Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

COMMISSION FILE NUMBER: 001-15215

SPECTRUM BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

NONE
(Title of class)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES ý NO o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: ý

        All voting and non-voting common equity is held by affiliates of the registrant.

        At September 15, 2002, there were 125,132 shares of registrant's common stock outstanding.

TABLE OF CONTENTS

2

FORWARD-LOOKING STATEMENTS

        This report includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements 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 current expectations. Factors that might cause future results to differ from management's expectations include, but are not limited to: fluctuations in interest rates, inflation, the effect of regulatory or government legislative changes, expected cost savings and revenue growth not fully realized, the progress of strategic initiatives and whether realized within expected time frames, general economic conditions, adequacy of allowance for loan losses, costs or difficulties associated with restructuring initiatives, changes in accounting policies or guidelines, changes in the quality or composition of the Company's loans and investment portfolios, technology changes and competitive pressures in the geographic and business areas where the Company conducts its operations.

        These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission.

PART I

ITEM 1.    BUSINESS

THE COMPANY

        Spectrum, a multi-bank holding company, offers full service community banking through 16 banking locations in Nebraska, 21 banking locations in South Dakota, 22 banking locations in southern Iowa, and two banking locations in northern Missouri. Its Chairman, Deryl F. Hamann, acquired Spectrum in 1971; at that time it had a single bank charter in Leon, Iowa with two locations. In 1974, Mr. Hamann acquired the parent company of F&M Bank, Watertown, South Dakota; the parent was merged into Spectrum on May 31, 1999. Citizens Corporation, an affiliated bank holding company with six Iowa banking locations, was merged into Spectrum on August 7, 2000. On March 23, 2001, Great Western Securities, Inc., the parent company of Great Western Bank, Omaha, Nebraska, was merged into Spectrum. Acquisitions of other banks and savings institutions have been made by each of the holding companies on both strategic and opportunistic bases. Expansion also occurred through acquisition of offices of other financial institutions and de novo branching. See "Mergers and Acquisitions" for additional information.

THE BANKS

        Spectrum has six direct subsidiaries: Great Western Bank, Omaha, Nebraska; F&M Bank, Watertown, South Dakota; Rushmore Bank & Trust, Rapid City, South Dakota; Citizens Bank, Mount Ayr, Iowa; Citizens Bank, Clive, Iowa; and Citizens Bank of Princeton, Princeton, Missouri. Each subsidiary bank is chartered by the state banking authorities of the state in which its headquarters is located. See "Supervision and Regulation." The following table sets forth information regarding Spectrum's banks as of June 30, 2002:

SPECTRUM BANC SERVICE CORPORATION

        Subsidiary banks (excluding Great Western Bank) own 100% of Spectrum Banc Service Corporation, which provides data processing and related services to its bank owners.

3

STRATEGIES

        Growth.    Spectrum intends to grow within its existing markets, to branch into or acquire financial institutions in existing markets, and to branch into or acquire financial institutions in other markets consistent with its capital requirements and management abilities.

        Spectrum seeks opportunities to acquire banks at acceptable prices. Spectrum's operating strategy is to provide high quality community banking services to its customers and increase market share through solicitation of new business, repeat business and referrals from customers, and selected promotional strategies.

        Branch Activity.    Citizens Bank, Clive closed its branch in Hartford, Iowa in August 2002. As of February 28, 2002, F&M Bank acquired First Western Bank, N.A., Atkinson, Nebraska ("First Western") and Marquette Bank Nebraska, N.A., O'Neill, Nebraska ("Marquette") for $17,484,000. At February 28, 2002, First Western and Marquette had assets of $110,429,000, deposits of $99,589,000, net loans of $62,981,000 and stockholders' equity of $10,217,000. In April, 2002 F&M Bank opened a branch in Milbank, South Dakota. Citizens Bank, Mt Ayr opened a branch in Creston, Iowa in April 2002. Rushmore Bank & Trust opened a Wal-Mart Store location in October 2001 in Rapid City, South Dakota. F&M Bank relocated its Chamberlain, South Dakota branch to a newly constructed facility, which opened in August of 2001. Should Spectrum be unable to acquire existing banks or other financial institutions at acceptable prices, it will continue to seek expansion through new branches or possibly by chartering new banks.

