# 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, 2007
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

# or

|[_] | Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act                of
1934 for the period from __________ to __________.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

# Commission File Number
005-78774

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

|Wisconsin                | 04-3638672                             
|------------------------ | ---------------------------------------
|(State of Incorporation) | (I.R.S. Employer 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 by check mark whether the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes |X| No |_|

Indicate by check mark if the
Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes |_| No |X|

Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes |X| No |_|

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

Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or
a smaller reporting company. See definitions of large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of
the Exchange Act. (Check one):

Large accelerated filer  |_|
           Accelerated filer  |X|            Non-accelerated filer  |_|         Smaller reporting
company  |_|

Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes |_| No |X|

The aggregate market value of the
voting stock held by non-affiliates of the Registrant was $543,431,480 as of June 30,
2007. As of March 10, 2008 there were 18,059,946 issued and outstanding shares of the
Registrants common stock.

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# Documents Incorporated
by Reference

Portions of the definitive Proxy
Statement for the Registrants 2008 Annual Meeting of Shareholders are expected to be
incorporated by reference in Part III, Items 10, 11, 12, 13 and 14. In the event that such
Proxy Statement is not filed on or prior to 120 days after the Registrants fiscal
year end (April 29, 2008), the Annual Report on Form 10-K will be amended to include the
information required 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                                                                | 5   
|Item 1A.   | Risk Factors                                                            | 38  
|Item 1B.   | Unresolved Staff Comments                                               | 45  
|Item 2.    | Properties                                                              | 45  
|Item 3.    | Legal Proceedings                                                       | 45  
|Item 4.    | Submission of Matters to a Vote of Security Holders                     | 46  
|           | Part II.                                                               
|Item 5.    | Market for the Registrants Common Equity, Related Stockholder Matters 
|           | and Issuer Purchases of Equity Securities                               | 47  
|Item 6.    | Selected Financial Data                                                 | 49  
|Item 7.    | Managements Discussion and Analysis of Financial Condition and Results
|           | of Operations                                                           | 50  
|Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk              | 77  
|Item 8.    | Financial Statements and Supplementary Data                             | 78  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and        
|           | Financial Disclosure                                                    | 122 
|Item 9A.   | Controls and Procedures                                                 | 122 
|Item 9B.   | Other Information                                                       | 124 
|           | Part III.                                                              
|Item 10.   | Directors, Executive Officers and Corporate Governance                  | 125 
|Item 11.   | Executive Compensation                                                  | 125 
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and     
|           | Related Stockholder Matters                                             | 125 
|Item 13.   | Certain Relationships and Related Transactions, Director Independence   | 126 
|Item 14.   | Principal Accounting Fees and Services                                  | 126 
|           | Part IV.                                                               
|Item 15.   | Exhibits, Financial Statement Schedules                                 | 127 
|Signatures | 128                                                                    

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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 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:

| |  | General
 economic  conditions  and  trends,  either  nationally  or in some or all of the areas
in which we and our  customers          conduct our businesses;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | Changes
in the financial or operating performance of our customers businesses;
| | - | -------------------------------------------------------------------------------

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

| |  | 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;
| | - | -----------------------------------------------

| |  | Unanticipated
issues relating to the recovery of insurance proceeds for claims arising out of our prior
relationship with TransLand Financial Services, Inc;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Conditions
precedent to our proposed merger with a subsidiary of CapitalSource Inc. may not be
satisfied or the merger agreement may be terminated pursuant to its terms;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Disruption
from our proposed merger with a subsidiary of  CapitalSource  Inc. may make it more
difficult to maintain  customer          relationships;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
required  regulatory  approvals for our proposed merger with a subsidiary of
CapitalSource  Inc. may not be obtained or if          obtained may not be on the terms
anticipated by, or acceptable to, the parties;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
outcome of pending or threatened litigation, or of other matters before regulatory
agencies, or of matters resulting from regulatory exams, whether currently existing or
commencing in the future; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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| |  | 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,
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.

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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 (loss) is also affected by our provision for loan losses, noninterest
income, noninterest expense and income tax expense (benefit). Noninterest income generally includes
fees and service charges, debit card fees, net income (loss) 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.

# United Nebraska
Financial Co. Acquisition

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 the
acquisition was approximately $97.3 million. UNB had assets in excess of $500 million and
16 banking offices located in Nebraska.

# Sale / Purchase of
Branches and Deposits

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.

# Proposed Merger with
CapitalSource Inc.

On
May 17, 2007, the Company, CapitalSource Inc. (CapitalSource) and
CapitalSource TRS Inc. (CapitalSource TRS) entered into and announced an
Agreement and Plan of Merger (Merger Agreement). The Merger Agreement provides
that, upon the terms and subject to conditions set forth in the Merger Agreement, the
Company will merge with and into CapitalSource TRS (Merger), with
CapitalSource TRS continuing as the surviving corporation. The Merger Agreement and the
Merger were approved by the stockholders of the Company at a special meeting held on
November 29, 2007.

5

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Subject
to the terms and conditions of the Merger Agreement, at the effective time and as a result
of the Merger, each issued and outstanding share of Company common stock (other than
certain shares owned by the Company) would be converted into the right to receive the
following (collectively, the Merger Consideration):

| |  | $6.80
in cash; plus
| | - | -------------------

| |  | 0.675
shares of CapitalSource common stock; plus
| | - | ------------------------------------------------

| |  | if
the ten-day average closing price of CapitalSource common stock prior to the closing of
the Merger is:
| | - | ---------------------------------------------------------------------------------------------------------

| | (a) | less
than or equal to $25.1852, then 0.405 shares of CapitalSource common stock;
               or
| | --- | --------------------------------------------------------------------------------------------------

| | (b) | greater
than $25.1852, then Company stockholders can elect to receive either
               $10.20 in cash or $10.20 of CapitalSource common stock.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

If,
on the day the last governmental approval to complete the Merger is obtained, the ten-day
average closing price of CapitalSource common stock is less than $21.98 and the trading
price of CapitalSource common stock has underperformed by more than 15% the S&P 500
Financial Sector Index during the period from May 17, 2007 to that date, then the Board of
Directors of the Company has the right, in accordance with the terms of the Merger
Agreement, to request that CapitalSource provide additional financial consideration,
either in stock or cash. The Company previously informed CapitalSource that, under such
circumstances, its Board of Directors would intend to make such a request. If, following
such a request, the parties are unable to agree on such additional consideration, then the
Board of Directors of the Company would have the right to terminate the Merger Agreement.

The
Company and CapitalSource have made customary representations, warranties and covenants in
the Merger Agreement, including, among others, covenants regarding the conduct of their
businesses and other activities between the execution of the Merger Agreement and the
consummation of the Merger, and have agreed to use their reasonable best efforts to
consummate the Merger. During the time that the Merger Agreement is in effect, the Company
is not permitted to solicit or facilitate proposals relating to alternative business
combination transactions, or, subject to certain exceptions, enter into discussions
concerning alternative business combination transactions.

Consummation
of the Merger is subject to customary conditions, including, without limitation, the
accuracy of the representations and warranties of the parties (subject generally to a
material adverse effect standard) and regulatory approval. Although CapitalSource has
filed an application with the Office of Thrift Supervision (OTS) for approval
of transactions contemplated by the Merger Agreement, the OTS has yet to deem the
application either complete or approved, and no assurance can be given that the OTS will
approve the transaction.

The
Merger Agreement further provides that either the Company or CapitalSource (each acting
through its respective Board of Directors) has the right at any time after February 17,
2008 to unilaterally terminate the Merger Agreement, unless the failure to effect the Merger
by such date was due to the terminating partys failure to perform its obligations
and covenants under the Merger Agreement. The Company has indicated that its present
intent is not to terminate the Merger Agreement pending receipt of further comment from
the OTS. Conversely, CapitalSource has publicly advised that its
Board of Directors has authorized its Chairman and Chief Executive Officer to either
terminate the Merger Agreement or negotiate new terms for the transaction. In light of the
preceding sentence, the Company can provide no assurance that the Merger will be completed
even if all conditions precedent to the transaction (including receipt of regulatory
approval) are satisfied.

In
addition to other factors affecting the Companys financial performance discussed
elsewhere in this Annual Report on Form 10-K, due to the proposed Merger, the Company has
been subject to or experienced limitations on the operation of its business including
restrictions on certain funding opportunities; certain one-time Merger-related expenses;
an increased commitment of time by Company personnel working with federal regulatory
agencies in connection with Merger-related issues; and restrictions on the Companys
ability to repurchase its common stock. These activities have and may continue to further
impact the Companys financial performance and earnings per share.

6

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# Government Monetary
Policy

We
are affected by the credit policies of monetary authorities, including the Board of
Governors of the Federal Reserve System (Federal Reserve Board). An important
objective of the Federal Reserve System is to regulate the national supply of bank credit.
Among the instruments of monetary policy used by the Federal Reserve Board are open market
operations in U.S. Government securities, changes in the discount rate, reserve
requirements on member bank deposits and funds availability regulations. The monetary
policies of the Federal Reserve Board have in the past had a significant effect on
operations of financial institutions, including the Bank, and will continue to do so in
the future. Changing conditions in the national economy and in the money markets make it
difficult to predict future changes in interest rates, deposit levels, loan demand or
their effects on the business and earnings of the Company.

# 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. 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 31 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 in recent years to include nine loan production offices located in Arizona,
Colorado, Florida, Minnesota, Nevada and North Carolina whose primary purpose is to
originate commercial real estate and construction, land and land development and/or
residential construction loans in their respective states.

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

# Subsequent Event

Subsequent
to the filing of the Companys March 4, 2008 Form 8-K Report of financial results
for the quarter and year ended December 31, 2007, an appellate court decision in our
federal goodwill litigation (see Item 3. Legal Proceedings for additional information)
was issued. As a result of this decision, we recorded a
2007 fourth quarter pretax charge of $560,000 in other operating expense to reflect fees and expenses
incurred during the appeal process which had previously been capitalized. The impact
after income tax benefits of $202,000, was $358,000. The 2007 Consolidated Statement of
Operations and related loss per share data reported in this Annual Report on Form 10-K have been updated
accordingly.

# 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.

7

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Lending Activities

General.          We
directly originate loans to customers located in Nebraska, Iowa, Kansas,
          Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina (Primary
          Lending Market Area). This 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, 2007 and 2006, approximately 20.2% and 20.8%, 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.

The
decrease in net loans at December 31, 2007 was primarily attributable to steps taken to
reduce exposure to certain lending markets, loan payoffs and periodic payments.
Additionally, lower demand, more stringent underwriting guidelines and macro-economic
factors have resulted in a decreased volume of residential real estate, land and land
development and commercial construction related loan originations.

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.
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, 2007, our total loans receivable
amounted to $3.3 billion. We have, in recent years, shifted the focus of our lending
strategy to place an increased emphasis on multi-family residential, commercial real
estate, land and land development, construction, agricultural, business, warehouse
mortgage lines of credit and consumer lending. The types of loans that we may purchase and
originate are subject to federal and state laws and regulations. The interest rates we
charge on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These factors are, in
turn, affected by general and local economic conditions, monetary policies of the Federal
Government, including the Board of Governors of the Federal Reserve System and legislative
tax policies.

Residential
Mortgage Lending. One-to-four family residential mortgage loan originations
are generally obtained from our in-house loan representatives, from existing or past
customers and from mortgage brokers. We also originate and/or purchase from correspondent
lenders second mortgage loans in amounts up to 90% 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.

8

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The
origination or purchase of adjustable-rate, one-to-four family residential mortgage loans
allows us to control 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.

We
maintain a corporate policy of not participating in subprime residential real estate
lending or negative amortizing mortgage products. The Office of Thrift Supervision, our
federal regulatory agency, defines subprime loans as loans to borrowers displaying one or
more credit risk characteristics including lending to a borrower with a credit bureau risk
score (FICO) of 660 or below. Furthermore, we have not engaged in
collateralized loan obligations (CLO), collateralized debt obligations
(CDO), structured investment vehicles (SIV) or asset-backed
commercial paper (ABCP).

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, 2007, 62.6%,
86.9% and 95.9% of our multi-family residential, commercial real estate and land and land
development loans, respectively, were located within our Primary Lending Market Area.

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

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

Construction
Lending.  We offer residential construction loans for either pre-sold houses
(a purchase contract has been signed) or speculative houses (properties for which no buyer
yet exists). We originate most of our residential construction loans within our Primary
Lending Market Area typically through direct contact with home builders. At December 31,
2007, approximately 80.2% of our residential construction loans were located in our
Primary Lending Market Area. During the years ended December 31, 2007 and 2006, we
purchased $55.4 million and $161.5 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, 2007, 72.5% of our
commercial construction loans were located in our Primary Lending Market Area.

9

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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.

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, 2007, 100.0% 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 $30.0 million.

Business
Lending. Business loans are made predominantly to small- and mid-sized
businesses located within Nebraska, Iowa and Kansas. At December 31, 2007, 98.0% 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.

10

---

Consumer
and Other Lending. Consumer loans are generally originated directly through
our network of banking offices. We 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 90% 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 81 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.

11

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

|                                                                                                    | At December 31,
|--------------------------------------------------------------------------------------------------- | ---------------
|
|Real estate loans:                                                                                  |                
|One-to-four family residential (1)                                                                  |                
|Second mortgage residential                                                                         |                
|Multi-family residential                                                                            |                
|Commercial real estate                                                                              |                
|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 (2)                                                                                |                
|                                                                                                   
|Net loans                                                                                           |                
|Allowance for loan losses                                                                           |                
|                                                                                                   
|Net loans after allowance for loan losses                                                           |                
|                                                                                                   
|(1) Includes loans held for sale                                                                    |                
|                                                                                                   
|(2) Loans in process represents the undisbursed portion of construction and land development loans.
|                                                                                                   

12

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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                                      |                
|Nevada                                        |                
|Colorado                                      |                
|Florida                                       |                
|Arizona                                       |                
|Minnesota                                     |                
|Iowa                                          |                
|North Carolina                                |                
|Kansas                                        |                
|                                             
|Total within our primary lending market area  |                
|                                             
|Outside our Primary Lending Market Area:      |                
|South Carolina                                |                
|California                                    |                
|Texas                                         |                
|Illinois                                      |                
|Oregon                                        |                
|Washington                                    |                
|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, 2007. Total loans declined $339.4 million, or 9.2%, to $3.3
billion at December 31, 2007 compared to $3.7 billion at December 31, 2006. Our total
loans in Florida at December 31, 2007 were $168.8 million, a decrease of $148.7 million,
or 46.8%, compared to $317.5 million at December 31, 2006.

During
the latter half of 2007 the nations equity, housing, credit and economic markets
faced unprecedented pressures which have significantly impacted much of the financial
sector. We have taken a number of steps related to the realignment of certain credit
administration functions, including the addition of personnel with extensive depth and
expertise in credit analysis, and we continue to tighten credit policies.

13

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Contractual
Terms to Final Maturities. The following table shows the scheduled
contractual maturities of our loans at December 31, 2007. Demand and overdraft loans, which have no
stated schedule of repayments and no stated maturity, are reported as due in
2008. 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, 2007 with fixed interest rates totaled $1.0 billion.           
|Total loans due after one year from December 31, 2007 with floating or adjustable interest rates totaled             
|$1.0 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. We
significantly reduced our utilization of third-party originators of residential
construction loans throughout 2006 and 2007. 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. The loans
purchased during 2007 consisted of one-to-four family residential, construction, consumer
(primarily home improvement loans and automobile financing), business, land and land
development (including participation interests), agricultural 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), 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.

14

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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 - real estate                                                                                                |                        
|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                                                                                                  |                        
|Agriculture - real estate                                                                                                |                        
|Business                                                                                                                 |                        
|Agriculture - operating                                                                                                  |                        
|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 (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.                                                                                       
|                                                                                                                        

15

---

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, 2007 and 2006, we were servicing $1.5 billion and $1.3 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, 2007 and 2006, we had issued commitments totaling $666.2 million and $865.9
million, respectively, 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.

16

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# Asset Quality

Reports
listing all delinquent loans (loans 30 or more days delinquent), 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.

During
2007, our levels of delinquent loans, nonperforming loans (loans 90 or more days
delinquent) and impaired loans increased significantly. These increases were primarily
attributable to the continued deterioration in the real estate market and the economy in
general. We have been further impacted by the erosion of property values and an overall
increase in housing inventory (both developed lots and completed houses) in many of the
areas of the country in which we do business and where the collateral for our loans
reside. Additionally, significantly tightened credit standards have made it more difficult
for potential borrowers to obtain financing and for current borrowers to refinance
existing loans.

In
light of current market conditions, we have taken a number of steps related to the
realignment of certain credit administration functions, including the addition of
personnel with extensive depth and expertise in credit analysis, and we continue to
tighten credit policies.

