**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý**                                                                                                                                                                                                                 | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                       |
| **for  the quarterly period ended March 31, 2003**                                                                                                                                                                         |
|                                                                                                                                                                                                                       |
| **o**                                                                                                                                                                                                                      | **TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE  ACT**                         |
|                                                                                                                                                                                                                       |
| **For  the transition period  from               to               ** |
|                                                                                                                                                                                                                       |
| **Commission  File Number: 001-15215**                                                                                                                                                                                     |

 

| **SPECTRUM BANCORPORATION, INC.**                                                |
|----------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                          |
|                                                                             |
| **Iowa**                                                                         |   | **42-0867112** |
| (State or other  jurisdiction  of incorporation or organization)                 |   | (I.R.S. Employer  Identification No.) |
|                                                                             |
| **10834  Old Mill Road, Suite One, Omaha, NE 68154**                        |
| (Address of  principal executive office)     (Zip code) |
|                                                                             |
| **(402)  333-8330**                                                              |
| (Registrant’s  telephone number, including area code)                       |

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for past 90days. Yes  ý  No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes  o  No  ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practical date.

 

| **Class**                      |   | **Outstanding at May 9, 2003** |
|--------------------------------|--------|--------------------------------|
|                           |   |                           |
| Common Stock,  $1.00 par value |   | 124,952 shares                 |

 

 

----

 

SPECTRUMBANCORPORATION, INC.INDEX TO FORM 10-Q FOR THE QUARTERLYPERIOD ENDED MARCH 31, 2003

 
|                            | **PAGE**                                                                                                  |
|---------------------------------|-----------------------------------------------------------------------------------------------------------|
|                            |
| **FORWARD-LOOKING  STATEMENTS** | 3                                                                                                         |
|                            |
| **PART I:**                     | **FINANCIAL INFORMATION**                                                                                 |
|                            |
|                            | ITEM 1:                                                                                                   | FINANCIAL STATEMENTS |
|                            |
|                            | Consolidated  Balance Sheets at March 31, 2003(unaudited) and June 30, 2002                               | 4 |
|                            |
|                            | Consolidated  Statements of Income - Three months ended March 31, 2003 and March 31, 2002  (unaudited)    | 5 |
|                            |
|                            | Consolidated  Statements of Income - Nine months ended March 31, 2003 and March 31, 2002  (unaudited)     | 6 |
|                            |
|                            | Consolidated  Statements of Cash Flows - Nine months ended March 31, 2003 and March 31,  2002 (unaudited) | 7 |
|                            |
|                            | Notes  to Consolidated Financial Statements                                                               | 8 |
|                            |
|                            | ITEM 2:                                                                                                   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION | 11 |
|                            |
|                            | ITEM  3:                                                                                                  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK | 15 |
|                            |
|                            | ITEM 4:                                                                                                   | CONTROLS AND PROCEDURES | 15 |
|                            |
| **PART II:**                    | **OTHER INFORMATION**                                                                                     |
|                            |
|                            | ITEM  1:                                                                                                  | LEGAL PROCEEDINGS | 16 |
|                            |                                                                                                      |   |
|                            | ITEM  2:                                                                                                  | CHANGES IN SECURITIES AND USE  OF PROCEEDS | 16 |
|                            |                                                                                                      |   |
|                            | ITEM  3:                                                                                                  | DEFAULTS UPON SENIOR  SECURITIES | 16 |
|                            |                                                                                                      |   |
|                            | ITEM 4:                                                                                                   | SUBMISSION OF MATTERS TO  A VOTE OF SECURITY HOLDERS | 16 |
|                            |                                                                                                      |   |
|                            | ITEM 5:                                                                                                   | OTHER INFORMATION | 16 |
|                            |                                                                                                      |   |
|                            | ITEM  6:                                                                                                  | EXHIBITS AND REPORTS ON FORM  8-K | 16 |
|                            |
|                            | SIGNATURES                                                                                                | 17 |
|                            | CERTIFICATION  BY CHIEF EXECUTIVE OFFICER                                                                 | 18 |
|                            | CERTIFICATION  BY CHIEF FINANCIAL OFFICER                                                                 | 19 |
|                            | CERTIFICATION BY  CHIEF EXECUTIVE OFFICER                                                                 | 20 |
|                            | CERTIFICATION BY  CHIEF FINANCIAL OFFICER                                                                 | 21 |
|                                 |                                                                                                           |  |  |  |  |

 

2

----

 

**FORWARD****-LOOKING STATEMENTS**

 

Thisreport includes certain forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. Such statements can includewords such as “may”, “believe”, “will”, “anticipated”, “estimated”,“projected”, “could”, “should”, “plan” or similar expressions.  Forward-looking statements are based onmanagement’s current expectations. Factors that might cause future results to differ from management’sexpectations include, but are not limited to: fluctuations in interest rates,inflation, the effect of regulatory or government legislative changes, expectedcost savings and revenue growth not fully realized, the progress of strategicinitiatives and whether realized within expected time frames, general economicconditions, adequacy of allowance for loan losses, costs or difficulties associatedwith restructuring initiatives, changes in accounting policies or guidelines,changes in the quality or composition of the Company’s loans and investmentportfolios, technology changes and competitive pressures in the geographic andbusiness areas where the Company conducts its operations.

 

Theserisks and uncertainties should be considered in evaluating forward-lookingstatements and undue reliance should not be placed on such statements.  Additional information concerning theCompany and its business, including other factors that could materially affectthe Company’s financial results, is included in the Company’s filings with theSecurities and Exchange Commission.

 

3

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**PART I****FINANCIAL INFORMATION**

 
| **ITEM  1****:** | **FINANCIAL  STATEMENTS** |
|------------------|---------------------------|

 

