                  |                                 |                              
|                                              
|Stock options outstanding at December 31, 2005 |                  |                                 |                              
|                                              
|Stock options granted                          |                  |                                 |                              
|Stock options exercised                        |                  |                                 |                              
|Stock options forfeited                        |                  |                                 |                              
|                                              
|Stock options outstanding at December 31, 2006 |                  |                                 |                              
|                                              

The
following table details the intrinsic value, cash received and tax benefit realized from
the exercise of stock options during the years ended December 31, 2006, 2005 and 2004:

|                                       | For the Year Ended December 31,
|-------------------------------------- | -------------------------------
|
|Intrinsic value (market value on the   |                                
|exercise date less the strike price)   |                                
|Cash received from the exercise of     |                                
|stock options                          |                                
|Tax benefit realized from the exercise |                                
|of stock options                       |                                
|                                      

At
December 31, 2006, there was $2.3 million of total unrecognized compensation expense
related to unvested stock options that will be expensed over a weighted average period of
1.4 years.

101

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 18. Regulatory Capital
Requirements

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

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

Quantitative
measures that have been established by regulation to ensure capital adequacy require that
we maintain minimum capital amounts and ratios (set forth in the following table). Our
primary regulatory agency, the Office of Thrift Supervision (OTS), requires
that we maintain minimum ratios of tangible capital (as defined in the regulations) of
1.5%, core capital (as defined) of 4.0% and total risk-based capital (as defined) of 8.0%.
We believe, as of December 31, 2006, that we exceed all capital requirements to which
we are subject.

As
of December 31, 2006 and 2005, the most recent notifications from the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since the notification that we
believe have changed the Banks category.

102

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Regulatory
Capital.  The actual capital amounts and ratios as of December 31, 2006 and 2005
are presented in the following table:

|                            | Actual | For Capital
Adequacy Purposes | To be Well Capitalized
Under Prompt Corrective
Action Provisions
|--------------------------- | ------ | ----------------------------- | ----------------------------------------------------------------
|
|As of December 31, 2006:    |        |                               |                                                                 
|Total risk-based capital    |        |                              
|(to risk-weighted assets)   |        |                               | $                                                               
|Tier 1 capital (to adjusted |        |                              
|tangible assets)            |        |                               |                                                                 
|Tangible capital (to        |        |                              
|tangible assets)            |        |                               |                                                                 
|Tier 1 capital (to risk-    |        |                              
|weighted assets)            |        |                               |                                                                 
|As of December 31, 2005:    |        |                              
|Total risk-based capital    |        |                              
|(to risk-weighted assets)   |        |                               | $                                                               
|Tier 1 capital (to adjusted |        |                              
|tangible assets)            |        |                               |                                                                 
|Tangible capital (to        |        |                              
|tangible assets)            |        |                               |                                                                 
|Tier 1 capital (to risk-    |        |                              
|weighted assets)            |        |                               |                                                                 
|                           

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

103

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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

|                                             | At December 31, 2006
|-------------------------------------------- | --------------------
|
|Bank GAAP capital                            |                     
|Add:                                         |                     
|Allowance for loan losses                    |                     
|Net unrealized loss on available             |                     
|for sale securities                          |                     
|Less:                                        |                     
|Investment in nonincludable subsidiaries     |                     
|Goodwill and certain other intangible assets |                     
|net of associated deferred tax benefits      |                     
|                                            
|Bank regulatory capital                      |                     
|                                            

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

104

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 19. Lease Commitments

At
December 31, 2006, 2005 and 2004, we were obligated under noncancelable operating
leases for office space and equipment. Certain leases contain escalation clauses providing
for increased rental rates based primarily on increases in real estate taxes or in the
average consumer price index. Net rent expense under operating leases, included in
occupancy expense, was approximately $1.1 million, $974,000 and $795,000 for the years
ended December 31, 2006, 2005 and 2004, 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
|-------------------------------- | ------
|2007                             |       
|2008                             |       
|2009                             |       
|2010                             |       
|2011                             |       
|Thereafter                       |       
|                                
|Total minimum lease payments due |       
|                                

# 20. Fair Value of
Financial Instruments

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

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

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

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

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

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

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

105

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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

Carrying
and Fair Value of Financial Instruments. The estimated fair values of our
financial instruments at December 31, 2006 and 2005 are presented in the following
table. Since the fair value of forward loan sales, loan purchase commitments and loan
origination commitments are not significant, these disclosures are not included in this
table.

