10-K405 1 a2059796z10-k405.txt 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________________ TO _____________________ COMMISSION FILE NUMBER: 001-15215 SPECTRUM BANCORPORATION, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Iowa 42 0867112 -------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10834 Old Mill Road, Suite One, Omaha, NE 68154-2648 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (402) 333-8330 Securities Registered Pursuant to Section 12(b) of the Act: Name of each Exchange Title of each Class on which registered ------------------- ------------------------- 10.00% Cumulative Trust Preferred Securities of American Stock Exchange Spectrum Capital Trust I 9.75% Cumulative Trust Preferred Securities of American Stock Exchange Spectrum Capital Trust II 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 X NO --- --- 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: [X] All voting and non-voting common equity is held by affiliates of the registrant. -1- At September 21, 2001, there were 125,267 shares of registrant's common stock outstanding. PART I ITEM 1. BUSINESS THE COMPANY Spectrum, a multi-bank holding company, offers full service community banking through 14 banking locations in Nebraska, 19 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 failed 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, 2001:
Common Stock Ownership Assets Net Loans Deposits ------------ -------- --------- -------- (dollars in thousands) Great Western Bank 100.0% $712,587 $527,486 $571,302 F&M Bank 95.6% 433,508 311,644 355,220 Rushmore Bank & Trust 90.0% 243,976 184,816 203,568 Citizens Bank, Mount Ayr 100.0% 238,991 184,107 200,651 Citizens Bank, Clive 95.2% 74,007 45,677 58,874 Citizens Bank of Princeton 100.0% 37,568 29,454 33,765
SPECTRUM BANC SERVICE CORPORATION Subsidiary banks (excluding Great Western Bank) own 100% of Spectrum Banc Service Corporation, which provides data processing services to its bank owners. 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. -2- 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. Since the merger of Great Western Securities on March 23, 2001, Spectrum's growth through acquisitions is limited to situations which management believes will be consistent with its commitment to the Federal Reserve to be well capitalized one year from the merger and its ability to attract and retain senior bank officers. Branch Expansion. Great Western Bank opened Wal-Mart Store locations and a branch in the metropolitan Omaha area in 2001. As of March 31, 2001 F&M Bank acquired Founders Trust National Bank, Sioux Falls, South Dakota for $2,501,000 subject to adjustment for certain contingencies. At March 31, 2001 Founders had assets of $34,644,000, deposits of $31,588,000, net loans of $17,762,000 and stockholders' equity of $2,183,000. F&M Bank has also relocated its Chamberlain, South Dakota branch to a newly constructed facility, which opened in August of 2001. Rushmore Bank & Trust has entered into an agreement with Wal-Mart stores to open an in-store branch in Rapid City, South Dakota in October 2001. In December, 2000, Citizens Bank, Carlisle moved its charter and main office to Clive, Iowa, a suburb of Des Moines, and retained its existing offices. 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. LOANS Spectrum has the ability to provide a broad range of commercial and retail lending services. Great Western Bank does not offer agricultural loans. Spectrum's other banks offer agricultural loans as well as other commercial, consumer and real estate loans. The subsidiary banks have credit policies tailored to their respective markets. 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, or augment loan demand, through the purchase and sale of participations among its subsidiary banks, as well as unaffiliated banks or other financial institutions. As of June 30, 2001, approximately 85% of all loans and leases were to customers within Spectrum's market area. Real Estate Mortgage Loans. These loans include various types of loans for which Spectrum's banks hold real property as collateral. Spectrum is experiencing increasing demand for fixed rate loans for terms longer than one year. The primary risks of real estate mortgage loans include the borrower's inability to pay and deterioration in value of real estate that is held as collateral. Real estate mortgage 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. Commercial and Agricultural Loans. These loans consist primarily of loans to business for various purposes, including revolving lines of credit and equipment financing. The loans secured by collateral other than real estate or equipment generally mature within one year, -3- have adjustable interest rates, and are secured by inventory, accounts receivable, livestock, crops, machinery and other commercial or agricultural project assets. Revolving lines of credit generally are for business purposes and generally 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 of Princeton has a weekly joint loan committee meeting with one of the regional loan committees of Citizens Bank, Mount Ayr, Great Western Bank, Rushmore Bank & Trust and Citizens Bank, Clive each have loan committees that meet 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. In the ordinary course of business, Spectrum's banks issue letters of credit. See Note 18 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, 2001, were limited to $9,813,570 for Great Western Bank, $4,666,337 for F&M Bank, $3,394,454 for Rushmore Bank & Trust, $4,100,183 for Citizens Bank, Mount Ayr, $1,848,677 for Citizens Bank, Clive and $969,238 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 certain purposes. -4- 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. Competition between financial institutions is affected by the Gramm-Leach-Bliley Act, which was signed into law in November 1999. 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, 2001, 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 June 30, 2001, Spectrum had approximately 653 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 is required by July 1, 2001. -5- 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 net 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. At June 30, 2001, Spectrum's core or Tier I capital was $82,219,000. -6- 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, 2001:
Ratio At June 30, 2001 ---- ------------------ Minimum Actual Required ------ -------- Tier I to Average Assets......................... 4.88% 4.00% Tier I to Risk-Weighted Assets................... 6.06% 4.00% Total Capital to Risk-Weighted Assets............ 11.17% 8.00%
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, 2001. 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 14 banking locations; Rushmore Bank & Trust Co., Rapid City, South Dakota, a South Dakota banking corporation with five banking locations; Citizens Bank, Mount Ayr, Iowa, an Iowa banking corporation with 18 banking locations; Citizens Bank, Clive, Iowa, an Iowa corporation with four 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 branching -7- opportunities. 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 1st, 2004, due to the fact that Citizens Bank, Clive relocation of 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 ratio of core capital to total risk-weighted assets of 4% and a 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. -8- The table below presents the regulatory capital ratios of the Spectrum subsidiary banks at June 30, 2001:
At June 30, 2001 ---------------- Citizens Great Rushmore Bank, Citizens Citizens Western F&M Bank & Mount Bank, Bank of Minimum Ratio Bank Bank Trust Ayr Clive Princeton Required ----- ------- ------ -------- -------- -------- -------- ------- Tier I capital to average assets............... 8.55% 7.32% 8.06% 8.80% 9.74% 9.11% 4.00% Tier I capital to risk-weighted assets......... 9.78% 9.63% 10.16% 11.99% 12.23% 12.33% 4.00% Total capital to risk-weighted assets.......... 11.03% 10.73% 11.41% 13.25% 13.48% 13.58% 8.00%
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, 2001, the Spectrum banks were well capitalized. 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. As an institution's capital decreases, the powers of the federal regulators become greater. A significantly 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. -9- 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: o Lending, exchanging, transferring, investing for others, or safeguarding money or securities; o 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. o Providing financial, investment, or economic advisory services, including advising an investment company; o Issuing or selling annuities representing interests in pools of assets permissible for a bank to hold directly; o Underwriting, dealing in, or making a market in securities; o 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; o Activities that the Federal Reserve has found to be usual in connection with the transaction of banking or other financial operations abroad; o 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 o Activities that may be conducted by an operating subsidiary. None of Spectrum's bank subsidiaries has 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 -10- 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, 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 and other laws 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 at 10834 Old Mill Road, Suite One, Omaha, Nebraska 68154. The table below presents property information concerning the main office and branches of Spectrum's subsidiary banks.
Approximate Square Footage of Name of Bank and Address of Branch Year Opened Type of Interest Facility ---------------------------------- ----------- ---------------- ------------------ Great Western Bank (Main Office) 1962 Land and building owned by 14,000 6015 NW Radial Hwy. Great Western Bank Omaha, NE 68104 Great Western Bank 1978 Land and building owned by 25,300 14545 West Center Rd. Great Western Bank Omaha, NE 68144 Great Western Bank 1986 Leased 12,660 9290 West Dodge Rd., Suite 101 Omaha, NE 68114
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Approximate Square Footage of Name of Bank and Address of Branch Year Opened Type of Interest Facility ---------------------------------- ----------- ---------------- ------------------ Great Western Bank 1976 Land and building owned by 4,800 7201 Maple Street Great Western Bank Omaha, NE 68134 Great Western Bank 1994 Leased 450 7300 Graceland Drive Omaha, NE 68134 Great Western Bank 1995 Land and building owned by 8,100 4140 South 84th Great Western Bank Omaha, NE 68127 Great Western Bank 1996 Land and building owned by 1,180 4718 L Street Great Western Bank Omaha, NE 68117 Great Western Bank 1981 Leased land, building owned by 26,000 919 Galvin Road South, Suite 100 Great Western Bank Bellevue, NE 68005 Great Western Bank 1999 Land and building owned by 2,100 3705 Twin Creek Drive Great Western Bank Bellevue, NE 68123 Great Western Bank 1972 Leased 6,500 Offutt Base Office Offutt Air Force Base Bellevue, NE 68113 Great Western Bank 1995 Leased 800 Offutt Base Exchange Office Offutt Air Force Base Bellevue, NE 68113 Great Western Bank 2001 Leased (Wal-Mart store branch) 700 10504 South 15th Street Bellevue, NE 68123 Great Western Bank 2001 Leased land and building owned by 2,400 550 North 155th Plaza Great Western Bank Omaha, NE 68154 Great Western Bank 2001 Leased (Wal-Mart store branch) 700 18201 Wright Street Omaha, NE 68130 F&M Bank (Main Office) 1935 Land and building owned by F&M Bank 10,078 35 1st Ave. NE Watertown, SD 57201
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Approximate Square Footage of Name of Bank and Address of Branch Year Opened Type of Interest Facility ---------------------------------- ----------- ---------------- ------------------ F&M Bank 1980 Land and building owned by F&M Bank 3,000 Hwys. 212 & 81 Watertown, SD 57201 F&M Bank 1946 Land and building owned by F&M Bank 1,250 Main Street Garden City, SD 57236 F&M Bank 1984 Land and building owned by F&M Bank 3,500 Main Street Rosholt, SD 57260 F&M Bank 1978 Land and building owned by F&M Bank 1,800 217 Main St. McIntosh, SD 57641 F&M Bank 1978 Land and building owned by F&M Bank 1,250 302 Main St. Morristown, SD 57645 F&M Bank 1996 Land and building owned by F&M Bank 2,500 301 N. Egan Ave Madison, SD 57042 F&M Bank 1996 Land and building owned by F&M Bank 4,200 517 So. Lincoln St. Aberdeen, SD 57402 F&M Bank 1996 Land and building owned by F&M Bank 1,800 1301 Main St. Webster, SD 57274 F&M Bank 2001 Land and building owned by F&M Bank 2,684 101 E. King St. Chamberlain, SD 57325 F&M Bank 1996 Land and building owned by F&M Bank 2,400 111 North East St Gettysburg, SD 57442 F&M Bank 2001 Land and building owned by F&M Bank 2,361 5100 W. 26th St. Sioux Falls, SD 57106 -13- F&M Bank 2001 First floor owned by F&M Bank 11,718 River Centre 200 East 10th St., Suite 100 Sioux Falls, SD 57104 F&M Bank 2001 Leased 6,100 Western Mall 2101 West 41st Street Sioux Falls, SD 57105 Rushmore Bank & Trust 1952 Land and building owned by Rushmore 37,000 (Main Office) Bank & Trust 14 St. Joseph St. Rapid City, SD 57701 Rushmore Bank & Trust 1974 Land and building owned by Rushmore 3,798 3510 Sturgis Rd. Bank & Trust Rapid City, SD 57702 Rushmore Bank & Trust 1999 Land and building owned by Rushmore 3,720 526 N. Main St. Bank & Trust Spearfish, SD 57783 Rushmore Bank & Trust 1997 Leased (grocery store branch) 500 751 Mountain View Rd. Rapid City, SD 57702 Rushmore Bank & Trust 1999 Leased (grocery store branch) 500 1516 E. St. Patrick St. Rapid City, SD 57701 Citizens Bank, Mount Ayr 1998 Land and building owned by 2,500 (Main Office) Citizens Bank, Mt. Ayr 100 E. South Mount Ayr, IA 50174 Citizens Bank, Mount Ayr 1999 Land and building owned by Citizens 8,265 111 No. Main Bank, My. Ayr Leon, Iowa 50144 Citizens Bank, Mount Ayr 1977 Land and building owned by Citizens 1,200 1008 W. First Bank, Mt. Ayr Leon, IA 50144 Citizens Bank, Mount Ayr 1937 Land and building owned by Citizens 960 126 Broadway Bank, Mt. Ayr Grand River, IA 50108 -14- Citizens Bank, Mount Ayr 1997 Land and building owned by Citizens 6,800 1020 Main Bank, Mt. Ayr Hamburg, IA 51640 Citizens Bank, Mount Ayr 1976 Land and building owned by Citizens 1,200 186 Summer St. Bank, Mt. Ayr Riverton, Iowa 51650 Citizens Bank, Mount Ayr 1994 Land and building owned by Citizens 2,500 610 W. McLane Bank, Mt. Ayr Osceola, IA 50313 Citizens Bank, Mount Ayr 1985 Land and building owned by 4,690 900 Illinois Street Citizens Bank, Mt. Ayr Sidney, IA 51652 Citizens Bank, Mount Ayr 1980 Land and building owned by 2,160 800 Filmore Street Citizens Bank, Mount Ayr Thurman, IA 51654 Citizens Bank, Mount Ayr 1904 Land and building owned by 5,972 400 Main Street Citizens Bank, Mount Ayr Bedford, IA 50833 Citizens Bank, Mount Ayr 1997 Land and building owned by 12,797 201 North Main Street Citizens Bank, Mount Ayr Chariton, IA 50049 Citizens Bank, Mount Ayr 1969 Leased 2,968 309 East Jefferson Street Corydon, IA 50060 Citizens Bank, Mount Ayr 1980 Land and building owned by 1,663 101 West Jackson Street Citizens Bank, Mount Ayr Corydon, IA 50060 Citizens Bank, Mount Ayr 1980 Land and building owned by 1,890 100 South Maple Street Citizens Bank, Mount Ayr Russell, IA 50238 Citizens Bank, Mount Ayr 1976 Land and building owned by 4,160 206 Broad Street Citizens Bank, Mount Ayr Humeston, IA 50123 Citizens Bank, Mount Ayr 1904 Land and building owned by 1,785 208 3rd Street Citizens Bank, Mount Ayr Lineville, IA 50147 Citizens Bank, Mount Ayr 1957 Land and building owned by 1,920 122 North Central Citizens Bank, Mount Ayr Allerton, IA 50008 -15- Citizens Bank, Mount Ayr 1984 Land and building owned by 1,200 Main and Ringgold Streets Citizens Bank, Mount Ayr Kellerton, IA 50133 Citizens Bank, Clive 2001 Leased 6,000 (Main Office) 10101 University Ave. Clive, IA 50325 Citizens Bank, Clive 1934 Land and building owned by 4,800 100 First Street Citizens Bank, Clive Carlisle, IA 50047 Citizens Bank, Clive 1974 Land and building owned by 600 Highway 5 and Vine Citizens Bank, Clive Hartford, IA 50118 Citizens Bank, Clive 1998 Land and building owned by 1,500 102 Brown Street Citizens Bank, Clive Runnells, IA 50237 Citizens Bank of Princeton 1988 Land and building owned by 4,708 (Main Office) Citizens Bank of Princeton US Highway 136 & 65 Princeton, MO 64673 Citizens Bank of Princeton 1994 Land and building owned by 1,450 825 N. Pearl Citizens Bank of Princeton Milan, MO 63556
The branch of Citizens Bank, Mt. Ayr at 309 East Jefferson St., Corydon, Iowa is leased from Spectrum. All of the other leased properties are leased from unaffiliated third parties. The grocery store leases are for five-year terms. The Wal-Mart store leases are for five-year terms. 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. Except as described below, 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. On November 21, 2000, certain purported class action members filed an amended petition in an action then pending in an Iowa district court in Lee County, Iowa against Thousand Adventures, Inc., also known as TAI, to add as defendants 18 lenders, including Great Western Bank, with respect to retail installment sales contracts originated by TAI in connection with is sale of campground memberships. The amended petition alleges that more than 50,000 class members purchased campground memberships at a cost ranging from $990 to $10,000 and that TAI assigned the contracts outright or as collateral to the lenders. The primary claim of the amended petition appears to be that the lenders, as -16- holders of the installment contracts, are subject to all claims the members had against TAI, which allegedly include breach of contract and consumer fraud, among other things. The amended petition seeks rescission of the campground memberships, an unspecified amount of damages, punitive damages, interest and attorneys' fees. In July 1997 a default judgment was entered against TAI certifying that action against it as a class action. TAI is the debtor in a Chapter 7 bankruptcy proceeding pending in federal bankruptcy court in Iowa. On December 19, 2000, Great Western Bank removed the lawsuit to federal district court in Iowa. The purported class action plaintiffs have filed a motion, which the bank plans to resist, to remand the lawsuit to the Iowa district court in Lee County. No discovery has been conducted with respect to the aspects of this lawsuit including whether the case can properly proceed as a class action. In the event the lawsuit were determined adversely to Great Western Bank, it could have a material adverse effect on the financial condition or results of operations of Great Western Bank and Spectrum, but the amount of the alleged damages is unspecified and cannot now be accurately estimated by Great Western Bank. 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, 2001. 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 June 30, 2001, there were 125,267 shares of common stock issued and outstanding that were held by approximately 23 shareholders of record. Cash dividends declared for fiscal year 2001 totaled $1,493,000, includes a $1,200,000 dividend in a form of notes payable or $18.02 per common share, compared to fiscal year 2000 of $985,000, or $12.45 per common share, and fiscal year 1999 of $911,000, or $11.49 per common share. For information regarding the payment of future dividends and any possible restrictions see " Dividend Restrictions" under Item 1. On March 23, 2001, Spectrum issued 46,319 shares of its common stock and 100,000 shares of its 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 to existing stockholders -17- of Spectrum assumption of $1,200,000 Capital Note. 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, 2001. 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 and the accounts of Founders Trust National Bank, Sioux Falls, South Dakota from March 31, 2001, the date of acquisition of Founders Trust. 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 Operations." 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 Spectrum and Citizens Corporation. See "Related Party Transactions." The Selected Consolidated Financial Data below takes into account this restatement.