LENDING ACTIVITIES

        Spectrum provides a broad range of commercial and retail lending services. Each of Spectrum's subsidiary banks has a written credit policy that addresses the needs of its market. Spectrum's Iowa and Missouri banks have substantially uniform credit policies. All of the credit policies contain underwriting and loan administration criteria, including levels of loan commitment, loan types, credit criteria, concentration limits, loan administration, loan review and grading and related matters.

        Spectrum is able to facilitate substantial credit requests, through the purchase and sale of participations among its subsidiary banks, as well as unaffiliated banks or other financial institutions. As of June 30, 2002, approximately 87% of all loans and leases were to customers within Spectrum's market area.

        Real Estate Loans.    These include various types of loans for which Spectrum's banks hold real property as collateral. The risks of real estate loans include the borrower's inability to pay and deterioration in value of real estate as collateral. Real estate loans include commercial and residential real estate construction loans. Real estate construction loans are principally made to builders to construct business buildings or single and multi-family residences. These loans typically have maturities of 6 to 12 months and adjustable interest rates, and are subject to origination fees. Terms may vary depending upon many factors, including location, type of project and financial condition of the builder. Real estate loans on commercial buildings and consumer single and multi family residency generally have terms of five years of less and bear fixed interest rates.

        Commercial and Agricultural Loans.    These consist of loans to businesses for various purposes, including revolving lines of credit and equipment financing. The loans secured by collateral other than real estate or equipment, in most cases, mature within one year, have adjustable interest rates, and are typically secured by inventory, accounts receivable, livestock, crops, machinery and other commercial or agricultural operating assets. Revolving lines of credit for business and agricultural purposes typically mature annually.

        Loans to Individuals.    Loans to individuals, which are not secured by real estate, generally have terms of two to six years and bear interest at fixed rates. These loans usually are secured by motor vehicles, investment securities, or other personal assets, and in some instances are unsecured.

        Citizens Bank, Mount Ayr has three regional loan committees, which meet weekly. Citizens Bank Princeton has a weekly joint loan committee meeting with one of the regional loan committees of Citizens Bank Mount Ayr. Great Western Bank has a senior loan committee and loan committee that meet weekly. F&M Bank has regional loan committee meetings bi-weekly as required by loan volume. Rushmore Bank & Trust has an executive loan committee that meets weekly.

        Interest rates charged on loans vary with the degree of risk, maturity, underwriting and servicing costs, loan amount and extent of other banking relationships maintained with customers and are further subject to competitive pressures, money market rates, availability of funds and government regulations.

4

        In the ordinary course of business, Spectrum's banks issue letters of credit. See Note 19 to Consolidated Financial Statements. Spectrum's banks apply the same credit standards to those commitments as they use in direct lending activities and have included these commitments in its lending risk evaluations. Spectrum's exposure to credit loss under letters of credit is represented by the amount of those commitments.

        Under applicable federal and state law, permissible loans to one borrower after June 30, 2002, were limited to $10,457,533 for Great Western Bank, $7,572,611 for F&M Bank, $3,451,842 for Rushmore Bank & Trust, $4,206,986 for Citizens Bank, Mount Ayr, $1,886,964 for Citizens Bank, Clive and $1,089,838 for Citizens Bank of Princeton. Certain exceptions, depending on the laws of the four respective states in which the Banks operate, increase the loan limit to one borrower for loans secured by readily marketable securities and certain readily marketable agricultural assets.

COMPETITION

        The banking and financial services industry is highly competitive and undergoing rapid consolidation. Within the market area of Spectrum's banks, numerous commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, investment firms and private lenders compete with the banks for deposits and loans. Many of these competitors have significantly greater resources than Spectrum, including higher lending limits and more extensive financial, technical and marketing resources.