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                |                
|Multi-family residential                   |                
|Commercial real estate                     |                
|Land and land development                  |                
|Residential construction                   |                
|Agriculture - real estate                  |                
|Business                                   |                
|Agriculture - operating                    |                
|Consumer                                   |                
|                                          
|Total delinquent loans                     |                
|                                          
|Delinquent loans as a percentage of        |                
|net loans before allowance for loan losses |                
|                                          

17

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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                                                                                  |                
|Commercial construction                                                                                   |                
|Agriculture - real estate                                                                                 |                
|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.                                        
|                                                                                                         

Nonperforming
Loans.As a result of economic conditions in the latter half
of 2007, we have experienced deteriorating asset quality. At December 31, 2007,
nonperforming loans totaled $128.5 million, an increase of $98.4 million, or 327.6%,
compared to $30.1 million at December 31, 2006. The increase in the nonperforming loans is
primarily attributable to the following:

| | Residential
Construction Loans. Due to the continued erosion of housing values and
increased housing inventory in several markets throughout the country, especially
Florida, we have, and may continue to experience, increased levels of nonperforming
residential construction loans. At December 31, 2007 we had classified $57.7 million of
our total residential construction loans as nonperforming, of which $31.8 million relate
to loans collateralized by property in Florida. As previously disclosed in regulatory
filings with the Securities and Exchange Commission, we reported that we have a group of
residential construction loans we purchased from TransLand Financial Services Inc. (TransLand)
which were primarily located in the Cape Coral area of southwest Florida. These loans
were originally made to individual homebuyers wishing to build a second or retirement
home. Subsequent to the filing of our June 30, 2007 Quarterly Report on Form 10-Q, we
assumed servicing of all loans purchased from TransLand. During our due diligence process
related to the transfer of residential construction loan servicing from TransLand to the
Bank, alleged fraudulent servicing practices were discovered. The majority of the alleged
fraud related to the withholding of loan payoff proceeds and periodic payments. A joint
petition for involuntary Chapter 11 bankruptcy was filed on August 23, 2007 in the United
States Bankruptcy Court for the Middle District of Florida (Court) by the
Bank and two other financial institutions against TransLand. A court-appointed examiner
furnished a detailed report documenting the alleged fraudulent activity. In December
2007, the Court entered an order approving the petitioning banks plan to agree to dismiss
the bankruptcy petition in return for the agreement by TransLand and certain of its
principal creditors to proceed with the liquidation and proportional distribution of
TransLands remaining assets. The liquidation of TransLands assets is
currently in process.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

| | Despite
these challenging economic conditions, we have reduced our total residential construction
loan disbursements for TransLand-related homebuyers to $58.5 million, prior to recording
loan charge-offs, at December 31, 2007 compared to $114.9 million at December 31, 2006.
Approximately $26.5 million of total nonperforming residential construction loans at
December 31, 2007 had been purchased from TransLand. During the three months ended
December 31, 2007, we charged off $25.5 million of TransLand-related residential
construction loans, due in large part to a decline in the estimated fair value of
undeveloped residential lots, and set up additional provisions for loan losses relating
to the loans acquired from TransLand.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
increase in nonperforming residential construction loans at December 31, 2007 was also
attributable to an increase in nonperforming residential construction loans located in
the Las Vegas, Nevada area. At December 31, 2007, we had three residential development
construction loans totaling $7.6 million in the Las Vegas, Nevada area which were
classified as nonperforming.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Land
and Land Development.Our nonperforming land development loans at December
31, 2007 totaled $38.7 million which consisted of eight residential land development
properties. Of the eight nonperforming residential land development properties, three
were located in the Las Vegas, Nevada area which totaled $30.4 million, one project in
Colorado at $5.7 million, two projects in the Minneapolis, Minnesota area totaling $2.3
million and two projects in Florida totaling $300,000. The three Las Vegas, Nevada area
properties entered nonperforming status during the three months ended December 31, 2007.
Currently, we are actively engaged in discussions with the developers or guarantors of
these loans for purposes of bringing the loans current or developing workout solutions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commercial
Construction.Nonperforming commercial construction loans totaled $19.2
million at December 31, 2007. This balance represents two loans for the construction of
upscale condominiums adjacent to a golf course located in a suburban area of Las Vegas,
Nevada. We provided funding to construct 33 units, of which 23 units are under contract
for purchase, within a planned 113-unit development. The units we have funded have been
completed and the balance of the remaining units are in various stages of construction.
Following the builders voluntary bankruptcy filing, a trustee was appointed by the
court and the trustee is identifying local builders and sales agents to complete the
project and sell the remaining units.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest
income that would have been recognized had nonperforming loans and troubled debt
restructurings been current or in accordance with their original terms approximates $10.8
million and $1.8 million for the years ended December 31, 2007 and 2006, respectively.

Impaired
Loans. Included in the preceding table, within nonperforming loans and
troubled debt restructurings, are impaired loans of $125.9 million and $3.8 million at
December 31, 2007 and 2006, respectively. At December 31, 2007, impaired loans consisted
primarily of $51.9 million of residential construction loans, $51.1 million of land and
land development loans and $19.2 million of commercial construction loans. At December 31,
2007 we had $24.8 million of loans which were not classified as nonperforming but were
classified as impaired due to a decline in the fair market value of the underlying
collateral securing such loans.

The
average balance of impaired and restructured loans for the years ended December 31, 2007
and 2006 totaled $58.4 million and $11.4 million, respectively. Interest recognized on
impaired and restructured loans for the years ended December 31, 2007 and 2006 was
$675,000 and $725,000, respectively. We had established an allowance for loan losses
related to impaired loans of $24.6 million and $152,000 at December 31, 2007 and 2006,
respectively.

19

---

Real
Estate Owned and Repossessed Assets. When we acquire real estate owned
property or other assets through foreclosure, deed in lieu of foreclosure or repossession,
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 and Repossessed Asset Activity. The following table sets forth
the activity of our real estate owned and repossessed assets for the periods indicated:

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

At
December 31, 2007, real estate owned consisted primarily of 36 residential properties
totaling $3.6 million and three commercial properties totaling $2.8 million.

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 OTSs 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.

20

---

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.

21

---

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                                               |                                      
|                                                      

We
generally discontinue funding of loans which become nonperforming or are deemed impaired unless additional funding is required
to protect the asset. In addition, due to certain laws and regulations in selected states, some additional funding
may be required. Our reserve for unfunded loan commitments at December 31, 2007 totaled $2.7 million which represents
potential future losses associated with these unfunded commitments.

22

---

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 - real estate      |                
|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 - real estate      |                
|Business                       |                
|Agriculture - operating        |                
|Warehouse mortgage lines       |                
|of credit                      |                
|Consumer                       |                
|Unallocated                    |                
|                              
|Total                          |                
|                              

23

---

# 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 to collateralize
deposits. Additionally, we may use investment securities for liquidity management, 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 trading. Substantially all of our investment
securities are purchased for the available for sale portfolio which totaled $130.5
million, or 3.7% of total assets, at December 31, 2007. At such date, we had net
unrealized losses with respect to such securities of $161,000. Losses due to
other-than-temporary impairment were $188,000 for the year ended December 31, 2007. At
December 31, 2007, the held to maturity securities portfolio totaled $70,000.

At
December 31, 2007, our mortgage-backed security portfolio (which was classified as
available for sale) totaled $6.7 million, or 0.2% of total assets. At such date, we had
net unrealized losses with respect to our mortgage-backed securities of $66,000.
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.

24

---

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
fair value 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, 2007. 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                            |                                             
|                                                 

25

---

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                  |                
|                                
|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, 2007 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 |                                             
|                      

26

---

Unrealized Losses. At December 31, 2007 and 2006, all unrealized losses
related to investment and mortgage-backed securities are considered temporary in nature.
Investment and mortgage-backed securities with unrealized losses at December 31, 2007 and
2006, are summarized in the following tables:

|                                      | Less than 12 Months | 12 Months or Longer | Total
|------------------------------------- | ------------------- | ------------------- | -----
|
|At December 31, 2007:                 |                     |                     |      
|U.S. Government securities and        |                     |                    
|agency obligations                    |                     |                     | $    
|Corporate securities                  |                     |                     |      
|Municipal obligations                 |                     |                     |      
|Agency equity securities              |                     |                     |      
|Mortgage-backed securities            |                     |                     |      
|                                     
|Total temporarily impaired securities |                     |                     | $    
|                                     
|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 |                     |                     | $    
|                                     

We
believe all unrealized losses at December 31, 2007 and 2006 to be market related, with no
permanent sector or issuer credit concerns or impairments. The unrealized losses are
believed to be temporarily 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. At December
31, 2007, we had the ability and intent to hold these securities until maturity.

27

---

# Sources of Funds

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

Deposits.          As
a regional community bank, we offer a variety of products designed to attract
          deposits from the general public, local businesses and governmental entities.
          Our product offerings consist of checking (both interest- and
          noninterest-bearing), money market, savings, time deposits and individual
          retirement accounts. We also may use brokered time deposits as an alternative
          source of funds. During 2007, deposits generated through our retail banking
          facilities increased $378.2 million or 18.4%. At December 31, 2005 we had
          brokered time deposits of $78.0 million. We did not have any brokered time
          deposits at December 31, 2007 and 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 of brokered time deposits at December 31, 2005. We did not have any brokered time
|deposits at December 31, 2007 or 2006.                                                                       
|                                                                                                             

28

---

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                      |                        
|                                            
|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, 2007:

|                    | Balance at December 31, 2007
Maturing in the 12 Months Ending December 31,
|------------------- | --------------------------------------------------------------------------
|
|Time deposits:      |                                                                           
|0.00% - 0.99%       |                                                                           
|1.00% - 1.99%       |                                                                           
|2.00% - 2.99%       |                                                                           
|3.00% - 3.99%       |                                                                           
|4.00% - 4.99%       |                                                                           
|5.00% - 5.99%       |                                                                           
|                   
|Total time deposits |                                                                           
|                   

29

---

Time
Deposits Exceeding $100,000. The following table shows the maturities of
our time deposits exceeding $100,000 at December 31, 2007 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, 2007.

|(Dollars in thousands)                 | Amount | Weighted Average Rate
|-------------------------------------- | ------ | ---------------------
|Quarter ending:                        |        |                      
|March 31, 2008                         |        |                      
|June 30, 2008                          |        |                      
|September 30, 2008                     |        |                      
|December 31, 2008                      |        |                      
|After December 31, 2008                |        |                      
|                                      
|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, 2007 and 2006, we
had $634.2           million and $907.2 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.

30

---

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.

31

---

# 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, 2007, 2006 and 2005, we had 862, 850 and 772 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.

Insurance
of Deposit Accounts. Deposit accounts are insured by the FDIC generally up
to a maximum of $100,000 per account and up to a maximum of $250,000 for self-directed
retirement accounts. Our deposits, therefore, are subject to FDIC deposit insurance
assessments.

On
November 2, 2006, the FDIC adopted final regulations that assess insurance premiums based
on risk. As a result, the new regulations will enable the FDIC to more closely tie each
financial institutions deposit insurance premiums to the risk it poses to the
Deposit Insurance Fund. Under the new risk-based assessment system, the FDIC will evaluate
the risk of each financial institution based on its supervisory rating, financial ratios
and its long-term debt issuer rating. The new rates for most financial institutions
vary between five and seven cents for every $100 of domestic deposits.

32

---

We
were not required to pay any deposit insurance assessments for the year ended December 31,
2007. Under the Federal Deposit Insurance Reform Act of 2005, which became law in 2006, we
received a one-time assessment credit of $1.9 million that could be applied against future
premiums, subject to certain limitations. This credit was utilized during the year ended
December 31, 2007 to offset $1.5 million of deposit insurance assessments. We estimate
that we will exhaust our remaining credit during the first quarter of 2008.

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 2008 is 1.14 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, 2007, the Bank met all regulatory capital
requirements. The OTS is authorized to impose capital requirements in excess of those
standards on individual institutions on a case-by-case basis.

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

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

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

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

OTS
regulations establish special capitalization requirements for savings banks that own
service corporations and other subsidiaries, including subsidiary savings banks. According
to these regulations, certain subsidiaries are consolidated for capital purposes and
others are excluded from assets and capital. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for national
banks, engaged solely in mortgage-banking activities or engaged in certain other
activities solely as agent for its customers are includable subsidiaries that
are consolidated for capital purposes in proportion to the 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, 2007, the Bank had $1.2 million of investments subject to a deduction from tangible
capital.

33

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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, 2007, the Bank exceeded all of its regulatory capital requirements. For more
information see Note 19  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. Under the prompt corrective action regulations, the OTS
is required and authorized to take supervisory actions against undercapitalized savings
associations. For this purpose, a savings institution is placed in one of the following
five categories based on the savings institutions capital:

| |  | well-capitalized
(at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based
capital);
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | adequately
capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total
risk-based capital);
| | - | --------------------------------------------------------------------------------------------------------------------

| |  | undercapitalized
(less than 3% leverage capital, 4% Tier 1 risk-based capital or 8% total risk-based
capital);
| | - | --------------------------------------------------------------------------------------------------------------

| |  | significantly
undercapitalized (less than 3% leverage capital, 3% Tier 1 risk-based capital or 6% total
risk-based capital); and
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | critically
undercapitalized (less than 2% tangible capital)
| | - | -----------------------------------------------------------

Generally,
the banking regulator is required to appoint a receiver or conservator for a savings
association that is critically undercapitalized within specific time frames.
The regulations also provide that a capital restoration plan must be filed with the OTS
within 45 days of the date a savings institution receives notice that it is
undercapitalized, significantly undercapitalized or
critically undercapitalized. Any holding company for a savings institution
required to submit a capital restoration plan must guarantee the lesser of an amount equal
to 5% of the savings institutions assets at the time it was notified or deemed to be
undercapitalized by the OTS, or the amount necessary to restore the savings institution to
adequately capitalized status. This guarantee remains in place until the OTS notifies the
savings institution that it has maintained adequately capitalized status for each of four
consecutive calendar quarters, and the OTS has the authority to require payment and
collect payment under the guarantee. Failure by a holding company to provide the required
guarantee will result in certain operating restrictions on the savings institution, such
as restrictions on the ability to declare and pay dividends, pay executive compensation
and management fees and increase assets or expand operations. The OTS may also take any
number of discretionary supervisory actions against undercapitalized institutions,
including the issuance of a capital directive and the replacement of senior executive
officers and directors.

At
December 31, 2007, the Bank met the criteria for being considered a well
capitalized institution.

34

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Safety
and Soundness Guidelines. Federal law requires each federal banking agency
to prescribe certain standards for all insured depository institutions. These standards
relate to, among other things, internal controls, information systems and audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset growth,
compensation and other operational and managerial standards as the agency deems
appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing
Standards for Safety and Soundness to implement the safety and soundness standards
required under federal law. The guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the appropriate federal
banking agency determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an acceptable
plan to achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to submit a
compliance plan. 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:

| |  | 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
institution would not be at least adequately capitalized following the distribution;
| | - | ----------------------------------------------------------------------------------------

| |  | the
distribution would violate any applicable statute, regulation, agreement or OTS-imposed
condition; or
| | - | ---------------------------------------------------------------------------------------------------------

| |  | the
institution is not eligible for expedited treatment of its filings.
| | - | -----------------------------------------------------------------------

Even if an application is not
otherwise required, every savings institution that is a subsidiary of a holding company
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. Under the Community
Reinvestment Act (CRA), as implemented by FDIC regulations, an institution has
a continuing and affirmative obligation consistent with its safe and sound operation to
help meet the credit needs of its entire community, 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. The CRA requires the FDIC, in connection with its
examinations, to assess the institutions record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain applications
by such institutions. 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 received a satisfactory CRA rating in its recent federal
examination.

35

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Loans-to-One
Borrower Limitations. Generally, a federal savings institution may not make
a loan or extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus (this amount was approximately $54.2 million at December
31, 2007). An additional amount may be loaned, equal to 10% of unimpaired capital and
surplus, if the loan is secured by readily marketable collateral, which generally does not
include real estate. As of December 31, 2007, we were in compliance with the loans-to-one
borrower limitations.

Qualified
Thrift Lender Test. As a federal savings institution, we are required to
satisfy the qualified thrift lender (QTL) test. Under the QTL test, we must
maintain at least 65% of our portfolio assets in qualified thrift
investments (primarily residential mortgages and related investments, including
mortgage-backed securities) in at least nine months of the most recent 12-month period.
Portfolio assets generally means total assets of a savings institution, less
the sum of specified liquid assets up to 20% of total assets, goodwill and other
intangible assets and the value of property used to conduct the savings institutions
business. We may also satisfy the QTL test by qualifying as a domestic building and
loan association as defined in the Internal Revenue Code. A savings institution that
fails the QTL test must either convert to a bank charter or operate under specified
restrictions.

At
December 31, 2007, approximately 78.1% 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, 2007, 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 Home Owners Loan Act provides that
transactions between an insured subsidiary of a holding company and an affiliate thereof
will be subject to the restrictions that apply to transactions between banks that are
members of the Federal Reserve System and their affiliates pursuant to Sections 23A and
23B of the Federal Reserve Act.

Generally,
Section 23A and 23B and OTS regulations issued in connection therewith limit the extent to
which a savings institution or its subsidiaries may engage in certain covered
transactions with affiliates to an amount equal to 10% of the institutions
capital stock and surplus, in the case of covered transactions with any one affiliate, and
to an amount equal to 20% of such capital stock 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.