At or for the year ended June 30, ------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per common share data) CONSOLIDATED STATEMENTS OF INCOME: Interest income .................................. $ 91,669 $ 61,363 $ 51,709 $ 47,089 $ 42,025 Interest expense ................................. 51,825 31,515 25,548 24,273 20,829 Net interest income .............................. 39,844 29,848 26,161 22,816 21,196 Provision for loan losses ........................ 2,618 2,036 1,563 1,434 1,619 Other income ..................................... 11,467 7,233 6,662 5,169 4,179 Other expenses ................................... 33,831 21,057 18,621 16,020 15,118 Income taxes ..................................... 4,922 4,440 4,089 3,184 2,602 Minority interest in earnings of subsidiaries .... 522 404 357 312 261 Net income ....................................... 9,418 9,144 8,193 7,035 5,775 PER COMMON SHARE DATA: Earnings per share ............................... $ 101.16 $ 113.62 $ 101.42 $ 86.71 $ 70.81 Dividends ........................................ 18.01 12.45 11.49 3.93 6.74 -18- Tangible book value per share(1) ................. 306.56 483.05 472.29 402.73 332.11 CONSOLIDATED BALANCE SHEETS: Assets ........................................... 1,782,122 850,776 684,236 616,526 550,503 Loans, net of unearned income(2) ................. 1,303,049 634,757 522,800 456,911 407,410 Allowance for loan losses ........................ 18,955 8,197 6,838 6,276 6,300 Deposits ......................................... 1,421,090 691,535 569,971 512,342 455,454 Long term notes payable .......................... 116,646 50,932 41,116 38,792 39,730 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures .. 48,000 20,400 -- -- -- Nonperforming assets ............................. 21,164 9,567 7,854 8,500 7,807 Stockholders' equity ............................. 96,926 47,822 41,768 36,471 29,968
At or for the year ended June 30, ------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per common share data) KEY RATIOS: Net interest margin(3) ........................... 3.79% 4.21% 4.34% 4.24% 4.53% Return on average assets ......................... 0.82 1.19 1.25 1.20 1.13 Return on average stockholders' equity ........... 14.53 19.67 20.47 21.01 21.37 Nonperforming loans to total loans................ 1.53 1.49 1.48 1.84 1.89 Dividend payout ratio............................. 17.80 10.96 11.33 4.53 9.52 Net loan charge-off to average loans.............. 0.27 0.10 0.21 0.46 0.26 Allowance for loan losses to total loans ......... 1.45 1.29 1.31 1.37 1.55 Allowance for loan losses to nonperforming loans . 94.85 86.70 88.37 74.73 82.02 Tier I risk-based capital ........................ 6.06 9.80 8.10 7.99 7.71 Total risk-based capital ......................... 11.17 11.60 9.30 9.25 8.97 Tier I leverage ratio ............................ 4.88 7.20 6.40 5.83 5.59 Stockholders' equity to assets ................... 5.44 5.62 6.10 5.92 5.44 RATIO OF EARNINGS TO FIXED CHARGES(4): -------------------------------------- (1) Stockholders' equity less preferred stock less cost in excess of net assets acquired (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) -19- Including interest on deposits ................... 1.28x 1.43x 1.48x 1.42x 1.40x Excluding interest on deposits ................... 2.50x 3.32x 4.29x 3.64x 3.80x
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION BUSINESS ENVIRONMENT AND RISK FACTORS The following discussion should be read in conjunction with the consolidated financial statements and related notes included in this report. Spectrum's future operating results may be affected by various trends and factors that are beyond Spectrum's control. Accordingly, past results and trends may not be reliable indicators of future results or trends. With the exception of historical information, the matters discussed below include forward-looking statements that involve risks and uncertainties. Spectrum cautions readers that a number of important factors discussed below could affect Spectrum's actual results and cause actual results to differ materially from those in the forward-looking statements. MERGERS AND ACQUISITIONS On May 31, 1999, Decatur Corporation became the surviving corporation in a merger of its affiliated bank holding companies, Spectrum Bancorporation, Inc. and Rushmore Financial Services, Inc. Decatur then changed its name to Spectrum Bancorporation, Inc. but retained its Iowa charter to facilitate acquisitions within that state. The merger 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 Spectrum. On March 27, 1998, Spectrum acquired all of the outstanding shares of First Savings & Loan Association of South Dakota, Inc., Aberdeen, South Dakota. First Savings was merged into F&M Bank, a subsidiary bank of Spectrum. Assets of $16,999,000, loans, net of unearned fees of $14,016,000 and deposits of $14,085,000 were acquired in connection with the merger. On January 14, 2000, Spectrum chartered Citizens Bank, Carlisle, Iowa, which purchased certain assets and assumed certain deposits of the failed Hartford-Carlisle Savings Bank. In addition to the main office in Carlisle, the bank has facilities in Hartford and Runnells, Iowa. On December 26, 2000, the bank moved its main office from Carlisle to Clive, Iowa, a suburb of Des Moines, and retained all of its existing banking facilities. Liquid assets of $4,800,000; loans, net of unearned fees, of $34,539,000, and deposits of $70,465,000 were acquired in connection with the purchase and assumption. Spectrum owns 95.24% of the stock of this bank. The newly chartered state bank was capitalized with $10.5 million in capital; the purchase included a $5.5 million premium paid to the FDIC. The acquisition was accounted for in a manner similar to a purchase and the deposit premium was allocated to goodwill. A major reason for this acquisition was the proximity of this bank's offices to the Des Moines market, and the ability to branch. On July 13, 2000, Spectrum's subsidiary, Citizens Bank, Mt. Ayr purchased the assets and assumed the liabilities of the branch of Commercial Federal Bank, FSB (Commercial) ------------------------------------------------------------------------------- fixed charges and dividends on Spectrum's series 1 and 2 preferred stock. Fixed charges consist of interest on borrowings, amortization of debt expense, and implicit interest on leases. -20- located in Kellerton, Iowa. A premium of approximately $175,000 was paid to acquire deposits of approximately $3,300,000. As of August 7, 2000, Spectrum acquired all of the outstanding shares of Hamburg Financial, Inc. (HFI), an unaffiliated holding company which owned two banks in southwestern Iowa. Spectrum paid $8,730,995 in cash which included a premium of $2,236,123 to acquire HFI and its subsidiaries; Thurman State Corporation, a second-tier holding company which owned the United National Bank of Iowa, headquartered in Sidney, Iowa; and Iowa State Bank, headquartered in Hamburg, Iowa. Deposits of $56,196,000 and loans of $48,989,000 were acquired. The transaction was accounted for as a purchase. HFI and Thurman State Corporation were merged into Spectrum. HFI's bank subsidiaries were merged into Spectrum's subsidiary bank, Citizens Bank, Mt. Ayr. On August 7, 2000, Spectrum acquired all of the outstanding shares of Citizens Corporation (Citizens), an affiliated one-bank holding company which owned Citizens Bank, Chariton, Iowa. Spectrum exchanged 7,584 newly issued shares of common stock for all 4,628 outstanding shares of Citizens, and assumed a $1,200,000, 10.00% capital note payable. Citizens Bank, Chariton, Iowa was merged into Spectrum's subsidiary, Citizens Bank, Mt. Ayr. Deposits of $60,382,514 and loans of $52,472,988 were acquired. Since the entities were under common control, the merger has been accounted for at historical cost in a manner similar to pooling-of-interests and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of both entities. The results of operations previously reported by the separate entities and the combined amounts presented in the accompanying consolidated financial statements (in thousands) are summarized below.
Years Ended June 30 ------------------- 2000 1999 ---- ---- Interest income: Spectrum Bancorporation, Inc. and Subsidiaries... $55,572 $46,273 Citizens Corporation and Subsidiary ............. 5,791 5,436 ------- ------- Combined ..................................... $61,363 $51,709 ======= ======= Net income: Spectrum Bancorporation, Inc. and Subsidiaries.................................... $ 7,586 $ 6,845 Citizens Corporation and Subsidiary(1) .......... 1,558 1,348 ------- ------- Combined ..................................... $ 9,144 $ 8,193 ======= =======
On March 23, 2001, Spectrum acquired Great Western Securities (GWS) for $58,348,384 in cash and by issuing 46,319 shares of common stock and $10,000,000 in nonvoting, non-cumulative perpetual preferred stock. The common stock was issued to existing shareholders in Spectrum for their 50% interest in GWS. The remaining portion was purchased from an unrelated party. The acquisition has been accounted for as a purchase and results of operation of GWS since the date of acquisition are included in the consolidated financial statements. Deposits of $507,207,856 and loans of $511,415,557 were acquired. The net assets previously attributed to the ownership of Spectrum's shareholders were recorded at predecessor cost, due to the shareholders' continuing interests. The remaining net assets were recorded at fair value. As a result of the merger, a core deposit intangible of $6,775,000 has been recognized and is being amortized over 5 years by an accelerated method. In addition, ---------------- (1) Citizens Corporation was an "S" corporation prior to the merger. -21- the intangible cost in excess of net assets acquired, other than purchased mortgage servicing rights, has been allocated to goodwill. Unaudited pro forma consolidated results of operations as though GWS had been acquired as of July 1, 1999 (in thousands except share data) are summarized below.
For the Year For the Year Ended Ended June 30, 2001 June 30, 2000 ------------- ------------- Total interest income $130,785 $107,049 Net interest income 66,243 48,690 Net income 10,156 14,009 Basic earnings per common share 72.68 103.34 Weighted average shares outstanding 125,354 125,459
The above amounts reflect adjustments for amortization of intangible assets, additional depreciation and amortization on revalued purchased assets and deposits, and preferred stock dividend requirements. As of March 31, 2001, F&M Bank acquired Founders Trust National Bank, Sioux Falls, South Dakota for $2,501,000, subject to adjustment for certain contingencies. At March 31, 2001 Founders had assets of $34,644,000, deposits of $31,588,000, net loans of $17,762,000 and stockholders' equity of $2,183,000. The acquisition has been accounted for as a purchase and results of operations of Founders Trust National Bank after the date of acquisition are included in the consolidated financial statements. RESULTS OF OPERATION GENERAL Net income for the year ended June 30, 2001 was $9,418,000, compared to net income of $9,144,000 for the year ended June 30, 2000 and net income of $8,193,000 for the year ended June 30, 1999. The increase in net income for all periods reflected greater volumes of loans and deposits due to recent acquisitions and Spectrum's internal growth. Spectrum's return on average assets was 0.82% for the year ended June 30, 2001 compared to 1.19% for the year ended June 30, 2000. This decrease is primarily attributable to the recent acquisitions, as discussed above in the mergers and acquisitions section. Spectrum's return on average stockholders' equity was 14.53% for the year ended June 30, 2001 compared to 19.67% for the year ended June 30, 2000. NET INTEREST INCOME Net interest income represents the amount by which interest income on interest-earning assets, including loans and securities, exceeds interest paid on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is the principal source of Spectrum's earnings. Interest rate fluctuations, as well as changes in the amount and type of interest-earning assets and interest-bearing liabilities, combine to affect net interest income. -22- The following table presents the average balances of Spectrum for each of the last three fiscal years and indicates the interest earned or paid on each major category of interest-earning assets and interest-bearing liabilities on a fully taxable-equivalent basis, assuming a 34% tax rate, and the average rates earned or paid on each major category. This analysis details the contribution of interest-earning assets and the overall impact of the cost of funds on net interest income.
Year Ended June 30, ------------------- 2001 2000 1999 ---- ---- ---- Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- (dollars in thousands) Interest-earning assets: Loans, net of un- earned fees(1)(2)... $844,280 $77,622 9.19% $567,658 $51,509 9.07% $479,533 $43,262 9.02% Investment securities: Taxable............. $155,832 $10,416 6.68% 106,127 7,221 6.80 97,274 6,228 6.40 Tax exempt (tax equivalent)....... $21,310 $1,530 7.18% 17,710 1,309 7.39 14,722 1,186 8.06 Federal funds sold and other............. $44,796 $2,621 5.85% 28,149 1,769 6.28 21,012 1,436 6.83 ---------- ------- -------- ------- -------- ------- Total interest- earning assets.... $1,066,218 $92,189 8.65% $719,644 $61,808 8.59% $612,541 $52,112 8.51% ========== ======= ======== ======= ======== ======= Interest-bearing liabilities: Demand, savings and money market deposits........... $290,984 $8,520 2.93% $190,591 $5,789 3.04% $164,610 $4,372 2.66% Time deposits........ $558,319 $33,785 6.05% 379,947 20,027 5.27 321,471 17,632 5.48 ---------- ------- -------- ------- -------- ------- Total interest- bearing deposits... $849,303 $42,305 4.98% 570,538 25,816 4.52 486,081 22,004 4.53 Federal Home Loan Bank borrowings, federal funds purchased and securities sold under agreements to repurchase $ 86,784 $ 4,801 5.53% 59,965 3,657 6.10 47,306 2,639 5.58 -------------------- (1) The data includes the accounts of Founders Trust National Bank from March 31, 2001, the date of its acquisition, those of Great Western Bank from March 23, 2001, the date of its acquisition, Citizens Bank, Clive from January 14, 2000, the date of its acquisition, and those of Iowa State Bank and United National Bank of Iowa from August 1, 2000, the effective date of acquisition of Hamburg Financial, Inc. The completed acquisitions were accounted for under the purchase method of accounting. (2) Nonaccrual loans are included in the Average Balance columns and income recognized on these loans, if any, is included in the Interest Income/Expense columns. Interest income on loans includes fees on loans, which are not material in amount. -23- Notes payable......... $21,474 $1,909 8.89% 3,158 231 7.31 12,367 905 7.32 Company obligated mandatorily redeemable preferred securities $28,456 $2,810 9.88% 18,110 1,811 10.00 0 0 0 -------- ------- -------- ------- -------- ------- ---- Total interest-bearing liabilities..... $986,017 $51,825 5.26% $651,771 $31,515 4.84% $545,754 $25,548 4.68% ======== ======= ======== ======= ======== ======= Net interest income.. $40,364 $30,293 $26,564 ======= ======= ======= Interest rate spread(3) 3.39% 3.75% 3.83% Net interest margin(4) 3.79% 4.21% 4.34% Ratio of average interest-bearing liabilities to average interest-earning assets 92.48% 90.57% 89.10%
------------ (3) The interest rate spread is the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) The net interest margin is equal to net interest income divided by average interest-earning assets (on a tax equivalent basis). Net interest income, on a tax-equivalent basis, was $40,364,000 for the year ended June 30, 2001, an increase of $10,071,000 from $30,293,000 in 2000. This increase resulted primarily from an increase of $346,574,000 in average interest-earning assets to $1,066,218,000 for the year ended June 30, 2001, from $719,644,000 in 2000. The majority of the asset growth was due to growth in the loans and securities portfolios, both from acquisitions and internal growth. Average loans increased $276,622,000 to $844,280,000 for the year ended June 30, 2001, from $567,658,000 in 2000. Interest expense increased $20,310,000 to $51,825,000 for the year ended June 30, 2001, from $31,515,000 in 2000. The cost of interest-bearing liabilities for the year ended June 30, 2001, was 5.26% compared to 4.84% in 2000. When combined with noninterest-bearing deposits, the cost of funds was 4.79% for the year ended June 30, 2001, compared to 4.41% in 2000. The average balance of Federal Home Loan Bank borrowings, federal funds purchased, and securities sold under agreements to repurchase increased to $86,784,000 in 2001, an increase of $26,819,000 from $59,965,000 in 2000. This source as well as an increase in notes payable and Company obligated mandatorily redeemable preferred securities were used to supplement core deposits in funding the loan growth. As a result of these factors, net interest margin, on a tax-equivalent basis, decreased to 3.79% for the year ended June 30, 2001, compared to 4.21% for the year ended June 30, 2000. Net interest income, on a tax-equivalent basis was $30,293,000 for the year ended June 30, 2000, an increase of $3,729,000 from $26,564,000 in 1999. This increase resulted primarily from an increase of $107,103,000 in average interest-earning assets to $719,644,000 for the year ended June 30, 2000, from $612,541,000 in 1999. The majority of the asset growth was due to growth in the loan and securities portfolios, both from internal growth and acquisitions. Average loans increased $88,125,000 to $567,658,000 for the year ended June 30, 2000 from $479,533,000 in 1999. -24- Interest expense increased $5,967,000 to $31,515,000 for the year ended June 30, 2000, from $25,548,000 in 1999. The cost of interest-bearing liabilities for the year ended June 30, 2000, was 4.84% compared to 4.68% in 1999. When combined with non-interest-bearing deposits, the cost of funds was 4.41% for the year ended June 30, 2000, compared to 4.25% for 1999. The average balances of Federal Home Loan Bank borrowings, federal funds purchased, and securities sold under agreements to repurchase increased to $59,965,000 in 2000, an increase of $12,659,000 from $47,306,000 in 1999. This source as well as an increase in preferred securities were used to supplement core deposits in funding the loan growth and reduce notes payable. As a result of these factors, net interest margin, on a tax equivalent basis, decreased to 4.21% for the year ended June 30, 2000 compared to 4.34% for the year ended June 30, 1999. The following table presents the changes in the components of net interest income and identifies the portion of each change due to differences in the average volume of interest-earning assets and interest-bearing liabilities and the portion of each change due to the average rate on those assets and liabilities. The changes in interest due to both volume and rate changes in the table have been allocated to volume or rate change in proportion to the absolute dollar amounts of the change in each.
2001 vs. 2000 2000 vs. 1999 1999 vs. 1998 -------------- ------------- ------------- Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to Changes In: Changes In: Changes In: ------------ ------------ ----------- Volume Rate Total Volume Rate Total Volume Rate Total ------ ------- ----- ------ ----- ----- ------ ------- ------- (dollars in thousands) Interest-earning assets: Loans, net of unearned fees........... $25,423 $690 $26,113 $7,995 $252 $8,247 $4,636 $(997) $3,639 Investment securities: Taxable................. 3,324 (129) 3,195 589 404 993 887 102 989 Tax exempt (tax equivalent)............ 259 (38) 221 228 (105) 123 (135) (3) (138) Federal funds sold....... 982 (130) 852 456 (123) 333 69 14 83 ------- -------- ------- ------ ----- ------ ------ ------- ------- Total interest income.. 29,988 393 30,381 9,268 428 9,696 5,457 (884) 4,573 ------- -------- ------- ------ ----- ------ ------ ------- ------- Interest-bearing liabilities: Demand, savings and money market deposits 2,947 (216) 2,731 743 674 1,417 672 (389) 283 Time deposits............ 10,460 3,298 13,758 3,093 (698) 2,395 1,734 (592) 1,142 ------- -------- ------- ------ ----- ------ ------ ------- ------- Total interest-bearing deposit expense........ 13,407 3,082 16,489 3,836 (24) 3,812 2,406 (981) 1,425 Federal Home Loan Bank borrowings, federal funds purchased and securities sold under agreements to repurchase............. 1,510 (366) 1,144 755 263 1,018 57 (113) (56) Notes payable............ 1,618 60 1,678 (673) (1) (674) (24) (70) (94) -25- Company obligated mandatorily redeemable preferred securities... 1,022 (23) 999 1,811 0 1,811 0 0 0 ------- -------- ------- ------ ----- ------ ------ ------- - Total interest expense... 17,557 2,753 20,310 5,729 238 5,967 2,439 (1,164) 1,275 ------- -------- ------- ------ ----- ------ ------ ------- ------ Increase (decrease) in net interest income.... $12,430 $(2,360) $10,071 $3,539 $190 $3,729 $3,018 $ 280 $3,298 ======= ======== ======= ====== ===== ====== ====== ======= ======
PROVISION FOR LOAN LOSSES The amount of the provision for loan losses is based on a quarterly or a more frequent evaluation of the loan portfolio, especially nonperforming and other potential problem loans. During these evaluations, consideration is given to such factors as: management's evaluation of specific loans; the level and composition of nonperforming loans; historical loss experience; results of examinations by regulatory agencies; expectations of current economic conditions and their impact on particular industries and individual borrowers; the market value of collateral; the strength of available guarantees; concentrations of credits; and other judgmental factors. In addition, the chief credit officer of Spectrum, assisted by personnel of affiliated banks and an unaffiliated company performs loan review services on a periodic basis. The provision for loan losses for the year ended June 30, 2001, was $2,618,000 compared to $2,036,000 for the year ended June 30, 2000. This represents an increase of $582,000, or 28.59%. This increase was primarily due to increases in nonperforming loans and net loans charged off. See " Nonperforming Loans" and " Allowance for Loan Losses". The provision for loan losses for the year ended June 30, 2000 increased $473,000 when compared to $1,563,000 for the previous year. OTHER INCOME The following table presents Spectrum's other income for the indicated periods.
Year Ended June 30, ------------------- 2001 2000 1999 ------- ------- ------- (dollars in thousands) Service charges and other fees......... $6,297 $ 4,259 $ 3,344 Net gains from sale of loans........... 1,152 628 1,120 Gain (loss) on securities, net......... 133 (13) 27 Loan servicing fees.................... 240 0 0 Other income........................... 3,645 2,359 2,171 ------- ------- ------- Total other income........ $11,467 $ 7,233 $ 6,662 ======= ======= =======
During the year ended June 30, 2001, total other income increased to $11,467,000 from $7,233,000 for the year ended June 30, 2000, due primarily to increased service charges and other fees. Net gains from the sale of loans arise when the subsidiary banks originate loans and sell them in the secondary market with servicing released. For this they receive fees that are realized immediately into income. Total other income for the year ended June 30, 2000, increased to $7,233,000 compared to $6,662,000, an increase of $571,000 due primarily to increased income from service charges and other fees. -26- OTHER EXPENSES The following table presents Spectrum's other expenses for the indicated periods.