        The Financial Modernization Act, also known as the Gramm-Leach-Bliley Act, enacted in November 1999, affects competition between financial institutions. This act significantly revised the laws regulating banks and bank holding companies and other providers of financial services, enabling bank holding companies and foreign banks that meet applicable statutory requirements—defined as financial holding companies—to engage in a broader range of services and to compete more efficiently in existing business lines. The Gramm-Leach-Bliley Act authorizes financial holding companies to engage in securities, insurance, and other activities that are financial in nature or that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. As of June 30, 2002, Spectrum had not elected to convert to a financial holding company, but reserves this right under the new rule. At this time, the management of Spectrum cannot currently predict the full impact of the enactment of the Gramm-Leach-Bliley Act on Spectrum.

EMPLOYEES

        As of the August 31, 2002, Spectrum had approximately 709 full-time equivalent employees. Management considers its relationship with its employees to be good.

SUPERVISION AND REGULATION

        Spectrum and its subsidiary banks are extensively regulated under federal and state laws. These laws and regulations are primarily intended to protect depositors and the deposit insurance fund of the FDIC, not securities holders of Spectrum. The following information is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of Spectrum and its banks. Spectrum is unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls or new federal or state legislation may have on its business and earnings in the future.

        The Gramm-Leach-Bliley Act preserves the role of the Federal Reserve as the umbrella supervisor for holding companies while at the same time incorporating a system of functional regulation designed to take advantage of the strengths of the various federal and state regulators. In particular, the Act replaces the broad exemption from Securities and Exchange Commission regulation that banks previously enjoyed with more limited exemptions, and it reaffirms that states are the regulators for the insurance activities of all persons, including federally chartered banks. The Gramm-Leach-Bliley Act also establishes a minimum federal standard of financial privacy. In general, the applicable federal regulations prohibit affected financial institutions (including banks, insurance agencies and broker/dealers) from sharing information about their customers with non-affiliated third parties unless (1) the financial institution has first provided a privacy notice to the customer; (2) the financial institution has given the customer an opportunity to opt out of the disclosure; and (3) the customer has not opted out after being given a reasonable opportunity to do so. Compliance with the notice and other requirements under the regulations was required by July 1, 2001.

5

        Recent regulatory developments.    The terrorists' attacks in September 2001 have impacted the financial services industry and have already led to federal legislation that attempts to address certain related issues involving financial institutions. On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other provisions, the USA PATRIOT Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. The USA PATRIOT Act also requires the Secretary of the Treasury to prescribe, by regulations to be issued jointly with the federal banking regulators and certain other agencies, minimum standards that financial institutions must follow to verify the identity of customers, both foreign and domestic, when a customer opens an account. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. Most specific changes take effect October 25, 2002. At this time, the company is unable to determine whether the provisions of the USA PATRIOT Act will have a material impact on the business of the Company and its subsidiaries.

SPECTRUM

        General.    Spectrum is a bank holding company registered under the Bank Holding Company Act of 1956 and is subject to regulation, supervision and examination by the Federal Reserve. Spectrum is required to file an annual report and other reports as the Federal Reserve now requires or may require.

        Acquisitions.    As a bank holding company, Spectrum is required to obtain the prior approval of the Federal Reserve before acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or bank holding company. The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantial anti-competitive result, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. The Federal Reserve also considers managerial, capital and other financial factors in acting on acquisition or merger applications.

        Permissible Activities.    Subject to limited exceptions, a bank holding company may not engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in a non-banking activity, unless this activity has been determined by the Federal Reserve to be closely related to banking or managing banks. The Federal Reserve has identified specific non-banking activities in which a bank holding company may engage with notice to, or prior approval by, the Federal Reserve.