36

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

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.

37

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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.

# No assurance can be
given that we will complete our proposed Merger with CapitalSource.

The
Merger Agreement provides that either the Company or CapitalSource (each acting through
its respective Board of Directors) has the right at any time after February 17, 2008 to
unilaterally terminate the Merger Agreement, unless the failure to effect the Merger by
such date was due to the terminating partys failure to perform its obligations and
covenants under the Merger Agreement. The Company has indicated that its present intent
is not to terminate the Merger Agreement pending receipt of further comment from the OTS.
Conversely, CapitalSource has publicly advised that its Board
of Directors has authorized its Chairman and Chief Executive Officer to either terminate
the Merger Agreement or negotiate new terms for the transaction. In light of the
preceding sentence, the Company can provide no assurance that the Merger will be
completed even if all conditions precedent to the transaction (including receipt of
regulatory approval) are satisfied.

# CapitalSource and the
Company must obtain regulatory approvals to complete the Merger, which, if delayed, not
granted, or granted with unacceptable conditions, may jeopardize or postpone the
completion of the Merger, result in additional expenditures of money and resources or
reduce the anticipated benefits of the Merger.

CapitalSource
and the Company must obtain certain approval in a timely manner from the OTS prior to
completion of the Merger. If CapitalSource and the Company do not receive the OTSs
approval, or do not receive it on terms that satisfy the conditions set forth in the
Merger Agreement, then neither party will be obligated, or in some cases permitted, to
complete the Merger. The OTS has broad discretion in administering the governing statutes
and regulations. As a condition to approval of the Merger, the OTS may impose
requirements, limitations or costs that could negatively affect the way the combined
companies conduct business. These requirements, limitations or costs could jeopardize or
delay the completion of the Merger.

Companies holding more than 10%
of the outstanding shares of CapitalSource common stock may affect or delay the approval
of the Merger by the OTS. If these holders do not become savings and loan holding
companies, or the OTS does not accept a rebuttal of control from them, regulatory approval
of the Merger would not be obtainable, and the Merger could not be completed.

Under
the OTSs regulations, companies holding more than 10% of CapitalSources
outstanding common stock may be presumed to control CapitalSource, subject to the
opportunity to rebut this presumption by obtaining the OTSs acceptance of a rebuttal
submission. If a company holding 10% or more of CapitalSources outstanding common
stock does not rebut the presumption of control, or reduce its holdings to less than 10%
of CapitalSources outstanding common stock, it would be required to obtain the
approval of the OTS to become a savings and loan holding company prior to completion of
the Merger. Some or all of CapitalSources 10% or greater stockholders may not be
willing to become a savings and loan holding company. As a result, if the OTS does not
accept a rebuttal of control from them, then regulatory approval of the Merger would not
be obtainable, and the Merger could not be completed.

# Failure to complete the
Merger could negatively impact our stock price and future business and operations.

If
the Merger is not completed, we may be subject to a number of material risks, including
the following:

| |  | the
price of our common stock may decline if the current market price of our common stock
reflects a market assumption that the Merger will be completed; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
costs related to the Merger, such as legal, accounting and certain financial advisor
fees, generally must be paid even if the Merger is not completed.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

38

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In
addition, our customers and suppliers may, in response to the announcement of the Merger,
delay or defer decisions concerning us. Any delay or deferral in those decisions by our
customers or suppliers could have a material adverse effect on our business, regardless of
whether or not the Merger is ultimately completed. Similarly, current and prospective
employees may experience uncertainty about their future role with CapitalSource until
CapitalSources strategies with regard to us are announced or executed. This
uncertainty may adversely affect our ability to attract and retain key management, sales,
marketing and technical personnel.

Further,
if the Merger is terminated and our Board of Directors decides to pursue another merger or
business combination, there can be no assurance that we will be able to find a partner
willing to pay an equivalent or more attractive price than CapitalSource would have paid
in the Merger.

# Because the market price
of CapitalSource common stock will fluctuate, our stockholders cannot be sure of the
value of the merger consideration they will receive if the Merger is effected.

If
the Merger is completed, the holders of each share of Company common stock owned prior to
the closing of the Merger will be entitled to receive for each such share:

| |  | $6.80
in cash; plus
| | - | -------------------

| |  | 0.675
shares of CapitalSource common stock; plus
| | - | ------------------------------------------------

| |  | If
the ten-day average closing price of CapitalSource common stock prior to the closing of
the Merger is:
| | - | ---------------------------------------------------------------------------------------------------------

| | a) | less
than or equal to $25.1852, then 0.405 shares of CapitalSource common stock;
               or
| | -- | --------------------------------------------------------------------------------------------------

| | b) | greater
than $25.1852, then TierOne Corporation stockholders can elect to                receive
either $10.20 in cash or $10.20 of CapitalSource common stock.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the Merger Agreement, the
stated maximum amount of CapitalSource stock that a Company stockholder may receive is
1.08 shares. To the extent the merger consideration is paid in CapitalSource shares, any
change in the market price of CapitalSource common stock prior to completion of the Merger
will affect the value of the merger consideration that our stockholders will receive upon
completion of the Merger. Because of this market risk, prior to the election deadline, our
stockholders will not know or be able to calculate the number or the value of the shares
of CapitalSource common stock they will receive upon completion of the Merger.
Accordingly, the specific dollar value of CapitalSource common stock a stockholder will
receive will depend on the market value of CapitalSource common stock at the time the
Merger is completed and may decrease from the date the stockholder makes an election as to
the third component of the merger consideration. Stock price changes may result from a
variety of factors, including general market and economic conditions, changes in the
Companys or CapitalSources respective businesses, operations and prospects,
and regulatory considerations. Many of these factors are beyond our control.

In the event the Merger is completed, CapitalSource and the Company
may fail to realize all of the anticipated benefits of the Merger.

We
entered into the Merger Agreement with the expectation that the Merger will result in
significant benefits for both companies. Achieving the benefits of the Merger will depend
in part on integrating the operations and personnel of the two companies in a timely and
efficient manner to minimize the risk that the Merger will result in the loss of customers
or key employees or the diversion of managements attention from other important
issues. This integration may or may not be successful. Assuming that the Merger is
effected, we cannot offer any assurances that we and CapitalSource can successfully
integrate or realize any of the anticipated benefits.

# Applicable regulations
affecting savings and loan holding companies could negatively impact both CapitalSources
commercial lending and investing business and the business of the Bank following the
Merger.

Currently,
CapitalSource is not regulated as a savings and loan holding company or bank holding
company and does not control any FDIC-insured depository institution. Savings banks such
as the Bank are subject to extensive regulation of their activities and investments, their
capitalization, their risk management policies and procedures, and their relationships
with affiliated companies. Upon acquiring control of the Bank and becoming a savings and
loan holding company assuming that the Merger is effected, CapitalSources operations
would be limited to financial and certain real estate-related activities. These
limitations may require CapitalSource to curtail or divest some of its current commercial
lending and investment business activities. For instance, in connection with its loans
used by financial sponsors to finance purchases of companies, CapitalSource commonly is
granted the opportunity to acquire equity in a borrower at the same time and on
substantially the same terms as the financial sponsor. Some of these equity investments
exceed 5% of the borrowers equity. If CapitalSource does not acquire merchant
banking authority that will enable it to conform these equity investments of more than 5%
in non-financial entities to the requirements of the Home Owners Loan Act within two
years of the acquisition of the Company, it will be required to divest them.

39

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In
addition, as a condition to approving the Merger, the OTS may impose restrictions on the
integration of the Banks banking and CapitalSources commercial lending and
investing businesses, and may require prior approval of any future material changes to the
Banks business plans. These regulations and conditions could constrain CapitalSource
in pursuing future business opportunities following the Merger. These regulations and
conditions, and CapitalSources inexperience with them, could also affect
CapitalSources ability to realize synergies from the Merger, and could negatively
affect both CapitalSource and the Bank following the Merger.

The value of the CapitalSource
common stock our stockholders receive in the Merger may fluctuate after the Merger.
Neither CapitalSource nor the Company can predict how the CapitalSource common stock will
trade subsequent to the closing of the Merger if the Merger is completed.

Stock
price changes may result from a variety of factors, including general market and economic
conditions, changes in CapitalSources businesses, operations and prospects, and
regulatory considerations. Many of these factors are beyond CapitalSources control.
The market price of CapitalSource common stock may decline as a result of the Merger if:

| |  | the
integration of CapitalSource and the Company is unsuccessful;
| | - | -----------------------------------------------------------------

| |  | CapitalSource
and the Company do not achieve the perceived  benefits of the Merger as rapidly or to the
extent  anticipated by          financial or industry analysts; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
effect of the Merger on the combined companys financial results is not consistent
with the expectations of financial or industry analysts.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

# The Merger Agreement
limits our ability to pursue alternatives to the Merger.

The
Merger Agreement, so long as it is in effect, contains terms and conditions that make it
more difficult for us to sell our business to a party other than CapitalSource. These
no shop provisions impose restrictions on us that, subject to certain
exceptions, limit our ability to discuss or facilitate competing third-party proposals to
acquire all or a significant part of our company.

# 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 further, our financial condition and results of operations could continue to 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 further decline in the local or national economy could continue to
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:

40

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| |  | 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, 2007, $1.7 billion, or 52.2%, of our total loans consisted of multi-family
residential, commercial real estate, land and land development, commercial construction
and business loans. 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, 2007, $513.6 million, or 15.4%, of our total loans consisted of residential
construction loans. Our portfolio of residential construction loans increased dramatically
in 2004, 2005 and 2006 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.

# Our concentration of
loans in certain areas of Florida and the Las Vegas, Nevada area may expose us to
increased credit risk that may cause us to record additional provisions for loan losses and/or
may result in future loan charge-offs.

At
December 31, 2007, $168.8 million, or 5.1%, of our total loans were collateralized by
properties in the state of Florida. Among our Florida loans, $31.8 million were considered
nonperforming residential construction loans at December 31, 2007. Approximately $26.5
million of our total nonperforming residential construction loans in Florida were
purchased from TransLand. During the three months ended December 31, 2007 we charged off
$25.5 million of TransLand residential construction loans, due in large part to a
permanent decline in the estimated fair value of residential lots.

At
December 31, 2007, $247.3 million, or 7.4%, of our total loans were collateralized by
properties in the state of Nevada, primarily in the Las Vegas, Nevada area. Our loans in
the Las Vegas, Nevada area are primarily composed of land development, commercial
construction and residential construction loans. At December 31, 2007, our nonperforming
land development, commercial construction and residential construction loans in the Las
Vegas, Nevada area totaled $30.4 million, $19.2 million and $7.6 million, respectively.

# 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.

41

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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.

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.

# Potential future loan
losses may increase.

We
maintain an allowance for loan losses that represents managements best estimate of
probable losses within our existing loan portfolio. The level of the allowance for loan
losses reflects managements continuing evaluation of industry concentrations,
specific credit risks, loan loss experience, current loan portfolio quality, present
economic, political and regulatory conditions and unidentified losses inherent in the
current loan portfolio. Over the past several years, historical loan losses had been low
and our loan loss ratios had performed better than industry averages. During 2007, our
levels of delinquent loans, nonperforming loans (loans 90 or more days delinquent),
impaired loans and charge-offs increased significantly. These increases were primarily
attributable to the continued deterioration in the real estate market and the economy in
general. We have been further impacted by the erosion of property values and an overall
increase in housing inventory (both developed lots and completed houses) in many of the
areas of the country in which we do business and where the collateral for our loans
reside. Additionally, significantly tightened credit standards have made it more difficult
for potential borrowers to obtain financing and for current borrowers to refinance
existing loans. Loan losses related to residential construction loans increased during the
year ended December 31, 2007. If the recent trend is prolonged and losses continue to
increase, our results of operations will continue to be negatively impacted.

# 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.

42

---

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.

# 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.

43

---

# 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.

# Our stock price can be
volatile.

Our
stock price can fluctuate in response to a variety of factors, including issues related to
the consummation of the Merger with CapitalSource and the CapitalSource stock price;
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 deficiency, or
combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis. A significant deficiency is a deficiency, or
combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness,
yet important enough to merit attention by those responsible for oversight of the
companys financial reporting.

44

---

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 20  Lease
Commitments included in Item 8. Financial Statements and Supplementary Data, in
Part II of this Annual Report on Form 10-K.

# Item 3. Legal Proceedings

Except
for litigation relating to certain goodwill claims against the United States
(U.S.) and a court action filed by the Bank and two other financial
institutions against a Florida-based mortgage broker, both of which are 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.

On
October 31, 2006, the U.S. Court of Federal Claims (Federal Claims Court)
issued an opinion finding the U.S. liable to the Bank for lost franchise value related to
our damages claim against the U.S. for breach of contract following changes to the rules
for computing our regulatory capital that were required by the adoption of the Financial
Institution Reform Recovery and Enforcement Act of 1989. The Federal Claims Courts
opinion awarding the Bank $4.5 million in damages was appealed to the United States Court
of Appeals for the Federal Circuit (Court of Appeals) by the U.S. on December
29, 2006. The Bank subsequently filed a cross-appeal seeking review of earlier liability
rulings which absolved the U.S. of liability in connection with two other related merger
transactions and reduced the amount of the Banks potential recovery.

Oral
argument of the appeal was heard before a three-judge panel of the Court of Appeals on
November 8, 2007. On March 5, 2008, the Court of Appeals panel rendered a split decision.
The majority found in favor of the U.S. thereby reversing the Federal Claims Courts
damage award and denying the cross-appeal. A separate dissenting opinion would have
sustained the Federal Claims Courts award for the Bank. We are currently evaluating
our legal options and have not made a determination as to what, if any, further actions
will be taken. 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.

A
joint petition for involuntary Chapter 11 bankruptcy was filed on August 23, 2007 in the
United States Bankruptcy Court for the Middle District of Florida by the Bank and two
other financial institutions against TransLand Financial Services, Inc.
(TransLand), a mortgage brokerage firm headquartered in Maitland, Florida. The
petition cites TransLand for alleged failure to remit loan payoffs and periodic payments
to the Bank involving approximately $12.9 million of residential loans. On October 8, 2007
a court-appointed examiner furnished a detailed report documenting the alleged fraudulent
activity. The Bank has notified its insurance carrier of a claim against a bond insuring
the Bank for up to $7.5 million against fraudulent losses by loan servicers. The Bank
believes that it is probable it will collect the proceeds on the insurance bond.

Pursuant
to an Inter-Creditor Settlement Agreement dated November 25, 2007, the petitioning banks
agreed to dismiss the involuntary Chapter 11 bankruptcy petition that had been filed
against TransLand in return for the agreement by TransLand and certain of its principal
creditors to proceed with the liquidation and distribution of TransLands remaining
assets. The Bank will receive a proportionate share of the net proceeds, if any, realized
from such liquidation. On December 4, 2007 the Bankruptcy Court entered an order approving
the dismissal of the involuntary bankruptcy. The liquidation of TransLands assets is
currently in process.

45

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

On
November 29, 2007, the Company held a special meeting of stockholders to obtain approval
for the Agreement and Plan of Merger, dated May 17, 2007, by and among TierOne
Corporation, CapitalSource Inc. and CapitalSource TRS Inc. Following is a summary of the
result of the vote.

|                                               | Number of Votes
|---------------------------------------------- | ---------------
|
|To approve Merger Agreement and Plan of Merger |                
|                                              

46

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# 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, 2007, we had 1,454
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.

|               | 2007 | 2006
|-------------- | ---- | ----
|
|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, 2007:

|                                     | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs* | Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs
|------------------------------------ | -------------------------------- | ---------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------------
|October 2007                         |                                  |                              |                                                                                   |                                                                           
|Beginning Date - October 1, 2007     |                                  |                             
|Ending Date - October 31, 2007       |                                  |                              |                                                                                   | 942                                                                       
|November 2007                        |                                  |                             
|Beginning Date - November 1, 2007    |                                  |                             
|Ending Date - November 30, 2007      |                                  |                              |                                                                                   | --                                                                        
|December 2007                        |                                  |                             
|Beginning Date - December 1, 2007    |                                  |                             
|Ending Date - December 31, 2007      |                                  |                              |                                                                                   | 314                                                                       
|                                    
|Total shares purchased during the    |                                  |                             
|three months ended December 31, 2007 |                                  |                              |                                                                                   | 1,256                                                                     
|                                    

|* | Information
related to our publicly announced plan authorizing purchases of common stock during the
three months ended December 31, 2007, is as follows:
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------

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

47

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Performance Graph.The following graph represents $100.00 invested in
our common stock at the closing price of the common stock on December 31, 2002, 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 the Company specifically incorporates it by reference into
such a filing.