**SPECTRUMBANCORPORATION, INC.Consolidated Balance Sheets**(In thousands, except share data)

 
|                                                                                                                                                                                                                                            |   | **March 31,  2003** |      | **June 30,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|--------------------|--------|
|                                                                                                                                                                                                                                            |   | **(unaudited)**     |      |               |   |
| **Assets**                                                                                                                                                                                                                                      |   |                |      |               |   |
| Cash  and due from banks                                                                                                                                                                                                                        |   | $                   | 61,642    |               | $      | 52,927 |   |
| Federal  funds sold and other                                                                                                                                                                                                                   |   | 44,865              |      | 16,351             |   |
| Total  cash and cash equivalents                                                                                                                                                                                                                |   | 106,507             |      | 69,278             |   |
|                                                                                                                                                                                                                                            |   |                |      |               |   |
| Certificates  of deposit                                                                                                                                                                                                                        |   | 99                  |      | 497                |   |
| Securities  available for sale                                                                                                                                                                                                                  |   | 323,975             |      | 334,059            |   |
| Securities  held to maturity                                                                                                                                                                                                                    |   | 110                 |      | 0                  |   |
| Loans,  net of allowance for loan losses of $21,581and $20,344                                                                                                                                                                                  |   | 1,539,708           |      | 1,475,856          |   |
| Premises  and equipment, net                                                                                                                                                                                                                    |   | 43,385              |      | 41,803             |   |
| Accrued  interest receivable                                                                                                                                                                                                                    |   | 13,798              |      | 15,089             |   |
| Core  deposit intangible and other, net                                                                                                                                                                                                         |   | 3,851               |      | 5,294              |   |
| Goodwill,  net                                                                                                                                                                                                                                  |   | 45,930              |      | 43,913             |   |
| Mortgage  servicing rights, net                                                                                                                                                                                                                 |   | 10,112              |      | 15,131             |   |
| Other  assets                                                                                                                                                                                                                                   |   | 13,116              |      | 11,237             |   |
|                                                                                                                                                                                                                                            |   | $                   | 2,100,591 |               | $      | 2,012,157 |   |
|                                                                                                                                                                                                                                            |   |                |      |               |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                  |   |                |      |               |   |
| **Liabilities:**                                                                                                                                                                                                                                |   |                |      |               |   |
| Deposits                                                                                                                                                                                                                                        |   |                |      |               |   |
| Non  interest bearing                                                                                                                                                                                                                           |   | $                   | 253,417   |               | $      | 194,792 |   |
| Interest  bearing                                                                                                                                                                                                                               |   | 1,451,230           |      | 1,441,175          |   |
| Total  deposits                                                                                                                                                                                                                                 |   | 1,704,647           |      | 1,635,967          |   |
| Federal  funds purchased and securities sold under agreements to repurchase                                                                                                                                                                     |   | 57,944              |      | 70,544             |   |
| FHLB  advances and other borrowing                                                                                                                                                                                                              |   | 94,828              |      | 70,564             |   |
| Notes  payable                                                                                                                                                                                                                                  |   | 43,700              |      | 53,700             |   |
| Company  obligated mandatorily redeemable preferred securities of subsidiary trust  holding solely subordinated debentures                                                                                                                      |   | 58,000              |      | 48,000             |   |
| Accrued  interest and other liabilities                                                                                                                                                                                                         |   | 16,549              |      | 17,990             |   |
|                                                                                                                                                                                                                                            |   | 1,975,668           |      | 1,896,765          |   |
|                                                                                                                                                                                                                                            |   |                |      |               |   |
| Minority  interest in subsidiaries                                                                                                                                                                                                              |   | 2,711               |      | 5,229              |   |
|                                                                                                                                                                                                                                            |   |                |      |               |   |
| **Stockholders’ equity:**                                                                                                                                                                                                                  |   |                |      |               |   |
| Preferred  stock, $100 par value; 500,000 shares authorized; issued and  outstanding:  9,000 shares of 8%  cumulative, nonvoting; 8,000 shares of 10% noncumulative, nonvoting; 100,000  shares of variable rate, noncumulative, nonvoting |   | 11,700              |      | 11,700             |   |
| Common  stock, $1.00 par value, authorized 1,000,000 shares, issued and outstanding  124,952 and 125,132 shares, respectively                                                                                                                   |   | 125                 |      | 125                |   |
| Additional  paid-in capital                                                                                                                                                                                                                     |   | 2,051               |      | 2,058              |   |
| Retained  earnings                                                                                                                                                                                                                              |   | 103,433             |      | 92,285             |   |
| Accumulated  other comprehensive income, net                                                                                                                                                                                                    |   | 4,903               |      | 3,995              |   |
| Total  stockholders’ equity                                                                                                                                                                                                                |   | 122,212             |      | 110,163            |   |
|                                                                                                                                                                                                                                            |   |                |      |               |   |
|                                                                                                                                                                                                                                            |   | $                   | 2,100,591 |               | $      | 2,012,157 |   |

 

See Notes toConsolidated Financial Statements.

 

4

----

 

**SPECTRUMBANCORPORATION, INC.Consolidated Statements of IncomeFor The Three Months Ended**(In thousands, except share and per share data)(unaudited)

 
|                                                                                  |   | **March 31,  2003** |   | **March 31,  2002** |   |
|---------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
| **Interest income on**:                                                               |   |                |   |                |   |
| Loans                                                                                 |   | $                   | 26,617 |                | $      | 26,678 |   |
| Taxable  securities                                                                   |   | 2,877               |   | 3,553               |   |
| Nontaxable  securities                                                                |   | 475                 |   | 325                 |   |
| Dividends  on securities                                                              |   | 60                  |   | 64                  |   |
| Federal  funds sold and other                                                         |   | 169                 |   | 280                 |   |
|                                                                                  |   | 30,198              |   | 30,900              |   |
| **Interest expense on:**                                                              |   |                |   |                |   |
| Deposits                                                                              |   | 8,269               |   | 10,396              |   |
| Federal  funds purchased and securities sold under agreements to repurchase           |   | 178                 |   | 303                 |   |
| FHLB  advances and other borrowing                                                    |   | 1,007               |   | 1,076               |   |
| Notes  payable                                                                        |   | 557                 |   | 661                 |   |
| Company  obligated mandatorily redeemable preferred securities                        |   | 1,310               |   | 1,183               |   |
|                                                                                  |   | 11,321              |   | 13,619              |   |
|                                                                                  |   |                |   |                |   |
| **Net interest income**                                                               |   | 18,877              |   | 17,281              |   |
| Provision  for loan losses                                                            |   | 857                 |   | 1,505               |   |
|                                                                                  |   |                |   |                |   |
| **Net interest income after provision for loan****losses**                            |   | 18,020              |   | 15,776              |   |
|                                                                                  |   |                |   |                |   |
| **Other income:**                                                                     |   |                |   |                |   |
| Service  charges and other fees                                                       |   | 3,214               |   | 2,542               |   |
| Net  gains from sale of loans                                                         |   | 1,815               |   | 728                 |   |
| Loan  servicing fees, net                                                             |   | 804                 |   | 780                 |   |
| Gain  on securities, net                                                              |   | 278                 |   | 10                  |   |
| Trust  department income                                                              |   | 382                 |   | 404                 |   |
| Net  gains from sale of other real estate owned and other assets                      |   | 1,240               |   | 23                  |   |
| Other                                                                                 |   | 692                 |   | 773                 |   |
|                                                                                  |   | 8,425               |   | 5,260               |   |
|                                                                                  |   |                |   |                |   |
| **Other expenses:**                                                                   |   |                |   |                |   |
| Salaries  and employee benefits                                                       |   | 8,880               |   | 7,453               |   |
| Occupancy  expenses, net                                                              |   | 1,093               |   | 963                 |   |
| Data  processing                                                                      |   | 994                 |   | 760                 |   |
| Equipment  expenses                                                                   |   | 715                 |   | 604                 |   |
| Advertising                                                                           |   | 624                 |   | 490                 |   |
| Professional  fees                                                                    |   | 718                 |   | 650                 |   |
| Communication  expenses                                                               |   | 505                 |   | 485                 |   |
| Amortization  of core deposit intangible and other                                    |   | 480                 |   | 659                 |   |
| Amortization  and valuation adjustments of mortgage servicing rights                  |   | 2,579               |   | 10                  |   |
| Other  operating expenses                                                             |   | 1,733               |   | 1,335               |   |
|                                                                                  |   | 18,321              |   | 13,409              |   |
|                                                                                  |   |                |   |                |   |
| **Income before income taxes and minority interest****in net income of subsidiaries** |   | 8,124               |   | 7,627               |   |
| Income  taxes                                                                         |   | 2,989               |   | 2,561               |   |
|                                                                                  |   |                |   |                |   |
| **Income before minority interest in net****income of subsidiaries**                  |   | 5,135               |   | 5,066               |   |
| Minority  interest in net income of subsidiaries                                      |   | 93                  |   | 116                 |   |
|                                                                                  |   |                |   |                |   |
| **Net income**                                                                        |   | $                   | 5,042  |                | $      | 4,950 |   |
|                                                                                  |   |                |   |                |   |
| **Basic earnings per common share**                                                   |   | $                   | 37.74  |                | $      | 35.83 |   |
|                                                                                  |   |                |   |                |   |
| **Cash dividends per share declared on common stock**                                 |   | $                   | 1.50   |                | $      | 1.50 |   |
|                                                                                  |   |                |   |                |   |
| **Weighted average shares outstanding**                                               |   | 125,066             |   | 125,218             |   |

 

See Notes toConsolidated Financial Statements.