        Capital Adequacy.    The Federal Reserve monitors the regulatory capital adequacy of bank holding companies. As discussed below, Spectrum's banks are also subject to the regulatory capital adequacy requirements of the FDIC and Nebraska, South Dakota, Iowa and Missouri regulations, as applicable. The Federal Reserve uses a combination of risk-based guidelines and leverage ratios to evaluate the regulatory capital adequacy of Spectrum.

        The Federal Reserve has adopted a system using risk-based capital adequacy guidelines to evaluate the regulatory capital adequacy of bank holding companies on a consolidated basis. Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a risk-weighted asset base. Some off balance sheet items, such as loan commitments in excess of one year, mortgage loans sold with recourse and letters of credit, are added to the risk-weighted asset base by converting them to a balance sheet equivalent and assigning to them the appropriate risk weight. For purposes of the regulatory risk-based capital guidelines, total capital is defined as the sum of core and supplementary capital elements, with supplementary capital being limited to 100% of core capital. For bank holding companies, core capital, also known as Tier I capital, generally includes common stockholders' equity, perpetual preferred stock and minority interests in consolidated subsidiaries less the unamortized balance of intangible assets. No more than 25% of core capital may be comprised of cumulative preferred stock including the Trust Preferred Securities of its subsidiaries. Supplementary capital, also known as Tier II capital, generally includes certain forms of perpetual preferred stock and cumulative preferred stock not included in core capital, as well as maturing capital instruments, and the allowance for loan losses limited to 1.25% of risk-weighted assets. The regulatory guidelines require a minimum ratio of total capital to risk-weighted assets of 8% to be adequately capitalized, of which at least 4% should be in the form of core capital.

6

        At June 30, 2002, Spectrum's core or Tier I capital was $96,618,000.

        In addition to the risk-based capital guidelines, the Federal Reserve and the FDIC use a leverage ratio as an additional tool to evaluate the capital adequacy of banks and bank holding companies. The leverage ratio is defined to be a company's core capital divided by its average tangible assets. Based upon the current capital status of Spectrum, the applicable minimum required leverage ratio is 4%.

        The table below presents Spectrum's applicable regulatory capital ratios at June 30, 2002:

        Failure to meet the regulatory capital guidelines may result in the initiation by the Federal Reserve of appropriate supervisory or enforcement actions. All three of Spectrum's capital ratios were above the minimum required as of June 30, 2002.

THE BANKS

        General.    Spectrum owns six banks: Great Western Bank, Omaha, Nebraska, a Nebraska banking corporation with 14 banking locations; F & M Bank, Watertown, South Dakota, a South Dakota banking corporation with 17 banking locations; Rushmore Bank & Trust Co., Rapid City, South Dakota, a South Dakota banking corporation with six banking locations; Citizens Bank, Mount Ayr, Iowa, an Iowa banking corporation with 19 banking locations; Citizens Bank, Clive, Iowa, an Iowa corporation with three banking locations; and Citizens Bank of Princeton, Princeton, Missouri, a Missouri banking corporation with two banking locations. The deposits of each bank are insured by the FDIC and the banks are subject to supervision and regulation by the FDIC. In addition, Great Western Bank is regulated by the Nebraska Department of Banking and Finance, the South Dakota banks are regulated by the South Dakota Division of Banking, the Iowa banks are regulated by the Iowa Division of Banking, and Citizens Bank of Princeton is regulated by the Missouri Division of Finance.

        Permissible Activities.    No state bank may engage in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to its Bank Insurance Fund. None of Spectrum's banks is presently involved in the types of activities covered by this limitation. Under the Financial Modernization Act and rules adopted pursuant thereto, banks may create financial subsidiaries to engage in activities that are "financial in nature." None of Spectrum's bank subsidiaries have elected to do so, but may do so in the future.

