**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **ý**                                                                                                                                                                                |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                      |   |                                                                                         |
| **for  the quarterly period ended December 31, 2002**                                                                                                                                     |
|                                                                                                                                                                                      |   |                                                                                         |
| **o**                                                                                                                                                                                     |   | **TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE  ACT**                         |
|                                                                                                                                                                                      |   |                                                                                         |
| **For  the transition period from                to            ** |

 

**CommissionFile 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 ýNo o

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practical date.

 

| **Class**                      |   | **Outstanding at February 10, 2003** |
|--------------------------------|--------|--------------------------------------|
|                           |   |                                 |
| Common Stock,  $1.00 par value |   | 125,132 shares                       |

 

 

----

 

SPECTRUMBANCORPORATION, INC.

INDEX TO FORM 10-QFOR THE QUARTERLY

PERIOD ENDEDDECEMBER 31, 2002

 
|                                     | **PAGE**                                                                                                                                   |
|------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |
| **FORWARD-LOOKING STATEMENTS**           | 3                                                                                                                                          |
|                                     |
| **PART  I:  FINANCIAL INFORMATION** |
|                                     |                                                                                                                                       |
|                                     | ITEM  1:                                                                                                                                   | FINANCIAL  STATEMENTS |
|                                     |                                                                                                                                       |
|                                     | Consolidated Balance Sheets at December 31, 2002  and June 30, 2002 (unaudited)                                                            | 4 |
|                                     |                                                                                                                                       |
|                                     | Consolidated   Statements  of  Income   - Three  months ended December  31, 2002 and December 31, 2001(unaudited) | 5 |
|                                     |                                                                                                                                       |
|                                     | Consolidated   Statements  of  Income   - Six  months ended December  31, 2002 and December 31, 2001(unaudited)   | 6 |
|                                     |                                                                                                                                       |
|                                     | Consolidated Statements of Cash Flows - Six months  ended December 31, 2002 and December 31, 2001 (unaudited)                              | 7 |
|                                     |                                                                                                                                       |
|                                     | Notes to Consolidated Financial Statements                                                                                                 | 8 |
|                                     |                                                                                                                                       |
|                                     | ITEM 2:                                                                                                                                    | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION | 10 |
|                                     |                                                                                                                                       |
|                                     | ITEM 3:                                                                                                                                    | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK | 14 |
|                                     |                                                                                                                                       |
|                                     | ITEM 4:                                                                                                                                    | DISCLOSURE  CONTROLS AND PROCEDURES | 15 |
|                                     |                                                                                                                                       |
| **PART II: OTHER INFORMATION**           |
|                                     |                                                                                                                                       |
|                                     | ITEM  1:                                                                                                                                   | LEGAL PROCEEDINGS | 15 |
|                                     |                                                                                                                                       |
|                                     | ITEM  2:                                                                                                                                   | CHANGES  IN SECURITIES AND USE OF PROCEEDS | 15 |
|                                     |                                                                                                                                       |
|                                     | ITEM  3:                                                                                                                                   | DEFAULTS  UPON SENIOR SECURITIES | 15 |
|                                     |                                                                                                                                       |
|                                     | ITEM  4:                                                                                                                                   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS | 15 |
|                                     |                                                                                                                                       |
|                                     | ITEM  5:                                                                                                                                   | OTHER  INFORMATION | 15 |
|                                     |                                                                                                                                       |
|                                     | ITEM  6:                                                                                                                                   | EXHIBITS  AND REPORTS ON FORM 8-K | 15 |
|                                     |                                                                                                                                       |
|                                     |                                                                                                                                       | SIGNATURES | 16 |
|                                     |                                                                                                                                       | CERTIFICATION BY CHIEF EXECUTIVE OFFICER | 17 |
|                                     |                                                                                                                                       | CERTIFICATION BY CHIEF FINANCIAL  OFFICER | 18 |

 

2

----

 

**FORWARD-LOOKINGSTATEMENTS**

 

This report includes certain forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995. Suchstatements can include words such as “may”, “believe”, “will”, “anticipated”,“estimated”,  “projected”, “could”,“should”, “plan” or similar expressions. Forward-looking statements are based on management’s currentexpectations.  Factors that might causefuture results to differ from management’s expectations include, but are notlimited to: fluctuations in interest rates, inflation, the effect of regulatoryor government legislative changes, expected cost savings and revenue growth notfully realized, the progress of strategic initiatives and whether realizedwithin expected time frames, general economic conditions, adequacy of allowancefor loan losses, costs or difficulties associated with restructuringinitiatives, changes in accounting policies or guidelines, changes in thequality or composition of the Company’s loans and investment portfolios,technology changes and competitive pressures in the geographic and businessareas where the Company conducts its operations.

 

These risks and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed on suchstatements.  Additional informationconcerning the Company and its business, including other factors that couldmaterially affect the Company’s financial results, is included in the Company’sfilings with the Securities and Exchange Commission.

 

3

----

 

**PARTI**

**FINANCIAL INFORMATION**

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

 

**SPE****CTRUMBANCORPORATION, INC.**

**ConsolidatedBalance Sheets**

(In thousands,except share data)