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

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

106

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 21. 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, 2006 and 2005, we had commitments to originate fixed-rate loans of
approximately $72.8 million and $57.1 million, respectively, and adjustable-rate loans of
approximately $46.3 million and $76.2 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 7.13% to 18.00% and 5.00% to 17.26% at December 31, 2006
and 2005, respectively.

Commitments
to extend credit are agreements to lend to customers as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. We evaluate each
customers creditworthiness on a case-by-case basis. The same credit policies are
used in both granting lines of credit and on-balance sheet instruments. At
December 31, 2006 and 2005, we had commitments to lend under unused warehouse
mortgage lines of credit of approximately $331.9 million and $392.3 million, respectively.
We also had commitments to lend customers unused consumer lines of credit at
December 31, 2006 and 2005 of approximately $134.8 million and $132.6 million,
respectively. In addition, at December 31, 2006 and 2005, we had commitments to lend
to customers pursuant to unused commercial lines of credit of approximately $226.9 million
and $132.3 million, respectively.

At
December 31, 2006 and 2005, outstanding commitments to purchase mortgage loans
aggregated approximately $50.8 million and $38.3 million, respectively, and commitments to
sell mortgage loans aggregated approximately $41.5 million and $27.1 million,
respectively. These commitments to sell extend over varying periods of time with the
majority being settled within a 60-day period.

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

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

Notional
and Fair Value of Derivatives. Information pertaining to the notional and
fair values of our derivative financial instruments is presented in the following table:

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

The
difference between the notional and fair value of these derivative financial instruments
is recorded in our Statements of Financial Condition at December 31, 2006 and 2005.

107

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 22. Condensed Parent
Company Financial Statements

The
following represents the condensed Statements of Financial Condition at December 31,
2006 and 2005 and condensed Statements of Income and Cash Flows for the years ended
December 31, 2006, 2005 and 2004 for TierOne Corporation, the parent company.

# Statements of
Financial Condition                                             (Parent Company Only)

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

108

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# Statements of Income
                                          (Parent Company Only)

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

109

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# Statements of Cash
Flows                                                  (Parent Company Only)

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

110

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 23. Quarterly Financial
Information (Unaudited)

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

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

111

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

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

# Item 9A. Controls and
Procedures

# Evaluation of Disclosure
Controls and Procedures

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

# Managements Report
on Internal Control Over Financial Reporting

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

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

Under
the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, an evaluation was conducted of the
effectiveness of our internal control over financial reporting as of December 31, 2006
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, 2006, our internal control
over financial reporting was effective based on those criteria.

112

---

# 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, 2006, based on
criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). TierOne
Corporations management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over
financial reporting based on our audit.

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

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

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

In
our opinion, managements assessment that TierOne Corporation maintained effective
internal control over financial reporting as of December 31, 2006, 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, 2006, 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, 2006 and 2005, and the
related consolidated statements of income, stockholders equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2006, and our report dated March 7, 2007 expressed an unqualified
opinion on those consolidated financial statements.

/s/ KPMG LLP
 Lincoln,NebraskaMarch 7, 2007

113

---

# 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, 2006 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

# Item 9B. Other
Information

None.

114

---

# PART III

# Item 10. Directors,
Executive Officers and Corporate Governance

The
information required by Item 10 of Form 10-K with respect to the identification of
directors and executive officers and corporate governance disclosure is incorporated by
reference from Information With Respect to Nominees for Director, Continuing
Directors and Executive Officers and Section 16(a) Beneficial Ownership
Reporting Compliance in the Companys definitive Proxy Statement for the Annual
Meeting of Stockholders (Proxy Statement) to be held May 15, 2007, which will
be filed with the Securities and Exchange Commission prior to April 30, 2007.

We
have adopted a Code of Conduct and Ethics that applies to our Chief Executive Officer and
Chief Financial Officer, as well as other officers and employees of the Company and the
Bank. A copy of the Code of Conduct and Ethics may be found on our website at
www.tieronebank.com. We intend to satisfy the disclosure requirements under Item
5.05 of Form 8-K regarding amendments to, or waivers from, the Code of Conduct and Ethics
by posting such information on our website.

# Item 11. Executive
Compensation

The
information required by Item 11 of Form 10-K is incorporated by reference from
Management Compensation and Information With Respect to Nominees for
Director, Continuing Directors and Executive Officers  Compensation Committee
Interlocks and Insider Participation in the Proxy Statement.