Year Ended June 30, ------------------- 2001 2000 1999 -------- -------- --------- (dollars in thousands) Salaries and employee benefits......... $ 17,569 $ 10,938 $ 10,011 Occupancy expense, net................. 2,268 1,249 1,062 Amortization of mortgage servicing rights acquired........... 304 0 0 Data processing........................ 2,115 1,719 1,537 Amortization of cost in excess of net assets acquired..................... 1,095 416 142 Amortization of core deposit intangible 593 8 0 Other expenses......................... 9,887 6,727 5,869 -------- --------- --------- Total other expense................ $ 33,831 $ 21,057 $ 18,621 ======== ========= =========
Other expenses increased $12,774,000 or 60.66%, to $33,831,000 during the year ended June 30, 2001, from $21,057,000 for the year ended June 30, 2000. This increase is primarily a result of the acquisition of Great Western Securities and its subsidiary, Great Western Bank. Other expenses increased $2,436,000 or 13.08%, to $21,057,000 in 2000 from $18,621,000 in 1999, primarily due to bank acquisitions during fiscal year 2000. Salaries and employee benefits rose $6,631,000 or 60.62%, to $17,569,000 for the year ended June 30, 2001, from $10,938,000 for the corresponding period of 2000. Salaries and benefits rose $927,000, or 9.26%, to $10,938,000 in 2000 from $10,011,000 in 1999. The increases in salaries were due to Spectrum's continuing growth and acquisitions throughout the periods. Net occupancy expense increased $1,019,000, or 81.59%, to $2,268,000 for the year ended June 30, 2001, from $1,249,000 for the year ended June 30, 2000. Net occupancy costs increased primarily due to the acquisition of Great Western Bank which has 14 facilities located in Nebraska. Net occupancy expense increased $187,000, or 17.61%, to $1,249,000 in 2000 from $1,062,000 in 1999. Net occupancy costs increased primarily due to costs associated with the construction of a new facility in Leon, Iowa, conversion of a historic post office to a banking facility in Spearfish, South Dakota, a significant addition to facilities in Rapid City, South Dakota, and the addition of facilities in Carlisle, Hartford, and Runnells, Iowa due to the acquisition of Citizens Bank, Carlisle (now Clive). Amortization of mortgage servicing rights acquired was $304,000 for the year ended June 30, 2001 compared to having no mortgage servicing rights amortization cost for the years ended June 30, 2000 and June 30, 1999. This was due to the acquisition of Great Western Bank in the year ended June 30, 2001. Great Western Bank is currently the only Spectrum bank that services mortgage loans pursuant to purchased mortgage servicing rights. Data processing costs increased $396,000, or 23.04% to $2,115,000 for the year ended June 30, 2001, from $1,719,000 during the year ended June 30, 2000. Data processing expense increased $182,000, or 11.84%, to $1,719,000 in 2000 from $1,537,000 in 1999. The increase was primarily due to internal growth and acquisitions. Amortization of cost in excess of net assets acquired increased $679,000 or 163.22% to $1,095,000 for the year ended June 30, 2001, from $416,000 for the year ended June 30, 2000. This increase was due to the acquisition of Great Western Bank in the third quarter of the year -27- ended June 30, 2001. Amortization of cost in excess of net assets acquired increased $274,000, or 192.96% to $416,000 for the year ended June 30, 2000, from $142,000 for the year ended June 30, 1999. This increase was primarily due to the acquisition of Citizens Bank, Carlisle (now Clive), in the second quarter of year ended June 30, 2000. Amortization of core deposit intangible was $593,000 for year ended June 30, 2001 compared to $8,000 for the year ended June 30, 2000 and no core deposit amortization cost for the year ended June 30, 1999. This was due to the acquisition of Great Western Bank in the third quarter of the year ended June 30, 2001. Other operating expenses include, among many other items, equipment expense, postage, due from bank account charges, armored car and courier fees, travel and entertainment, advertising, regulatory examination fees, directors' fees, dues and subscriptions, and FDIC insurance premiums. These expenses increased $3,160,000, or 46.97%, to $9,887,000 for the year ended June 30, 2001, from $6,727,000 for the year ended June 30, 2000. These expenses increased $858,000, or 14.62%, to $6,727,000 during 2000 from $5,869,000 during 1999. Other operating expenses increased for the year ended June 30, 2001 due to Spectrum's growth and acquisitions. FEDERAL INCOME TAX Spectrum's consolidated income tax rate varies from statutory rates principally due to interest income from tax-exempt securities. The provision for income taxes increased by $482,000 to $4,922,000 for the year ended June 30, 2001, from $4,440,000 for the year ended June 30, 2000, reflecting the increase of income before taxes for the period. Spectrum's recorded income tax expenses increased $351,000 in 2000 from $4,089,000 in 1999. RECENT ACCOUNTING PRONOUNCEMENT In July, 2001, the Financial Accounting Standards Board (FASB) issued two statements--Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, which will impact the Company's accounting for its reported goodwill. Statement 141: o Eliminates the pooling method for accounting for business combinations. o Requires that intangible assets that meet certain criteria be reported separately from goodwill. o Requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142: o Eliminates that amortization of goodwill and other intangibles that are determined to have an indefinite life. o Requires, at a minimum, annual impairment tests of goodwill and other intangible assets that are determined to have an indefinite life. o Requires that carrying value of goodwill which exceeds its implied fair value to be recognized as an impairment loss. Upon adoption of these Statements, the Company is required to: o Evaluate its existing intangible assets and goodwill that were acquired in prior business combinations and to make any necessary reclassifications in order to conform to the new criteria. -28- o Reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly, The provisions of FASB Statement 141 apply to all business combinations initiated after June 30, 2001 and all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001, or later. The provisions of FASB Statement 142 are required to be implemented by the Company in the first quarter of its 2003 fiscal year, although the Company currently intends to early implement in the first quarter of its 2002 fiscal year. The Company has not yet completed its full assessment of the effects of these new pronouncements on its financial statements, however, the impact of adopting FASB Statement No. 142 will be to eliminate the amortization of goodwill and other intangibles that are determined to have an indefinite life and subject goodwill and other intangibles to annual impairment tests. For the year ended June 30, 2001, goodwill amortization expense was approximately $1,100,000. ANALYSIS OF FINANCIAL CONDITION LOAN PORTFOLIO Total loans, net of unearned fees, increased $668,292,000, or 105.28%, to $1,303,049,000 at June 30, 2001, from $634,757,000 at June 30, 2000. The increase was primarily due to the acquisition of Great Western Bank. Total loans, net of unearned fees, increased $111,957,000, or 21.41 %, at June 30, 2000, from $522,800,000 at June 30, 1999 due primary to internal growth and the acquisition of Citizens Bank, Carlisle (now Clive). Spectrum's subsidiary banks primarily make installment loans to individuals and commercial loans to small to medium-sized businesses and professionals. The subsidiary banks offer a variety of commercial lending products including revolving lines of credit, letters of credit, working capital loans and loans to finance accounts receivable, inventory and equipment. See "Business-Loans." Typically, the subsidiary banks' commercial loans have floating rates of interest, are for varying terms, (generally not exceeding five years), are personally guaranteed by the borrower and are collateralized by accounts receivable, inventory or other business assets. The following tables present Spectrum's loan balances at the dates indicated categorized by loan type:
June 30, 2001 June 30, 2000 June 30, 1999 ------------- ------------- ------------- (dollars in thousands) Loans to individuals................. $215,071 16.75% $106,499 17.00% $ 86,243 16.71% Real estate loans.............. 172,786 13.46 135,033 21.55 107,944 20.92 Commercial and agricultural................ 912,611 71.07 388,615 62.03 326,515 63.28 Other loans.................... 3,242 0.25 4,910 0.78 2,563 0.50 ----------- ------- --------- -------- --------- -------- Total face amount of loans..... 1,303,710 101.53 635,057 101.36 523,265 101.41 Unearned loan fees........................ (661) (0.05) (300) (0.05) (465) (0.09) ----------- ------- --------- -------- --------- -------- Loans.......................... 1,303,049 101.48% 634,757 101.31% 522,800 101.32% Less allowance for loan losses....................... (18,955) (1.48) (8,197) (1.31) (6,838) (1.32) ----------- ------- --------- -------- --------- -------- Net Loans...................... $1,284,094 100.00% $626,560 100.00% $515,962 100.00% =========== ======= ========= ======== ========= ========
-29-
June 30, 1998 June 30, 1997 ------------- ------------- (dollars in thousands) Loans to individuals................. $ 68,529 15.21% $ 64,442 16.07% Real estate loans.............. 147,324 32.69 161,286 40.21 Commercial and agricultural................. 229,114 50.84 171,620 42.79 Other loans.................... 12,358 2.74 10,334 2.57 ---------- -------- ---------- -------- Total face amount of loans..... 457,325 101.48 407,682 101.64 Unearned loan fees........................ (414) (0.09) (272) (0.07) ---------- -------- ---------- -------- Loans.......................... 456,911 101.39% 407,410 101.57% Less allowance for loan losses....................... (6,276) (1.39) (6,300) (1.57) ---------- -------- ---------- -------- Net loans.................... $ 450,635 100.00% $ 401,110 100.00% ========== ======== ========== ========
Spectrum's primary category of loans, commercial and agricultural loans, constituting over two-thirds of loans as of June 30, 2001, trended upward as indicated at the stated dates. At June 30, 2001, agricultural loans totaled $126,194,000. Of this amount, $52,609,000 comprised loans primarily secured by agricultural real estate, and $73,585,000 comprised loans primarily secured by agricultural operating assets. At June 30, 2000, agricultural loans totaled $91,121,000. Of this amount, $34,528,000 comprised loans primarily secured by agricultural real estate, and $56,593,000 comprised loans primarily secured by agricultural operating assets. Commercial and agricultural loans were $912,611,000 as of June 30, 2001, an increase of $523,996,000 over the $388,615,000 balance as of June 30, 2000. Loans as of June 30, 2000 increased by $110,598,000 compared to June 30, 1999, primarily due to greater amounts of commercial loans. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities, or loans secured by similar collateral, that would cause them to be similarly impacted by economic or other conditions. Spectrum had loans secured by real estate amounting to $686,818,000 at June 30, 2001. Other than loans secured by real estate and the loan categories set forth in the above table, Spectrum had no concentrations of loans at June 30, 2001. Spectrum had no loans outstanding to foreign countries or borrowers headquartered in foreign countries at June 30, 2001. Management of Spectrum's subsidiary banks may renew loans at maturity, when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in Spectrum's best interest. Spectrum requires payment of accrued interest in such instances and may adjust the rate of interest, require a principal reduction or modify other terms of the loan at the time of renewal. Although the risk of non-payment exists for a variety of reasons relating to all loans, other more specific risks are associated with each type of loan. Risks associated with real estate mortgage loans include the borrower's inability to pay and deterioration in value of real estate held as collateral. Several risks are present in construction loans, including economic conditions in the building industry, fluctuating land values, failure of the contractor to complete work and the borrower's inability to repay. Risks associated with commercial and agricultural -30- loans are the quality of the borrower's management and the impact of local economic factors as well as prices received for products and services. Loans to individuals face the risk of a borrower's unemployment as a result of deteriorating economic conditions as well as the personal circumstances of the borrower. Management believes that risk levels associated with the various types of loans are dependent upon the existence of the risks at any particular time, for example, economic conditions in the building industry. LOAN MATURITIES The following tables present, at June 30, 2001, and June 30, 2000, loans, net of unearned fees, by maturity in each major category of Spectrum's portfolio based on contractual repricing schedules. Actual maturities may differ from the contractual repricing maturities shown below as a result of renewals and prepayments. Loan renewals are evaluated by Spectrum in the same manner as new credit applications. If loans are not repaid upon maturity, these loans are subject to the same credit evaluation and other underwriting criteria as new loan applications, and are subject to new terms and conditions as deemed appropriate by Spectrum's lending personnel.
At June 30, 2001 ------------------------------------------------------------------------------ Over One Year Through Five Years Over Five Years ------------------------ -------------------- One Year Floating Floating or Less Fixed Rate Rate Fixed Rate Rate Total --------- ---------- --------- ---------- -------- ---------- (dollars in thousands) Loans to individuals...................... $ 39,316 $152,928 $ 909 $15,461 $4,402 $ 213,016 Real estate loans......................... 48,913 57,184 35,835 26,697 3,859 172,488 Commercial and agricultural........................... 461,403 267,935 154,015 30,485 619 914,457 Other loans............................... 1,894 1,194 0 0 0 3,088 --------- ---------- --------- -------- ------- ----------- Total loans...................... $551,526 $479,241 $190,759 $72,643 $8,880 $1,303,049 ========= ========== ========= ======== ======= ===========
At June 30, 2000 ------------------------------------------------------------------------------- Over One Year Through Five Years Over Five Years ------------------------ --------------------- One Year Floating Floating or Less Fixed Rate Rate Fixed Rate Rate Total --------- ---------- --------- ---------- -------- --------- (dollars in thousands) Loans to individuals...................... $ 11,752 $ 74,950 $ 3,783 $11,591 $ 4,423 $106,449 Real estate loans......................... 31,063 42,930 30,554 23,000 7,486 135,033 Commercial and agricultural........................... 188,230 101,729 76,807 20,757 792 388,315 Other loans............................... 514 3,924 25 447 0 4,910 --------- ---------- --------- -------- -------- --------- Total loans...................... $231,559 $223,533 $111,169 $55,795 $12,701 $634,757 ========= ========== ========= ======== ======== =========
LOAN REVIEW PROCESS Spectrum's subsidiary banks follow both internal and external loan review programs to evaluate the credit risk in their loan portfolios and assess the adequacy of the allowance for loan losses. -31- Internally, each bank maintains a classified loan list that, along with the list of non-performing loans discussed below, helps Spectrum management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. The classification categories of substandard, doubtful and loss correspond with those of state and FDIC examiners. Loans classified as "substandard" are those loans with clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize repayment. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans, but also have an increased risk of loss or would require a partial write-off in liquidation. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as "loss" are those loans that are in the process of being charged off. In addition to the internally classified loans, each subsidiary bank has a "watch list" of loans that further assists monitoring of its loan portfolios. A loan is included on the watch list if it demonstrates one or more deficiencies requiring attention in the near term or if the loan's ratios have weakened to a point where more frequent monitoring is warranted. These loans do not have all the characteristics of a classified loan (substandard, doubtful or loss), but do have weakened elements as compared with those of a satisfactory credit. Management of the subsidiary banks reviews these loans to assist in assessing the adequacy of the allowance for loan losses. Substantially all of the loans on the watch list at June 30, 2001 were current and paying in accordance with loan terms. Spectrum's external loan review process consists of an intensive on-site review of more than 50% of dollar value of loans at each subsidiary bank (other than Great Western Bank) during twelve to twenty-four month periods, depending on conditions. Reviews are performed by a regional consulting firm, which is affiliated with Spectrum's external auditor, and by loan officers of Spectrum's subsidiary banks for all the banks except Citizens Bank, Clive and Citizens Bank, Princeton. The chief credit officer and loan officers of subsidiaries banks perform the Clive and Princeton reviews. Spectrum's chief credit officer is responsible for determining the frequency and scope of external loan reviews and evaluating the results of those reviews. The report of the consulting firm is presented to each bank's management and board of directors for review. The external review is used to supplement and provide a check on the internal review conducted by subsidiary bank management Great Western Bank is the only bank that has an internal loan review staff. 50% of the dollar values of Great Western Bank's loans are reviewed in a 24-month cycle. The chief credit officer of Spectrum supplements Great Western Bank's internal review staff. NONPERFORMING LOANS Nonperforming loans consist of nonaccrual, past due and restructured loans. A past due loan is an accruing loan that is contractually past due 90 days or more as to principal and/or interest payments. Loans on which management does not expect to collect interest in the normal course of business are placed on nonaccrual or are restructured. When a loan is placed on nonaccrual, any interest previously accrued but not yet collected is reversed against current income unless, in the opinion of management, the outstanding interest remains collectible. Thereafter, interest is included in income only to the extent of cash received. A loan is restored to accrual status when all interest and principal payments are current and the borrower has demonstrated to management the ability to make payments of principal and interest as scheduled. -32- A restructured loan is one upon which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is accrued based upon the new loan terms. Nonperforming loans are fully or substantially collateralized by assets. In general, the excess of loan balances over collateral values allocated in the allowance. Assets acquired through foreclosure are carried at the lower of cost or estimated fair value, net of estimated costs of disposal, if any. The following table lists nonaccrual, over 90 days past due and restructured loans, other real estate and other repossessed assets at June 30, 2001, and for each of the prior four years. At June 30, ---------------------------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------ ------ ------ Nonaccrual loans..................... $ 4,703 $ 1,920 $1,503 $2,603 $2,533 Accruing loans past due over 90 days............................ 1,772 2,370 1,082 1,609 720 Restructured loans................... 13,510 5,164 5,153 4,186 4,428 ------- ------- ------ ------ ------ Total non-performing loans........... 19,985 9,454 7,738 8,398 7,681 Other real estate and other repossessed assets................ 1,179 113 116 102 126 ------- ------- ------ ------ ------ Total non-performing assets.......... $21,164 $9,567 $7,854 $8,500 $7,807 ======= ======= ====== ====== ====== Ratio of total nonperforming loans to total loans................. 1.53% 1.49% 1.48% 1.84% 1.89% Ratio of total nonperforming assets to total loans plus other real estate and other repossessed assets....... 1.62 1.51 1.50 1.86 1.92 Ratio of nonperforming assets to total assets............. 1.19 1.12 1.15 1.38 1.42
Restructured loans were $13,510,000, $5,164,000 and $5,153,000 at June 30, 2001, 2000, and 1999. This increase in fiscal 2001 is primarily due to acquisitions. Included in the category is $7,124,000 of loans for which an increased provision was taken in 1996. These loans were primarily serviced by a single servicer that declared bankruptcy in 1996. A settlement was reached with the bankruptcy trustee that resulted in a partial charge-off of amounts owing to Spectrum's subsidiary banks, with the remaining balances carried at a below-market rate of interest for an eight-year period. These loans begin a two-year principal amortization in 2002 and are scheduled to be completely repaid in 2004. Payments of interest are being received monthly and have been received according to the terms of the settlement since its inception. A potential problem loan is defined as a loan where information about possible credit problems of the borrower is known, causing management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may result in the inclusion of such loan in one of the nonperforming asset categories. Spectrum does not believe it has any potential problem loans other than those reported in the above table. -33- Foreclosures on defaulted loans result in Spectrum acquiring other real estate and other repossessed assets. Accordingly, Spectrum incurs other expenses, specifically net costs applicable to other real estate and other repossessed assets, in maintaining, insuring and selling such assets. Spectrum's subsidiary banks attempt to convert nonperforming loans into interest-earning assets either through liquidation of the collateral securing the loan or through intensified collection efforts. ALLOWANCE FOR LOAN LOSSES Implicit in Spectrum's lending activities is the fact that loan losses will be incurred and that the risk of loss will vary with the type of loan being made and the creditworthiness of the borrower over the term of the loan. To reflect the currently perceived risk of loss associated with Spectrum's loan portfolio, provisions are made to the allowance for loan losses. The allowance is created by direct charges of the provision against income and the allowance is available to absorb realized loan losses. The allowance for loan losses is maintained to absorb probable losses inherent in the loan portfolio. Spectrum's allowance was $18,955,000 or 1.45% of loans, net of unearned fees, at June 30, 2001 compared to $8,197,000 or 1.29% of loans, net of unearned fees, at June 30, 2000. The increase was primarily due to acquisitions. Management performs regular monthly assessments of these estimated losses by utilizing a methodology that relies on several key elements. Larger-balance, non-homogeneous loans representing significant individual credit exposures are evaluated based upon the borrower's overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors and, if appropriate, the realizable value of the collateral. The allowance on these loans is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors include management's assessment of current economic conditions and the potential impact on various industries, and the financial conditions of the borrowers. Net loans charged off for the year ended June 30, 2001 were $2,296,000 compared with $540,000 in 2000. The increase is primarily due to the acquisition of Hamburg Financial, Inc. whose loans were deemed by management to carry more risk than the remainder of Spectrums' loans. Specific allowances are maintained for larger-balance, non-homogeneous loans that have been individually determined to be impaired as prescribed by State of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan." Impairment is measured on a loan-by-loan basis for these loans by either the present value of the expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the method predominantly used, which is the fair value of the collateral. Each portfolio of smaller balance, homogeneous loans, including individual installment, consumer and residential loans, is collectively evaluated for impairment. The allowance for loan losses attributed to these loans is established from an estimate of probable losses inherent in the portfolio. Loss factors are applied to outstanding loans based upon historical credit losses, trends in volumes and terms of loans, and consideration of economic, geographical, product and other factors. The allowance for loan losses is based upon estimates, and the amount actually observed for these losses can vary significantly from the estimated amounts. By assessing the -34- probable estimated losses inherent in the loan portfolio on a quarterly or more frequent basis, adjustments are made to specific and inherent loss estimates based upon the most recent information available. The following table presents the provisions, loans charged off and recoveries of loans previously charged off, the amount of the allowance, average loans outstanding and certain pertinent ratios for the year ended June 30, 2001, and for each of the prior four years.