(unaudited)

 
|                                                                                                                                                                                                                                           |   | **December  31,  2002** |      | **June 30,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|--------------------|--------|
| **Assets**                                                                                                                                                                                                                                     |   |                    |      |               |   |
| Cash and due from banks                                                                                                                                                                                                                        |   | $                       | 70,158    |               | $      | 52,927 |   |
| Federal funds sold and other                                                                                                                                                                                                                   |   | 46,140                  |      | 16,351             |   |
| Total cash and cash equivalents                                                                                                                                                                                                                |   | 116,298                 |      | 69,278             |   |
|                                                                                                                                                                                                                                           |   |                    |      |               |   |
| Certificates of deposit                                                                                                                                                                                                                        |   | 299                     |      | 497                |   |
| Securities available for sale                                                                                                                                                                                                                  |   | 300,059                 |      | 334,059            |   |
| Securities held to maturity                                                                                                                                                                                                                    |   | 110                     |      | 0                  |   |
| Loans, net of allowance for loan losses of $21,393****and $20,344                                                                                                                                                                              |   | 1,547,789               |      | 1,475,856          |   |
| Premises and equipment, net                                                                                                                                                                                                                    |   | 42,059                  |      | 41,803             |   |
| Accrued interest receivable                                                                                                                                                                                                                    |   | 15,002                  |      | 15,089             |   |
| Core deposit intangible and other, net                                                                                                                                                                                                         |   | 4,332                   |      | 5,294              |   |
| Goodwill, net                                                                                                                                                                                                                                  |   | 45,930                  |      | 43,913             |   |
| Mortgage servicing rights, net                                                                                                                                                                                                                 |   | 11,423                  |      | 15,131             |   |
| Other assets                                                                                                                                                                                                                                   |   | 12,833                  |      | 11,237             |   |
|                                                                                                                                                                                                                                           |   | $                       | 2,096,134 |               | $      | 2,012,157 |   |
|                                                                                                                                                                                                                                           |   |                    |      |               |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                                 |   |                    |      |               |   |
| **Liabilities:**                                                                                                                                                                                                                               |   |                    |      |               |   |
| Deposits                                                                                                                                                                                                                                       |   |                    |      |               |   |
| Non interest bearing                                                                                                                                                                                                                           |   | $                       | 250,311   |               | $      | 194,792 |   |
| Interest bearing                                                                                                                                                                                                                               |   | 1,444,235               |      | 1,441,175          |   |
| Total deposits                                                                                                                                                                                                                                 |   | 1,694,546               |      | 1,635,967          |   |
| Federal funds purchased and securities sold under agreements to  repurchase                                                                                                                                                                    |   | 63,571                  |      | 70,544             |   |
| Notes payable                                                                                                                                                                                                                                  |   | 138,803                 |      | 124,264            |   |
| Company obligated mandatorily redeemable preferred securities of  subsidiary trust holding solely subordinated debentures                                                                                                                      |   | 58,000                  |      | 48,000             |   |
| Accrued interest and other liabilities                                                                                                                                                                                                         |   | 17,991                  |      | 17,990             |   |
|                                                                                                                                                                                                                                           |   | 1,972,911               |      | 1,896,765          |   |
|                                                                                                                                                                                                                                           |   |                    |      |               |   |
| Minority interest in subsidiaries                                                                                                                                                                                                              |   | 4,749                   |      | 5,229              |   |
|                                                                                                                                                                                                                                           |   |                    |      |               |   |
| Commitments and contingencies                                                                                                                                                                                                                  |   |                    |      |               |   |
|                                                                                                                                                                                                                                           |   |                    |      |               |   |
| **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 125,132 and 125,132 shares, respectively                                                                                                                   |   | 125                     |      | 125                |   |
| Additional paid in capital                                                                                                                                                                                                                     |   | 2,058                   |      | 2,058              |   |
| Retained earnings                                                                                                                                                                                                                              |   | 99,015                  |      | 92,285             |   |
| Accumulated other comprehensive income, net                                                                                                                                                                                                    |   | 5,576                   |      | 3,995              |   |
| Total stockholders’ equity                                                                                                                                                                                                                |   | 118,474                 |      | 110,163            |   |
|                                                                                                                                                                                                                                           |   |                    |      |               |   |
|                                                                                                                                                                                                                                           |   | $                       | 2,096,134 |               | $      | 2,012,157 |   |

 

See Notes toConsolidated Financial Statements.

 

4

----

 

**SPECTRUM BANCORPORATION, INC.**

**ConsolidatedStatements of Income**

**ForThe Three Months Ended**

(In thousands,except share and per share data)

(unaudited)