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

48

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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 (loss) before income taxes                                                                                                       |                                      
|Income tax expense (benefit)                                                                                                            |                                      
|                                                                                                                                       
|Net income (loss)                                                                                                                       |                                      
|                                                                                                                                       
|Net income (loss) per common share, basic                                                                                               |                                      
|Net income (loss) 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 (1)                                                                                                        |                                      
|Net interest margin (1)                                                                                                                 |                                      
|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 (2)                                                                                         |                                      
|Efficiency ratio (2)(3)                                                                                                                 |                                      
|Return on average assets (2)                                                                                                            |                                      
|Return on average equity (2)                                                                                                            |                                      
|Average equity to average assets (2)                                                                                                    |                                      
|Return on tangible equity (2)(4)                                                                                                        |                                      
|                                                                                                                                       
|(1)  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.                                                         
|(2)  Employee stock options were expensed beginning January 1, 2006.                                                                   
|(3)  Efficiency ratio is calculated as total noninterest expense, less amortization expense of other intangible assets, as a percentage
|of the sum of net interest income and noninterest income.                                                                              
|(4)  Return on tangible equity is calculated as annualized net income (loss) as a percentage of average stockholders equity           
|adjusted for goodwill and other intangible assets.                                                                                     
|                                                                                                                                       

49

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

# Introduction

We
are a Nebraska-based financial services holding company that offers customers a wide
variety of full-service consumer, commercial and agricultural banking products and
services through TierOne Bank, our wholly owned banking subsidiary. TierOne Banks
franchise network includes 69 banking offices located in Nebraska, Iowa and Kansas and
nine loan production offices located in Arizona, Colorado, Florida, Minnesota, Nevada and
North Carolina.

As
a regional community bank, our goal is to provide our customers competitive financial
services through a positive, quality service environment that distinguishes us from our
competition. This is achieved by our strategic focus on our core businesses of mortgage
and business lending and retail banking that has contributed to the Banks history of
growth. At December 31, 2007, the Company had total assets of $3.5 billion, net loan
receivables of $3.0 billion, total deposits of $2.4 billion and stockholders equity of
$345.6 million.

The
following is a discussion and analysis of the Companys financial condition and
results of operations including information on the Companys critical accounting
policies, asset/liability management, liquidity and capital resources and contractual
obligations. Information contained in this Managements Discussion and Analysis should be
read in conjunction with the disclosure regarding Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995, as well as the discussion set forth in Item 1A. Risk Factors and
Item 8. Financial Statements and Supplementary Data.

# 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 estimating
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 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 subject 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
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50

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| |  | 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.
| | - | -----------------------------------

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 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 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. 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, 2007 and concluded that no potential impairment of
goodwill existed as the fair value of our goodwill exceeded its carrying value.
Additionally, we performed our impairment analysis as of December 31, 2007 due to the
decline in our stock price and prevailing economic conditions and concluded that no
potential impairment existed.

51

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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 Operations 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, 2007, 2006 and 2005, no events or circumstances triggered an impairment
charge against our core deposit intangible assets.

Mortgage
Servicing Rights.On January 1, 2007 we adopted SFAS No. 156, Accounting
for Servicing of Financial Assets  an Amendment of FASB Statement No. 140(SFAS No. 156). In accordance with SFAS No. 156, we have elected to
continue to utilize the amortization method for all of our mortgage servicing right
assets, thus, carrying our mortgage servicing rights at the lower of cost or
market (fair value). Under the amortization method, we amortize mortgage servicing
rights in proportion to and over the period of net servicing income. Income generated as a
result of new servicing assets is reported as net gain on sale of loans held for sale in
the Consolidated Statements of Operations. Loan servicing fees, net of amortization of
mortgage servicing rights, is recorded in fees and service charges in the Consolidated
Statements of Operations.

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 compute a present value of 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 of mortgage servicing rights. As interest rates rise, prepayments generally
slow, which results in an increase in the fair value of mortgage servicing rights. 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. We currently do not utilize direct financial hedges to mitigate the effect
of changes in the fair value of our mortgage servicing rights.

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.

52

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

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

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

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

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

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

In
June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
requires that we determine whether a tax position is more likely than not to be sustained
upon examination, including resolution of any related appeals or litigation processes,
based on the technical merits of the position. Once it is determined that a position meets
the recognition threshold, the position is measured to determine the amount of benefit to
be recognized in the financial statements. Any interest and penalties related to uncertain
tax positions are recorded in income tax expense in the Consolidated Statements of Operations.

53

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# Comparison of Financial
Condition at December 31, 2007 and 2006

General.Our total assets were $3.5 billion at December 31, 2007, an
          increase of $106.6 million, or 3.1%, compared to $3.4 billion at December 31,
          2006.

Cash
and Cash Equivalents. Our cash and cash equivalents totaled $241.5 million
at December 31, 2007, an increase of $154.7 million, or 178.2%, compared to $86.8 million
at December 31, 2006. The increase was primarily attributable to an increase in deposits
and a decrease in net loans partially offset by the repayment of FHLBank advances and
other borrowings.

Investment
Securities. Our available for sale investment securities totaled $130.5
million at December 31, 2007, an increase of $25.5 million, or 24.3%, compared to $105.0
million at December 31, 2006. During the year ended December 31, 2007 we had security
purchases of $318.4 million which were partially offset by $295.8 million in proceeds from
maturing and sold investment securities. The securities purchased during 2007 were
primarily agency obligations that were purchased to collateralize deposits.

Mortgage-Backed
Securities. Our mortgage-backed securities, all of which are recorded as
available for sale, totaled $6.7 million at December 31, 2007, a decrease of $5.6 million,
or 45.5%, compared to $12.3 million at December 31, 2006. The decrease in our
mortgage-backed securities was the result of $5.6 million of principal payments received
during the year ended December 31, 2007.

Loans
Receivable. Net loans totaled $3.0 billion at December 31, 2007, a decrease
of $74.0 million, or 2.4%, compared to $3.1 billion at December 31, 2006. During the year
ended December 31, 2007, we originated $1.6 billion of loans (exclusive of warehouse
mortgage lines of credit) and purchased $411.4 million of loans. These increases were
offset by $2.0 billion of principal repayments (exclusive of warehouse mortgage lines of
credit) and $344.0 million of loan sales. The following table details the composition of
our loan portfolio at the dates indicated:

|                                                                                                     | 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 - real estate                                                                            |                
|Business                                                                                             |                
|Agriculture - operating                                                                              |                
|Warehouse mortgage lines of credit                                                                   |                
|Consumer                                                                                             |                
|                                                                                                    
|Total loans                                                                                          |                
|                                                                                                    
|Unamortized premiums, discounts                                                                      |                
|and deferred loan fees                                                                               |                
|Loans in process (2):                                                                                |                
|Land and land development                                                                            |                
|Residential construction                                                                             |                
|Commercial construction                                                                              |                
|                                                                                                    
|Net loans                                                                                            |                
|                                                                                                    
|(1)  Includes loans held for sale                                                                    |                
|                                                                                                    
|(2)  Loans in process represents the undisbursed portion of construction and land development loans.
|                                                                                                    

54

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At
December 31, 2007, the outstanding balance (net of loans in process) of our residential
construction loans was $374.0 million, a decrease of $123.6 million, or 24.8%, compared to
$497.6 million at December 31, 2006. The outstanding balance (net of loans in process) of
our commercial construction loans was $388.9 million at December 31, 2007, an increase of
$128.5 million, or 49.4%, compared to $260.4 million at December 31, 2006. The outstanding
balance of our land and land development loans was $388.6 million at December 31, 2007, an
increase of $16.3 million, or 4.4%, compared to $372.2 million at December 31, 2006.

The
decrease in net loans at December 31, 2007 was primarily attributable to a decrease in
loan originations and purchases, loan payoffs and periodic payments on loans. The decrease
in the level of loan originations and purchases was primarily attributable to a decrease
in demand resulting from the continued deterioration in the real estate market and the
economy in general. We have taken a number of steps related to the realignment of certain
credit administration functions, including the addition of personnel with extensive depth
and expertise in credit analysis, and we continue to tighten credit policies.

We
maintain a corporate policy of not participating in subprime residential real estate
lending or negative amortizing mortgage products. The Office of Thrift Supervision, our
federal regulatory agency, defines subprime loans as loans to borrowers displaying one or
more credit risk characteristics including lending to a borrower with a credit bureau risk
score (FICO) of 660 or below. Furthermore, we have not participated in
collateralized loan obligations (CLO), collateralized debt obligations
(CDO), structured investment vehicles (SIV) or asset-backed
commercial paper (ABCP).

Allowance
for Loan Losses. Our allowance for loan losses increased $33.4 million, or
100.9%, to $66.5 million at December 31, 2007 compared to $33.1 million at December 31,
2006. During the year ended December 31, 2007 we recorded provisions for loan losses
totaling $68.1 million and had net charge-offs of $32.0 million. Our allowance for loan
losses as a percentage of nonperforming loans was 51.79% at December 31, 2007 compared to
110.25% at December 31, 2006. Our ratio of the allowance for loan losses to net loans was
2.24% and 1.09% at December 31, 2007 and 2006, respectively. The following table details
our nonperforming and impaired loans for the periods presented:

|                               | Nonperforming Loans | Impaired Loans
|------------------------------ | ------------------- | --------------
|
|
|One-to-four family residential |                     |               
|Second mortgage residential    |                     |               
|Multi-family residential       |                     |               
|Commercial real estate         |                     |               
|Land and land development      |                     |               
|Residential construction       |                     |               
|Commercial construction        |                     |               
|Agriculture - real estate      |                     |               
|Business                       |                     |               
|Agriculture - operating        |                     |               
|Consumer                       |                     |               
|                              
|Total                          |                     |               
|                              

The
increase in our allowance for loan losses was primarily attributable to an increase in
delinquent, nonperforming and impaired loans. During 2007, our levels of delinquent loans,
nonperforming loans (loans 90 or more days delinquent) and impaired loans increased
significantly. These increases were primarily attributable to the continued deterioration
in the real estate market and the economy in general. We have been further impacted by the
erosion of property values and an overall increase in housing inventory (both developed
lots and completed houses) in many of the areas of the country in which we do business and
where the collateral for our loans reside. Additionally, significantly tightened credit
standards have made it more difficult for potential borrowers to obtain financing and for
current borrowers to refinance existing loans.

55

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Our
allowance for loan losses related to impaired loans totaled $24.6 million at December 31,
2007 compared to $152,000 at December 31, 2006. Actual losses are dependent upon future
events and, as such, further changes to the level of allowance for loan losses may become
necessary based on changes in economic conditions and other factors.

At
December 31, 2007, our nonperforming residential construction loans totaled $57.7 million
of which $31.8 million were located in Florida. Approximately $26.5 million of our total
nonperforming residential construction loans had been purchased from TransLand Financial
Services, Inc. (TransLand), a Florida mortgage brokerage firm. To limit our
geographic loan concentration, we discontinued purchasing residential construction loans
in the Cape Coral area of Lee County, Florida from TransLand by December 31, 2005.

At
December 31, 2007, we had classified $51.9 million of our total residential construction
loans as impaired, of which $33.1 million relate to loans purchased from TransLand. We
have established an allowance for loan losses related to the TransLand loans which have
been classified as impaired of $11.5 million at December 31, 2007.

As
previously disclosed in regulatory filings with the Securities and Exchange Commission, we
reported that we have a group of residential construction loans we purchased from
TransLand which were primarily located in the Cape Coral area of southwest Florida. These
loans were originally made to individual homebuyers wishing to build a second or
retirement home. Subsequent to the filing of our June 30, 2007 Quarterly Report on Form
10-Q, we assumed servicing of all loans purchased from TransLand. During our due diligence
process related to the transfer of residential construction loan servicing from TransLand
to the Bank, alleged fraudulent servicing practices were discovered. The majority of the
alleged fraud related to the withholding of loan payoff proceeds and periodic payments. A
joint petition for involuntary Chapter 11 bankruptcy was filed on August 23, 2007 in the
United States Bankruptcy Court for the Middle District of Florida (Court) by
the Bank and two other financial institutions against TransLand. A court-appointed
examiner furnished a detailed report documenting the alleged fraudulent activity. In
December 2007, the Court entered an order approving the petitioning banks plan to
agree to dismiss the bankruptcy petition in return for the agreement by TransLand and
certain of its principal creditors to proceed with the liquidation and proportional
distribution of TransLands remaining assets. The liquidation of TransLands
assets is currently in process.

In
addition to seeking recoveries from TransLand, the Bank is also insured up to $7.5 million
against fraudulent activity by loan servicers. A $12.2 million receivable from TransLand
associated with the alleged misappropriation of loan payoff proceeds and periodic payments
due to the Bank was reclassified from loans receivable to other assets on the
Companys Consolidated Statements of Financial Condition at September 30, 2007. We
believe that it is probable we will collect the proceeds on the insurance bond. We
wrote-off as a charge to other operating expense $4.8 million during the three months
ended September 30, 2007 in connection with the TransLand receivable. This amount
represents the excess of the aggregate TransLand receivable over the amount of our
insurance coverage. During the three months ended December 31, 2007, we recovered $1.6
million related to the TransLand receivable write-off. Any future recoveries from
TransLand would be recorded as other operating income in the period the funds are received.

FHLBank
Topeka Stock. FHLBank stock totaled $65.8 million at December 31, 2007, an
increase of $3.8 million, or 6.2%, compared to $62.0 million at December 31, 2006. The
increase was attributable to FHLBank dividends paid in stock received during the year
ended December 31, 2007.

Premises
and Equipment.Premises and equipment decreased $1.8 million, or 4.5%, to
$38.0 million at December 31, 2007 compared to $39.8 million at December 31, 2006. The
decrease was attributable to $4.0 million of depreciation and amortization expense which
was partially offset by $2.2 million in asset additions. Additions during the year ended
December 31, 2007 consisted primarily of computer equipment, furniture and software.

Goodwill.Goodwill totaled $42.1 million at December 31, 2007, a decrease
          of $127,000, or 0.3%, compared to $42.2 million at December 31, 2006 and
relates           to the 2004 acquisition of UNFC. The decline in goodwill is
attributable to the           realization of a $61,000 tax benefit related to the UNFC
acquisition and a           $66,000 adjustment resulting from the adoption of Financial
Accounting Standards           Board (FASB) Interpretation No. 48.

56

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Other
Intangible Assets. Other intangible assets totaled $6.7 million at December
31, 2007, a decrease of $1.6 million, or 19.6%, compared to $8.4 million at December 31,
2006 and relates to the core deposit intangible assets recorded as a result of the UNFC
acquisition and the Marine Bank transaction. The decrease was attributable to $1.6 million
in amortization during the year ended December 31, 2007.

Other
Assets.Other assets increased $39.0 million, or 177.0%, to $61.0 million
at December 31, 2007 compared to $22.0 million at December 31, 2006. Other assets consists
primarily of prepaid expenses, miscellaneous receivables and other miscellaneous assets.
The increase in other assets at December 31, 2007 is primarily attributable to an $18.2
million increase in deferred tax assets, an $8.0 million income tax receivable and a $7.4
million receivable related to TransLand. The increase in deferred tax assets was primarily
related to the increase in our allowance for loan losses and the accelerated recognition
of deferred loan fees.

# Liabilities and
Stockholders Equity

General.           Our
total liabilities were $3.2 billion at December 31, 2007, an increase of           $114.3
million, or 3.7%, compared to $3.1 billion at December 31, 2006. We           utilized
increased deposits to reduce our FHLBank advances during the year ended
          December 31, 2007.

Deposits.           Deposits
increased $378.2 million, or 18.4%, to $2.4 billion at December 31,           2007
compared to $2.1 billion at December 31, 2006.

|                             | At 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 $1.0 billion at December
31, 2007, an increase of $99.6 million, or 10.7%, compared to $931.8 million at December
31, 2006. The increase in our savings accounts was attributable to a new savings account
which was introduced during the three months ended September 30, 2007. The number of
transaction accounts increased by 4,800 accounts, or 3.7%, to 133,400 accounts compared to
128,600 accounts at December 31, 2006. The weighted average interest rate of our
transaction accounts was 1.96% at December 31, 2007 compared to 1.68% at December 31,
2006. The increase in our time deposits was primarily the result of marketing promotions
throughout 2007. The weighted average interest rate of our time deposits was 4.96% at
December 31, 2007 compared to 4.81% at December 31, 2006.

FHLBank
Advances and Other Borrowings. Our FHLBank advances and other borrowings
totaled $689.3 million at December 31, 2007, a decrease of $273.1 million, or 28.4%,
compared to $962.4 million at December 31, 2006. The decrease in FHLBank advances and
other borrowings at December 31, 2007 was primarily attributable to the utilization of
increased deposits to reduce our FHLBank advances. During the year ended December 31, 2007
we executed one new FHLBank term advance in the amount of $50.0 million at an interest
rate of 3.94%. Additionally, we paid off eight FHLBank term advances which were called
during the year ended December 31, 2007 totaling $250.0 million. The weighted average
interest rate on FHLBank advances which were called by the FHLBank during the year ended
December 31, 2007 was 3.61%. We did not have an outstanding balance on our FHLBank line of
credit at December 31, 2007 compared to an outstanding balance of $72.5 million at
December 31, 2006. The weighted average interest rate on our FHLBank advances and other
borrowings was 4.50% at December 31, 2007, an increase of 10 basis points compared to
4.40% at December 31, 2006.