At June 30, ----------- 2001 2000 1999 1998 1997 ---------- -------- -------- -------- -------- (dollars in thousands) Average loans outstanding(1) .................... $844,280 $567,658 $479,533 $428,454 $370,783 ========== ======== ======== ======== ======== Total loans at end of period(1)...... $1,303,049 $634,757 $522,800 $456,911 $407,410 ========== ======== ======== ======== ======== Allowance at beginning of period..... $8,197 $6,701(2) $6,276 $6,699(2) $5,659 Loans charged off: Loans to individuals............... 828 399 216 501 210 Real estate loans.................. 402 68 57 31 23 Commercial and agricultural........ 899 217 855 1,305 736 Other loans........................ 498 198 106 431 425 ---------- -------- -------- -------- -------- Total charge-offs.................. 2,627 882 1,234 2,268 1,394 ---------- -------- -------- -------- -------- Recoveries of loans previously charged off: Loans to individuals............... 223 110 89 61 58 Real estate loans.................. 12 46 9 2 2 Commercial and agricultural ...................... 72 115 133 218 354 Other loans........................ 24 71 2 1 2 ---------- -------- -------- -------- -------- Total recoveries................... 331 342 233 282 416 ---------- -------- -------- -------- -------- Net loans charged off.............. 2,296 540 1,001 1,986 978 Provision for loan losses.......... 2,618 2,036 1,563 1,434 1,619 Business acquisition(3)............ 10,436 0 0 129 0 ---------- -------- -------- -------- -------- Allowance at end of period......... $ 18,955 $8,197 $6,838(2) $6,276 $6,300(2) ========== ======== ======== ======== ========
---------------------- (1) Net of unearned fees. (2) Restated balance at end of 1999 does not equal the 2000 beginning and restated balance at the end of 1997 does not equal the 1998 beginning balance due to a change in reporting periods. (3) The allowance for loan losses includes the allowance related to Iowa State Bank, Hamburg, Iowa and United National Bank, Sidney, Iowa (collectively) for their merger into Citizens Bank, Mt. Ayr, Iowa of $2,153,000 the allowance related to Founders Trust National Bank, Sioux Falls, South Dakota for its merger into F&M Bank of $304,000, and allowance related to acquisition of Great Western Bank, Omaha, Nebraska of $7,979,000. See "Nonperforming Loans." -35- Net loan charge-offs to average loans............................. 0.27% 0.10% 0.21% 0.46% 0.26% Allowance to total loans at end of period............................ 1.45% 1.29% 1.31% 1.37% 1.55%
Credit and loan decisions are made by management and the board of directors of the subsidiary banks in conformity with loan policies established by their boards of directors. The subsidiary banks' practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectable due to the borrower's failure to meet repayment terms, the borrower's deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan's classification as a loss by regulatory examiners or for other reasons. Spectrum charged off $2,627,000 during the year ended June 30, 2001. Recoveries during the same period were $331,000. The increase in charged off loans increased primarily due to the acquisition of Hamburg Financial, Inc. as discussed earlier in this section "Allowance For Loan Losses". The following table shows the allocations in the allowance and the respective percentages of each loan category to total loans at June 30, 2001, and at year-end for each of the prior four years. Portions of the allowance have been allocated to categories based on an analysis of the status of particular loans and homogenous pools of loans. The allocation table should not be interpreted as an indication of the specific amounts, by loan classification, to be charged to the allowance. Management believes that the table may be a useful device for assessing the adequacy of the allowance as a whole. The table has been derived in part by applying historical loan loss ratios to both internally classified loans and the portfolio as a whole in determining the allocation of the loan losses attributable to each category of loans.
At June 30, 2001 At June 30, 2000 At June 30, 1999 ---------------- ---------------- ---------------- Percent of Percent of Percent of Loans by Loans by Loans by Amount of Category Amount of Category Amount of Category Allowance to Loans Allowance to Loans Allowance to Loans --------- ---------- --------- ---------- --------- ---------- (dollars in thousands) Loans to individuals............... $4,023 16.77% $1,383 16.77% $877 16.48% Real estate loans.................. 1,719 21.26 1,288 21.26 980 20.63 Commercial and agricultural........ 13,034 61.19 5,266 61.20 4,876 62.40 Other loans........................ 179 0.77 260 0.77 105 0.49 --------- ---------- -------- ---------- --------- ---------- Total allowance for loan losses.... $ 18,955 100.00% $8,197 100.00% $6,838 100.00% ========= ========== ======== ========== ========= ==========
-36-
At June 30, 1998 At June 30, 1997 ---------------- ---------------- Percent of Percent of Loans by Loans by Amount of Category Amount of Category Allowance to Loans Allowance to Loans --------- ---------- --------- ---------- (dollars in thousands) Loans to individuals............... $644 14.98% $695 15.81% Real estate loans.................. 939 32.21 868 39.56 Commercial and agricultural........ 4,087 50.11 4,120 42.10 Other loans........................ 606 2.70 617 2.53 --------- ---------- --------- ---------- Total allowance for loan losses.. $6,276 100.00% $6,300 100.00% ========= ========== ========= ==========
SECURITIES Securities, all of which are classified as available-for-sale and carried at fair value, increased $125,940,000, or 90.56%, to $265,010,000 at June 30, 2001, from $139,070,000 at June 30, 2000. The increase was primarily due to acquisitions. The board of directors of each subsidiary bank reviews all securities transactions at each board meeting and the securities portfolio periodically. For obligations of U.S. Government agencies and corporation, state, county, municipal and other securities, Spectrum's investment policy allows for the purchase of securities with maturities in excess of ten years. As of June 30, 2001, 86.15% of Spectrum's securities with defined maturities mature in less than ten years. As of June 30, 2001, 46.21% of Spectrum's investment portfolio had defined maturities. The investment portfolio with defined maturities was concentrated in the following categories: obligations of the U.S. Treasury, U.S. government agencies, corporations and state and local political subdivisions totaled $106,625,000, or 40.24% of the portfolio and corporate debt totaled 15,845,000, or 5.97% of the portfolio. Mortgage-backed securities which do not have defined maturities, totaled $134,970,000 or 50.93% of Spectrum's investment portfolio. The remaining 2.86% of Spectrum's investment portfolio is in equity securities, which primarily are stock in the Federal Home Loan Banks of Des Moines and Topeka totaled $7,568,000 as of June 30, 2001. Certain of Spectrum's securities are pledged to secure public and trust fund deposits and for other purposes required or permitted by law. At June 30, 2001, the face value of U.S. Government and other securities so pledged amounted to $176,077,000, or 66.44% of the total securities portfolio. The following table provides the maturity distribution and weighted average interest rates of Spectrum's securities portfolio at June 30, 2001. The yield has been computed by dividing the forward annualized income stream on the securities, plus or minus the anticipated amortization of premium or accretion of discount, by the book value of the securities. The book value of available-for-sale securities is their fair value. All securities are classified as available-for-sale. The restatement of the yields on tax-exempt securities to a fully taxable-equivalent basis has been computed assuming a tax rate of 34%. The equity securities are primarily composed of stock in the Federal Home Loan Banks of Des Moines and Topeka. The yield is set quarterly by the Federal Home Loan Bank's board of directors. For the quarter ended June -37- 30, 2001, the yields were 5.05% and 7.10% at Federal Home Loan Banks of Des Moines and Topeka, respectively.
At June 30, 2001 ---------------------------------------------------------- Estimated Weighted Principal Amortized Fair Average Type and Maturity Amount Cost Value Yield ----------------- --------- --------- --------- -------- (dollars in thousands) U.S. Treasury securities: Within one year................................... $ 16,500 $ 16,553 $ 16,839 6.23% After one but within five years................... 9,500 9,508 9,849 6.24 --------- --------- --------- Total U.S. Treasury securities.................. 26,000 26,061 26,688 6.23 --------- --------- --------- Obligations of other U.S. Government agencies and corporations: Within one year................................ 16,228 16,256 16,431 6.13% After one but within five years................ 22,774 22,473 23,444 6.80 After five but within ten years................ 6,000 5,988 6,165 6.89 After ten years................................ 9,000 8,978 9,106 7.36 --------- --------- --------- Total obligations of U.S. Government agencies and corporations....................... 54,002 53,695 55,146 6.71 --------- --------- --------- Obligations of states and political subdivisions: Within one year................................ 2,561 2,569 2,595 8.14% After one but within five years................ 9,219 9,222 9,420 7.14 After five but within ten years................ 7,894 7,879 7,940 7.55 After ten years................................ 4,995 4,952 4,840 7.68 --------- --------- --------- Total obligations of states and political subdivisions........................... 24,669 24,622 24,795 7.58 --------- --------- --------- Other securities: Within one year................................... 432 432 433 6.00% After one but within five years................... 10,150 10,192 10,622 7.14 After five but within ten years................... 1,700 1,754 1,766 7.41 After ten years................................... 3,150 3,096 3,022 6.09 --------- --------- --------- Total other securities.......................... 15,432 15,474 15,843 6.86 --------- --------- --------- Total securities with defined maturities........ 120,103 119,852 122,472 6.34 Mortgage Backed Securities.................... 133,593 133,195 134,970 6.53 Equity securities................................... 5,367 7,568 7,568 4.85 --------- --------- --------- ----- Total securities................................. $ 259,063 $ 260,615 $ 265,010 6.53% ========= ========= ========= =====
-38- DEPOSITS Total deposits increased $729,555,000, or 105.50%, to $1,421,090,000 at June 30, 2001, from $691,535,000 at June 30, 2000. The increase in deposits is primarily due to internal growth and to purchases of Iowa State Bank, United National Bank of Iowa, Commercial Federal Bank's Kellerton, Iowa office, Founders Trust National Bank and Great Western Bank which collectively had deposits of $593,292,000. The increase in total deposits of $121,564,000, or 21.33%, at June 30, 2000, from $569,971,000 at June 30, 1999 is attributable to the purchase of Citizens Bank of Carlisle (now Clive), Iowa on January 14, 2000, which had deposits of $69,846,000, and internal growth. See "Mergers and Acquisition". The following table presents the average amounts and the average rates paid on deposits of Spectrum for the year ended June 30, 2001, and for each of the prior two years:
Year Ended June 30, ------------------------------------------------------------------------------ 2001 2000 1999 ---- ---- ---- Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate -------- ------- -------- ------- --------- ------- (dollars in thousands) Interest-bearing demand, savings and money market deposits............ $290,984 2.93% $190,591 3.04% $164,610 2.66% Time deposits of less than $100,000.................. 412,866 6.05 284,353 5.20 252,740 5.61 Time deposits of $100,000 or more.......... 145,453 6.05 95,594 5.48 68,731 5.02 -------- -------- -------- Total interest-bearing deposits 849,303 4.98 570,538 4.52 486,081 4.53 Noninterest-bearing demand deposits............ 95,071 0.00 62,324 0.00 55,637 0.00 -------- -------- -------- Total deposits............... $944,373 4.48% $632,862 4.08% $541,718 4.06% ======== ======== ========
The maturity distribution of time deposits of $100,000 or more at June 30, 2001 is presented below:
At June 30, 2001 ---------------- (dollars in thousands) 3 months or less................................. $ 79,340 Over 3 through 6 months.......................... 102,380 Over 6 through 12 months......................... 51,811 Over 12 months................................... 0 --------- Total time deposits of $100,000 or more... $ 233,531 =========
The subsidiary banks rely to a limited extent on time deposits of $100,000 or more. Time deposits of $100,000 or more are a more volatile funding source than other deposits and are more likely to affect Spectrum's future earnings because of interest rate sensitivity. FEDERAL HOME LOAN BANK BORROWINGS -39- All of the subsidiary banks are members of the Federal Home Loan Bank. Due to the competitive rates available, each subsidiary bank has utilized Federal Home Loan Bank advances as a source of funding. At June 30, 2001, the subsidiary banks had $70,696,000 in Federal Home Loan Bank advances compared to $48,632,000 at June 30, 2000 and $28,666,000 at June 30, 1999. At June 30, 2001, based on its Federal Home Loan Bank stockholdings, the aggregate unused borrowing capacity of Spectrum was $107,563,000. A variety of borrowing terms and maturities can be chosen from the Federal Home Loan Bank. Maturities available range generally from one day to 10 years. Interest rates can be either fixed or variable and prepayment options are available if desired. The Federal Home Loan Bank offers both amortizing and non-amortizing advances. Historically, Federal Home Loan Bank stock has been redeemable at the preset price of $100 per share, its current carrying value, but there can be no assurance that this policy will continue. CAPITAL NOTES Capital Investors (See "Certain Relationships and Related Transactions") negotiated a loan from an unaffiliated bank of $35,000,000 to purchase Spectrum's subordinated capital notes. The loan has the following terms, the option to either fix the rate of interest at the five-year treasury rate plus 350 basis points but not less than the lender's cost of funds plus 250 basis points at the date the loan is closed, or to select a rate of interest at LIBOR plus 215 basis points fixed at intervals ranging from 30 days to 180 days. Interest is to be payable quarterly on the loan and principal is to be payable annually in each year beginning 2007 through 2011. Capital Investors collateralized its borrowing by pledging the subordinated capital notes to the unaffiliated bank. In addition, the stockholders of Spectrum pledged their common stock as additional collateral for Capital Investors' loan. LINE OF CREDIT Spectrum has a $5,000,000 revolving line of credit from the unaffiliated bank, to be used by Spectrum as a short-term liquidity facility. Spectrum entered into a covenant with the unaffiliated lender not to pledge the stock of its subsidiary banks except to the lender as collateral for Spectrum's loans. LIQUIDITY SOURCES OF LIQUIDITY Liquidity with respect to a financial institution is the ability to meet its short-term needs for cash without suffering an unfavorable impact on its on-going operations. The need for the subsidiary banks to maintain funds on hand arises principally from maturities of short-term borrowings, deposit withdrawals, customers' borrowing needs and the maintenance of reserve requirements. Liquidity with respect to a financial institution can be met from either assets or liabilities. On the asset side of the balance sheet, the primary sources of liquidity are cash and due from banks, federal funds sold, maturities of securities and scheduled repayments and maturities of loans. The subsidiary banks maintain adequate levels of cash and near-cash investments to meet its day-to-day needs. Cash and due from banks averaged $42,697,000 and $24,641,000 during the years ended June 30, 2001 and 2000. These amounts comprised 3.71% and 3.20% of average total assets during the years ended June 30, 2001 and 2000. The average level of securities and federal funds sold was $218,749,000 and $115,200,000 during the years ended June 30, 2001 and 2000. -40- At June 30, 2001, $32,302,000, or 29.64%, of Spectrum's securities portfolio, excluding mortgage-backed securities and equity securities, matured within one year and $53,334,000 or 43.55%, excluding mortgage-backed securities, matured after one but within five years. The subsidiary banks' commercial lending activities are concentrated in loans with maturities of less than five years and with both fixed and adjustable interest rates. Its installment lending activities are concentrated in loans with maturities of three to six years and with generally fixed interest rates. At June 30, 2001, approximately $551,437,000, or 42.40%, of Spectrum's loans, net of unearned fees, matured within one year. See "Loan Maturities." On the liability side of the balance sheet, the principal sources of liquidity are deposits, borrowed funds and accessibility to money and capital markets. Spectrum attracts its deposits primarily from individuals and businesses located within the market areas served by the subsidiary banks, and to lesser extent, on brokered deposits. Borrowed funds come primarily from three sources, Federal Home Loan Bank borrowings, Spectrum's notes payable to an unaffiliated bank and the sale of subordinated capital notes to an affiliate. Interest is due quarterly to the unaffiliated bank at either the lender's cost of funds plus 1.75% per annum or the LIBOR rate plus 1.5% (fixed for periods of up to 180 days) per annum, at the option of Spectrum. The maturity date of this outstanding debt is August 1, 2005. On August 12, 1999, Spectrum issued $20,400,000 of company obligated mandatorily redeemable preferred securities of a subsidiary trust, with interest due at 10% per annum payable quarterly. The maturity date of the securities is August 18, 2029. On March 19, 2001 Spectrum issued $27,600,000 of company obligated mandatorily redeemable preferred securities of a subsidiary trust, with interest due at 9.75% per annum payable quarterly. The maturity date of the securities is March 19, 2031. CAPITAL RESOURCES Spectrum monitors compliance with bank and bank holding company regulatory capital requirements, focusing primarily on risk-based capital guidelines. As indicated in the table immediately below, at June 30, 2001, Spectrum was above the total capital minimum requirements. Under the risk-based capital method of capital measurement, the ratio computed is dependent upon the amount and composition of assets recorded on the balance sheet, and the amount and composition of off-balance sheet items, in addition to the level of capital. Included in the risk-based capital method are two measures of capital adequacy, core capital and total capital, which consist of core and supplementary capital. The following tables present Spectrum's capital ratios as of the indicated dates.
Risk-Based Capital Ratios ------------------------- June 30, 2001 June 30, 2000 ------------- ------------- Amount Ratio Amount Ratio ---------- ------ --------- ------ (dollars in thousands) Core (Tier I) capital...................... $ 82,219 6.06% $ 61,436 9.80% Core (Tier I) capital minimum requirement.. 54,269 4.00 25,187 4.00 ---------- ------ --------- ----- Excess..................................... $ 27,950 2.06% $ 36,249 5.80% ========== ====== ========= ===== Total capital.............................. $ 151,603 11.17% $ 72,654 11.60% Total capital minimum requirement.......... 108,539 8.00 50,374 8.00 ---------- ------ --------- ------ -41- Excess..................................... $ 43,064 3.17% $ 22,280 3.60% ========== ====== ========= ====== Total risk-weighted assets............... $1,356,782 $ 626,898 ========== =========
Leverage Ratios --------------- June 30, 2001 June 30, 2000 ------------- ------------- Amount Ratio Amount Ratio ---------- ----- ---------- ----- (dollars in thousands) Core capital............................... $ 82,219 4.88% $ 61,436 7.20% Minimum requirement........................ 67,420 4.00 34,048 4.00 ---------- ----- ---------- ----- Excess..................................... $ 14,799 0.88% $ 27,388 3.20% ========== ===== ========== ===== Average total risk weighted assets......... $1,685,495 $ 853,278 ========== ==========
IMPACT OF INFLATION The effects of inflation on the local economy and on Spectrum's operating results have been relatively modest for the past several years. Because substantially all of Spectrum's assets and liabilities are monetary in nature, such as cash, securities, loans and deposits, their values are less sensitive to the effects of inflation than to changes in interest rates, which do not necessarily change in accordance with inflation rates. Spectrum attempts to control the impact of interest rate fluctuations by managing the relationship between its interest rate sensitive assets and liabilities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk arises when an interest-earning asset matures, is called, is prepaid or when such asset's rate of interest changes in a time frame different from that of the supporting interest-bearing liability. Spectrum seeks to control the risk of significant adverse effects on Spectrum's net interest income caused by interest rate changes. Spectrum does not attempt to match each interest-earning asset with a specific interest-bearing liability. Instead, as shown in the table below, it aggregates all of its interest-earning assets and interest-bearing liabilities to determine the difference between the two in specific time frames. This difference is known as the rate-sensitivity gap. A positive gap indicates that more interest-earning assets than interest-bearing liabilities mature in a time frame, and a negative gap indicates the opposite. Maintaining a balanced rate-sensitivity gap will reduce the risk associated with interest rate changes, but it will not guarantee a stable interest rate spread since various rates within a particular time frame may change by differing amounts and in different directions. Management regularly monitors the rate-sensitivity gap and considers this position in its decisions with regards to interest rates and maturities for interest-earning assets acquired and interest-bearing liabilities issued or accepted. The following tables show the ratio of the cumulative gap to total assets to be (21.09%) at the less than three-month interval, (31.50%) at the three month to less than one-year interval and 2.43% at the one to five year intervals at June 30, 2001. Currently, Spectrum is in an asset-sensitive position. Spectrum had $460,882,000 of interest-bearing demand, savings and money market deposits at June 30, 2001 that are somewhat less rate-sensitive. Excluding these deposits, Spectrum's interest-sensitive ratio would have been (4.78%) at the less than -42- three-month interval, (5.64%) at the three month to less than one-year interval and 28.29% at the one to five year intervals at June 30, 2001. The interest sensitivity position is presented as of a point in time and can be modified to some extent by management as changing conditions dictate. The following table shows the interest rate sensitivity position of Spectrum at June 30, 2001:
Estimated Maturity or Repricing at June 30, 2001 ------------------------------------------------ Three Months Less Than to Less Than One to Over Three Months One Year Five Years Five Years Total ------------ ------------ ---------- ---------- ------ Interest-earning assets: (dollars in thousands) Loans, net of unearned fees.................. $ 349,468 $202,969 $669,089 $ 81,523 $1,303,049 Investment securities: Taxable..................................... 7,783 47,199 124,137 63,262 242,381 Tax exempt.................................. 841 1,654 8,801 11,333 22,629 Federal funds sold and other................ 50,692 1,234 299 0 52,225 --------- -------- --------- -------- --------- Total interest-earning assets......... 408,784 253,056 802,326 156,118 1,620,284 Interest-bearing liabilities: Deposits: Demand, savings and money market deposits................................. 460,882 0 0 0 460,882 Time deposits............................. 207,681 405,221 183,594 2,303 798,799 Federal Home Loan Bank borrowings, federal funds purchased and securities sold under agreements to repurchase................................ 71,238 33,415 14,047 16,290 134,990 Notes payable................................ 44,750 0 0 1,200 45,950 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures................................ $0 $0 0 $ 48,000 $ 48,000 --------- --------- --------- --------- ---------- Total interest-bearing liabilities...... $ 784,551 $ 438,636 $ 197,641 $ 67,793 $1,488,621 --------- --------- --------- -------- ---------- Interest rate gap............................. $(375,767) $(185,580) $ 604,685 $ 88,325 $ 131,663 ========= ========= ========= ======== ========== Cumulative interest rate gap at June 30, 2001........................... $(375,767) $(561,347) $ 43,338 $131,663 $ 263,326 ========= ========= ========= ======== ========== Cumulative interest rate gap to total assets............................... (21.09%) (31.50%) 2.43% 7.39% 14.78% ========= ========= ========= ======== ==========
The following table indicates that at June 30, 2001, if there had been a sudden and sustained increase in prevailing market interest rates, Spectrum's 2002 interest income would be expected to decrease, while a decrease in rates would indicate an increase in income. -43-
Net interest income (Decrease) Increase PercentChange ------------------- ------------------ ------------- (dollars in thousands) Changes in Interest Rates 200 basis point rise................... $ 34,963 (4,881) (12.25%) 100 basis point rise................... 37,403 (2,441) (6.13%) Base rate scenario..................... 39,844 0 0.00% 100 basis point decline................ 41,272 1,428 3.58% 200 basis point decline................ 44,725 4,881 12.25%
The following table indicates that at June 30, 2000, if there had been a sudden and sustained increase in prevailing market interest rates, Spectrum's 2001 net interest income would be expected to decrease, while a decrease in rates would indicate an increase in income. Spectrum's interest rate risk profile was slightly more sensitive to changes in interest rates at June 30, 2001 versus June 30, 2000.