 
|                                                                                   |   | **December  31,  2002** |   | **December 31,  2001** |   |
|----------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| **Interest income on**:                                                                |   |                    |   |                   |   |
| Loans                                                                                  |   | $                       | 27,807 |                   | $      | 27,222 |   |
| Taxable securities                                                                     |   | 3,103                   |   | 3,626                  |   |
| Nontaxable securities                                                                  |   | 457                     |   | 265                    |   |
| Dividends on securities                                                                |   | 59                      |   | 79                     |   |
| Federal funds sold and other                                                           |   | 265                     |   | 300                    |   |
|                                                                                   |   | 31,691                  |   | 31,492                 |   |
| **Interest expense on:**                                                               |   |                    |   |                   |   |
| Deposits                                                                               |   | 9,260                   |   | 11,856                 |   |
| Federal funds purchased and securities sold under agreements to  repurchase            |   | 220                     |   | 453                    |   |
| Notes payable and company obligated mandatorily redeemable preferred  securities       |   | 2,965                   |   | 3,047                  |   |
|                                                                                   |   | 12,445                  |   | 15,356                 |   |
|                                                                                   |   |                    |   |                   |   |
| **Net interest income**                                                                |   | 19,246                  |   | 16,136                 |   |
| Provision for loan losses                                                              |   | 1,288                   |   | 2,300                  |   |
|                                                                                   |   |                    |   |                   |   |
| **Net interest income after provision  for loan****losses**                            |   | 17,958                  |   | 13,836                 |   |
|                                                                                   |   |                    |   |                   |   |
| **Other income:**                                                                      |   |                    |   |                   |   |
| Service charges and other fees                                                         |   | 3,431                   |   | 2,520                  |   |
| Net gains from sale of loans                                                           |   | 1,701                   |   | 1,216                  |   |
| Loan servicing fees, net                                                               |   | 916                     |   | 793                    |   |
| Gain on securities, net                                                                |   | 6                       |   | 61                     |   |
| Trust department income                                                                |   | 477                     |   | 452                    |   |
| Other                                                                                  |   | 793                     |   | 753                    |   |
|                                                                                   |   | 7,324                   |   | 5,795                  |   |
|                                                                                   |   |                    |   |                   |   |
| **Other expenses:**                                                                    |   |                    |   |                   |   |
| Salaries and employee benefits                                                         |   | 8,151                   |   | 6,973                  |   |
| Occupancy expenses, net                                                                |   | 1,026                   |   | 904                    |   |
| Data processing                                                                        |   | 1,008                   |   | 712                    |   |
| Equipment expenses                                                                     |   | 714                     |   | 639                    |   |
| Advertising                                                                            |   | 1,169                   |   | 571                    |   |
| Professional fees                                                                      |   | 844                     |   | 679                    |   |
| Amortization of core deposit intangible and other                                      |   | 465                     |   | 740                    |   |
| Amortization and valuation adjustments of mortgage servicing rights                    |   | 2,285                   |   | 85                     |   |
| Other operating expenses                                                               |   | 2,442                   |   | 2,029                  |   |
|                                                                                   |   | 18,104                  |   | 13,332                 |   |
|                                                                                   |   |                    |   |                   |   |
| **Income before income taxes and  minority interest****in net income of subsidiaries** |   | 7,178                   |   | 6,299                  |   |
| Income taxes                                                                           |   | 2,643                   |   | 2,250                  |   |
|                                                                                   |   |                    |   |                   |   |
| **Income before minority interest in  net****income of subsidiaries**                  |   | 4,535                   |   | 4,049                  |   |
| Minority interest in net income of subsidiaries                                        |   | 190                     |   | 90                     |   |
|                                                                                   |   |                    |   |                   |   |
| **Net income**                                                                         |   | $                       | 4,345  |                   | $      | 3,959 |   |
|                                                                                   |   |                    |   |                   |   |
| **Basic earnings per common share**                                                    |   | $                       | 34.42  |                   | $      | 31.30 |   |
|                                                                                   |   |                    |   |                   |   |
| **Cash dividends per share declared  on common stock**                                 |   | $                       | 1.50   |                   | $      | 1.50 |   |
|                                                                                   |   |                    |   |                   |   |
| **Weighted average shares outstanding**                                                |   | 125,132                 |   | 125,267                |   |

 

See Notes toConsolidated Financial Statements.

 

5

----

 

**SPECTRUM BANCORPORATION, INC.**

**ConsolidatedStatements of Income**

**ForThe Six Months Ended**

(In thousands,except share and per share data)

(unaudited)

 
|                                                                                   |   | **December  31,  2002** |   | **December  31,  2001** |   |
|----------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
| **Interest income on**:                                                                |   |                    |   |                    |   |
| Loans                                                                                  |   | $                       | 55,996 |                    | $      | 55,486 |   |
| Taxable securities                                                                     |   | 6,834                   |   | 7,345                   |   |
| Nontaxable securities                                                                  |   | 879                     |   | 536                     |   |
| Dividends on securities                                                                |   | 120                     |   | 166                     |   |
| Federal funds sold and other                                                           |   | 421                     |   | 829                     |   |
|                                                                                   |   | 64,250                  |   | 64,362                  |   |
| **Interest expense on:**                                                               |   |                    |   |                    |   |
| Deposits                                                                               |   | 19,418                  |   | 25,777                  |   |
| Federal funds purchased and securities sold under agreements to  repurchase            |   | 477                     |   | 1,048                   |   |
| Notes payable and company obligated mandatorily redeemable preferred  securities       |   | 5,846                   |   | 6,144                   |   |
|                                                                                   |   | 25,741                  |   | 32,969                  |   |
|                                                                                   |   |                    |   |                    |   |
| **Net interest income**                                                                |   | 38,509                  |   | 31,393                  |   |
| Provision for loan losses                                                              |   | 2,529                   |   | 3,461                   |   |
|                                                                                   |   |                    |   |                    |   |
| **Net interest income after provision  for loan****losses**                            |   | 35,980                  |   | 27,932                  |   |
|                                                                                   |   |                    |   |                    |   |
| **Other income:**                                                                      |   |                    |   |                    |   |
| Service charges and other fees                                                         |   | 6,643                   |   | 5,033                   |   |
| Net gains from sale of loans                                                           |   | 3,046                   |   | 1,712                   |   |
| Loan servicing fees, net                                                               |   | 1,832                   |   | 1,674                   |   |
| Gain on securities, net                                                                |   | 90                      |   | 176                     |   |
| Trust department income                                                                |   | 889                     |   | 832                     |   |
| Other                                                                                  |   | 1,577                   |   | 1,546                   |   |
|                                                                                   |   | 14,077                  |   | 10,973                  |   |
|                                                                                   |   |                    |   |                    |   |
| **Other expenses:**                                                                    |   |                    |   |                    |   |
| Salaries and employee benefits                                                         |   | 15,778                  |   | 13,703                  |   |
| Occupancy expenses, net                                                                |   | 2,085                   |   | 1,804                   |   |
| Data processing                                                                        |   | 1,775                   |   | 1,466                   |   |
| Equipment expenses                                                                     |   | 1,408                   |   | 1,261                   |   |
| Advertising                                                                            |   | 2,078                   |   | 1,137                   |   |
| Professional fees                                                                      |   | 1,602                   |   | 1,333                   |   |
| Amortization of core deposit intangible and other                                      |   | 940                     |   | 1,289                   |   |
| Amortization and valuation adjustments of mortgage servicing rights                    |   | 6,688                   |   | 4,879                   |   |
| Other operating expenses                                                               |   | 4,769                   |   | 3,655                   |   |
|                                                                                   |   | 37,123                  |   | 30,527                  |   |
|                                                                                   |   |                    |   |                    |   |
| **Income before income taxes and  minority interest****in net income of subsidiaries** |   | 12,934                  |   | 8,378                   |   |
| Income taxes                                                                           |   | 4,885                   |   | 2,972                   |   |
|                                                                                   |   |                    |   |                    |   |
| **Income before minority interest in  net****income of subsidiaries**                  |   | 8,049                   |   | 5,406                   |   |
| Minority interest in net income of subsidiaries                                        |   | 386                     |   | 314                     |   |
|                                                                                   |   |                    |   |                    |   |
| **Net income**                                                                         |   | $                       | 7,663  |                    | $      | 5,092 |   |
|                                                                                   |   |                    |   |                    |   |
| **Basic earnings per common share**                                                    |   | $                       | 58.35  |                    | $      | 37.48 |   |
|                                                                                   |   |                    |   |                    |   |
| **Cash dividends per share declared  on common stock**                                 |   | $                       | 3.00   |                    | $      | 3.00 |   |
|                                                                                   |   |                    |   |                    |   |
| **Weighted average shares outstanding**                                                |   | 125,132                 |   | 125,267                 |   |

