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 Forward-Looking Statements and the risk factors described in Part 2, Item 1A. of this Quarterly Report on Form 10-Q.

General

TierOne Bank ("Bank"), a subsidiary of TierOne Corporation ("Company"), is a $3.2 billion federally chartered stock savings bank headquartered in Lincoln, Nebraska. Established in 1907, the Bank offers customers a wide variety of full-service consumer, commercial and agricultural banking products and services through a network of 69 banking offices located in Nebraska, Iowa and Kansas. Product offerings include residential, commercial and agricultural real estate loans; consumer, construction, business and agricultural operating loans; warehouse mortgage lines of credit; consumer and business checking and savings plans; investment and insurance services; and telephone and internet banking.

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 results of operations are also affected by our provision for loan losses, noninterest income, noninterest expense and income tax expense. Noninterest income generally includes fees and service charges, debit card fees, net income from real estate operations, net gain on sales of investment securities, loans held for sale and real estate owned and other operating income. Noninterest expense consists of salaries and employee benefits, occupancy, data processing, advertising and other operating expense. Our results of operations 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.

As used in this report, unless the context otherwise requires, the terms "we," "us," or "our" refer to the Company and the Bank.

Termination of Acquisition Agreement. On May 17, 2007, we entered into and announced an Agreement and Plan of Merger ("Merger Agreement") with CapitalSource Inc. and CapitalSource TRS Inc. On March 20, 2008, our Board of Directors terminated the Merger Agreement. Pursuant to the terms of the Merger Agreement, either party had the right to terminate the Merger Agreement if the proposed merger was not completed by February 17, 2008. No termination fee was payable by either company as a result of the termination of the Merger Agreement.

TransLand Financial Services Loan Sale. On June 25, 2008, we announced the sale of over 300 delinquent residential construction loans previously originated by TransLand Financial Services Inc. ("TransLand"), a Florida-based mortgage brokerage firm. This sale comprised $12.7 million, net of charge-offs, of our total nonperforming residential construction loans.

Loan Production Office Closings. On June 30, 2008, we announced the closing of all of our loan production offices in an effort to focus our lending activity in our primary market area of Nebraska, Iowa and Kansas. We completed the closure of all of our loan production offices during the three months ended September 30, 2008. The lending offices that were closed were located in Phoenix, Arizona; Colorado Springs, Denver and Fort Collins, Colorado; Orlando, Florida; Minneapolis, Minnesota; Las Vegas, Nevada and Charlotte and Raleigh, North Carolina. We will continue to service loans made to existing customers. At the current time, customer transition and collection support functions for existing customers will continue in Charlotte, Las Vegas, Minneapolis and Orlando.

Board of Director Appointment. On September 22, 2008, we announced that Ann Lindley Spence had submitted her resignation as a director of the Company and the Bank. On that same day, to fill the vacancy created by Ms. Spence's retirement, the Company's Board of Directors appointed Samuel P. Baird as an independent director of the Company for a term expiring at the 2010 annual meeting of stockholders. Mr. Baird, who was Director of the Nebraska Department of Banking and Finance from 1999-2004, has over 35 years of experience in banking, real estate, insurance and law. Mr. Baird was also appointed to the Audit and Compensation Committees of the Company's Board of Directors as well as director of the Bank.

Regulatory Developments. As a result of operating losses which were reported during the previous four quarterly periods during the current economic downturn, the Company is subject to certain limitations imposed by the Office of Thrift Supervision ("OTS"). We are restricted from: (1) paying dividends, (2) repurchasing common stock, and (3) making any payments on trust preferred securities without the prior written notice of non-objection of the OTS. To support our capital position during the current period of market volatility, the Bank currently has no requests pending before the OTS to pay dividends or repurchase stock. The Company has also agreed with the OTS to contribute additional capital above levels required for the Bank to be deemed "well-capitalized" for regulatory purposes. The Company has contributed $19.1 million to the Bank during the first nine months of 2008 and subsequent to September 30, 2008, contributed an additional $10.0 million to the Bank. The Bank is required to maintain a ratio of 11.0% (as opposed to 10.0%) with respect to total risk-based capital to risk-weighted assets and a ratio of 8.5% (as opposed to 6.0%) with respect to Tier 1 capital to risk-weighted assets. As of September 30, 2008, the Bank exceeded these elevated ratios before the subsequent $10.0 million capital contribution. See Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Capital.

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. These policies 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 reported financial condition and results of operations.

Income Recognition. We recognize interest income by methods that conform to U.S. generally accepted accounting principles ("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

• Determining reserve factors to be applied to pass loans based upon loan type.

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

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

• 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.

In addition, we use information about specific borrower situations, including their financial position, work-out plans and estimated collateral values under various liquidation scenarios to estimate the risk and amount of potential loss.

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

• The fair value of the collateral if the loan is collateral dependent;

• The present value of expected future cash flows; or

• The loan's observable market price.