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Accrued
Expenses and Other Liabilities. Our accrued expenses and other liabilities
totaled $35.9 million at December 31, 2007, an increase of $6.5 million, or 22.2%,
compared to $29.3 million at December 31, 2006. The primary items comprising accrued
expenses and other liabilities are deferred compensation agreements, loan servicing
payments and other miscellaneous accrued expenses.

Stockholders
Equity. At December 31, 2007, stockholders equity totaled $345.6
million, a decrease of $7.7 million, or 2.2%, compared to $353.3 million at December 31,
2006. The decrease in stockholders equity was primarily the result of a net loss of
$12.4 million and cash dividends of $5.2 million paid to our stockholders during the year
ended December 31, 2007. This decrease was partially offset by $3.9 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). We paid
cash dividends of $0.07 per share on March 31, 2007 to stockholders of record on March 15,
2007 and $0.08 per common share on June 29, 2007, September 28, 2007 and December 31, 2007
to stockholders of record on June 15, 2007, September 14, 2007 and December 14, 2007.

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 8,367 shares of our outstanding common stock to
support employee benefit programs during the year ended December 31, 2007. The weighted
average price paid per repurchased common share was $24.39 for the year ended December 31,
2007. After accounting for earlier repurchases, at December 31, 2007, the total remaining
common stock repurchase authority was 1,518,692 shares. These shares may be repurchased
when permissible under the Merger Agreement and SEC guidelines. 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, 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.

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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 - real estate                                                                            |                
|Business                                                                                             |                
|Agriculture - operating                                                                              |                
|Warehouse mortgage lines of credit                                                                   |                
|Consumer                                                                                             |                
|                                                                                                    
|Total loans                                                                                          |                
|                                                                                                    
|Unamortized premiums, discounts                                                                      |                
|and deferred loan fees                                                                               |                
|Loans in process (2):                                                                                |                
|Land and land development                                                                            |                
|Residential construction                                                                             |                
|Commercial construction                                                                              |                
|                                                                                                    
|Net loans                                                                                            |                
|                                                                                                    
|(1)  Includes loans held for sale                                                                   
|(2)  Loans in process represents the undisbursed portion of construction and land development loans.
|                                                                                                    

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.

59

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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.

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

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

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

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

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

60

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# 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.

|                             | At 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.

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 ESOP, $2.9 million related to amortization of awards
under the 2003 MRRP and $1.7 million related to amortization of stock options under the
2003 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.

61

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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.

# Comparison of Operating
Results for the Years Ended December 31, 2007 and 2006

Net
Income (Loss).  Net loss for the year ended December 31, 2007 was $12.4
million, or $0.74 per diluted and basic share, compared to net income of $41.3 million,
or $2.41 per diluted share ($2.50 per basic share), for the year ended December 31, 2006.
The decrease in our net income for the year ended December 31, 2007 compared to the same
period in 2006 was primarily attributable to the increase in the provision for loan
losses resulting from an increased level of nonperforming loans. A recent appellate court
decision in our federal goodwill litigation (see Item 3. Legal Proceedings for additional
information) resulted in a 2007 fourth quarter pretax charge of $560,000 recorded in
other operating expense to reflect fees and expenses incurred during the appeal process
which had previously been capitalized. The impact after income tax benefits of $202,000
was $358,000. The appellate court rendered its decision after we had reported our
financial results for the quarter and year ended December 31, 2007. Our 2007 Consolidated
Statement of Operations and related loss per share data in this Annual Report on Form 10-K have been
updated accordingly.

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, average interest rate spread and net interest margin for the year ended
December 31, 2007 were negatively affected by the increased balance of our nonperforming
loans as we do not recognize interest income on nonperforming loans (loans 90 days or more past due). We had
nonperforming loans totaling $128.5 million and $30.1 million at December 31, 2007 and
2006, respectively.

Net
interest income before provision for loan losses totaled $116.1 million for the year ended
December 31, 2007, a decrease of $9.7 million, or 7.7%, compared to $125.9 million for the
year ended December 31, 2006. The decrease in net interest income for the year ended
December 31, 2007 compared to the year ended December 31, 2006 was primarily attributable
to an 86 basis point increase in the average rate paid on time deposits and an increase of
$201.8 million in the average balance of time deposits. Our net interest income for the
year ended December 31, 2006 was supplemented by a $2.7 million loan prepayment fee
collected on a commercial real estate loan.

Our
average interest rate spread was 3.15% for the year ended December 31, 2007 compared to
3.72% for the year ended December 31, 2006. The decrease in our average interest rate
spread was attributable to an increase in the average rate paid on interest-bearing
liabilities, primarily time deposits. Our average interest rate spread was also negatively
affected by our increased level of nonperforming loans.

The
average yield on interest-earning assets was 7.21% for the year ended December 31, 2007, a
three basis point decrease compared to 7.24% for the year ended December 31, 2006. Our
average rate paid on interest bearing liabilities was 4.06% for the year ended December
31, 2007, an increase of 54 basis points compared to 3.52% for the year ended December 31,
2006. 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.

Our
net interest margin was 3.58% for the year ended December 31, 2007 compared to 4.07% for
the year ended December 31, 2006. The decrease in net interest margin was primarily
attributable to the increased average interest rate on our interest-bearing liabilities,
primarily time deposits. This decrease was partially offset by the increase in the average
balance of loans receivable. Our net interest margin for the year ended December 31, 2007
compared to the year ended December 31, 2006 was negatively impacted by the increased
balance of nonperforming loans.

62

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We
anticipate that our average interest rate spread and net interest margin may further
compress during 2008 due to slower loan growth and increasing levels of nonperforming
loans.

Average
Balances, Net Interest Income, Yields Earned and Cost of Funds.The following
table shows for the periods 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, net interest
margin and average interest rate spread. 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.                                                                 
|                                                                                                                                     

63

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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 periods  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.

|                                                                                                                          | 2007 vs. 2006 | 2006 vs. 2005
|------------------------------------------------------------------------------------------------------------------------- | ------------- | -------------
|
|
|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 interest expense                                                                                                    |               |              
|on deposits                                                                                                               |               |              
|FHLBank Topeka advances and                                                                                               |               |              
|other borrowings                                                                                                          |               |              
|                                                                                                                         
|Total interest expense                                                                                                    |               |              
|                                                                                                                         
|Net change in net interest income                                                                                         |               |              
|                                                                                                                         
|(1)  Calculated net of unamortized premiums, discounts and deferred fees, loans in process and allowance for loan losses.
|                                                                                                                         

Interest
Income.For the year ended December 31, 2007 our total interest income was $234.0
million, an increase of $10.1 million, or 4.5%, compared to $223.9 million for the year
ended December 31, 2006. Interest income on loans receivable totaled $220.0 million for
the year ended December 31, 2007, an increase of $5.3 million, or 2.5%, compared to $214.7
million for the year ended December 31, 2006. The average balance of loans receivable
totaled $3.0 billion for the year ended December 31, 2007, an increase of $71.5 million,
or 2.5%, compared to $2.9 billion for the year ended December 31, 2006. The average yield
earned on the loan portfolio was 7.39% for both of the years ended December 31, 2007 and
2006.

The
increase in total interest income for the year ended December 31, 2007 was primarily
attributable to an increase in interest income on loans receivable. The increase in
interest income on loans receivable was attributable to an increase in the average balance
of loans receivable. The increases in the average balance of loans receivable was offset
by the increased balance of nonperforming loans.

Interest
Expense.Our total interest expense for the year ended December 31, 2007 was
$117.9 million, an increase of $19.9 million, or 20.3%, compared to $98.0 million for the
year ended December 31, 2006. Interest expense on deposits totaled $82.0 million for the
year ended December 31, 2007, an increase of $21.8 million, or 36.1%, compared to $60.2
million for the year ended December 31, 2006. Interest expense on FHLBank advances and
other borrowings declined $1.9 million, or 5.0%, to $35.9 million for the year ended
December 31, 2007 compared to $37.8 million for the year ended December 31, 2006. The
average rate paid on interest-bearing deposits was 3.92% and 3.18% for the years ended
December 31, 2007 and 2006, respectively. The average rate paid on FHLBank advances and
other borrowings increased to 4.42% for the year ended December 31, 2007 compared to 4.23%
for the year ended December 31, 2006. Additionally, the average balance of our
interest-bearing liabilities totaled $2.9 billion for the year ended December 31, 2007, an
increase of $116.1 million, or 4.2%, compared to $2.8 billion for the year ended December
31, 2006. The average balance of our interest-bearing deposits increased $197.1 million,
or 10.4%, to $2.1 billion for the year ended December 31, 2007 compared to $1.9 billion
for the year ended December 31, 2006. The average balance of our FHLBank advances and
other borrowings totaled $812.4 million for the year ended December 31, 2007, a decrease
of $81.1 million, or 9.1%, compared to $893.4 million for the year ended December 31,
2006.

64

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The
increase in interest expense was primarily attributable to an increase in the average rate
paid on interest-bearing liabilities. This increase was primarily the result of increases
in the average rate paid on and the average balance of time deposits. The increase in time
deposits was the result of marketing promotions designed to attract new customers.
Additionally, the increase was also attributable to customers migrating to other
higher-yielding deposit products.

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
recorded a provision for loan losses of $68.1 million for the year ended December 31, 2007
compared to $6.1 million for the year ended December 31, 2006, an increase of $62.0
million. The increase in our provision for loan losses for the year ended December 31,
2007 compared to the year ended December 31, 2006 was primarily attributable to the
increase in our nonperforming residential construction, land and land development and
commercial construction loans. The increase in our provision for loan losses was also
attributable to an increase in the level of loans which were deemed impaired at December
31, 2007. The following table details nonperforming and impaired loans for selected loan
types for the periods presented:

|                          | Nonperforming Loans | Impaired Loans
|------------------------- | ------------------- | --------------
|
|
|Residential construction  |                     |               
|Land and land development |                     |               
|Commercial construction   |                     |               
|                         
|Total                     |                     |               
|                         

Our
loan delinquency rate (30 or more days delinquent) at December 31, 2007 as a percentage of
net loans (before allowance for loan losses) was 6.08% compared to 1.89% at December 31,
2006. Our level of nonperforming loans and loan delinquencies may continue to increase.

During
the years ended December 31, 2007 and 2006, we charged-off, net of recoveries, $32.0
million and $3.8 million, respectively. Charge-offs, net of recoveries, during the year
ended December 31, 2007 consisted primarily of $26.4 million of residential construction
loans, $2.0 million of consumer loans, $1.9 million of business loans and $1.6 million of
commercial real estate loans. Included in the $26.4 million of residential construction
loan charge-offs were $25.5 million of charge-offs related to loans acquired from
TransLand. These charge-offs relate to a decline in the estimated fair value of
residential lots due to the erosion of property values and an increase in housing
inventory (both developed lots and completed houses) in the Cape Coral area of Lee County
Florida. The decline in the fair value of residential lots in the Cape Coral area of Lee
County Florida was deemed to be unrecoverable due to the large number of similar lots in
the same geographical area and the current sale prices of similar lots in this area.

65

---

Our
charge-offs, net of recoveries, as a percentage of average loans outstanding were 1.07%
and 0.13% for the years ended December 31, 2007 and 2006, respectively. 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 which has resulted in
an increased amount of nonperforming loans, loan delinquencies and charge-offs. Our volume
and dollar amount of loan charge-offs and related provisions for loan losses may continue
to increase in future periods.

Noninterest
Income.Noninterest income for the year ended December 31, 2007 was $30.3 million,
an increase of $1.3 million, or 4.3%, compared to $29.1 million for the year ended
December 31, 2006.

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

Growth
in noninterest income during the year ended December 31, 2007 compared to the year ended
December 31, 2006 was primarily attributable to increases in deposit account fees and
service charges, net gains on the sale of loans held for sale, commissions and management
fee income and debit card fees. The increase in deposit account fees and service charges
was primarily due to an increase in the number of transaction accounts. At December 31,
2007, we had 133,400 transaction accounts, an increase of 4,800 accounts, compared to
December 31, 2006. The increase in commissions and management fee income was primarily
attributable to fees collected by TierOne Financial, a subsidiary that administers the
sale of securities and insurance products. The increase in debit card fees was largely due
to transaction volume.

Noninterest
income for the year ended December 31, 2006 included a $1.0 million pre-tax gain on sale
of two Kansas bank offices and related deposits.

66

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Noninterest
Expense.Our noninterest expense increased by $13.3 million, or 16.3%, to $95.1
million for the year ended December 31, 2007 compared to $81.8 million for the year ended
December 31, 2006.

|                                                   | Year Ended December 31, | Increase
|-------------------------------------------------- | ----------------------- | --------
|
|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                              |                         |         
|TransLand receivable write-off                     |                         |         
|Partial recovery of TransLand receivable write-off |                         |         
|Provision for VISA lawsuit settlement              |                         |         
|Other                                              |                         |         
|                                                  
|Total noninterest expense                          |                         |         
|                                                  

The
increase in noninterest expense during the year ended December 31, 2007 compared to the
year ended December 31, 2006 was primarily attributable to the TransLand receivable
write-off, increases in employee compensation, employee benefits, payroll taxes and
professional services. At December 31, 2007, other assets included a $7.5 million
insurance receivable relating to TransLand, less a $100,000 insurance policy deductible,
that was not included in other assets at December 31, 2006. At September 30, 2007, we had
a $12.2 million receivable from TransLand associated with the alleged misappropriation of
loan payoff proceeds and periodic payments. At September 30, 2007, we recorded a write-off
totaling $4.8 million of the TransLand receivable to other operating expense. This amount
represents the excess of the aggregate TransLand receivable over the amount of our
insurance coverage. During the three months ended December 31, 2007, we entered into a
liquidation agreement with TransLand which allowed us to recover $1.6 million of the
receivable previously charged-off. This liquidation agreement does not preclude us from
recovering additional amounts related to the receivable write-off in future periods. We
believe that it is probable we will collect the proceeds on the insurance bond. The
increase in employee compensation, employee benefits and payroll taxes resulted from
personnel growth and annual salary increases. At December 31, 2007 and 2006, we had 862
and 850 full-time equivalent employees, respectively. The increase in professional
services expense for the year ended December 31, 2007 was primarily related to consulting,
legal and accounting services associated with the proposed Merger, TransLand-related
matters and the goodwill litigation expenses.

We
issue debit cards through Visa U.S.A. Inc. card association or its affiliates
(Visa). Accordingly, we are a member bank of Visa. Visa U.S.A. Inc. and
MasterCard International (Card Associations) have been named in antitrust
lawsuits challenging the practices of the Card Associations. As a Visa member bank we will
be responsible for our proportionate share of any resulting settlements. During the three
months ended December 31, 2007, we recognized a pre-tax charge of $700,000 for potential
liabilities in connection with the Visa antitrust lawsuit which reflects our proportionate
share of potential damages as a Visa member bank.

Income
Tax Expense.Our income tax expense decreased by $30.1 million, or 116.6%, for an
income tax benefit of $4.3 million for the year ended December 31, 2007 compared to income
tax expense of $25.8 million for the year ended December 31, 2006. The decrease in income
tax expense for the year ended December 31, 2007 compared to the same period in 2006 was
primarily due to a decrease in net income resulting from an increase in our provision for
loan losses. The effective income tax benefit rate for the year ended December 31, 2007
was 25.6% compared to an effective income tax rate of 38.5% for the year ended December
31, 2006. The decrease in the effective tax rate for the year ended December 31, 2007 was
primarily attributable to the impact of permanent tax items in relation to our net income
(loss). Nondeductible expenses related to the Merger Agreement with CapitalSource were
$1.9 million for the year ended December 31, 2007.

67

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# 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 before provision for loan losses
totaled $125.9 million for the year ended December 31, 2006, an increase of $21.0 million,
or 20.0%, compared to $104.9 million for the year ended December 31, 2005. The increase in
net interest income was attributable to a continued increase in the average yield on our
net loan portfolio, partially offset by an increase in our funding cost, supplemented by a
$2.7 million prepayment fee collected on a commercial real estate loan during the year
ended December 31, 2006.

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

Our
net interest margin (net interest income divided by average interest-earning assets)
increased to 4.07% for the year ended December 31, 2006 compared to 3.58% for the year
ended December 31, 2005. The increase in our net interest margin for the year ended
December 31, 2006 was primarily the result of increases in the average yield earned and
average balance of loans receivable. The average balance of our total interest-earning
assets was $3.1 billion for the year ended December 31, 2006, an increase of $157.0
million, or 5.4%, compared to $2.9 billion for the year ended December 31, 2005.

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.

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.

68

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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.

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 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.

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.

69

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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, | Increase
|----------------------------------------------- | ----------------------- | --------
|
|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, | Increase
|------------------------------------------ | ----------------------- | --------
|
|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                  |                         |         
|                                          

70

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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.