 

See Notes toConsolidated Financial Statements.

 

6

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**SPECTRUM BANCORPORATION, INC.**

**ConsolidatedStatements of Cash Flows**

**ForThe Six Months Ended**

(In thousands)

(unaudited)

 
|                                                                                                   |   | **December  31,  2002** |       | **December  31,  2001** |       |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
| Cash Flow from Operating Activities                                                                    |   |                    | ** ** |                    | ** ** |
| **Net cash (used in) operating  activities**                                                           |   | $                       | (18,872    | )                       | $          | 2,300 |   |
|                                                                                                   |   |                    |       |                    |       |
| Cash Flow from Investing Activities                                                                    |   |                    |       |                    |       |
| Proceeds from maturities of certificates of deposit                                                    |   | 198                     |       | 5,036                   |       |
| Purchase of certificate's of deposit                                                                   |   | 0                       |       | (4,199                  | )          |
| Proceeds from sales and maturities of securities available for sale                                    |   | 98,624                  |       | 63,680                  |       |
| Purchase of securities available for sale                                                              |   | (62,323                 | )          | (67,635                 | )          |
| Proceeds from sale of other real estate owned                                                          |   | 1,598                   |       | 358                     |       |
| Business acquisition (See below)                                                                       |   | 19,139                  |       | 0                       |       |
| Net increase in loans                                                                                  |   | (36,758                 | )          | (44,243                 | )          |
| Proceeds from sale of premises and equipment                                                           |   | 574                     |       | 36                      |       |
| Purchase of premises and equipment                                                                     |   | (2,564                  | )          | (3,238                  | )          |
| Purchase of mortgage servicing rights                                                                  |   | (118                    | )          | (10                     | )          |
| Proceeds from sale of mortgage servicing rights                                                        |   | 0                       |       | 38                      |       |
| **Net cash (used in) investing  activities**                                                           |   | 18,370                  |       | (50,177                 | )          |
|                                                                                                   |   |                    |       |                    |       |
| Cash Flows from Financing Activities                                                                   |   |                    |       |                    |       |
| Proceeds from issuance of preferred securities                                                         |   | 10,000                  |       | 0                       |       |
| Net increase in deposits                                                                               |   | 33,840                  |       | 51,243                  |       |
| Net increase (decrease) in federal funds purchased and securities  sold under agreements to repurchase |   | (8,080                  | )          | 1,882                   |       |
| Proceeds from notes payable                                                                            |   | 27,500                  |       | 6,415                   |       |
| Payment of other liabilities                                                                           |   | (2,236                  | )          | (9,141                  | )          |
| Principal payments on notes payable                                                                    |   | (11,854                 | )          | (8,956                  | )          |
| Debt issuance cost incurred                                                                            |   | (9                      | )          | 0                       |       |
| Purchase of minority interest in subsidiaries                                                          |   | (764                    | )          | 0                       |       |
| Dividends paid, including ($138) and ($108) paid to minority  interest, respectively                   |   | (875                    | )          | (880                    | )          |
| **Net cash provided by financing  activities**                                                         |   | 47,522                  |       | 40,563                  |       |
| **Net increase (decrease) in cash and  cash equivalents**                                              |   | 47,020                  |       | (7,314                  | )          |
|                                                                                                   |   |                    |       |                    |       |
| **Cash and cash equivalents:**                                                                         |   |                    |       |                    |       |
| **Beginning**                                                                                          |   | 69,278                  |       | 106,436                 |       |
| **Ending**                                                                                             |   | $                       | 116,298    |                    | $          | 99,122 |   |
|                                                                                                   |   |                    |       |                    |       |
| **Supplemental Disclosures of Cash  Flow Information:**                                                |   |                    |       |                    |       |
| Cash payments for interest                                                                             |   | $                       | 26,942     |                    | $          | 34,160 |   |
| Cash payments for income taxes                                                                         |   | 8,331                   |       | 6,171                   |       |
|                                                                                                   |   |                    |       |                    |       |
| **Supplemental Schedules of Noncash  Investing and Financing Activities:**                             |   |                    |       |                    |       |
| Net change in unrealized gain (loss) on securities available for sale                                  |   | 1,581                   |       | (126                    | )          |
| Purchase of mortgage servicing rights for other liabilities                                            |   | 2,864                   |       | 0                       |       |
| Reduction of other liabilities related to mortgage servicing rights                                    |   | 0                       |       | 434                     |       |
| Loans transferred to other real estate owned and other assets                                          |   | 696                     |       | 319                     |       |
| Deemed dividend to affiliate                                                                           |   | (196                    | )          | 0                       |       |
|                                                                                                   |   |                    |       |                    |       |
| **Business acquisitions, net of cash  and cash equivalents acquired, allocated to:**                   |   |                    |       |                    |       |
| Assets                                                                                                 |   |                    |       |                    |       |
| Securities                                                                                             |   | $                       | 390        |                    |       |   |
| Loans receivable                                                                                       |   | 2,910                   |       |                    |       |
| Other assets                                                                                           |   | 22                      |       |                    |       |
| Premises and equipment                                                                                 |   | 65                      |       |                    |       |
| Goodwill                                                                                               |   | 2,017                   |       |                    |       |
| Intangibles assets                                                                                     |   | 304                     |       |                    |       |
| Liabilities assumed                                                                                    |   |                    |       |                    |       |
| Deposits                                                                                               |   | (24,739                 | )          |                    |       |
| Other liabilities                                                                                      |   | (108                    | )          |                    |       |
| Net cash and cash equivalent (received)                                                                |   | $                       | (19,139    | )                       |       |   |