 

5

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**SPECTRUMBANCORPORATION, INC.Consolidated Statements of IncomeFor The Nine Months Ended**(In thousands, except share and per share data)(unaudited)

 
|                                                                                  |   | **March 31,  2003** |   | **March 31,  2002** |   |
|---------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
| **Interest income on**:                                                               |   |                |   |                |   |
| Loans                                                                                 |   | $                   | 82,613 |                | $      | 82,164 |   |
| Taxable  securities                                                                   |   | 9,711               |   | 10,898              |   |
| Nontaxable  securities                                                                |   | 1,354               |   | 861                 |   |
| Dividends  on securities                                                              |   | 180                 |   | 230                 |   |
| Federal  funds sold and other                                                         |   | 590                 |   | 1,109               |   |
|                                                                                  |   | 94,448              |   | 95,262              |   |
| **Interest expense on:**                                                              |   |                |   |                |   |
| Deposits                                                                              |   | 27,687              |   | 36,173              |   |
| Federal  funds purchased and securities sold under agreements to repurchase           |   | 650                 |   | 1,346               |   |
| FHLB  advances and other borrowing                                                    |   | 3,099               |   | 3,229               |   |
| Notes  payable                                                                        |   | 1,855               |   | 2,273               |   |
| Company  obligated mandatorily redeemable preferred securities                        |   | 3,771               |   | 3,567               |   |
|                                                                                  |   | 37,062              |   | 46,588              |   |
|                                                                                  |   |                |   |                |   |
| **Net interest income**                                                               |   | 57,386              |   | 48,674              |   |
| Provision  for loan losses                                                            |   | 3,386               |   | 4,966               |   |
|                                                                                  |   |                |   |                |   |
| **Net interest income after provision for loan****losses**                            |   | 54,000              |   | 43,708              |   |
|                                                                                  |   |                |   |                |   |
| **Other income:**                                                                     |   |                |   |                |   |
| Service  charges and other fees                                                       |   | 9,857               |   | 7,575               |   |
| Net  gains from sale of loans                                                         |   | 4,861               |   | 2,440               |   |
| Loan  servicing fees, net                                                             |   | 2,636               |   | 2,454               |   |
| Gain  on securities, net                                                              |   | 368                 |   | 186                 |   |
| Trust  department income                                                              |   | 1,271               |   | 1,236               |   |
| Net  gains from sale of other real estate owned and other assets                      |   | 1,286               |   | 75                  |   |
| Other                                                                                 |   | 2,223               |   | 2,267               |   |
|                                                                                  |   | 22,502              |   | 16,233              |   |
|                                                                                  |   |                |   |                |   |
| **Other expenses:**                                                                   |   |                |   |                |   |
| Salaries  and employee benefits                                                       |   | 24,658              |   | 21,156              |   |
| Occupancy  expenses, net                                                              |   | 3,178               |   | 2,767               |   |
| Data  processing                                                                      |   | 2,769               |   | 2,226               |   |
| Equipment  expenses                                                                   |   | 2,123               |   | 1,865               |   |
| Advertising                                                                           |   | 2,702               |   | 1,627               |   |
| Professional  fees                                                                    |   | 2,320               |   | 1,983               |   |
| Communication  expenses                                                               |   | 1,533               |   | 1,384               |   |
| Amortization  of core deposit intangible and other                                    |   | 1,420               |   | 1,948               |   |
| Amortization  and valuation adjustments of mortgage servicing rights                  |   | 9,267               |   | 4,889               |   |
| Other  operating expenses                                                             |   | 5,474               |   | 4,091               |   |
|                                                                                  |   | 55,444              |   | 43,936              |   |
|                                                                                  |   |                |   |                |   |
| **Income before income taxes and minority interest****in net income of subsidiaries** |   | 21,058              |   | 16,005              |   |
| Income  taxes                                                                         |   | 7,874               |   | 5,533               |   |
|                                                                                  |   |                |   |                |   |
| **Income before minority interest in net****income of subsidiaries**                  |   | 13,184              |   | 10,472              |   |
| Minority  interest in net income of subsidiaries                                      |   | 479                 |   | 430                 |   |
|                                                                                  |   |                |   |                |   |
| **Net income**                                                                        |   | $                   | 12,705 |                | $      | 10,042 |   |
|                                                                                  |   |                |   |                |   |
| **Basic earnings per common share**                                                   |   | $                   | 96.09  |                | $      | 73.30 |   |
|                                                                                  |   |                |   |                |   |
| **Cash dividends per share declared on common stock**                                 |   | $                   | 4.50   |                | $      | 4.50 |   |
|                                                                                  |   |                |   |                |   |
| **Weighted average shares outstanding**                                               |   | 125,110             |   | 125,251             |   |

 

See Notes toConsolidated Financial Statements.

 

6

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**SPECTRUMBANCORPORATION, INC.Consolidated Statements of Cash FlowsFor The Nine Months Ended**(In thousands)(unaudited)

