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.

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, 2008, the Company had total assets of $3.3 billion, net loan receivables of $2.8 billion, total deposits of $2.3 billion and stockholders equity of $270.6 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 other 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 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

· 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 monthly 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 and Mortgage-Backed 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 Operations 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. 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 indicated 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 year ended December 31, 2008.

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, SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities and SEC Staff Accounting Bulletin No. 109.

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 earnings during the loan commitment period is recorded in our results of operations.

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.

Other Real Estate Owned and Repossessed Assets. 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 other 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 other real estate owned and repossessed assets is intended to include amounts for estimated losses as a result of impairment in value of real property after repossession. We review our other 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.

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. We consider the scheduled reversals of deferred tax liabilities and carryback opportunities in making the assessment of the necessity of a valuation allowance.

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.

Comparison of Financial Condition at December 31, 2008 and 2007

General. Our total assets were $3.3 billion at December 31, 2008, a decrease of $219.8 million, or 6.2%, compared to $3.5 billion at December 31, 2007.

Cash and Cash Equivalents. Our cash and cash equivalents totaled $249.9 million at December 31, 2008, an increase of $8.4 million, or 3.5%, compared to $241.5 million at December 31, 2007. The increase was primarily attributable to loan repayments which exceeded deposit outflows during the year.

Investment Securities. Our available for sale investment securities totaled $137.7 million at December 31 , 2008, an increase of $7.2 million, or 5.5%, compared to $130.5 million at December 31, 2007. During the year ended December 31, 2008, security purchases totaled $453.7 million which were substantially offset by maturing investment securities totaling $447.3 million. The securities purchased during 2008 were primarily agency obligations that were purchased to collateralize deposits. Losses due to other-than-temporary impairment were $1.4 million for the year ended December 31, 2008. These losses related to a $906,000 loss on the Asset Management Fund (ARM Fund), a $519,000 loss on Freddie Mac preferred stock and a $9,000 loss on Farmer Mac preferred stock.

Mortgage-Backed Securities. Our mortgage-backed securities, all of which are recorded as available for sale, totaled $3.1 million at December 31, 2008, a decrease of $3.6 million, or 53.2%, compared to $6.7 million at December 31, 2007. The decrease in our mortgage-backed securities was the result of $3.6 million of principal payments received during the year ended December 31, 2008.

Loans Receivable. Net loans totaled $2.8 billion at December 31, 2008, a decrease of $193.9 million, or 6.5%, compared to $3.0 billion at December 31, 2007. During the year ended December 31, 2008, we originated $1.2 billion of loans (exclusive of warehouse mortgage lines of credit) and purchased $427.2 million of loans. These increases were offset by $1.7 billion of principal repayments (exclusive of warehouse mortgage lines of credit) and charge-offs and $365.8 million of loan sales.

The decrease in net loans at December 31, 2008 was primarily attributable to a decrease in loan originations related to our tightening of our credit policies and our reduction of exposure in selected business lines and geographic markets due to the continued deterioration in these real estate markets and the economy in general. See "Loan Quality and Nonperforming Assets" for a discussion on the business lines and geographic markets in which we have reduced our exposure.

The following table details the composition of our loan portfolio at the dates indicated:

                                                          At December 31,                 Increase
(Dollars in thousands)                              2008                  2007           (Decrease)       % Change

One-to-four family residential (1)             $       384,614       $       314,623     $    69,991          22.25 %
Second mortgage residential                             76,438                95,477         (19,039 )       (19.94 )
Multi-family residential                               199,152               106,678          92,474          86.69
Commercial real estate                                 356,067               370,910         (14,843 )        (4.00 )
Land and land development                              396,477               473,346         (76,869 )       (16.24 )
Residential construction                               229,534               513,560        (284,026 )       (55.31 )
Commercial construction                                360,163               540,797        (180,634 )       (33.40 )
Agriculture - real estate                               95,097                91,068           4,029           4.42
Business                                               250,619               252,712          (2,093 )        (0.83 )
Agriculture - operating                                106,429               100,365           6,064           6.04
Warehouse mortgage lines of credit                     133,474                86,081          47,393          55.06
Consumer                                               373,087               397,247         (24,160 )        (6.08 )
Total loans                                          2,961,151             3,342,864        (381,713 )       (11.42 )
Unamortized premiums, discounts
and deferred loan fees                                   9,558                 9,451             107           1.13
Loans in process (2):
Land and land development                              (50,622 )             (84,765 )        34,143         (40.28 )
Residential construction                               (32,846 )            (139,514 )       106,668         (76.46 )
Commercial construction                               (105,021 )            (151,907 )        46,886         (30.86 )
Net loans                                      $     2,782,220       $     2,976,129     $  (193,909 )        (6.52 ) %

(1) Includes loans held for sale               $        13,917       $         9,348     $     4,569          48.88 %

(2) Loans in process represents the undisbursed portion of construction and land development loans.