 

See Notes toConsolidated Financial Statements.

 

7

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

 

1.               Basisof presentation.

 

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; F & M Bank (95.8% owned), which is charteredin Watertown, South Dakota; Rushmore Bank and Trust (90.0% owned), which ischartered in Rapid City, South Dakota; Citizens Bank (100.0% owned), which ischartered in Mount Ayr, Iowa; Citizens Bank (100.0% owned), which is charteredin Clive, Iowa; Citizens Bank of Princeton (100.0% owned), which is charteredin Princeton, Missouri; Spectrum Banc Service Corporation (100.0% owned by banksubsidiaries, excluding Great Western Bank), a data processing organization;Spectrum Capital Trust I (100.0% owned); Spectrum Capital Trust II (100.0%owned) and Spectrum Capital Trust III (100.0% owned). Great Western Bank alsoowns 100.0% of GW Leasing, Inc., a leasing company.

 

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 December 31,2002 and for the three and six months ended December 31, 2002 and 2001 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. Results for the three and six months ended December 31, 2002 are notnecessarily indicative of the results to be expected for future periods.

 

2.               Earningsper common share.

 

Earnings per sharehave been 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 $38,000 and $38,000in the three months ended December 31, 2002 and 2001 and totaled $361,000 and$397,000 for the six months ended December 31, 2002 and 2001, reduced earningsavailable to common stockholders in the computation.

 

3.               ComprehensiveIncome.

 

Comprehensiveincome was $3,988,000****and$2,273,000 for the three months ended December 31, 2002 and 2001 and $9,244,000and $4,966,000 for the six months ended December 31, 2002 and 2001. Thedifference between comprehensive income and net income presented in theConsolidated Statements of Income is attributed solely to change in unrealizedgains and losses on securities available for sale during the periods presented.

 

4.               IntangibleAssets.

 

On October 1,2002, the Company elected adoption of Statement of Financial AccountingStandard No. 147,  “Acquisitions ofCertain Financial Institutions.”  ThisStatement addresses the financial accounting and reporting for the acquisitionof all or part of a financial institution, except for a transaction between twoor more mutual enterprises.  ThisStatement removes acquisitions of financial institutions, other thantransactions between two or more mutual enterprises, from the scope of FASBStatement No. 72, “Accounting for Certain Acquisitions of Banking or ThriftInstitutions”, and FASB Interpretation No. 9, “Applying APB Opinions No. 16 and17 When a Savings and Loan Association or a Similar Institution Is Acquired ina Business Combination Accounted for by the Purchase Method.”  Transaction provisions for previouslyrecognized unidentifiable intangible assets are effective on October 1, 2002,with earlier application permitted.  Thecarrying amount of an unidentifiable intangible asset shall continue to beamortized as set forth in paragraph 5 of Statement 72 after October 1, 2002,unless the transaction in which the asset arose was a business combination.  If the transaction that gave rise to theunidentifiable intangible asset was a business combination, the carrying amountof the asset shall be reclassified to goodwill as of the later of the date ofacquisition or the date Statement 142 was applied in its entirety.

 

8

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The Company hasidentified those 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 asset of $4,598,000) was $43,913,000 and core depositintangible and other, net was $5,294,000.  As of December 31, 2002, total goodwill (including reclassifiedunidentifiable intangible assets of $4,598,000) was $45,930,000 and coredeposit intangible and other was $4,333,000. If the goodwill reclassification of $4,598,000 were applied retroactivelyto July 1, 2001, net income for the three and six month periods ended December31, 2001 would be increased by approximately $60,000 and $120,000,respectively.

 

On July 1, 2001,the Company 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 addressesfinancial accounting and reporting for acquired goodwill and other intangibleassets and replaces APB Opinion No. 17, “Intangible Assets.”  SFAS 142 addresses how intangible assetsshould be accounted for upon their acquisition and after they have beeninitially recognized in the financial statements.  The new standards provide specific guidance on measuring goodwillfor impairment annually using a two-step process.  The first step identifies potential impairment and the secondstep measures the amount of goodwill 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 the goodwillimpairment test to be completed within the first six months and the final stepto be completed within twelve months of adoption.  The first step of the test was completed as of July 1, 2001 andno indications of goodwill impairment were found; therefore, step two of thegoodwill impairment test was not applicable. As of July 1, 2002 the fair value of each reporting unit was reviewedand it was determined that the fair values were equal to or greater than the fairvalue as of July 1, 2001; hence no indications of goodwill impairment werefound.

 

5.     Legal Proceedings.

 

Spectrum and itssubsidiary banks are from time to time parties to various legal actions arisingin the normal course of business. Management of Spectrum believes there is noproceeding threatened or pending against Spectrum or its subsidiaries, which,if determined adversely, would have a material adverse effect on its financialcondition or results of operation.