 
|                                                                                                    |   | **March 31,  2003** |       | **March 31,  2002** |       |
|---------------------------------------------------------------------------------------------------------|--------|---------------------|------------|---------------------|------------|
| Cash  Flow from Operating Activities                                                                    |   |                | ** ** |                | ** ** |
| **Net cash provided by operating activities**                                                           |   | $                   | 9,226      |                | $          | 27,678 |   |
|                                                                                                    |   |                |       |                |       |
| Cash  Flow from Investing Activities                                                                    |   |                |       |                |       |
| Proceeds  from maturities of certificates of deposit                                                    |   | 398                 |       | 5,235               |       |
| Purchase  of certificates of deposit                                                                    |   | 0                   |       | (4,199              | )          |
| Proceeds  from sales and maturities of securities available for sale                                    |   | 147,624             |       | 99,423              |       |
| Purchase  of securities                                                                                 |   | (136,282            | )          | (116,864            | )          |
| Proceeds  from sale of other real estate owned                                                          |   | 3,383               |       | 358                 |       |
| Business  acquisition (See below)                                                                       |   | 19,139              |       | 83                  |       |
| Net  increase in loans                                                                                  |   | (49,138             | )          | (81,208             | )          |
| Proceeds  from sale of premises and equipment                                                           |   | 704                 |       | 36                  |       |
| Purchase  of premises and equipment                                                                     |   | (4,962              | )          | (4,271              | )          |
| Purchase  of mortgage servicing rights                                                                  |   | (294                | )          | (4,843              | )          |
| Proceeds  from sale of mortgage servicing rights                                                        |   | 0                   |       | 38                  |       |
| **Net cash (used in) investing activities**                                                             |   | (19,428             | )          | (106,212            | )          |
|                                                                                                    |   |                |       |                |       |
| Cash  Flows from Financing Activities                                                                   |   |                |       |                |       |
| Proceeds  from issuance of preferred securities                                                         |   | 10,000              |       | 0                   |       |
| Net  increase in deposits                                                                               |   | 43,941              |       | 71,459              |       |
| Net  increase (decrease) in federal funds purchased and securities sold under  agreements to repurchase |   | (12,985             | )          | 6,843               |       |
| Proceeds  from notes payable                                                                            |   | 32,500              |       | 25,902              |       |
| Payment  of other liabilities                                                                           |   | (3,760              | )          | (9,141              | )          |
| Principal  payments on notes payable                                                                    |   | (17,851             | )          | (18,082             | )          |
| Debt  issuance cost incurred                                                                            |   | (9                  | )          | (38                 | )          |
| Purchase  of minority interest in subsidiaries                                                          |   | (2,876              | )          | 0                   |       |
| Dividends  paid, including ($161) and ($176) paid to minority interest, respectively                    |   | (1,408              | )          | (1,601              | )          |
| Retirement  of common stock                                                                             |   | (121                | )          | (79                 | )          |
| **Net cash provided by financing activities**                                                           |   | 47,431              |       | 75,263              |       |
| **Net increase (decrease) in cash and cash equivalents**                                                |   | 37,229              |       | (3,271              | )          |
|                                                                                                    |   |                |       |                |       |
| **Cash and cash equivalents:**                                                                          |   |                |       |                |       |
| **Beginning**                                                                                           |   | 69,278              |       | 106,436             |       |
| **Ending**                                                                                              |   | $                   | 106,507    |                | $          | 103,165 |   |
|                                                                                                    |   |                |       |                |       |
| **Supplemental Disclosures of Cash Flow Information:**                                                  |   |                |       |                |       |
| Cash  payments for interest                                                                             |   | $                   | 39,169     |                | $          | 49,920 |   |
| Cash  payments for income taxes                                                                         |   | 11,866              |       | 8,375               |       |
|                                                                                                    |   |                |       |                |       |
| **Supplemental Schedules of Noncash Investing and Financing  Activities:**                              |   |                |       |                |       |
| Net  change in unrealized gain (loss) on securities available for sale                                  |   | 908                 |       | (1,372              | )          |
| Purchase  of mortgage servicing rights for other liabilities                                            |   | 3,956               |       | 457                 |       |
| Loans transferred to other real estate  owned and other assets                                          |   | 1,044               |       | 595                 |       |
| Deemed dividend to affiliate                                                                            |   | (196                | )          | 0                   |       |
|                                                                                                    |   |                |       |                |       |
| **Business acquisitions, net of cash and cash equivalents  acquired, allocated to:**                    |   |                |       |                |       |
| Assets                                                                                                  |   |                |       |                |       |
| Securities                                                                                              |   | $                   | 390        |                | $          | 27,289 |   |
| Loans  receivable                                                                                       |   | 2,910               |       | 62,981              |       |
| Other  assets                                                                                           |   | 22                  |       | 2,392               |       |
| Premises  and equipment                                                                                 |   | 65                  |       | 3,285               |       |
| Goodwill                                                                                                |   | 2,017               |       | 4,182               |       |
| Intangible  assets                                                                                      |   | 304                 |       | 0                   |       |
| Liabilities  assumed                                                                                    |   |                |       |                |       |
| Deposits                                                                                                |   | (24,739             | )          | (99,589             | )          |
| Other  liabilities                                                                                      |   | (108                | )          | (623                | )          |
| Net  cash and cash equivalents (received)                                                               |   | $                   | (19,139    | )                   | $          | (83 | ) |

 

See Notes toConsolidated Financial Statements.

 

7

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**NOTES****TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.          Basis ofpresentation.

 

The consolidatedfinancial statements include the accounts of the Company and itssubsidiaries.  All material intercompanyaccounts and transactions with subsidiaries are eliminated in consolidation.

 

The consolidatedsubsidiaries are as follows: Great Western Bank (100.0% owned), which ischartered in Omaha, Nebraska; Great Western Bank, (95.8% owned), which ischartered in Watertown, South Dakota; Great Western Bank, (100.0% owned), whichis chartered in Rapid City, South Dakota; Great Western Bank, (100.0% owned),which is chartered in Clive, Iowa; Great Western Service Corporation, (100.0%owned by bank subsidiaries, excluding Great Western Bank, Omaha), a dataprocessing organization; Spectrum Capital Trust I (100.0% owned); SpectrumCapital Trust II (100.0% owned) and Spectrum Capital Trust III (100.0% owned).Great Western Bank, Omaha also owns 100.0% of GW Leasing, Inc., a leasingcompany.  See “Changes in MinorityInterest and Business Acquisitions”.

 

The June 30, 2002consolidated balance sheet has been derived from the Company’s audited balancesheet as of that date. The consolidated financial statements as of March 31,2003 and for the three and nine months ended March 31, 2003 and 2002 areunaudited but include all adjustments (consisting only of normal recurringadjustments), which the Company considers necessary for a fair presentation offinancial position and results of its operation and its cash flows for thoseperiods. Certain information and note disclosures normally included in theCompany’s annual financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted.  These consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes thereto included in the Company’s Form 10-K annual report for 2002 filedwith the Securities and Exchange Commission. Results for the three and nine months ended March 31, 2003 are notnecessarily indicative of the results to be expected for future periods.

 

2.          Earnings per commonshare.

 

Earnings per share havebeen computed on the basis of weighted average number of common sharesoutstanding during each period presented. Dividends accumulated or declared oncumulative and noncumulative preferred stock, which totaled $322,000 and$464,000 in the three months ended March 31, 2003 and 2002 and totaled $683,000and $861,000 for the nine months ended March 31, 2003 and 2002, reduced earningsavailable to common stockholders in the computation.

 

3.          Comprehensive Income.

 

Comprehensive income was$4,369,000****and $3,704,000 for thethree months ended March 31, 2003 and 2002 and $13,613,000 and $8,670,000 forthe nine months ended March 31, 2003 and 2002. The difference betweencomprehensive income and net income presented in the Consolidated Statements ofIncome is attributed solely to change in unrealized gains and losses onsecurities available for sale during the periods presented.

 

4.          Intangible Assets.

 

On October 1, 2002, theCompany elected adoption of Statement of Financial Accounting Standards No.147,  “Acquisitions of Certain FinancialInstitutions.”  This Statement addressesthe financial accounting and reporting for the acquisition of all or part of afinancial institution, except for a transaction between two or more mutualenterprises.  This Statement removesacquisitions of financial institutions, other than transactions between two ormore mutual enterprises, from the scope of FASB Statement No. 72, “Accountingfor Certain Acquisitions of Banking or Thrift Institutions”, and FASBInterpretation No. 9, “Applying APB Opinions No. 16 and 17 When a Savings andLoan Association or a Similar Institution Is Acquired in a Business CombinationAccounted for by the Purchase Method.” Transaction provisions for previously recognized unidentifiableintangible assets are effective on October 1, 2002, with earlier applicationpermitted.  The carrying amount of anunidentifiable intangible asset shall continue to be amortized

 

8

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as set forth in paragraph 5 of Statement 72 afterOctober 1, 2002, unless the transaction in which the asset arose was a businesscombination.  If the transaction thatgave rise to the unidentifiable intangible asset was a business combination,the carrying amount of the asset shall be reclassified to goodwill as of thelater of the date of acquisition or the date Statement 142 was applied in itsentirety.