# 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-earning 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.

71

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Net
Portfolio Value.  The following table sets forth our NPV as of December 31, 2007,
as calculated by the OTS:

|       | Net Portfolio Value | NPV as a % of Portfolio
Value of Assets
|------ | ------------------- | ---------------------------------------
|
|
|300    | $  381,993          | $  (12,836)                            
|200    | 394,606             | (223)                                  
|100    | 400,061             | 5,232                                  
|50     | 398,190             | 3,361                                  
|Static | 394,829             | --                                     
|-50    | 387,817             | (7,012)                                
|-100   | 381,709             | (13,120)                               
|-200   | 360,066             | (34,763)                               
|      

Due
to our recognition of the need to control our interest rate exposure, we have, in recent
years, 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.

72

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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, 2007. The estimated maturity/repricing amounts reflect contractual
maturities and amortizations, assumed loan prepayments based on our historical experience
and estimated deposit account decay rates. Management believes these assumptions and
estimates are reasonable, but there can be no assurance in this regard.

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

73

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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, 2007, net cash provided by operating activities was $39.3
million, which primarily consisted of net interest income before provision for loan
losses. Net cash provided by investing activities during the year ended December 31, 2007
was $11.5 million and related to cash inflows from maturing investment securities and a
decrease in loans receivable partially offset by the purchase of available for sale
investment securities. During the year ended December 31, 2007, net cash provided by
financing activities was $103.8 million, which consisted primarily of net cash inflows
from deposits and FHLBank advances, partially offset by the repayment of FHLBank advances
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. Deposits
generated through our retail banking facilities increased $378.2 million, or 18.4%, to
$2.4 billion at December 31, 2007 compared to $2.1 billion at December 31, 2006. The
increase in deposits during the year ended December 31, 2007 was primarily used to reduce
our FHLBank advances. In addition, due to a decreased volume of lending activity we had
$241.5 million of cash and cash equivalents at December 31, 2007. At December 31, 2007, we
had time deposits maturing within the next 12 months amounting to $1.3 billion. Based upon
historical experience, we anticipate that a significant portion of the maturing time
deposits will be renewed 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 $812.4 million for the year ended December 31, 2007
compared to $893.4 million for the year ended December 31, 2006. 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 $1.3 billion and $1.6 billion at December 31, 2007 and 2006, respectively.
Other qualifying collateral can be pledged in the event additional borrowing capacity is
required.

74

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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, 2007, 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,
2007, the maximum total dollar amount of such recourse was approximately $19.0 million.
Based on historical experience, at December 31, 2007, we had established a liability of
$733,000 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, special purpose entities.

For
more information regarding our contractual obligations, commitments, contingent
liabilities and off-balance sheet arrangements see Note 22  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.

75

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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
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 do not anticipate that the adoption of SFAS No. 157 will have a material impact
on our consolidated financial statements.

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.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, Including an amendment of FASB Statement No. 115
(SFAS No. 159). SFAS No. 159 provides an alternative measurement treatment for
certain financial assets and liabilities, under an instrument-by-instrument election, that
permits fair value to be used for both initial and subsequent measurement, with changes in
fair value recognized in earnings. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We do not anticipate that the adoption of SFAS No. 159 will have
a material impact on our consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51(SFAS No. 160). The
objective of this statement is to improve the relevance, comparability and transparency of
the financial information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards. SFAS No. 160 is effective
for fiscal years beginning after December 15, 2008. We do not anticipate that the adoption
of SFAS No. 160 will have a material impact on our consolidated financial statements.

76

---

In
December 2007, The FASB issued SFAS No. 141R, Business Combinations (SFAS No.
141R). The objective of this statement is to improve the relevance, representational
faithfulness and comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS No. 141R establishes
principles and requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase and determines what information
to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.

# SEC Staff Accounting
Bulletins

In
November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value Through Earnings (SAB 109). SAB 109
expresses the views of SEC staff (Staff) regarding written loan commitments
that are accounted for at fair value through earnings under GAAP. SAB 105,Application
of Accounting Principles to Loan Commitments(SAB 105) provided the views
of Staff regarding derivative loan commitments that are accounted for at fair value
through earnings pursuant to SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SAB 105 stated that in measuring fair value of a derivative loan
commitment, it was inappropriate to incorporate the expected net future cash flows related
to the associated servicing of the loan. SAB 109 supersedes SAB 105, and expresses the
current view of Staff that, consistent with the guidance in SFAS No. 156, Accounting
for Servicing of Financial Assets, and SFAS No. 159, the expected net future cash
flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value through
earnings. The SEC expects registrants to apply the provisions of SAB 109 on a prospective
basis to derivative loan commitments issued or modified in fiscal quarters beginning after
December 31, 2007. We do not anticipate that the adoption of SAB 109 will have a material
impact on our consolidated financial statements.

In
December 2007 the SEC issued Staff Accounting Bulletin No 110, Certain Assumptions Used
in Valuation Methods (SAB 110). SAB 110 expresses the views of Staff
regarding the use of a simplified method, as discussed in SAB 107,
Share-Based Payment, in developing an estimate of the expected term of plain
vanilla share options in accordance with SFAS No. 123(revised 2004), Share-Based
Payment. Staff indicated in SAB 107 that it will accept a companys election to
use the simplified method, regardless of whether the company has sufficient information to
make more refined estimates of expected term. At the time SAB 107 was issued, the Staff
believed that more detailed external information about employee exercise behavior (e.g.,
employee exercise patterns by industry and/or other categories of companies) would, over
time, become readily available to companies. Therefore, the Staff stated in SAB 107 that
it would not expect a company to use the simplified method for option grants after
December 31, 2007. The Staff understands that such detailed information about employee
exercise behavior may not be widely available by December 31, 2007. Accordingly, the Staff
will continue to accept, under certain circumstances, the use of the simplified method
beyond December 31, 2007.

# 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.

77

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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, 2007 and 2006, and the related
consolidated statements of operations, changes in stockholders equity and comprehensive
income, and cash flows for each of the years in the three-year period ended December 31,
2007. 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, 2007 and 2006, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.

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.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), TierOne Corporations internal control over
financial reporting as of December 31, 2007, based on criteria established inInternal
Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 10, 2008
expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.

# /s/ KPMG LLP

Lincoln, NebraskaMarch 10, 2008

78

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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 $9,348 and $19,285 at            |                
|December 31, 2007 and 2006, 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                                                |                
|Mortgage servicing rights (lower of cost or market), 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; 18,058,946 and |                
|18,041,413 shares issued at December 31, 2007 and 2006, respectively        |                
|Additional paid-in capital                                                  |                
|Retained earnings, substantially restricted                                 |                
|Treasury stock, at cost; 4,516,129 and 4,533,662 shares at                  |                
|December 31, 2007 and 2006, respectively                                    |                
|Unallocated common stock held by Employee Stock Ownership Plan              |                
|Accumulated other comprehensive loss, net                                   |                
|                                                                           
|Total stockholders equity                                                  |                
|                                                                           
|Total liabilities and stockholders equity                                  |                
|                                                                           

See accompanying notes to
consolidated financial statements.

79

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# TierOne Corporation
and Subsidiaries Consolidated
Statements of Operations

|                                                    | 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                               |                        
|Loss on impairment of securities                    |                        
|Loans held for sale                                 |                        
|Real estate owned                                   |                        
|Other operating income                              |                        
|                                                   
|Total noninterest income                            |                        
|                                                   
|Noninterest expense:                                |                        
|Salaries and employee benefits                      |                        
|Occupancy, net                                      |                        
|Data processing                                     |                        
|Advertising                                         |                        
|Other operating expense                             |                        
|                                                   
|Total noninterest expense                           |                        
|                                                   
|Income (loss) before income taxes                   |                        
|Income tax expense (benefit)                        |                        
|                                                   
|Net income (loss)                                   |                        
|                                                   
|Net income (loss) per common share, basic           |                        
|                                                   
|Net income (loss) 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.

80

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

|(Dollars in thousands)                   | Common Stock | Additional Paid-In Capital | Retained EarningsSubstantiallyRestricted | TreasuryStock | UnallocatedCommon StockHeld by theEmployee StockOwnership Plan | UnearnedCommon StockHeld by theManagementRecognition andRetention Plan | Accumulated OtherComprehensiveIncome (Loss), Net | Total Stockholders Equity
|---------------------------------------- | ------------ | -------------------------- | ---------------------------------------- | ------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------ | --------------------------
|Balance at December 31, 2004             |              |                            | $                                        | 226           |                                                                | $                                                                      | 355,986                                          |                           
|                                        
|Common stock earned by                   |              |                           
|employees in Employee                    |              |                           
|Stock Ownership Plan                     |              |                            |                                          | --            |                                                                |                                                                        | 2,446                                            |                           
|Amortization of awards under the         |              |                           
|Management Recognition and               |              |                           
|Retention Plan                           |              |                            |                                          | --            |                                                                |                                                                        | 214                                              |                           
|Treasury stock reissued under 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                                          |                           
|                                        
|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                   |              |                            |                                          | --            |                                                                |                                                                        | 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                                          |                           
|                                        

81

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

|(Dollars in thousands)                          | Common Stock | Additional Paid-In Capital | Retained EarningsSubstantiallyRestricted | TreasuryStock | UnallocatedCommon StockHeld by theEmployee StockOwnership Plan | Accumulated OtherComprehensiveIncome (Loss), Net | Total Stockholders Equity
|----------------------------------------------- | ------------ | -------------------------- | ---------------------------------------- | ------------- | -------------------------------------------------------------- | ------------------------------------------------ | --------------------------
|Balance at December 31, 2006                    |              |                            | $                                        | 226           |                                                                | $                                                | 358,733                   
|                                               
|Common stock earned by employees in             |              |                           
|Employee Stock Ownership Plan                   |              |                            |                                          | --            |                                                                |                                                  | 2,441                     
|Amortization of awards under the                |              |                           
|Management Recognition and                      |              |                           
|Retention Plan                                  |              |                            |                                          | --            |                                                                |                                                  | 2,904                     
|Amortization of stock options under             |              |                           
|2003 Stock Option Plan                          |              |                            |                                          | --            |                                                                |                                                  | 1,682                     
|Repurchase of common                            |              |                           
|stock (8,367 shares)                            |              |                            |                                          | --            |                                                                |                                                  | --                        
|Treasury stock reissued under 2003              |              |                           
|Stock Option Plan                               |              |                            |                                          | --            |                                                                |                                                  | (140                      
|Excess tax benefit realized from stock-         |              |                           
|based compensation plans                        |              |                            |                                          | --            |                                                                |                                                  | 422                       
|Dividends paid ($0.31 per common share)         |              |                            |                                          | --            |                                                                |                                                  | --                        
|Cumulative effect of adoption of FASB           |              |                           
|Interpretation No. 48 on Janaury 1, 2007        |              |                            |                                          | --            |                                                                |                                                  | --                        
|Comprehensive income:                           |              |                           
|Net loss                                        |              |                            |                                          | --            |                                                                |                                                  | --                        
|Change in unrealized loss on available for sale |              |                           
|securities, net of tax                          |              |                            |                                          | --            |                                                                |                                                  | --                        
|                                               
|Total comprehensive income (loss)               |              |                            |                                          | --            |                                                                |                                                  | --                        
|                                               
|Balance at December 31, 2007                    |              |                            | $                                        | 226           |                                                                | $                                                | 366,042                   
|                                               

See accompanying notes to
consolidated financial statements.

82

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# TierOne Corporation
and SubsidiariesConsolidated Statements of Cash Flows

|                                                                                    | Year Ended December 31,
|----------------------------------------------------------------------------------- | -----------------------
|
|Reconciliation of net income (loss) to net cash provided by operating activities:   |                        
|Net income (loss)                                                                   |                        
|Adjustments to reconcile net income (loss) 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 other 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 benefit                                                         |                        
|Provision for loan losses                                                           |                        
|Provision for real estate owned losses                                              |                        
|Provision for uncollectible receivable                                              |                        
|Recovery of uncollectible receivable                                                |                        
|Provision for VISA lawsuit settlement                                               |                        
|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:                                               |                        
|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             |                        
|Decrease (increase) in loans receivable                                             |                        
|Purchase 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 provided by (used in) investing activities                                 |                        
|                                                                                   

83

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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           |                        
|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 during year 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.

84

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# 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 which are deemed 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.

85

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# 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
nonperforming loans (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.

86

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# 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. 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, 2007 and concluded that no potential impairment of
goodwill existed since the fair value of our goodwill exceeded its carrying value.
Additionally, we performed our impairment analysis as of December 31, 2007 due to the
decline in our stock price and prevailing economic conditions and concluded that no
potential impairment existed.

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 Operations 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,
2007 and 2006, no events or circumstances triggered an impairment charge against our core
deposit intangible assets.

Mortgage
Servicing Rights. On January 1, 2007 we adopted SFAS No. 156, Accounting
for Servicing of Financial Assets  an Amendment of FASB Statement No. 140(SFAS No. 156). In accordance with SFAS No. 156, we have elected to
continue to utilize the amortization method for all of our mortgage servicing right
assets, thus, carrying our mortgage servicing rights at the lower of cost or
market (fair value). Under the amortization method, we amortize mortgage servicing
rights in proportion to and over the period of net servicing income. Income generated as a
result of new servicing assets is reported as net gain on sale of loans held for sale in
the Consolidated Statements of Operations. Loan servicing fees, net of amortization of
mortgage servicing rights, is recorded in fees and service charges in the Consolidated
Statements of Operations.

We
capitalize the estimated fair 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 compute a present value of 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 of mortgage servicing rights. As interest rates rise, prepayments generally
slow, which results in an increase in the fair value of mortgage servicing rights. 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. We currently do not utilize direct financial hedges to mitigate the effect
of changes in the fair value of our mortgage servicing rights.

87

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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.

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.

In
June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires that we
determine whether a tax position is more likely than not to be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the
technical merits of the position. Once it is determined that a position meets the
recognition threshold, the position is measured to determine the amount of benefit to be
recognized in the financial statements. Any interest and penalties related to uncertain
tax positions are recorded in income tax expense in the Consolidated Statements of Operations.

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 EPS 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.

88

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Comprehensive
Income. Comprehensive income (loss) consists of net income (loss) and net
unrealized gains (losses) on securities 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 $361,000, $210,000 and
($500,000) for the years ended December 31, 2007, 2006 and 2005, respectively.
Reclassification adjustments for realized gross losses included in income, were
approximately $295,000, $291,000 and $57,000, net of tax benefit of approximately
$114,000, $109,000 and $20,000, respectively, for the years ended December 31, 2007,
2006 and 2005, respectively.

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

Reclassifications.          Certain
prior years amounts have been reclassified to conform to the 2007           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.

# 3. Earnings Per Share

Basic
EPS is computed by dividing net income (loss) by the weighted average number of common
shares outstanding for each reporting period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were exercised.
Diluted EPS is computed after giving consideration to the weighted average dilutive
effect of our 2003 SOP shares and 2003 MRRP shares. All stock options are assumed to be
100% vested for purposes of the EPS computations. Due to the loss for the year ended
December 31, 2007, no potentially dilutive shares were included in the loss per share
calculation as including such shares would be anti-dilutive. The following table is a
reconciliation of basic and diluted EPS:

|                                                     | Year Ended December 31,
|---------------------------------------------------- | -----------------------
|
|
|Net income (loss)                                    |                        
|                                                    
|Total weighted average basic                         |                        
|common shares outstanding                            |                        
|Effect of dilutive securities:                       |                        
|2003 Stock Option Plan                               |                        
|2003 Management Recognition and       Retention Plan |                        
|                                                    
|Total weighted average basic and diluted             |                        
|common shares outstanding                            |                        
|                                                    
|Net income (loss) per common share                   |                        
|                                                    

89

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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
year ended December 31, 2005:

|                                                             | Year Ended
|------------------------------------------------------------ | ----------
|
|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                         |           
|                                                            

90

---

# 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, 2007 and 2006
are as follows:

|                                                  | At December 31, 2007
|------------------------------------------------- | --------------------
|
|
|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, 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                    |                     
|                                                 

91

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

The
amortized cost and estimated fair value of investment securities at December 31,
2007, 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, 2007
|--------------------------- | --------------------
|
|
|Amount maturing in:         |                     
|2008                        |                     
|2009 - 2012                 |                     
|2013 - 2017                 |                     
|After 2017                  |                     
|                           
|Total investment securities |                     
|                           

There
were no sales of investment securities held to maturity during the three years ended
December 31, 2007. Proceeds from the sale of investment securities available for sale
totaled $10,000, $2.3 million and $3.2 million for the years ended December 31, 2007, 2006
and 2005, respectively. Gross realized gains on the sale of investment securities were
$21,000 and $14,000 for the years ended December 31, 2006 and 2005, respectively. There
were no gains or losses on the sale of investment securities during the year ended
December 31, 2007. Losses due to other-than-temporary impairment were $188,000 on
investment securities for the year ended December 31, 2007. There were no sales of
mortgage-backed securities during the three years ended December 31, 2007.

At
December 31, 2007 and 2006, investment and mortgage-backed securities with fair
values of approximately $114.0 million and $96.3 million, respectively, were pledged as
collateral for certain deposits, primarily those of public institutions.