 

6.               Changes in Minority Interest and Business Acquisitions.

 

As of December 13,2002, Great Western Bank 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. The resultsof operation of Peoples Bank after the date of acquisition are included in theconsolidated financial statements.

 

A summary of thefair value of net assets acquired and net cash and cash equivalents received(in thousands) on the date of acquisitions is as follows:

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

 

9

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On September 30,2002, the Company acquired 1,688 shares (4.8%) of the common stock of CitizensBank, Clive for $673,288 in cash from a minority shareholder.  The transaction was accounted for as apurchase.

 

In October of2002, the Company purchased a total of 24 shares of common stock of F & MBank, from two minority shareholders for $90,765.  This transaction was accounted for as a purchase.

 

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 shorten the maturity date not earlier than five years from the issuedate.  The redemption price is $1,000per capital security plus any accrued and unpaid distributions to the date ofredemption.  Holders of the PreferredSecurities have no voting rights.  The PreferredSecurities are unsecured and rank junior in priority of payment to all of theCompany’s senior indebtedness and senior to the Company’s common and preferredstock.

 

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.

 

7.               SubsequentEvents-Merger.

 

On January 24th,2003, the Company purchased from a minority shareholder 180 shares of commonstock and 1,800 shares of preferred stock in Rushmore Bank & Trust,subsidiary, for $2,111,492.  Thistransaction was accounted for as a purchase. After January 24th, 2003, the Company owns 100.0% of RushmoreBank & Trust.

 

On February 21,2003, Citizens Bank, Mt Ayr, Iowa and Citizens Bank of Princeton, Princeton,Missouri will merge with and into Citizens Bank, Clive, Iowa.  All three banks are 100.0% ownedsubsidiaries of the Company.  Inaddition, on March 29, 2003, the surviving bank will be renamed Great WesternBank.  Management of Spectrum does not expectthe merger to have a material effect on the business or earnings of Spectrum.The merger will be accounted for at historical cost in a manner similar to apooling-of-interests combination and, accordingly, the merger will not requireany restatement of financial statements on a consolidated basis.  Regulatory approval has been obtained.

 

On March 3, 2003,Rushmore Bank and Trust, Rapid City, South Dakota and F & M Bank,Watertown, South Dakota will be renamed Great Western Bank.  In addition, on May 30, 2002, Spectrum willmerge Great Western Bank, Rapid City, South Dakota into Great Western Bank,Watertown, South Dakota. Management of Spectrum does not expect the merger tohave a material effect on the business or earnings of Spectrum. The merger willbe accounted for at historical cost in a manner similar to a pooling-of-interestscombination and, accordingly, the merger will not require any restatement offinancial statements on a consolidated basis. The Company is in the process ofobtaining regulatory approval.

 
| **ITEM  2:** | **MANAG**EMENT’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, Iowa and Missouri based subsidiarybanks.  Substantially all of theCompany’s income is generated from banking operations.

 

10

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The Company’sfiscal year end is June 30.

 

**CRITICALACCOUNTING POLICIES**

 

Spectrum’s criticalaccounting policies involving the more significant judgments and assumptionsused in the preparation of the consolidated financial statements as of December31, 2002, 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 year ended June 30, 2002.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

Average assetswere $2,063,954,000 for the six months ended December 31, 2002, compared to$1,802,263,000 for the six months ended December 31, 2001, a 14.5% increase.Average interest-earning assets were $1,892,952,000 for the six months endedDecember 31, 2002 and $1,647,000,000 for the six months ended December 31,2001, representing a 14.9% increase. Average assets and average interest-earning assets increased due toincreases in loans, net unearned fees, securities internal growth andacquisitions.

 

Total assets were$2,096,134,000 at December 31, 2002, an increase of $83,977,000 or 4.2% fromJune 30, 2002. The increase in total assets is due to a $47,020,000, 67.9%,increase in cash and cash equivalents and a $71,933,000, 4.9%, increase inloans, net unearned fees and allowance for loan losses.

 

Cash and cashequivalents (cash, due from banks and federal funds sold) increased$47,020,000, 67.9%, due to mortgage servicing loan payoffs, resulting from alow market mortgage interest rate environment, a $34,000,000, 10.2%, decreasein securities and a $55,519,000, 28.5% increase in noninterest bearing deposits.

 

Loans, netunearned fees, grew $72,982,000 or 4.9% during the six months ended December31, 2002 due to internal growth.

 

Loans originatedfor resale were $182,170,000 at December 31, 2002, an increase of  $62,532,000 when compared to $119,638,000 onDecember 31, 2001. Proceeds from sale of loans originated for resale was$150,422,000 for the six months ended December 31, 2002 compared to$111,819,000 for the same period one year ago. The increase in loans originatedis due to the low mortgage rates in the current period when compared to thesame period one year ago.  This increasewas the major factor in the net cash used by operating activities of$18,872,000 in the six months ended December 31, 2002. See “ConsolidatedStatements of Cash Flows.”

 

Mortgage servicingrights, net, were $11,423,000 at December 31, 2002, a decrease of $3,708,000 or24.5%, from June 30, 2002.  Mortgageservicing rights decreased due to a $5,792,000 amortization expense, $898,000valuation adjustment expense and an increase due to purchases of$2,982,000.  See “Noninterest Expense”.

 

The allowance forloan losses increased to $21,393,000 at December 31, 2002 from $20,344,000 atJune 30, 2002. The allowance represented 1.4% and 1.4% of loans, net unearnedfees as of December 31, 2002 and June 30, 2002.  The increase in allowance for loan losses was due to a greaterincrease in loan loss provisions when compared to net charge-offs during theperiod.  See “Provision for LoanLosses”.