 

The Company has identifiedthose unidentifiable intangible assets that arose from a businesscombination.  In applying SFAS 147, theCompany has reclassified the carrying amount of unidentifiable intangibleassets of $4,598,000 to goodwill as of July 1, 2002.  As of June 30, 2002 total goodwill (including reclassifiedunidentifiable intangible assets of $4,598,000) was $43,913,000 and coredeposit intangible and other, net was $5,294,000.  As of March 31, 2003, total goodwill (including reclassifiedunidentifiable intangible assets of $4,598,000) was $45,930,000 and coredeposit intangible and other was $3,851,000. If the goodwill reclassification of $4,598,000 were appliedretroactively to July 1, 2001, net income for the three and nine month periodsended March 31, 2002 would be increased by approximately $60,000 and $180,000,respectively.

 

On July 1, 2001, theCompany elected early adoption of Statement of Financial Accounting StandardsNo. 141, “Business Combinations,” and No. 142, “Goodwill and Other IntangibleAssets” (SFAS 141 and 142).  SFAS 141addresses financial accounting and reporting for business combinations andreplaces APB Opinion No. 16, “Business Combinations” (APB 16).  SFAS 141 no longer allows the pooling ofinterests method of accounting for acquisitions, provides new recognitioncriteria for intangible assets and carries forward without reconsideration theguidance in APB 16 related to the application of the purchase method ofaccounting.  SFAS 142 addresses financialaccounting and reporting for acquired goodwill and other intangible assets andreplaces APB Opinion No. 17, “Intangible Assets.”  SFAS 142 addresses how intangible assets should be accounted forupon their acquisition and after they have been initially recognized in thefinancial statements.  The new standardsprovide specific guidance on measuring goodwill for impairment annually using atwo-step process.  The first stepidentifies potential impairment and the second step measures the amount ofgoodwill impairment loss to be recognized.

 

The Company hasidentified those intangible assets that remain separable under the provisionsof the new standard and those that are to be included in goodwill.  In applying SFAS 142, the Company hasre-evaluated the useful lives of these separable intangible assets.  The weighted average life of the remainingamortizable intangible assets is 7 years. In the year of adoption, SFAS 142 requires the first step of thegoodwill impairment test to be completed within the first six months and thefinal step to be completed within twelve months of adoption.  The first step of the test was completed asof July 1, 2001 and no indications of goodwill impairment were found;therefore, step two of the goodwill impairment test was not applicable.  As of July 1, 2002 the fair value of eachreporting unit was reviewed and it was determined that the fair values wereequal to or greater than the fair values as of July 1, 2001; hence noindications of goodwill impairment were found.

 

5.          Legal Proceedings.

 

Spectrum and its subsidiarybanks are from time to time parties to various legal actions arising in thenormal course of business. Management believes there is no proceedingthreatened or pending against Spectrum or its subsidiaries, which, ifdetermined adversely, would have a material adverse effect on its financialcondition or results of operation.

 

6.          Changes in MinorityInterest and Business Acquisitions.

 

On December 13, 2002,Great Western Bank, Omaha acquired Peoples Bank, Overland Park, Kansas by cashmerger.  At December 13, 2002, PeoplesBank had $24,847,000 in total assets, $2,910,000 in net loans and $24,739,000in deposits.  Peoples Bank has onelocation, which at closing became a branch of Great Western Bank, Omaha. The resultsof operation of Peoples Bank after the date of acquisition are included in theconsolidated financial statements.

 

A summary of the fairvalue of net assets acquired and net cash and cash equivalents received (inthousands) on the date of acquisition is as follows:

 

9

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|                                      |   | **Peoples  Bank** |    |
|-------------------------------------------|--------|-------------------|---------|
|                                      |   |              |    |
| Assets  acquired:                         |   |              |    |
| Securities                                |   | $                 | 390     |   |
| Loans  receivable                         |   | 2,910             |    |
| Other  assets                             |   | 22                |    |
| Premises  and equipment                   |   | 65                |    |
| Goodwill                                  |   | 2,017             |    |
| Intangible  assets                        |   | 304               |    |
|                                      |   |              |    |
| Liabilities  assumed:                     |   |              |    |
| Deposits                                  |   | (24,739           | )       |
| Other  liabilities                        |   | (108              | )       |
| Net  cash and cash equivalents (received) |   | $                 | (19,139 | ) |

 

On September 30, 2002,the Company acquired 1,688 shares (4.8%) of the common stock of Great Western,Clive (formerly Citizens Bank, Clive, Iowa) for $673,288 in cash from aminority shareholder.  The transactionwas accounted for as a purchase.

 

In October 2002, theCompany purchased a total of 24 shares of common stock of Great Western,Watertown (formerly F & M Bank), from two minority shareholders for $90,765.  This transaction was accounted for as apurchase.

 

The Company issued 10,000shares, $1,000 par value, of Company Capital Trust Pass-Through Securities(Preferred Securities) of Spectrum Capital Trust III on October 29, 2002through a private placement.  Thedistribution rate is set quarterly at three month LIBOR plus 345 basis points,which was set on October 25, 2002 at 5.27%, with a maximum rate of 12.50%through November 7, 2007.  Distributionpayment dates are February 7, May 7, August 7 and November 7 of each year,beginning February 7, 2003 and are payable in arrears.  The Company may, at one or more times, deferinterest payments on the capital securities for up to 5 consecutive yearsfollowing suspension of dividends on all other capital stock.  At the end of any deferral period, allaccumulated and unpaid distributions will be paid. The capital securities willbe redeemed thirty years from the issuance date; however, the Company has theoption to accelerate the maturity date not earlier than five years from theissue date.  The redemption price is$1,000 per capital security plus any accrued and unpaid distributions to thedate of redemption.  Holders of thePreferred Securities have no voting rights. The Preferred Securities are unsecured and rank junior in priority ofpayment to all of the Company’s senior indebtedness and senior to the Company’scommon and preferred stock.

 

The sole asset of thetrust is junior subordinated deferrable interest debentures issued by theCompany with interest and maturity provisions similar in term to the respectivepreferred securities.  The trust’sability to pay amounts due on the Preferred Securities is solely dependent uponthe Company making payment on the related junior subordinated debentures.  The Company’s obligation under thedebentures and relevant trust agreement constitute a full, irrevocable andunconditional guarantee on a subordinated basis by it of the obligations of thetrust under the Preferred Securities.

 

The Preferred Securitiesare classified as debt in the accompanying consolidated financialstatements.  For regulatory purposes thePreferred Securities qualify as elements of capital.  Proceeds from the issue were used for general corporate purposes.

 

On January 24, 2003, theCompany purchased from a minority shareholder 180 shares of common stock and1,800 shares of preferred stock in Great Western Bank, Rapid City (formerlyRushmore Bank & Trust), subsidiary, for $2,111,492.  This transaction was accounted for as apurchase.  After January 24, 2003, theCompany owns 100.0% of Great Western Bank, Rapid City.

 

On February 21, 2003,Citizens Bank, Mt Ayr, Iowa and Citizens Bank of Princeton, Princeton, Missourimerged with and into Citizens Bank, Clive, Iowa.  All three banks are 100.0% owned subsidiaries of theCompany.  In addition, on March 29,2003, the surviving bank was renamed Great Western Bank.  Management of Spectrum does not expect themerger to have a material effect on the business or earnings of Spectrum. Themerger was accounted for at historical cost in a manner similar to apooling-of-interests combination and, accordingly, the merger did not requireany restatement of financial statements on a consolidated basis.  Regulatory approval had been obtained.

 

On March 3, 2003, RushmoreBank and Trust, Rapid City, South Dakota and F & M Bank, Watertown, SouthDakota were renamed Great Western Bank.