        Community Reinvestment Act.    Enacted in 1977, the federal Community Reinvestment Act has become important to financial institutions, including their holding companies. This allows regulators to turn down an applicant seeking to make an acquisition or establish a branch unless it has performed satisfactorily under this act. Satisfactory performance means meeting adequately the credit needs of the communities the applicant serves. The applicable federal regulators regularly conduct examinations to assess the performance of financial institutions. During their last examinations, ratings of satisfactory or outstanding were received by each of Spectrum's banks. As a result, management believes that the banks' performance under the act will not impede regulatory approvals of any proposed acquisitions or branches.

        Dividend Restrictions.    Dividends paid by Spectrum's banks provide substantially all of the operating and investing cash flow of Spectrum. Spectrum's banks are subject to legal limitations on the frequency and amount of dividends that may be paid to Spectrum. Under South Dakota and Nebraska law, the approval of the principal regulator is required prior to the declaration of any dividend by a bank if the total of all dividends declared in any calendar year exceeds the total of its net profits of that year to date combined with its retained net profits for the preceding two years. Under Iowa law, a bank may declare and pay dividends only out of undivided profits and only if not restricted by the principal regulator. The Iowa principal regulator requires that Iowa state banks maintain an adjusted equity capital ratio of not less than 6.5% of adjusted assets plus a fully funded allowance for loan losses unless a lower ratio is approved by the principal regulator. An Iowa state bank operating below the minimum requirement would be subject to immediate dividend restriction; a request for immediate capital injection and/or a possible cease and desist order. Citizens Bank, Clive has committed to maintain a ratio for Tier I capital to average assets of not less than 8 percent until August 1^st, 2004, due to the fact that the bank

7

relocated its principal place of business from Carlisle, Iowa, to Clive, Iowa. Under Missouri law, a bank may not pay dividends that would impair capital. The Missouri principal regulator generally requires that Missouri state banks maintain equity capital of not less than 6% of assets. The Nebraska principal regulator requires a total capital to asset ratio of 6%, excluding intangibles other than purchased mortgage servicing rights. At least 5.5% must be primary capital which includes all equity capital accounts plus allowances for loan and lease losses. In addition, either the applicable state banking regulator or the FDIC has the power to prohibit Spectrum's banks from paying dividends if such payments would constitute unsafe or unsound banking practices or cause the bank to be undercapitalized.

        Examinations.    Spectrum's banks are examined from time to time by the FDIC. Based upon an evaluation, the examining regulator may revalue the assets of an insured institution and require that it establish specific reserves to compensate for the difference between the value determined by the regulator and the book value of Spectrum's assets. The state bank regulators also conduct examinations of state-chartered banks. State bank regulators may accept the results of a federal examination in lieu of conducting an independent examination. South Dakota, Iowa, Nebraska and Missouri regulators have the authority to revalue the assets of a state-chartered institution and require it to establish reserves.

        Capital Adequacy.    The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured institutions. The requirements address both risk-based capital and leverage capital, with risk-based assets and core and supplementary capital being determined in essentially the same manner as described above for bank holding companies. The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk.

        The FDIC risk-based capital guidelines require state non-member banks to have a minimum ratio of core capital to total risk-weighted assets of 4% and a minimum ratio of total capital to total risk-weighted assets of 8%.

        The FDIC leverage guidelines require that state banks maintain core capital of no less than 3% and up to 5% of total tangible assets. The applicable guideline for Spectrum's banks is estimated to be 4%. Banks with regulatory capital ratios below the required minimum are subject to administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

        The table below presents the regulatory capital ratios of the Spectrum subsidiary banks at June 30, 2002:

        Banking regulators have adopted regulations that define five capital levels: well capitalized, adequately capitalized, undercapitalized, severely undercapitalized and critically undercapitalized. An institution is critically undercapitalized if it has a tangible equity to total assets ratio that is equal to or less than 2%. An institution is well capitalized if it has a total risk-based capital ratio of 10% or greater, Tier I risk-based capital ratio of 6% or greater, and a Tier I capital leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An institution is adequately capitalized if it has a total risk-based capital ratio of not less than 8%, a Tier I risk-based capital ratio not less than 4% and a leverage ratio of not less than 4%. Under these regulations, as of June 30, 2002, the Spectrum banks were above well capitalized minimum ratios.