Net interest income (Decrease)Increase Percent Change ------------------- ------------------ -------------- (dollars in thousands) Changes in Interest Rates 200 basis point rise................... $ 27,951 $ (1,897) (6.36)% 100 basis point rise................... 28,899 (94) (3.18) Base rate scenario..................... 29,848 0 0.00 100 basis point decline................ 30,460 612 2.05 200 basis point decline................ 31,745 1,897 6.36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of Spectrum at June 30, 2001 and 2000, together with the Independent Auditor's Report, are included in this Form 10-K below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no current report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of Spectrum and their respective ages and positions as of the date of this report are as follows: -44-
NAME AGE POSITION WITH SPECTRUM POSITION WITH SUBSIDIARY Deryl F. Hamann 68 Chairman of the Board, CEO and Chairman and Director of F&M Bank, Director Rushmore Bank & Trust, Great Western Bank and Citizens Bank, Clive Daniel A. Hamann 43 President, COO and Director Chairman and Director of Citizens Bank, Mount Ayr and Citizens Bank of Princeton; Vice Chairman and Director of F&M Bank, Rushmore Bank & Trust and Citizens Bank, Clive; Chairman and Director of Spectrum Banc Service Corporation, Director of Great Western Bank Daniel J. Brabec 42 Executive Vice President and President and Director of Great Director Western Bank since January 17, 2001 Thomas B. Fischer 54 Senior Vice President and None Director Art N. Burtscher 50 Director Vice Chairman and Director of Great Western Bank Andrew C. Hove, Jr. 66 Director None Robert W. Murray 66 Director None Leo W. Smith II 65 Director Director of Great Western Bank James R. Clark 50 CFO, Secretary and Treasurer None
Deryl F. Hamann is the father of Daniel A. Hamann and the father-in-law of Daniel J. Brabec. All directors of Spectrum hold office until the next meeting of stockholders or until their successors are elected and qualified. Deryl F. Hamann. Mr. Hamann has been Chairman or President and CEO of Spectrum since 1971. He has been Chairman of the Executive Committee and he is Chairman of the affiliated Spectrum Life Insurance Company, an Arizona reinsurance company. He is Chairman of the affiliated Spectrum Financial Services, Inc. He is a partner in the Omaha, Nebraska law firm of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim LLP, counsel to Spectrum. Daniel A. Hamann. Mr. Daniel Hamann has been President of Spectrum since 1996 and served as Vice President of Spectrum from 1992 to 1996. He is Chairman and Director of Citizens Bank, Mount Ayr and Citizens Bank of Princeton and Vice Chairman of F&M Bank, Rushmore Bank & Trust and Citizens Bank, Clive and a Director of Great Western Bank. He is Chairman and Director of Spectrum's banks' subsidiary, Spectrum Banc Service Corporation. He is President and Director of the affiliated Spectrum Life Insurance Company. He is Executive Vice President of Spectrum Financial Services, Inc., an affiliate of Spectrum. Daniel J. Brabec. Mr. Brabec has served as Vice President of Spectrum since 1992 and as Executive Vice President. Mr. Brabec served as CFO, Secretary and Treasurer of Spectrum -45- from 1999 to 2001. Mr. Brabec served as Executive Vice President and Director of Rushmore Bank & Trust from 1993 until July 1999, when he resigned to assume expanded duties with Spectrum. He is a Director of the affiliated Spectrum Life Insurance Company. Mr. Brabec has served as Executive Vice President of Great Western Securities since 1999 and became President of Great Western Bank in January 2001. Thomas B. Fischer. Mr. Fischer has been President of Spectrum Financial Services, Inc. an affiliate of Spectrum since 1996. In 1997, he was elected Senior Vice President and Director of Spectrum. From 1992 to 1996, Mr. Fischer was Vice President, General Counsel, and Secretary of FirsTier Financial, Inc., a multi-bank holding company headquartered in Omaha, Nebraska. Art N. Burtscher. Mr. Burtscher is President of McCarthy Group Asset Management, in Omaha. He has been a Director of Spectrum since May 2001. He is Vice Chairman and Director of Great Western Bank, where he served as President from 1988 to 2001. Andrew C. Hove, Jr. Mr. Hove, retired, was Vice Chairman and Acting Chairman of the Federal Deposit Insurance Corporation in Washington, DC, from 1990 to 2001. He is the former Chairman and CEO of the Minden Exchange Bank & Trust Company, Minden, Nebraska, where he had served for 30 years. Mr. Hove became a Director of Spectrum in May 2001. Robert W. Murray. Mr. Murray is Vice Chairman of National Travelers Life Insurance Company in West Des Moines, Iowa. He is the former Chairman and CEO of Mercantile Bank Iowa and former Chairman and CEO of Hawkeye Bancorporation. Mr. Murray became a Director of Spectrum in May 2001. Leo W. Smith II. General Smith (retired) is Director, Planned Giving and Major Gifts for United Way of the Midlands in Omaha, Nebraska. He has been Director of Great Western Bank since September 1998 and Director of Spectrum since May 2001. Prior to his service with United Way, General Smith was the Last Vice Commander-In-Chief of the Strategic Air Command. James R. Clark. Mr. Clark jointed Spectrum Bancorporation as Chief Financial Officer, Treasurer, and Secretary in August 2001. From 1994 to 1999, he was Vice President of Finance and Administration of (i) Structures, Inc. From 1977 to 1994, he held financial positions with Peter Kiewit Sons', Inc., Omaha, Nebraska. ITEM 11. EXECUTIVE COMPENSATION The following table presents the cash compensation paid by Spectrum and its subsidiaries to its Chief Executive Officer and Chief Operating Officer, the only named officers, for the fiscal years 1999 through 2001. No other executive officer of Spectrum received compensation from Spectrum exceeding $100,000 for these years.
All Other Name and Principal Position Year Salary Compensation(1) ---------------------------- ---- ------ --------------- Deryl F. Hamann, Chairman and Chief Executive Officer (2) 2001 340,822 10,000 2000 258,796 9,720 1999 251,485 9,460 -46- Daniel A. Hamann, President and Chief Operating Officer 2001 158,500 15,070 2000 141,629 3,490 1999 127,840 3,196
(1) Amounts represent 401(k) Plan employer contributions, a portion of "Split-Dollar" insurance premiums and amounts allocated under Phantom Stock Agreements. (See "Phantom Stock Agreements.") (2) Excludes compensation from Great Western Bank prior to March 23, 2001. Spectrum does not have any compensatory stock option plan for its executive officers and directors. None of the directors or officers of Spectrum have any options, warrants or other similar rights to purchase securities of Spectrum. Spectrum has no board committees at the holding company level except an audit committee. On June 14, 2000, Spectrum adopted an Audit Committee Charter in compliance with SEC and American Stock Exchange rules. As a result of this action, Spectrum added four independent directors to serve as its audit committee. INDEMNIFICATION The articles of incorporation of Spectrum provide that the board of directors is authorized to indemnify, in the manner and to the extent provided by the Iowa Business Corporation Act, any person entitled to indemnification thereunder. Generally under Iowa law, any individual who is made a party to a proceeding because the individual is or was a director may be indemnified if the individual acted in good faith and had reasonable basis to believe that: (1) in the case of conduct in the individual's official capacity with the corporation, that the individual's conduct was in the corporation's best interests; and (2) in all other cases, that the individual's conduct was at least not opposed to the corporation's best interest; and regarding any criminal proceedings, the individual had no reasonable cause to believe the individual's conduct was unlawful. Iowa law also extends such indemnification to officers, employees, and agents of the corporation and further provides that an Iowa corporation may advance expenses to a director, officer, employee, or agent of the corporation. Spectrum has adopted resolutions to implement such indemnity. Iowa law also provides that an Iowa corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation, or who, while a director, officer, employee, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by that individual in that capacity or arising from the individual's status as a director, officer, employee, or agent. Spectrum has not purchased such insurance. The indemnification and advancement of expenses provided by Iowa law are not exclusive of any other rights to which persons seeking indemnification or advancement of expenses are entitled under a provision in the articles of incorporation or bylaws, agreements, vote of stockholders or disinterested directors, or otherwise, both as to action in a person's official capacity and as to action in another capacity while holding office. However, such provisions, agreements, votes or other actions shall not provide indemnification for a breach of a director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law, for a transaction from which -47- the person seeking indemnification derives an improper personal benefit, or for liability for unlawful distributions. Iowa law provides that a director is not liable for any action taken as a director, or any failure to take any action, as long as the director discharged his or her duties (1) in good faith, (2) with the care of an ordinarily prudent person in a like position would exercise under similar circumstances, and (3) in a manner the director reasonably believes to be in the best interests of the corporation. There is no pending litigation or proceeding involving a director, officer, employee or other agent of Spectrum as to which indemnification is being sought. Spectrum is not aware of any other threatened litigation that may result in claims for indemnification by any director, officer, employee or other agent. PHANTOM STOCK AGREEMENTS Spectrum's subsidiary banks have phantom stock agreements with six senior bank officers, including Daniel A. Hamann, Chairman of Citizens Bank, Mount Ayr and Daniel J. Brabec, President of Great Western Bank. Cash amounts are accumulated for the officers based on their bank's performance, 50% by achieving certain annual growth rates in net income and 50% by achieving certain annual rates of return on assets. Accumulated amounts are payable to the officers over ten years beginning at age 65 or prior due to death or permanent disability. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table presents information regarding beneficial ownership of common stock of Spectrum as of September 21, 2001 by (1) each shareholder known by Spectrum to be the beneficial owner of more than 5% of its outstanding common stock and (2) each director of Spectrum and each named executive officer and (3) all directors and executive officers as a group. Based on information furnished by the owners, management believes that the stockholders listed below have sole investment and voting power regarding their shares, except that co-trustees share investment and voting power.
Shares Beneficially Percentage Name and Address of Beneficial Owner Owned of Class ------------------------------------ ------------ ---------- Deryl F. Hamann....................... 91,682(1) 73.19% 1500 Woodmen Tower Omaha, NE 68102 Daniel A. Hamann...................... 22,677(2) 18.10% 10834 Old Mill Road, Suite One Omaha, NE 68154
--------------------- (1) Of this amount, an aggregate of 61,263 shares are held by four separate trusts for which Mr. Hamann serves as trustee for the benefit of his children, Daniel A. Hamann, Esther Hamann Brabec, Julie Hamann Bunderson, and Karl E. Hamann. Mr. Hamann as trustee owns an additional 454 shares held by an affiliated company. In addition, Mr. Hamann owns 29,965 shares individually. (2) Of this amount, 2,221 shares are owned by his revocable trust for which he serves as sole trustee, 176 shares are owned by his spouse, and an aggregate of 20,280 shares are held by various Hamann family trusts for which he serves as co-trustee with Esther Hamann Brabec and Julie Hamann Bunderson. -48-
Shares Beneficially Percentage Name and Address of Beneficial Owner Owned of Class ------------------------------------ ------------ ---------- Esther Hamann Brabec.................. 24,769(3) 19.77% 10834 Old Mill Road, Suite One Omaha, NE 68154 Daniel J. Brabec...................... 420(4) * 14545 West Center Road Omaha, NE 68144 Julie Hamann Bunderson................ 26,699(5) 21.31% 10834 Old Mill Road, Suite One Omaha, NE 68154 Art N. Burtscher...................... -0- -0- 1125 So. 103rd St., Suite 450 Omaha, NE 68124 Andrew C. Hove, Jr.................... -0- -0- 6610 Blue Ridge Lane Lincoln, NE 68516 Robert W. Murray...................... -0- -0- 1716 So. 42nd St. West Des Moines, IA 50265 Leo W. Smith II....................... -0- -0- 1805 Harney St. Omaha, NE 68102 Thomas B. Fischer..................... -0- -0- 10834 Old Mill Road, Suite One Omaha, NE 68154 All executive officers and directors as a group (eight persons) 114,779 91.63%
------------------------ (3) Of this amount, 2,005 shares are owned by her revocable trust for which she serves as sole trustee, 420 shares are owned by her spouse, an aggregate of 20,280 shares are held by various Hamann family trusts for which she serves as co-trustee with Daniel A. Hamann and Julie Hamann Bunderson, and 2,064 shares are owned by her as trustee for Julie Hamann Bunderson's issue. (4) Does not include shares beneficially owned by his spouse. Mr. Brabec disclaims beneficial ownership of such shares. (5) Of this amount, 2,128 shares are owned by her revocable trust for which she serves as sole trustee, an aggregate of 20,280 shares are held by various Hamann family trusts for which she serves as co-trustee with Daniel A. Hamann and Esther Hamann Brabec, 2,571 shares are owned by her as trustee for Esther Hamann Brabec's issue and 1,720 shares are owned by her as trustee for Daniel A. Hamann's issue. * Less than 1%. -49- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Spectrum Life Insurance Company and Spectrum Financial Services, Inc. are affiliates of Spectrum. They are owned, directly or indirectly, by Deryl F. Hamann, individually or as trustee for the benefit of his children. Spectrum Life Insurance Company reinsures certain credit life, accident and health insurance policies sold by Spectrum's subsidiary banks and unaffiliated banks as agents for an unaffiliated insurance company. Spectrum Life Insurance Company reinsures certain of the mortality and morbidity risks under such policies in accordance with separate treaties with the unaffiliated insurance company, and received compensation from such insurance company of $641,791 during Spectrum's fiscal year ended June 30, 2001, and $338,146 for the year ended June 30, 2000, for assuming such reinsurance risks with respect to credit insurance originated by Spectrum's subsidiary banks. Spectrum's subsidiary banks receive a commission on such sales of credit insurance as permitted by applicable state law. In addition, Spectrum Financial Services receives a commission as general agent from the unaffiliated insurance company on such sales of credit insurance where permitted by law. Such commissions on credit insurance originated by Spectrum's subsidiary banks was $299,083 during the fiscal year ended June 30, 2001, and $297,097 during the fiscal year ended June 30, 2000. Spectrum believes that the foregoing arrangements are on terms similar to those which would be obtained with an unaffiliated party. Spectrum Financial Services places investment centers in banks, including Spectrum's subsidiary banks, and unaffiliated banks. The investment centers engage in the sale of life insurance, annuities, mutual funds and certain other securities on the premises of the banks under lease arrangements and with joint or common employees. Spectrum Financial Services pays Spectrum's subsidiary banks lease rentals based on commissions generated. Gross commissions originated from Spectrum's subsidiary banks were $591,220 during Spectrum's fiscal year ended June 30, 2001, and $529,511 during the fiscal year ended June 30, 2000. Each Spectrum bank received approximately 75% (before broker compensation) of the amount of gross commissions generated from its leased space as rental. Spectrum believes that these arrangements are on terms similar to those that would be obtained with an unaffiliated party. Spectrum's banks (excluding Great Western Bank) own all of the stock of Spectrum Banc Service Corporation. It provides data processing services and certain related services to the five banks on a break-even basis. Spectrum Banc Services Corporation operates under lease agreement for office space from F&M Bank. Spectrum believes that these arrangements are on terms similar to those that would be obtained with an unaffiliated party. On May 31, 1999, Spectrum, which was then named Decatur Corporation, became the surviving corporation in a merger with two affiliated bank holding companies, Spectrum Bancorporation, Inc. and Rushmore Financial Services, Inc., which owned F & M Bank, Watertown, South Dakota, and Rushmore Bank & Trust, Rapid City, South Dakota. The Hamann family or their interests owned beneficially all of the stock of all parties to the merger. In the merger, the Hamann family or their interests received a total of 61,063 shares of common stock of Spectrum and 8,000 shares of 10% nonvoting, noncumulative perpetual preferred stock of Spectrum. On August 7, 2000, Spectrum became the surviving corporation in a merger with the affiliated Citizens Corporation, which owned Citizens Bank, Chariton, Iowa. The Hamann family or their interests owned beneficially all of the stock to all parties to the merger. In the merger, the Hamann family or their interests received a total of 7,584 shares of common stock of -50- Spectrum. Shortly prior to the merger the Hamann family or their interests received 10% subordinated capital notes of Citizens Corporation, having a face amount of $1,200,000 due December 31, 2010, as a distribution of income received while Citizens Corporation was an "S" corporation. The liability on the capital notes was assumed by Spectrum in the merger. In January of 2001, F&M Bank, a subsidiary of Spectrum, purchased the insurance agency business of Watertown Agency, Inc. from Spectrum Financial Services, Inc. for $539,652. The selling corporation has been owned by the Hamann family and was engaged in the insurance agency business in Watertown, South Dakota since 1976. Spectrum believes that the price paid was similar to the price which would have been paid by an unaffiliated party. On March 23, 2001, Spectrum became the surviving corporation in a merger with the affiliated Great Western Securities, which owned Great Western Bank. The Hamann family or their interests owned 50% of the common stock of Great Western Securities, Inc. In the merger, the Hamann family or their interests received a total of 46,319 shares of common stock of Spectrum. The remainder of the consideration was paid to an unaffiliated party. In connection with the acquisition of Great Western Securities, stockholders of Spectrum formed Capital Investors, LLC. Capital Investors, LLC is owned by stockholders of Spectrum for the purpose of financing the purchase of Spectrum's subordinated capital notes. This structure was designed to meet requirements of the third party lender to Capital Investors and to qualify Spectrum's subordinated capital notes as Tier II capital for regulatory purposes. The subordinated capital notes will bear interest at a floating rate of one percent per annum over prime rate and will be due March 23, 2011 with interest payable quarterly. Spectrum has the right to prepay the subordinated capital notes without penalty. Depending upon the availability of funds and Spectrum's capital requirements, Spectrum intends to prepay the subordinated capital notes at the rate of 20% of the original principal amount each year beginning in 2007 through 2011. Spectrum's obligations under its preferred securities guarantee and the junior subordinated debentures are unsecured and rank junior to Spectrum's obligations under its subordinated capital notes. Capital Investors negotiated a loan from an unaffiliated bank of $35,000,000 to purchase Spectrum's subordinated capital notes. The loans terms are to have the option to either fix the rate of interest at the five-year treasury rate plus 350 basis points but not less than the lender's cost of funds plus 250 basis points at the date the loan is closed, or to select a rate of interest at LIBOR plus 215 basis points fixed at intervals ranging from 30 days to 180 days. Interest is payable quarterly on the loan and principal is payable annually in each year beginning 2007 through 2011. Capital Investors collateralized its borrowing by pledging the subordinated capital notes to the unaffiliated bank. In addition, the stockholders of Spectrum pledged their common stock as additional collateral for Capital Investors' loan. Deryl F. Hamann is a partner in the law firm of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim LLP, Omaha, Nebraska, counsel to Spectrum. See "Legal Matters." Mr. Hamann devotes approximately 5% of his time to law firm matters, 90% to Spectrum matters, and the remaining 5% of his time to other interests. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed with this report. (1) See index to consolidated financial statements on page F-1 of this report. -51- (2) All supplemental schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the Consolidated Financial Statements or notes thereto. (3) Exhibits (a) (3) EXHIBITS