 

10

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On March 17, 2003,Spectrum Banc Service Corporation was renamed Great Western ServiceCorporation.

 

7.          SubsequentEvents-Merger.

 

Spectrum has obtainedregulatory approval to merge Great Western Bank, Rapid City, South Dakota intoGreat Western Bank, Watertown, South Dakota. Management expects the merger tobecome effective May 30, 2003.  Managementof Spectrum does not expect the merger to have a material effect on thebusiness or earnings of Spectrum. The merger will be accounted for athistorical cost in a manner similar to a pooling-of-interests combination and,accordingly, the merger will not require any restatement of financialstatements on a consolidated basis.

 
| **ITEM  2:** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATION** |
|--------------|-------------------------------------------------------------------------------------------------|

 

**GENERAL**

 

The Company is amulti-bank holding company organized under the laws of Iowa whose primarybusiness is providing trust, commercial, consumer, and mortgage bankingservices through its Nebraska, South Dakota and Iowa based subsidiarybanks.  Substantially all of theCompany’s income is generated from banking operations.

 

The Company’s fiscal yearend is June 30.

 

**CRITICAL ACCOUNTING POLICIES**

 

Spectrum’s criticalaccounting policies involving the more significant judgments and assumptionsused in the preparation of the consolidated financial statements as of March31, 2003, have remained unchanged from June 30, 2002.  These policies involve the provision and allowance for loanlosses, and valuation of mortgage servicing rights and intangibles.  Disclosure of these critical accountingpolicies is incorporated by reference under Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operation” in Spectrum’sAnnual report on Form 10-K for Spectrum’s fiscal year ended June 30, 2002.

 

**FINANCIAL CONDITION, LIQUIDITY ANDCAPITAL RESOURCES**

 

Average assets were$2,069,665,000 for the nine months ended March 31, 2003, compared to$1,822,709,000 for the nine months ended March 31, 2002, a 13.6% increase.Average interest-earning assets were $1,900,062,000 for the nine months endedMarch 31, 2003 and $1,667,816,000 for the nine months ended March 31, 2002,representing a 13.9% increase.  Averageassets and average interest-earning assets increased due to internal growth andacquisitions.

 

Total assets were$2,100,591,000 at March 31, 2003, an increase of $88,434,000 or 4.4% from June30, 2002. The increase in total assets is due to a $37,229,000 or 53.7%;increase in cash and cash equivalents and a $65,089,000 or 4.4% increase inloans, net unearned fees.

 

Loans, net unearned fees,grew $65,089,000 or 4.4% during the nine months ended March 31, 2003 due tointernal growth.

 

Loans originated forresale were $275,251,000 for the nine months ended March 31, 2003; an increaseof  $186,070,000 when compared to$89,181,000 for the nine months ended March 31, 2002. The increase in loansoriginated for resale is due to the low mortgage rates in the current periodwhen compared to the same period one year ago.

 

Securities available forsale were $323,975,000 at March 31, 2003 compared to $334,059,000 at June 30,2002, a decrease of $10,084,000 or 3.0%. The decrease in securities is due to a large volume of called agencysecurities along with large pay downs in CMO and MBS securities due to a lowinterest rate environment.  Net proceedsof

 

11

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$11,342,000 from securities during the current ninemonths period were used to finance loan growth and increase investment infederal funds sold.

 

Mortgage servicingrights, net, were $10,112,000 at March 31, 2003, a decrease of $5,019,000 or33.2%, from June 30, 2002.  Mortgageservicing rights decreased due to $7,310,000 amortization expense, $1,959,000valuation adjustment expense and increased due to purchases of $4,250,000.  See “Noninterest Expense”.

 

The allowance for loanlosses increased to $21,581,000 at March 31, 2003 from $20,344,000 at June 30,2002. The allowance represented 1.4% and 1.4% of loans, net unearned fees as ofMarch 31, 2003 and June 30, 2002.  Theincrease in allowance for loan losses was due to a greater increase in loanloss provisions when compared to net charge-offs during the period.  See “Provision for Loan Losses”.

 

For the nine months endedMarch 31, 2003, the Company’s annualized return on average assets (“ROA”) was0.8%, compared to 0.7% for the nine months ended March 31, 2002. Return onaverage stockholders’ equity (“ROE”) for the nine months ended March 31, 2003and 2002 was 14.5% and 13.2%, respectively. The increases in ROA and ROE are due to a 26.5% increase in net incomefor the nine months ending March 31, 2003 when compared to the same period ayear ago.

 

Cash and cashequivalents, certificates of deposit, securities available for sale totaled$430,581,000 or 20.5% of total assets at March 31, 2003, compared to$403,834,000 or 20.1% of total assets, at June 30, 2002.  The increase occurred primarily becausefederal funds sold increased, $28,514,000, or 174.4%, due to additional fundsfrom mortgage servicing loan payoffs.

 

Company obligatedmandatorily redeemable preferred securities of subsidiary trust holding solelysubordinated debentures increased to $58,000,000 at March 31, 2003 compared to$48,000,000 at June 30, 2002.  Thisincrease is due to the Company issuing 10,000 shares, $1,000 par value, ofCompany Capital Trust Pass-Through Securities (Preferred Securities) ofSpectrum Capital Trust III on October 29, 2002 through a privateplacement.  The distribution rate is setquarterly at three month LIBOR plus 345 basis points, which was set on October25, 2002 at 5.27%, with a maximum rate of 12.50% through November 7, 2007.  Distribution payment dates are February 7,May 7, August 7 and November 7 of each year, beginning February 7, 2003 and arepayable in arrears.  The Company may, atone or more times, defer interest payments on the capital securities for up to5 consecutive years following suspension of dividends on all other capitalstock.  At the end of any deferralperiod, all accumulated and unpaid distributions will be paid. The capitalsecurities will be redeemed thirty years from the issuance date; however, theCompany has the option to accelerate the maturity date not earlier than fiveyears from the issue date.  Theredemption price is $1,000 per capital security plus any accrued and unpaiddistributions to the date of redemption. Holders of the Preferred Securities have no voting rights.  The Preferred Securities are unsecured andrank junior in priority of payment to all of the Company’s senior indebtednessand senior to the Company’s common and preferred stock.

 

The sole asset of the trustis junior subordinated deferrable interest debentures issued by the Companywith interest and maturity provisions similar in term to the respectivePreferred Securities.  The trust’sability to pay amounts due on the Preferred Securities is solely dependent uponthe Company making payment on the related junior subordinated debentures.  The Company’s obligation under thedebentures and relevant trust agreement constitute a full, irrevocable andunconditional guarantee on a subordinated basis by it of the obligations of thetrust under the Preferred Securities.

 

The Preferred Securitiesare classified as debt in the accompanying consolidated financialstatements.  For regulatory purposes thePreferred Securities qualify as elements of capital.  Proceeds from the issue were used for general corporatepurposes.  As of March 31, 2003,$39,703,000 of Preferred Securities was eligible for treatment as Tier 1Capital and $18,297,000 was eligible as Tier 2 Capital.

 

At March 31, 2003, theCompany’s leverage ratio was 5.3%, Tier 1 risk-based capital ratio was 6.6%,and total risk-based capital ratio was 11.2%, compared to minimum requiredlevels of 4% for leverage and Tier 1 risk-based capital ratios and 8% for totalrisk-based capital ratio, subject to change at the discretion of regulatoryauthorities to impose higher standards in individual cases. At March 31, 2003,the Company had net risk-weighted assets of $1,643,387,000.