        Federal regulations require the federal banking regulators to take prompt corrective action to resolve the problems of depository institutions, including capital-deficient institutions. In addition to requiring the submission of a capital restoration plan, the regulations contain broad limits on activities of institutions which are less than adequately capitalized, involving asset growth, acquisitions, branch establishment, and expansion into new lines of business. With limited exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any distribution or payment.

8

        As an institution's capital decreases, the powers of the federal regulators become greater. An undercapitalized or severely undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management, and other restrictions. The regulators have limited discretion in dealing with a critically undercapitalized institution and are virtually required to appoint a receiver or conservator if the capital deficiency is not corrected promptly.

        Real Estate Lending Evaluations.    The federal regulators have adopted uniform standards for evaluations of loans secured by real estate or made to finance improvements to real estate. Banks are required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. The regulations establish loan to value ratio limitations on real estate loans. Spectrum's bank loan policies establish limits on loan to value ratios that are equal to or less than those established in such regulations.

        Interstate Banking Legislation.    Federal legislation effective September 1995, eliminated many of the historical barriers to the acquisition of banks by out-of-state bank holding companies. This law facilitates the interstate expansion and consolidation of banking organizations by permitting: (1) bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home states regardless of whether acquisitions are authorized under the laws of the host state; (2) the interstate merger of banks, subject to the right of individual states either to pass legislation providing for earlier effectiveness of mergers or to opt out of this authority after June 1, 1997; (3) banks to establish new branches on an interstate basis provided that this action is specifically authorized by the law of the host state; (4) foreign banks to establish, with approval of the appropriate regulators in the United States, branches outside their home states to the same extent that national or state banks located in that state would be authorized to do so; and (5) banks to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for any bank or thrift affiliate, whether the affiliate is located in the same or different state. In August 2001, each of Spectrum's subsidiary banks executed an agency agreement appointing each of the other subsidiary banks as its agent to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations to the full extent permitted by applicable law and regulation.

        Financial Modernization Act (Gramm-Leach-Bliley Act).    Banks that elect to create "financial subsidiaries" may engage in activities that are financial in nature, including:

•

Lending, exchanging, transferring, investing for others, or safeguarding money or securities;



•

Engaging as agent or broker in any state for purposes of insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, death, defects in title, or providing annuities as agent or broker.



•

Providing financial, investment, or economic advisory services, including advising an investment company;



•

Issuing or selling annuities representing interests in pools of assets permissible for a bank to hold directly;



•

Underwriting, dealing in, or making a market in securities;



•

Engaging in activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto;



•

Activities that the Federal Reserve has found to be usual in connection with the transaction of banking or other financial operations abroad;



•

Additional activities that the Secretary of the Treasury in consultation with the Federal Reserve determines to be financial in nature or incidental to a financial activity; and



•

Activities that may be conducted by an operating subsidiary.

        None of Spectrum's bank subsidiaries have elected to create financial subsidiaries.

CHANGING REGULATORY STRUCTURE

        The laws and regulations affecting banks and bank holding companies are in a state of flux. The rules and the regulatory agencies in this area have changed significantly over recent years, and there is reason to expect that similar changes will continue in the future. It is not possible to predict the outcome of these changes.

        One of the major additional burdens imposed on the banking industry is the increased authority of federal agencies to regulate the activities of federal and state banks and their holding companies. The Federal Reserve,

9

the Comptroller of the Currency and the FDIC have extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. These agencies can assess civil money penalties. Other laws such as Sarbanes-Oxley Act of 2002 have expanded the agencies' authority in recent years, and the agencies have not yet fully tested the limits of their powers. In addition, the South Dakota Division of Banking, Iowa Division of Banking, Nebraska Department of Banking and Finance and Missouri Division of Finance, possess broad enforcement powers to address violations of their banking laws by banks chartered in their respective states.