SEQUENTIAL REFERENCE TO PAGE NUMBER PRIOR FILING WHERE ATTACHED OR EXHIBIT EXHIBITS ARE LOCATED REGULATION S-K NUMBER IN THIS FORM 10-K EXHIBIT NUMBER ATTACHED REPORT DOCUMENT HERETO 2.2 Agreement and Plan of Merger dated May 25, 2000, between Spectrum Bancorporation, Inc. and Citizen's Corporation (2) Not Applicable 2.3 Agreement dated November 14, 2000, between Jack K. Harvey and Great Western Securities, Inc. (2) Not Applicable 2.4 Agreement and Plan of Merger dated December 16, 2000, between Spectrum Bancorporation, Inc. and Great Western Securities, Inc. (2) Not Applicable 3.1 Articles of Amendment to Articles of Incorporation of Spectrum Bancorporation, Inc. (1) Not Applicable 3.2 Bylaws of Spectrum Bancorporation, Inc. (1) Not Applicable 4.1 Form of Subordinated Indenture dated August 18, 1999, to be entered into between the Registrant and Wilmington Trust Company, as Indenture Trustee. (1) Not Applicable 4.1 Form of Subordinated Indenture dated March 19, 2001 to be entered into between the Registrant and Wilmington Trust Company, as Indenture Trustee. (2) Not Applicable 4.2 Form of Junior Subordinated Debenture. (1) Not Applicable 4.2 Form of Junior Subordinated Debenture. (2) Not Applicable 4.3 Certificate of Trust of Spectrum Capital I. (1) Not Applicable 4.3 Certificate of Trust of Spectrum Capital II. (2) Not Applicable 4.4 Trust Agreement of Spectrum Capital I dated as of June 11, 1999. (1) Not Applicable 4.4 Trust Agreement of Spectrum Capital II dated as of January 4, 2001. (2) Not Applicable 4.5 Form of Amended and Restated Trust Agreement of Spectrum Capital I dated August 18, 1999. (1) Not Applicable 4.5 Form of Amended and Restated Trust Agreement of Spectrum Capital II dated March 19, 2001. (2) Not Applicable 4.6 Form of Preferred Security Certificate of Capital I. (1) Not Applicable 4.6 Form of Preferred Security Certificate of Capital II. (2) Not Applicable -52- 4.7 Form of Preferred Securities Guarantee Agreement. (1) Not Applicable 4.8 Form of Agreement as to Expenses and Liabilities. (1) Not Applicable 4.8 Form of Agreement as to Expenses and Liabilities. (2) Not Applicable 4.9 Revised Form of Spectrum's Subordinated Capital Notes due 2011. (3) Not Applicable 10.1 Time Note dated July 18, 2000, between Spectrum Bancorporation, Inc., as borrower, and LaSalle Bank National Association. (2) Not Applicable 10.3 Agreement for Advances, Pledge and Security Agreement dated September 11, 1995, between Federal Home Loan Bank of Des Moines and Rushmore Bank & Trust. (Registrant's other subsidiary banks have identical agreements). (1) Not Applicable 10.4 Form of CMS Agency Agreement (reverse repurchase agreement) between F&M Bank and its customers. (1) Not Applicable 10.5 Phantom Stock Long-Term Incentive Plan dated January 16, 1998, between Daniel A. Hamann and Citizens Bank. (1) Not Applicable 10.5 Phantom Stock Long-Term Incentive Plan dated June 30, 2000 between Daniel A. Hamann and Citizens Bank. (2) Not Applicable 10.6 License Agreement dated September 5, 1997 between Jack Henry & Associates, Inc. and Spectrum Banc Service Corporation. (1) Not Applicable 10.7 Split-Dollar Agreement dated July 12, 1995 among Decatur Corporation and Daniel A. Hamann, Esther Hamann Brabec and Julie Hamann Bunderson. (1) Not Applicable 12.1 Statement re Computation of Ratios. (4) 21 Subsidiaries of Registrant. (4) 24.1 Power of Attorney for Art N. Burtscher. (4) 24.2 Power of Attorney for Andrew C. Hove, Jr. (4) 24.3 Power of Attorney for Robert W. Murray. (4) 24.4 Power of Attorney for Leo W. Smith. (4)
------------------------------ (1) Filed as exhibits to Spectrum's Form S-1 registration statement filed on June 11, 1999, (File No. 333-80551) pursuant to Section 5 of the Securities Act of 1933. (2) Filed as exhibits to Spectrum's Form S-1 registration statement filed on January 12, 2001 (File No. 333-53644) pursuant to Section 5 of the Securities Act of 1933. (3) Filed as an exhibit to Spectrum's Amendment No. 1 to the Form S-1 registration statement filed on February 28, 2001 (File No. 333-53644) pursuant to Section 5 of the Securities Act of 1933. (4) Filed herewith. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. (b) REPORTS ON FORM 8-K -53- No reports on Form 8-K were filed during the fourth quarter. -54- SIGNATURES Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPECTRUM BANCORPORATION, INC. By /s/ Deryl F. Hamann ------------------------- Deryl F. Hamann, Chairman and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /s/ Deryl F. Hamann /s/ Daniel A. Hamann ---------------------------------- -------------------------------- Deryl F. Hamann, Chairman, Daniel A. Hamann, President Chief Executive Officer and Director Chief Operating Officer and (Principal Executive and Operating Officer) Director DATE: 9/28/01 DATE: 9/28/01 ------- ------- /s/ Thomas B. Fischer /s/ Arthur N. Burtscher * ---------------------------------- -------------------------------- Thomas B. Fischer, Arthur N. Burtscher, Director Senior Vice President and Director DATE: 9/28/01 DATE: 9/28/01 ------- ------- /s/ Daniel J. Brabec /s/ Andrew C. Hove * ---------------------------------- -------------------------------- Daniel J. Brabec, Andrew C. Hove, Jr; Director Executive Vice President DATE: 9/28/01 and Director ------- DATE: 9/28/01 /s/ Robert W. Murray * ------- -------------------------------- Robert W. Murray, Director /s/ James R. Clark DATE: 9/28/01 ---------------------------------- ------- CFO and Secretary/Treasurer /s/ Leo W. Smith II * DATE: 9/28/01 -------------------------------- ------- Leo W. Smith II, Director DATE: 9/28/01 ------- *By: /s/ Deryl F. Hamann ---------------------------------- Deryl F. Hamann AS: ATTORNEY-IN-FACT DATE: 9/28/01 ------- -55- SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL REPORT JUNE 30, 2001 CONTENTS ------------------------------------------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT ON THE FINANICAL STATEMENTS F-2 ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS Balance sheets F-3 Statements of income F-4 Statements of stockholders' equity F-5 Statements of cash flows F-6 Notes to consolidated financial statements F-7 - F-36 -------------------------------------------------------------------------------------------------------------------
F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Spectrum Bancorporation, Inc. Omaha, Nebraska We have audited the accompanying consolidated balance sheets of Spectrum Bancorporation, Inc. and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spectrum Bancorporation, Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. MCGLADREY & PULLEN, LLC Sioux Falls, South Dakota August 17, 2001 F-2 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 2001 2000 ------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks (Note 3) $55,744 $26,037 Federal funds sold 50,692 15,089 ----------------------------------- TOTAL CASH AND CASH EQUIVALENTS 106,436 41,126 Certificates of deposit 1,533 2,772 Securities available for sale (Notes 4, 9 and 10) 265,010 139,070 Loans receivable, net (Notes 5, 10 and 19) 1,284,094 626,560 Premises and equipment, net (Note 6) 37,035 17,676 Accrued interest receivable 14,454 8,740 Core deposit and other intangibles 6,703 - Cost in excess of net assets acquired 40,121 7,928 Mortgage servicing rights (Note 7) 18,366 - Other assets (Note 12) 8,370 6,904 ----------------------------------- $1,782,122 $850,776 =================================== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------- Liabilities Deposits (Note 8): Noninterest bearing $161,409 $65,896 Interest bearing 1,259,681 625,639 ---------------------------------- TOTAL DEPOSITS 1,421,090 691,535 Federal funds purchased and securities sold under agreements to repurchase (Note 9) 63,211 22,917 Notes payable (Note 10) 117,730 55,760 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures (Note 11) 48,000 20,400 Accrued interest and other liabilities (Note 13) 30,837 9,597 --------------------------------- 1,680,868 800,209 --------------------------------- Minority interest in subsidiaries (Note 2) 4,328 2,745 --------------------------------- Commitments and contingencies (Notes 17 and 18) Stockholders' equity (Note 15): 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 and 0 shares of variable rate, noncumulative, nonvoting, respectively 11,700 1,700 Common stock, $1 par value, authorized 1,000,000 shares, issued and outstanding: 125,267 and 79,068 shares, respectively 125 79 Additional paid-in capital 2,064 2,069 Retained earnings 80,792 46,331 Accumulated other comprehensive income (loss) (Note 4) 2,245 (2,357) ----------------------------------- 96,926 47,822 ----------------------------------- $1,782,122 $850,776 ===================================
See Notes to Consolidated Financial Statements F-3 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- Interest income on: Loans receivable $77,622 $51,509 $43,262 Taxable securities 10,148 7,027 6,119 Nontaxable securities 1,010 864 783 Dividends on securities 268 194 109 Federal funds sold and other 2,621 1,769 1,436 ------------------------------------------------------------- 91,669 61,363 51,709 ------------------------------------------------------------- Interest expense on: Deposits 42,305 25,816 22,004 Federal funds purchased and securities sold under agreements to repurchase 1,567 1,193 895 Notes payable and company obligated mandatorily redeemable preferred securities 7,953 4,506 2,649 ------------------------------------------------------------- 51,825 31,515 25,548 ------------------------------------------------------------- NET INTEREST INCOME 39,844 29,848 26,161 Provision for loan losses (Note 5) 2,618 2,036 1,563 ------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 37,226 27,812 24,598 ------------------------------------------------------------- Other income: Service charges and other fees 6,297 4,259 3,344 Net gains from sale of loans 1,152 628 1,120 Loan servicing fees 240 - - Casualty insurance commissions 689 441 291 Credit life and health and accident insurance commissions 262 291 268 Health and life insurance commissions 82 19 14 Other insurance commissions 112 84 58 Real estate brokerage commissions 99 99 85 Investment center income 503 275 234 Gain (loss) on sale of securities, net (Note 4) 133 (13) 27 Trust department income 617 313 233 Other 1,281 837 988 ------------------------------------------------------------- 11,467 7,233 6,662 ------------------------------------------------------------- Other expenses: Salaries and employee benefits (Notes 13 and 14) 17,569 10,938 10,011 Occupancy expenses, net 2,268 1,249 1,062 Amortization of mortgage servicing rights acquired 304 - - Data processing 2,115 1,719 1,537 Equipment expenses 1,519 719 532 Advertising 1,270 1,098 739 Amortization of cost in excess of net assets acquired 1,095 416 142 Amortization of core deposit and other intangibles 593 8 - Other operating expenses 7,098 4,910 4,598 ------------------------------------------------------------- 33,831 21,057 18,621 ------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES 14,862 13,988 12,639 Income taxes (Note 12) 4,922 4,440 4,089 ------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES 9,940 9,548 8,550 Minority interest in net income of subsidiaries 522 404 357 ------------------------------------------------------------- NET INCOME $9,418 $9,144 $8,193 ============================================================= Basic earnings per common share $101.16 $113.62 $101.42 ============================================================= Weighted average shares outstanding 91,598 79,140 79,287 =============================================================
See Notes to Consolidated Financial Statements F-4 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated Other Compre- Compre- Additional hensive hensive Preferred Common Paid-in Retained Income Income Stock Stock Capital Earnings (Loss) Total ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 $1,700 $79 $2,079 $31,868 $744 $36,470 Comprehensive income: Net income $8,193 - - - 8,193 - 8,193 Other comprehensive income, net of tax: Net change in unrealized gain (loss) on securities available for sale (Note 4) (1,760) - - - - (1,760) (1,760) ------- Comprehensive income $6,433 ======= Cash dividends paid: Preferred stock - - - (152) - (152) Common stock ($11.49 per share) - - - (911) - (911) Redeem stock - - (5) (67) - (72) -------------------------------------------------------------------------------- Balance, June 30, 1999 1,700 79 2,074 38,931 (1,016) 41,768 Comprehensive income: Net income $9,144 - - - 9,144 - 9,144 Other comprehensive income, net of tax: Net change in unrealized gain (loss) on securities available for sale (Note 4) (1,801) - - - - (1,801) (1,801) ------- Comprehensive income $7,343 ======= Cash dividends paid: Preferred stock - - - (152) - (152) Common stock ($12.45 per share) - - - (985) - (985) Redeem stock - - (5) (70) - (75) Adjustment to conform year ends (Note 16) - - - (537) 460 (77) -------------------------------------------------------------------------------- Balance, June 30, 2000 1,700 79 2,069 46,331 (2,357) 47,822 Comprehensive income: Net income $9,418 - - - 9,418 - 9,418 Other comprehensive income, net of tax: Net change in unrealized gain (loss) on securities available for sale (Note 4)3,865 - - - - 3,865 3,865 ------ Comprehensive income $13,283 ======= Redeem stock - - (5) (73) - (78) Issue stock for acquisition 10,000 46 - 26,761 737 37,544 Dividends paid: Preferred stock, cash - - - (152) - (152) Common stock ($18.01 per share), including $1,200 in form of notes payable - - - (1,493) - (1,493) -------------------------------------------------------------------------------- Balance, June 30, 2001 $11,700 $125 $2,064 $80,792 $2,245 $96,926 ================================================================================ See Notes to Consolidated Financial Statements.
F-5 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (IN THOUSANDS)
2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $9,418 $9,144 $8,193 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,369 1,833 1,821 (Gain) loss on sale of securities (133) 13 (27) (Gain) from sale of loans (1,152) (628) (1,120) Loss on sale of other assets - - 121 Provision for loan losses 2,618 2,036 1,563 Provision for deferred income taxes (720) (803) (169) Minority interest in net income of subsidiaries 522 404 357 Loans originated for resale (87,311) (43,614) (69,261) Proceeds from sale of loans originated for sale 84,987 46,016 70,709 (Increase) in accrued interest receivable (3,517) (1,912) (452) (Increase) decrease in other assets 8,385 (284) (95) Increase (decrease) in accrued interest and other liabilities (6,758) 2,080 544 ------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 10,708 14,285 12,184 ------------------------------------------------ Cash Flows from Investing Activities Purchase of certificates of deposit (5,465) (4,153) - Proceeds from maturities of certificates of deposit 6,704 2,187 1,216 Purchase of securities available for sale (39,683) (61,907) (63,780) Proceeds from sales and maturities of securities available for sale 44,074 30,069 45,468 Purchase of mortgage servicing rights (4,844) - - Net increase in loans (78,508) (114,774) (67,218) Purchase of premises and equipment (6,129) (5,630) (4,106) Purchase of other assets - (800) (1,087) Proceeds from sale of premises and equipment 4 9 450 Proceeds from sale of other assets - 1,385 - Business acquisitions (Note 2) (43,819) 63,952 - ------------------------------------------------ NET CASH (USED IN) INVESTING ACTIVITIES (127,666) (89,662) (89,057) ------------------------------------------------ Cash Flows From Financing Activities Net increase in deposits 131,263 53,275 57,629 Net increase in federal funds purchased and securities sold under agreements to repurchase 842 9,711 2,365 Proceeds from issuance of preferred securities 27,600 20,400 - Proceeds from notes payable 47,826 22,560 7,010 Principal payments on notes payable (24,268) (14,687) (5,236) Debt issuance costs incurred (1,402) (1,061) Purchase of minority interest in subsidiaries - (6) (152) Proceeds from sale of minority interest in subsidiary 1,063 500 - Purchase of common stock for retirement (78) (75) (72) Dividends paid, including $133, $47 and $58 paid to minority interest, respectively (578) (1,184) (1,121) ------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 182,268 89,433 60,423 ------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 65,310 14,056 (16,450) Cash and Cash Equivalents Beginning (Note 16) 41,126 27,070 43,911 ------------------------------------------------ Ending $106,436 $41,126 $27,461 ================================================ Supplemental Disclosures of Cash Flow Information Cash payments for interest $50,368 $29,265 $25,174 Cash payments for income taxes 3,157 5,444 3,665 Supplemental Schedules of Noncash Investing and Financing Activities Net change in unrealized gain/loss on securities available for sale $3,865 $(1,801) $(1,760) Dividend declared in the form of notes payable 1,200 - - Purchase of mortgage servicing rights for other liabilities 10,000 - - See Notes to Consolidated Financial Statements.