92

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Investment
and mortgage-backed securities with unrealized losses at December 31, 2007 and 2006 are
summarized in the following table:

|                                      | Less Than 12 Months | 12 Months or Longer | Total
|------------------------------------- | ------------------- | ------------------- | -----
|
|At December 31, 2007:                 |                     |                     |      
|Mortgage-backed securities            |                     |                     | $    
|U.S. Government securities and        |                     |                    
|agency obligations                    |                     |                     |      
|Corporate securities                  |                     |                     |      
|Municipal obligations                 |                     |                     |      
|Agency equity securities              |                     |                     |      
|                                     
|Total temporarily impaired securities |                     |                     | $    
|                                     
|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 |                     |                     | $    
|                                     

We
believe all unrealized losses as of December 31, 2007 and 2006 to be market related, with
no permanent sector or issuer credit concerns or impairments. We had 48 and 107 securities
with unrealized losses for 12 consecutive months or longer as of December 31, 2007 and
2006, respectively. The unrealized losses are believed to be temporarily 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. At December 31, 2007, we had the ability and intent to
hold these securities until maturity.

93

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 5. Loans Receivable

Loans
receivable at December 31, 2007 and 2006 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 (2)                                                                                |                
|                                                                                                   
|Net loans                                                                                           |                
|Allowance for loan losses                                                                           |                
|                                                                                                   
|Net loans after allowance for loan losses                                                           |                
|                                                                                                   
|(1) Includes loans held for sale                                                                    |                
|                                                                                                   
|(2) Loans in process represents the undisbursed portion of construction and land development loans.
|                                                                                                   

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.

94

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

At
December 31, 2007 and 2006 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 $3.0 billion and $3.3
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,
2007 and 2006, we had $64.7 million and $62.4 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, 2007 and 2006, approximately 20.2% and 20.8%, 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                           |                        
|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 |                        
|                                                      

We
generally discontinue funding of loans which become nonperforming or are deemed impaired unless additional
funding is required to protect the asset. In addition, due to certain laws and regulations in selected states, some additional funding
may be required. Our reserve for unfunded loan commitments at December 31, 2007 totaled $2.7 million which
represents potential future losses associated with these unfunded commitments.

95

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Nonperforming
Assets and Troubled Debt Restructurings. Nonperforming assets consist of
nonperforming loans, troubled debt restructurings and real estate owned. Nonperforming
loans are loans that are 90 or more days delinquent 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. 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. Included in
the preceding table, within nonperforming loans and troubled debt restructurings, are
impaired loans of $125.9 million and $3.8 million at December 31, 2007 and 2006,
respectively. At December 31, 2007, impaired loans consisted primarily of $51.9 million of
residential construction loans, $51.1 million of land and land development loans and $19.2
million of commercial construction loans. At December 31, 2007 we had $24.8 million of
loans which were not classified as nonperforming but were classified as impaired due to
decline in the fair market value of the underlying collateral securing such loans.

The
average balance of impaired and restructured loans for the years ended December 31, 2007,
2006 and 2005 totaled $58.4 million, $11.4 million and $7.1 million, respectively.
Interest recognized on such loans for the years ended December 31, 2007, 2006 and 2005
approximated $675,000, $725,000 and $603,000, respectively. Additionally, interest income
that would have been recorded for the years ended December 31, 2007, 2006 and 2005 if
nonperforming loans and troubled debt restructurings had been current or in accordance
with their original terms approximates $10.8 million, $1.8 million and $802,000,
respectively.

Loans
serviced for others are not included in the accompanying Consolidated Statements of
Financial Condition. Servicing loans for others consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and conducting foreclosure
processing. In connection with these loans serviced for others, we held borrowers
escrow balances of approximately $19.7 million and $17.1 million at December 31, 2007
and 2006, respectively.

Loans
serviced for others include approximately $601.1 million and $605.8 million of unpaid
principal balances of residential real estate loans at December 31, 2007 and 2006,
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 $19.0 million and $17.4 million at December 31, 2007 and
2006, respectively. We have established a liability for this recourse obligation, which is
based on our historical loss experience, in the amount of approximately $733,000 and
$742,000 at December 31, 2007 and 2006, respectively. This liability is included in
accrued expenses and other liabilities.

96

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 6. Mortgage Servicing
Rights

The
balance of capitalized mortgage servicing rights, net of valuation allowances,
at December 31, 2007 and 2006, was $14.5 million and $12.5 million,
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.

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 capitalized |                        
|Amortization expense                  |                        
|Valuation adjustment                  |                        
|                                     
|Balance at end of year                |                        
|                                     

The
estimated future amortization expense of capitalized mortgage servicing rights for each of
the years ending December 31, 2008 through 2012 is approximately $3.3 million, $2.6
million, $2.0 million, $1.5 million and $1.2 million, respectively. These projections are
based on existing asset balances and the existing interest rate environment at
December 31, 2007. 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. Our evaluation of mortgage servicing rights at
December 31, 2007 and 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 Operations.

97

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 7. Accrued Interest
Receivable

Accrued
interest receivable at December 31, 2007 and 2006 is summarized in the following
table:

|                                          | At December 31,
|----------------------------------------- | ---------------
|
|Loans receivable                          |                
|Investment and mortgage-backed securities |                
|Other                                     |                
|                                         
|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 $43.8
million and $57.5 million of FHLBank stock at December 31, 2007 and 2006,
respectively.

# 9. Real Estate Owned and
Repossessed Assets

Real
estate owned and repossessed assets, included in other assets in the Consolidated
Statements of Financial Condition, at December 31, 2007 and 2006 aggregating $6.4
million and $5.3 million, respectively, is recorded net of a valuation allowance of
$540,000 and $100,000, respectively. At December 31, 2007, real estate owned consisted
primarily of 36 residential properties totaling $3.6 million and three commercial
properties totaling $2.8 million.

# 10. Premises and
Equipment

Premises
and equipment at December 31, 2007 and 2006 is 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, 2007,
2006 and 2005 was $4.0 million, $3.8 million and $3.6 million, respectively.

98

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 11. Goodwill and
Acquired Intangible Assets

Goodwill. 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, 2007           and 2006 are as follows:

|                                          | Year Ended December 31,
|----------------------------------------- | -----------------------
|
|Balance at beginning of year              |                        
|Realized tax benefit associated with      |                        
|United Nebraska Financial Co. acquisition |                        
|Adjustment due to adoption of FASB        |                        
|Interpretation No. 48                     |                        
|                                         
|Balance at end of year                    |                        
|                                         

Other
Intangible Assets. 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.

Other
Intangible Asset Activity. The changes in the carrying amount of acquired
intangible assets for the years ended December 31, 2007 and 2006 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, 2008 and five years
thereafter are as follows:

|(Dollars in thousands)               | Core Deposit Intangible Asset
|------------------------------------ | -----------------------------
|Estimated amortization expense:      |                              
|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 |                              
|For the year ended December 31, 2013 |                              
|                                    

99

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 12. Deposits

Deposit
Composition.  Deposits at December 31, 2007 and 2006 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, 2007
are shown in the following table:

|(Dollars in thousands) | Amount | Percent
|---------------------- | ------ | -------
|2008                   |        |        
|2009                   |        |        
|2010                   |        |        
|2011                   |        |        
|2012                   |        |        
|Thereafter             |        |        
|                      
|Total time deposits    |        |        
|                      

At
December 31, 2007 and 2006, time deposits of $100,000 or more approximated $373.4
million and $269.9 million, respectively. The weighted average interest rate of time
deposits of $100,000 or more was 5.09% and 4.99% at December 31, 2007 and 2006,
respectively.

100

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# 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,  2007, 2006 and 2005 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, 2007 and 2006, 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:         | 2007      | 2.79        | $         --   
|                                       | 2009      | 5.41        | 5,425          
|                                       | 2013      | 6.24        | 336            
|                                       | 2015      | 3.97        | 1,149          
|                                       | 2030      | 5.46        | 2,285          
|Convertible fixed-rate notes           |           |             |                
|payable to the FHLBank Topeka:         | 2009      | 5.41 - 5.55 | 75,000         
|                                       | 2010      | 5.06 - 5.36 | 40,000         
|                                       | 2012      | 3.01 - 3.30 | 25,000         
|                                       | 2013      | 2.99        | 25,000         
|                                       | 2015      | 3.39 - 4.00 | 85,000         
|                                       | 2016      | 3.83 - 4.66 | 325,000        
|                                       | 2017      | 3.94        | 50,000         
|Line of credit with the FHLBank Topeka | 2007      | 5.47        | --             
|Retail repurchase agreements           | 2007/2006 | 1.29 - 4.96 | 24,165         
|Junior subordinated debentures         | 2031/2034 | 7.79 - 8.49 | 30,928         
|                                      
|Total FHLBank Topeka advances and      |           |             |                
|other borrowings                       |           |             | $  689,288     
|                                      
|Weighted average interest rate         |           |             | 4.50  %        
|                                      

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

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 $1.3 billion and $1.6 billion at December 31,
2007 and 2006, respectively. Under our blanket collateral agreement with the FHLBank, our
borrowing capacity at December 31, 2007 and 2006 was $863.0 million and $984.4 million,
respectively. Other qualifying collateral can be pledged in the event additional borrowing
capacity is required.

101

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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.  Income tax expense  (benefit)  for the years ended  December 31,  2007,
 2006 and 2005  consisted  of the  following components:

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

102

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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

|                                         | Year Ended December 31,
|---------------------------------------- | -----------------------
|
|Expected income tax expense (benefit)    |                        
|Increase (decrease) resulting from:      |                        
|Employee Stock Ownership Plan expense    |                        
|State income taxes, net of federal tax   |                        
|Tax-exempt interest income               |                        
|Nondeductible compensation expense       |                        
|Nondeductible expenses related to merger |                        
|with CapitalSource                       |                        
|FIN 48 - Interest                        |                        
|Other                                    |                        
|                                        
|Total income tax expense (benefit)       |                        
|                                        
|Effective tax (benefit) rate             |                        
|                                        

Deferred
Taxes.  The  significant  items  comprising our net deferred income tax asset at
December 31,  2007 and 2006 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, 2007 and 2006. 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, 2007 and 2006 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.

103

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Accrued
Taxes. Income taxes receivable at December 31, 2007 were approximately $8.0
million and were recorded in other assets in the Consolidated Statements of Financial
Condition. Income taxes payable at December 31, 2006 were approximately $2.3 million
and were recorded in accrued expenses and other liabilities in the Consolidated Statements
of Financial Condition. We did not have any accrued taxes payable at December 31, 2007.

Pre-1988
Bad Debt Reserve. Our retained earnings at December 31, 2007 and 2006
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. Unrecognized Tax
Benefits

In
June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires that we
determine whether a tax position is more likely than not to be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the
technical merits of the position. Once it is determined that a position meets the
recognition threshold, the position is measured to determine the amount of benefit to be
recognized in the financial statements.

We
adopted FIN 48 on January 1, 2007 and, as a result, recognized no material adjustment in
our liability for unrecognized tax benefits. Unrecognized tax benefits, excluding interest
and penalties, were $4.3 million at December 31, 2007. Unrecognized tax benefits of
$144,000 and interest and penalties of $405,000 would favorably affect our effective tax
rate if recognized in future periods. Unrecognized tax benefits of $543,000 are related to
our UNFC acquisition and would reduce goodwill if recognized in future periods. The
following table summarizes our unrecognized tax benefits upon adoption and for the year
ended December 31, 2007:

104

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

|(Dollars in thousands)                                                         | Unrecognized Tax Benefits
|------------------------------------------------------------------------------ | -------------------------
|Unrecognized tax benefits at January 1, 2007                                   |                          
|Changes in unrecognized tax benefits for the three months ended:               |                          
|March 31, 2007                                                                 |                          
|June 30, 2007                                                                  |                          
|September 30, 2007                                                             |                          
|December 31, 2007                                                              |                          
|Changes in unrecognized tax benefits from settlements with taxing authorities  |                          
|Changes in unrecognized tax benefits from the lapse of statutes of limitations |                          
|for the three months ended September 30, 2007                                  |                          
|                                                                              
|Unrecognized tax benefits at December 31, 2007                                 |                          
|                                                                              

Any
interest and penalties related to uncertain tax positions are recorded in income tax
expense in the Consolidated Statements of Operations. At December 31, 2007, we had
approximately $402,000 of accrued interest payable related to uncertain tax positions
recorded in our Consolidated Statements of Financial Position.

We
anticipate that a reduction in unrecognized tax benefits of up to $4.2 million is
reasonably possible during the next 12 months. This reduction will be principally due to a
change in accounting method related to the timing of when certain deferred loan fees are
recognized for tax purposes. The Internal Revenue Service approved this change in
accounting method in the first quarter of 2008.

The
tax years of 2004 through 2006 remain open for examination by federal and state taxing
authorities.

# 16. 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.

105

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 17. Employee Benefit
Plans

Savings
Plan. We sponsor a defined contribution 401(k) profit sharing plan. At
December 31, 2007, 2006 and 2005, 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,
2007, 2006 and 2005 were $779,000, $691,000 and $604,000, respectively, and are included
in salaries and employee benefits in the accompanying Consolidated Statements of Operations.

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 $684,000, $855,000 and $1.0 million for the years ended December 31,
2007, 2006 and 2005, 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 $1.3
million, $1.9 million and $1.6 million for the years ended December 31, 2007, 2006
and 2005, respectively. The liability for this plan is included in accrued expenses and
other liabilities.

# 18. 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                   |                                
|Management Recognition and Retention Plan       |                                
|2003 Stock Option Plan                          |                                
|                                               
|Amount of stock-based compensation expense,     |                                
|before income tax benefit                       |                                
|                                               
|Amount of related income tax benefit recognized |                                
|                                               

106

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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.

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 have established the MRRP which is a
stock-based incentive plan. The shares awarded by the MRRP vest to participants at the
rate of 20% per year. 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, 2007. The following table summarizes shares
of our common stock that were subject to award and have been granted pursuant to the MRRP:

|                                                  | 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       |                        
|                                       

107

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

As
of December 31, 2007, we had $1.2 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 10 months. Excess tax benefits of $377,000 were realized
during the year ended December 31, 2007 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. 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 exercise price of the options is equal to the fair market value of the
common stock on the grant date. At December 31, 2007, 359,758 of these stock options
remain available for future grants.

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, 2007, 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 |                        
|                                                    

108

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# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Stock
Option Activity. The following table details stock options granted,
exercised and forfeited during the year ended December 31, 2007:

|(Dollars in thousands, except per share data)  | Number of Shares | Weighted Average Exercise Price | Weighted AverageRemainingContractual Term(In Years) | AggregateIntrinsicValue
|---------------------------------------------- | ---------------- | ------------------------------- | --------------------------------------------------- | -----------------------
|Stock options outstanding at beginning of year |                  |                                 |                                                     | 1,818,626              
|Stock options granted                          |                  |                                 |                                                     | --                     
|Stock options exercised                        |                  |                                 |                                                     | (25,900                
|Stock options forfeited                        |                  |                                 |                                                     | (500                   
|                                              
|Stock options outstanding at end of year       |                  |                                 |                                                     | 1,792,226              
|                                              
|Stock options exercisable at end of year       |                  |                                 |                                                     | 1,411,676              
|                                              

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

|(Dollars in thousands, except per share data)  | Number of Shares | Weighted Average Exercise Price | Weighted AverageRemainingContractual Term(In Years) | AggregateIntrinsicValue
|---------------------------------------------- | ---------------- | ------------------------------- | --------------------------------------------------- | -----------------------
|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              
|                                              

The
aggregate intrinsic value in the preceding tables for stock options outstanding is based
on the closing price of our stock at December 31, 2007 and 2006. The aggregate intrinsic
value in the preceding tables of stock options exercised was based on the closing price of
our stock on the exercise date.

109

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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 |                  |                                 |                              
|                                              
|Stock options granted                          |                  |                                 |                              
|Stock options exercised                        |                  |                                 |                              
|Stock options forfeited                        |                  |                                 |                              
|                                              
|Stock options outstanding at December 31, 2007 |                  |                                 |                              
|                                              

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, 2007, 2006 and 2005:

|                                       | 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, 2007, there was $592,000 of total unrecognized compensation expense related
to unvested stock options that will be expensed over a weighted average period of six
months.

110

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 19. 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%.
As of December 31, 2007, we exceed all capital requirements to which we are subject.

As
of December 31, 2007 and 2006, 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.

111

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

Regulatory
Capital.  The actual capital amounts and ratios as of December 31, 2007 and 2006
are presented in the following table:

|                            | Actual | For Capital
Adequacy Purposes | To be Well Capitalized
Under Prompt Corrective
Action Provisions
|--------------------------- | ------ | ----------------------------- | ----------------------------------------------------------------
|
|As of December 31, 2007:    |        |                               |                                                                 
|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, 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)            |        |                               |                                                                 
|                           

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.

During
the three months ended December 31, 2007, the Bank paid a $33.9 million dividend to the
Company. This dividend reduced the Banks regulatory capital; however,
the Company may provide additional support to the Bank if additional capital is needed to
maintain the Banks capital ratios.