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

Goodwill and Other Intangible Assets. We recorded goodwill as a result of our 2004 acquisition of United Nebraska Financial Co. ("UNFC"). We tested this goodwill for impairment annually during the third quarter of each year, or between annual assessment dates whenever events or significant changes in circumstances indicate that the carrying value may be impaired. We performed a goodwill impairment test as of March 31, 2008 due to adverse changes in the business climate. As a result of a decline in the market value of our common stock to levels below our book value, we determined that the entire amount of our goodwill was impaired, and we recorded a $42.1 million goodwill impairment charge to write-off our goodwill at March 31, 2008.

The value of core deposit intangible assets acquired in connection with the UNFC transaction and our acquisition of Marine Bank's banking office in Omaha, Nebraska, 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. No events or circumstances triggered an impairment analysis of our core deposit intangible assets during the nine months ended September 30, 2008.

Mortgage Servicing Rights. On January 1, 2007 we adopted Statement of Financial Accounting Standard ("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 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.

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. 109, Written Loan Commitments Recorded at Fair Value Through Earnings. Accordingly, the fair value of these derivatives at the end of the reporting period is based on a quoted market price that closely approximates the amount that would have been recognized if the loan commitment was funded and sold.

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

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

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.

Under current federal income tax rules we have the ability to carry back net operating losses two years and recover federal income taxes paid. Therefore, we expect to generate federal income tax cash refunds for the net operating loss we will incur for 2008. We utilize this ability to carry back our federal net operating losses to support our position that the benefit of our deferred tax assets will be realized. Furthermore, we will have exhausted our ability to carry back net operating losses at December 31, 2008. If we continue to experience net losses and our future level of net deferred tax assets should increase in 2009, we may be required to establish a valuation allowance against our deferred tax assets. For example, in the event our provision for loan losses significantly exceeds our loan charge-offs in future years, we may be required to establish a valuation allowance against our deferred tax assets. The establishment of a valuation allowance related to our deferred tax assets could adversely affect our future results of operations.

On January 1, 2007, we adopted Financial Accounting Standards Board ("FASB") 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.

General. Our total assets were $3.2 billion at September 30, 2008, a decrease of $321.0 million, or 9.1%, compared to $3.5 billion at December 31, 2007.

Cash and Cash Equivalents. Our cash and cash equivalents totaled $123.7 million at September 30, 2008, a decrease of $117.7 million, or 48.8%, compared to $241.5 million at December 31, 2007. The decrease was primarily attributable to decreases in deposits and FHLBank advances and an increase in investment securities.

Investment Securities. Our available for sale investment securities totaled $163.1 million at September 30 , 2008, an increase of $32.6 million, or 25.0%, compared to $130.5 million at December 31, 2007. During the nine months ended September 30, 2008, security purchases totaled $363.9 million which were substantially offset by maturing investment securities totaling $331.5 million. The securities purchased during 2008 were primarily agency obligations that were purchased to collateralize deposits. Losses due to other-than-temporary impairment were $355,000 and $949,000 on investment securities for the three and nine months ended September 30, 2008, respectively.

Mortgage-Backed Securities. Our mortgage-backed securities, all of which are recorded as available for sale, totaled $3.6 million at September 30, 2008, a decrease of $3.1 million, or 46.0%, compared to $6.7 million at December 31, 2007. The decrease in our mortgage-backed securities was the result of $3.1 million of principal payments received during the nine months ended September 30, 2008.

                                                                                Increase
(Dollars in thousands)                 September 30, 2008  December 31, 2007   (Decrease)   % Change
-------------------------------------- ------------------ ------------------- ------------ -----------
One-to-four family residential
(1)                                      $     364,989     $        314,623   $   50,366      16.01  %
Second mortgage residential                     80,182               95,477      (15,295 )   (16.02 )
Multi-family residential                       181,613              106,678       74,935      70.24
Commercial real estate                         335,668              370,910      (35,242 )    (9.50 )
Land and land development                      419,070              473,346      (54,276 )   (11.47 )
Residential construction                       269,097              513,560     (244,463 )   (47.60 )
Commercial construction                        424,898              540,797     (115,899 )   (21.43 )
Agriculture - real estate                      100,533               91,068        9,465      10.39
Business                                       234,151              252,712      (18,561 )    (7.34 )
Agriculture - operating                        106,980              100,365        6,615       6.59
Warehouse mortgage lines of
credit                                          72,583               86,081      (13,498 )   (15.68 )
Consumer                                       378,568              397,247      (18,679 )    (4.70 )
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   Total loans                               2,968,332            3,342,864     (374,532 )   (11.20 )
------------------------------------------------------------------------------------------------------
Unamortized premiums, discounts
  and deferred loan fees                         9,526                9,451           75       0.79
Loans in process (2):
  Land and land development                    (55,336 )            (84,765 )     29,429     (34.72 )
. . .