The
report of the Audit 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 Securities Exchange Act of 1934 or the Securities Act of 1933 except to the
extent we specifically incorporate said report herein or therein by reference thereto.
The report of the Compensation Committee is deemed furnished in this Annual Report on Form
10-K, but is not deemed to be soliciting material or to be filed with
the SEC or subject to Regulation 14A or 14C under the Securites Act of 1934 or to the
liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed
to be incorporated by reference into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent we specifically incorporate it by
reference into such a filing.

# 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, 2006:

|Plan Category             | Number of Shares to be Issued Upon the Exercise of Outstanding Options, Restricted Stock Grants, Warrants and Rights | Weighted-AverageExercise 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                     |                                                                                                                      |                                                                                                 |                                                                                                       
|                         

115

---

# Item 13. Certain
Relationships, Related Transactions and Director Independence

The
information required by Item 13 of Form 10-K is incorporated by reference from
Management Compensation  Transactions with Certain Related Persons and
Information With Respect to Nominees for Director, Continuing Directors and
Executive Officers  Election of Directors 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.

116

---

# PART IV

# Item 15. Exhibits and
Financial Statement Schedules

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

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

| |  | Consolidated
Statements of Financial Condition at December 31, 2006 and 2005;
| | - | -----------------------------------------------------------------------------

| |  | Consolidated
Statements of Income for the years ended December 31, 2006, 2005 and 2004;
| | - | ---------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Changes in Stockholders Equity and Comprehensive Income for the years ended December 31, 2006, 2005
and 2004;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004;
| | - | -------------------------------------------------------------------------------------------

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

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

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

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

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

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

117

---

# SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) 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 7, 2007 | 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 7, 2007 | By:  /s/ Gilbert G. Lundstrom                    
|-------------------- | -------------------------------------------------
|                     | Gilbert G. Lundstrom                             
|                     | Chairman of the Board and Chief Executive Officer
|Date:  March 7, 2007 | By:  /s/ James A. Laphen                         
|                     | James A. Laphen                                  
|                     | Chief Operating Officer and Director             
|Date:  March 7, 2007 | By:  /s/ Eugene B. Witkowicz                     
|                     | Eugene B. Witkowicz                              
|                     | Chief Financial Officer and Corporate Secretary  
|                     | (Principal Accounting Officer)                   
|Date:  March 7, 2007 | By:  /s/ Campbell R. McConnell                   
|                     | Campbell R. McConnell                            
|                     | Director                                         
|Date:  March 7, 2007 | By:  /s/ Joyce Person Pocras                     
|                     | Joyce Person Pocras                              
|                     | Director                                         
|Date:  March 7, 2007 | By:  /s/ Ann Lindley Spence                      
|                     | Ann Lindley Spence                               
|                     | Director                                         
|Date:  March 7, 2007 | By:  /s/ Charles W. Hoskins                      
|                     | Charles W. Hoskins                               
|                     | Director                                         

118

---

# Exhibit Index

|     
|-----
|2.1  
|     
|3.1  
|3.2  
|4.0  
|10.1 
|10.2 
|10.3 
|10.4 
|10.5 
|     
|10.6 
|     
|10.7 
|     
|10.8 
|10.9 
|     
|10.10
|10.11
|10.12
|10.13
|10.14
|     
|10.15
|10.16
|     
|10.17
|10.18
|10.19
|10.20
|     
|10.21
|     
|10.22
|     
|10.23
|     
|22   
|     
|23   
|31.1 
|     
|31.2 
|     
|32.1 
|32.2 
|     

|*   | Denotes a management contract or compensatory plan or arrangement.                          
|--- | --------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from Exhibit 2 of TierOne Corporation's Form 8-K filed on         
|    | August 31, 2004.                                                                            
|(2) | Incorporated by reference from TierOne Corporation's Registration Statement on Form S-1,    
|    | filed on April 8, 2002, as amended and declared effective on August 12, 2002 (File No. 333- 
|    | 85838).                                                                                     
|(3) | Incorporated herein by reference from TierOne Corporation's definitive proxy                
|    | statement filed by TierOne Corporation with the SEC on March 11, 2003.                      
|(4) | Incorporated by reference from TierOne Corporation's Annual Report and                      
|    | Form 10-K for the year ended December 31, 2002 filed by TierOne Corporation                 
|    | with the SEC on March 28, 2003.                                                             
|(5) | Incorporated by reference from TierOne Corporation's Annual Report on Form 10-K for the year
|    | ended December 31, 2004 filed by TierOne Corporation with the SEC on March 9, 2005.         
|(6) | Incorporated by reference from TierOne Corporation's Form 8-K filed on August 2, 2006.      
|   

119