112

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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

|                                             | At December 31, 2007
|-------------------------------------------- | --------------------
|
|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, 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                      |                     
|                                            

113

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 20. Lease Commitments

At
December 31, 2007, 2006 and 2005 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 $1.2 million, $1.1 million and $974,000 for the years
ended December 31, 2007, 2006 and 2005, 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
|-------------------------------- | ------
|2008                             |       
|2009                             |       
|2010                             |       
|2011                             |       
|2012                             |       
|Thereafter                       |       
|                                
|Total minimum lease payments due |       
|                                

# 21. 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, insurance and other escrow
funds and accrued interest payable.

Investment
and Mortgage-Backed Securities. For investment and mortgage-backed
securities, fair value represents 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 and 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 time deposits of similar remaining maturities.

114

---

# 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, 2007 and 2006 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.

115

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

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

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

At
December 31, 2007 and 2006, we had commitments to originate fixed-rate loans of
approximately $32.4 million and $72.8 million, respectively, and adjustable-rate loans of
approximately $35.7 million and $46.3 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 6.25% to 18.00% and 7.13% to 18.00% at December 31, 2007
and 2006, 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, 2007 and 2006, we had commitments to lend under unused warehouse
mortgage lines of credit of approximately $210.4 million and $331.9 million, respectively.
We also had commitments to lend customers unused consumer lines of credit at
December 31, 2007 and 2006 of approximately $133.2 million and $134.8 million,
respectively. In addition, at December 31, 2007 and 2006, we had commitments to lend
to customers pursuant to unused commercial lines of credit of approximately $221.5 million
and $226.9 million, respectively.

At
December 31, 2007 and 2006, outstanding commitments to purchase mortgage loans
aggregated approximately $33.0 million and $50.8 million, respectively, and commitments to
sell mortgage loans aggregated approximately $50.0 million and $41.5 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 Operations.

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, 2007 and 2006.

116

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 23. Condensed Parent
Company Financial Statements

The
following represents the condensed Statements of Financial Condition at December 31,
2007 and 2006 and condensed Statements of Operations and Cash Flows for the years ended
December 31, 2007, 2006 and 2005 for TierOne Corporation, the parent company.

# Statements of
Financial Condition                                             (Parent Company Only)

|                                            | At December 31,
|------------------------------------------- | ---------------
|
|Assets                                      |                
|Cash in subsidiary bank                     |                
|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               |                
|Accumulated other comprehensive loss, net   |                
|                                           
|Total stockholders equity                  |                
|                                           
|Total liabilities and stockholders equity  |                
|                                           

117

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# Statements of Operations
                                          (Parent Company Only)

|                                                              | Year Ended December 31,
|------------------------------------------------------------- | -----------------------
|
|Interest on investment securities                             |                        
|Interest on subsidiary bank note receivable                   |                        
|Other income                                                  |                        
|Interest expense - junior subordinated debentures             |                        
|Professional services expense related to CapitalSource merger |                        
|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 (loss) of subsidiary bank                  |                        
|                                                             
|Net income (loss)                                             |                        
|                                                             

118

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# Statements of Cash
Flows                                                  (Parent Company Only)

|                                                                    | Year Ended December 31,
|------------------------------------------------------------------- | -----------------------
|
|Reconciliation of net income (loss) to net cash provided by         |                        
|(used in) operating activities:                                     |                        
|Net income (loss)                                                   |                        
|Adjustments to reconcile net income to net cash used in             |                        
|operating activities:                                               |                        
|Net premium amortization of investment securities                   |                        
|Equity in loss (earnings) of subsidiary bank                        |                        
|Deferred income tax expense (benefit)                               |                        
|Changes in certain assets and liabilities:                          |                        
|Tax benefit receivable                                              |                        
|Accrued interest receivable                                         |                        
|Prepaid expenses and other assets                                   |                        
|Accrued interest payable                                            |                        
|Accrued expenses and other liabilities                              |                        
|                                                                   
|Net cash used in operating activities                               |                        
|                                                                   
|Cash from investing activities:                                     |                        
|Proceeds from maturity of investment securities, available for sale |                        
|Dividends received from subsidiary bank                             |                        
|Net repayment (advances) on note receivable from subsidiary bank    |                        
|                                                                   
|Net cash provided by investing activities                           |                        
|                                                                   
|Cash flows from financing activities:                               |                        
|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                              |                        
|                                                                   

119

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 24. Quarterly Financial
Information (Unaudited)

|                                            | Quarter Ended
|------------------------------------------- | -------------
|
|Total interest income                       |              
|Total interest expense                      |              
|                                           
|Net interest income                         |              
|Provision for loan losses                   |              
|                                           
|Net interest income (loss) after            |              
|provision for loan losses                   |              
|                                           
|Noninterest income                          |              
|Noninterest expense                         |              
|Income tax expense (benefit)                |              
|                                           
|Net income (loss)                           |              
|                                           
|Net income (loss) per common share, basic   |              
|Net income (loss) per common share, diluted |              
|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 |              
|                                   

120

---

# TierOne Corporation
and SubsidiariesNotes to Consolidated Financial Statements

# 25. Proposed Merger with
CapitalSource Inc.

On
May 17, 2007, the Company, CapitalSource Inc. (CapitalSource) and
CapitalSource TRS Inc. (CapitalSource TRS) entered into and announced an
Agreement and Plan of Merger (Merger Agreement). The Merger Agreement provides
that, upon the terms and subject to conditions set forth in the Merger Agreement, the
Company will merge with and into CapitalSource TRS (Merger), with
CapitalSource TRS continuing as the surviving corporation. The Merger Agreement and the
Merger were approved by the stockholders of the Company at a special meeting held on
November 29, 2007.

Consummation
of the Merger is subject to customary conditions, including, without limitation, the
accuracy of the representations and warranties of the parties (subject generally to a
material adverse effect standard) and regulatory approval. Although CapitalSource has
filed an application with the OTS for approval of transactions contemplated by the Merger
Agreement, the OTS has yet to deem the application either complete or approved, and no
assurance can be given that the OTS will approve the transaction.

The
Merger Agreement further provides that either the Company or CapitalSource (each acting
through its respective Board of Directors) has the right at any time after February 17,
2008 to unilaterally terminate the Merger Agreement, unless the failure to effect the Merger
by such date was due to the terminating partys failure to perform its obligations
and covenants under the Merger Agreement. The Company has indicated that its present
intent is not to terminate the Merger Agreement pending receipt of further comment from
the OTS. Conversely, CapitalSource has publicly
advised that its Board of Directors has authorized its Chairman and Chief Executive
Officer to either terminate the Merger Agreement or negotiate new terms for the
transaction. In light of the preceding sentence, the Company can provide no assurance that
the Merger will be completed even if all conditions precedent to the transaction (including
receipt of regulatory approval) are satisfied.

121

---

# 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 Annual
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, 2007
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, 2007, our internal control
over financial reporting was effective based on those criteria.

122

---

# Report of Independent
Registered Public Accounting Firm

The Board of Directors and
StockholdersTierOne Corporation:

We
have audited TierOne Corporations internal control over financial reporting as of
December 31, 2007, 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, included in the
accompanying Managements Annual Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on 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, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included
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, TierOne Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, 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 as of December 31, 2007 and 2006, and the related consolidated
statements of operations, changes in stockholders equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31, 2007, and our
report dated March 10, 2008expressed an unqualified opinion on those consolidated
financial statements.

/s/ KPMG LLP  Lincoln,NebraskaMarch
10, 2008

123

---

# Changes in Internal
Control Over Financial Reporting

There
were no changes in our internal control over financial reporting that occurred during the
quarter and year ended December 31, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

# Item 9B. Other
Information

None.

124

---

# 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 2008
Annual Meeting of Stockholders (Proxy Statement). In the event that such Proxy
Statement is not filed on or prior to 120 days after the Companys fiscal year end
(April 29, 2008), the Annual Report on Form 10-K will be amended to include the
information required by Instruction G to Form 10-K.

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. In the event that such
Proxy Statement is not filed on or prior to 120 days after the Companys fiscal year
end (April 29, 2008), the Annual Report on Form 10-K will be amended to include the
information required by Instruction G to Form 10-K.

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 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.

# 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. In the event that such Proxy Statement is not
filed on or prior to 120 days after the Companys fiscal year end (April 29, 2008),
the Annual Report on Form 10-K will be amended to include the information required by
Instruction G to Form 10-K.

125

---

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,
2007:

|Plan Category             | Number of Shares to be Issued 
Upon the Exercise of Outstanding 
Options, Restricted Stock Grants, 
Warrants and Rights | Weighted-Average 
Exercise Price of
Outstanding Options
Restricted Stock Grants,
Warrants and Rights | Number of Shares Remaining
Available for Future Issuance
(Excluding Shares Reflected 
in the First Column)
|------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------
|Equity compensation plans |                                                                                                                         |                                                                                                      |                                                                                                           
|plans approved by         | 2,086,146                                                                                                               | $          17.96                                                                                     | 460,411                                                                                                   
|security holders         
|Equity compensation plans
|not approved by security 
|holders                   | N/A                                                                                                                     | N/A                                                                                                  | N/A                                                                                                       
|                         
|Total                     | 2,086,146                                                                                                               | $          17.96                                                                                     | 460,411                                                                                                   
|                         

# Item 13. Certain
Relationships and Related Transactions, 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. In the event
that such Proxy Statement is not filed on or prior to 120 days after the Companys
fiscal year end (April 29, 2008), the Annual Report on Form 10-K will be amended to
include the information required by Instruction G to Form 10-K.

# Item 14. Principal
Accounting 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. In the event
that such Proxy Statement is not filed on or prior to 120 days after the Companys
fiscal year end (April 29, 2008), the Annual Report on Form 10-K will be amended to
include the information required by Instruction G to Form 10-K.

126

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# PART IV

# Item 15. Exhibits,
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, 2007 and 2006;
| | - | -----------------------------------------------------------------------------

| |  | Consolidated
Statements of Operations for the years ended December 31, 2007, 2006 and 2005;
| | - | -------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Changes in Stockholders Equity and Comprehensive Income for the years
ended December 31, 2007, 2006 and 2005;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005;
| | - | -------------------------------------------------------------------------------------------

| |  | 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.
| | -----------------------------------------------------------------------------------------------

127

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# 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 10, 2008 | 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 10, 2008 | By:/s/ Gilbert G. Lundstrom                      
|                      | Gilbert G. Lundstrom                             
|                      | Chairman of the Board and Chief Executive Officer
|Date:  March 10, 2008 | By:/s/ James A. Laphen                           
|                      | James A. Laphen                                  
|                      | Chief Operating Officer and Director             
|Date:  March 10, 2008 | By:/s/ Eugene B. Witkowicz                       
|                      | Eugene B. Witkowicz                              
|                      | Chief Financial Officer and Corporate Secretary  
|                      | (Principal Accounting Officer)                   
|Date:  March 10, 2008 | By:/s/ Campbell R. McConnell                     
|                      | Campbell R. McConnell                            
|                      | Director                                         
|Date:  March 10, 2008 | By:/s/ Joyce Person Pocras                       
|                      | Joyce Person Pocras                              
|                      | Director                                         
|Date:  March 10, 2008 | By:/s/ Ann Lindley Spence                        
|                      | Ann Lindley Spence                               
|                      | Director                                         
|Date:  March 10, 2008 | By:/s/ Charles W. Hoskins                        
|                      | Charles W. Hoskins                               
|                      | Director                                         

128

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# Exhibit Index

|No.   | Exhibits                                                                                                    | Location      
|----- | ----------------------------------------------------------------------------------------------------------- | --------------
|2.1   | Stock Purchase Agreement, dated as of March 30, 2004, among TierOne Corporation,                            |               
|      | United Nebraska Financial Co. and the Shareholders of United Nebraska Financial Co.                         | (1)           
|2.2   | Agreement and Plan of Merger, dated as of May 17, 2007, by and among CapitalSource Inc.,                   
|      | CapitalSource TRS Inc. and TierOne Corporation (a)                                                          | (8)           
|3.1   | Articles of Incorporation of TierOne Corporation                                                            | (2)           
|3.2   | Bylaws of TierOne Corporation                                                                               | (2)           
|4.0   | Forms of Stock Certificate of TierOne Corporation                                                           | (2)           
|10.1  | Amended and Restated Employment Agreement between TierOne Bank and Gilbert G. Lundstrom*                    | (6)           
|10.2  | Amended and Restated Employment Agreement between TierOne Bank and James A. Laphen*                         | (6)           
|10.3  | Amended and Restated Employment Agreement between TierOne Corporation and Gilbert G. Lundstrom              | (6)           
|10.4  | Amended and Restated Employment Agreement between TierOne Corporation and James A. Laphen*                  | (6)           
|10.5  | Amended and Restated 1993 Supplemental Retirement Plan Agreement between TierOne Bank and                  
|      | Gilbert G. Lundstrom*                                                                                       | (6)           
|10.6  | Form of Amended and Restated Three-Year Change in Control Agreement between TierOne Bank,                  
|      | TierOne Corporation and certain executive officers*                                                         | (6)           
|10.7  | Form of Amended and Restated Two-Year Change in Control Agreement between TierOne Bank,                    
|      | TierOne Corporation and certain executive officers*                                                         | (6)           
|10.8  | TierOne Bank Amended and Restated Employee Severance Plan*                                                  | (6)           
|10.9  | Amended and Restated Supplemental Executive Retirement Plan for the TierOne Corporation Employee           
|      | Stock Ownership Plan*                                                                                       | (6)           
|10.10 | Amended and Restated Supplemental Executive Retirement Plan for the TierOne Bank Savings Plan*              | (6)           
|10.11 | TierOne Bank Amended and Restated Deferred Compensation Plan*                                               | Filed Herewith
|10.12 | Fourth Amended and Restated Consultation Plan for Directors*                                                | (6)           
|10.13 | TierOne Bank Management Incentive Compensation Plan*                                                        | (4)           
|10.14 | Form of Trust Agreement for Deferred Compensation and Supplemental Executive Retirement Plans of           
|      | TierOne Corporation and TierOne Bank*                                                                       | (6)           
|10.15 | Amended and Restated 2003 Stock Option Plan*                                                                | (6)           
|10.16 | Form of Non-employee Director Compensatory Stock Option Agreement for use under the                        
|      | 2003 Stock Option Plan*                                                                                     | (5)           
|10.17 | Form of Employee Compensatory Stock Option Agreement for use under the 2003 Stock Option Plan*              | (5)           
|10.18 | Form of Employee Incentive Stock Option Agreement for use under 2003 Stock Option Plan*                     | (5)           
|10.19 | Amended and Restated 2003 Management Recognition and Retention Plan and Trust Agreement*                    | (6)           
|10.20 | Form of award agreements for use under the Management Recognition and Retention                            
|      | Plan and Trust Agreement*                                                                                   | (5)           
|10.21 | First Amendment to Amended and Restated Employment Agreement between TierOne Corporation and               
|      | Gilbert G. Lundstrom*                                                                                       | (7)           
|10.22 | First Amendment to Amended and Restated Employment Agreement between TierOne Corporation and               
|      | James A. Laphen*                                                                                            | (7)           
|10.23 | First Amendment to TierOne Bank Savings Plan Amended and Restated Supplemental Executive                   
|      | Retirement Plan*                                                                                            | (7)           
|21    | Subsidiaries of the Registrant - Item 1. Business - Subsidiary Activities of TierOne Corporations Annual |               
|      | Report on Form 10-K for the year ended December 31, 2007 is incorporated by reference herein                | --            
|23    | Consent of KPMG LLP                                                                                         | Filed Herewith
|31.1  | Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted       
|      | pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                   | Filed Herewith
|31.2  | Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted       
|      | pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                   | Filed Herewith
|32.1  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002          | Filed Herewith
|32.2  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002          | Filed Herewith
|     

|*   | Denotes a management contract or compensatory plan or arrangement.                               
|--- | -------------------------------------------------------------------------------------------------
|(a) | The disclosure schedules and exhibits to the Agreement and Plan of Merger were                   
|    | not filed with the Agreement. TierOne Corporation has agreed to furnish supplementally           
|    | a copy of any such schedules or exhibits to the Securities and Exchange Commission               
|    | upon request.                                                                                    
|(1) | Incorporated by reference to Exhibit 2 of TierOne Corporations Form 8-K filed on                
|    | August 31, 2004.                                                                                 
|(2) | Incorporated by reference to 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 to TierOne Corporations definitive proxy                       
|    | statement filed by TierOne Corporation with the SEC on March 11, 2003.                           
|(4) | Incorporated by reference to TierOne Corporation's Annual Report on                              
|    | 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 to 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 to TierOne Corporations Form 8-K filed on August 2, 2006.             
|(7) | Incorporated by reference to TierOne Corporations Annual Report on Form 10-K for the year       
|    | ended December 31, 2006 filed by TierOne Corporation with the SEC on March 12, 2007.             
|(8) | Incorporated by reference to TierOne Corporations Form 8-K filed on May 23, 2007.               
|   

129