ECONOMIC ENVIRONMENT

        The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

        The Federal Reserve's monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of these policies on the business and earnings of Spectrum and its subsidiaries cannot be predicted.

ITEM 2.    PROPERTIES

        The offices of Spectrum are located in a leased one-story building located at 10834 Old Mill Road, Suite One, Omaha, Nebraska 68154. Spectrum, through its subsidiaries, currently operates 61 banking offices and one leasing office.

        At June 30, 2002, Spectrum, through its subsidiaries, owned the buildings for 48 of its branch offices and leased the remaining 13 offices. With only one exception, a branch of Citizens Bank, Mt Ayr being leased from Spectrum, all leased properties are leased from unaffiliated third parties. We believe each of our facilities is in good condition, adequately covered by insurance and sufficient to meet the needs at that location for the foreseeable future.

ITEM 3.    LEGAL PROCEEDINGS

        Spectrum and its subsidiary banks are from time to time parties to various legal actions arising in the normal course of business. Management of Spectrum believes there is no proceeding threatened or pending against Spectrum or its subsidiary banks, which, if determined adversely, would have a material adverse effect on the financial condition or results of operations of Spectrum.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matter was submitted to a vote of security holders, through solicitation of proxies or otherwise, during the quarter ending June 30, 2002.

10

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Market Information and Holders.    There is no established public trading market for any class of common equity of Spectrum or any of its subsidiaries.

        As of September 15, 2002, there were 125,132 shares of common stock issued and outstanding that were held by approximately 23 shareholders of record.

        Common stock dividends declared for fiscal year 2002 totaled $751,000, or $6.00 per common share, compared to $1,493,000 or $18.01 per common share in fiscal year 2001. The 2001 dividend included $1,200,000 in the form of a note payable. In fiscal year 2000 dividends of $985,000, or $12.45 per common share were declared. For information regarding the payment of future dividends and any possible restrictions see "Dividend Restrictions" under Item 1.

        Frequency (quarterly) and amount of cash dividends per common share declared were as follows:

        On March 23, 2001, Spectrum issued 46,319 shares of its common stock and 100,000 shares of its Series 3 variable rate nonvoting, noncumulative perpetual preferred stock in the merger of Great Western Securities, Inc. into Spectrum. Such shares of common stock were issued to existing stockholders of Spectrum who were holders of one-half of the outstanding shares of common stock of Great Western Securities, Inc. Such shares of preferred stock were issued to Jack K. Harvey, holder of all of the outstanding preferred stock and one-half of the outstanding shares of the common stock of Great Western Securities, Inc. No underwriters were involved in the transaction. The issuance was made in a transaction exempt from the requirements of Section 5 of the Securities Act of 1933, as amended, pursuant to Section 4 (2) thereof.

        On August 7, 2000 Spectrum issued 7,584 shares of its common stock in exchange for all outstanding common stock of Citizens Corporation ("Citizens") and assumption of $1,200,000 Capital Notes to existing Spectrum stockholders. Its subsidiary, Citizens Bank, Chariton, Iowa was merged into Spectrum's subsidiary, Citizens Bank, Mt. Ayr, Iowa. No cash proceeds were generated from the issuance.

ITEM 6.    SELECTED FINANCIAL DATA

        The following table presents selected consolidated financial data for Spectrum for each of the years in the five-year period ended June 30, 2002. The data set forth below includes the accounts of Iowa State Bank, Hamburg, Iowa and United National Bank of Iowa, Sidney, Iowa from August 1, 2000, the effective date of acquisition of those banking subsidiaries of Hamburg Financial, Inc., the accounts of Great Western Bank, Omaha, Nebraska from March 23, 2001, the effective date of acquisition of that banking subsidiary of Great Western Securities, the accounts of Founders Trust National Bank, Sioux Falls, South Dakota ("Founders") from March 31, 2001, the date of acquisition of Founders and the accounts of First Western Bank, N.A., Atkinson, Nebraska ("First Western") and Marquette Bank Nebraska, N.A., O'Neill, Nebraska ("Marquette") from February 28, 2002, the date of acquisition of First Western and Marquette. The completed acquisitions were accounted for under the purchase method of accounting. The following table should be read in conjunction with the consolidated financial statements of Spectrum and the notes thereto appearing elsewhere in this report and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operation."