F-6 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: The Company is a multi-bank holding company organized under the laws of Iowa whose primary business is providing the traditional functions of trust, commercial, consumer, and mortgage banking services through its Nebraska, South Dakota, Missouri and Iowa based subsidiary banks. Substantially all of the Company's income is generated from banking operations. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of mortgage servicing rights. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions with subsidiaries are eliminated in consolidation. The consolidated subsidiaries are as follows: Great Western Bank (100.0% owned at June 30, 2001), which is chartered in Omaha, Nebraska; F & M Bank (95.6% owned), which is chartered in Watertown, South Dakota; Rushmore Bank & Trust (90.0% owned), which is chartered in Rapid City, South Dakota; Citizens Bank, Mount Ayr (100.0% owned), which is chartered in Mount Ayr, Iowa; Citizens Bank, Clive (95.2% owned), which is chartered in Clive, Iowa; Citizens Bank of Princeton (100.0% owned), which is chartered in Princeton, Missouri; Spectrum Banc Service Corporation (100.0% owned by bank subsidiaries, excluding Great Western Bank), a data processing organization; Spectrum Capital Trust I (100.0% owned); and Spectrum Capital Trust II (100.0% owned); Rushmore Bank & Trust also owns 99.0% of Ameriloan, LLC, a loan origination company, which is currently inactive. Great Western Bank also owns 100.0% of GW Leasing, Inc., a leasing company. CASH AND CASH EQUIVALENTS AND CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash items in process of clearing) and federal funds sold. Cash flows from loans (other than those originated for resale), deposits, federal funds purchased and securities sold under agreements to repurchase are reported net. TRUST ASSETS: Assets of the trust departments of the Company's subsidiaries, other than trust cash on deposit at that bank, are not included in these financial statements because they are not assets of the Company. F-7 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SECURITIES AVAILABLE FOR SALE: Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are reported at fair value with unrealized gains or losses reported as a separate component of stockholders' equity, net of the related deferred tax effect. The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income. Realized gains or losses, determined on the basis of the amortized cost of specific securities sold, are included in earnings. Declines in the fair value of individual securities classified as available for sale below their amortized cost that are determined to be other than temporary result in write-downs of the individual securities to their fair value with the resulting write-downs included in current earnings as realized losses. LOANS RECEIVABLE: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the amount of unpaid principal, reduced by unearned fees and an allowance for loan losses. The Company grants real estate, commercial and consumer loans to customers primarily in Nebraska, South Dakota, Missouri and Iowa and has purchased loans primarily originated in those states and surrounding states. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower. Collateral held varies, but includes accounts receivable, inventory, property and equipment, residential real estate, income-producing commercial properties and government guarantees. Loans sold on the secondary market are sold on a prearranged basis. Loans held for sale are included in loans receivable and are stated at the lower of cost or market on an aggregate basis. Loans held for sale totaled $3,973,000 and $2,806,000 as of June 30, 2001 and 2000, respectively. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans receivable are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing loans, based on an evaluation of their collectibility and prior loss experience. The evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. While management uses the best information available to make this evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations. F-8 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOANS RECEIVABLE (CONTINUED): Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. The amount of impairment, if any, and any subsequent changes are included in the provision for loan losses. Interest on loans is accrued daily on the outstanding balances. For impaired loans, accrual of interest is discontinued when management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. For loans on which the accrual of interest has been discontinued, cash collections are credited to the loan receivable balance, and interest income is not recognized on those loans until the principal balance has been collected. A substantial portion of loan fees charged or received on the origination of mortgage loans are related to loans sold on the secondary market with servicing released and are recognized as income when received. Certain other loan fees, net of certain direct loan origination costs, are deferred and the net amount amortized as an adjustment of the related loan's yield. The Company is generally amortizing these amounts over the contractual life of the loan. Commitment fees based upon the amount of a customer's line of credit and fees related to letters of credit are not significant and are recognized in income when received. OTHER REAL ESTATE OWNED: Other real estate owned (OREO) represents properties acquired through foreclosure or other proceedings and is initially recorded at fair value at the date of foreclosure, which establishes cost. After foreclosure, OREO is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Any write-down to fair value at the time of transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value, and valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded if necessary. OREO is included in other assets in the accompanying consolidated balance sheets. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the following estimated useful lives:
Years ------------ Buildings and building improvements 3 - 50 Furniture and equipment 5 - 15
F-9 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CORE DEPOSIT AND OTHER INTANGIBLES: Core deposit intangibles with a net book value of $6,210,000 as of June 30, 2001 are being amortized over five years using an accelerated method. Other intangibles are being amortized over five to fifteen years using the straight-line method. COST IN EXCESS OF NET ASSETS ACQUIRED: Cost in excess of net assets acquired represents the excess of the acquisition cost over the fair value of the net assets acquired in the purchase of subsidiaries and branches and is being amortized over periods of eleven to forty years using the straight-line method. Cost in excess of net assets acquired is net of accumulated amortization of $4,093,000 and $2,985,000 at June 30, 2001 and 2000, respectively. MORTGAGE SERVICING RIGHTS ACQUIRED: The cost of mortgage servicing rights acquired is amortized in proportion to, and over the period of, estimated net servicing revenues. The cost of mortgage servicing rights acquired and the amortization thereon is periodically evaluated in relation to estimated future net servicing revenues. Projected net servicing revenue is in turn determined on the basis of the estimated future balance of the underlying mortgage loan portfolio. The Company estimates future prepayment rates based on relevant characteristics of the servicing portfolio. Impairment of mortgage servicing rights acquired is assessed based on the fair value of those rights as compared to amortized cost. For purposes of measuring impairment, the rights are stratified based on investor remittance type. Fair values are estimated using discounted cash flows based on interest rates commensurate with the risks involved. Impairment, if any, is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount of the stratum. LONG-LIVED ASSETS: Long-lived assets, including intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. DEFERRED COMPENSATION: The net present value of payments expected to be made under deferred compensation agreements is being accrued over the respective employees' expected employment service periods. EARNINGS PER COMMON SHARE: Earnings per common share have been computed on the basis of the weighted-average number of common shares outstanding during each period presented. Dividends accumulated or declared on cumulative preferred stock and dividends declared on noncumulative preferred stock, which totaled $152,000 in each of the years ended June 30, 2001, 2000 and 1999, reduced the earnings available to common stockholders in the computation. The Company has no common stock equivalents. F-10 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OPERATING SEGMENTS: The Company uses the "management approach" for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the "management approach" model, the Company has determined that its business is comprised of a single operating segment. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments as presented in Note 20: CARRYING AMOUNTS APPROXIMATE FAIR VALUES for the following instruments: Cash and due from banks Federal funds sold Certificates of deposit Securities available for sale Variable rate loans that reprice frequently where no significant change in credit risk has occurred Accrued interest receivable Variable rate money market deposit accounts and deposits payable on demand Federal funds purchased and securities sold under agreements to repurchase Notes payable with a variable interest rate Accrued interest payable DISCOUNTED CASH FLOWS using interest rates currently being offered on instruments with similar terms and with similar credit quality: All loans except variable rate loans described above Fixed rate time certificates Notes payable with a fixed interest rate Company obligated mandatorily redeemable preferred securities FEES CURRENTLY BEING CHARGED for similar instruments, taking into account the remaining terms of the agreements and the counterparties' credit standing: Off-balance sheet instruments: Letters of credit Commitments to extend credit F-11 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EMERGING ACCOUNTING STANDARDS: In July 2001, the Financial Accounting Standards Board (FASB) issued two statements -- Statement 141, BUSINESS COMBINATIONS, and Statement 142, GOODWILL AND OTHER INTANGIBLE ASSETS, which will impact the Company's accounting for its reported goodwill. Statement 141: - Eliminates the pooling method for accounting for business combinations. - Requires that intangible assets that meet certain criteria be reported separately from goodwill. - Requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142: - Eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life. - Requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. - Requires the carrying value of goodwill which exceeds its implied fair value to be recognized as an impairment loss. Upon adoption of these Statements, the Company is required to: - Evaluate its existing intangible assets and goodwill that were acquired in prior business combinations and to make any necessary reclassifications in order to conform to the new criteria. - Reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. Cost in excess of net assets acquired in the accompanying balance sheet is generally goodwill. The provisions of FASB Statement 141 apply to all business combinations initiated after June 30, 2001 and all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001, or later. The provisions of FASB Statement 142 are required to be implemented by the Company in the first quarter of its 2003 fiscal year, although the Company currently intends to early implement in the first quarter of its 2002 fiscal year. The Company has not yet completed its full assessment of the effects of these new pronouncements on its financial statements, however, the impact of adopting FASB Statement No. 142 will be to eliminate the amortization of goodwill and other intangibles that are determined to have an indefinite life and subject goodwill and other intangibles to annual impairment tests. For the year ended June 30, 2001 goodwill amortization expense was approximately $1,100,000. F-12 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. BUSINESS ACQUISITIONS On March 23, 2001 Spectrum acquired Great Western Securities (GWS) for $58,348,384 in cash and by issuing 46,319 shares of common stock and $10,000,000 in nonvoting, non-cumulative perpetual preferred stock. The common stock was issued to existing shareholders in Spectrum for their 50% interest in GWS. The remaining portion was purchased from an unrelated party. The acquisition has been accounted for as a purchase and results of operation of GWS since the date of acquisition are included in the consolidated financial statements. Deposits of $507,208,000 and loans of $511,416,000 were acquired. The net assets previously attributed to the ownership of Spectrum's shareholders were recorded at predecessor cost, due to the shareholders' continuing interests. The remaining net assets were recorded at fair value. As a result of the merger, a core deposit intangible of $6,775,000 has been recognized and is being amortized over 5 years by an accelerated method. In addition, the cost in excess of net assets acquired of $31,022,000 is being amortized over 25 years by the straight-line method. Unaudited pro forma consolidated results of operations as though Great Western Securities had been acquired as of the July 1, 1999 (in thousands except share data) are summarized below.
Years Ended June 30, ------------------------------------- 2001 2000 ------------------------------------- Total interest income $130,785 $107,049 Net interest income 66,243 48,690 Net income (1) 10,156 14,009 Basic earnings per common share 72.68 103.34 Weighted average shares outstanding 125,354 125,459
(1) For the year ended June 30, 2000, Great Western Securities had a gain on sale of mortgage servicing rights of $6,306,805. The above amounts reflect adjustments for amortization of intangible assets, additional depreciation and amortization on revalued purchased assets and deposits, and preferred stock dividend requirements. As of March 31, 2001 F&M Bank acquired Founders Trust National Bank, Sioux Falls, South Dakota for cash of $2,501,000, subject to adjustment for certain contingencies. At March 31, 2001 Founders had assets of $34,644,000, deposits of $31,588,000 and net loans of $17,762,000. The acquisition has been accounted for as a purchase and results of operations of Founders Trust National Bank after the date of acquisition are included in the consolidated financial statements. F-13 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. BUSINESS ACQUISITIONS (CONTINUED) As of August 7, 2000 the Company acquired all of the outstanding shares of Hamburg Financial (HFI), an unaffiliated holding company which owned two banks in southwestern Iowa. The Company paid $8,730,995 in cash which included a premium of $2,236,123 to acquire HFI and its subsidiaries; Thurman State Corporation, a second-tier holding company which owned the United National Bank of Iowa, headquartered in Sidney, Iowa; and Iowa State Bank, headquartered in Hamburg, Iowa. Deposits of $56,196,000 and loans of $48,989,000 were acquired. The transaction was accounted for as a purchase. HFI and Thurman State Corporation were merged into the Company. HFI's bank subsidiaries were merged into the Company's subsidiary bank, Citizens Bank, Mt. Ayr. On July 13, 2000, the Company's subsidiary, Citizens Bank, Mt. Ayr purchased the assets and assumed the liabilities of the branch of Commercial Federal Bank, FSB located in Kellerton, Iowa. A premium of approximately $175,000 paid to acquire deposits of approximately $3,300,000. On January 14, 2000 the Company, through a newly chartered bank subsidiary, acquired selected assets and assumed the FDIC insured deposits of Hartford-Carlisle Savings Bank in Carlisle, Iowa. Liquid assets of $4,800,000 and loans of $139,000 were acquired and $70,465,000 of deposits and other liabilities were assumed. A premium of $5,500,000 was paid for the right to assume the insured deposits. The bank was capitalized with $10,500,000 in paid-in capital, including $500,000 by a minority shareholder. Cash was received from the FDIC for the deposits assumed net of assets purchased and premium paid. The acquisition has been accounted for in a manner similar to a purchase and the results of operation of the branches acquired since the date of acquisition are included in the consolidated financial statements. The deposit premium of $5,500,000 has been allocated to cost in excess of net assets acquired, and is being amortized over 15 years using the straight-line method. Under a purchase and assumption agreement with the FDIC, the new bank exercised its right to purchase certain securities and the buildings, real estate, furniture, fixtures and equipment of the failed bank. The acquisition costs of these assets were determined by independent appraisal. Since acquisition date, $34,400,000 of additional loans were acquired from the FDIC. F-14 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. BUSINESS ACQUISITIONS (CONTINUED) A summary of the fair value of net assets acquired and net cash and cash equivalents received (in thousands) on the date of acquisition is as follows:
2001 Hartford-Carlisle Acquisitions Savings Bank ---------------------------------------- Assets acquired: Securities $126,333 $862 Loans receivable 578,167 139 Other assets 10,172 12 Premises and equipment 15,612 - Mortgage servicing rights 3,825 - Core deposit intangible 6,775 - Cost in excess of net assets acquired 33,433 5,500 Liabilities assumed: Deposits (598,292) (69,846) Common stock issued (27,544) - Preferred stock issued (10,000) - Other liabilities (94,662) (619) ---------------------------------------- Net cash and cash equivalents paid $43,819 $(63,952) ========================================
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Company's banking subsidiaries are required to maintain reserve balances in cash and on deposit with the Federal Reserve based on a percentage of deposits. The total requirement was approximately $4,010,000 and $6,515,000 at June 30, 2001 and 2000 respectively. F-15 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- NOTE 4. SECURITIES AVAILABLE FOR SALE Amortized cost and fair value of investments in securities, all of which are classified as available for sale according to management's intent, are summarized are follows:
June 30, 2001 (In Thousands) -------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------- U.S. Treasury securities $26,061 $627 $ - $26,688 U.S. Government agencies and corporations, including mortgage-backed securities 186,890 3,474 (248) 190,116 States and political subdivision securities 24,622 297 (124) 24,795 Corporate debt securities 15,474 381 (12) 15,843 Stock in Federal Home Loan Bank and Federal Reserve Bank 7,568 - - 7,568 -------------------------------------------------------------- $260,615 $4,779 $(384) $265,010 ============================================================== June 30, 2000 (In Thousands) -------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------- U.S. Treasury securities $6,942 $1 $(54) $6,889 U.S. Government agencies and corporations, including mortgage-backed securities 103,914 142 (2,880) 101,176 States and political subdivision securities 20,617 12 (521) 20,108 Corporate debt securities 7,759 24 (126) 7,657 Stock in Federal Home Loan Bank and Federal Reserve Bank 3,240 - - 3,240 ------------------------------------------------------------- $142,472 $179 $(3,581) $139,070 =============================================================
F-16 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- NOTE 4. SECURITIES AVAILABLE FOR SALE (CONTINUED) No ready market exists for the Federal Home Loan Bank and Federal Reserve Bank stock, and they have no quoted market value. For disclosure purposes, such stock is assumed to have a fair value which is equal to cost. The amortized cost and fair value of debt securities available for sale (in thousands) as of June 30, 2001, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Amortized Cost Fair Value --------------------------------- Due in one year or less $35,810 $36,298 Due after one year through five years 51,396 53,335 Due after five years through ten years 15,621 15,871 Due after ten years 17,025 16,968 Mortgage-backed securities 133,195 134,970 ---------- --------- $253,047 $257,442 ========== =========
Proceeds from sales of securities available for sale were $44,074,000, $7,585,000, and $2,004,000 for the years ended June 30, 2001, 2000, and 1999, respectively. Gross gains of $133,000, $18,000 and $27,000 and gross losses of $0, $31,000 and $0 were realized on those sales for the years ended June 30, 2001, 2000, and 1999, respectively. Securities with an amortized cost of approximately $191,106,000 and $95,195,000 at June 30, 2001 and 2000, respectively, were pledged as collateral on public deposits, securities sold under agreements to repurchase, notes payable to Federal Home Loan Bank and for other purposes as required or permitted by law. F-17 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- NOTE 4. SECURITIES AVAILABLE FOR SALE (CONTINUED) The components of other comprehensive income - net unrealized gain (loss) on securities available for sale (in thousands) are as follows:
------------------------------------------------- 2001 2000 1999 ------------------------------------------------- Unrealized holding gain (loss) arising during the period $6,396 $(2,540) $(2,231) Less reclassification adjustment for net (gain) loss realized in net income (133) 13 (27) ------------------------------------------------- Net unrealized gain (loss) before income taxes 6,263 (2,527) (2,258) Income (taxes) benefit (2,328) 695 475 Minority interest in unrealized (gain) loss (70) 31 23 ------------------------------------------------- Other comprehensive income - net change in unrealized gain (loss) on securities $3,865 $(1,801) $(1,760) ================================================= NOTE 5. LOANS RECEIVABLE The composition of net loans receivable (in thousands) is as follows: June 30, --------------------------------- 2001 2000 --------------------------------- Commercial and agricultural $912,611 $388,615 Real estate loans 172,786 135,033 Loans to individuals 215,071 106,499 Other loans 3,242 4,910 Unearned net loan fees (661) (300) --------------------------------- 1,303,049 634,757 Allowance for loan losses (18,955) (8,197) --------------------------------- $1,284,094 $626,560 =================================
Loans guaranteed by agencies of the U.S. government totaled $39,939,000 and $29,415,000 at June 30, 2001 and 2000, respectively. F-18 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 5. LOANS RECEIVABLE (CONTINUED) Information about impaired loans (in thousands) is as follows:
- As of and for the year ended June 30, ------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------ Loans receivable for which there is a related allowance for loan losses $14,090 $5,425 $2,423 Other impaired loans - - - ------------------------------------------------------ Total impaired loans $14,090 $5,425 $2,423 ====================================================== Related allowance for loan losses $872 $318 $269 Average monthly balance of impaired loans (based on month-end balances) 12,941 5,397 2,183 Interest income recognized on impaired loans 782 73 81 Changes in the allowance for loan losses (in thousands) are as follows: Years ended June 30, ------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------ Balance, beginning $8,197 $6,701 $6,276 Provision charged to operating expense 2,618 2,036 1,563 Business acquisition (Note 2) 10,436 - - Recoveries of amounts charged off 331 342 233 ------------------------------------------------------ 21,582 9,079 8,072 Amounts charged off (2,627) (882) (1,234) ------------------------------------------------------ Balance, ending $18,955 $8,197 $6,838 ======================================================
The balance at the end of 1999 does not equal the beginning of 2000 due to a change in reporting period (See Note 16). F-19 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 6. PREMISES AND EQUIPMENT The major classes of premises and equipment and the total amount of accumulated depreciation (in thousands) are as follows:
June 30, ------------------------------------ 2001 2000 ------------------------------------ Land $5,653 $3,145 Buildings and building improvements 30,002 14,717 Furniture and equipment 21,374 8,901 ------------------------------------ 57,029 26,763 Less accumulated depreciation (19,994) (9,087) ------------------------------------ $37,035 $17,676 ====================================
NOTE 7. MORTGAGE SERVICING RIGHTS Mortgage loans serviced for others are not included in the accompanying financial statements. The unpaid principal balances of these loans (in thousands) as of June 30, 2001 are summarized as follows: Mortgage loan portfolios serviced for: GNMA $4,742 FHLMC 75,304 FNMA 788,032 Other investors 94,021 ---------------- $962,099 ================
Custodial escrow balances maintained in connection with the foregoing loan servicing, which are held by the Company, were approximately $3,220,000 at June 30, 2001. At June 30, 2001 the number of mortgage loan pools serviced for GNMA totaled 6. Following is an analysis of the changes in the mortgage servicing rights for the year ended June 30, 2001: Balance at the beginning of period $ - Additions 18,670 Sales (1) Amortization (266) Valuation adjustment (37) --------------- Balance at end of period $18,366 ===============
Mortgage servicing rights had an estimated fair value of $18,435,000 at June 30, 2001. Avaluation allowance totaling $37,000 was recorded at June 30, 2001. F-20 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 8. DEPOSITS The composition of deposits (in thousands) is as follows:
June 30, ----------------------------------------- 2001 2000 ----------------------------------------- Noninterest bearing demand $161,409 $65,896 NOW accounts, money market and savings 460,882 208,565 Time certificates, $100,000 or more 233,531 101,942 Other time certificates 565,268 315,132 ----------------------------------------- $1,421,090 $691,535 ========================================= At June 30,2001, the scheduled maturities of time certificates (in thousands) are as follows: Year ending June 30, --------------------------------------------------------------------- 2001 $539,623 2002 221,205 2003 23,301 2004 - 2005 14,437 2006 and thereafter 233 ---------------- $798,799 ================
NOTE 9. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Federal funds purchased totaled $1,699,000 and $1,277,000 at June 30, 2001 and 2000, respectively. Securities sold under agreements to repurchase, which generally mature within one to four days from the transaction date totaled $61,512,000 and $21,640,000 at June 30, 2001 and 2000, respectively. Securities underlying the agreements had an amortized cost of approximately $61,847,000 and $24,328,000, and fair value of approximately $67,100,000 and $23,712,000 at June 30, 2001 and 2000 respectively. The Company holds the securities. For the years ended June 30, 2001, 2000 and 1999, respectively, the maximum month-end balance of the agreements was $65,420,000, $23,107,000 and $21,901,000, and they had an average balance of $53,893,000, $19,058,000 and $19,737,000 and an average interest rate of 5.8%, 4.8% and 4.4%. F-21 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 10. NOTES PAYABLE Notes payable consist of the following (in thousands):
June 30, ------------------------------------- 2001 2000 ------------------------------------- Subordinated capital notes to Capital Investors, LLC, due March 2011, interest paid quarterly at prime rate plus 100 basis points, unsecured (1) $35,000 $ - Subordinated capital notes, to shareholders, due December 2010, 10% interest paid quarterly 1,200 - Notes payable to bank, due March 2006, interest paid quarterly at LIBOR plus 150 basis points, annual principal payments of $2,250,000 due in April of each year, secured by stock in subsidiary banks 9,750 2,300 Notes payable to Federal Home Loan Bank, interest rates from 4.23% to 6.9% and maturity dates from July 2001 to December 2013, secured by real estate loans and Federal Home Loan Bank stock 70,696 48,632 Notes payable to Federal Reserve Bank, consisting of treasury, tax and loan deposits, due on demand 1,084 4,828 ------------------------------------- $117,730 $55,760 =====================================
(1) Capital Investors, LLC is owned by certain stockholders of the Company. The Company has a $5,000,000 line of credit from an unaffiliated bank, secured by stock in subsidiary banks, with a maturity date of March 23, 2002. F-22 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- NOTE 10. NOTES PAYABLE As of June 30, 2001, notes payable are due or callable (whichever is earlier) as follows (in thousands): Year ending June 30, ------------------------------------------------------------------------------------- 2002 $47,542 2003 8,107 2004 1,294 2005 337 2006 14,500 Thereafter 45,950 -------------------- $117,730 ====================
NOTE 11. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBENTURES The Company issued 2,040,000 shares, $10 par value, of Company Obligated Mandatorily Redeemable Preferred Securities (Preferred Securities) of Spectrum Capital Trust I on August 18, 1999. Cumulative cash distributions are calculated at a 10.0% annual rate. The Company issued 2,760,000 shares, $10 par value, of Company Obligated Mandatorily Redeemable Preferred Securities ("Preferred Securities") of Spectrum Capital Trust II on March 19, 2001. Cumulative cash distributions bear a 9.75% annual rate. Distributions on both series are paid quarterly. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarters, but not beyond thirty years from the issuance date. At the end of any deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed thirty years from the issuance date; however, the Company has the option to shorten the maturity date to a date not earlier than five years from the maturity date. The redemption price is $10 per capital security plus any accrued and unpaid distributions to the date of redemption. Holders of the Preferred Securities have no voting rights. The Preferred Securities are unsecured and rank junior in priority of payment to all of the Company's indebtedness and senior to the Company's common and preferred stock. The sole asset of Spectrum capital Trust I is $21,031,000 of 10.0% junior subordinated deferrable interest debentures issued by Company. The sole asset of Spectrum Capital Trust II is $28,454,000 of 9.75% junior subordinated deferrable interest debentures issued by the Company. The maturity provisions of the debentures are similar in term to the respective preferred securities. The Company's obligation under the debentures and relevant trust agreements constitute a full, irrevocable and unconditional guarantee on a subordinated basis by it of the obligations of the trusts under the preferred securities. F-23 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 12. INCOME TAX MATTERS The provision for income taxes charged to operations consists of the following (in thousands):
Years Ended June 30, ----------------------------------------------------- 2001 2000 1999 ----------------------------------------------------- Currently paid or payable: Federal $4,757 $4,470 $3,588 State 885 773 670 Deferred (benefit) (720) (803) (169) ----------------------------------------------------- $4,922 $4,440 $4,089 ===================================================== The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income due to the following (in thousands): Years Ended June 30, ---------------------------------------------------- 2001 2000 1999 ---------------------------------------------------- Computed "expected" tax expense $5,202 $4,927 $4,424 Increase (decrease) in income taxes resulting from: Benefit of income taxed at lower rates (100) (100) (112) Tax exempt interest income (527) (325) (289) State income tax, net of federal benefit 575 463 383 Effect of Citizens Corporation income not subject to Federal tax due to S-corporation election (320) (519) (423) Goodwill amortization 222 - - Other (130) (6) 106 ---------------------------------------------------- $4,922 $4,440 $4,089 ====================================================
F-24 NOTE 12. INCOME TAX MATTERS (CONTINUED) Net deferred tax assets (liabilities) (in thousands) consist of the following components:
June 30, ------------------------------------------ 2001 2000 ------------------------------------------ Deferred tax assets: Allowance for loan losses $5,970 $2,303 Securities available for sale - 979 Deferred compensation 229 155 Net operating loss carry forward 676 - Deposits 371 - Other 11 72 ------------------------------------------ 7,257 3,509 ------------------------------------------ Deferred tax liabilities: Premises and equipment (2,350) (777) Securities available for sale (1,661) - Core deposit intangible (2,174) - Other (589) (581) ------------------------------------------ (6,774) (1,358) ------------------------------------------ $483 $2,151 ==========================================
In the accompanying consolidated balance sheets, net deferred tax assets are included in other assets. The deferred tax asset amounts above include no valuation allowance. Retained earnings at June 30, 2001 includes approximately $1,107,000 related to the pre-1998 allowance for loan losses of an acquired savings bank for which no deferred income tax liability has been recognized. If the Company no longer qualifies as a bank or in the event of a liquidation of the Company, income would be created, for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for financial statement purposes was $376,000 at June 30, 2001. F-25 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 13. DEFERRED COMPENSATION The Company has entered into deferred compensation agreements with certain officers, directors and employees which provide for payments to the employees or their beneficiaries over a period of ten years beginning at age 65 or prior death or disability. The level of payments is dependent upon the Company's earnings during employment. The net present value of the payments is being accrued over the respective employees' expected employment service period. Deferred compensation charged to expense during the years ended June 30, 2001, 2000, and 1999 was $190,000, $125,000 and $127,000, respectively, with a total amount accrued as of June 30, 2001 and 2000 of $575,000 and $407,000, respectively. NOTE 14. PROFIT SHARING PLAN The Company participates in a multiple employer 401(k) profit sharing plan (the Plan). All employees are eligible to participate beginning with the first eligibility date following the completion of one year of service and having reached the age of 21. In addition to employee contributions, the Company may contribute discretionary amounts for eligible participants. Contribution rates for participating employers must be equal. The Company contributed $686,000, $380,000 and $311,000 to the Plan for the years ended June 30, 2001, 2000 and 1999 respectively. NOTE 15. REGULATORY RESTRICTIONS The Company and its bank subsidiaries are subject to certain restrictions on the amount of dividends which may be declared without prior regulatory approval and are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its bank subsidiaries to maintain minimum amounts and ratios (set forth in the table following) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (all defined in the regulations). Management believes the Company and its bank subsidiaries meet all capital adequacy requirements to which they are subject as of June 30, 2001. F-26 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 15. REGULATORY RESTRICTIONS (CONTINUED) The most recent notifications from the regulatory agencies categorize each of the Company's bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since those notifications that management believes have changed the category. Actual capital amounts and ratios are also presented in the following tables (amounts in thousands).