 

12

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**ACQUISITIONS**

 

As of December 13, 2002,Great Western Bank, Omaha acquired Peoples Bank, Overland Park, Kansas by cashmerger.  At December 13, 2002, PeoplesBank had $24,847,000 in total assets, $2,910,000 in net loans and $24,739,000in deposits. Peoples Bank had one location at closing which became abranch of Great Western Bank, Omaha. The results of operation of Peoples Bankafter the date of acquisition are included in the consolidated financialstatements.

 

**RESULTSOF OPERATION**

 

**Comparison of the Three Months EndedMarch 31, 2003 and March 31, 2002.**

 

Net Interest Income

 

Totalinterest income for the three months ended March 31, 2003 was $30,198,000, a2.3% decrease from $30,900,000 for the three months ended March 31, 2002. Theslight decrease is the result of lower interest rates paid for interest bearingassets during the current period when compared to the same period March 31,2002, despite an overall growth in average interest earning assets of 12.0%.

 

Averageinterest-earning assets were $1,914,281,000 for the three months ended March31, 2003 and $1,709,450,000 for the three months ended March 31, 2002,representing a 12.0% increase.  Thisincrease is primarily due to acquisitions and internal loan growth.

 

Totalinterest expense for the three months ended March 31, 2003 was $11,321,000, a16.9% decrease from $13,619,000 for the three months ended March 31, 2002. Thedecrease was the result of lower interest rates paid for interest bearingdeposits for the current period when compared to the same period a year ago.

 

Averageinterest-bearing liabilities were $1,703,220,000 and $1,559,368,000 for thethree month periods ended March 31, 2003 and March 31, 2002.  Average interest-bearing liabilitiesincreased between these periods $143,852,000 or 9.2%. This increase isprimarily due to acquisitions and an increase in average interest-bearingdeposits when compared to the same period for fiscal year 2002.

 

Netinterest income was $18,877,000 for the three months ended March 31, 2003,compared to $17,281,000 for the same period in 2002, an increase of 9.2%. TheCompany’s net interest margin decreased to 3.9% for the three months endedMarch 31, 2003 from 4.0% for the three months ended March 31, 2002. Thedecrease in the net interest margin was caused by a $2,298,000 decrease ininterest paid on interest bearing deposits and borrowings compared to a$702,000 decrease in interest earned on loans, securities and federal fundssold resulting in an $1,596,000 increase in net interest income.

 

Provision for LoanLosses

 

Theprovision for loan losses for the three months ended March 31, 2003, was$857,000, compared to $1,505,000 for the three months ended March 31,2002.  The decrease was due to a declinein estimated loan losses.

 

Noninterest Income

 

Noninterestincome for the three months ended March 31, 2003 was $8,425,000, an increase of$3,165,000, or 60.2%, over the same period last fiscal year. The increaseresulted primarily from a $1,240,000 gain on sale of other real estate ownedand other assets, a $1,087,000 increase in net gains from sale of loans and a$672,000 increase in service charges and other fees.

 

13

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Noninterest Expense

 

Noninterest expense forthe three months ended March 31, 2003 was $18,321,000, an increase of$4,912,000, or 36.6% over the same period last fiscal year.  The increase resulted primarily from a$2,569,000 increase in amortization and valuation adjustment of mortgageservicing rights, a $1,427,000 increase in salaries and employee benefits and a$234,000 increase in data processing expenses.

 

Amortizationand valuation adjustment of mortgage servicing rights increased $2,569,000 to$2,579,000 for the three months ended March 31, 2003 from $10,000 for the threemonths ended March 31, 2002. The increase is due to a $1,518,000 acceleratedamortization and a $1,061,000 valuation adjustment resulting from the change inthe current payoffs of mortgage servicing loans caused by a declining interestrate environment when compared to the three months ended March 31, 2002.

 

Adecline in mortgage interest rates in future periods may result in furtherchanges in prepayment rates and further acceleration in amortization expenses,the result of which will be estimated at the end of each quarter.

 

Income Taxes 

 

Incometaxes for the three months ended March 31, 2003 and March 31, 2002 were$2,989,000 and $2,561,000. The increase is due to a 6.5%, $497,000, increase inpretax income and an increase in the effective rate to 36.8% from 33.6% in theprevious period.  These effective taxrates are impacted by items of income and expense that are not subject tofederal or state taxation.

 

**Comparison of the Nine Months EndedMarch 31, 2003 and March 31, 2002.**

 

Net Interest Income

 

Totalinterest income for the nine months ended March 31, 2003 was $94,448,000, a0.9% decrease from $95,262,000 for the nine months ended March 31, 2002. Theslight decrease was due to a greater decrease in interest earned on federalfunds sold and taxable securities offset by the increase in interest earned on loansfor the current period when compared to the same period a year ago.

 

Averageinterest-earning assets were $1,900,062,000 for the nine months ended March 31,2003 and $1,667,816,000 for the nine months ended March 31, 2002, representinga 13.9% increase.  This increase isprimarily due to acquisitions and internal loan growth.

 

Totalinterest expense for the nine months ended March 31, 2003 was $37,062,000, a20.5% decrease from $46,588,000 for the nine months ended March 31, 2002. Thedecrease was primarily the result of lower interest rates paid for interestbearing deposits during fiscal 2003 when compared to the same period a yearago.

 

Averageinterest-bearing liabilities were $1,669,241,000 and $1,519,131,000 for thenine months ended March 31, 2003 and March 31, 2002.

 

Averageinterest-bearing liabilities increased between these periods $150,110,000 or9.9%. This increase is primarily due to acquisitions and an increase in averageinterest-bearing deposits when compared to the same period for fiscal year2002.

 

Netinterest income was $57,386,000 for the nine months ended March 31, 2003,compared to $48,674,000 for the same period in 2002, an increase of 17.9%. TheCompany’s net interest margin increased to 4.0% for the nine months ended March31, 2003 from 3.9% for the nine months ended March 31, 2002. The increase inthe net interest margin was caused by a $9,526,000 decrease in interest expensewhen compared to an $814,000 decrease in interest income over the same periodone year ago.

 

Provision for LoanLosses

 

Theprovision for loan losses for the nine months ended March 31, 2003, was$3,386,000, compared to $4,966,000 for the nine months ended March 31,2002.  The decrease was due to a declinein estimated loan losses for the current period.

 

14

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Noninterest Income

 

Noninterestincome for the nine months ended March 31, 2003 was $22,502,000, an increase of$6,269,000, or 38.6%, over the same period last fiscal year. The increaseresulted primarily from a $2,421,000 increase in net gains from sale of loans,a $2,282,000 increase in service charges and other fees and a $1,211,000increase in net gains from sale of other real estate owned and other assets.

 

Noninterest Expense

 

Noninterestexpense for the nine months ended March 31, 2003 was $55,444,000, an increaseof $11,508,000, or 26.2%, over the same period last fiscal year.  The increase resulted primarily from a$4,378,000 increase in amortization and valuation adjustment of mortgageservicing rights, a $3,502,000 increase in salaries and employee benefits, anda $1,075,000 increase in advertising expenses.

 

Amortizationand valuation adjustment of mortgage servicing rights increased $4,378,000 to$9,267,000 for the nine months ended March 31, 2003 from $4,889,000 for thenine months ended March 31, 2002.  Theincrease is due to accelerated amortization and valuation adjustments ofmortgage servicing rights for the nine months ended March 31, 2003 when comparedto the same period a year ago, attributable to the declining interest rateenvironment in the current period.