        The merger of Spectrum and Citizens Corporation on August 7, 2000 has been accounted for at historical cost in a manner similar to a pooling-of-interests combination and, accordingly, the consolidated financial statements prior to the combination have been restated to include the accounts and results of operations of

11

Spectrum and Citizens Corporation. See "Related Party Transactions." The Selected Consolidated Financial Data below takes into account this restatement.

(1)

Stockholders' equity less preferred stock less goodwill and core deposit and other intangibles, divided by period end shares outstanding of common stock.

(2)

Before allowance for loan losses.

(3)

On a tax equivalent basis.

(4)

The ratio of earnings to combined fixed charges and preference security dividends is computed by dividing (x) the sum of income before income taxes and fixed charges by (y) fixed charges and dividends on Spectrum's series 1, 2 and 3 preferred stock. Fixed charges consist of interest on borrowings, amortization of debt expense, and implicit interest on leases.

12

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

        The following is management's discussion and analysis of the financial condition and results of the operation of Spectrum. It is intended to explain certain financial information regarding Spectrum and should be read in conjunction with the Consolidated Financial Statements, related Notes, and the Five Year Summary of Selected Data included in this report.

CRITICAL ACCOUNTING POLICIES

        The "Management's Discussion and Analysis of Financial Condition and Results of Operations," and disclosures included within this Form 10-K Annual Report, are based on the Company's audited consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used, including the adequacy of allowances for loan losses, valuation of mortgage servicing rights and intangibles. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities where these values are not readily available from other sources as well as assessing and identifying the accounting treatments of commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. The Company's significant accounting policies are described in the "Notes to Consolidated Financial Statements" under "Nature of Business and Significant Accounting Policies". Three of the Company's more critical accounting policies involve the more significant judgments and assumptions used in the preparation of the consolidated financial statements, these are related to the allowance for loan losses, mortgage servicing rights and intangibles.

        Provision and allowance for loan losses.    The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio including timely identification of potential problem credits. On a quarterly or more frequent basis, management reviews the appropriate level for the allowance for loan losses. This review and analysis is based on the results of:

•

Internal monitoring and reporting system



•

Economic conditions, including duration of the current cycle



•

Past experience, including recent loss experience



•

Credit quality trends



•

Collateral values



•

Volume, composition, and growth of the loan portfolio



•

Specific credits and industry conditions



•

Results of bank regulatory and internal credit exams



•

Actions by the Federal Reserve Board



•

Existence and effect of concentrations of credit



•

Delay in receipt of information to evaluate loans or confirm existing credit deterioration

        To the extent actual results differ from forecasts and management's judgment the allowance for loan losses may be greater or less than future charge-offs.

        Mortgage servicing rights.    Mortgage servicing rights are established based on the cost of acquiring the right to service mortgage loans. These costs are initially capitalized and then amortized in proportion to, and proportionately over the period of estimated future net servicing income based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the mortgage servicing rights. Projected net servicing income is determined on the basis of the future balances of loans after scheduled loan amortization and estimated prepayments. An independent outside company estimates for the Company future prepayment rates based on relevant characteristics of the servicing portfolio, such as loan types,

13

interest rate stratification and recent prepayment experience, as well as current rate levels, market forecasts and other economic conditions.

        The Company reports mortgage servicing rights at the lower of amortized cost or fair value. The carrying value of mortgage servicing rights is adjusted by estimated impairment losses. The fair value of mortgage servicing rights is determined based on the present value of estimated expected future cash flows, using assumptions as to current market discount rates and prepayment speeds. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Loan types include fixed-rate, balloon government, conventional and