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes (a) Action Provisions (a) ------------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------ As of June 30, 2001 Total capital (to risk-weighted assets): Consolidated $151,603 11.2% $108,539 8.0% N/A N/A Citizens Bank, Mount Ayr 23,255 13.3 14,038 8.0 17,548 10.0% Citizens Bank of Princeton 3,739 13.6 2,203 8.0 2,753 10.0 F&M Bank 34,771 10.7 25,932 8.0 32,459 10.0 Rushmore Bank & Trust 21,273 11.4 14,916 8.0 18,646 10.0 Citizens Bank, Clive 7,311 13.5 4,339 8.0 5,423 10.0 Great Western Bank 64,517 11.0 46,781 8.0 58,476 10.0 Tier I capital (to risk-weighted assets): Consolidated 82,219 6.1 54,269 4.0 N/A N/A Citizens Bank, Mount Ayr 21,045 12.0 7,019 4.0 10,529 6.0 Citizens Bank of Princeton 3,394 12.3 1,101 4.0 1,652 6.0 F&M Bank 31,232 9.6 12,966 4.0 19,475 6.0 Rushmore Bank & Trust 18,941 10.2 7,458 4.0 11,187 6.0 Citizens Bank, Clive 6,632 12.2 2,169 4.0 3,254 6.0 Great Western Bank 57,196 9.8 23,390 4.0 35,805 6.0 Tier I capital (to average assets): Consolidated 82,219 4.9 67,420 4.0 N/A N/A Citizens Bank, Mount Ayr 21,045 8.8 9,567 4.0 11,959 5.0 Citizens Bank of Princeton 3,394 9.1 1,491 4.0 1,864 5.0 F&M Bank 31,232 7.3 17,076 4.0 21,366 5.0 Rushmore Bank & Trust 18,941 8.1 9,397 4.0 11,746 5.0 Citizens Bank, Clive 6,632 9.7 2,722 4.0 3,403 5.0 Great Western Bank 57,196 8.5 26,763 4.0 33,453 5.0
F-27 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 15. REGULATORY RESTRICTIONS (CONTINUED)
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes (a) Action Provisions (a) ------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------- As of June 30, 2000: Total capital (to risk-weighted assets): Consolidated $72,654 11.6% $50,374 8.0% N/A N/A Citizens Bank, Mount Ayr 14,453 11.5 10,093 8.0 12,617 10.0% Citizens Bank of Princeton 3,499 12.6 2,236 8.0 2,796 10.0 F&M Bank 29,706 11.5 20,743 8.0 25,929 10.0 Rushmore Bank & Trust 19,151 10.9 14,032 8.0 17,540 10.0 Citizens Bank, Clive 5,465 12.9 3,390 8.0 4,237 10.0 Tier I capital (to risk-weighted assets): Consolidated 61,436 9.8 25,187 4.0 N/A N/A Citizens Bank, Mount Ayr 13,282 10.5 5,047 4.0 7,570 6.0 Citizens Bank of Princeton 3,150 11.3 1,118 4.0 1,677 6.0 F&M Bank 26,614 10.3 10,372 4.0 15,558 6.0 Rushmore Bank & Trust 17,100 9.8 7,016 4.0 10,524 6.0 Citizens Bank, Clive 4,935 11.7 1,695 4.0 2,542 6.0 Tier I capital (to average assets): Consolidated 61,436 7.2 34,048 4.0 N/A N/A Citizens Bank, Mount Ayr 13,282 7.6 7,024 4.0 8,779 5.0 Citizens Bank of Princeton 3,150 8.7 1,442 4.0 1,803 5.0 F&M Bank 26,614 7.8 13,574 4.0 16,967 5.0 Rushmore Bank & Trust 17,100 8.1 8,400 4.0 10,500 5.0 Citizens Bank, Clive 4,935 6.9 2,846 4.0 3,557 5.0
(a) The amounts and ratios are minimums under the regulations. Prompt corrective action provisions only apply to the bank subsidiaries. F-28 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 16. MERGER OF CITIZENS CORPORATION AND SPECTRUM BANCORPORATION, INC. On August 7, 2000, Spectrum Bancorporation, Inc. (Spectrum) issued 7,584 shares of its common stock in exchange for all outstanding common stock of Citizens Corporation (Citizens). Since the entities were under common control, the merger has been accounted for at historical cost in a manner similar to a pooling-of-interests and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of both entities. The results of operations previously reported by the separate entities and the combined amounts presented in the accompanying consolidated financial statements (in thousands) are summarized below.
Years Ended June 30, --------------------------------------- 2000 1999 --------------------------------------- Interest income: Spectrum Bancorporation, Inc. and Subsidiaries $55,572 $46,273 Citizens Corporation and Subsidiary 5,791 5,436 --------------------------------------- Combined $61,363 $51,709 ======================================= Net income: Spectrum Bancorporation, Inc. and Subsidiaries $7,586 $6,845 Citizens Corporation and Subsidiary 1,558 1,348 --------------------------------------- Combined $9,144 $8,193 =======================================
Prior to the combination, Citizens' fiscal year ended December 31. In recording the combination, Citizens' financial statement for the twelve months ended June 30, 2000 were combined with Spectrum's financial statements for the same period. For previous periods, financial statements for Citizens' fiscal years ended December 31, 1999 and 1998 were combined with Spectrum's fiscal years ended June 30, 1999 and 1998, respectively. Citizens' unaudited results of operations for the six months ended December 31, 1999 included interest income of $2,831,000, net of income of $675,000, dividends paid of $138,000, and other comprehensive loss of $460,000. An adjustment has been made to stockholders' equity as of June 30, 2000 to eliminate the effect of including Citizens' results of operations for the six moths ended December 31, 1999 in both the years ended June 30, 2000 and 1999. NOTE 17. STOCK PURCHASE AND REDEMPTION AGREEMENT The Company has entered into stock purchase agreements with two minority stockholders of its subsidiary banks under which the Company has the right of first refusal to purchase the minority shares of common stock offered for sale by each stockholder at a specified price. In addition, the Company has agreed to purchase the shares upon the death or termination of employment of each shareholder, and obligates the estate or shareholder to sell such shares. If the purchase occurred on June 30, 2001, the total purchase price would be approximately $2,442,000 which is recorded as a component of minority interest. F-29 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------ NOTE 18. COMMITMENTS AND CONTINGENCIES FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. A summary of the Company's commitments (in thousands) is as follows:
June 30, ------------------------------ 2001 2000 ------------------------------ Commitments to extend credit $217,260 $104,027 Letters of credit 3,730 965
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do no necessarily represent future cash requirements. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company evaluates each customer's credit worthiness on a case-by-case basis. The credit and collateral policy for commitments and letters of credit is comparable to that for granting loans. CONSTRUCTION IN PROGRESS: The Company has entered into contracts to complete construction of additional facilities. Total estimated costs to complete these projects is approximately $797,000 at June 30, 2001. Construction in progress is approximately $987,000 as of June 30, 2001. CONTINGENCIES: In the normal course of business, the Company is involved in various legal proceedings. Except as described below, in the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company's financial statements. On November 21, 2000, certain purported class action members filed an amended petition in an action then pending in an Iowa district court in Lee County, Iowa against Thousand Adventures, Inc., also knows as TAI, to add as defendants 18 lenders, including Great Western Bank, with respect to retail installment sales contracts originated by TAI in connection with its sale of campground memberships. The amended petition alleges that more than 50,000 class members purchased campground memberships at a cost ranging from $990 to $10,000 and that TAI assigned the contracts outright or as collateral to the lenders. The primary claim of the amended petition appears to be that the lenders, as holders of the installment contracts, are subject to all claims the members had against TAI, which allegedly include breach of contract and consumer fraud, among other things. The amended petition seeks rescission of the campground memberships, an unspecified amount of damages, punitive damages, interest and attorneys' fees. In July of 1997 a default judgment was entered against TAI certifying the action against it as a class action. TAI is the debtor in a Chapter 7 bankruptcy proceeding pending in federal bankruptcy court in Iowa. F-30 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 18. COMMITMENTS AND CONTINGENCIES (CONTINUED) On December 19, 2000, Great Western Bank removed the lawsuit to federal district court in Iowa. The purported class action plaintiffs have filed a motion, which Great Western Bank plans to resist, to remand the lawsuit to the Iowa district court in Lee County. No discovery has been conducted with respect to the claim against Great Western Bank. Great Western Bank denies any wrongdoing and plans to vigorously contest all aspects of this lawsuit including whether the case can properly proceed as a class action. In the event the lawsuit is determined adversely to Great Western Bank, it could have material adverse effect on the financial condition or results of operations of Great Western Bank, but the amount of the alleged damages is unspecified and cannot now be accurately estimated by the Company. FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK BY GEOGRAPHIC LOCATION: A substantial portion of the Company's customers' abilities to honor their contracts is dependent on the economy in eastern Nebraska, northern Missouri, Iowa and South Dakota. Although the Company's loan portfolio is diversified, there is a relationship in these regions between the agricultural economy and the economic performance of loans made to nonagricultural customers. The concentration of credit in the regional agricultural economy is taken into consideration by management in determining the allowance to loan losses. NOTE 19. TRANSACTIONS WITH RELATED PARTIES Total loans to related parties were approximately $28,909,000 and $6,779,000 at June 30, 2001 and 2000, respectively. The increase in loans to related parties is due to approximately $7,000,000 in related party loans from the acquisition of Great Western Bank and additional advances of approximately $15,000,000 by the bank subsidiaries. The Company had participation loans sold of approximately $10,152,000 and participations loans purchased of approximately $26,566,000 at June 30, 2000, with Great Western Bank which was partially owned by a stockholder of the Company. These transactions have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. F-31 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK The estimated fair values of the Company's financial instruments are (in thousands) as follows:
June 30, ------------------------------------------------------------------- 2001 2000 ------------------------------------------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------------------------------------------------------------------- Financial Assets Cash and due from banks $55,744 $55,744 $26,037 $26,037 Federal funds sold 50,692 50,692 15,089 15,089 Certificates of deposit 1,533 1,533 2,772 2,772 Securities 265,010 265,010 139,070 139,070 Loans receivable 1,284,094 1,287,706 626,560 622,894 Accrued interest receivable 14,454 14,454 8,740 8,740 Financial Liabilities Deposits 1,421,090 1,432,603 691,535 688,861 Federal funds purchased and securities sold under agreements to repurchase 63,211 63,211 22,917 22,917 Notes payable 117,730 118,630 55,760 54,781 Company obligated mandatorily redeemable preferred securities 48,000 48,778 20,400 20,400 Accrued interest payable 14,867 14,867 7,151 7,151
The estimated fair value of commitments to extend credit and letters of credit at June 30, 2001 and 2000 is insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at June 30, 2001 and 2000. The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, fair values of the Company's financial instruments will change when interest rate levels change and the change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to repay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk. F-32 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 21. CONDENSED FINANCIAL STATEMENTS-PARENT COMPANY ONLY The following presents condensed parent company only financial statements for Spectrum Bancorporation, Inc. Condensed Balance Sheets (In thousands)
June 30, ---------------------------------- 2001 2000 ---------------------------------- Assets Cash $3,288 $1,019 Investment in subsidiaries 186,990 68,536 Other assets 8,925 2,152 ---------------------------------- Total assets $199,203 $71,707 ================================== Liabilities Notes payable $95,435 $23,331 Accounts payable and accrued liabilities 6,842 554 ---------------------------------- Total liabilities 102,277 23,885 ---------------------------------- Stockholders' Equity Preferred stock 11,700 1,700 Common stock 125 79 Additional paid-in capital 2,064 2,069 Retained earnings 80,792 46,331 Accumulated other comprehensive income (loss) 2,245 (2,357) ---------------------------------- Total stockholders' equity 96,926 47,822 ---------------------------------- Total liabilities and stockholders' equity $199,203 $71,707 ==================================
F-33 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 21. CONDENSED FINANCIAL STATEMENTS-PARENT COMPANY ONLY (CONTINUED) Condensed Statements of Income (In thousands)
Years ended June 30, ------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------ Income: Dividends received from subsidiaries $5,111 $4,336 $3,531 Real estate brokerage commissions 18 114 18 Interest 99 99 85 Other 265 97 9 ------------------------------------------------------ Total income 5,493 4,646 3,643 ------------------------------------------------------ Expense: Salaries and employee benefits 317 199 114 Interest 4,911 2,067 958 Amortization of core deposit and other intangibles 408 68 56 Amortization of cost in excess of net assets acquired 565 - - Other 423 321 196 ------------------------------------------------------ Total expenses 6,624 2,655 1,324 ------------------------------------------------------ Income (loss) before income tax (benefit) and equity in undistributed income of subsidiaries (1,131) 1,991 2,319 Income tax (benefit) (1,995) (715) (352) ------------------------------------------------------ Income before equity in undistributed income of subsidiaries 864 2,706 2,671 Equity in undistributed income of subsidiaries 8,554 6,438 5,522 ------------------------------------------------------ Net income $9,418 $9,144 $8,193 ======================================================
F-34 SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 21. CONDENSED FINANCIAL STATEMENTS-PARENT COMPANY ONLY (CONTINUED) Condensed Statements of Cash Flows (In thousands)
Years ended June 30, ------------------------------------------------------- 2001 2000 1999 ------------------------------------------------------- Cash flows from operating activities: Net income $9,418 $9,144 $8,193 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,110 35 60 Equity in undistributed income of subsidiaries (8,554) (6,438) (5,522) Changes in deferrals and accruals: Other assets (2,796) 13 (353) Accounts payable and accrued liabilities 5,228 208 48 ------------------------------------------------------- Net cash provided by (used in) operating activities 5,406 2,962 2,426 ------------------------------------------------------- Cash flows from investing activities: Investment in subsidiary (1,250) (10,631) - Business acquisitions (70,711) - - Purchase of securities available for sale (134) Other (21) - - ------------------------------------------------------- Net cash (used in) investing activities (72,116) (10,631) - ------------------------------------------------------- Cash flows from financing activities: Proceeds from notes payable 75,454 24,031 810 Payments on notes payable (4,550) (13,168) (2,153) Incur debt issuance costs (1,402) (1,061) - Proceeds from sale (purchase) of minority interest - - (153) Dividends paid (445) (1,137) (1,063) Stock purchased for retirement (78) (75) (72) ------------------------------------------------------- Net cash provided by (used in) financing activities 68,979 8,590 (2,631) ------------------------------------------------------- Net increase (decrease) in cash 2,269 921 (205) Cash at beginning of period 1,019 98 245 ------------------------------------------------------ Cash at end of period $3,288 $1,019 $40 ======================================================
F-35 NOTE 22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Dollars in thousands except earnings per share data)
Year Ended June 30, 2001 ------------------------------------------------------------------- First Second Third Fourth ------------------------------------------------------------------- Total interest income $18,883 $19,460 $20,173 $33,153 Net interest income 8,601 8,145 8,623 14,475 Provision for loan losses 512 540 298 1,268 Net income 2,686 1,991 2,059 2,682 Basic earnings per common share 33.49 24.70 24.30 21.11 Year Ended June 30, 2000 ------------------------------------------------------------------- First Second Third Fourth ------------------------------------------------------------------- Total interest income $13,882 $13,909 $15,702 $17,870 Net interest income 7,093 6,591 7,279 8,885 Provision for loan losses 411 418 758 449 Net income 2,386 2,152 2,080 2,526 Basic earnings per common share 29.65 26.69 25.79 31.44
F-36