At December 31, 2008, the outstanding balance (net of loans in process) of our residential construction loans was $196.7 million, a decrease of $177.4 million, or 47.4%, compared to $374.0 million at December 31, 2007. The outstanding balance (net of loans in process) of our land and land development loans was $345.9 million at December 31, 2008, a decrease of $42.7 million, or 11.0%, compared to $388.6 million at December 31, 2007. The outstanding balance (net of loans in process) of our commercial construction loans was $255.1 million at December 31, 2008, a decrease of $133.7 million, or 34.4%, compared to $388.9 million at December 31, 2007.

The increase in multi-family residential loans at December 31, 2008 was primarily the result of the completion of construction on several multi-family development projects. Upon completion of construction, the loans were reclassified to multi-family residential from commercial construction.

We maintain a corporate policy of not participating in subprime residential real estate lending or negative amortizing mortgage products for loans placed into our portfolio. The OTS, our primary 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 purchased collateralized loan obligations, collateralized debt obligations, structured investment vehicles or asset-backed commercial paper.

Redefining our Primary Lending Market Area. As previously discussed, on June 30, 2008, we announced the closing of all nine of our loan production offices in an effort to focus our lending activity in our primary market area of Nebraska, Iowa and Kansas. At December 31, 2008, $1.6 billion, or 53.7%, of our total loans were secured by property located in Nebraska, Iowa and Kansas. Loans collateralized by property in states in which we formerly operated a loan production office (Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina) totaled $763.6 million, or 25.8%, of our total loan portfolio at December 31, 2008. Loans in all other states totaled $607.6 million, or 20.5%, of our total loan portfolio.

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,

(Dollars in thousands)                        2008             %            2007             %

Within our Primary Market Area:

Nebraska                                   $ 1,383,732         46.73 %   $ 1,367,659         40.91 %
Iowa                                           123,330          4.16         135,885          4.06
Kansas                                          82,834          2.80          69,180          2.07

Total within our Primary Market Area         1,589,896         53.69       1,572,724         47.04

Within Former Loan Production Office States:
Nevada                                         192,624          6.51         247,260          7.40
Colorado                                       157,924          5.33         237,441          7.10
Arizona                                        144,359          4.88         161,339          4.83
Minnesota                                      132,057          4.46         157,985          4.73
North Carolina                                  63,768          2.15         121,594          3.64
Florida                                         72,912          2.46         168,765          5.05

Total within former loan production
office states                                  763,644         25.79       1,094,384         32.75

Other States:
South Carolina                                  66,786          2.26         103,153          3.09
California                                      68,642          2.32          78,817          2.36
Texas                                           76,162          2.57          74,390          2.22
Illinois                                        63,502          2.14          70,891          2.12
Oregon                                          45,078          1.52          37,266          1.11
Washington                                      31,052          1.05          29,736          0.89
Other States                                   256,389          8.66         281,503          8.42

Total other states                             607,611         20.52         675,756         20.21

Total loans                                $ 2,961,151        100.00 %   $ 3,342,864        100.00 %

Allowance for Loan Losses. Our allowance for loan losses decreased $3.3 million, or 5.0%, to $63.2 million at December 31, 2008 compared to $66.5 million at December 31, 2007.

                                                                     At or for the Year Ended
                                                                           December 31,

(Dollars in thousands)                                                 2008              2007

Allowance for loan losses at beginning of year                     $      66,540       $  33,129
Charge-offs                                                              (90,398 )       (33,037 )
Recoveries on loans previously charged-off                                 2,288           1,066
Provision for loan losses                                                 84,790          65,382

Allowance for loan losses at end of year                           $      63,220       $  66,540

Allowance for loan losses as a percentage of net loans                      2.27 %          2.24 %
. . .