 

For the six monthsended December 31, 2002, the Company’s annualized return on average assets(“ROA”) was 0.7%, compared to 0.6% for the six months ended December 31, 2001.Return on average stockholders’ equity (“ROE”) for the six months endedDecember 31, 2002 and 2001 was 13.4% and 10.2%, respectively.  The increases in ROA and ROE are due to a50.5% increase in net income for the six months ending December 31, 2002 whencompared to the same period a year ago.

 

Cash and cashequivalents, certificates of deposit and securities available for sale totaled$416,656,000 or 19.9% of total assets at December 31, 2002, compared to

 

11

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$403,834,000 or20.1%, at June 30, 2002.  The increaseoccurred primarily because federal funds sold increased 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 December 31, 2002 comparedto $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 deferral period,all accumulated and unpaid distributions will be paid. The capital securitieswill be redeemed thirty years from the issuance date; however, the Company hasthe option to shorten 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 the debenturesand relevant trust agreement constitute a full, irrevocable and unconditionalguarantee on a subordinated basis by it of the obligations of the trust underthe 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.

 

At December 31,2002, the Company’s leverage ratio was 5.1%, Tier 1 risk-based capital ratiowas 6.4%, and total risk-based capital ratio was 11.1%, compared to minimumrequired levels of 4% for leverage and Tier 1 risk-based capital ratios and 8%for total risk-based capital ratio, subject to change at the discretion of regulatoryauthorities to impose higher standards in individual cases. At December 31,2002, the Company had net risk-weighted assets of $1,633,461,000.

 

**ACQUISITIONS**

 

As of December 13,2002, Great Western Bank 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. The resultsof operation of Peoples Bank after the date of acquisition are included in theconsolidated financial statements.

 

**RESULTS OF OPERATION**

 

# **Comparison of theThree Months Ended December 31, 2002 and December 31, 2001.**

 

Net Interest Income

 

Total interest income for the three months ended December 31,2002 was $31,691,000, a 1.0% increase from $31,492,000 for the three monthsended December 31, 2001. The slight increase was due to a greater increase ininterest earned on loans when compared to the decrease in interest earned onfederal funds sold and taxable securities for the current fiscal period whencompared to the same fiscal period one year ago.

 

Total interest expense for the three months ended December 31,2002 was $12,445,000, a 19.0% decrease from $15,356,000 for the three monthsended December 31, 2001. The decrease was the result of lower interest ratespaid for interest bearing deposits for the current period when compared to thesame period a year ago. Average interest-bearing liabilities were$1,608,195,000 and $1,496,421,000 for the three months ended December 31, 2002and three months ended December 31, 2001, respectively.  Average interest-bearing liabilitiesincreased between these periods $111,774,000 or 7.5%. This increase isprimarily due to acquisitions and an increase in average interest-bearingdeposits when compared to the same period for fiscal year 2002.

 

Net interest income was $19,246,000 for the three months endedDecember 31, 2002, compared to $16,136,000 for the same period in 2002, anincrease of 19.3%. The Company’s net interest margin increased to 4.0% for thethree months ended December 31, 2002 from

 

12

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3.9% for the three months ended December31, 2001. The increase in the net interest margin was caused by a decrease inthe cost of interest bearing deposits and borrowings and a slight increase inincome earned from loans, securities and federal funds sold.

 

Provision for Loan Losses

 

The provision for loan losses for the three months endedDecember 31, 2002, was $1,288,000, compared to $2,300,000 for the three monthsended December 31, 2001.  The decreasewas due to a decline in estimated loan losses.

 

Noninterest Income

 

Noninterest income for the three months ended December 31, 2002was $7,324,000, an increase of $1,529,000, or 26.4%, over the same period lastfiscal year. The increase resulted primarily from a $911,000 increase inservice charges and other fees and a $485,000 increase in net gains from saleof loans.

 

Noninterest Expense

 

Noninterest expensefor the three months ended December 31, 2002 was $18,104,000, an increase of$4,772,000, or 35.8% over the same period last fiscal year.  The increase resulted primarily from a$2,200,000 increase in amortization of mortgage servicing rights, a $1,178,000increase in salaries and employee benefits and a $598,000 increase inadvertising expense.

 

Amortization and valuation adjustment of mortgage servicingrights increased $2,200,000 to $2,285,000 for the three months ended December31, 2002 from $85,000 for the three months ended December 31, 2001.     The$2,200,000 increase in the three months ended December 31, 2002 is due to anaccelerated amortization resulting from the change in the current payoffs ofmortgage servicing loans caused by a declining interest rate environment whencompared to the three months ended December 31, 2001 which had a reduction inthe valuation allowance due to an increasing interest rate environment.

 

A decline in mortgage interest rates in future periods mayresult in further changes in prepayment rates and further acceleration inamortization expenses, the result of which will be estimated at the end of eachquarter.

 

Income Taxes 

 

Income taxes for the three months ended December 31, 2002 andDecember 31, 2001 were $2,643,000 and $2,250,000. The increase is due to a14.0%, $879,000, increase in pretax net income. The effective tax rates for theperiods were 36.8% and 35.7%. The increase in the effective tax rate is due toadjustments made in the second quarter of fiscal 2003 for fiscal year 2002taxes.  The effective tax rate isexpected to be approximately 35% in the future.

 

# **Comparison of theSix Months Ended December 31, 2002 and December 31, 2001.**

 

Net Interest Income

 

Total interest income for the six months ended December 31, 2002was $64,250,000, a 0.2% decrease from $64,362,000 for the six months endedDecember 31, 2001. The slight decrease was due to a greater decrease ininterest earned on federal funds sold and taxable securities when compared tothe increase in interest earned on loans for the current period when comparedto the prior period.

