Now that its long-delayed sale to a Maryland real estate investment trust has officially been called off, TierOne Corp. is focused on getting its house back in order.
The $3.5 billion-asset Lincoln, Neb., company, an active residential construction lender, has been hard hit by the real estate downturn, particularly in Florida and Las Vegas. Last year its percentage of nonperforming loans to total loans more than quadrupled, to 4.3% at yearend, and Gilbert G. Lundstrom, its chief executive officer, said this week that addressing the problem credits is its top priority.
Mr. Lundstrom also said that TierOne is scaling back its residential construction lending and beefing up its commercial real estate and agricultural lending, and that at this point it has no intention of trying to find another buyer.
"We are going to go back and do what we did before, and that is run a very successful bank," he said.
TierOne was not soliciting suitors when CapitalSource Inc. of Chevy Chase, Md., came knocking with an offer to buy the company for $652 million in cash and stock, or roughly 1.8 times its book value.
The deal, announced in May, would have given CapitalSource a stable source of deposit funding, lowering its lending costs. For TierOne, which would have kept its name and operated as a subsidiary of CapitalSource, the deal was attractive because it likely would have gotten larger spreads, allowing it to pay higher rates on deposits, Mr. Lundstrom said.
But the deal had been on shaky ground for months before it collapsed last week, mainly because of the declining market values of both companies and TierOne's mounting credit problems.
The Office of Thrift Supervision still had not approved the transaction by mid-February, when CapitalSource said its board had given its CEO permission to call it off at any time without paying a penalty. The deal was terminated March 2.
Most of TierOne's troubles can be attributed to its residential construction lending outside its branch network, which is confined to Nebraska, Iowa, and Kansas. (It has loan production offices in Florida, Nevada, Arizona, Colorado, Minnesota, and North Carolina.) The company announced March 3 that it had $128.5 million of nonperforming loans at yearend, and 45% of the problem credits were related to residential construction, primarily in southwestern Florida and Las Vegas.
Ed Swotek, a TierOne senior vice president, said it began slowing its lending in Florida in 2005 — loans there have dropped 67% since then, to $168.7 million — and remains "very cautious" about lending in Las Vegas.
As the company is scaling back in those markets, it is lending more in its home markets. Last year it increased its loans by 3.1% in Nebraska, to $1.4 billion, while increasing them 27% in Iowa, to $135.8 million.
Most of those loans are in commercial real estate and agriculture — a sector that Mr. Lundstrom said offers significant opportunity, as a result of heightened demand for corn-based ethanol.
And despite its recent troubles in markets far from home, TierOne said it will continue to explore lending opportunities outside Nebraska, Iowa, and Kansas.
When asked which areas the company is targeting, Mr. Swotek would say only that it plans to be "very careful and very selective" and is looking mostly at commercial real estate loans.
"Diversity will be the key ingredient," he said. "But we will be acutely focused on strategic growth in commercial real estate."
In the past TierOne has made commercial real estate loans for hotels, multifamily housing projects, and retail centers.
Mr. Lundstrom said that even though the deal with CapitalSource presented a "unique opportunity" for TierOne, it had not been shopping for a buyer, and it is not doing so now.
Jeff K. Davis, an analyst at First Horizon National Corp's FTN Midwest Securities Corp., said that since any buyer might be wary of inheriting TierOne's loan problems, "the odds would not seem to favor a deal" right now anyway.
"Their nonperforming assets are very high, and we are still early in this credit cycle," said Mr. Davis, who covers CapitalSource but not TierOne. "They are going to have their work cut out for them in 2008."
(Analysts dropped their coverage of TierOne after the deal with CapitalSource was announced.)
Theodore Kovaleff, an analyst at Sky Capital LLC in New York, said TierOne is not in a position where it needs to find a buyer, though he warned that the situation could change if its credit quality worsens.
But he said he would be surprised if TierOne were still independent two years from now.
"My expectations are that within two years TierOne will be the target of another acquisition," said Mr. Kovaleff, who sold his TierOne shares this month.
For now TierOne's strategy of focusing on commercial real estate and agricultural lending is wise, he said. "There is a lot of opportunity in agriculture. Farmers are getting rich by sticking their corncobs in our gas tanks."