 

Adecline in mortgage interest rates in future periods may result in furtherchanges in prepayment rates and further acceleration in amortization expenses,the result of which will be estimated at the end of each quarter.

 

Income Taxes

 

Incometaxes for the nine months ended March 31, 2003 and March 31, 2002 were$7,874,000 and $5,533,000. The increase is due to a 31.6%, $5,053,000, increasein pretax income. The effective tax rates for the periods were 37.4% and34.6%.  These effective tax rates areimpacted by items of income and expense that are not subject to federal orstate taxation.

 
| **ITEM  3:** | **QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK** |
|--------------|-----------------------------------------------------------------|

 

Asset/liabilitymanagement refers to management’s efforts to minimize fluctuations in netinterest income caused by interest rate changes. This is accomplished bymanaging the repricing of interest rate sensitive interest-earning assets andinterest-bearing liabilities. Controlling the maturity or repricing of aninstitution’s liabilities and assets in order to minimize interest rate risk iscommonly referred to as gap management. Close matching of the repricing ofassets and liabilities will normally result in little change in net interestincome when interest rates change. A mismatched gap position will normallyresult in changes in net interest income as interest rates change.

 

Management regularlymonitors the interest sensitivity position and considers this position in itsdecisions with regard to the Company’s interest rates and maturities forinterest-earning assets acquired and interest-bearing liabilities accepted.

 

There has not been amaterial change in the interest rate sensitivity of the Company during the ninemonths ended March 31, 2003.

 
| **ITEM  4****:** | **CONTROLS AND PROCEDURES** |
|------------------|-----------------------------|

 

The Company’s principalexecutive officer and principal financial officer have concluded that theCompany’s disclosure controls and procedures as defined in Exchange Act Rule13a-14(c), based on their evaluation of such controls and procedures conductedwithin

 

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90 days prior to the date hereof, are effective toensure that information required to be disclosed by the Company in the reportsit files under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in therules and forms of the Securities and Exchange Commission and that suchinformation is accumulated and communicated to the Company’s management,including its principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date of theevaluation referred to above.

 

**PART II****OTHER INFORMATION**

 
| ITEM 1: | LEGAL PROCEEDINGS                                                                                                                                                                                                                                                                                                            |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    | None                                                                                                                                                                                                                                                                                                                         |
|    |
| ITEM 2: | CHANGES  IN SECURITIES AND USE OF PROCEEDS                                                                                                                                                                                                                                                                                   |
|    | See Part 1, Item 2 “Financial Condition, Liquidity  and Capital Resources” regarding the Company issuing 10,000 shares, $1,000  par value, of Company Capital Trust Pass-Through Securities of Spectrum  Capital Trust III on October 29, 2002 through a private placement, and incorporated  herein by reference. |
|    |
| ITEM 3: | DEFAULTS  UPON SENIOR SECURITIES                                                                                                                                                                                                                                                                                             |
|    | None                                                                                                                                                                                                                                                                                                                         |
|    |
| ITEM 4: | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                                                                                                                                                                                                          |
|    | None                                                                                                                                                                                                                                                                                                                         |
|    |
| ITEM 5: | OTHER  INFORMATION                                                                                                                                                                                                                                                                                                           |
|    | None                                                                                                                                                                                                                                                                                                                         |
|    |
| ITEM 6: | EXHIBITS  AND REPORTS ON FORM 8-K                                                                                                                                                                                                                                                                                            |
|    |
|    | (a).                                                                                                                                                                                                                                                                                                                         | Exhibits: |
|    |
|    | 99.1 -                                                                                                                                                                                                                                                                                                                       | Chief Executive Officer’s Certificate Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. (1) |
|    |
|    | 99.2 -                                                                                                                                                                                                                                                                                                                       | Chief Financial Officer’s Certificate Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. (1) |
|    |
|    | (b).                                                                                                                                                                                                                                                                                                                         | Reports on Form 8-K: |
|    |
|    |                                                                                                                                                                                                                                                                                                                         | The Company filed a current report on Form 8-K (Item  4) during the quarter ended March 31, 2003.   The Form 8-K was filed on March 3, 2003, and reported the Audit  Committee of the Board of Directors of Spectrum Bancorporation, Inc.,  notified McGladrey & Pullen, LLP that they were dismissed as the  Company’s independent auditor, effective February 27, 2003.  The report included a letter from  McGladrey & Pullen, LLP regarding its concurrence with a Spectrum  Bancorporation, Inc. statement regarding change of accountants. |
|    |                                                                                                                                                                                                                                                                                                                         |   |
|    |                                                                                                                                                                                                                                                                                                                         | The Company filed a current report on Form 8-K (Item  4) subsequent to the quarter ended March 31, 2003.  The Form 8-K was filed on April 1, 2003, and reported the Audit  Committee of the Board of Directors of Spectrum Bancorporation, Inc, engaged  BKD, LLP, as its new auditor and BKD, LLP accepted such appointment. |

 

16

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                     |   | SPECTRUM BANCORPORATION, INC.                                                            |
|--------------------------|--------|------------------------------------------------------------------------------------------|
|                     |
| Date:  May 9,  2003 |   | By:                                                                                      | /s/  Deryl F. Hamann |   |
|                     |   | Deryl F. Hamann, Chairman and Chief  Executive Officer  (Duly Authorized Representative) |
|                          |        |                                                                                          |  |  |

 

(Authorized officer and principal financial officer ofthe registrant)

 
| Date:  May 9,  2003 |   | By:                                           | /s/  James R. Clark |   |
|--------------------------|--------|-----------------------------------------------|---------------------|--------|
|                     |   | James R. Clark, CFO, Secretary  and Treasurer |

 

17

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**CERTIFICATION****PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I,Deryl F. Hamann, certify that:

 

1.               I have reviewed this quarterlyreport on Form 10-Q of Spectrum Bancorporation, Inc.;

2.               Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.               Based on my knowledge, the financialstatements and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

4.               The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

(a)          designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

(b)         evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”); and

(c)          presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.               The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of this registrant’s board ofdirectors (or persons performing the equivalent functions):

(a)          all significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

(b)         any fraud, whether or not material, that involves management orother employees who have a significant role in registrant’s internal controls;and

 

6.               The registrant’s other certifyingofficers and I have indicated in this quarterly report whether there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | May 9, 2003 |   | /s/ Deryl F.  Hamann |                     |
|--------|-------------|--------|----------------------|--------------------------|
|   |        |   |                 | Deryl F. Hamann          |
|   |        |   |                 | Chief Executive  Officer |
|        |             |        |                      |                          |  |

 

18

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**CERTIFICATIONPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I,James R. Clark, certify that:

 

1.               I have reviewed this quarterlyreport on Form 10-Q of Spectrum Bancorporation, Inc.;

2.               Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.               Based on my knowledge, the financialstatements and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

4.               The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

a.               designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly report isbeing prepared;

b.              evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

c.               presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent functions):

a.               all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

b.              any fraud, whether or not material,that involves management or other employees who have a significant role inregistrant’s internal controls; and

 

6.               The registrant’s other certifyingofficers and I have indicated in this quarterly report whether there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | May 9, 2003 | /s/ James R.  Clarks |                     |
|--------|-------------|----------------------|--------------------------|
|   |        |                 | James R. Clark           |
|   |        |                 | Chief Financial  Officer |
|        |             |                      |                          |  |

 

19

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