 

Total interest expense for the six months ended December 31,2002 was $25,741,000, a 21.9% decrease from $32,969,000 for the six monthsended December 31, 2001. The decrease was the result of lower interest ratespaid for interest bearing deposits during fiscal 2003 when compared to the sameperiod a year ago. Average interest-bearing liabilities were $1,700,252,000 and$1,499,012,000 for the six months ended December 31, 2002 and six months endedDecember 31, 2001, respectively. Average interest-bearing liabilities increased between these periods$201,240,000 or 13.4%. This increase is primarily due to

 

13

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acquisitions and an increase in average interest-bearingdeposits when compared to the same period for fiscal year 2002.

 

Net interest income was $38,509,000 for the six months endedDecember 31, 2002, compared to $31,393,000 for the same period in 2001, anincrease of 22.7%. The Company’s net interest margin increased to 4.1% for thesix months ended December 31, 2002 from 3.8% for the six months ended December31, 2001. The increase in the net interest margin was caused by a largerdecrease in the cost of interest-bearing deposits and borrowings when comparedto the decrease in income earned from loans, securities and federal funds sold.

 

Provision for Loan Losses

 

The provision for loan losses for the six months ended December31, 2002, was $2,529,000, compared to $3,461,000 for the six months endedDecember 31, 2001.  The decrease was dueto a decline in estimated loan losses for the current period.

 

Noninterest Income

 

Noninterest income for the six months ended December 31, 2002was $14,077,000, an increase of $3,104,000, or 28.3%, over the same period lastfiscal year. The increase resulted primarily from a $1,610,000 increase inservice charges and other fees and a $1,334,000 increase in net gains from saleof loans.

 

Noninterest Expense

 

Noninterest expense for the six months ended December 31, 2002was $37,123,000, an increase of $6,596,000, or 21.6%, over the same period lastfiscal year.  The increase resultedprimarily from a $2,075,000 increase in salaries and employee benefits,$1,809,000 increase in amortization of mortgage servicing rights and a $941,000increase in advertising expenses.

 

Amortization and valuation adjustment of mortgage servicingrights increased $1,809,000 to $6,688,000 for the six months ended December 31,2002 from $4,879,000 for the six months ended December 31, 2001.  The increase is due to an acceleratedamortization and valuation adjustments of mortgage servicing rights for the sixmonths ended December 31, 2002 when compared to the same period a year ago.

 

A decline in mortgage interest rates in future periods mayresult in further changes in prepayment rates and further acceleration inamortization expenses, the result of which will be estimated at the end of eachquarter.

 

Income Taxes 

 

Income taxes for the six months ended December 31, 2002 andDecember 31, 2001 were $4,885,000 and $2,972,000. The increase is due to a54.5%, $4,560,000, increase in pretax net income. The effective tax rates forthe periods were 37.8% and 35.5%. The increase in the effective tax rate is dueto adjustments made in the first quarter of fiscal 2003 for fiscal year 2002taxes.  The effective tax rate isexpected to be approximately 35% in the future.

 

 
| **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.

 

Managementregularly monitors the interest sensitivity position and considers thisposition in its decisions with regard to the Company’s interest rates andmaturities for interest-earning assets acquired and interest-bearingliabilities accepted.

 

14

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There has not beena material change in the interest rate sensitivity of the Company during thesix months ended December 31, 2002.

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

 

The Company’sprincipal executive officer and principal financial officer have concluded thatthe Company’s disclosure controls and procedures as defined in Exchange ActRule 13a-14(c), based on their evaluation of such controls and proceduresconducted within 90 days prior to the date hereof, are effective to ensure thatinformation required to be disclosed by the Company in the reports it files underthe Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission and that such information isaccumulated and communicated to the Company’s management, including itsprincipal executive officer and principal financial officer, as appropriate toallow 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 |

 

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 shorten the maturity date not earlier than five years from the issuedate.  The redemption price is $1,000per capital security plus any accrued and unpaid distributions to the date ofredemption.  Holders of the PreferredSecurities have no voting rights.  ThePreferred Securities are unsecured and rank junior in priority of payment toall of the Company’s senior indebtedness and senior to the Company’s common andpreferred 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.

 
| 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) |

 

15

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|   |   | (b). | Reports on Form 8-K: |
|--------|--------|------|----------------------|

 

No reports on Form 8-Kwere filed during the six months ended December 31, 2002.

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                                                                    | SPECTRUM BANCORPORATION, INC. |
|-------------------------------------------------------------------------|-------------------------------|
|                                                                    |                          |   |   |
| Date:   February 10, 2003                                          | By:                           |       /s/ Deryl F.  Hamann |   |
|                                                                    |                          | Deryl F. Hamann, Chairman and Chief |
|                                                                    |                          | Executive Officer |
|                                                                    |                          | (Duly Authorized Representative) |
|                                                                    |                          |   |
| (Authorized officer and principal financial officer  of the registrant) |                          |   |
|                                                                    |                          |   |
| Date:   February 10, 2003                                          | By:                           |       /s/ James R.  Clark |   |
|                                                                    |                          | James R. Clark, CFO, Secretary  and Treasurer |
|                                                                         |                               |  |  |  |

 

16

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**CERTIFICATION****PURSUANT TO 18 U.S.C. SECTION 1350,**

**AS ADOPTED PURSUANT TO SECTION 302 OF THESARBANES-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 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 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:  February 10, 2003 | /s/ Deryl F.  Hamann     |   |
|-------------------------------|--------------------------|--------|
|                          | Deryl F. Hamann          |
|                          | Chief Executive  Officer |

 

17

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**CERTIFICATION PURSUANT****TO 18 U.S.C.SECTION 1350,**

**AS ADOPTED PURSUANT TO SECTION 302 OF THESARBANES-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 reportis being 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:  February 10, 2003 | /s/ James R.  Clark      |   |
|-------------------------------|--------------------------|--------|
|                          | James R. Clark           |
|                          | Chief Financial  Officer |

 

18

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